Ateneo

CORPORATE LAW NOTES PAGE - 1 -
HISTORICAL BACKGROUND PHILIPPINE CORPORATION IS CODIFICATION OF AMERICAN CORPORATE LAW When the Philippines passed into the sovereignty of the US, attention was gi ven to the fact that there was no entity in Spanish law exactly correspond ing to the nation of the corporation in English and American law With the enactment of the Corporation law, the purpose was to introduce the American corporation into the Philippines as the standard commercial entity and to hasten the day when the sociedad anonima of the Spanish law would be obsolete. That statute is sort of a codification of the American Corporate Law. OLD CORPORATION LAW: ACT 1459 First corporate statute in Philippine jurisdiction It had various piece-meal amendments during its 74-year history CORPORATION CODE It adopted various corporate doctrines previously enunciated by the Supreme Court under the old Corporation law It clarified the obligations of corporate directors and officers, expressed in statutory language established principles and doctrines, and provided for a c hapter on close corporations The code was enacted to establish a new concept of business corporations so that they are not merely entities established for private gain but effective par tners of the national government in spreading the benefits of capitalism for the social and economic development of the nation PROPER TREATMENT OF CORPORATE LAW Philippine corporate law comes from the common law system of the US Although we have a corporation code that provides for statutory principles, Philippine Corporate Law is essentially and continues to be the product of commercial developments Much of the development in Corporate Law can be expected to happen in jurisp rudential rules that apply and adopt corporate principles into the changing concepts and mechanism of the commercial world CONCEPTS OF CORPORATE LAW DEFINITION OF A CORPORATION Section 2. Corporation defined. - A corporation is an artificial being created by operation of law, having the right of succession and the powers, at tributes and properties expressly authorized by law or incident to its existence . (2) The present statutory definition is essentially narrow and antiquated since it only looks at one aspectTHE RELATIONSHIP BETWEEN THE CORPORATION AND THE STATEof the otherwise multi-faceted relationships that a corporation would have in the b usiness environment The statutory definition looks only at a corporation as a creation of law wh en actually judicial personality is merely one aspect of corporate existence CC definition: a corporation is a juridical personality, separate and distin ct from that of each shareholder, partner, or member A corporation is a creature of limited powersexcept for the powers which are expressly conferred on it by the Corporation Code and those that are implied by or are incidental to its existence, a corpora tion has no powers. It exercises its powers through its board of directors and/
or duly authorized agent. FOUR ATTRIBUTES OF A CORPORATION IN REFERENCE TO SECTION 2 1. ARTIFICIAL BEINGby operation of law it becomes a being with the attributes of an individual with full capacity to enter into contractual relations (ability to contract and transact) 2. CREATURE OF LAWjuridical existence is dependent on the consent or grant of the sovereign; there must be a contract between the individuals forming the corp oration upon which the state grant may be conferredthus, there is an interplay of state grant and contr actual relations 3. RIGHT OF SUCCESSIONcapacity for continuous existence despite the death or re placement of its shareholders or member
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for it has a personality separate and distinct from those who compose it (strong juridical personality) 4. CREATURE OF ENUMERATED POWERS, ATTRIBUTES, AND PROPERTIES (creature o f limited powers) TRI-LEVEL EXISTENCE OF A CORPORATION 1. Aggregation of assets and resources 2. Business enterprise or economic unit 3. Juridical entity NOTE 1. Knowing the tri-level existence in the corporate setting provides a better way to explain the varying and interweaving doctrines prevailing in Corporate L aw. 2. In practice, piercing the corporate fiction is achieved by looking at the corporation as an aggregation of individuals doing business. RELATIONSHIPS INVOLVED IN A CORPORATE SETTING 1. Juridical entity levelrelationship between the State and the corporation 2. Intra-corporate level Between the corporation and its agents or representative s to act in the real world Between the corporation and the shareholders Between the shareholders in a common venture 3. Extra-corporate levelBetween the corporation and third parties or outsiders THEORIES ON FORMATION OF A CORPORATION: THEORY OF CONCESSION A corporation is an artificial being and is created by operation of law. I t owes its life to the State and its birth being purely dependent on its will. Although fiction cannot be created unless there is an enterprise or group up on which it may be conferred, and in spite of the underlying contract among the persons wanting to form the corporation, the grant is only by virtue of a primary franchise given by the Sta te The theory looks at the corporation as a creature of the State and completel y under the control of the latter
THEORY OF ENTERPRISE ENTITY The corporate entity takes its being from the reality of the underlying enter prise, formed or in formation; that the state's approval of the corporate form sets up a prima facie case that the assets, liabilities, and operations of the corporation are those of the ente rprise Where the corporate entity is defective or otherwise challenged, its existen ce, entity and circumstances may be determined by the actual existence and operations of the underlying enterprise, which by these very qualities and operations acquires an entity of its own, reco gnized by law This theory breeds on situation where the courts have either erected corpora te personality which the state had not granted or disregarded corporate personal ity where the state granted it The corporation is seen to be emerging as an enterprise bounded by economics , rather than as an artificial juridical personality bounded by the form of words in a charter or minute books, and books of account The theory draws its vitality from the fact that it is not legal fiction alo ne that creates a corporate entity A corporation is but an association of individuals, allowed to transact unde r an assumed corporate name, and with a distinct legal personality and that in organizing itself as a collective body, it waives no constitutional immunities and prerequisites appropriate to su ch a body This theory hinges itself on the fact that there can be no corpor ate existence without persons to compose it; there can be no association without associates ADVANTAGES OF CORPORATE FORM 1. STRONG LEGAL PERSONALITYthe corporation has legal capacity to act and contra ct as a distinct unit in its own name and has continuity of existence 2. LIMITED LIABILITY OF INVESTORSthe liability of investors is limit ed to their shares and this can be distinguished from partnerships wherein if the assets of the same are
exhausted, creditors may go after the separate property of the partners 3. FREE TRANSFERABILITY OF UNITS OF INVESTMENTas a general rule, shares of sto ck may be transferred without the consent of the other stockholders 4. CENTRALIZED MANAGEMENTcentralized in the board of directors which poses a m ore stable and efficient system of governance and dealings with third parties 5. ADVANTAGES OVER UNREGISTERED ASSOCIATIONS a. It enjoys perpetual succession in its corporate name and in artificial for m b. It can sue and be sued in its corporate name as a juridical person c. It has the capacity to receive and enjoy common grants of immunities and p rivileges d. Its members or stockholders generally have no personal liability beyond the value of their shares
DISADVANTAGES OF CORPORATE FORM 1. Complicated and costly formation and maintenancethere is a greater degree f government control and supervision than other forms of business organizations 2. Lack of personal element 3. Abuse of corporate managementthe stockholder's voting rights have become eoretically because of the use of proxies and widespread ownership 4. Limited liability hits innocent victimsabused by business to avoid having o provide adequate protection and compensation for victims of the business ventures they undertake 5. Double taxationcorporations are subject to heavier loads of taxation than ther forms of business organizations
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COMPARING CORPORATIONS WITH OTHER BUSINESS MEDIA 1. Sole proprietorshipare less saddled with the many requisites and requiremen ts which corporations are often subjected to by law 2. Partnershipsa corporation has a stronger legal personality, enabling it t o continue despite the death, insolvency or withdrawal of any of its stockh olders or members. In a partnership, the death or insolvencv of any partner would automatically cause the dissolution of the partnership CAN A DEFECTIVE ATTEMPT TO FORM A CORPORATION RESULT AT LEAST IN A PARTNERSHIP? CLV believes in the negative. First, both corporate and partnership relationship are fundamentally contr actual relations created by the co-venturers who consent to come together under said relationship. If the parties had intended to create a corporation, a partn ership cannot be created in its stead since such isn't within their intent and the refore doesn't constitute a part of their consent to the contractual relationship. Second, the important differences between a corporation and a partnership cannot lead to the conclusion that in the absence of the first, the contracting partie s would have gone along with the latter. As held in jurisprudence, when parties come together intending to form a corpora tion, and no corporation is formed due to some legal cause, then: a. Parties who had intended to participate or actually participated in the busin ess affairs of the proposed corporation would be considered as partners un der a de facto partnership, and would be liable as such in an action for settlement of partnership obligations b. Parties who took no part except to subscribe for stock in a proposed corpo ration don't become partners with other subscribers who engaged in the business un der the name of the pretended corporation, and are not liable for action for set tlement of the alleged partnership contribution 3. Joint venturesa form of partnership and should be governed by the law on pa rtnerships (useful mechanism to engage in business) 4. Cooperativesregistered association of persons, with a common bond of intere st, who have voluntarily joined together to achieve
a lawful common social or economic end, making equitable contributions to the ca pital required and accepting a fair share of the risks and benefits of the under taking in accordance with universally accepted cooperative principles 5. Business trustssimply a deed of trust which is easier and less expensive to constitute for it is not bound by any legal requirements like a corporation. It doesn't have a separate juridical personality and is mainly governed by contrac tual doctrines and the common law principles on trust 6. Sociedades anonima a. A commercial partnership, a sort of corporation, where upon the execution of a public instrument in which its articles of agreement appear, and the contri bution of funds and personal property, becomes a juridical personan artificial be ing, invisible, intangible, and existing only in contemplation of lawwith power t o buy, and sell property, and to sue and be sueda corporationnot a general partner ship nor a limited co- partnership b. Although there are similarities, such as the features of limited liability and centralized management granted to such juridical entity, the sociedad aninoma didn't exactly correspond to the notion of a corporation in English or American law 7. Cuenta en participacionas a sort of accidental partnership constituted in su ch a manner that its existence was only known to those who had an interest in th e same, there being no mutual agreement between the partners, and without a corp orate name indicating to the public in some way that there are other people besides the one who ostensibly managed and conducted the business, governed under Code of Comme rce NATURE AND ATTRIBUTES OF A CORPORATION NATURE AND POWER TO CREATE A CORPORATION Constitutional Provisions The power to create corporations is one of the attributes of sovereignty The exercise of the power is legislative in character and the legislature ma y, subject to the restrictions of the Constitution, create a particular corporat ion by direct act, or make provisions, by general law, for the organization of c orporations by natural persons upon compliance with the prescribed conditions Article 12, Section 16. The Congress shall not, except by general law, provide f or the formation, organization, or regulation of private corporations. Governmen t-owned or controlled corporations may be created or established by special char ters in the interest of the common good and subject to the test of economic viab ility. Congress cannot under the Constitution, except by general law, provide for t he formulation, organization and regulation of private corporations It has been held that private corporations pursuant to a special law is a nu llity, and such special law is unconstitutional for being violative of the Constitution The constitutional provision taking away from Congress the power to g rant specific franchises to private corporations comes from a history of corruption when such power were exercised by legislatures in common law jurisdiction In Philippine jurisdiction, the Corporation Code is the general law under wh ich private corporations are organized pursuant to the mandates of the Constitution Civil Code Provisions Recognizes corporations, partnerships and associations for private interest or purpose to which they are granted a juridical personality separate and distinct from that of each shareholder, partner, or member (Article 44 of th e CC)
Franchises of Corporations 1. Primary franchise a. Franchise to exist as a corporation b. Right to exist as such and is vested in the individuals who compose the co rporation and not in the corporation itself and cannot be conveyed in the absence of legislative authority to do so
2. Secondary franchise a. Certain rights and privileges conferred upon existing corporations b. Special or secondary franchises of a corporation are vested in the corporation and may ordinarily be conveyed or mortga ged under a general power granted to a corporation to dispose of its property, e xcept such secondary or special franchises as are charged with a public use CORPORATION AS A PERSON Entitled to due process and equal protection The guarantees of the bill of rights are universal in application to all per sons within the territorial jurisdiction, without regard to any differences in race, color, or nationality. The word person includes aliens Private corporations, likewise, are persons within the scope of t he guarantees insofar as their property is concerned Unreasonable Searches and Seizures Corporations are protected by the constitutional guarantee against unr easonable searches and seizures But officers of a corporation from which documents, papers, and things were seized have no cause of action to assail the legality of the seizures, regardles s of the amount of shares of stock or of the interest of each of them in said corporation, and whatever the offices they hold therein may be, because the corporation has a personality separate and dist inct from those of said officers Corporation is entitled to immunity against unreasonable searches and seizures A corporation after all is but an association of individuals under an assume d name and with a distinct legal entity. In organizing itself as a collective body it waives no constitutional immunities appropriate f or such body. Its property cannot be taken without compensation. It can only b e proceeded against by due process of law, and is protected, under the 14th Ame ndment, against unlawful discrimination. (Bache case) Corporation is not entitled to privilege against self-incrimination In the same Bache case, it was mentioned that corporations are not entitled to the privilege against self-incrimination The corporation is a creature of the State. It is presumed to be incorporat ed for the benefit of the public. It receives certain special privileges and franchises, and holds them subject to the laws of the State and the limitations of its charter. Its right to act as a cor poration is only preserved to it as long as it obeys the laws of its creation. The abovementioned made the great CLV to contemplate on the circumstances
There is a distinction between the application of the rights to due proces s, equal protection, and against unreasonable searches and seizures, and the right against self-incrimination The great CLV contemplates that the diff may lie on the fact that the right against self-incrimination doesn't result in a physical intrusion into the premise s of the corporation, because it would require only that the corporation, through its agents, produce records and books before the courts. This right only denies individuals the right to a buse the corporate medium to do folly. On the other hand, to deny the due process rights or rights against unreaso nable searches and seizures to corporations would actually be to invite the State to physically intrude into the personal and business privacy of the stockholders or members who com pose it Another view is the protected rights with respect to corporations is all meant to curb the abuse that the State and its representatives may employ upon the citizenry, including the modes upon which they conduct their lives and businesses. The right against self-incrimination is not meant to prevent an actual State abuse but to avoid pressuring the individual from having to tell a lie. PRACTICE OF PROFESSION Corporations cannot engage in the practice of profession since they lack the actual and technical competence required by the PRC
COUNTER-REVOLUTION is the Architectural Professional Corporations is now allowed under RA9266 LIABILITY FOR TORTS A corporation is civilly liable in the same manner as natural persons for torts, because generally speaking, the rules governing the liability of a principal or master for a tort committed by an agent or servant are the same whether the principal or master be a natural person or a corporation, and whether the servant or agent be a natura l or artificial person PNB CASEA corporation is liable whenever a tortuous act committed by an offic er or agent under an express direction or authority from the stockholders or members acting as a body, or generally, from the directors as the governing body Not every tortuous act committed by an officer can be ascribed to the corpor ation as its liability, for it is reasonable to presume that in the granting of the authority by the corporation to its agent, such a grant did not include the direction to commit tortuous acts against third partiesonly when the corporation has expressly directed the commission of such tortuous act, would the da mages resulting therefrom be ascribable to the corporation The direction of the corporation may be manifested either by its board expre ssly or impliedly ratifying such act or is estopped from impugning such an act Atty. Dy posts the question on what if you are the one making the authority , being a member of the Board of Directors,
authorized yourself to do a certain act? CRIMINAL LIABILITY OF CORPORATIONS WEST COAST LIFE CASEthere are no provisions relating to the practice and p rocedure in criminal actions whereby a corporation may be proceeded against criminally and brought into court When it comes to criminal jurisdiction, our courts have no common law jurisdiction or powers, and being creatures of statute have only thos e powers conferred upon them by statute PEOPLE V. CONCEPCIONwhen a criminal statute forbids a corporation itself from doing an act, the prohibition extends to the board of directors, and to each director separately and individually Note that a corporation can only act through its officers and agents, and wh ere the business itself involves a violation of law, the correct rule is that all who participate in it are liable (PEOPLE V. TAN BOON KONG) PEOPLE V. TAN BOON KONGEssentially in the field of Criminal Law, the Court refuses to apply the fiction of corporate entity to shie ld the individual actors in the criminal act, even when they do the criminal act for or in behalf of the corporation they represent The other reason why a corporation cannot be held liable for a crime is the difficulty if not impossibility, of imposing the penal sanction Also, a crime cannot be imputed to a corporation, being a mere artificial be ing without a mind, since criminal intent as an essential ingredient of a crime is missing SIA V. PEOPLECourt made a clear distinction when a corporate officer can be held personally liable criminally for acts done in behalf of the corporation o The performance of an act is an obligation directly imposed by the law on the corporation. Since it is a responsible officer or officers of the corporation who actually perform the act for the corporation, they must of necessity be the ones to assume the criminal liability; otherwise this liability as created by th e law would be illusory, and the deterrent effect of the law, negated. If we pursue the doctrine of Sia that a corporate officer can only be held p ersonally liable for the crime committed by or in behalf of a corporation only in cases when the corporation was directly required by the law to do an act in a given manner, and the same law makes the p erson who fails to perform the act in the prescribed manner expressly criminally liable. COMETA V. CAalthough a criminal case can only be filed against the officers of a corporation and not against the corporation itself, it doesn't follow that the corporation cannot be a real-partyin-interest for the purpose of bringing a civil action for malicious prosecuti on for the damages incurred by the
corporation for the criminal proceedings brought against its officer UNDER THE CASE OF CHING V. CA, A CORPORATION CAN BE HELD CRIMINALLY LIABLE HOW? READ BELOW.
If the crime is committed by a corporation or other juridical entity, the direct ors, officers, employees or other officers thereof responsible for the offense s hall be charged and penalized for the crime, precisely because of the nature of the crime and the penalty therefor. A corporation cannot be arrested and impriso ned; hence, cannot be penalized for a crime punishable by imprisonment. However, a corporation may be charged and prosecuted for a crime if the imposable penalt y is fine. Even if the statute prescribes both fine and imprisonment as penalty, a corporation may be prosecuted and, if found guilty, may be fined. A crime is the doing of that which the penal code forbids to be done, or omittin g to do what it commands. A necessary part of the definition of every crime is t he designation of the author of the crime upon whom the penalty is to be inflict ed. When a criminal statute designates an act of a corporation or a crime and pr escribes punishment therefor, it creates a criminal offense which, otherwise, wo uld not exist and such can be committed only by the corporation. But when a pena l statute does not expressly apply to corporations, it does not create an offens e for which a corporation may be punished. On the other hand, if the State, by s tatute, defines a crime that may be committed by a corporation but prescribes th e penalty therefor to be suffered by the officers, directors, or employees of su ch corporation or other persons responsible for the offense, only such individua ls will suffer such penalty. Corporate officers or employees, through who se act, default or omission the corporation commits a crime, are themselves indi vidually guilty of the crime. The principle applies whether or not the crime requires the co nsciousness of wrongdoing. It applies to those corporate agents who themselves c ommit the crime and to those, who, by virtue of their managerial positions or ot her similar relation to the corporation, could be deemed responsible for its com mission, if by virtue of their relationship to the corporation, they had the pow er to prevent the act. Moreover, all parties active in promoting a crime, whether agents or not, are principals. Whether such officers or employees are benefited by their delictual acts is not a touchstone of their criminal liability. Benefit is not an operativ e fact. In this case, petitioner signed the trust receipts in question. He cannot, thus, hide behind the cloak of the separate corporate personality of PBMI. In the words of Chief Justice Earl Warren, a corporate officer cannot protect hi mself behind a corporation where he is the actual, present and efficient actor. HOWEVER, COMPARED WITH CONSOLIDATED BANK V. CONTINENTAL CEMENT By all indications, then, it is apparent that there was really no trust receipt transaction that took place. Evidently, respondent Corporation was required to sign the trust receipt simply to facilitate collection by petitioner of the loa n it had extended to the former. Finally, we are not convinced that respondent Gregory T. Lim and his spouse shou ld be personally liable under the subject trust receipt. Petitioner's argument tha t respondent Corporation and respondent Lim and his spouse are one and the same cannot be sustained. The transactions sued upon were clearly entered into by r espondent Lim in his capacity as Executive Vice President of respondent Corporat ion. We stress the hornbook law that corporate personality is a shield against personal liability of its officers. Thus, we agree that respondents Gregory T. Lim and his spouse cannot be made personally liable since respondent Lim entered into and signed the contract clearly in his official capacity as Executive Vice President. The personality of the corporation is separate and distinct from th e persons composing it.
*The above was mentioned because no violation was committed. Will there be the same pronouncement if there was a finding of criminal liability? ENTITLEMENT TO MORAL DAMAGES Obiter in Mabitao casea corporation may have a good reputation which , if besmirched, may also be a ground for the award of moral damages
In recent decisions, nonetheless, the SC held that even when a corporation's reputation and goodwill have been prejudiced, there can be no award for mor al damages under Article 2217 and succeeding articles of the CC Recovery of corporation would be under Articles 19, 20, and 21 of the CC, bu t which requires a clear proof of malice or bad faith A claim for moral damages arising from libel falls under Article 2219, which expressly authorizes the recovery of moral damages in cases of libel , slander or any form of defamation, and doesn't qualify whether the plaintiff is a natural or juridical person. Therefore, a jurisdictional person can validly complain or any other form of def amation and claim for moral damages. CORPORATE NATIONALITY Corporate nationality serves as legal basis for subjecting the enterprise or its activities to the laws, the economic and fiscal powers, and the various soc ial and financial policies of the state to which its supposed to belong. PLACE OF INCORPORATION TEST is the principal test of nationality of a corpor ate entitya corporation is a national of the country under whose laws it ha s been organized and registered SEC. 123. Definition and rights of foreign corporations. - For the purposes of t his Code, a foreign corporation is one formed, organized or existing under any l aws other than those of the Philippines and whose laws allow Filipino citizens a nd corporations to do business in its own country or state. It shall have the ri ght to transact business in the Philippines after it shall have obtained a licen se to transact business in this country in accordance with this Code and a certi ficate of authority from the appropriate government agency. (n) CONTROL TESTthe nationality of a corporation is determined by the nationa lity of the majority of the stockholders on whom control is vested PLACE OF PRINCIPAL BUSINESS TEST is also used to determine whether a state has jurisdiction over the existence and legal character of a corporation, its capacity or powers, internal organization, capital structure, the rights and liabilities of directors, officers, and shareholders towards each other and to creditors and third personscorporation is a national or subject to the jurisdiction of the pla ce where its principal office or center of management is located WHY IS THE PLACE OF INCORPORATION TEST THE PRIMARY TEST? This follows the theory of concession wherein a corporation is a creature of the State NOTE, ALTHOUGH THE PLACE OF INCORPORATION IS THE PRIMARY TEST, IN THE FOLLOWING
DISCUSSIONS, THE CONTROL TEST IS ALSO USED EXPLOITATION OF NATURAL RESOURCES Section 2. All lands of the public domain, waters, minerals, coal, petroleum, an d other mineral oils, all forces of potential energy, fisheries, forests or timb er, wildlife, flora and fauna, and other natural resources are owned by the Stat e. With the exception of agricultural lands, all other natural resources shall n ot be alienated. The exploration, development, and utilization of natural resour ces shall be under the full control and supervision of the State. The State may directly undertake such activities, or it may enter into co-production, joint ve nture, or production-sharing agreements with Filipino citizens, or corporations or associations at least sixty per centum of whose capital is owned by such citi zens. Such agreements may be for a period not exceeding twenty-five years, renew able for not more than twenty-five years, and under such terms and conditions as may be provided by law. In cases of water rights for irrigation, water supply f isheries, or industrial uses other than the development of water power, benefici al use may be the measure and limit of the grant. The State shall protect the nations marine wealth in its archipelagic waters, t erritorial sea, and exclusive economic zone, and reserve its use and enjoyment e xclusively to Filipino citizens. The Congress may, by law, allow small-scale utilization of natural resources by Filipino citizens, as well as cooperative fish farming, with
priority to subsistence fishermen and fish- workers in rivers, lakes, bays, and lagoons. The President may enter into agreements with foreign-owned corpora tions involving either technical or financial assistance for large- scale explor ation, development, and utilization of minerals, petroleum, and other mineral oi ls according to the general terms and conditions provided by law, based on real contributions to the economic growth and general welfare of the country. In such agreements, the State shall promote the development and use of local scientific and technical resources. The President shall notify the Congress of every contract entered into in accord ance with this provision, within thirty days from its execution. Section 7. Save in cases of hereditary succession, no private lands shall be tra nsferred or conveyed except to individuals, corporations, or associations qualif ied to acquire or hold lands of the public domain. The above-quoted provision doesn't include the place of incorporation test. Eve n if the corporation is a creature and technically under the control of the Stat e, there is a need to further safeguard the exploitation of natural resources There is no distinction between non-voting and voting shares since there are instances when non-voting shares can vote REGISTER OF DEEDS OF RIZAL V. UNG SUI SI TEMPLE The purpose of the sixty per centum requirement is to ensure that corporations or associations allowed to acquire agricultural land or to exploit natural resources shall be controlled by Filipinos and that t
he spirit of the Constitution demands that in the absence of capital stock, the controlling membership should be composed of Filipino citizens JG SUMMIT HOLDINGS CASE o If the foreign shareholdings in a landholding corporation exceed 40%, it is not the foreign stockholder's ownership of the shares which is adv ersely affected by the capacity of the corporation to own land, that is the corp oration becomes disqualified to own land o The Constitutional prohibition only extends to land ownership and it do esn't extend to immovable property OWNING AND OPERATING PUBLIC UTILITIES Section 11. No franchise, certificate, or any other form of authorization for th e operation of a public utility shall be granted except to citizens of the Phili ppines or to corporations or associations organized under the laws of the Philip pines, at least sixty per centum of whose capital is owned by such citizens; nor shall such franchise, certificate, or authorization be exclusive in character o r for a longer period than fifty years. Neither shall any such franchise or righ t be granted except under the condition that it shall be subject to amendment, a lteration, or repeal by the Congress when the common good so requires. The State shall encourage equity participation in public utilities by the general public. The participation of foreign investors in the governing body of any public util ity enterprise shall be limited to their proportionate share in its cap ital, and all the executive and managing officers of such corporation or associa tion must be citizens of the Philippines. The abovementioned expressly includes the place of incorporation test and requires that only domestic corporations with at least 60% of the capital stock owned by Filipinos may own and operate public utilities in the Philippines PEOPLE V. QUASHAthe Constitution doesn't prohibit the formation of a public util ity corporation without the required proportion of Filipino capital. What it prohibits is the granting of a franchise or other form of authorization for the operation of a public util ity of a corporation already in existence but without the requisite proportion of Filipino capital The above case then draws the distinction between the primary and secondary franchise of a corporation Given this ruling however, according to the great CLV, shows that the cons titutional provision on the formation of corporations really serves no useful benefit then since all it covers is the primary franchise but it is through a secondary franchise by which the corporation may be granted special privileges, etc.
MASS MEDIA AND ADVERTISING INDUSTRY Section 11. (1) The ownership and management of mass media shall be limited to c itizens of the Philippines, or to corporations, cooperatives or associations, wh olly-owned and managed by such citizens. The Congress shall regulate or prohibit monopolies in commercial mass media when the public interest so requires. No combinations in restraint of trade or unfai r competition therein shall be allowed.
(2) The advertising industry is impressed with public interest, and shall be reg ulated by law for the protection of consumers and the promotion of the general w elfare. Only Filipino citizens or corporations or associations at least seventy per cent um of the capital of which is owned by such citizens shall be allowed to engage in the advertising industry. The participation of foreign investors in the governing body of entities in such industry shall be limited to their proportionate share in the capital thereof, and all the executive and managing officers of such entities must be citizens of the Philippines. Although the constitutional provision with regard mass media doesn't expressl y include the place of incorporation test, the same should be deemed incl uded under the same principles of exploitation of natural resources The ancillary control test for mass media under the Constitution is actually more stringent than in other defined areas since it requires not only 100% Filipino ownership of the capital stock of the corporation but also 100% Filipino management of the entity, with re spect to mass media Summarizing them all Exploitation of natural resources At least 60% Filipino-owned Ownership of private lands At least 60% Public utilities and fr anchise At least 60% Mass media 100% control and management Advertising industry At least 70% with foreign participation limited to their proportionate share in the capital and that all executive and management officers must be Filipino citizens WAR TIME TEST In times of war, the nationality of the corporation is determined by the cha racter or citizenship of its controlling stockholders INVESTMENT TEST AND GRANDFATHER RULE GRANDFATHER RULE is the method by which the percentage of Filipino equity in a corporation engaged in nationalized and/or partly nationalized areas of activities, provided for under the Constitution and other nationalization laws, is computed, in cases where cor porate stockholders are present in the situation, by attributing the nationality of the second or even subsequent tier of ownershi p to determine the nationality of the corporate shareholder SEC Rule: corporations and partnerships with 60% of the capital is owned b y Filipinos is of Filipino nationality but if the percentage is lesser than 60% only the number of shares corresponding to such percentage shall be counted as of Philippine nationalitythi s however, pertains only to investments Foreign Investments Act of 1991: Philippine national refers to a corporation organized under the laws of the Philippines which at least 60% of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines o Where a corporation and its non-Filipino shareholders own stocks in a SEC -registered corporation, at least 60% of the outstanding capital stock and entitled to vote of BOTH corporations must be owned and held by Filipino citizens and at lea st 60% of the Board of Directors must be citizens of the Philippines PALTING V. SAN JOSE PETROLEUMapplication of the grandfather rule to det
ermine the nationality of the ultimate
controller of the subject corporation cannot go beyond the level of what is reas onable. The further away the level of ownership from the subject corporation , the less can one practically associate control of the subject corporation Sec. 140. Stock ownership in certain corporations. - Pursuant to the d uties specified by Article XIV of the Constitution, the National Econom ic and Development Authority shall, from time to time, make a determination of w hether the corporate vehicle has been used by any corporation or by business or industry to frustrate the provisions thereof or of applicable laws, and shall su bmit to the Batasang Pambansa, whenever deemed necessary, a report of its findin gs, including recommendations for their prevention or correction. Maximum limits may be set by the Batasang Pambansa for stockho ldings in corporations declared by it to be vested with a public interest purs uant to the provisions of this section, belonging to individuals or groups of individuals related to each other by consanguinity or affinity or by close business interests, or whenever it is necessary to achieve national objectives, prevent illegal monopolies or combinations in restraint or trade, or to implement national economic policies declared in laws, rules and r egulations designed to promote the general welfare and foster economic developme nt. In recommending to the Batasang Pambansa corporations, business or industries to be declared vested with a public interest and in formulating proposals for limi tations on stock ownership, the National Economic and Development Authority sh all consider the type and nature of the industry, the size of the en terprise, the economies of scale, the geographic location, the extent of F ilipino ownership, the labor intensity of the activity, the export potential, as well as other factors which are germane to the realization and promotion of bus iness and industry. SEPARATE JURIDICAL PERSONALITY AND DOCTRINE OF PIERCING THE VEIL OF CORPORATE FI CTION INTRODUCTION There is a complementary relationship of the piercing doctrine to the main d octrine that a corporation has a juridical personality separate and distinct from the stockholders or members who compose it MAIN DOCTRINE OF SEPARATE JURIDICAL PERSONALITY A corporation has a personality distinct and separate from its stockholders and members A corporation is a juridical entity with legal personality separate and dis tinct from those acting for and in his behalf and, in general, from the people composing it, and that obligations incurred by the corporation, acting through its directors, officers, and employe es are its sole liabilities A corporation's strong juridical personality has been considered as the attrib ute most characteristic of corporationsright of succession, limited liability , centralized management, and
generally free transferability of shares of stock The separate juridical personality of the corporation facilitates and prese rves the going concern value of the underlying business enterprise, saves on transaction costs, and prevents disruption of that value because of investors who withdraw or are deceased The stability of the main doctrine of separate juridical per sonality is inextricably linked with the attractiveness of the corporation as an effective medium by which businessmen can pursue business enterprises A stockholder's right in corporate property is purely inchoate and will not en title them to intervene in a litigation involving corporate property. If there exists any right, it is indirect, contingent, remote, conjectural, consequential and collateral. At the very leas t, their interest is very inchoate, or in sheer expectancy of a right in the man agement of a corporation and to share in the profits thereof and in the properti es and assets thereof on dissolution, after payment of the corporate debts and obligations APPLICATION: MAJORITY EQUITY OWNERSHIP AND INTERLOCKING DIRECTOR SHIP DBP V. NLRCownership of a majority of capital stock and the fact that a major ity of directors of a corporation are the directors of another corporation created no employer-employee
relationship, nor did it make the controlling stockholder liable for employee's cl aim of the subject corporation Mere ownership by a single stockholder or by another corpora tion of all or nearly all of the capital stock of a corporation isn't of itself sufficient ground for disregarding the separate juridical personality A corporate defendant in a case, against whom a writ of possession has been issued, cannot use the fact that it has obtained controlling equities in the corporate plaintiffs to suspend enforcement of the writ, for their separate juridical personality and th us their separate business and proprietary interests remain Mere substantial identity of incorporators of two corporations doesn't necessa rily imply fraud nor warrant the piercing of the veil of corporate fiction. In the absence of clear and convincing evidence to s how that the corporate personalities were used to perpetrate fraud, or circumven t the law, the corporations are to be rightly treated as distinct and separate f rom each other Having interlocking directors, corporate officers and shareholders isn't e nough justification to pierce the veil of corporate fiction in the absence of fraud or other public policy considerations APPLICATION: BEING CORPORATE OFFICER Being an officer or stockholder of a corporation doesn't by itself make one's pr operty also of the corporation, and vice-versa, for they are separate entitie s, and that shareholders who are officers are in no legal sense the owners of corporate property which is owned by the corporation as a distinct and legal
person The mere fact that one is president doesn't render the property he owns or pos sesses the property of the corporation, since the president as an individual and the corporation are separate entities Corporate personality is a shield against personal liability of its officersa corporate officer and his spouse cannot be made personally liable under a trust receipt where he entered into and signed the con tract clearly in his official capacity The fact alone that one is president is not sufficient to hold him solidaril y liable for the liabilities adjudged against the corporation and the employees When the compulsory counterclaim filed against corporate officers for their alleged fraudulent act indicate that such corporate officers are indispensable parties in the litigation, the original inclusion of the corporation in the suit doesn't thereby allow the denial of a specific counterclaim being filed to make the corporate officers personal ly liable. A corporation has a legal personality entirely separate and distinc t from that of its officers and cannot act for and on their behalf, without bein g so authorized APPLICATION: DEALINGS BETWEEN CORPORATION AND STOCKHOLDERS The fact that a majority stockholder had used his own money to pay part of t he loan of the corporation cannot be used as basis to pierce Mere fact that stockholder sells his shares of stock in the corporation during the pendency of a collection suit against the corporation, doesn't make such stockholder personally liable for the corporate debt, since the disposing stockholder has no personal obligation t o the creditor, and it is inherent right of the stockholder to dispose of hi s shares of stock anytime he so desires APPLICATION: ON PRIVILEGES ENJOYED The tax exemption clause in the charter of a corporation cannot be extended nor is enjoyed by even its controlling stockholders APPLICATION: OBLIGATIONS AND DEBTS Corporate debt or credit is not the debt or credit of the stockho lder nor is the stockholder's debt or credit that of the corporation Stockholders have no right to intervene in a collection case coveri ng loans of the corporation since the interest of shareholders in corporate property is purely fictitious
PIERCING THE VEIL OF CORPORATE FICTION: SOURCE OF INCANTATION The notion of corporate entity will be pierced or disregarded and the indivi duals composing it will be treated as identical if the corporate entity is being used as a cloak or cover for fraud or illegality, as a justification for the sole benefit of the stockholders
As a general rule, a corporation will be looked upon as a legal entity, unl ess and until sufficient reason to the contrary appears. When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons. Also, the corporate entity will be disregarded in the interest of justice in such cases as fraud that may work inequities among members of the cor poration internally, involving no rights of the public or third persons. In bot h instances, there must have been fraud and proof of it. For the separate jurid ical personality of a corporation to be disregarded, the wrongdoing must be clea rly and convincingly established. It cannot be presumed. The main treatment of the piercing doctrine to both corporate practicioners and their clients has always been to prevent it being applied by the courts to their particular situation and avoid the dire con sequences of piercing, which is mainly holding the associates in the venture per sonally liable for corporate obligations NATURE AND EFFECT OF THE DOCTRINE FRANSISCO MOTORS V. CAthe rationale behind piercing the corporation's ident ity in a given case is to remove the barrier between the corporation from th e persons comprising it to thwart the fraudulent and illegal schemes of thos e who use the corporate personality as a shield for undertaking certain proscrib ed activities. However, in the case at bar, instead of holding certain individ uals or person responsible for an alleged corporate act, the situation has been reversed. It is the petitioner as a corporation which is being order ed to answer for the personal liability of certain individual directors, officer s and incorporators concerned. Hence, it appears to us that the doctrine has b een turned down because of its erroneous invocation. The notion of separate personality however may be disregarded under the doct rine piercing the veil of corporate fiction as in fact the court will often look a t the corporation as a mere collection of individuals or an aggregations of pers ons undertaking business as a group, disregarding the separate juridical persona lity of the corporation unifying the group Equitable Remedy The doctrine of piercing the corporate veil is an equitable doctrin e developed to address situations where the separate corporate personality of a corporation is abused or used for wrongful purposes Whether the separate personality of the corporation should be pierced hinges on the obtaining facts, appropriately pleaded or proved. However, any piercing of the corporate veil has to be done with cautio n, albeit the court will not hesitate to disregard the corporate veil when it is misused or when necessary in the interest of justice. After all, the concept o f corporate entity was not mean to promote unfair objectives. Remedy of Last Resort Piercing the corporate veil isn't allowed unless the remedy sought is not available and when other remedies are still available Objectives for Availing of the Piercing Piercing isn't allowed unless the remedy sought is to make the officer or anot her corporation pecuniarily liable for the corporate debts Piercing is not available when personal obligations of an individual are to be enforced against the corporation Piercing doctrine is meant to prevent fraud, and cannot be employed when the end result would be to perpetrate fraud or a wrong The theory of corporate entity wasn't meant to promote unfair objectives or ot
herwise, nor to shield them The attempt to make the security agencies appear as two separate en tities when in reality they were but one, was a devise to defeat the law and shouldn't be permitted
Basis must be Clear Evidence To disregard the separate juridical personality of a corporation, it is elem entary that the wrongdoing cannot be presumed and must be clearly and convincingly established. The organization of the corporation at the time when the relationship between the landholder and the developer were still cordial cannot be used as a basis to hold the corporation liable later on for the obligations of the lando wner to the developer under the mere allegation that the corporation is being us ed to evade the performance of obligation by one of its stockholders Application of the doctrine of piercing the corporate veil should be done wi th caution Not Available To Theorizing BOYER-ROXAS V. COURT OF APPEALSPiercing of the corporate veil isn't allowed when it is resorted under the theory of co-ownership to justify continued use and possession of stockholders of corporate properties The piercing doctrine cannot be availed of to dislodge from SEC's jurisdiction the petition for suspension of payments under PD 902-A on the g round that the petitioning individuals should be treated as the real petitioners to the exclusion of petitioning corporation. The doctrine of piercing the veil of corporate fiction relied heavily upon the petitioner is entirely misplaced, as said doctrine only applies when such corporate fiction is used to de feat public convenience, justify wrong, protect fraud, or defend crime. Application to Third Parties GO CHAN V. YOUNGThat respondents aren't stockholders of the sister corporations doesn't make them non-parties to this case, since it is alleged that the sister c orporations are mere alter egos to the directors-petitioners, and that the siste r corporations acquired the properties sought to be reconveyed to the FGSRC in v iolation of director-petitioner's fiduciary duty to the FGSRC. The notion of corp orate entity will be pierced and the individuals composing it will be treated as identical if the corporate entity is being used as a cloak or cover for fraud o r illegality; as a justification for a wrong, or as an alter ego, an adjunct, or a business conduit for the sole benefit of the stockholders Piercing Application Is Essentially Of Judicial Prerogative Under the case of Cruz v. Dalisay, it was held that piercing the corporate v eil is a judicial remedy not available to a sheriff According to the CLV, the more appropriate application of Cruz would be th at the administrative determination of the facts upon which the piercing d octrine is to be applied is subject to judicial or quasi-judicial review, as the case may be
Consequences Available Of Piercing Doctrine (Concept Of Res Judicata) Application of the doctrine to a particular case doesn't deny the corporation of legal personality for any and all purposes, but only for the particular transaction or instance or the particular obligation for which the doctrine was applied Piercing application, ergo, has only res judicata effect Once pierced, it doesn't mean that it is always pierced. The purpose is not the revoke the separate personality of the corporation. CLASSIFICATION OF PIERCING CASES 1. Fraud caseswhen the corporate entity is used to commit fraud or to justify a wrong, or to defend a crime a. There is always the element of malice or evil motive 2. Alter ego caseswhen the corporate entity is used to defeat public convenie nce, or a mere farce, since the corporation is merely the alter ego, business conduit or instrumentality of a person or another equity a. Even in the absence of evil motive, piercing is allowed 3. Equity casesWhen the piercing of the corporate fiction is necessary to achiev e justice or equity a. Dumping ground or added flourish when it had to apply the piercing doctrin e but could find it convenient to do so because no evil had been sought to be ac hieved, but at the same time, the corporate juridical personality of
the subject corporation cannot be respected in order to achieve justice Authorities are agreed on three basic areas where piercing the veil, with wh ich the law covers and isolates the corporation from any other legal entity to w hich it may be related, is allowed (GCC V. ALSONS DEVELOPMENT AND INVESTMENT COR P.) o Defeat of public inconvenience, as when the corporation is used as vehicle fo r the evasion of existing obligation o Fraud cases or when the corporate entity is used to justify wrong, protect fr aud, or defend a crime o Alter ego cases, where the corporation is merely a farce since it is mere alter ego or business conduit of a person, or where a corporation is so organized and controlled and its affairs are conducted as to make it merely an instrumentality , agency, conduit or adjunct of another corporation RUNDOWN ON PIERCING APPLICATIONthe SC pierced the corporate veil to ward off a judgment credit, to avoid inclusion of corporate assets as part of the estate of the decedent, to escape liability arising for a debt, or to perpetuate fraud and/or confuse legitimate issues either to promote or to shield unfair objectives to cover up an otherwise blatant violation of t he prohibition against forum shopping SUMMARY OF PROBATIVE FACTORS (CONCEPT BUILDERS CASE) 1. Stock ownership by one or common ownership corporations of both
2. 3. 4.
Identity of directors and officers The manner of keeping corporate books and records Methods of conducting the business
TESTS IN DETERMINING THE APPLICABILITY OF DOCTRINE OF PIERCING CORPORATE VEIL 1. Control, not mere majority of complete stock control, but complete denomination, not only of finances but of policy and business practice, in resp ect to the transaction attacked so that the corporation as to this transaction had at the time to 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 statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff's legal rights 3. The aforesaid control and breach of duty proximately caused the injury or unjust loss complained of FRAUD CASES FRANSISCO V. MEJIAWhen the legal fiction of the separate corporate personalit y is abused, such as when the same is used for fraudulent or wrongful ends, the courts haven't hesitated to pierce the corporate veil The general rule is that obligations incurred by a corporation, acting throu gh the directors, officers, or employees, are its sole liabilities. However, the veil with which the law covers and isolates the corp oration from its directors, officers, or employees will be lifted when the corpo ration is used by any of them as a cloak or cover for fraud or illegality or inj ustice. Here the fraud was committed by the petitioners to the prejudice of the bank. Fraud or bad faith on the part of certain corporate officers or stockholders may warrant the piercing of the veil of corporate fiction so that the said individual may not seek refuge therein, but may be held individually and personally liable for his or her actions. Mere allegation of fraud or bad faith, without evidence supp orting such claims cannot warrant the piercing of corporate veil. Acts by Controlling Stockholder NAMARCO V. ASSOCIATED FINANCE CO.where a stockholder, who has absolute control over the business and affairs of the corporation, entered into a contract with another corporation thr ough fraud and false representations, such stockholder shall be liable jointly a nd severally with his co- defendant corporation even when the contract sued upon was entered into on behalf of the corporation
In fraud cases, the alter ego concept pertains to employing the corporation even for a single transaction, to do evil, unlike in pure alter ego cases, where the courts go into findings of systematic disregard and disrespect of the separ ate juridical person of the corporation Avoidance of Taxes With regard to the companies were meant to be used as mere tools for the avo idance of estate taxes, suffice it to say that the legal right of a taxpayer to
reduce the amount of what otherwise could be his taxes or altogether avoid them, by means which the law permits cannot be doubted If it's used as a tax avoidance measure, it seems that the SC gave the notion that it is perfectly normal and permissible to do so : I think this is a question of fact. Was the corporation used to perpetrate fraud or commit tax evasion or what-have-you? There should be a grasp of the circumstances to say if the piercing doctrine should be ap plied. Nonetheless, practically I think, if you use a corporation to evade per sonal liabilities, doesnt a corporation entail bigger tax liabilities? Isn't tha t one of its disadvantages as previously mentioned way above this notes. Avoidance of Contractual Commitments or Civil Liabilities PALACIO V. FELY TRANSPORTATIONone cannot evade civil liability by incorp orating properties or the business o This is contrary to another ruling saying that piercing isn't available whe n personal obligations of an individual are to be enforced against a cor poration o With this, does it mean that piercing can go both ways? No, in this present case, the purpose of the incorporation was to evade the liability. This is different from the p revious case discussed. Look at the purpose of incorporation always so that you will not be misled. VILLA REY TRANSIT V. FERRERwhen the fiction of legal entity is urged as a mea ns to avoid a contractual commitment against non-competition (monopoly) Liability of Officers Unless sufficient proof exists on record that an officer has used the corpor ation to defraud private respondents, he cannot be made personally liable just because he appears to be the controlling stockholder Mere ownership by a single stockholder or by another corpora tion of all or nearly all of the capital stock of a corporation isn't of itself sufficient ground for disregarding the separate corporate personality An officer may not be held liable personally for damages if he acted in good faith within the scope of his authority Avoidance of Legal Restrictions Corporate veil cannot be used to shield an otherwise blatant violation of th e prohibition against forum-shopping. Shareholders, whether suing as the majorit y in direct actions or as the minority in a derivative suit, cannot be allowed t o trifle with court processes, particularly where the corporation itself hasn't be en remiss in vigorously prosecuting or defending corporate causes and in using a nd applying remedies available to it Under-Capitalization Note: in the book, this was placed by CLV under alter-ego cases and yet it i s being discussed in the outline as part of the fraud cases Important case is MCCONNELL V. CA Although it held that mere ownership of all and nearly all of the stocks do esn't make a corporation a business conduit of the stockholders, but in thi s case, the operation of the corporation was so merged with those of the stockho lders as to be practically be indistinguishablethey had the same office, the fund s were held by the stockholders, etc. There is no clear-cut distinction by the court if the abov ementioned case is a fraud case or alter ego case for piercing the corporate veil since it applied the Milwaukee doctrine to the alter ego formula. Though, reading the case would show that th ere has bee no finding of fraud
In this end, undercapitalizing a corporation is therefore a species of alter ego cases especially when it didn't consider prudent business practice fo r ventures to shoulder all the capital needed for the venture when credit theref or is available Indeed, leveraging is accepted and often idealized business practice. More im portantly, creditors extend credit fully aware of the risk involved in case of under-capitalization, and the element of fraud generally doesn't attain by that fact alone : Just a thought thenmy 2-cents worthif this is an alter-ego case, then what is it doing under the fraud ones in the outline? Proba bly, when this was answered, I was not around =P Rules in Labor Cases In the field of labor, the rule on liability of officers have taken two diff erent strains Following AC RANSOM, since a corporate employer is an artificial per son, it must have an officer who can be presumed to be the employer, being the person acting in the interest of the employerAC RANSOM then held that the responsible officer of the employer corporation can be held liable personally, not to say even criminally, for non-payment of backwages; and that in the absence of definite proof as to the identity of an officer or offic ers of a corporation directly liable for failure to pay backwages, the responsible officer is the president of the corporation jointly a nd severally with other presidents of the same corporation In effect then, AC RANSOM held that a corporate officer is liable for c orporate obligations by the mere fact that he is the highest officer of the corporation But a different turn was made in the case of DEL ROSARIO V. NLRC when it was held that for a separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and convincingly established. It cannot be presumed. Parent-Subsidiary Relations: Affiliates The fact that a corporation owns all of the stocks of another corporation ta ken alone, is not sufficient to justify their being treated as one entity. If used to legitimate functions, a subsidiary's separate existence shall be respected, and the liability of the parent corporation, as well as the subsidiary shall be confine d to those arising in their respective business. A corporation has a sep arate personality distinct from its stockholders and from other corporations to which it may be conducted. This separate and distinct personality of a corpor ation is a fiction created by law for convenience and to prevent injustice. Mere ownership by a single stockholder or another corporation of all or near ly all of the capital stock of the corporation isn't by itself a sufficient ground to disregard the separate corporate personality. The substantial identity of the incorporators of two or more corpo rations doesn't warrantly imply that there was fraud so as to justify the piercing of the writ of corporate fiction. To disregard the said separate juridical personality of a corporation, the wrong doing must be proven clearly and convincingly.
GUIDING PRINCIPLES IN FRAUD CASES 1. There must have been fraud or an evil motive in the affected transaction, and the mere proof of control of the corporation by itself wouldn't authorized piercing 2. The main action should seek for the enforcement of pecuniary claims pertai ning to the corporation against corporate officers or stockholders, or vice-vers a 3. The corporate entity has been used in the perpetration of the fraud or in justification of wrong, or to escape personal liability Fraud cases requiring the piercing of the corporate veil should be properly perceived as viewing the corporate entity from the outsidefrom the position of th ose in the business community who have to deal with corporations on the other si de of the bargaining table Piercing in fraud cases is an assurance to the dealing public that in cases of mischief by the actors behind the corporation, the piercing doctrine allows them remedy against the very actors themselves Basic public policywithout the fraud cases of piercing, then the corporate entity would become a shield behind which unscrupulous businessmen can hide and perhaps even become
dangerously aggressive in undertaking duplicitous deals because they would n ever have to be personally liable for their fraudulent or unlawful acts WHY IS THERE A SHOWING OF ALTER EGO ELEMENTS, CLV ASKED IN HIS OUTLINE? The re is showing of alter-ego elements because it is through the alter ego mechanism that fraud is perpetuated ALTER EGO CASES The question of whether a corporation is a mere alter ego is purely one of f act, and the burden is on the party who alleges it Using Corporation as Conduit or Alter ego ARNOLD V. WILLETS AND PATTERSONwhere the stock of a corporation is owned by o ne person whereby the corporation functions only for the benefit of such individual owner, the corporation and the individuals should be deemed the same When corporation is merely an adjunct, business conduit or alter ego of anot her corporation, the fiction of separate and distinct corporation be disregarded GENERAL CREDIT CORPORATION V. ALSONS DEVT. AND INVESTMENT CORP.the SC agrees with the disposition of the appellate court on the application of the piercing doctrine to the transaction subject of the case. Per the Court's count, the trial court en umerated no less than 20 documented circumstances and transaction, which taken as a package, indeed strongly supported the conclusion that responden t EQUITY was but an adjunct, as instrumentality or business conduit of petitioner.
Tax Avoidance Cases YUTIVO CASESouthern Motors was found to be the subsidiary of Yu tivo only Use of nominees to constitute the corporation for the benefit of the control ling stockholder who sought to avoid the payment of taxes Mixing-up of Operations; Disrespect to the Corporate Entity LA CAMPANA COFFEEemployment of same workers, single place of business, same p ayroll, etc. may indicate alter ego situation PADILLA V. CAThe facts that two corporations may be sister companies and th at they may be sharing personnel and resources, without more, is insufficient to prove that their separate corporate personalities are being used to defeat public inconvenience, justify wrong, protect fraud, or defend crime. Where two business enterprises are owned, conducted, and controlled by the sam e parties, both law and equity will, when necessary to protect the rights of third persons, disregard the legal fiction that two corporations are distinct earlier and treat them as illog ical Mixing of personal accounts with corporate bank deposit accounts Parent-Subsidiary Relationship Absence of proof that control over a corporation is being used by a mother c ompany to commit fraud or wrong, there would be no basis to disregard their separate juridical personalities If used to perform legitimate functions, a subsidiary's separate existence sh all be respected and the liability of the parent corporation as well as the subsidiary will be confined to those arising in their respective businesses. Even when the parent corporation agre ed to the terms to support a standby credit agreement in favor of the subsidiary, doesn't mean that its personality h as merged with that of the subsidiary GUIDING PRINCIPLES IN EQUITY CASES 1. Doctrine applies in the absence of evil intent, because of the direct vi olation of the central corporate law principle of separating ownership from management 2. Doctrine of such cases is based on estoppel; if stockholders don't respect the separate entity, others cannot be expected to be bound by the separa te juridical entity 3. Piercing in alter ego cases may prevail even when no monetary claims are s ought to be enforced against the stockholders or officers of the corporation
4. ONLY IN THE BOOK: when the underlying business enterprise doesn't really change and only the medium by which that business enterprise is changed, then there would be occasion to pierce the veil of corporate fict ion to allow business creditors to recover from whoever has control of the busin ess enterprise
EQUITY CASES When used to confuse legitimate issues o Where a corporate fiction was used to perpetrate social injustice or as a veh icle to evade obligations or confuse the legitimate issues, it would be discarde d and the two corporations would be merged as one When used to raise technicalities DUE PROCESS CLAUSE Need to bring a new case against the officer o A suit against individual shareholders in a corporation isn't a suit against th e corporation. Failure to implead the complainants is a violation of due process for it would be in effect be disregarding their distinct and sepa rate personality without a hearing o PADILLA V. CAthe general principle is that no person shall be affected by any proceedings to which he is a stranger, and strangers to a case aren't bound by the judgment rendered by a court When corporate officers are sued in their official capacity when the corpora tion wasn't made a party, the corporation isn't denied due process JACINTO V. COURT OF APPEALSProvided the evidential basis has been adduced during trial to apply the piercing doctrine CORPORATE CONTRACT LAW MERGING PRINCIPLES OF CORPORATE LAW AND CONTRACT LAW Essential elements of a contract are consent of the contracting parties, s ubject matter of the contract, and cause or consideration The essential requisite of consent requires that the two contr acting parties are legally capacitated by law to bind and be bound by the obligations, and also shouldn't represent the same interests Although the corporate entity is a juridical person, being a legal fiction it cannot act in the world except through its duly authorized officers or representativestherefore, the issue in Corporate law impinges on Contract law on what happens to contracts entered into where the corporation either has not been legally constituted, or has been defe ctively constituted; there is also the issue as to contracts involvin g duly constituted corporations, but which were entered into by officers who either were not duly a uthorized, or who exceeded their scope of authorities When a corporation hasn't been constituted by law, there is as yet no juridica l person which can validly enter into a contract contract law would consider a contract entered into in behalf of the corporation as a void contract for lack of the essential requisite of consen t being given by two contracting parties. However, in Corporate law, such contra cts would have binding effects pending on prevailing circumstances A distinction also has to be drawn between a situation where such a contract is entered into with the parties knowing fully well that a corporation doesn't ye t legally exist (promoter's contracts), and the other situation where at least one of the parties is unaware that a corporation hasn't been duly constituted (de facto corpo rations and corporations by estoppel) PRE-INCORPORATION STAGES: PROMOTER'S CONTRACT Who is a promoter? A person who, acting alone, or with others, takes initiative in founding and organizing the business or enterprise of the issuer and receives co nsideration therefor Pre-incorporation Subscription Agreement
Section 60. Subscription contract. - Any contract for the acquisition of unissue d stock in an existing corporation or a corporation still to be formed shall be deemed a subscription within the meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or some other contract. (n) Section 61. Pre-incorporation subscription. - A subscription for shares of stock of a corporation still to be formed shall be irrevocable for a period of at lea st six (6) months from the date of subscription, unless all of the other subscri bers consent to the revocation, or unless the incorporation of said corporation fails to materialize within said period or within a longer period as may be stip ulated in the contract of subscription: Provided, That no pre-incorporation subs cription may be revoked after the submission of the articles of incorporati on to the Securities and Exchange Commission. (n) The above have effectively adopted into our jurisdiction 1a fused version of both the contract theory and offer theory in defining the nature of pre-incorpo ration subscription agreements Theories Fused With Respect to Pre-Incorporation Agreements (following Section 60 and 61) 1. Contract theorya subscription agreement among several persons to take shares in a proposed corporation becomes a binding contract and is irrevoca ble from the time of subscription, unless cancelled by all the parties bef ore acceptance by the corporation 2. Offer theorya subscription agreement is only a continuing offer to a proposed corporation, which offer doesn't ripen into a contract until accepted by the corporation when organized Note: Subscription agreements are special contracts in the sense that they go beyond what we would term as ordinary contracts. Although subscription agreements are contracts between the subscriber and the corporation , at the same time they are deemed to be contracts among the stockholders of a c orporation. Such a special relationship among the subscribers of the corporati on can be sustained only if we look beyond the pale of the corporate fiction and see that actually, beneath the corporate shell, is an association of warm-blood ed persons who decided to band together in the corporation to pursue a business. This is clear from the fact t hat Section 61 wherein a pre-incorporation subscription agreement is generally irrevocable within the stipulated 6-month period unless all of the other subscribers consent to the revocation. Theories In Pre-Incorporation Contracts (As found in the Code and in jurispruden ce) 1. Since a promoter's contract is the promoter's own, the only reason wh y the corporation, once it is organized becomes liable is when the corporation a dopts it as its own. The promoter's real contract theory is one of the three theo ries by which to validate a contract prior to incorporation 2. Continuing offerthe continuing offer that exists as to the time of the issu ance of the certificate of incorporation. And if it is accepted, then the offe r means the acceptance, and there arises a contract 3. Once the promoter enters into a contract for and in behalf of a non-existe nt principal, the promoter becomes personally liable
like an agent who acts without authority from the principal. The contract ente red into then is valid unless the agent acted without authority. But i t is possible for the contract to be adopted by the principal by accepting it. Note: in all three instances, there is deemed to be a valid contract of a valid offer. That is the basis of a promoter's contractso that the people will be willing to risk without such fear, investing their money into a venture prior to the incorporation of a company or a corporation. DE FACTO CORPORATIONS Section 20. De facto corporations. - The due incorporation of any corporation cl aiming in good faith to be a corporation under this Code, and its right to exerc ise corporate powers, shall not be inquired into collaterally in any private sui t to which such corporation may be a party. Such inquiry may be made by the Soli citor General in a quo warranto proceeding. (n) Every corporation is deemed de jure until proven otherwise Rationale for the Doctrine It prevents any party from raising the defect of authority as a means to avo id fulfillment of a contract or a transaction entered into in good faith
The essence of the doctrine is to protect the sanctity of dealing by the pub lic with persons or entities whose authority emanates from the State, to allow t he public to take such authority at face value, provided nothing is clearly show n to be defective in such authority. Even it is proven that such authority was indeed defective, such defect cannot be used as an excuse to set aside the rela tionship or transaction entered into in good faith This doctrine is meant in corporate law to protect the enf orceability of corporate dealings and contracts, to allow the public to take at reasonable face value the authority of the corporation to enter into va lid and binding contracts, thereby providing a healthy system by which to encour age the public to deal with corporate entities Therefore this is meant to apply to the level of existence that pertains to the relationship of the corporation with the dealing public; and isn't meant to govern nor be applicable to other levels of existence, such as those pertaining to intra-corporate relationships Various Scopes Of De Facto Corporation Doctrine 1. The enterprise contracts with an outsider, who later brings action against the enterprise as though it were a corporation, and the enterprise is h eld liable in corporate form 2. The enterprise contracts with an outsider, and subsequently brings actions in corporate form against the outsider, the outsider is held lia ble to the enterprise 3. The enterprise contracts with an outsider, and the outsider brings action against the component individuals, they are absolved from liability and the outsider held to his remedy against the enterprise only 4. The enterprise contracts with an outsider, and the component individuals s eek to hold the outsider liable on the contract, were logically, the individuals are not allowed to recover, recovery must be by the e nterprise
Requisites for De Facto status 1. The existence of a valid law under which it may be incorporated 2. An attempt in good faith to incorporate, or colorable compliance with prov isions on incorporation 3. Assumption by the enterprise of corporate powers Related to the above discussion is the case of Hall v. Piccio, nonetheless, the case cannot be taken as doctrinal in matters of de facto corporations and co rporations by estoppel If the case has value at all, it would be that the de facto cor poration and estoppel have no applications to issue and controversies that deal on the level of those that fall within the intra-corporate level Another value brought by the case is that good faith is an essent ial element of the de facto corporation. The case made it an essential test of good faith that the incorporators must have been aware of the issuance of the certificate of incorporation of the corporatio n Valid statute under which organized The valid statute under which private corporations are mostly organized is t he Corporation Code Can there be a de facto corporation organized with an enabling statute that is unconstitutional? o Using the prevailing view, the answer would be no, that an unconstitutional e nabling law has the same effect as though there is no law under which to organiz e, and even if the associates organize in good faith in reliance upon it, the resulting association cannot claim to be a de facto corporation o A qualified view however is that the actual existence of a statute prior to s uch determination is an operative fact and may have consequences which cannot al ways be erased by a new judicial declarationit's after the declaration of the invalidity or unconstitutionality of a statute, any corporation cannot claim the sta tus of being a de facto corporation, since the element of good faith would no l onger exist Colorable Compliance with the Law While substantial compliance ce should be shown is not required, colorable complian
There must be a bona fide attempt to comply with the requirements of the law The outward manifestation of the existence of a corporate being is therefor e a necessary as the basis upon with the dealing public may be led to believe that they are dealing with a juridical p erson Some defects that do not preclude the creation of a de facto corporation are as follows o Defects in the incorporation papers o Corporate name
o Ineligibility of incorporators o Defects in the execution of incorporation papers Continued Good Faith CLV raises two questionsone, of despite a substantial defect the SEC still is sues the certificate of incorporation and the incorporators knew of such defect at the time of issuance, would the situation still call for the application of t he de facto doctrine? Second, if there was good faith at the time of i ncorporation which would have brought about the creation of a de facto corporati on with the issuance of the SEC certificate, but later on the directors and the officers of the corporation came to know of such defects, would the corporation then lose its standing as a corporation de facto? In following Section 20 of the Corporation Code as well as the Piccio ruling that the issuance of certificate is a basis for good faith, then the proper ans wer would be that the issuance of the SEC certificate would raise it to the leve l of a de facto corporation and therefore, its right to exercise corporate power s, shall not be inquired into collaterally in any private suit to which such cor poration may be a party This is bolstered by PD902-A, on which the SEC is given authority after proper notice and hearing, the franchise or certificate of incorporation when there has been fraud in procuring its certificate of registrationin other words, the SEC has to go throug h a quasi-judicial process before it can revoke the certificate of a corpora tion which has used fraud in the process of its incorporation, clearly indicating that prior to such revocation, the corporation has all the powers and attributes of a corporation d e facto To allow the collateral attack on a corporation's personality because of existing defects known to the corporation and its board would circumvent the very rationale of the de facto doctrine which seeks to prevents any party from raising the defect of authority as a means to avoid fulfillment of a contract or a transaction entered into On the other hand, in a suit between and among the parties who knew that the re was a defect in the incorporation of the corporation, there certainly is no g ood faith on their part and in their case, the de facto doctrine cannot be availed of in order to further their fraud CORPORATION BY ESTOPPEL DOCTRINE Rationale of Doctrine The doctrine is meant to hold contractual parties to their representations or expectations at the time the contract was perfected and it do esn't allow parties to draw on a basic defect lack of one contracting partyto avoid the enforcement of the contract The doctrine has evolved in corporate law primarily as a rule to promote the integrity of commercial contracts; the basic role of the doctrine of corporation by estoppel is to promote the public's underlying fait h in contracts drawn with corporate entities, rather than to promote corporate p rinciples Current Status Of The Doctrine Section 21. Corporation by estoppel. - All persons who assume to act as a corpor ation knowing it to be without authority to do so shall be liable as general par tners for all debts, liabilities and damages incurred or arising as a result the reof: Provided, however, That when any such ostensible corporation is sued on an y transaction entered by it as a corporation or on any tort committed by it as s uch, it shall not be allowed to use as a defense its lack of corporate personali ty. Fusion of the strict estoppel doctrine and the Albert rationale for piercing , amply covers both fraud and non-fraud cases
On liability, in fraud cases the section makes the actor personally liable on the contract as a general partner. On the other hand, if there has b een no fraud, it would prevent both parties from raising the non-existence of th e corporation as a means to avoid enforcement of the contract. If there has been no fraud or misrepresentation, the Section 21 would creat e a corporation when none exists to uphold the validity and enforceability of the contract, but ultimately does it make the persons acting for the purported corporation liable? Importing the word s used in Section 21, it means that persons who act for a purported corporation without knowing it to be without authority t o do so would not be personally liable for the debts, liabilities and damages in curred or arising from the contract One who acts for a purported corporation not knowing that it had no authorit y to do so would be liable as a limited partner, that is, he would only be liable to the extent only of his investment or promised investment in the purported corporate venture LIM V. PHILIPPINE FISHING GEAR INDUSTRIESit is not only those who participate d in the contract or transactions that can be held as general partners but also that the liability for a contract entered into behalf of an unincorporated association or ostensible corp oration may lie in a person who may not have directly transacted on its behalf, but reaped benefits from that contract PIONEER INSURANCE V. CAwhen there was a clear intention to form a p artnership venture through a corporate venture which essentially means that the partners had intended to be active participants in the business of the corporation, then even those wh o didn't directly participated in the contracts or transactions being sued upon, b ut benefited therefrom may be held liable as general partners under the corporat ion by estoppel doctrine. On the other hand, when the investors merely invested in a corporate venture with no intention of participating in its corp orate affairs, and the corporation wasn't formed, no partnership relation is deeme d established by the failure to incorporate, and such investors cannot even be h eld liable for the contracts and transaction sued upon even when such contracts and transactions were entered into by the corporate actors in the name of the ostensible corporation CASES OUTSIDE THE DE FACTO CORPORATION AND CORPORATION BY ESTOPPEL DOCTRINE A possible solution would be the application of the in pari delicto doctrine but it doesn't fit squarely as a solution The more ample solution according to the great CLV is to paraphrase Salvatierr asince a non-existent organization has no personality and is incompetent to ac t and appropriate for itself the powers and attributes of a corporation, it cannot create agents or co nfer authority on another to act in its behalf, in contracts entered into for such purported corporations, where both parties knew that no such corporati on existed, the actors enter the contracts without authority and at their own ri sk Following the aforementioned, an elementary principle of law is then applied , when actors to a contract act or allow others to act as agents without authority or without a principal, the law
considers such agents as principals, possessed of all the rights and subjected t o all liabilities of a principal TRUST FUND DOCTRINE Commercial/Common law Premise: Debt v. Equity Art. 2236. The debtor is liable with all his property, present and future, for t he fulfillment of his obligations, subject to the exemptions provided by law. (1 911a) The capital stock of the corporation, especially its unpaid subscription, is a trust fund for the benefit of the general creditors of the corporation When a corporation is solvent, the theory is that the capital stock is a trust fund upon which there is any lien for the payment of its debts, has in fact very little foundation. No general credito r has any lien upon the fund under such circumstances, and the right of the corp oration to deal with its property is absolute so long as it doesn't violate the ch arter or the law applicable to such corporation Generally accepted that the scope of the trust fund doctrine is that the c apital stock of the corporation, as well as other
property and assets are generally regarded in equity as a trust fund for the pay ment of corporate debts, the creditors of the corporation have the right of prio rity payment over any stockholder thereof Trust Fund Doctrine Applies In Four Cases In The Philippine Setting 1. Where the corporation has distributed its capital among the stockholders wi thout providing for the payment of creditors 2. Where it had released the subscribers to the capital stock from their subscriptions 3. Where it has transferred the corporate property in fraud of its creditors 4. Where the corporation is insolvent Application Of Trust Fund Doctrine In Philippine Setting The definition of the doctrine adhered to by the Philippines is the one by F letcher, which says that the capital stock of a corporation, or the asset s of the insolvent corporation representing its capital is a trust fund for the benefit of the company's creditors PHIL. TRUST CO. V. RIVERAit is an established doctrine that subscriptions to the capital of a corporation constitute a fund to which the creditors have a right to look for satisfaction of their claim s and the assignee in the insolvency can maintain an action upon any unpaid stoc k subscription in order to realize assets for the payment of its debts Section 122. Corporate liquidation. - Every corporation whose charter expires by its own limitation or is annulled by forfeiture or otherwise, or whose corporat e existence for other purposes is terminated in any other manner, shall neverthe less be continued as a body corporate for three (3) years after the time whe n it would have been so dissolved, for the purpose of prosecuting and de fending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was established.
At any time during said three (3) years, the corporation is authorized and empow ered to convey all of its property to trustees for the benefit of stockholders, members, creditors, and other persons in interest. From and after any such conve yance by the corporation of its property in trust for the benefit of its stockho lders, members, creditors and others in interest, all interest which the corporation had in the property terminates, the legal interest vests in the trustees, and the beneficial interest in the stockholders, members, credi tors or other persons in interest. Upon the winding up of the corporate affairs, any asset distributable to any cre ditor or stockholder or member who is unknown or cannot be found shall be eschea ted to the city or municipality where such assets are located. Except by decrease of capital stock and as otherwise allowed by this Code, no co rporation shall distribute any of its assets or property except upon lawful diss olution and after payment of all its debts and liabilities. (77a, 89a, 16a) Fraud theory Due to the difficulties met with the terminology and application of the tr ust fund doctrine, there have been advocates of the position that most issues relating to the capital stock or corporate assets and as to unpaid subscriptions properly belong to the question of fraud rather than the trust fund doctrine Under this theory, the actionable wrong is the fraud or misrepresentation by directors, officers, or stockholders in falsely representing that the capit al stock has been fully paid or covered by binding subscription contracts Consequently, only creditors who have been defrauded are entitled to relief, creditors without notice may not be protected This varies with the principle of the trust fund doctrine which seeks to pro tect ALL corporate creditors Coverage of the Doctrine In our jurisdiction, we have adopted through statutory provisi ons the two precursors of the trust fund doctrinecapital impairment doctrine and the profit rule
A fixed capital must be preserved for protecting the claims of the creditors so that dividend distributions to stockholders should be limited to profits ear ned or accumulated by the corporation Impliedly therefore, for a solvent corporation, the trust fund doctrine encompasses only the capital stock of the corporation Concept of the Capital Stock The protective reach of the trust fund doctrine, when the corporation isn't inso lvent, would only be to the extent of the capital stock Since retained earnings isn't part of the capital stock, it is not covered by the doctrine and the corporation is at liberty to declare and pay out assets to the stockholders in way of dividends up to the extent of unrestricted retained earnings
Section 137. Outstanding capital stock defined. - The term "outstanding capital stock", as used in this Code, means the total shares of stock issued under bindi ng subscription agreements to subscribers or stockholders, whether or not fully or partially paid, except treasury shares. (n) SEC has defined capital stock or authorized capital stock as the amount fixed in the articles of incorporation to be subscribed and paid by the stockholders of the corporation. When shares are subscribed out of the authorized capital stock, that portion of the paid-in capital arising from the subscriptions becomes the legal capital of the corporation which cannot be returned to the stockholders in any form during the lifetime of the corporation unless otherwise authorized by law. Rescission of Subscription Agreement Based on Breach (Ong v. Tiu case) The violation of terms embodied in a subscription agreement, with are person al commitments, don't constitute legal ground to rescind the subscription agreement since such would violate the Trust Fund Doctr ine and the procedures for a valid distribution of assets and property under the Corporation Code. To Purchase Own Shares Section 8. Redeemable shares. - Redeemable shares may be issued by the corporati on when expressly so provided in the articles of incorporation. They may be purc hased or taken up by the corporation upon the expiration of a fixed period, rega rdless of the existence of unrestricted retained earnings in the books of the co rporation, and upon such other terms and conditions as may be stated in the arti cles of incorporation, which terms and conditions must also be stated in the cer tificate of stock representing said shares. (n) Section 41. Power to acquire own shares. - A stock corporation shall have the p ower to purchase or acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the following cases: Provided, That the corporation has unrestricted retained earnings in its books to cover t he shares to be purchased or acquired: 1. To eliminate fractional shares arising out of stock dividends; 2. To collect or compromise an indebtedness to the corporation, arising out of u npaid subscription, in a delinquency sale, and to purchase delinquent shares sol d during said sale; and 3. To pay dissenting or withdrawing stockholders entitled to payment for their s hares under the provisions of this Code. (a) Section 43. Power to declare dividends. - The board of directors of a stock corp oration may declare dividends out of the unrestricted retained earnings which sh all be payable in cash, in property, or in stock to all stockholders on the basi s of outstanding stock held by them: Provided, That any cash dividends due on de linquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinq uent stockholder until his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders representing not less than two-thirds (2/3) of the outstanding capi tal stock at a regular or special meeting duly called for the purpose. (16a)
Stock corporations are prohibited from retaining surplus profits in excess of on e hundred (100%) percent of their paid-in capital stock, except: (1) when justif ied by definite corporate expansion projects or programs approved by the board o f directors; or (2) when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet bee n secured; or (3) when it can be clearly shown that such retention is nec essary under special circumstances obtaining in the corporation, such as when t here is need for special reserve for probable contingencies. (n) Section 122. xxx Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities. (77a, 89a , 16a) Distribution of Corporation Assets (again from Ong v. Tiu case) The distribution of corporate assets and property cannot be made to depend on the whims and caprices of the stockholders, officers, or directors of the corporation, or even, for that matter, on the earnest desire of the court a quo to prevent further squabbles and future litigations unless the indispensable conditions and procedures for the protection of the corporate creditors are foll owed. Otherwise, the corporate peace laudably hoped for by the court will remain n othing but a dream because this time, it will be the creditor's turn to engage in squabbles and litigations should the court order an unlawful distribution in blatant disregard of the Trust Fund doctrine ARTICLES OF INCORPORATION NATURE OF CHARTER It is the contract between the corporation and the State, and they are both bound by its provisions It is a contract between three parties o Between the state and the corporation o Between the stockholders and the state o Between the corporation and the stockholders Amendments thereto can be made by one party only with the consent of the other parties under the strict provisions of the Corporation Code , and the contents thereof as mandated by law are treated with strictness REGISTRATION OF ARTICLES OF INCORPORATION It doesn't become binding as the charter of the corporation unless th ey have been filed with and registered with the SEC In the case of the articles of incorporation of special types of corporation s, they will not be registered with the SEC unless they are accommodated with th e appropriate recommendations from supervising agencies PROCEDURE AND DOCUMENTARY REQUIREMENTS Section 14. Contents of the articles of incorporation. - All corporations organi
zed under this code shall file with the Securities and Exchange Commission artic les of incorporation in any of the official languages duly signed and acknowledg ed by all of the incorporators, containing substantially the following matters, except as otherwise prescribed by this Code or by special law: 1. The name of the corporation; 2. The specific purpose or purposes for which the corporation is being incorpora ted. Where a corporation has more than one stated purpose, the articles of incor poration shall state which is the primary purpose and which is/are the secondary purpose or purposes: Provided, That a non- stock corporation may not include a purpose which would change or contradict its nature as such; 3. The place where the principal office of the corporation is to be located, whi ch must be within the Philippines; 4. The term for which the corporation is to exist;
5. The names, nationalities and residences of the incorporators; 6. The number of directors or trustees, which shall not be less than five (5) nor more than fifteen (15); 7. The names, nationalities and residences of persons who shall act as directors or trustees until the first regular directors or trustees are duly elected and qualified in accordance with this Code; 8. If it be a stock corporation, the amount of its authorized capital stock in l awful money of the Philippines, the number of shares into which it is divided, a nd in case the share are par value shares, the par value of each, the names, nat ionalities and residences of the original subscribers, and the amount subscribed and paid by each on his subscription, and if some or all of the shares are with out par value, such fact must be stated; 9. If it be a non-stock corporation, the amount of its capital, the names, natio nalities and residences of the contributors and the amount contributed by each; and 10. Such other matters as are not inconsistent with law and which the incorporat ors may deem necessary and convenient. The Securities and Exchange Commission shall not accept the articles of incorpor ation of any stock corporation unless accompanied by a sworn statement of the Tr easurer elected by the subscribers showing that at least twenty-five (25%) perce nt of the authorized capital stock of the corporation has been subscribed, and a t least twenty-five (25%) of the total subscription has been fully paid to him i n actual cash and/or in property the fair valuation of which is equal to at leas t twenty-five (25%) percent of the said subscription, such paid-up capital being not less than five thousand (P5,000.00) pesos. Section 15. Forms of Articles of Incorporation. - Unless otherwise prescribed by
special law, articles of incorporation of all domestic corporations shall compl y substantially with the following form: ARTICLES OF INCORPORATION OF (Name of Corporation) KNOW ALL MEN BY THESE PRESENTS: The undersigned incorporators, all of legal age and a majority of whom are resid ents of the Philippines, have this day voluntarily agreed to form a (stock) (non -stock) corporation under the laws of the Republic of the Philippines; AND WE HEREBY CERTIFY: FIRST: e " That the name of said corporation shall b
, INC. or CORPORATION";
SECOND: That the purpose or purposes for which such corporation is incorporated are: (If there is more than one purpose, indicate primary and secondary purposes ); THIRD: That the principal office of the corporation is located in the City/Municipality of Province of , Philippines; ,
FOURTH: That the term for which said corporation is to exist is years from and after the date of issuance of the certif icate of incorporation; FIFTH: That the names, nationalities and residences of the incorporators of the corporation are as follows: NAME NATIONALITY RESIDENCE
Subscribed Subscribed
SIXTH: That the number of directors or trustees of the corporation shall be ; and the names, nationalities and residences of the first dire ctors or trustees of the corporation are as follows: NAME NATIONALITY RESIDENCE
NINTH: That the above-named subscribers have paid at least twenty- five (25%) pe rcent of the total subscription as follows: Name of Subscriber Amount Subscribed Total Paid-In
SEVENTH: That the authorized capital stock of the corporation is (P ) PESOS in lawful money of the Philippines, divided into shares with the par value of (P ) Pesos per share. (In case all the share are without par value): That the capital stock of the corporation is
shares
(Modify Nos. 8 and 9 if shares are with no par value. In case the without par value. (In case some shares have par value and some are without par value): That the capital stock of said corporation consists of shares of which shares are of the par value corporation is non-stock, Nos. 7, 8 and 9 of the above articles may be modified accordingly, and it is sufficient if the articles state the amount of c apital or money contributed or donated by specified persons, stating of (P ) PESOS each, and of which the names, nationalities and residences of the contributors or donors and shares are without par value. EIGHTH: That at least twenty five (25%) per cent of the authorized capital stock above stated has been subscribed as follows: Name of Subscriber Nationality No of Shares Amount the respective amount given by each.) TENTH: That has been elected by the subsc ribers as Treasurer of the Corporation to act as such until his successor is dul y elected and qualified in accordance with the by-laws, and that as such Treasur er, he has been authorized to receive for and in the name and for
the benefit of the corporation, all subscription (or fees) or contributions or d onations paid or given by the subscribers or members. ELEVENTH: (Corporations which will engage in any business or activity reserved f or Filipino citizens shall provide the following): "No transfer of stock or interest which shall reduce the ownership of Filipino c itizens to less than the required percentage of the capital stock as provided by existing laws shall be allowed or permitted to be recorded in the proper books of the corporation and this restriction shall be indicated in all stock certific ates issued by the corporation." IN WITNESS WHEREOF, we have hereunto signed these Articles of Incorporation, this day of in the REPUBLIC OF THE PHILIPPINES ) CITY/MUNICIPALITY OF ) S.S. PROVINCE OF ) I, , being duly sworn, depose and say: , 19
That I have been elected by the subscribers of the corporation as Treasurer ther eof, to act as such until my successor has been duly elected and qualified in ac cordance with the by-laws of the corporation, and that as such Treasurer, I here by certify under oath that at least 25% of the authorized capital stock of the c orporation has been subscribed and at least 25% of the total subscription has be en paid, and received by me, in City/Municipality of , Province of cash or property, in the amount of not less than P5,000.00, in accordance , Republic of the Philippines. with the Corporation Code.
(Signature of Treasurer) SUBSCRIBED AND SWORN to before me, a Notary Public, for and in the City/Municipality of Province of (Names and signatures of the incorporators) , this day of , 19 ; by SIGNED IN THE PRESENCE OF: with on issued at Res. Cert. No. , 19
NOTARY PUBLIC (Notarial Acknowledgment) My commission expires on , 19 Doc. No. ;
Page No. TREASURERS AFFIDAVIT Book No. ;
Series of 19
(7a)
As To The Number And Residency Of The Incorporators Section 10. Number and qualifications of incorporators. - Any number of natural persons not less than five (5) but not more than fifteen (15), all of legal age and a majority of whom are residents of the Philippines, may form a private corp oration for any lawful purpose or purposes. Each of the incorporators of s stock corporation must own or be a subscriber to at least one (1) share of the capita l stock of the corporation. (6a) It is possible for a business to be wholly owned by one individua l, and the validity of its incorporation isn't affected when given nominal ownersh ip of only one share of stock to each of the other four incorporators. This a rrangement isn't necessarily illegal, but it is valid only between and among the i ncorporators privy to the agreement. It doesn't bind the corporations, which wil l consider all stockholders of record as the lawful owners of their registered s hares. As between the corporation on the one hand and its stockholders and thi rd persons on the other, the corporation looks only to its books for the purpose of determining who its stockholders are. Only natural persons can be incorporators. However, corporat ions and partnerships are not precluded from becoming stockholders and members as long as they are not incorporatorsderives its support exclusively from the fiction theory of corporate existence (artificial persons, existing only in appear through legislative command and incapable of thought or action except thr ough natural persons, cannot create other artificial persons) Is It Advisable To Have A Corporation As An Original Stockholder? No. According to CLV, in practice the SEC would allow the incorporation which woul d have as original stockholder in the articles of incorporation, as long as the minimum number of individuals appear. In one opinion, the SEC has posited that both domestic and foreign corporati ons, if allowed by their charters, may be initial subscribers to the capital stock of the corporation, but their subscription will not be considered in the computation of the 25% requirement for incorporation Corporate Name Section 18. Corporate name. - No corporate name may be allowed by the Securities and Exchange Commission if the proposed name is identical or deceptively or con
fusingly similar to that of any existing corporation or to any other name alread y protected by law or is patently deceptive, confusing or contrary to existing l aws. When a change in the corporate name is approved, the Commission shall issue an amended certificate of incorporation under the amended name. (n) Section 14. Contents of the articles of incorporation. - All corporations organi zed under this code shall file with the Securities and Exchange Commission artic les of incorporation in any of the official languages duly signed and acknowledg ed by all of the incorporators, containing substantially the following matters, except as otherwise prescribed by this Code or by special law: 1. The name of the corporation; The corporate name is essential to the existence of a corporation and it can not be changed except in the manner provided for by statute, by that name alone is it authorized to transact business, and it is by that name that a corporation can sue and be sued, and perform all other legal acts Red Line Transportation v. Rural Transita corporation may use another name as a business or brand name, but a corporation cannot use another corporation's name because it will only confuse the public. The name of the corporation is essential to its existence. Purpose Clause
The best proof of the purpose of a corporation is its articles of incorporat ion and by-laws. The articles of incorporation must state the primary and seco ndary purposes of the corporation, while the by-laws outline the administrative organization of the corporation, which, in turn, is supposed to insure or facili tate the accomplishment of said purpose. Corporate Term Section 11. Corporate term. - A corporation shall exist for a period not exceedi ng fifty (50) years from the date of incorporation unless sooner dissolved or un less said period is extended. The corporate term as originally stated in the art icles of incorporation may be extended for periods not exceeding fifty (50) year s in any single instance by an amendment of the articles of incorporation, in ac cordance with this Code; Provided, That no extension can be made earlier than fi ve (5) years prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as may be determined by the Securi ties and Exchange Commission. (6) The corporation may virtually have a perpetual lifespan renewa ble every 50 years. The limit of a 50-year period emphasizes the contractual nature of a corporationpeople would be discouraged to invest if it lasts for ever, management would theoretically be more honesta renewal of the corporate ter m would be a vote of confidence by the stockholders or members Section 19. Commencement of corporate existence. A private cor
poration formed or organized under this Code commences to have corporate existen ce and juridical personality and is deemed incorporated from the date the Se curities and Exchange Commission issues a certificate of incorporation unde r its official seal; and thereupon the incorporators, stockholders/members and their successors shall constitute a body politic and corporate under the nam e stated in the articles of incorporation for the period of time mentioned there in, unless said period is extended or the corporation is sooner dissolved in acc ordance with law. (n) Principal Place of Business Art. 51. When the law creating or recognizing them, or any other prov ision does not fix the domicile of juridical persons, the same shall be understo od to be the place where their legal representation is established or where they exercise their principal functions. (41a) The residence of the corporation is the place where its principal office is established; it can be sued in that place, not in the place where its branch off ice is located Well established in our jurisprudence is the rule that the residenc e of a corporation is the place where its principal office is located, as stated in the articles of incorporation. It now becomes apparent that the residence or domicile of a juridical person is fixed b y the law creating or recognizing it. Although the Rules of Court don't provide that when the plaintiff is a corporation, the complaint should be filed in the location of its principal office as indicated in its articles of incorporation, jurisprudence however, settled that the price where the principal office of a corporation is located, as stated in the articles, indeed establish es its residence. This ruling is important in determining the venue of an acti on by or against the corporation. Minimum Capitalization Section 12. Minimum capital stock required of stock corporations. - Stock corpor ations incorporated under this Code shall not be required to have any minimum au thorized capital stock except as otherwise specifically provided for by special law, and subject to the provisions of the following section. Why is maximum capitalization required to be indicated? This is required to protect the stockholderslimits the issuance of the capita l stock and extent of voting power or capacity of a stockholder; it is also intended to delineate the pre-emptive rights of stockholders to future issuances of capital stock.
Subscription and Paid-up Requirements Section 13. Amount of capital stock to be subscribed and paid for the purposes o f incorporation. - At least twenty-five percent (25%) of the authorized capital stock as stated in the articles of incorporation must be subscribed at the time
of incorporation, and at least twenty-five (25%) per cent of the total subscript ion must be paid upon subscription, the balance to be payable on a date or dates fixed in the contract of subscription without need of call, or in the absence o f a fixed date or dates, upon call for payment by the board of director s: Provided, however, That in no case shall the paid-up capital be less than fi ve Thousand (P5,000.00) pesos. (n) Capital stockamount fixed in the articles of incorporation procured to be subsc ribed and paid-in. stocks issued in excess of this is void. Outstanding capital stocktotal shares of stock issued to subscribers or stockho lders, whether or not fully or partially, except treasury shares Subscribed capital stockportion of the capital stock subscribed Subscriptionmutual agreement of the corporation and the subscriber to take and pay for the stock of the corporation Paid up capital stocktotal paid up subscription The entries in the articles of incorporation of the original issuan ce of shares of stock has a stronger weight that the stock GROUNDS FOR DISAPPROVAL Section 17. Grounds when articles of incorporation or amendment may be rejected or disapproved. - The Securities and Exchange Commission may reject the articles of incorporation or disapprove any amendment thereto if the same is not in comp liance with the requirements of this Code: Provided, That the Commission shall g ive the incorporators a reasonable time within which to correct or modify the ob jectionable portions of the articles or amendment. The following are grounds for such rejection or disapproval: 1. That the articles of incorporation or any amendment thereto is not substantia lly 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 Treasurers Affidavit concerning the amount of capital stock subscri bed and/or paid is false; 4. That the percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied with as required by existing laws or t he Constitution. No articles of incorporation or amendment to articles of incorporation of banks, banking and quasi-banking institutions, building and loan associations, trust c ompanies and other financial intermediaries, insurance companies, public utiliti es, educational institutions, and other corporations governed by special laws sh all be accepted or approved by the Commission unless accompanied by a favorable recommendation of the appropriate government agency to the effect that such arti cles or amendment is in accordance with law. (n) Illustrationwhen the proposed articles show that the object is to organize a barrio into a separate corporation for the purpose of taking possession and havi ng control of all municipal property within the incorporated barrio and administ er it exclusively for the benefit of the residents, the object is unlawf ul and the articles can be denied registration It is well to note that, if a corporation's purpose, as stated in the Articles of Incorporation, then the SEC has no authority to inquire whether the corporation has purposes other than those stated, and mandamus will lie to compel it to issue the certificate of incorporation AMENDMENTS TO THE ARTICLES OF INCORPORATION
Section 16. Amendment of Articles of Incorporation. - Unless otherwise prescribe d by this Code or by special law, and for legitimate purposes,
any provision or matter stated in the articles of incorporation may be amended b y a majority vote of the board of directors or trustees and the vote or written assent of the stockholders representing at least two- thirds (2/3) of the out standing capital stock, without prejudice to the appraisal right of dissenting s tockholders in accordance with the provisions of this Code, or the vote or writt en assent of at least two- thirds (2/3) of the members if it be a non-stock corp oration. The original and amended articles together shall contain all provisions required by law to be set out in the articles of incorporation. Such article s, as amended shall be indicated by underscoring the change or changes made, and a copy thereof duly certified under oath by the corporate secretary and a major ity of the directors or trustees stating the fact that said amendment or amendme nts have been duly approved by the required vote of the stockholders or members, shall be submitted to the Securities and Exchange Commission. The amendments shall take effect upon their approval by the Securities and Excha nge Commission or from the date of filing with the said Commission if not acted upon within six (6) months from the date of filing for a cause not attributable to the corporation. COMMENCEMENT OF CORPORATE EXISTENCE Section 19. Commencement of corporate existence. - A private cor poration formed or organized under this Code commences to have corporate existen ce and juridical personality and is deemed incorporated from the date the Se curities and Exchange Commission issues a certificate of incorporation unde r its official seal; and thereupon the incorporators, stockholders/members and their successors shall constitute a body politic and corporate under the nam e stated in the articles of incorporation for the period of time mentioned there in, unless said period is extended or the corporation is sooner dissolved in acc ordance with law. (n) BY-LAWS NATURE AND FUNCTIONS By-laws are meant to be an intramural document, to govern the relationship b etween and among the members of the corporate family o By-laws are intended merely for the protection of the corporation, and prescr ibe regulation, not restrictions o Although the power of the corporation to adopt by-laws is an inherent r ight, by-law provisions cannot contravene the law o On the basis of their nature and functions, one may therefore conclude that p rovisions of the articles of incorporation prevail over by-law provision s with respect to third partiesby-laws have non-binding effects to third partie s (this is the prevailing doctrine) GOKONGWEI V. SEC: Every corporation has the inherent power to adopt by-laws for its internal government, and to regulate the conduct and prescribe the rights and duties of its members towards itself and among themselves in refe rence to the management of its affairs
WHAT ARE BY-LAWS IN THE FIRST PLACE? Traditionally been defined as regulations, ordinances, rules or laws adopted by an association or corporation or the like for its internal governance, including rules for routine matters such as calling meetings and the like, if those key by-law provisions on matters such as quorum requirements, meeting, or on the internal governance of the local/chapte r are themselves already provided for in the constitution, then it would be feas ible to overlook the requirements for by-laws. Indeed, in such an event, to insist on t he submission of a separate document denominated as by-laws would be und ue technicality, as well as a redundancy. Section 46. Adoption of by-laws. - Every corporation formed under this Code must , within one (1) month after receipt of official notice of the issuance of its c ertificate of incorporation by the Securities and Exchange Commission, adopt a c ode of by-laws for its government not inconsistent with this Code. For the adopt ion of by-laws by the corporation the affirmative vote of the stockholders repre senting at least a majority of the outstanding capital stock, or of at least a m ajority of the members in
case of non-stock corporations, shall be necessary. The by-laws shall be signed by the stockholders or members voting for them and shall be kept in the principa l office of the corporation, subject to the inspection of the stockholders or members during office hours. A copy thereof, duly certified to by a major ity of the directors or trustees countersigned by the secretary of the corporati on, shall be filed with the Securities and Exchange Commission which shall be at tached to the original articles of incorporation. Notwithstanding the provisions of the preceding paragraph, by-laws may be adopte d and filed prior to incorporation; in such case, such by-laws shall be approved and signed by all the incorporators and submitted to the Securities and Exchang e Commission, together with the articles of incorporation. In all cases, by-laws shall be effective only upon the issuance by the Securitie s and Exchange Commission of a certification that the by-laws are not inconsiste nt with this Code. The Securities and Exchange Commission shall not accept for filing the by-laws o r any amendment thereto of any bank, banking institution, building and loan asso ciation, trust company, insurance company, public utility, educational instituti on or other special corporations governed by special laws, unless accompanied by a certificate of the appropriate government agency to the effect that such by-l aws or amendments are in accordance with law. (20a) COMMON LAW LIMITATIONS ON BY-LAWS (WHAT ARE THE REQUIREMENTS FOR A VALID BY-LAWS ?) 1. BY-LAWS CANNOT BE CONTRARY TO LAW AND CHARTER a. Section 36 of the Corp oration Codethe power to adopt by-laws shouldn't contrary to law, morals and public policy b. The corporation is a creature of the law and therefore, its by-laws cannot prevail over legal provisions and the
lawful court orders and processes c. A by-law provision granting to a stockholder permanent seat in the Board o f Directors is contrary to the Corporation Code requiring all members to the Boa rd to be elected by the stockholders. Even when the members of the asso ciation may have formally adopted the provision, their action would be of no ava il because no provision of the by-laws can be adopted if it is contrary to law 2. BY-LAW PROVISIONS CANNOT BE UNREASONABLE OR BE CONTRARY TO THE NATURE OF BY-LAWS Section 47. Contents of by-laws. - Subject to the provisions of the Constitution , this Code, other special laws, and the articles of incorporation, a private co rporation may provide in its by-laws for: 1. The time, place and manner of calling and conducting regular or special meeti ngs of the directors or trustees; 2. The time and manner of calling and conducting regular or special meetings of the stockholders or members; 3. The required quorum in meetings of stockholders or members and the manner of voting therein; 4. The form for proxies of stockholders and members and the manner of voting the m; 5. The qualifications, duties and compensation of directors or trustees, officer s and employees; 6. The time for holding the annual election of directors of trustees a nd the mode or manner of giving notice thereof; 7. The manner of election or appointment and the term of office of all officers other than directors or trustees; 8. The penalties for violation of the by-laws; 9. In the case of stock corporations, the manner of issuing stock certificates; and
10. Such other matters as may be necessary for the proper or convenient transac tion of its corporate business and affairs. (21a) 3. BY-LAW PROVISIONS CANNOT DISCRIMINATE a. The validity and reasonableness of by-laws are a question of law and in such case, the issue to be resolved would be whether a by-law pro vision conflicts with a provision of law, or with the charter of the corporation; or is in the le gal sense unreasonable and therefore unlawful.
b. Abovementioned is subject to the limitation that where the reasonableness of a by-law is a mere matter of judgment, and one upon which reasonable minds mu st necessarily differ, a court wouldn't be warranted in substituting its judgment ins tead of the judgment of those who are authorized to make by-laws and who have exercised their authority. c. The circumstance that one of the provisions contained in the by-laws of a corporation is invalid as conflicting with the express provision of law isn't a misdemeanor on the part of the corporati on for which the corporation may be penalized by the forfeiture of its c harter; instead, the proper remedy is to render such offending provision invalid and of no force and effect. BINDING EFFECTS OF BY-LAWS TO OUTSIDERS (CHINA BANKING CORPORATION CAS E) By-laws signify the rules and regulations or private laws enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and its stockholders or members or directors a nd officers with relation thereto and among themselves in their relation to it. In other words, by- laws are the relatively permanent and continuing rules of action adopted by the corporation for its government and that of individuals com posing it and having the directions, management and control of its affairs, in whole or in part, in the management and control o f its affairs and activities The purpose of the by-law is to regulate the conduct and define the duties o f the members toward the corporation and among themselves. They are self-impos ed and although adopted pursuant to statutory authority, having no status as pub lic law Therefore, it is generally accepted rule that third persons aren't bound by-l aws, except when they have knowledge of the provisions either actually or constructively WHAT IS THE REASON FOR THE DIFFERENCE BETWEEN PEA AND CHINA BANK CASE? Pea was regarding the disposition of corporate property while in China bank, it was about the disposition of the property of stockholder What's good about these two cases is that in practice, what you will use will depend on what spectrum you are in Ask if the act is of the corporation's. If you are the lawyer of the person dealing with the corporation, make sure that all the officers that should provide authorization has provided the same. It is good to give your client maximum protection. In the contract itsel f, check the warranties and guarantees (not in contravention with law, pro perly authorized by corporate authorities). In case there is need to enforce the contract, then all will be c overed. Another, don't be lax with dealing with shareholders. Example is the Ch inabank case. Check if there are any restrictions, which may affect the sale or pledge agreement. Normally, if you are a stockholder, there are sometimes tag -along rights. You have to take a look at internal agreements. It's better to know than not to know. ATTY. DY'S ADVICE: in practice, as an advocate, you have to adopt the maximum position because for sure, the other side will be adopting the other maximum pos ition ADOPTION PROCEDURE Section 46. Adoption of by-laws. - Every corporation formed under this Code must , within one (1) month after receipt of official notice of the issuance of its c ertificate of incorporation by the Securities and Exchange Commission, adopt a c ode of by-laws for its government not inconsistent with this Code. For the adoption of by-laws by the corporation the
affirmative vote of the stockholders representing at least a majority of the out standing capital stock, or of at least a majority of the members in case of nonstock corporations, shall be necessary. The by-laws shall be signed by the stock holders or members voting for them and shall be kept in the principal office of the corporation, subject to the inspection of the stockholders or members dur ing office hours. A copy thereof, duly certified to by a majority of the d irectors or trustees countersigned by the secretary of the corporation, shall be filed with the Securities and Exchange Commission which shall be attached to th e original articles of incorporation. Notwithstanding the provisions of the preceding paragraph, by-laws may be adopte d and filed prior to incorporation; in such case, such by-laws shall be approved and signed by all the incorporators and submitted to the Securities and Exchang e Commission, together with the articles of incorporation. In all cases, by-laws shall be effective only upon the issuance by the Securitie s and Exchange Commission of a certification that the by-laws are not inconsiste nt with this Code. The Securities and Exchange Commission shall not accept for filing the by-laws o r any amendment thereto of any bank, banking institution, building and loan asso ciation, trust company, insurance company, public utility, educational instituti on or other special corporations governed by special laws, unless accompanied by a certificate of the appropriate government agency to the effect that such by-l aws or amendments are in accordance with law. (20a) CONTENTS Section 47. Contents of by-laws. - Subject to the provisions of the Constitution , this Code, other special laws, and the articles of incorporation, a private co rporation may provide in its by-laws for: 1. The time, place and manner of calling and conducting regular or spec ial meetings of the directors or trustees; 2. The time and manner of calling and conducting regular or special meetings of the stockholders or members; 3. The required quorum in meetings of stockholders or members and the manner of voting therein; 4. The form for proxies of stockholders and members and the manner of voting the m; 5. The qualifications, duties and compensation of directors or trustees, officer s and employees; 6. The time for holding the annual election of directors of trustees and the mod e or manner of giving notice thereof; 7. The manner of election or appointment and the term of office of all officers other than directors or trustees;
8. The penalties for violation of the by-laws; 9. In the case of stock corporations, the manner of issuing stock cer tificates; and 10. Such other matters as may be necessary for the proper or convenient transact ion of its corporate business and affairs. (21a) WHAT WOULD HAPPEN IN CASE OF A CONFLICT BETWEEN THE ARTICLES OF INCORPORATION AN D BY-LAWS? In reference to the hierarchy, the articles of incorporation will prevail ov er the by-laws This however may not be the case all the time. For example, the by-laws wi ll provide for a higher majority to constitute a quorum. In this case, one may be confused since articles should prevail over the by-laws normally but in this case, with reference to S ection 25, the law is the one prevailing and not the by-laws over the articles of incorporation. (Section 25xxx Unless the articles of incorporation or the by-laws provide for a greater majority, a majority o f the number of directors or trustees as fixed in the articles of incorpora tion shall constitute
a quorum for the transaction of corporate business, and every decision of at lea st a majority of the directors or trustees present at a meeting at which there i s a quorum shall be valid as a corporate act, except for the election of officer s which shall require the vote of a majority of all the members of the board.) AMENDMENTS Section 48. Amendments to by-laws. - The board of directors or trustees, by a ma jority vote thereof, and the owners of at least a majority of the outstanding ca pital stock, or at least a majority of the members of a non- stock corporation, at a regular or special meeting duly called for the purpose, may amend or repeal any by-laws or adopt new by-laws. The owners of two-thirds (2/3) of the outstan ding capital stock or two-thirds (2/3) of the members in a non-stock corporation may delegate to the board of directors or trustees the power to amend or repeal any by-laws or adopt new by-laws: Provided, That any power delegated to the boa rd of directors or trustees to amend or repeal any by-laws or adopt new by- laws shall be considered as revoked whenever stockholders owning or representing a m ajority of the outstanding capital stock or a majority of the members in non-sto ck corporations, shall so vote at a regular or special meeting. Whenever any amendment or new by-laws are adopted, such amendment or new by-laws shall be attached to the original by-laws in the office of the corporation, and a copy thereof, duly certified under oath by the corporate secretary and a majo rity of the directors or trustees, shall be filed with the Securities and Exchan ge Commission the same to be attached to the original articles of incorporation and original by-laws. The amended or new by-laws shall only be effective upon the issuance by the Secu rities and Exchange Commission of a certification that the same are not inconsis
tent with this Code. (22a and 23a) WHY IS THERE A DIFFERENCE BETWEEN AMENDMENT OF ARTICLES OF INCORPORATION AND OF BY-LAWS? A majority is needed to amend the by-laws A 2/3 vote is needed to amend the articles of incorporation The difference lies because the by-laws are internal in nature and will not really affect the nature of the corporation CORPORATE POWERS, Article 46, Civil Juridical persons r obligations and with the laws and AUTHORITY, AND ACTIVITIES CORPORATE POWER AND CAPACITY Code may acquire and possess property of all kinds, as well as incu bring civil or criminal actions, in conformity obligations of their organization.
Section 36. Corporate powers and capacity. - Every corporation incorporated unde r this Code has the power and capacity: 1. To sue and be sued in its corporate name; 2. Of succession by its corporate name for the period of time stated in the arti cles 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 provi sions of this Code; 5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this Code; 6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to subscribers and to sell treasury stocks in accordance with the pr ovisions of this Code; and to admit members to the corporation if it be a non-st ock corporation; 7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortg age and otherwise deal with such real and personal property, including securitie s and bonds of other corporations, as the transaction of the lawful business of the corporation may reasonably and necessarily require, subject to the l imitations 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 ospital, charitable, cultural, scientific, That no corporation, domestic or foreign, litical party or candidate or for purposes those for the public welfare or for h civic, or similar purposes: Provided, shall give donations in aid of any po of partisan political activity;
10. To establish pension, retirement, and other plans for the benefit of its dir ectors, trustees, officers and employees; and 11. To exercise such other powers as may be essential or necessary to carry ou t its purpose or purposes as stated in the articles of incor poration. (13a) Section 45. Ultra vires acts of corporations. - No corporation under this Code shall possess or exercise any corporate powers except those conferred by this Code or by its articles of incorporation and except such as are necessary or incidental to the exercise of the powers so conferred. (n) A corporation has only such powers as are expressly granted to it by law and by its articles of incorporation, those which may be incidental to such conferr ed powers, those reasonably necessary to accomplish its purpose and those which may be incident to its existence The underlying doctrine on corporate powers and capacity is covered by t he theory of concession which looks at the corporation as a mere creature of, and completely under the control of the State. WHERE DOES CORPORATE POWERS COME FROM? Corporate powers emanate basically from the articles of incorporation and the l aw WHERE IS CORPORATE POWER LODGED? Section 23. The board of directors or trustees. - Unless otherwise provided in t his Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations contr olled and held by the board of directors or trustees to be elected from among th e holders of stocks, or where there is no stock, from among the members of the c orporation, who shall hold office for one (1) year until their successors are el ected and qualified. (28a) Every director must own at least one (1) share of the capital stock of the corpo ration of which he is a director, which share shall stand in his name on the boo ks of the corporation. Any director who ceases to be the owner of at least one ( 1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be memb ers thereof. A majority of the directors or trustees of all corporations organiz ed under this Code must be residents of the Philippines. There are specific instances in the Corporation Code where the particular ex ercise of the power of the corporation by the board, in order to be binding and effective, requires the consent or ratification of the stockholders or members, and on the part of the State In the aforementioned instances, what usually is the case is the need to val idate or give legal effect to a corporate power, that shows that each of those specified instances, the underlying contractual relationship is being amended or altered, and therefore the appropri ate consent of all parties concerned must be obtained The principle of corporate power being primarily vested in the board of th e corporation is therefore circumscribed by the greater doctrine of underlying corporate contractual relationship between and among the members of a particular corporate family, in line with the principle in contract law, that a party to a contract cannot release himself from the contractual terms and conditions, much less amend or alter them, without the consent or approval of th e other party or parties CLASSIFICATION OF CORPORATE POWERS: EXPRESS, IMPLIED, AND INCIDENTAL
Express Implied corporation such purposes as Those powers given to a corporation either:
Incidental
By clear and express provision of law: Some of the other powers enumerated in Section 36 are considered inherent or incidental, which even if not given by express grant are even so deemed to be within the capaci ty of the foreign entities (such as the power to adopt by-laws) By the charter or articles of incorporation: Express grant of authority from the board of directors needed to validly bind the corporation Unless there is a board resolution authorizing an officer to exercise express powers given to a Those powers that exist as a necessary consequence of: The exercise of express powers of the corporation or The pursuit of its purpose as provided for in the articles of incorporation The management of the corporation, in the absence of express restrictions, has discretionary authority to enter into contracts or transactions which may be deemed reasonably necessary or incidental to the business purpose Sub-paragraph 11 of Section 36 provide that a corporation has the power and capacity to exercise such powers as may be essential or necessary to carry out its purpose or Those powers that: Attach to a corporation at the moment of its creation Without regard to its express powers or particularly primary purposes Is said to be inherent in it as a legal entity or a legal organization Powers that go into the very nature and extent of a corporation's juridical entity cannot be presumed to be incidental or inheren t powers. This juridical entity is State- grant and cannot be altered or amended without S tate authority as filing a suit on its behalf, such an action is absent The power of a corporation to sue and be sued in any court is lodged with the
board of directors that exercise its corporate powers By-laws are not sources of any power Art 46 of the CC expressly provides for the powers of the corporation as a juridical personality possesses Sec 36 of the Corporation Code expressly enumerates the 10 powers which the corporation may exercise Sec 45 of the same Code recognizes other powers provided for in the Articles of Incorporation Generally exercised by the Board of Directors with exception to stated in the articles of incorporation
Generally, purely members of the Board of Directors exercise this
Section 2 of the Corp. Code provides the corporation as having the powers, attributes, and properties expressly authorized by law or incident to it s existence
Generally, purely members of the Board of Directors exercise this
certain
instances where
the stockholders' assent are needed
The ultra vires doctrine is connected with ancillary doctrines of apparent a uthority and estoppel One has to look at the corporation as a person before the law because of the issue of o Consent o Liabilitywho commits itself to the obligations The corporation is only given limited powers and not general powers as an individual because of consent and liability ULTRA VIRES DOCTRINE Concept Section 45. Ultra vires acts of corporations. - No corporation under this Code shall possess or exercise any corporate powers except those conferred by this Code or by its articles of incorporation and except such as are necessary or incidental to the exercise of the powers so conferred. (n) Stems in part from the principle that a corporation is a creature of the l aw and has only such powers and privileges as are granted by the State Upholds the duty of trust and obedience owed by the corpor ations' directors and officers to the stockholders and members Three Types Of Ultra Vires Acts Those illegal per se because they are contrary to law Those, which are contrary to the articles of incorporation and by-laws Those done by persons without corporate authority But this is how CLV arranges it by level 1. Acts done beyond the powers of the corporation as provided for in the laws and articles of corporation 2. Acts entered into in behalf of the corporation by persons who have no corp
orate authority 3. Acts or contracts which are per se illegal as being contrary to law Test To Determine Ultra Vires Whether the act in question is in direct and immediate furtherance of the corporation's business, fairly incident to the express powers and reasonabl y necessary to their exercise. The strict terms direct and immediate refers to the business of the corporatio n while the liberal terms fairly incident and reasonably necessary with reference to the powers of the corporation. With regard to the business of the corporation as the reference point, much latitude is given to the corporation to enter into various contracts as long as they have logical relations to the pursuit of such business. On the other hand, when the purpose clause uised limiting words tha t Court will hold such corporation to such limited business Policies Supervening Ultra Vires Issues 1. Public convenience 2. Contravention of contractual expectations 3. Principle of business judgment 4. Nature of business of operations Distinguishing From Acts Which Are Per Se Illegal Illegal acts of a corporation are those acts which is contrary to law, moral s, public order, or contravenes some rules of public policy or public duty, and are void Ultra vires are those which are not illegal and void ab initio but are withi n the scope of the articles of incorporation, are merely voidable and may become binding and enforceable when ratified by stockholders
EXPRESS POWERS What Are The Enumerated Powers? Section 36. Corporate powers and capacity. - Every corporation incorporated unde r this Code has the power and capacity: 1. To sue and be sued in its corporate name; 2. Of succession by its corporate name for the period of time stated in the arti cles 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 provi sions of this Code; 5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to subscribers and to sell treasury stocks in accordance with the pr ovisions of this Code; and to admit members to the corporation if it be a non-st ock corporation; 7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortg age and otherwise deal with such real and personal property, including securitie s and bonds of other corporations, as the transaction of the lawful business of the corporation may reasonably and necessarily require, subject to the l imitations 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 ospital, charitable, cultural, scientific, That no corporation, domestic or foreign, in aid of any political party or candidate activity; those for the public welfare or for h civic, or similar purposes: Provided, shall give donations or for purposes of partisan political
10. To establish pension, retirement, and other plans for the benefit of its dir ectors, trustees, officers and employees; and 11. To exercise such other powers as may be essential or necessary to carry ou t its purpose or purposes as stated in the articles of incor poration. (13a) Power To Extend or Shorten Corporate Term Section 37. Power to extend or shorten corporate term. - A private corporation m ay extend or shorten its term as stated in the articles of incorporation when ap proved by a majority vote of the board of directors or trustees and ratified at a meeting by the stockholders representing at least two-thirds (2/3) of the outs tanding capital stock or by at least two- thirds (2/3) of the members in case of non-stock corporations. Written notice of the proposed action and of the time a nd place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and depos ited to the addressee in the post office with postage prepaid, or served persona lly: Provided, That in case of extension of corporate term, any dissenting stock holder may exercise his appraisal right under the conditions provided in this code. (n) Section 81. Instances of appraisal right. - Any stockholder of a corp oration shall have the right to dissent and demand payment of the fair value of his shares in the following instances: 1. In case any amendment to the articles of incorporation has the effect of chan ging or restricting the rights of any stockholder or class of shares, or of auth orizing preferences in any respect superior to those of outstanding shares of an y class, or of extending or shortening the term of corporate existence;
Extension of corporate termany dissenting stockholder may exercise his apprai sal right to have his shares brought back by the corporation at its fair value This appraisal right is also available when the corporate term is shortened However, the appraisal right is rightly within the ambits of the extension o f corporate term because every extension novates the original corporate relati onship by extending it beyond the original term provided for in the articles of incorporation According to CLV, there shouldn't be any appraisal right when it comes to the shortening of corporate term because there is really no Novation of the original contractual intent The power to extend the corporate term is not an inherent power since the co rporate term isn't only a matter that constitutes an integral clause in the articl es of incorporation, but also the state in granting juridical personality to a c orporation is presumed to have granted only for the period of time provided in t he corporation's charter Power to shorten the corporate term is for practical purposes an inherent ri ght on the part of the corporation since the decision to shorten the business endeavor should really be addressed to the business decision of the co-ventures Power To Increase or Decrease The Capital Stock Section 38. Power to increase or decrease capital stock; incur, create or increa se bonded indebtedness. - No corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority vote of the board of directors and, at a stockholders meeting duly cal led for the purpose, two-thirds (2/3) of the outstanding capital stock shall fav or the increase or diminution of the capital stock, or the incurring, creat ing or increasing of any bonded indebtedness. Written notice of the proposed increase or diminution of the capital stock or of the incurring, creating, or i ncreasing of any bonded indebtedness and of the time and place of the stockholde rs meeting at which the proposed increase or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be considered, mus t be addressed to each stockholder at his place of residence as shown on the books of the corporation and deposited to the addressee in the post offic e with postage prepaid, or served personally. A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by the chairman and the secretary of the stockhold ers meeting, setting forth: (1) That the requirements of this section have been complied with; (2) The amoun t of the increase or diminution of the capital stock; (3) If an increase of the capital stock, the amount of capital stock or number o f shares of no-par stock thereof actually subscribed, the names, nationalities a nd residences of the persons subscribing, the amount of capital stock or number of no-par stock subscribed by each, and the amount paid by each on his subscript ion in cash or property, or the amount of capital stock or number of shares of n o-par stock allotted to each stock-holder if such increase is for the purpose of making effective stock dividend therefor authorized; (4) Any bonded indebtedness to be incurred, created or increased; (5) The actual indebtedness of the corporation on the day of the meeting; (6) Th e amount of stock represented at the meeting; and (7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness.
Any increase or decrease in the capital stock or the incurring, creating or incr easing of any bonded indebtedness shall require prior approval of the Securities and Exchange Commission. One of the duplicate certificates shall be kept on file in the office of the cor poration and the other shall be filed with the Securities and Exchange Commissio n and attached to the original articles of incorporation. From and after approva l by the Securities and Exchange Commission and the issuance by the Commission o f its certificate of filing, the capital stock shall stand increased or decr eased and the incurring, creating or
increasing of any bonded indebtedness authorized, as the certificate of filing m ay declare: Provided, That the Securities and Exchange Commission shall not a ccept for filing any certificate of increase of capital stock unless a ccompanied by the sworn statement of the treasurer of the corporation lawf ully holding office at the time of the filing of the certificate, showing that a t least twenty-five (25%) percent of such increased capital stock has been subscribed and that at least twenty-five (25%) percent of the amount subscr ibed has been paid either in actual cash to the corporation or that there has be en transferred to the corporation property the valuation of which is equal to tw enty-five (25%) percent of the subscription: Provided, further, That no decrease of the capital stock shall be approved by the Commission if its effect shall pr ejudice the rights of corporate creditors. Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the approval by a majority vote of the board of trustees and of at le ast two-thirds (2/3) of the members in a meeting duly called for the purpose. Bonds issued by a corporation shall be registered with the Securities and Exchan ge Commission, which shall have the authority to determine the sufficiency of th e terms thereof. (17a) It is not an inherent right to increase or decrease the capital stockit is no t only because it is expressly provided for in the articles of incorporation but also because it is governed by many common law principles such as trust fund do ctrine, pre-emptive rights, among others The implied policy under Section 38it doesn't include an appraisal right on the p art of the stockholder on the reason that every stockholder should come into the corporate setting fully aware that the expediencies of corporate life may requi re eventually the corporation may need to increase capitalization to fund its op erations or expansions, and need to look primarily into its equity investors to fund the same Prior to the approval of the SEC of the increase in capital stock, and desp ite the board resolution approving the increase in capital stock, and the receipt of payment on the future issues of shares from th e increased capital stock, such funds don't constitute part of the capital stock o f the corporation until approval of the increase of the SEC Present SEC rules provide that no announcement of an offer of rights to acquire share or to issue stock dividends to stockholders shall be made after an increase of the capital stock
without a definite fixed date for the exercise of such right or issuance of stoc k dividends Power to Incur, Create, or Increase Bonded Indebtedness BONDsecurity representing denominated units of indebtedness issued by a corporation to raise money or capital obliging the issuer to pay the maturity value at the end of a specified period which shouldn't be less than 360 days, and where applica ble, payment of interest on stipulated dates Bonded indebtedness is limited by the SEC to cover only indebtedness of the co rporation which are incurred by mortgage on real or personal property as distinguished from debentures, which are unsecured corporate indebtedness Written notice of the proposed incurring, creating, or increasing of any bon ded indebtedness is to be considered, must be addressed to each stockholder at h is place of residence as shown on the books of the corporation and deposited to the addresses in the post office with postage prepaid, or served personally Any incurring, creating or increasing of bonded indebtedness shall require p rior approval of the SEC An application for registration and issuance of bonds can only be filed by t he issuing corporation which has a minimum net worth of P25 million at the time of the filing of the application, and must have been in operation for three year s It must also fulfill the financial ratios mandated by the SEC in its interim guidelines This power to incur or create liabilities is an inherent power on the part o f the business corporation since it is presumed that they need to incur or creat e liabilities as part of the normal
operations of the business and the pursuit of the business of the corporation No appraisal right is granted to dissenting stockholders when the corporati on validly incurs, creates or increases bonded indebtedness since the granting of the appraisal right would deprive the corporation of financial resources contrary to the purpose of the bo nded indebtedness Power To Sell, Dispose, Lease or Encumber Assets Section 40. Sale or other disposition of assets. - Subject to the provisions of existing laws on illegal combinations and monopolies, a corporation may, by a ma jority vote of its board of directors or trustees, sell, lease, exchange, mortga ge, pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon such terms and conditions and for such consideration, which may be money, stocks, bonds or other instruments for t he payment of money or other property or consideration, as its board of di rectors or trustees may deem expedient, when authorized by the vote of the s tockholders representing at least two-thirds (2/3) of the outstanding capital st ock, or in case of non-stock corporation, by the vote of at least to two-thirds (2/3) of the members, in a stockholders or members meeting duly called for the purpose. Written notice of the proposed action and of the time and place of the
meeting shall be addressed to each stockholder or member at his place of reside nce as shown on the books of the corporation and deposited to the addressee in t he post office with postage prepaid, or served personally: Provided, That any di ssenting stockholder may exercise his appraisal right under the conditions provi ded in this Code. A sale or other disposition shall be deemed to cover substantially all the corpo rate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorpo rated. After such authorization or approval by the stockholders or members, the board of directors or trustees may, nevertheless, in its discretion, abandon s uch sale, lease, exchange, mortgage, pledge or other disposition of property and assets, subject to the rights of third parties under any contract relating thereto, without further action or approval by the stockholder s or members. Nothing in this section is intended to restrict the power of any corporation, wi thout the authorization by the stockholders or members, to sell, lease, exchange , mortgage, pledge or otherwise dispose of any of its property and assets if the same is necessary in the usual and regular course of business of said corporati on or if the proceeds of the sale or other disposition of such property and asse ts be appropriated for the conduct of its remaining business. In non-stock corporations where there are no members with voting rights , the vote of at least a majority of the trustees in office will be sufficient a uthorization for the corporation to enter into any transaction authorized by thi s section. This power affects the contractual relationship between the corporation's board of directors and its stockholders and not really as much of that between the cor poration itself and the State The sale, disposition or encumbrance of all or substantially all of the asse ts of the corporation doesnt render it empty, since the corporation is still le ft with assets received in exchange and neither does it change its primary purpose indicated in the articles of incorporation Section 40 distinguishes between onerous contracts and gratuitou s ones and therefore in each instance, the corporation always receive something of equal value to what has been sold, disposed or encumbered The determination of a sale, disposition, or encumbrance of all the corporat e property is a quantitative test, which when covered would require the necessar y stockholders' or members' approval A formula for the determination of a sale, disposition, or encumbrance of subs tantially all corporate property is also provided in Section 40 but when is it su bstantially allif the corporation would be rendered incapable of o Continuing its business
o Accomplishing the purpose for which it was incorporated The test on whether it is substantial is a qualitative testsale of one piece of machinery, if it is essential in the continuation of the business, amounts to sale of substantially all the assets Aside from the requirements of Section 40, the sale of all or substantially all of the corporate assets or property may require compliance with the Bulk Sal es Law, when the transaction falls within the classification of the law as bulk sale Section 40 doesnt provide for the legal consequences to a contract or transaction entered into by the corporation through its board without obtain ing the ratificatory votes of the stockholders or members Appraisal right is afforded the dissenting stockholders as a matter of equity and fairness since they should be allowed to plough their investments into ventures they feel they could get a better return rather than with a corpor ation that is no longer capable of pursuing the business Power To Purchase Own Shares Section 41. Power to acquire own shares. - A stock corporation shall have the p ower to purchase or acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the following cases: Provided, That the corporation has unrestricted retained earnings in its books to cover t he shares to be purchased or acquired: 1. To eliminate fractional shares arising out of stock dividends; 2. To collect or compromise an indebtedness to the corporation, arising out of u npaid subscription, in a delinquency sale, and to purchase delinquent shares sol d during said sale; and 3. To pay dissenting or withdrawing stockholders entitled to payment for their s hares under the provisions of this Code. (a) Power To Invest Corporate Funds In Another Corporation or Business Section 42. Power to invest corporate funds in another corporation or business o r for any other purpose. - Subject to the provisions of this Code, a private cor poration may invest its funds in any other corporation or business or for any pu rpose other than the primary purpose for which it was organized when approved by a majority of the board of directors or trustees and ratified by the stockholde rs representing at least two-thirds (2/3) of the outstanding capital stock, or b y at least two thirds (2/3) of the members in the case of non-stock corpora tions, at a stockholders or members meeting duly called for the purpose. Written notice of the proposed investment and the time and place of the mee ting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the p ost office with postage prepaid, or served personally: Provided, That any dissen ting stockholder shall have appraisal right as provided in this Code: Provided, however, That where the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in the articles of incorporation, the approval of the stockholders or members shall not be necessary. (17 1/2a) The law therefore presumes rather strongly that when stockhold ers invest, or members join, a corporation, it is with the primary expectation t hat the corporation through its Board, will only pursue the primary purpose indi cated in its articles and the Board feels that it is propitious to pursue a seco ndary purpose, then it would do so only if the stockholders/members have had a c
hance to evaluate and decide upon such diversion of corporate funds from the pri mary business of the corporation Fundsany corporate property to be used in the furtherance of the business, an d consequently when property is devoted in any business other than pursuit of the primary purpose for which the corporation was incorporated, it would need the ratificatory vote of two-thi rds of the outstanding capital stock Power To Declare Dividends
Section 43. Power to declare dividends. - The board of directors of a stock corp oration may declare dividends out of the unrestricted retained earnings which sh all be payable in cash, in property, or in stock to all stockholders on the basi s of outstanding stock held by them: Provided, That any cash dividends due on de linquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinq uent stockholder until his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders representing not less than two-thirds (2/3) of the outstanding capi tal stock at a regular or special meeting duly called for the purpose. (16a) Stock corporations are prohibited from retaining surplus profits in excess of on e hundred (100%) percent of their paid-in capital stock, except: (1) when justif ied by definite corporate expansion projects or programs approved by the board o f directors; or (2) when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet bee n secured; or (3) when it can be clearly shown that such retention is nec essary under special circumstances obtaining in the corporation, such as when t here is need for special reserve for probable contingencies. (n) meeting duly called for the purpose: Provided, That (1) where a stockholder or s tockholders representing the same interest of both the managing and the managed corporations own or control more than one- third (1/3) of the total outstanding capital stock entitled to vote of the managing corporation; or (2) where a major ity of the members of the board of directors of the managing corporation also co nstitute a majority of the members of the board of directors of the managed corp oration, then the management contract must be approved by the stockholders of th e managed corporation owning at least two-thirds (2/3) of the total outstanding capital stock entitled to vote, or by at least two-thirds (2/3) of the members i n the case of a non-stock corporation. No management contract shall be entered i nto for a period longer than five years for any one term. The provisions of the next preceding paragraph shall apply to any cont ract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation, whether such contracts are called se rvice contracts, operating agreements or otherwise: Provided, however, That such service contracts or operating agreements which relate to the exploration, deve lopment, exploitation or utilization of natural resources may be entered into fo r such periods as may be provided by the pertinent laws or regulations. (n) Any declaration of dividends whether cash or stock, shall be reported to the
SEC within 15 days from the date of declaration If the corporation is listed or registered or licensed under the Securities Regulation Code, the report shall be made simultaneously or before with the release of the notice of declaration of dividends Power To Enter Into Management Contract Section 44. Power to enter into management contract. - No corporation shall conc lude a management contract with another corporation unless such contract shall h ave been approved by the board of directors and by stockholders owning at lea st the majority of the outstanding capital stock, or by at least a majorit y of the members in the case of a non-stock corporation, of both the managing an d the managed corporation, at a Management contract covers any contract whereby a corporation undertakes to manage or operate all or substantially all of the businesses of another corporat ion, whether such contracts are called service contracts, operating agreements, or otherwise Rationale for the ratification requirement for the managed corporationit is a d eviation from Section 23 that the corporate affairs shall be managed by the boar d of directors Rationale for the ratification requirement for the managing corporationmanageme nt arrangement is a deviation from the principle that the board of directors in the managing corporation assumed office with the understanding that they would devote their time and reso urces to the affairs of the corporation, and the entering into the management co ntract whereby the board, as the direct agents of the managing corporation would be devoting their time and resources towards the operations of
another corporation, would be a deviation from such a contractua l relationship, and thereby would require the confirmation of the stockholders o f the managing corporation WHAT IS THE DIFF BETWEEN ENTITY AND INDIVIDUAL? When it comes to management contracts between the managed corporation and an individual or partnership, the same is not covered by the rules of Section 44 On the side of the managing individual, he need not get consent from anyone to start managing a corporation Power To Make Donations Section 36. xxx 9. To make reasonable donations, including ospital, charitable, cultural, scientific, That no corporation, domestic or foreign, litical party or candidate or for purposes Power To Grant Gratuities To Employees xxx those for the public welfare or for h civic, or similar purposes: Provided, shall give donations in aid of any po of partisan political activity;
10. To establish pension, retirement, and other plans for the benefit of its dir ectors, trustees, officers and employees; and Providing gratuity pay for its employees is one of the cor poration's express powers of a corporation under the Corporation Code, and cannot be considered to be ultra vires to avoid any liability arising from the issuance of resolution granting such gratuity pay Such resolution doesnt also require the ratification of the stockholders Power To Enter Into Partnerships A corporation may validly enter into a joint venture agreement Joint venturepartnership agreement that pertains to a particular project or undertaking What makes a project or undertaking a joint venture to authorize a corporation to be a co-venturer therein is not the name or nomenclature given to the undertaking but the nature and essence of the undertaking that limits it to a particular project which allows the Board of Directors of the participating corporations to properly evaluate all the consequences and likely liabilities to which the corp oration would be held liable for SEC ruled that the corporation cannot enter into a partnership with another corporation or individual for the reason that it would be bound by the acts of the persons who aren't its duly appointed and authorized agents and officers, which is inconsistent with the rul e that the corporation shall manage its own affairs separately and exclusively The SEC admits of exceptions however when the following are present o The authority to enter into a partnership relation is expressly conferred by the charter or the articles of incorporation, and the nature of business venture to be undertaken by the partnership is in line with the business authorized by the cha rter of the corporation involved o The agreement on the articles of partnership must provide that all the partners shall manage the partnership and the articles might stipulate that all the partners shall be jointly and severally liable for all the obligations of the pa rtnership DIRECTORS, TRUSTEES, AND OFFICERS Section 23. The board of directors or trustees. - Unless otherwise pro vided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of s uch corporations controlled and held by the board of directors or truste es to be elected from among the holders of stocks, or where there is no stock, f rom among the members of the corporation, who
shall hold office for one (1) year until their successors are elected and qualif ied. (28a) Every director must own at least one (1) share of the capital stock of the corpo ration of which he is a director, which share shall stand in his name on the boo ks of the corporation. Any director who ceases to be the owner of at least one (
1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be memb ers thereof. A majority of the directors or trustees of all corporations organiz ed under this Code must be residents of the Philippines. DOCTRINE OF CENTRALIZED MANAGEMENT Just as a natural person may authorize another to do certain acts in his beh alf, so may the board of directors of a corporation validly delegate some of its functions to individual officers or agents appointed by it Contracts or acts of a corporation must be made either by the board of direc tors or by a corporate agent duly authorized by the board Absent such valid delegation/authorization, the rule is that the declaration s of an individual director relating to the affairs of the corporation but not in the course of, or connected with the performance of authorized duties of a director are held not binding on the corpo ration Rationale for the Doctrine (As provided for in the case of FILIPINAS PORT SERVICES, 2007) Section 23 of the Corporation Code explicitly provides that unless o therwise provided therein, the corporate powers of all corporations formed under the Code shall be exercised, all business conducted an d all property of the corporation shall be controlled and held by a board of dir ectors. Thus, with the exception only of some powers expressly granted by law to stockholders (or members, in case of non-stock corporations), the board of directors (or trustees, in case of nonstock corporations) has the sole authority to determine policies, enter into con tracts, and conduct the ordinary business of the corporation within the scope of its charter, i.e., its articles of incorporation, by-laws and relevant provisions of law. Verily, the authority o f the board of directors is restricted to the management of the regular business affairs of the corporation, unless more extensive power is expressly conferred. The raison d'etre behind the conferment of corporate powers on the board of di rectors is not lost on the Court. Indeed, the concentration in the board of th e powers of control of corporate business and of appointment of corporate officers and managers is necessary fo r efficiency in any large organization. Stockholders are too numerous, scat tered and unfamiliar with the business of a corporation to conduct its business directly. And so the plan of corporate organization is for the stockholders to choose the directors who shall control and supervise the conduct of corporate business. Primary Objective of the Board It is the obligation of the Board to seek the maximum amount of profits for the corporation It is a position of trust The fiduciary or trust relationship is not a matter of statutory or technica l law. It springs from the fact that directors have the control and guidance of corporate affairs and property, and hence of the property interest of the stockholders THEORIES ON THE SOURCE OF POWER Theory of Original Power The source of power comes directly from the law and that the Board is originally and directly granted corporate power as the embodiment of th e corporation This has no democratic notions but more akin to the principles of autocracy This finds support in Section 23 of the Corporation Code
Theory of Delegated Power The authority exercised by the Board of Directors is viewed as derived or de legated authority, delegated to them by stockholders or members of the corporat ion
The source of primary theory can override the decisions of the delegates This promotes the notion of democracy in the corporate set-up, where the rea l source of power are the stockholders or members, and the representatives thereof would be the Board Under this theory, a corporation has a personality distinct and separate fro m the individuals that compose it, but the fact remains that it cannot act witho ut the medium of human beings BOARD MUST ACT AS A BODY Section 25. Corporate officers, quorum. - Immediately after their election, the directors of a corporation must formally organize by the election of a president , who shall be a director, a treasurer who may or may not be a director, a sec retary who shall be a resident and citizen of the Philippines, and such other officers as may be provided for in the by- laws. Any two (2) or more posi tions may be held concurrently by the same person, except that no one shall act as president and secretary or as president and treasurer at the same time. The directors or trustees and officers to be elected shall perform the duties e njoined on them by law and the by-laws of the corporation. Unless the articles of incorporation or the by-laws provide for a greater majority, a major ity of the number of directors or trustees as fixed in the articles of incorpora tion shall constitute a quorum for the transaction of corporate business, and ev ery decision of at least a majority of the directors or trustees present at a me eting at which there is a quorum shall be valid as a corporate act, except for t he election of officers which shall require the vote of a majority of all the me mbers of the board. Directors or trustees cannot attend or vote by proxy at board meetings. (33a) A corporation through its Board of Directors should act in a manner and with in the formalities prescribed by its charter or by the general law The board must act as a body in a meeting called pursuant, otherwise, any ac tion taken therein may be questioned by any objecting director or stockholder Be that as it may, jurisprudence tells us that an action of the board of dir ectors during a meeting, which was illegal for lack of notice, may be ratified e ither expressly, by the action of the directors in subsequent legal meeting, or impliedly, by the corporation's subsequent course of conduct EFFECTS OF BOGUS BOARD The acts or contracts effected by a bogus board would be void pursuant to Ar ticle 1318 of the CC because of the lack of consent EXECUTIVE COMMITTEE Section 35. Executive committee. - The by-laws of a corporation may create an ex ecutive committee, composed of not less than three members of the board, to be a
ppointed by the board. Said committee may act, by majority vote of all its membe rs, on such specific matters within the competence of the board, as may be deleg ated to it in the by-laws or on a majority vote of the board, except with respec t to: (1) approval of any action for which shareholders approval is also requir ed; (2) the filing of vacancies in the board; (3) the amendment or repeal of bylaws or the adoption of new by-laws; (4) the amendment or repeal of any resoluti on of the board which by its express terms is not so amendable or repealable; an d (5) a distribution of cash dividends to the shareholders. Take note that in a SEC opinion, an executive committee can only be created by virtue of a provision in the by-laws and that in the absence of a provis ion in the by-laws, the board of directors cannot simply create or appoint an executive committee to perform some of its functions THE BUSINESS JUDGMENT RULE A resolution or transaction pursued within the corporate powers and business operations of the corporation, and passed in good faith by the board of directors, is valid and binding, and generally the courts have no authority to review the same or substitute their ow n judgment, even when the exercise of such power may cause losses to the corporation or decrease the profits of a department
No court can, as an integral part of resolving the issues between squabbling stockholders, order the corporation to undertake certain corporate acts, since it would be in violation of the business judgment rule Theoretical Basis for the Rule (As provided for by PSE case) A corporation is but an association of individuals, allowed to transact unde r an assumed corporate name, and with a distinct legal personality In organizing itself as a collective body, it waives no co nstitutional immunities and perquisites appropriate to such a body As to its management decisions, therefore, the state will generally not interfere with the same Questions of policy and of management are left to the honest discretion of t he officers and directors of the corporation, and the court are without authority to substitute the judgment for the judgment of the board of directors The board is the manager of the corporation, and so long as it acts in good faith, the orders are not reviewable by the courts. In the case of PSE, the business judgment rule was applied because the SEC is the entity with the primary say as to whether or not securities may be traded or not in the stock exchange When is the Business Judgment Rule applicable? Resolutions and transactions entered into by the Board of Directors within the powers of the corporation cannot be reversed by the courts not even on the behest of the stockholders of the corporation Directors and officers acting within such business judgment cannot be held liable personally for the consequences of such
acts o This doesnt apply when When the director willfully and knowingly vote for patently illegal acts of the corporation When he is guilty of gross negligence or bad faith in directing the corpora te affairs When he acquires any personal or pecuniary interest in conflict with his du ty as such directors The business judgment rule is a rule on evidence and not only a substantial rule of law COUNTER-VAILING DOCTRINES TO PROTECT CORPORATE CONTRACTS Doctrine of Estoppel and Ratification Even when a particular corporate transaction doesn't pass the lenient Montelib ano test and is held ultra vires, the transaction would nevertheless be held binding on the corporation under the estoppel doctrine. When a contract isn't on its face necessarily beyond the scope of the power of the corporation by which it is made, it will, in the absence of proof to the contrary, be presumed to be valid. Corporations are presumed to contract within their powers. The doctrine o f ultra vires, when invoked for or against the corporation shouldn't be allowed to prevail where it would defeat the ends of justice or work a legal wrong. Where a transaction is merely ultra vires and not malum in se or prohibitum , although it may be made for forfeiture of corporate charter or dissolution of the corproration, such transaction is, if pe rformed by one party, not void as between the parties, and an action may be brou ght directly upon the transaction and relief had according to its terms Even in the case of ultra vires acts which are not per se illegal, a corpora tion cannot be heard to complain that it is not liable for the acts of its board, because of estoppel by representation Even when the contract entered into behalf of the corporation is outside t he usual powers of the corporate officer, the corporation's ratification of the contract and acceptance of the benefits arising therefrom have made such contract binding upon the corpo ration, and the enforceability of such contract has been ratified by the accepta nce of benefits under them Ratification would have to come from the Board of Directors or a properly au thorized representative
For ratification to be sustained o The act must be consummated and not executory o Creditors aren't prejudiced or all of them have given their consent o Rights of the public or the State aren't involved o All the stockholders must have given their consent Does Apparent Authority Have To Exist Before Estoppel Will Lie?
No If You Are The Third Party, What Should Be Done? If you are the third party, dont give room for the other party to fault you for lack of due diligence If you can, do a background check. Theory of Apparent Authority If a corporation knowingly permits one of its officers, or any other agent, to act within the scope of apparent authority, it holds him out to the public possessing the power to so do those acts; and thus, the corporation will, as against anyone who has in good faith de alt with it through such agent, be estopped from denying the agent's authority Its existence may be ascertained through o The general manner in which the corporation holds out an officer or agent as having the power to act, or in other words, the apparent authority to act in gen eral, with which it clothes him, o Or the acquiescence in his acts of a particular nature, with actual or constr uctive knowledge thereof, whether within or beyond the scope of his ordinary pow ers Necessarily, the application of apparent authority requires presentati on of evidence of similar acts executed either in its favor or in favor of third parties It is not the quantity of similar acts which establishes apparent authority, but the vesting of a corporate officer with the power to bind the corporation Note: In the case of FRANSISCO, there was a series of acts that led to a ruling agains t the corporation. To be noted also is the long period of time before the corpo ration raised its defenses. In the case of YAO KA SIN, can't the China Bank case be invoked, by saying that th e by-laws are not binding upon third parties? Using this case as context, when you prove that the President has been dealing w ith you, the burden of proof then shifts. It is comparable to a ping-pong game. In NYCO and YAO KA SIN, which would prevail in case of discrepancy, the by-laws or the previous transaction? In answering this, you should ask the following 1. Does the person dealing with you have the authority? 2. If there a third party involved? Is there a corporate insider or someone who has knowledge of the by-laws? 3. In case third party doesnt know, ask what authority the person has. Als o ask what transaction is. Always be on toes and on notice on every aspect as much as possible. QUALIFICATIONS OF DIRECTORS OR TRUSTEES Section 23. The board of directors or trustees. - Unless otherwise pro vided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of s uch corporations controlled and held by the board of directors or truste es to be elected from among the holders of stocks, or where there is no stock, f rom among the members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified. (28a) Every director must own at least one (1) share of the capital stock of the corpo ration of which he is a director, which share shall stand in his name on the boo ks of the corporation. Any director who ceases to be the owner of at least one (
1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be memb ers thereof. A majority of the directors or trustees of all corporations organiz ed under this Code must be residents of the Philippines.
Section 27. Disqualification of directors, trustees or officers. - No person con victed by final judgment of an offense punishable by imprisonment for a period e xceeding six (6) years, or a violation of this Code committed within five (5) ye ars prior to the date of his election or appointment, shall qualify as a directo r, trustee or officer of any corporation. (n) In connection with Section 23, doesnt this encourage the use of dummies or nomi nees? In a sense yes but with this flexibility comes rules of rigidity or standard s, such as representative responsibility, requirements in ascertaining who has b eneficial ownership, etc. Note: 1. A director must have at least one share of stock 2. Beneficial ownership under voting trust agreement no longer qualifies 3. As a safety measure, once there is change is the roster of offi cers, inform the SEC outright and fast. You can also amend the GIS. 4. With respect to corporate stockholders, they cannot be seated as one of th e directors or trustees. A corporation cannot act by itself but through its of ficers and agents, and as such a corporation cannot attend personally board meet ings of the corporation wherein it is elected as a director, but only through a representative or a proxy, would contravene the established rule that a direct or may not be represented by a proxy. 5. In addition to what is provided in the Code with respect to disqualifi cation, the by-laws of a corporation can supplant this ELECTION OF BOARD OF DIRECTORS/TRUSTEES Section 24. Election of directors or trustees. - At all elections of directors o r trustees, there must be present, either in person or by representative authori zed to act by written proxy, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the members entitled to v ote. The election must be by ballot if requested by any voting stockholder or me mber. In stock corporations, every stockholder entitled to vote shall have the r ight to vote in person or by proxy the number of shares of stock standing, at the time fixed in the by- laws, in his own name on the stock books of the corporation, or where the by-laws are silent, at the time of the election; and said stockholder may vote such number of shares for as many persons as there are directors to be elected or he may cum ulate said shares and give one candidate as many votes as the number of director s to be elected multiplied by the number of his shares shall equal, or he may di stribute them on the same principle among as many candidates as he shall see fit : Provided, That the total number of votes cast by him shall not exceed the numb er of shares owned by him as shown in the books of the corporation multiplied by
the whole number of directors to be elected: Provided, however, That no delinqu ent stock shall be voted. Unless otherwise provided in the articles of incorpora tion or in the by-laws, members of corporations which have no capital stock may cast as many votes as there are trustees to be elected but may not cast mor e than one vote for one candidate. Candidates receiving the highest number of votes shall be declared elected. Any meeting of the stockholders or m embers called for an election may adjourn from day to day or from time to tim e but not sine die or indefinitely if, for any reason, no election is held, or i f there are not present or represented by proxy, at the meeting, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a m ajority of the member entitled to vote. (31a) Section 26. Report of election of directors, trustees and officers. - Within thi rty (30) days after the election of the directors, trustees and officers of the corporation, the secretary, or any other officer of the corporation, shall submi t to the Securities and Exchange Commission, the names, nationalities and resi dences of the directors, trustees, and officers elected. Should a director , trustee or officer die, resign or in any manner cease to hold office, his heir s in case of his death, the secretary, or any other officer of the corporation, or the director, trustee or officer himself, shall immediately report such fact to the Securities and Exchange Commission. (n) TRUSTEES Section 92. Election and term of trustees. - Unless otherwise provided in the ar ticles of incorporation or the by-laws, the board of trustees of non- stock corp orations, which may be more than fifteen (15) in number as
may be fixed in their articles of incorporation or by-laws, shall, as soon as or ganized, so classify themselves that the term of office of one-third (1/3) of th eir number shall expire every year; and subsequent elections of trustees compris ing one-third (1/3) of the board of trustees shall be held annually and trustees so elected shall have a term of three (3) years. Trustees thereafter electe d to fill vacancies occurring before the expiration of a particular term shall hold office only for the unexpired period. No person shall be elected as trustee unless he is a member of the corporati on. Unless otherwise provided in the articles of incorporation or the by-laws, offic ers of a non-stock corporation may be directly elected by the members. (n) Section 138. Designation of governing boards. - The provisions of specific provi sions of this Code to the contrary notwithstanding, non-stock or special corpora tions may, through their articles of incorporation or their by-laws, designate t heir governing boards by any name other than as board of trustees. (n) CUMULATIVE VOTING Voting procedure wherein minority stockholders are allowed the capacity to be able to elect representatives to the board of directors
This is reckoned to be equitable since it allowed stockholders the opportuni ty for representation in the Board of Directors in proportion to their holdings D'Hondt Remainders Table Offers a simple method for determining the number of candida tes form whom a bloc should vote This is constructed by dividing the number of votes each bloc can cast by th e integers 1 through D, which will indicate the number of shares controlled and the number of candidates for whom votes are cast This is first used to determine the number of directors each block is certai n of electing. The largest entries in the table are circled, indicating D, the number of directors is elected Illustration: ABC Corporation 100 outstanding capital stock 5 directors to be elected Bloc 1 has 66 shares Bloc 2 has 34 shares 1 2 Bloc 1 2.5 66 Bloc 2 42.5 34
3 330 170
4 165 85
5 110 56.5 8
Step-by-Step Procedure for D' Hondt Remainders Table: 1. In the table, make allocation for the D number of directors to be elected, in this case D=5 2. N (Total number of votes to be used) = Sn x D wherein Sn is the total numb er of shares per bloc 3. Divide the number of votes a bloc can cast by the integers 1 to D 4. Encircle the largest entries in the table, indicating D 5. A bloc can safely nominate for n directors if the nth entry in the bloc's ro w is greater than the first uncircled entry in the next row. VACANCY IN BOARD Section 29. Vacancies in the office of director or trustee. - Any vacancy occurr ing in the board of directors or trustees other than by removal by the stockhold ers or members or by expiration of term, may be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum ; otherwise, said vacancies must be filled by the stockholders in a regular or s pecial meeting called for that purpose. A director or trustee so elected to fill a vacancy shall be elected only or the unexpired term of his predecessor in off ice.
Any ber at in ted
directorship or trusteeship to be filled by reason of an increase in the num of directors or trustees shall be filled only by an election at a regular or a special meeting of stockholders or members duly called for the purpose, or the same meeting authorizing the increase of directors or trustees if so sta in the notice of the meeting. (n)
A by-law provision or company practice of giving a stockholder a permanent s eat in the Board would be against the provisions of Section 28 and 29 of the Cor poration Code which requires members of the Board of the corporation to be elect ed TERM OF OFFICE, HOLD-OVER PRINCIPLE The term of office of the members of the Board in a stock corporation shall b e one year and until their successors are elected and qualified In the event that no new board is elected or qualified after the original on e-year term of the board of directors, then under the hold-over principle, the existing board, if still constituting a quorum, is still a legitimate board with full authority to bind the corporation Directors may lawfully fill vacancies occurring in the board, as well as the original directors, hold-over until qualification of their successors The remedy is quo warranto to question the legality and proper qualification of persons elected to the board REMOVAL OF DIRECTORS AND TRUSTEES Section 28. Removal of directors or trustees. - Any director or trustee of a cor poration may be removed from office by a vote of the stockholders holding or r epresenting at least two-thirds (2/3) of the outstanding capital stock, o r if the corporation be a non-stock corporation, by a vote of at least two-third s (2/3) of the members entitled to vote: Provided, That such removal shall take place either at a regular meeting of the corporation or at a special meeting cal led for the purpose, and in either case, after previous notice to stockholders o r members of the corporation of the intention to propose such removal at the meeting. A special meeting of the stockholders or members of a corporati on for the purpose of removal of directors or trustees, or any of them, must be called by the secre tary on order of the president or on the written demand of the stockholders re presenting or holding at least a majority of the outstanding cap ital stock, or, if it be a non-stock corporation, on the written demand of a maj ority of the members entitled to vote. Should the secretary fail or refuse to ca ll the special meeting upon such demand or fail or refuse to give the notice, or if there is no secretary, the call for the meeting may be addressed directly to the stockholders or members by any stockholder or member of the corporation sig ning the demand. Notice of the time and place of such meeting, as well as of the intention to propose such removal, must be given by publication or by written n otice prescribed in this Code. Removal may be with or without cause: P rovided, That removal without cause may not be used to deprive minority stockhol ders or members of the right of representation to which they may be entitled und er Section 24 of this Code. (n) General rule however is that by 2/3 vote is already enough to remove a direc tor. Exception is that when the director is elected lative voting, he may not be removed without cause even if there is 2/3 votes There is no legal definition for cause but the of a director/trusteeloyalty, obedience, diligence violation thus of either three will constitute cause Only stockholders or members have the power to tees elected by them as laid down in Section by the minority through cumu Code enumerates three duties for removal remove the directors and trus
28 of the Code DIRECTORS' OR TRUSTEES' MEETINGS Section 49. Kinds of meetings. - Meetings of directors, trustees, stockholders, or members may be regular or special. (n) Section 53. Regular and special meetings of directors or trustees. - R egular meetings of the board of directors or trustees of every corpora tion shall be held monthly, unless the by-laws provide otherwise. Special meetings of the board of directors or trustees may be held at any time u pon the call of the president or as provided in the by-laws.
Meetings of directors or trustees of corporations may be held anywhere in or ou tside of the Philippines, unless the by-laws provide otherwise. Notice o f regular or special meetings stating the date, time and place of the meeting mu st be sent to every director or trustee at least one (1) day prior to the schedu led meeting, unless otherwise provided by the by-laws. A director or trustee may waive this requirement, either expressly or impliedly. (n) Section 54. Who shall preside at meetings. - The president shall preside at all meetings of the directors or trustee as well as of the stockholders or members, unless the by-laws provide otherwise. (n) Section 92. Election and term of trustees. - Unless otherwise provided in the ar ticles of incorporation or the by-laws, the board of trustees of non- stock corp orations, which may be more than fifteen (15) in number as may be fixed in their articles of incorporation or by-laws, shall, as soon as organized, so classify themselves that the term of office of one-third (1/3) of their number shall expi re every year; and subsequent elections of trustees comprising one-third (1/3) o f the board of trustees shall be held annually and trustees so elected shall hav e a term of three (3) years. Trustees thereafter elected to fill vacan cies occurring before the expiration of a particular term shall hold offic e only for the unexpired period. No person shall be elected as trustee unless he is a member of the corporati on. Unless otherwise provided in the articles of incorporation or the by-laws, offic ers of a non-stock corporation may be directly elected by the members. (n) Quorum Shall be the presence of the majority of the number of directors as fixed in the articles of incorporation The required vote to pass a resolution shall be a majority vote of the direc tors present at such meeting where quorum is achieved In the election of officers however, the vote of the majority of all the mem bers of the board is necessary For stock corporations, this is based on the number of out
standing voting stocks For non-stock, voting rights shall be counted in determining the existence of a quorum during members' meetings. Dead members shall not be counted. Abstention General rule is that an abstention is counted in favor of the issue that won the majority vote since by their act of abstention, the abstaining directors are deem to abide by the rule of the majority Requisites for a Valid Meeting 1. Meeting of the directors or trustees duly assembled as a board, at the pla ce, time, and manner provided in the by-laws 2. Presence of the required quorum 3. Decision of the majority of the quorum or in other cases, majori ty of the entire board Mode of Attendance of Board Members A director or trustee cannot attend nor be represented in a board meeting by proxy Since the board is the governing body of the corporation upon whom all cor porate powers are vested by law, each elected member are supposed to exercise their judgment and discretion in running the affairs of the corporation The each have been elected by the stockholders or members on the basis of th eir personal qualifications and capabilities with full expectations that they would discharge their duties and functions COMPENSATION OF DIRECTORS/TRUSTEES Section 30. Compensation of directors. - In the absence of any provision in the by-laws fixing their compensation, the directors shall not receive any compensat ion, as such directors, except for reasonable per diems: Provided, however, That any such compensation other than per diems may be granted to directors by the v ote of the stockholders representing
at least a majority ckholders meeting. as such directors, of the corporation
of the outstanding capital stock at a regular or special sto In no case shall the total yearly compensation of directors, exceed ten (10%) percent of the net income before income tax during the preceding year. (n)
Directors and trustees are not entitled to salary or other compensation when t hey perform nothing more than the usual and ordinary duties of their office, fou nded on the presumption that directors and trustees render service gratuitously, and that the return upon their services adequately furnishes the motives for se rvice, without compensation. But they can receive renumeration for executive o fficer position There are two ways of receiving additional remuneration aside from the per d iemsone, when there is a provision in the bylaws fixing their compensation, and two, when the stockholders
representing a majority of the outstanding capital stock at a regular or special meeting agree to give them compensation FIDUCIARY DUTIES OF DIRECTORS AND TRUSTEES Pre-Corporation Code/Common Law Nature of Duties of Directors, Trustees and Officers (As Held in Palting case) These provisions are in direct opposition to our corporation law and corpora te practices in this country. These provisions alone would outlaw any corporation locally organized or doing business in this jurisdiction. Consider the unique and unusual provision that no contract or transaction between the company and any other association or corporation shall be affected except in case of fraud, by the fact that any of the directors or officers of the compa ny may be interested in or are directors or officers of such other association o r corporation; and that none of such contracts or transactions of this company w ith any person or persons, firms, associations or corporations shall be affected by the fact that any director or officer of this company is a party to or has an interest in such contract or transaction or has any connection with such person or persons, firm s associations or corporations; and that any and all persons who may become dire ctors or officers of this company are hereby relieved of all responsibility whic h they would otherwise incur by reason of any contract entered into which this company either for their own benefit, or for th e benefit of any person, firm, association or corporation in which they may be i nterested. The impact of these provisions upon the traditional judiciary relationship between the directors and the stockholders of a corporation is too obvious to escape notice by those who are called upon to protect the interest of investors. The directors and officers of the company can do anything, short of actual fraud, with the affairs of the corporation even to benefit themselves directly or other persons or entities in which they are interested, and with imm unity because of the advance condonation or relief from responsibility by reason of such acts. This and the other provision which authorizes the election of non -stockholders as directors, completely disassociate the stockholders from the government and ma nagement of the business in which they have invested. Nature of Duties of Officers and Directors (As Held in Prime White Cement case) A director of a corporation holds a position of trust and as such, he owes a duty of loyalty to his corporation. In case his interests conflict with those of the corporation, he cannot sacrifice the latter to his own advantage and benefit. As corporate managers, directors are co mmitted to seek the maximum amount of profits for the corporation. This trust relationship "is not a matter of statutory or technical law. It springs from the fact that directors have the con trol and guidance of corporate affairs and property and hence of the property in terests of the stockholders."' Duty of Obedience Board will direct the affairs of the corporation only in a ccordance with the purposes for which it was organized The powers exercised by the directors and officers are neces sarily limited, because all the limitations imposed by law on private corporation are necessarily imposed also on the board of directors who act on behalf of the corporation A corporation, through its board of directors, should act in a manner and wi thin the formalities if any, prescribed by its charter or by the general law
Duty of Diligence Section 31. Liability of directors, trustees or officers. - Directors or trustee s who wilfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary i nterest in conflict with their duty as such directors or trustees shall b e liable jointly and severally for all damages resulting therefrom suffered by t he corporation, its stockholders or members and other persons. When a director, trustee or officer attempts to acquire or acquires, in violatio n of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disabi lity upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation. (n) Steinberg v. Velasco 52 PHIL 953 FACTSplaintiff sues the directors and officers of the trading corporation for allegedly unlawfully authorizing the purchase of stocks from other corporations as well as declaring dividends to the prejudice of its creditors HELD: o Directors of a corporations are bound to care for its property and manage i ts affairs in good faith, and for violation of these duties resulting in waste o f its assets or injury to the property they are liable to account the same as ot her trustees. And there can be no doubt that if they do acts clearly beyond the ir power, whereby loss ensues to the corporation, or dispose of its property or pay away its money without authority, they will be required to make good the los s out of their private estates. This is the rule where the disposition made of money or property of the corporation is one either not within the lawful power o f the corporation, or if within the power of the corporation, is not within the power or authority of the partic ular officer or director. o Creditors of a corporation have the right to assume that so long as there are outstanding debts and liabilities, the board of directors will not use the asse ts of the corporation to purchase its own stock, and that will not declare dividends to st ockholders when the corporation is insolvent Bates v. Dresser 251 US 524 FACTS: Numerous acts of theft were committed by the bank's bookkeeper. Beca use of this, the bank suffered some losses. This prompted Bates to file a case against Dresser, among others, as officer of the bank for allowing such theft to happen. HELD: o In accepting the presidency Dresser must be taken to have contemplated respon sibility for losses to the bank, whatever they were, if chargeable to his fault.
Those that happened were chargeable to his fault, after he had warnings that sh ould have led to steps that would have made fraud impossible, even though the pr ecise form that the fraud would take hardly could have been foreseen. o The position of the president is different. Practically he was the master of the situation. He was daily at the bank for hours, he had the deposit ledger in his hands at times and might have had it at any time. He had had hints and warni ngs in addition to those that we have mentioned, warnings that should not be mag nified unduly, but still that taken with the auditors report of 1903, the unexplained shortages, the suggestion of the teller, Cutting, in 1905, and the final seeming rapid decline in deposits, would have induced scrutiny bu t for an invincible repose upon the status quo. Smith v. Van Gorkam 488 A.2D 858
FACTS: Trans Union was a publicly-traded, diversified holding company, the p rincipal earnings of which were generated by its railcar leasing business. Du ring the period here involved, the Company had a cash flow of hundreds of mil lions of dollars annually. However, the Company had difficulty in generating sufficient taxable income to offset increasingly large investment tax credits (I TCs). Accelerated depreciation deductions had decreased available taxable in come against which to offset accumulating ITCs. The Company took these deductions, despite their effect on usable ITCs, because the rental price in th e railcar leasing market had already impounded the purported tax savings. Effor ts were made to lobby in Congress the refund of ITCs but to no avail. In trying to solve the taxable income problem, the company started with acquirin g the smaller companies. This accelerated growth but still wasnt enough. Then the president thought of selling the company out which eventually happened. A cash-out merger was done and this prompted the stockholders to file an action ag ainst Van Gorkam. HELD: o In carrying out their managerial roles, directors are charged with an u nyielding fiduciary duty to the corporation and its shareholders. The busin ess judgment rule exists to protect and promote the full and free exercise of th e managerial power granted. The rule itself is a presumption that in making a bus iness decision, the directors of a corporation acted on an informed basis, in go od faith and in the honest belief that the action taken was in the best interest s of the company. o Since a director is vested with the responsibility for the management of the affairs of the corporation, he must execute that duty with the recognition that he acts on behalf of others. Such obligation does not tolerate faithlessness or self-dealing. But fulfillment of the fiduciary function requires more than the mere absence of bad faith or fraud. Representation of the financial interests of others imposes on a director an affirmative duty to protect those interests and to proceed with a critical eye in assessing information of the type and under the circumstances present here. Thus , a directors duty to exercise an informed business judgment is in *873 the n ature of a duty of care, as distinguished from a duty of loyalty. Here, there were no allegations of fraud, bad faith, or self-dealing, or proof thereo f. Hence, it is presumed that the directors reached their business judgment in
good faith, considerations of motive are irrelevant to the issue before us. o With the circumstances on record, it must be held that the directors didnt r each a sound business judgment in approving the merger agreement. They solely re lied on the representations of the president without prior knowledge on the matt er. Duty of Loyalty Section 31. Liability of directors, trustees or officers. - Directors or trustee s who wilfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary i nterest in conflict with their duty as such directors or trustees shall b e liable jointly and severally for all damages resulting therefrom suffered by t he corporation, its stockholders or members and other persons. When a director, trustee or officer attempts to acquire or acquires, in violatio n of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disabi lity upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation. (n) Section 32. Dealings of directors, trustees or officers with the corporation. - A contract of the corporation with one or more of its directors o r trustees or officers is voidable, at the option of such corporation, unless all the following conditions are present:
1. That the presence of such director or trustee in the board meeting in which t he contract was approved was not necessary to constitute a quorum for such meeti ng; 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 th e board of directors. Where any of the first two conditions set forth in the preceding para graph is absent, in the case of a contract with a director or trustee, such cont ract may be ratified by the vote of the stockholders representing at least two-t hirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full disclosure of the adverse interest of the directors or trustees involved is made at such me eting: Provided, however, That the contract is fair and reasonable under the cir cumstances. (n)
Section 33. Contracts between corporations with interlocking directors. - Except in cases of fraud, and provided the contract is fair and reasonable under the c ircumstances, a contract between two or more corporations having interlocking di rectors shall not be invalidated on that ground alone: Provided, That if the int erest of the interlocking director in one corporation is substantial and his int erest in the other corporation or corporations is merely nominal, he shall be su bject to the provisions of the preceding section insofar as the latter corporati on or corporations are concerned. Stockholdings exceeding twenty (20%) percent of the outstanding capital stock s hall be considered substantial for purposes of interlocking directors. (n ) Section 34. Disloyalty of a director. - Where a director, by virtue of his offic e, acquires for himself a business opportunity which should belong to the corpo ration, thereby obtaining profits to the [qprejudice of such corporation, he must account to the latter for all such profits by re funding the same, unless his act has been ratified by a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding capital sto ck. This provision shall be applicable, notwithstanding the fact that the direct or risked his own funds in the venture. (n) Difference between Section 31 and 34 o While they both cover the same subject matter which is business opportunity b ut they concern different personalities, Section 34 is only applicable to direct ors and not to officers while Section 31 is applicable to directors, trustees, a nd officers o Section 34 allows ratification of a transaction by a self- dealing director b y the vote of stockholders representing 2/3 of the outstanding capital stock Why is a self-dealing transaction entered into by a director can be ratifie d while that entered into by an officer cannot be ratified? o One theorydirectors and trustees are the direct elected representatives of the stockholders/members (under theory of delegated power) while officers are generally elected by the Board o Other theoryofficers are mandated to have a greater loyalty compared to the di rectors since they spend more time with corporate affairs, getting salary from t he corporation, etc. Take note also the gravity of the acts comprised in Section 31 compared to S ection 34. The acts in Section 31 committed by a director, trustee or officer is graver than that in Section 34 This duty also applies to confidential employees Mead v. McCullough 21 PHIL 95 FACTS: Mead was the general manager of an engineering and construction firm . While he was away on a trip to China, the
board entered into a contract this, his effects were sold
with
defendant
company. Pursuant to
HELD: there was nothing wrong with the transaction entered into by the comp any. Doctrine of Corporate Opportunity (As Mentioned in the Gokongwei case) If there is presented to a corporate officer or director a business opportun ity which the corporation is financially able to undertake, is from its nature, in the line of the corporations business and is of practical advantage to it, i s one in which the corporation has an interest or a reasonable expectancy, and b y embracing the opportunity, the self-interest of the officer or director will b e brought into seize the opportunity for himself. And, if, in such circumstances , the interests of the corporation are betrayed, the corporation may elect to claim all of the benefits of the transaction for itself. and the law wil l impress a trust in favor of the corporation upon the property interests and pr ofits so acquired. The doctrine of "corporate opportunity" is precisely a recognition by the co urts that the fiduciary standards could not be upheld where the fiduciary was acting for two entities with competing interests. This doctrine rests fundamentally on the unfairness, in particular ci rcumstances, of an officer or director taking advantage of an opportunity for hi s own personal profit when the interest of the corporation justly calls for prot ection. 30 It is not denied that a member of the Board of Directors of the San Miguel Corpo ration has access to sensitive and highly confidential information, such as: (a) marketing strategies and pricing structure; (b) budget for expansion and divers ification; (c) research and development; and (d) sources of funding, availabilit y of personnel, proposals of mergers or tie-ups with other firms. It is obviously to prevent the creation of an opportunity for an officer or dire ctor of San Miguel Corporation, who is also the officer or owner of a competing corporation, from taking advantage of the information which he acquires as direc tor to promote his individual or corporate interests to the prejudice of San Miguel Corporation and its stockholders, that the questioned amendment of th e by-laws was made. Certainly, where two corporations are competitive in a subst antial sense, it would seem improbable, if not impossible, for the director, if he were to discharge effectively his duty, to satisfy his loyalty to both corpor ations and place the performance of his corporation duties above his personal co ncerns. Self-Dealings Section 32. Dealings of directors, trustees or officers with the corporation. - A contract of the corporation with one or more of its directors o r trustees or officers is voidable, at the option of such corporation, unless al l the following conditions are present: 1. That the presence of such director or trustee in the board meeting in which t he contract was approved was not necessary to constitute a quorum for such meeti ng; 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 th e board of directors.
Where any of the first two conditions set forth in the preceding para graph is absent, in the case of a contract with a director or trustee, such cont ract may be ratified by the vote of the stockholders representing at least two-t hirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full disclosure of the adverse interest of the directors or trustees involved is made at such me eting: Provided, however, That the contract is fair and reasonable under the cir cumstances. (n) Section 33. Contracts between corporations with interlocking directors. - Except in cases of fraud, and provided the contract is fair and reasonable
under the circumstances, a contract between two or more corporations having inte rlocking directors shall not be invalidated on that ground alone: Provided, That if the interest of the interlocking director in one corporation is substantial and his interest in the other corporation or corporations is merely nominal, he shall be subject to the provisions of the preceding section insofar as the latte r corporation or corporations are concerned. Stockholdings exceeding twenty (20%) percent of the outstanding capital stock s hall be considered substantial for purposes of interlocking directors. (n ) SEC Code of Corporate Governance SEC MEMORANDUM CIRCULAR NO. Series of 2002 CODE OF CORPORATE GOVERNANCE In accordance with the State's policy to actively promote corporate governance ref orms aimed to raise investor confidence, develop capital market and help achieve high sustained growth for the corporate sector and the economy, the Commission, in its Resolution No.135, Series of 2002 dated April 04 2002, approved the promulgation and implementation o f this Code, which shall be applicable to corporations whose securities are regi stered or listed, corporations which are grantees of permits/licenses and second ary franchise from the Commission and public companies. This Code also applies to branches or subsidiaries of foreign corporations operating in the Philippines whose securities are registered or li sted. I. Definitions 2
A. Board of Directors refers to the collegial body that exercises the corporat e powers of all corporations formed under the Corporation Code. It conducts all business and controls or holds all property of such corporations. B. Corporate Governance refers to a system whereby shareholders, creditors an d other stakeholders of a corporation ensure that management enhances the value of the corporation as it competes in an increasing ly global market place. C. Independent Director refers to a person other than an officer or
employee of the corporation, its parent or subsidiaries, or any other individual having any relationship with the corporation, which would interfere wi th the exercise of independent judgment in carrying out the responsibiliti es of a director. This means that apart from the directors' fees and shareholdings , he should be independent of management and free from any business or other rel ationship which could materially interfere with the exercise of his independent judgment. D. Public Company refers to any corporation with a class of equity securities listed in an Exchange or with assets in excess of Fifty Million Pesos (P50,000 ,000.00) and having two hundred (200) or more stockholders each holding at least one hundred (100) shares of a class of its securities. E. Management refers to the body given the authority to implement the policies determined by the Board in directing the course/business activity/ies of the co rporation. F. Executive Director refers to a director who is at the same time appointed to head a department/unit within the corporate organization. G. Non-executive director refers to a Board member with non- executiv e functions. H. Non-audit work refers to other services offered by the external auditor to a corporation that are not directly related and relevant to its statutory audit function. Examples include accounting, payroll, bookkeeping, reconciliation, computer project management, data processing or inf ormation technology outsourcing services, internal auditing, and services that m ay compromise the independence and objectivity of the external audit. I. Internal control refers to the process effected by a company's Board of Dire ctors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the effectivenes s and efficiency of operations, the reliability of financial reporting, and comp liance with applicable laws, regulations, and internal policies. J. Internal control environment refers to the framework under which internal controls are developed, implemented, alone or in concert
with other policies or procedures, to manage and control a particular risk or business activity, or combination of risks or business activities, to whi ch the company is exposed. K. Internal auditing refers to an independent, objective assurance and consulting activity designed to add value and improve an organization's operations . It helps an organization accomplish its objectives by bringing a systematic, d isciplined approach to evaluate and improve the effectiveness of risk management , control, and governance processes. L. Internal audit department refers to a department, division, team of consultants, or other practitioner(s) that provide independent, objective assura nce and consulting services designed to add value and improve an organization's op erations. M. Chief Audit Executive refers to the top position within the organization resp onsible for internal audit activities. In a traditional internal audit activity, this would be the internal audit director. In the case where internal audit activities are obtained from outside service providers, the chief audit executive is the person responsible for overseeing the service cont ract and the overall quality assurance of these activities, and follow-up of eng agement results. The term also includes such titles as general auditor, chief in
ternal auditor, and inspector general. N. Independence refers to that environment which allows the person to carry ou t his/her work freely and objectively. O. Objectivity refers to unbiased mental attitude that requires the person to carry out his/her work in such a manner that he/she has an honest belief in his/ her work product and that no significant quality compromises are made. Objectivity requires the person not to subordinate his/h er judgment to that of others. P. Standards for the Professional Practice of Internal Auditing (SPPIA) refers t o the criteria by which the operations of an internal auditing department are evaluated and measured. They are intended to represent the practice of internal auditing as it should be, provide a framework for performing and promoting a broad range of value-added internal aud it activities and foster improved organizational processes and operations. II. The Board Governance The Board of Directors (Board) is primarily responsible for th e governance of the corporation. It needs to be structured so that it provides an independent check on management. As such, it is vitally importa nt 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 least t wenty percent (20%) of the members of such Board, whichever is the lesser. All o ther companies are encouraged to have independent directors as well. The Board may include a balance of executive and non-executive director s (including independent non-executives), having a clear division of responsibil ities such that no individual or small group of individuals can dominate the Boa rd's decision making. The non-executive directors should be of sufficient qualifications, stature and number to carry significant weight in the Board's decisions. Non- executive dir ectors considered by the Board to be independent shall be identified in the annu al report. 2. Multiple Board Seats
The Board may consider guidelines on the number of directorships for its members . The optimum number is related to the capacity of a director to perform his du ties diligently in general. The Chief Executive Officer and other executive dire ctors may submit themselves to a low indicative limit on membership in other cor porate Boards. The same low limit may apply to independent, non-executive direc tors who serve as full-time executives in other corporations. In any case, the capacity of directors to serve with diligence shall not be compromised. 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 and greater capacity of the Board for independent decision-making. The company shall d isclose the relationship between the Chairman and the CEO upon their election. Where both positions of the Chairman and CEO are unified, there is clearly one l eader to provide a single vision and mission. In this instance, checks and balan ces should be clearly provided to help ensure that independent, outside views, perspectives, and judgments are given proper hearing in the Board. The Chairman's responsibilities may include: 1. schedule meetings to enable the Board nsibly while not interfering with the flow of 2. prepare meeting agenda in consultation with 3. exercise control over quality, quantity and rmation between Management and the Board; and 4. assist in ensuring compliance with porate governance. to perform its duties respo the company's operations the CEO; timeliness of the flow of info company's guidelines on cor
The responsibilities set out in the above guidelines may pertain only to the Cha irman's role in respect to the Board proceedings. It should not be taken as a com prehensive 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 the corp oration of which he is a director, which share shall stand in his name in the bo oks of the corporation. The Board may provide for additional qualifications of a director such as, but n ot limited to, the following: a) b) c) e) 5. Educational attainment Adequate competency and understanding of business Age requirement d) Integrity/probity Assiduousness Disqualification of Directors
The following shall be grounds for the disqualification of a director: a) Any person who has been finally convicted by a competent judicial or admin istrative body of the following: (i) any crime involving the purchase or sale of securities, e.g., proprietary or non-proprietary membership certificate, comm odity futures contract, or interest in a common trust fund, pre-need plan, pensi on plan or life plan; (ii) any crime arising out of the person's conduct as an und erwriter, broker, dealer, investment company, investment adviser, principal dist ributor, mutual fund dealer, futures commission merchant, commodity trading advi sor, floor broker; and (iii) any crime arising out of his relationship with a ba nk, quasi-bank, trust company, investment house or as an affiliated person of an y of them. b) Any person who, by reason of any misconduct, after hearing or trial, is pe rmanently or temporarily enjoined by order, judgment or decree of the Commissi on or any court or other administrative body of competent jurisdiction from: (i) acting as an underwriter, broker, dealer, inv estment adviser, principal distributor, mutual fund dealer, futures com mission merchant, commodity trading advisor, or a floor broker; (ii) acting as a director or officer of a bank, quasi- bank, trust company, investment house, in
vestment company or an affiliated person of any of them; (iii) engaging in or co ntinuing any conduct or practice in connection with any such activity or willfully violating laws governing securities, and banking activities. Such disqualification shall also apply when such person is currently subject to an effective order of the Commission or any court or other administrative body refusing, revoking or suspending any registration, license or permit issued under the Corporation Code , Securities Regulation Code, or any other law administered by the Commission or Bangko Sentral ng Pilipinas, or under any rule or regulation promu lgated 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 an effective order of a self-regulatory org anization suspending or expelling him from membership or participation or from a ssociating with a member or participant of the organization. c) Any person finally convicted judicially or administratively of an offense involving moral turpitude, fraud, embezzlement, theft, estafa, cou nterfeiting, misappropriation, forgery, bribery, false oath, perjury or other fr audulent act or transgressions. d) Any person finally found by the Commission or a court or other administrati ve 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 admini stered by the Commission or Bangko Sentral ng Pilipinas, or any rule, regulation or order of the Commission or Bangko Sentral ng Pilipinas, or who has filed a m aterially false or misleading application, report or registration statement requ ired by the Commission, or any rule, regulation or order of the Commission. e) Any pe rson judicially declared to be insolvent. f) Any person finally found guilty by a foreign court or equivalent fina ncial regulatory authority of acts, violations or misconduct similar to a ny of the acts, violations or misconduct listed in paragraphs (a) to (e) hereof. g) Any affiliated person who is ineligible, by reason of paragraphs (a) to (e) hereof to serve or act in the capacities listed in those paragraphs. h) Co nviction by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or a violation of the Corpora tion Code, committed within five (5) years prior to the date of his election or appointment. The Board may also provide for the temporary disqualification of a dir ector for the following reasons: a. Refusal to fully disclose the extent of his business interest as required under the Securities Regulation Code and its Implementing Rules and Re gulations. This disqualification shall be in effect as long as his refusal persi sts. b. Absence or non-participation for whatever reason/s for more than fifty per cent (50%) of all meetings, both regular and special, of the Board of directors during his incumbency, or any twelve (12) month period during said incumbency. This disqualification applies for purposes of the succeeding election.
c. Dismissal/termination from directorship in another listed corporation f or cause. This disqualification shall be in effect until he has cleared himself of any involvement in the alleged irregularity. d. Being under preventive suspension by the corporation. e. If the independent director becomes an officer or employee of the same cor poration he shall be automatically disqualified from being an independent direct or. f. If the beneficial security ownership of an independent director in the company or in its related companies shall exceed the 10% limit. g. Conviction that has not yet become final referred to in the grounds for th e disqualification of directors. 6. Duties, Functions and Responsibilities
It is the Board's responsibility to foster the long-term success of the corporatio n and secure its sustained competitiveness in a manner consistent with its fiduc iary responsibility, which it should exercise in the best interest of the corpor ation and its shareholders. a. General Responsibility A director's office is one of trust and confidence. He should act in the best in terest of the corporation in a manner characterized by transparency, accountabi lity and fairness. He should exercise leadership, prudence and integrity i n directing the corporation towards sustained progress over the long term. A dir ector assumes certain responsibilities to different constituencies or stakeholde rs, who have the right to expect that the institution is being run in a prudent and sound manner. To ensure good governance of the corporation, the Board should establish the cor poration's vision and mission, strategic objectives, policies and procedures that may guide and direct the activities of the company and the means to attain the s ame as well as the mechanism for monitoring management's performance. While the ma nagement of the day-to-day affairs of the institution is the responsibility of t he management team, the Board is, however, responsible for monitoring and overse eing management action.
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 discha rge of its duties, functions and responsibilities which include, among others, t he following:\ i. Install a process of selection to ensure a mix of compet ent directors, each of whom can add value and contribute independent judgment to the formulation of sound corporate strategies and policies. Select and appoint the CEO and other senior officers, who must have the motivation, integrity, co mpetence and professionalism at a very high level. Adopt a professional devel opment program for employees and officers, and succession planning for senior ma
nagement. ii. Determine the corporation's purpose and value as well as str ategies and general policies to ensure that it survives and thrives despite fin ancial crises and its assets and reputation are adequately protected. Prov ide sound written policies and strategic guidelines to the corporation that will help decide on major capital expenditures. Determine importan t policies that bear on the character of the corporation with a view towards ensuring its long-term viability and strength. It must periodically evaluate and monitor implementation of such strategies and policies, business p lans and operating budgets as well as management's over-all performance to ensure optimum results. iii. Ensure that the corporation complies with all relevant ulations and codes of best business practices. laws, reg
iv. Identify the corporation's major and other stakeholders and formulate a clear policy on communicating or relating with them accurately, effectively an d sufficiently. There must be an accounting rendered to them regularly in orde r to serve their legitimate interests. Likewise, an investor relations program that reaches out to all shareholders and fully informs them of corporate activities should be developed. As a best pract ice, the chief financial officer or CEO should have oversight of this program and should actively participate in public activit ies v. Adopt a system of internal checks and balances, which may be applie d in the first instance to the Board. A regular review of the effectiv eness of such system must be conducted so that the decision- making capability a nd the integrity of corporate operations and reporting systems are maintained at a high level at all times. vi. Endeavor to provide appropriate technology and systems rating to ac count for available resources to ensure a position of a strong and meaningful co mpetitor. Identify key risk areas and key performance indicators and monitor t hese factors with due diligence. vii. Constitute an Audit and Compliance Committee.
viii. Properly discharge Board functions by meeting regularly. Independent views during Board meetings should be given due consideration and all such meeti ngs should be duly minuted. ix. Keep Board ibed in the articles of egulation. Conduct and pe of its authority as nd regulations. c. authority within the powers of the institution as prescr incorporation, by-laws and in existing laws, rules and r maintain the affairs of the institution within the sco prescribed in its charter and in existing laws, rules a
Specific Duties and Responsibilities of a Director
i. To conduct fair business transactions with the corporation and t o ensure that personal interest does not bias Board decisions. The basic princi ple to be observed is 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 interest should arise on the part of directors or senior executives, it should be fully disclosed and the concerned director s hould not participate in the decision making. A director who has a continuing
conflict of interest of a material nature should consider resigning.
ii. To devote time and attention necessary to properly discharg e his duties and responsibilities. A director should devote sufficient time to f amiliarize himself with the institution's business. He should be constantly aware of the institution's condition and be knowledgeable enough to contribute meaningfu lly to the Board's work. He should attend and actively participate in Board and co mmittee meetings, request and review meeting materials, ask questions, and reque st explanations. iii. To act judiciously. Before deciding on any matter brought before the Board of directors, every director should thoroughly evaluate the issues, as k questions and seek clarifications when necessary. iv. To exercise independent judgment. A director should view each prob lem/situation objectively. When a disagreement with others occurs, he should car efully evaluate the situation and state his position. He should not be afraid t o take a position even though it might be unpopular. Corollarily, he should su pport plans and ideas that he thinks are beneficial to the corporation. v. To have a working knowledge of the statutory and regulatory requirements affecting the corporation, including the contents of its articles of incorporation and by-laws, the requirements of the Commission, and where appl icable, the requirements of other regulatory agencies. A director should also ke ep himself informed of industry developments and business trends in order to saf eguard the corporation's competitiveness. vi. To observe confidentiality. A director should observe the confidenti ality of non-public information acquired by reason of his position as di rector. He should not disclose any information to any other person without the a uthority of the Board. vii. To ensure the continuing soundness, effectiveness and adequacy of t he company's control environment. 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 and prudent manner, (c) the organizational and procedural controls supp orted by an effective management information system and risk management reportin g system, and (d) the independent audit mechanisms to monitor the adequacy and e ffectiveness of the organization's governance, operations, information systems, to include reliability and integrity of financial and operational information, eff ectiveness and efficiency of operations, safeguarding of assets, and compliance with laws, rules, regulations, and contracts. i. The minimum internal control mechanisms for the Board's overs ight responsibility may include: Defining the duties and responsibilities of the CEO;
Selecting or approving an individual with appropriate ability, integ rity, experience to fill the CEO role; Reviewing proposed senior management appointments; Ensuring the selection, appointment and retention of qualified and competen t management; Reviewing the company's personnel and human resource policies and sufficiency , conflict of interest situations, changes to the compensation plan for employees and officers and management succession pl an. ii. The minimum internal control mechanisms for management's operational responsibility would center on the CEO, being ultimately accountable for the co mpany's organizational and procedural controls. iii. The scope and particulars of a system of effective organizational a nd procedural controls may differ among companies depending on factors s uch as: the nature and complexity of business and the business culture; the volu me, size and complexity of transactions; the degree of risk; the degree of centr alization and delegation of authority; the extent and effectiveness of informati on technology; and the extent of regulatory compliance. iv. Each company may have in place an independent audit function, throu gh which the company's Board, senior management, and stockholders may be provided with reasonable assurance that its key
organizational and procedural controls are effective, appropriate, and compli ed with. The Board may appoint a chief audit executive to carry out the audit fu nction, and may require the chief audit executive to report to a level within th e organization that allows the internal audit activity to fulfill its responsibi lities. 7. Board Meetings and Quorum Requirement
Members of the Board should attend regular and special meetings of the Board in person. In view of modern technology, however, attendance at Board meetings thro ugh teleconference may be allowed. An independent director should always be in attendance. However, the absence an independent director may not affect the quorum requirements if he is duly tified of the meeting but deliberately and without justifiable cause fails to tend the meeting. Justifiable causes may only include grave illness or death immediate family and serious accidents. of no at of
To monitor compliance with the above requirement, corporations may, at the end o f every fiscal year, provide the Commission with a sworn certification that the foregoing requirement has been complied with. The said certification may be sub mitted with the company's current report (SEC Form 17-1) or on a separate filing. 8. Remuneration of the Members of the Board and Officers
Levels of remuneration shall be sufficient to attract and retain the directors, if any, and officers needed to run the company successfully. Corporations, howev
er, should avoid paying more than what is necessary for this purpose. A proport ion of executive directors' remuneration may be structured so as to link rewards t o corporate and individual performance. Corporations may establish a formal and transparent procedure for developing a p olicy on executive remuneration and for fixing the remuneration packages of indi vidual directors, if any, and officers. No director should be involved in deci ding his or her own remuneration. The corporations' annual reports, information and proxy statements shall in clude a clear, concise and understandable disclosure of all plan and non-plan co mpensation awarded to, earned by, paid to, or estimated to be paid to, directly or indirectly to all individuals serving as the CEO or acting in a similar capac ity during the last completed fiscal year, regardless of the compensation level and the corporation's four (4) most highly compensated executive officers other than the CEO who were serving as executive officers at the end of the last comp leted year. To protect the funds of the corporation, the Commission may regulate the payment by the corporation to directors and officers of compensation, allowance, fees a nd fringe benefits in very exceptional cases, e.g., when a corporation is under receivership or rehabilitation. 9. Board Committees
The Board shall constitute Committees in aid of good corporate governance. A. The Audit Committee shall be composed of at least three (3) Board members , preferably with accounting and finance background, one of whom shall be an ind ependent director and another should have related audit experience. It shall ha ve the following specific functions: a. Provide oversight over the senior management's activities in m anaging credit, market, liquidity, operational, legal and other risks of the cor poration. This function shall include receiving from senior management periodic information on risk exposures and risk management activities. However, in cons ideration of the risk profile of the corporation, the Board may constitute a sep arate Risk Management Committee to focus on carrying out this oversight role ove r risk management; b. Provide oversight of the corporation's internal and external auditors;
c. Review and approve audit scope and frequency, and the annual internal audit plan;
d. Discuss with the external auditor before the audit commences the nature an d scope of the audit, and ensure coordination where more than one audit firm is involved; e. Responsible for the setting-up of an internal audit department and conside r the appointment of an internal auditor as well as an independent external audi
tor, the audit fee and any question of resignation or dismissal; f. Monitor and evaluate the adequacy and effectiveness of the corporation's inte rnal control system; g. Receive and review reports of internal and external auditors and regulator y agencies, where applicable and ensure that management is taking appropriate co rrective actions, in a timely manner in addressing control and compliance functions with regulatory agencies; h. Review the quarterly, half-year and annual financial statements bef ore submission to the Board, focusing particularly on: Any change/s in accounting policies and practices Major judgmental areas Significant adjustments resulting from the audit Going concern assumption Compliance with accounting standards Compliance with tax, legal, and stock exchange requirements i. Responsible for coordinating, monitoring and facilitating compliance with existing laws, rules and regulations. It may also constitute a Compliance Unit for this purpose. j. Evaluate and determine non-audit work by external auditor and keep un der review the non-audit fees paid to the external auditor both in relation to t heir significance to the auditor and in relation to the company's total expenditur e on consultancy. The non-audit work should be disclosed in the annual report. k. Establish and identify the reporting line of the chief audit executive so that the reporting level allows the internal audit activity to fulfill its respo nsibilities. The chief audit executive shall report directly to the Audit Comm ittee functionally. The Audit Committee shall ensure that the internal au ditors shall have free and full access to all the company's records, properties an d personnel relevant to the internal audit activity and that the internal audit activity should be free from interference in determining the scope of internal a uditing examinations, performing work, and communicating results, and shal l provide a venue for the Audit Committee to review and approve the annual inter nal audit plan. The Chairman of this committee should be an independent director. He should be r esponsible for inculcating in the minds of the Board members the importance of m anagement responsibilities in maintaining a sound system of internal control and the Board's oversight responsibility. For Philippine branches or subsidiaries of foreign corporations covered by this Code, the local audit head for such entities should be independent of the Phil ippine operations and should report to the regional or corporate headqua rters. B. The Board may also constitute the following committees:
a. The Nomination Committee which may be composed of at least three (3 ) members, one of whom should be an independent director may review and evaluate the qualifications of all persons nominated to the Board as well as those nomin ated to other positions requiring appointment by the Board and provide assessmen t on the Board's effectiveness in directing the process of renewing and replacing Board members. b. The Compensation or Remuneration Committee may be composed of at least three (3) members, one of whom should be an independent director. It may establish a f
ormal and transparent procedure for developing a policy on executive remuneratio n and for fixing the remuneration packages of corporate officers and directors, and provide oversight over remuneration of senior management and other key pers onnel ensuring
that compensation is consistent with the corporation's culture, strategy and contr ol environment. 10. The Corporate Secretary The Corporate Secretary, who must be a Filipino, is an officer of the corporatio n. Perfection in performance and no surprises are expected of him. Likewise, his loyalty to the mission, vision and specific business objectives of the corpo rate entity come with his duties. Like the CEO, he should work and deal fairly and objectively with all the consti tuencies of the corporation, namely, the Board, management, stockholders and oth er stakeholders. As such, he should be someone his colleagues and these constit uencies can turn to, trust and confide with on a regular basis. He should have the administrative skills of the chief administrative of ficer of the corporation and the interpersonal skills of the chief human resourc es officer. If the Corporate Secretary is not the general counsel, then he must have the legal skills of a chief legal officer. He must also have the financia l and accounting skills of a chief financial officer, and, lastly the vision and decisiveness of the CEO. Since there are different individuals on top of various corporate activ ities, the Corporate Secretary should be fully informed and be part of the sched uling process of the different activities. As to agendas, he should have the s chedule thereof at least for the current year and should put the Board on notice before every meeting. It is a very important discipline to get the Board to t hink ahead. He should serve as an adviser to director's responsibilities and obli gations. The Corporate Secretary should make sure that directors have before them everyth ing that they need to make an informed decision. When the Board makes a decisio n, it is covered by a business judgment that can be arrived at by the members ac ting in good faith with the assistance of the Corporate Secretary who should rev iew carefully the information presented to the directors at the time they are to make a decision. III. Supply Information
In order to fulfill their responsibilities, Board members, should be provided wi th complete, adequate and timely information prior to Board meetings on an on-go ing basis. Management should have an obligation to supply the Board with complete, adequate information in a timely manner. Reliance purely on what is volunteered by Mana
gement is unlikely to be enough in all circumstances and further inquiries may b e required if the particular director is to fulfill his or her duties properly. Hence, the Board may have separate and independent access to the company's senio r management. The information may include the background or explanatory information relating t o matters to be brought before the Board, copies of disclosure documents, budge ts, forecasts and monthly internal financial statements. With respect to th e budget, any variance between the projections and actual results should also be disclosed and explained. Directors should also have a separate and independent access to the Corporate S ecretary. The role of the Corporate Secretary should be clearly defined and should include responsibility for ensuring that Board procedures are being follo wed and that applicable rules and regulations are complied with. The Corporate Secretary should attend all Board meetings. The Board should have a procedure for directors, either individually or as a gro up, in the furtherance of their duties, to take independent professional advice, if necessary, at the corporation's expense. IV. Accountability and Audit
1. The Board is primarily accountable to the shareholders and Management is prim arily accountable to the Board. The Board should provide the shareholders with a balanced and understandable assessment of the corporation's perfor mance, position and prospects on a quarterly basis. The Management should prov ide all members of the Board with a balanced and understandable account of the c orporation's performance, position and prospects on a monthly basis. This
responsibility should extend to interim and other price sensitive public reports and reports to regulators (if required). It should be primarily responsible in making financial reporting and internal control in accordance with the following guidelines: a. Present a balanced and understandable assessment of the comp any's position and prospects. The Board's responsibility to present a balanced and u nderstandable assessment should extend to interim and other price-sensitive publ ic reports and reports to regulators as well as to information required to be pr esented by statutory requirements; b. Explain their responsibility for preparing the accounts, for which there should be a statement by the auditors about their reporting respons ibilities; c. Report that the business is a going concern, with supporting assump tions or qualifications, if necessary; d. Maintain a sound system of internal control to safeguard stakeholders' investment and the company's assets;
e. Based on the approved audit plans, scope and frequency of audits, ensure that internal audit examinations cover, at least, the evaluation of adequacy and effectiveness of controls encompassing the organization's governan ce, operations, information systems, to include reliability and integrity of fin ancial and operational information, effectiveness and efficiency of operations, safeguarding of assets, and compliance with laws, rules, regulations, and contra cts. f. Require the chief audit executive to render to the Audit Committee and senior management an annual report on the internal audit departmen t's activity, purpose, authority, responsibility and performance relative to the a udit plans and strategies approved by the Audit Committee of the Board. Such a nnual report should include significant risk exposures and control issues, corporate governance issues, and other matters needed or requested by the Boar d and senior management. The chief audit executive's annual report shall likewise be made available to the stockholders of the company. Internal auditors shall report that their activities are conducted in accordance with the Standards for the Professional Practice of Internal Auditing. Otherwise, the chie f audit executive shall disclose to the Board and senior management that it has not yet achieved full compliance with the standards for the professional practic e of internal auditing. 2. Selection/Appointment, Resignation, Dismissal or Cessation of Service of an External Auditor The Board, through the Audit Committee, shall recommend to the stockholders a du ly accredited external auditor who shall undertake an independent audit and shal l provide an objective assurance on the way in which financial statements sha ll have been prepared and presented. Such external auditor cannot at the sa me time provide the services of an internal auditor to the same client. Other no n-audit work should not be in conflict with the functions of the external audito r. The external auditor should be rotated every five (5) years or earlier or the ha ndling partner shall be changed. The reason/s for the resignation, dismissal or cessation from service and the da te thereof of an external auditor shall be reported in the company's annual and cu rrent reports. Said report shall include a discussion of any disagreement with said former external auditor on any matter of accounting principles or practices , financial statement disclosure or auditing scope or procedure, which if not re solved to the satisfaction of the former auditor, would have cause making refere nce to the subject matter of the disagreement in connection with its report. If an external auditor believes that the statements made in an annual report, in formation statement or proxy statement filed during his engagement are incorrect or incomplete, he shall also present his views in said reports. V. Stockholders' Stockholders' Interests Rights and Protection of Minority
The Board shall be committed to respect the following rights of the stockholders :
MA. ANGELA AGUINALDO ATENEO LAW 2010
1.
Voting Right
Shareholders have the right to elect, remove and replace directors and vote on c ertain corporate acts in accordance with the Corporation Code. The Code mandates the use of cumulative voting in the election of directors. Alt hough directors may be removed with or without cause, the Code prohibits rem oval without cause if it will deny minority shareholders represent ation in the Board. Removal of directors requires an affirmative vote of two-thi rds of the outstanding capital. 2. Pre-emptive Right
All stockholders have pre-emptive rights, unless there is a specific denial of t his right in the articles of incorporation or an amendment thereto. They shall h ave the right to subscribe to the capital stock of the corporation. The Articl es of Incorporation may lay down the specific rights and powers of shareh olders with respect to the particular shares they hold, all of which are protect ed by law so long as they are not in conflict with the Corporation Code. 3. Power of Inspection
The Corporation Code mandates corporations to allow shareholders to inspect corp orate books and records including minutes of Board meetings and stock registries in accordance with the Corporation Code and to provide them an annual report, i ncluding financial statements, without cost or restrictions. 4. Right to Information
The Shareholders shall be provided, upon request, with periodic reports which di sclose personal and professional information about the directors and officers and certain other matters such as their holdings of the company's shares, d ealings with the company, relationships among directors and key officers, and th e aggregate compensation of directors and officers. The Information Statement/ Proxy Statement where these are found must be distributed to the shareholders be fore annual general meetings and in the Registration Statement and Prospectus in case of registrati on of shares for public offering with the Commission. The minority shareholders should be granted the right to propose the holding of a meeting, and the right to propose items in the agenda of the meeting, provided the items are for legitimate business purposes. The minority shareholders should have access to any and all information relating to matters for which the management is accountable for and to those relating to matters for which the management should include such information and, if not in cluded, then the minority shareholders can propose to include such matters in th e agenda of stockholders' meeting, being within the definition of legitimate purpos es. 5. Right to Dividends
Shareholders have the right to receive dividends subject to the discretion of th e Board. However, the Commission may direct the corporation to declare dividen ds when its retained earnings is in excess of 100% of its paid-in capital stock, except: a) when justified by definite corporate expansion projects or pr
ograms approved by the Board or b) when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or fore ign, from declaring dividends without its consent, and such consent has not been secured; or c) when it can be clearly shown that such retention is nece ssary under special circumstances obtaining in the corporation, such as when th ere is a need for special reserve for probable contingencies. 6. Appraisal Right
The Corporation Code allows the exercise of the shareholders' appraisal rights und er the following circumstances: a. In case any amendment to the articles of incorporation has the effe ct of changing or restricting the rights of any stockholders or class of shares, or of authorizing preferences in any respect superior to those of outstanding s hares of any class, or of extending or shortening the term of corporate existenc e;
b. In case of sale, lease, exchange, transfer, mortgage, pledge or oth er disposition of all or substantially all of the corporate property and assets as provided in the Corporation Code; and c. In case of merger or consolidation.
It is the duty of the directors to promote shareholder rights, remove impediment s to the exercise of shareholders rights and allow possibilities to seek redress for violation of their rights. They shall encourage the exercise of sharehol ders' voting rights and the solution of collective action problems through appropr iate mechanisms. They shall be instrumental in removing excessive costs and oth er administrative or practical impediments to shareholders participating in meet ings and/or voting in person. The directors shall pave the way for the electro nic filing and distribution of shareholder information necessary to make informe d decisions subject to legal constraints. VI. Evaluation Systems
The management may establish a performance evaluation system to measure the perf ormance of the Board and top-level management of the corporation. The establishment of such evaluation system, including the features thereof, may be disclosed in the company's annual report (SEC Form 17- A). VII. Disclosure and Transparency
A dominant theme in all issues related to corporate governance is the vital impo rtance of disclosure. The more transparent the internal workings of the compan y and cash flows, the more difficult it will be for management and controlling s hareholders to misappropriate company assets or mismanage the company. The most basic and all encompassing disclosure requirement is that all material
information, i.e., any thing that could potentially affect share price, should be publicly disclosed. Such information would include earnings results, acquisit ion or disposal of assets, board changes, related party transactions, shareholdings of directors and changes to ownership. Other information that should always be disclosed includes remuneration (includi ng stock options) of all directors and senior management corporate strategy, and off balance sheet transactions. All disclosed information should be released v ia the approved stock exchange procedure for company announcements as well as th rough the annual report. The Board shall therefore, commit at all times to full disclosure of material in formation dealings. It shall cause the filing of all required information for the interest of the stakeholders. VIII. Commitment to Corporate Governance
Corporations shall promulgate and adopt its corporate governance rules and princ iples in accordance with this Code. Said rules shall be in manual form and ava ilable as reference by the directors. It shall be submitted to the Commission, w hich shall evaluate the same and their compliance with this Code taking into acc ount the size and nature of business. The said manual shall be available for ins pection by any stockholder of the corporation at reasonable hours on business da ys. The Chairman of the Board shall be specifically tasked with the responsibility of ensuring adherence to the corporate governance code and practices. Unless mandated by law, other corporations are likewise encouraged to observe th is Circular in the absence of any mandated corporate governance rules adopted by other agencies. IX. Administrative Sanction
Failure to adopt a manual of corporate governance as specified therein shall sub ject a corporation, after due notice and hearing, to a penalty of P100,000.00. X. Transitory Provision
All corporations affected by this Code shall submit their manual by July 1, 2002 to be effective January 1, 2003. A model manual will be drafted
by the Commission and will be available by May 15, 2002 in the SEC web page. CORPORATE OFFICERS The general principles of agency govern the relation between the corporation and its officers and agents, subject to the articles of incorporation, by-laws , or relevant provisions of lawwhen authorized, their acts bind the corporation, otherwise, their acts cannot bind i t Who Are Corporate Officers? Section 25. Corporate officers, quorum. - Immediately after their election, the
directors of a corporation must formally organize by the election of a president , who shall be a director, a treasurer who may or may not be a director, a sec retary who shall be a resident and citizen of the Philippines, and such other officers as may be provided for in the by- laws. Any two (2) or more posi tions may be held concurrently by the same person, except that no one shall act as president and secretary or as president and treasurer at the same time. The directors or trustees and officers to be elected shall perform the duties e njoined on them by law and the by-laws of the corporation. Unless the articles of incorporation or the by-laws provide for a greater majority, a major ity of the number of directors or trustees as fixed in the articles of incorpora tion shall constitute a quorum for the transaction of corporate business, and ev ery decision of at least a majority of the directors or trustees present at a me eting at which there is a quorum shall be valid as a corporate act, except for t he election of officers which shall require the vote of a majority of all the me mbers of the board. Directors or trustees cannot attend or vote by proxy at board meetings. (33a) There are two levels of discussion with respect to corporate office rs The first level of discussion relates to the power of the Board of Directors to hire and terminate officers in the exercise of business judgment The test of officers in the first level is based on an arbitrary formula and doesnt necessarily go into the nature or importance of the position held, and that the nature of the office is not essential in determining the type of officership The second level deals on the distinction of corporate officers from non-off icers to determine who are bound by the duties of loyalty and diligence Both officers and directors are jointly and severally lisble for assenting t o patently unlawful acts or who are guilty of bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors and officers Thus, non-officers are not lodged with the duties of diligence and loyalty Gurrea v. Lezema 103 PHIL 553 By board resolution, Gurrea was removed from his position as manager of the corporation We can only regard as officers of a corporation those who are given that cha racter either by the Corporation Law or by its bylaws. The rest can be considered merely as employees or subordinate officials. And considering that plaintiff has been appointed ma nager by the board of directors and as such does not have the character of an officer, the conclusion is inescapable that he can be suspended or removed by said board of directors under such terms as it may see fit and not as provided for in the by-laws. Evidently, the powe r to appoint carries with it the power to remove, and it would be i ncongruous to hold that having been appointed by the board of directors he co uld only be removed by the stockholders. Mita Pardo de Tuvera v. Tuberculosis Society 112 SCRA 423
Tuvera was a doctor who specializes in the treatment of tuberculosis. She wa s a member of the board of directors and was later appointed as acting executive secretary. By board resolution, she was removed from the same and this prompt ed her to file an action against the board and its officers for her allegedly un lawful removal. The absence of a fixed term in the letter addressed to petitioner informing her of her appointment as Executive Secretary is very significant. This could have no other implication than that petitioner held an appointment at the pleasure of the appointing power. An appointment held at the pleasure of the appointing power is in essence te mporary in nature. It is co-extensive with the desire of the Board of Directors. Hence, when the Board opts to replace the incumbent, technically there is no removal but only an expiration of term an d in an expiration of term, there is no need of prior notice, due hearing or suf ficient grounds before the incumbent can be separated from office. De Rossi v. NLRC 314 SCRA 245 De Rossi was an executive secretary of the MICC. For alleged unlawful acts committed by the plaintiff, he was dismissed from his office. He then filed an action for illegal dismissal against the corporation and its board directors. Note that a corporate officers removal from his office is a corpo rate act. If such removal occasions an intra-corporate controversy, its nature is not altered by the reason or wisdom, or lack thereof, with which the Board of Directors might have in taking such action. 11 When p etitioner, as Executive Vice- President allegedly diverted company funds for his personal use resulting in heavy financial losses to the company, this matter wo uld amount to fraud. Such fraud would be detrimental to the interest not only of the corporation but also of its members. 12 This type of fraud encompasses controversies in a relationship within the corpor ation covered by SEC jurisdiction. 13 Perforce, the matter would come within th e area of corporate affairs and management, and such a corporate controversy wou ld call for the adjudicative expertise of the SEC, not the Labor Arbiter or the NLRC. Nacpil v. International Broadcasting Corporation 379 SCRA 653 Petitioner was the Assistant General Manager for Finance/Administration and Comp troller of respondent corporation. With the change in the corporation's presidenc y, he was dismissed from his office. He then was prompted to file a case for il legal dismissal against the corporation. The Court has held that in most cases the "by-laws may and usually do provid e for such other officers,"14 and that where a corporate office is not specifically indicated in the roster of corporate offices in the by-laws of a corporation, the board of directors may al so be empowered under the by-laws to create additional officers as may be necess ary. An "office" has been defined as a creation of the charter of a corporation, while an "officer" as a person elected by the directors or stockholde rs. On the other hand, an "employee" occupies no office and is generally employed not by action of the directors and stockholders but by the managing officer of the corporation who also determines the compensation to be paid to such employee. As petitioners appointment as comptroller required the approval
and formal action of the IBCs Board of Directors to become valid, it is clear therefore holds that petitioner is a corporate officer whose dismissal may be the subject of a controversy cognizable by the SEC under Section 5(c) of P.D. 902-A which includes controversies involving both election and appointment of corporate directors, trustees, officers, and managers.18 Had peti tioner been an ordinary employee, such board action would not have been required .// Theory on Power of Board to Appoint or Terminate Corporate Officers Officers of the corporation are within the business judgment of the Board of Directors to terminate in the absence of a specific period of employments provi ded in their contracts or in the by- laws
A corporate officer's dismissal is always a corporate act or an intra-corporat e controversy, and the nature isn't affected by the reason or wisdom with which th e board of directors may have in taking such action What Are The Two Converging Disciplines With Respect To Corporate Officers? In strict corporate sense, the terms of corporate officers are coterminous wi th that of the board of directors It can be even said that they serve at the pleasure of the Board Fundamental doctrine in Corporate Law because the ability to hire and term inate officers lies at the very heart of the operations of the corporati onpart of the business judgment of the Board On the other end of the spectrum is Labor Law wherein corporate of ficers are looked at as employees and the corporation is the employer It is important to determine existence of officership to determine which ha s jurisdiction over matter in case of removal or dismissalwhether it is the RTC or the NLRC Powers of Corporate Officers While the Court agrees that those who belong to the upper corporate echelons would have some privileges, it cannot be presumed the existence of such privileges or benefitshe who claims the same is burdened to prove not only the existence of such benefits but also that he is entitled to the same Even though a judgment, decree or order is addressed to the corporation only , the officers as well as the corporation itself, may be punished for contempt for disobedience to its terms, at least if they knowingly disobey the court's mandate, since a lawful judicial c ommand to a corporation is in effect a command to the officers Rule on Corporate Officer's Power to Bind the Corporation An officer's power as an agent of the corporation must be sought from statute, charter, the by-laws or in a delegation of authority to such officer, from the acts of the board of directors formally expressed or implied from a habit or custom of doing business
As a general rule, the acts of corporate officers within the scope of their authority are binding on the corporation, but when the officers exceeded their a uthority, their actions cannot bind the corporation, unless it has ratified such acts or is estopped from disclaiming them The general principles of agency govern the relation between the corporation and the officers or agents, subject to the articles of incorporation, by-laws, or by statute President Inasmuch as a corporate president is often given general supervision and contr ol over corporate operations, the strict rule that said officer has no inherent power to act for the corporation is slowly giving way to the realization that such officer has certain l imited powers in the transaction of the usual and ordinary business of the corporation. 31 In the absence of a charter or bylaw provision to the contrary, the president is presumed to have th e authority to act within the domain of the general objectives of its business a nd within the scope of his or her usual duties. Hence, it has been held in other jurisdictions that the president of a corpo ration possesses the power to enter into a contract for the corporation, when th e "conduct on the part of both the president and the corporation [shows] that he had been in the habit of acting in similar matters on behalf of the company and that the company had authorized him so to act and had recognized, approved and ratified his former and similar actions." 33 Furthermore, a party dealing with the presi dent of a corporation is entitled to assume that he has the authority to enter, on behalf of the corporation, into contracts that are within the scope of the powers of said corporation and that do not violate any s tatute or rule on public policy. People's Aircargo Warehousing v. Court of Appeals 297 SCRA 170 (1998) Facts: President transacted with private respondent for an operations manua l that would help the corporation in securing license from Bureau of Customs to operate their customs warehouse. He did this without board approval. Nonethele ss,
there wasnt any repudiation from the corporation. He then resigned as preside nt and the corporation subsequently failed to pay private respondent. Held: In the case at bar, petitioner, through its president Antonio Punsalan Jr., entered into the First Contract without first securing boa rd approval. Despite such lack of board approval, petitioner did not object to o r repudiate said contract, thus "clothing" its president with the power to bind the corporation. Hence, private respondent should not be faulted for believing t hat Punsalans conformity to the contract in dispute was also binding on petitio ner. It is familiar doctrine that if a corporation knowingly permits one of its officers, or any other agent, to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those acts; and thu s, the corporation will, as against anyone who has in good faith dealt with it t hrough such agent, be estopped from denying the agents authority. Note that it is the board of directors and not the president that exercise c
orporate powers. It must be emphasized that the basis for agency is representat ion and a person dealing with an agent is put upon inquiry and must discover upo n his peril the authority of the agent A corporation may not distance itself from the acts of a senior officer Corporate Secretary Unless otherwise provided, the corporate secretary is deemed to be the custo dian of corporate recordshe keeps the stock and transfer book and makes proper an d necessary entries therein It is his duty and obligation to register valid transfers of stock in the b ooks of the corporation and in the event he refuses to comply with such duty, the transferor-stockholder may rightfully bring an action to compel performance When a secretary's certificate is regular on its face, it can be relied upon b y a third party who doesnt have to investigate the truth of the facts conta ined in such certification, otherwise, business transactions of corporations would become tortuously slow and unnecessa rily hampered Corporate Treasurer Generally described to have the function to receive and keep funds of the co rporation and to disburse them in accordance with the authority given him by the board or the properly authorized officers Unless duly authorized, a treasurer whose power is limited, cannot b ind the corporation in the sale of its assetsselling is completely foreign to a corporate treasurer's functions Service of Summons on Corporations Section 11. Service upon domestic private juridical entity. When the defendant is a corporation, partnership or association organized under the laws of the Ph ilippines with a juridical personality, service may be made on the president, ma naging partner, general manager, corporate secretary, treasurer, or in-house cou nsel. (13a) LIABILITIES OF CORPORATE OFFICERS Section 31. Liability of directors, trustees or officers. - Directors or trustee s who wilfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary i nterest in conflict with their duty as such directors or trustees shall b e liable jointly and severally for all damages resulting therefrom suffered by t he corporation, its stockholders or members and other persons. When a director, trustee or officer attempts to acquire or acquires, in violatio n of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disabi lity upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation. (n) Vasquez v. Borja 74 PHIL 560
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Borja filed individual claims against Vasquez and others for failing t o deliver the cavans of palay he ordered from the latter. According to him, he e ntered into an agreement to buy from Vasquez and others cavans of palay but the latter failed to comply. Vasquez answered the claim and averred that the contr act wasnt entered into his personal capacity but instead, it was entered into o n behalf of the corporation Natividad-Vasquez Sabani Development Corporation. The trial court decided in favor of the plaintiff. The action in this case is a contract and it was conclusively found that the contract was entered into by Vasquez not in his personal capacity but as the manager of the corporation. The legal fiction can only be disregarded when there is an attempt is made to use it as a cloak to hide an unlawful or fraudulent purpose. No such thing has been alleged or proven in this case. It has not been alleged nor even intimated that Vasquez personally benefited by th e contract of sale in question and he merely invoked the legal fiction as an exc use to avoid personal liability. General rule is that if an officer acts within his authority, then he wouldn t be held liable personally. But if the act wasnt authorized or otherwise, the tortuous act was authorized by the corporation, then the officer may be held liable. Palay v. Clave 124 SCRA 638 (1993) Corporation through its president entered into a contract to sell a parcel o f land to Dumpit. The latter was able to pay some of the installments but stopp ed paying after a relevant date. After six years, he sought to update his accou nts with the corporation but he was informed that his contract has long been res cinded. Petitioner Olscott was made liable since he was the president of the corpora tion but there is no sufficient proof that petitioner used the corporation to defraud Dumpit. He cannot therefore be made personally liable just because he appears to be the controlling stockholder . Mere ownership by a single stockholder or by another stockholder of all or nearly all of the capital stock of a corpora tion isn't in itself sufficient ground for disregarding the separate corporate per sonality Aratea v. Suico 538 SCRA 501 (2007) Aratea and Canonigo are the controlling stockholders of SAMDECO. Suico entere d into a memorandum of agreement with SAMDECO. It was the two who signed the ag reement on behalf of the corporation. It was agreed upon that Suico would suppl y loans and cash advances to the corporation in exchange to the right to market 50% of the total coal extraxcted by the corporation. The agreement ran smoothly until in contravention of its provisions, the two sold the mining rights and ope rations of the corporation to another and sold their shares to the corporation's p resident. This was made without the consent and knowledge of Suico. This promp ted Suico to file for collection of money and damages against the two stockholde rs, SAMDECO, and SPMI. The trial and appellate courts rendered judgment in favo r of Suico. The general rule is that obligations incurred by the corporation, acting thr ough its directors, officers and employees are its sole liabilities. There are times however, when solidary liabilities may be incurred but only when exceptional circumstances warrant such as when
they act in bad faith or with gross negligence in directing its corporate affairs. Petitioners may be held personally liable even though the corporation has a se parate and distinct personality from them. They may be held liable personally fo r the loans and advances made by Suico to SAMDECO which they represent on account of their bad faith in c arrying out the business of the corporation. There was bad faith when they preve nted Suico from selling the coal they extracted, which was in violation of the a greement. Singian v. Sandiganbayan 478 SCRA 348 (2005) Salvador was on detail with the Presidential Good Government Consultant on d etail with the Presidential Ad Hoc Committee on Behest Loans. Among the account s acted upon by the committee was that of the loan granted to ISI by PNB. The committee found that the loans granted to ISI were of the character of
behest loans for not being secured with sufficient collaterals and obtained with undue haste. This prompted Salvador to file a complaint against the bank and its officers. It is true that the board of directors has the powers to increase collateral ization and to offer or give collateral to secure indebtedness are lodged with the corporation's board of directors. However, this doesnt mean that the officers of the corporation oth er than the board of directors cannot be made criminally liable for their criminal acts if it can be proven that they participated therein. In the instant case, there is evidence that petition er participated in the loan transactions when he signed the undertaking. General Rule As laid down in Palay v. Clave: unless sufficient proof exists on record, t hat an officer has used the corporation to defraud private respondent he cannot be made liable personally just because he appears to be the controlling stockholder Mere ownership by a single stockholder or by another corpora tion of all or nearly all the capital stock of the corporation isn't of itself sufficient ground for disregarding the separate corpor ate personality Rundown on Officer's Liabilities 1. He assents to a patently unlawful act of the corporation, or for bad fait h or gross negligence in directing its affairs, or for conflict of inte rest, resulting in damages to the corporation, its stockholders or other persons 2. He consents to the issuance of watered stocks, or who having knowledge the reof, doesnt forthwith file with the corporate secretary his written objection thereto 3. He agrees to hold himself personally and solidarily liable with the corpor ation 4. He is made by a specific provision of law, to personally answer for his co rporate action 5. An officer may also be solidarily liable with the corporation for simulate
d or fraudulent contracts entered into in behalf of the corporation Tramat Mercantile Inc. v. CA 238 SCRA 14 (1994) De La Cuesta sold to Ong, president of Tramat a tractor. This was in turn s old to Special Provisions in Labor Law In the field of labor, the liability of corporate officers seem to have take n two different strains It is mentioned that since a corporate employer is an artificial person, it must have an officer who can be presumed to be the employer, being the officer acting in the interest of the employer There is another strain which holds only the officer personally liable when it is clearly shown he had participated in the fraudulent or unlawful acts AC Ransom Labor Union-CCLU v. NLRC 142 SCRA 269 (1986) Limiting the AC Ransom Ruling to Insolvent Corporations AC Ransom isn't in point because there the corporation actually ceased opera tions after the decision of the court was promulgated against it, making it necessary to enforce it against the former president. When the corporation is still existing and able to satisf y the judgment in favor of the private respondent, the corporate officers cannot be held personally liable. AC Ransom will apply only where the persons who are made personally liable f or the employee's claims are stockholders- officers of the employer-corporation. STOCKHOLDERS AND MEMBERS SHAREHOLDERS NOT CORPORATE CREDITORS Shares of stock constitute personal property of the stockholder They dont represent proprietary rights to the assets or pro perties of the corporation If a stockholder's interest exists at all, it is indirect, contingent, remote, conjectural, consequential and collateral. At the very least, there interest is purely inchoate, or in sheer expectancy of
a right in the management of the corporation and to share in the profits thereof and in the properties and assets thereof on dissolution after payment of the co rporate debts and obligations Garcia v. Lim Chu Sing 59 Phil 562 (1934) Defendant is a shareholder of the plaintiff bank and is also the surety of L im Cuan Sy for a promissory note executed in favor of the bank. The bank, un known to the debtor, foreclosed the chattel mortgage securing the promissory note and held the defendant liable for the promissory note. The defendant was able to make partial payments but still was not enough. The issue in this case is whether there can be compensation between a sh areholder's debt with the value of his share in the corporation? A share of stock is not an indebtedness to the owner nor evidence of indebtedness and therefore, is not credit. Stockholders are not creditors of the corporation. The capital
stock of the corporation is a trust fund to be used particularly for the securit y of creditors of the corporation who presumably deal with it on credit of its capital stock. SUBSCRIPTION CONTRACT Section 60. Subscription contract. - Any contract for the acquisition of unissue d stock in an existing corporation or a corporation still to be formed shall be deemed a subscription within the meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or some other contract. (n) Section 72. Rights of unpaid shares. - Holders of subscribed shares not fully pa id which are not delinquent shall have all the rights of a stockholder. (n) The subscription agreement underpins the relationship between the stockholde r and the corporation It is a special contract in contract law and although it is gover ned by the law on contracts, the subscription agreement has characteristics that go beyond the discipline and delve into the very core o f Corporate Law When Are Shares Deemed Subscribed A subscription contract exists upon the meeting of the minds of the corporat ion and the subscriber as to the number and subscription value of the shares And since a subscription agreement shall exist upon meeting of the minds of the parties, it would necessarily mean that the covered shares have therefore be en issued by the corporation at that point in time, since subscription and issuance as to a particular share of stock happen exactly at the same point of time, being merely opposite sides of the same coin It could be drawn from the pertinent provisions that upon entering the contract would constitute itself the tradition by which the subscriber becomes a subscriber to the corporation and through which he becomes the owner of the shares of stock subscribed and exe rcise acts of ownership, subject to the limiting provisions of Corporation Code Are Subscription Agreements Covered By The Statute of Frauds? This is a question that CLV wishes to delve on It is his opinion that NO, they are not covered The special treatment accorded to subscription contracts require s that subscription contracts, even when they have been entered into orally, should be allowed to be proved and enforced by oral evidence, in order to fully protect corporate creditors under the trust fund doctrine Even if subscription agreements are covered by the Statute of Frauds, but by their nature which upon the consent would make the subscriber a stockholder and owner of the covered shares, which would constitute partial execution, they are deemed to be exempted from th e prohibition against the presenting of oral evidence to prove and enforce them Characteristics of Subscription Agreements 1. The original issuance from the authorized capital stock at the time of inc orporation
2. The opening, during the life of the corporation, of the portion of the ori ginal authorized capital stock previously unissued 3. The increase of authorized capital stock achieved through a formal amendment of the articles of incorporation and registration thereof with the SEC Purchase Agreement Bayla v. Silang Traffic 73 Phil 557 Petitioners filed a claim against the corporation to recover certain sums of money, which they had paid severally to the corporation pursuant to an installment sale of shares of stock. particulars the rules governing subscriptions and sales of shares are different. For instance, the provisions of our Corporation Law regarding calls for unpaid subscription and assessment of stock (sections 37-50) do not apply to a purchase of stock. Likewise the rule that corporation has no legal capacity to release a n original subscriber to its capital stock from the obligation to pay for his sh ares, is inapplicable to a contract of purchase of shares. Subscription contract Purchase agreement Under the said contract, the subscriber agreed that if he fails to pay any of sa id installment when due, or to perform any of the aforesaid conditions, or if sa id shares shall be attached or levied upon by creditors of the said subscriber, then the said shares are to revert to the seller and the payments already made a re to be forfeited in favor of said seller, and the latter may then take possess ion, without resorting to court proceedings. The trial court absolved the defendant from the complaint and declared canceled (forfeited) in favor of the defendant the shares of stock in question. It held that the resolutionwas null a nd void, since "a corporation has no legal capacity to release an original subscriber to its capital stock from the obligation to pay for sh ares; and any agreement to this effect is invalid". HELD: o Whether a particular contract is a subscription or a sale of stock is a matte r of construction and depends upon its terms and the intention of the parties. I t seems clear from the terms of the contracts in question that they are contract s of sale and not of subscription. The lower courts erred in overlooking the dis tinction between subscription and purchase "A subscription, properly speaking, i s the mutual agreement of the subscribers to take and pay for the stock of a cor poration, while a purchase is an independent agreement between the individual an d the corporation to buy shares of stock from it at stipulated price." (18 C. J. S., 760.) In some A subscriber becomes a stockholder even if he hasnt fully paid for his subscription
The unpaid subscription is a debt to the corporation
Insolvency of the corporation makes the undue subscription immediately demand able and due Promise to issue the shares and the promise to pay the price are considered dependent and concurrent duties and payment is a
condition to a right to a certificate for shares The purchaser is not a debtor and according to some, the measure of liability if he defaults is the damages for the difference between the contract price and market value of the shares Bankruptcy and insolvency automatically terminates the claim against the purchas er because it means that the corporation cannot actually do its part of the obligation Provisions regarding calls for unpaid subscription and assessment of stock is not applicable Corporation has legal capacity to release a purchaser to its capital stock from the obligation to pay for his shares
o The provision regarding interest on deferred payments would not have been inserted if it had been the intention of the parties to provide for automa tic forfeiture and cancelation of the contract. Moreover, the contract did not e xpressly provide that the failure of the purchaser to pay any installment woul d give rise to forfeiture and cancelation without the necessity of any demand from the seller; and under article 1100 of the Civil Code persons obliged to del iver or do something are not in default until the moment the creditor de mands of them judicially or extrajudicially the fulfillment of their obligation, unless (1) the obligation or the law expressly provides that demand shall not b e necessary in order that default may arise, (2) by reason of the nature and circumstances of the obligation it shall appear that the designation of the time at which that thing was to be delivered or the service rendered was the pr incipal inducement to the creation of the obligation. o On the question of validity of the resolution rescinding the agreements, the contract in question being one of purchase and not subscription, there is no leg al impediment to its rescission by agreement of the parties. According to the resolution of August 1, 1937, the rescission was made for the good of the c orporation and in order to terminate the then pending civil case involving the validity of the sale of the shares in question among others. To that res cission the herein petitioners apparently agreed, as shown by their demand for the refund of the amounts they had paid as provided in said resolutio n. It appears from the record that said civil case was subsequently dismissed, a nd that the purchasers of shares of stock, other than the herein petitioners, wh o were mentioned in said resolution were able to benefit by said resolution. It would be an unjust discrimination to deny the same benefit to the herein petitio ners. Further, there is no intimation in this case that the corpor ation was insolvent, or that the right of any creditor of the same was in any way prejudic ed by the rescission. Pre-Incorporation Subscription Section 61. Pre-incorporation subscription. - A subscription for shares of stock of a corporation still to be formed shall be irrevocable for a period of at lea st six (6) months from the date of subscription, unless all of the other subscri bers consent to the revocation, or unless the incorporation of said corporation fails to materialize within said period or within a longer period as may be stip ulated in the contract of subscription: Provided, That no pre-incorporation subs cription may be revoked after the submission of the articles of incorporati on to the Securities and Exchange Commission. (n)
The abovequoted provision combined the best features of the offer and contra ct theoryit recognized that the subscription agreements is a contract between the subscriber and the corporation and although the corporation is still non-existe nt since it is still in the process of incorporation, it is still bound under th e pre-incorporation agreement. The provision also recognizes the contractual relationship amongst th e subscribers. Ong Yong v. Tiu 375 SCRA 614 (2002) When properties were assigned pursuant to a pre-incorporation subscription a greement, but the corporation fails to issue the covered shares, the return of s uch properties to the subscriber is a direct consequence of rescission, and does nt amount to a corporate distribution of assets prior to dissolution Release from Subscription Obligation A corporation can release a subscriber from liability, in part or whole, on ly with the express or implied consent of all the shareholders and when there is no prejudice to the corporate creditors Tan v. Sycip
499 SCRA 216 (2006) In stock corporations, shareholders may generally transfer their shares. T hus, on the death of a shareholder, the executor or administrator duly appointed by the Court is vested with the legal title to the stock and entitled to vote i t. Until a settlement and division of the estate is effected, the stocks of the decedent are held by the administrator or executor. On the other hand, membersh ip in and all rights arising from a nonstock corporation are personal and non-transferable, unless the articles of incorporation or t he bylaws of the corporation provide otherwise. In other words, the determinati on of whether or not dead members are entitled to exercise their voting rights (th rough their executor or administrator) depends on those articles of incorporatio n or bylaws. When Condition Of Payment Provided In By-Laws CONSIDERATION Section 62. Consideration for stocks. - Stocks shall not be issued for a conside ration less than the par or issued price thereof. Consideration for the issuance of stock may be any or a combination of any two or more of the following: 1. Actual cash paid to the corporation; 2. Property, tangible or intangible, actually received by the corporation and ne cessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued; 3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness of the corporation; 5. Amounts transferred from unrestricted retained earnings to stated capital; an d 6. Outstanding shares exchanged lassification or conversion. for stocks in the event of rec
Where the consideration is other than actual cash, or consists of intangible pro perty such as patents of copyrights, the valuation thereof shall initially be determined by the incorporators or the board of directors, subject t o approval by the Securities and Exchange Commission. Shares of stock shall not be issued in exchange for promissory notes or future s ervice. The same considerations provided for in this section, insofar as they may be app licable, may be used for the issuance of bonds by the corporation. The issued price of no-par value shares may be ation or by the board of directors pursuant to e articles of incorporation or the by-laws, or ockholders representing at least a majority of a meeting duly called for the purpose. (5 and 16) fixed in the articles of incorpor authority conferred upon it by th in the absence thereof, by the st the outstanding capital stock at
Cash and Promissory Notes For Consideration Despite wordings of the provision, it is not required that the actual paymen t of the cash consideration is required to make the subscription agreement valid and binding But CLV asks, why is it in the books of a corporation, there is an account n ame called subscription receivables when promissory notes are clearly prohibited as consideration? o The prohibition may be based on two factors. First, on the underlying differ ence in legal consequences between notes receivable, accounts receivable and sub scription receivable. Second, the philosophical basis behind the trust fund doc trine. o If notes receivable shall be accepted by the corporation, its face value shal l be added to the assets of the corporation without affecting the paid-up capita l, which could mislead the creditors upon examination of the books because they would think that all the paid-up capital stock is fully paid for
o Subscription receivables are correctly not assets of the corporation, and are reflected properly in the balance sheet as a deduction from stockholder's equity and the difference shows only a net amount of the stockholder's equity which is ba cked up by assets actually received by the corporation which have values that do nt depend on the credit standing of another person Property Consideration The property by which the corporation may accept as exchange for its stock m ust be of the kind which the corporation may lawfully acquire and hold in carrying out the purposes of the
corporation, and which is necessary or proper for it to own in carrying on its b usiness Financial instruments and receivables can be proper considerations but ar e subject to the following o Actually received by the corporation o Necessary and convenient for the corporation's use and purposes o At a fair valuation equal to the par value of the stock issued to be approved by the SEC Debts and Service Although a previously incurred debt is valid consideration for subscription, future services is not because the value of the service to the corporation woul d depend on the future performance of the subscriber of the service offered, and there would be a tendency to short-change the corporation Retained Earnings Amounts transferred from unrestricted retained earnings to stated capi tal, and outstanding shares exchanged for stocks in the event of reclassification or conversion are merely booking entries The amounts transferred from unrestricted earnings to stated capital covers the declaration of stock dividends which has the effect of capitalizing unrestricted retained earnings Stock dividends are in the nature of shares of stock where the consideration is the amount of unrestricted retained earnings converted into equity in the co rporation's books Consequences of Unlawful Consideration It would be against the trust fund doctrine to declare the agreements void This being the case, then the subscription agreements would be considered valid and binding upon the corporation and subscribers and the consideration void as to the effect that it will be considered made in cash WATERED STOCK Section 65. Liability of directors for watered stocks. - Any director or officer of a corporation consenting to the issuance of stocks for a consideration less than its par or issued value or for a consideration in any form other than cash, valued in excess of its fair value, or who, having knowledge thereof, does not forthwith express his objection in writing and file the same with the corporate secretary, shall be solidarily, liable with the stockholder concerned to the cor poration and its creditors for the difference between the fair value received at the time of issuance of the stock and the par or issued value of the same. (n) Watered stockshares issued as fully paid when in truth the consideration rece ived is known to be less than the par value of the stock It is prohibited due the damage it may cause o The corporation for being deprived of the needed capital o Existing and futu re stockholders, by the dilution of the proportionate interests in the corporati on and who pay the full value of the shares o Present and future creditors who are injured as the corporation is depr ived of the assets or capital required to be contributed o Persons who deal with the company and purchase its securities
Three Underlying Doctrines As Basis For Holding Officers and Directors Liable 1. Subscription contract theorythe subscription contract is the source and mea sure of the duty of a subscriber to pay for his shares; if the contract releases him from further liability, the subscriber ceas es to be liable (this is unacceptable under our jurisdiction because of Sections 61 and 65) 2. Fraud theorythe wrong done to the creditor is fraud in falsely representing that the par value has been paid or agreed to be paid in full 3. Trust fund doctrinethis is the doctrine prevalent in Philippine jurisdictio n PAYMENT OF BALANCE OF SUBSCRIPTION Section 66. Interest on unpaid subscriptions. - Subscribers for stock shall pay to the corporation interest on all unpaid subscriptions from the date of subscri ption, if so required by, and at the rate of interest fixed in the by-laws. If n o rate of interest is fixed in the by-laws, such rate shall be deemed to be the legal rate. (37) Section 67. Payment of balance of subscription. - Subject to the provi sions of the contract of subscription, the board of directors of any stock corpo ration may at any time declare due and payable to the corporation unpaid subscri ptions to the capital stock and may collect the same or such percentage thereof, in either case with accrued interest, if any, as it may deem necessary. Payment of any unpaid subscription or any percentage thereof, together with the interest accrued, if any, shall be made on the date specified in the contract of subscription or on the date stated in the call made by the board. Failure to pa y on such date shall render the entire balance due and payable and shall make th e stockholder liable for interest at the legal rate on such balance, unless a di fferent rate of interest is provided in the by-laws, computed from such date unt il full payment. If within thirty (30) days from the said date no paymen t is made, all stocks covered by said subscription shall thereupon bec ome delinquent and shall be subject to sale as hereinafter provided, unless th e board of directors orders otherwise. (38) A stockholder who is employed with the company cannot set off his unpaid sub scription with his actual claims for wages, where there has been no call for the payment of such subscription DELIQUENCY ON SUBSCRIPTION Section 68. Delinquency sale. - The board of directors may, by resolution, order the sale of delinquent stock and shall specifically state the amount due on eac h subscription plus all accrued interest, and the date, time and place of the sa le which shall not be less than thirty (30) days nor more than sixty (60) days f rom the date the stocks become delinquent. Notice of said sale, with a copy of the resolution, shall be sent to every delin quent stockholder either personally or by registered mail. The same shall furthe rmore be published once a week for two (2) consecutive weeks in a newspaper of g eneral circulation in the province or city where the principal office of the cor
poration is located. Unless the delinquent stockholder pays to the corporation, on or before the date specified for the sale of the delinquent stock, the balance due on his subscrip tion, plus accrued interest, costs of advertisement and expenses of sale, or unl ess the board of directors otherwise orders, said delinquent stock shall be sold at public auction to such bidder who shall offer to pay the full amount of the balance on the subscription together with accrued interest, costs of advertiseme nt and expenses of sale, for the smallest number of shares or fraction of a shar e. The stock so purchased shall be transferred to such purchaser in the books of the corporation and a certificate for such stock shall be issued in his favor. The remaining shares, if any, shall be credited in favor of the delinquent stock holder who shall likewise be entitled to the issuance of a certificate of stock covering such shares. Should there be no bidder at the public auction who offers to pay the full amoun t of the balance on the subscription together with accrued interest, costs of ad vertisement and expenses of sale, for the smallest number of shares or fractio n of a share, the corporation may, subject to the provisions of this Co de, bid for the same, and the total amount due shall be credited as paid in full in the books of the corporation. Title to all the
shares of stock covered by the subscription shall be vested in the corporation as treasury shares and may be disposed of by said corporation in accord ance with the provisions of this Code. (39a-46a) Section 69. When sale may be questioned. - No action to recover delinquent stock sold can be sustained upon the ground of irregularity or defect in the notice o f sale, or in the sale itself of the delinquent stock, unless the party seeking to maintain such action first pays or tenders to the party holding the stock the sum for which the same was sold, with interest from the date of sale at the leg al rate; and no such action shall be maintained unless it is commenced by the fi ling of a complaint within six (6) months from the date of sale. (47a) Section 70. Court action to recover unpaid subscription. - Nothing in this Code shall prevent the corporation from collecting by action in a court of proper jur isdiction the amount due on any unpaid subscription, with accrued interest, cost s and expenses. (49a) Section 71. Effect of delinquency. - No delinquent stock shall be voted for or b e entitled to vote or to representation at any stockholders meeting, nor shall the holder thereof be entitled to any of the rights of a stockholde r except the right to dividends in accordance with the provisions of th is Code, until and unless he pays the amount due on his subscription with accrue d interest, and the costs and expenses of advertisement, if any. (50a) Unless the delinquent stockholder pays to the corporation, on or before the date specified for the sale of the delinquent stock, the balance due on his subs cription plus accrued interest, costs of advertisement and expenses of sale, or unless the board of directors otherwise orders, said delinquent stock shall be s old at public auction to such bidder who shall offer to pay the full amount of t he balance on the subscription together with accrued interest, costs of advertis
ement and expenses of sale, for the smallest number of shares or fraction of a s hare The stock so purchased shall be transferred to the name of such purchaser in the books of such corporation and a certificate for such stock shall be issued in his favor The remaining shares shall be credited in favor of the del inquent stockholder who shall likewise be entitled to the issuance of a certific ate of stock covering such shares Should there be no bidder, the corporation may bid for the stocks and the to tal amount due shall be credited in the books of the corporation. Title shall be vested as treasury share Questioning the Delinquency Sale No action to recover the delinquent stock shall be sustained on the ground o f irregularity or defect in the notice of sale, or in the sale itself of the delinquent stock unless the party holding the stock the sum for which the same was sold, with interest from the date of sale a t the legal rate, and no such action shall be sustained unless it is commanded b y the filing of a complaint within 6 months from the date of sale CERTIFICATE OF STOCK Section 63. Certificate of stock and transfer of shares. - The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or vice president, countersigned by the secretary or assistant se cretary, and sealed with the seal of the corporation shall be issued in accordan ce with the by-laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer . No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation showing the names of the p arties to the transaction, the date of the transfer, the number of the certifica te or certificates and the number of shares transferred. No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. (35) Section 64. Issuance of stock certificates. - No certificate of stock shall be i ssued to a subscriber until the full amount of his subscription together with in terest and expenses (in case of delinquent shares), if any is due, has been paid . (37)
Nature of Certificate Tan v. SEC 206 SCRA 740 (1992) Involves issues between intra-corporate members, namely the corporation and the stockholder A certificate of stock is not necessary to render one as a stockh older in a corporation
The certificate of stock is the paper representative or tangible evidence of the stock itself and of the various interests therein De Los Santos v. Republic 96 Phil 577 (1955) A certificate of stock is not a negotiable instrument but has a character of a quasi-negotiable in the sense that it may be transferred by endorsement, coup led with delivery, but it is not negotiable because the holder thereof takes it without prejudice to such rights or defenses as the registered o wners or transferor's creidtor may have under the law, except insofar as such ri ghts and defenses are subject to the limitations imposed by the principles gover ning estoppel Ponce v. Alsons Cement Corporation 393 SCRA 602 (2002) Quasi-Negotiable Character of Certificate of Stock Bachrach Motor Co. v. Lacson Ledesma 64 Phil 681 (1937) Razon v. IAC 207 SCRA 234 (1992) Bitong v. CA 292 SCRA 503 (1998) The endorsement of a certificate of stock by the owner, his attorney-in-fact or any other legally authorized person to make the transfer shall be sufficient to effect the transfer of shares only if the same is coupled with delivery, and that the delivery of the stock certificate duly endorsed by the owner is the ope rative act of the transfer of the shares The following are the requirements o There must be delivery of the stock certificate o The certificate must be endorsed by the owner or his attorney in fact or other persons legally authorized to make the transfer o To be valid against third persons, the transfer must be recorded in the books of the corporation Rural Bank of Lipa City v. CA 366 SCRA 168 (2001) Right to Issuance Purpose of the above prohibition is to prevent the partial disposition of the subscription which is not fully paid, because if it is permitted, and the subscriber subsequently becomes delinquent in the payment of his subscription, the corporation may not be able t o sell as many of his subscribed shares as would be necessary to cover the total amount due from him In absence of provisions in the by-laws to the contrary, a corporation may a pply payments made by subscribers on account of their subscriptions either as: o Full payment for the corresponding number of shares, the par value of which i s covered by such payment o Payment pro-rata to each and all the entire number of shares subscribed for Issuance of Certificate of Stock A formal certificate of stock cannot be considered issued in contemplation of
law unless signed by the president or vicepresident and countersigned by the secretary or assistant secretary Remedies available to a stockholder if a corporation wrongfully refuses to i ssue a certificate of stock
o To file a suit for specific performance of an express or implied contract' o To file for an alternative relief by way of damages where specific p erformance cannot be granted o To file for a petition for mandamus to compel the issuance of the ce rtificate where the conditions, facts and circumstances of a particular case bri ng it within the legal rules which govern the granting of the writ o To rescind the contract of subscription if the corporation wrongfully refuses to deliver a certificate, and sue to recover back what has been paid Lost or Section ollowed f those Destroyed Certificates 73. Lost or destroyed certificates. - The following procedure shall be f for the issuance by a corporation of new certificates of stock in lieu o which have been lost, stolen or destroyed:
1. The registered owner of a certificate of stock in a corporation or his legal representative shall file with the corporation an affidavit in triplica te setting forth, if possible, the circumstances as to how the certificate was lost, stolen or destroyed, the number of shares represented by such certificate, the serial number of the certificate and the name of the corpo ration which issued the same. He shall also submit such other information and ev idence which he may deem necessary; 2. After verifying the affidavit and other information and evidence with the boo ks of the corporation, said corporation shall publish a notice in a newspaper of general circulation published in the place where the corporation has its princi pal office, once a week for three (3) consecutive weeks at the expense of the re gistered owner of the certificate of stock which has been lost, stolen or destro yed. The notice shall state the name of said corporation, the name of the regist ered owner and the serial number of said certificate, and the number of shares represented by such certificate, and that after the expiration of one (1) year f rom the date of the last publication, if no contest has been presented to said c orporation regarding said certificate of stock, the right to make such contest s hall be barred and said corporation shall cancel in its books the certificate of stock which has been lost, stolen or destroyed and issue in lieu thereof new ce rtificate of stock, unless the registered owner files a bond or other security in lieu thereof as may be required, effective for a period of one (1) y ear, for such amount and in such form and with such sureties as may be satisfact ory to the board of directors, in which case a new certificate may be issued even before the expiration of the one (1) year period provided herein: Provi ded, That if a contest has been presented to said corporation or if an action is pending in court regarding the ownership of said certificate of stock which has been lost, stolen or destroyed, the issuance of the new certificate of stock in lieu thereof shall be suspended until the final decision by the court regarding the ownership of said certificate of stock which has been lost, stolen or destr oyed.
Except in case of fraud, bad faith, or negligence on the part of the corporation and its officers, no action may be brought against any corporation which shall have issued certificate of stock in lieu of those lost, stolen or destroyed purs uant to the procedure above-described. (R.A. 201a) According to the SEC, the requirements above are not mandato ry and admits of exceptions to the rule The corporation may issue a new certificate of stock without compliance abov e provided that the corporation is certain as to the real owner of the shares to whom the new certificates shall be issued Forged and Unauthorized Transfers Since shares of stock are quasi-negotiable, they dont afford the same prote ction to a holder in good faith and for value who receives them in the course of their being negotiated, and that the ownership of the true owner would be preferred The only exception to the above rule is when the true owner is negligent and in causing the loss Santamaria v. HSBC 89 Phil 780 Santamaira bought shares of stock from a mining corporation. The certificates were issued in the name of the brokerage firm and indorsed to h er in blank. She then delivered the same to another brokerage firm as secu rity to purchase stocks from
another mining firm. These was delivered by the second brokerage firm to the b ank and the latter had no knowledge that Santamaria owned the shares of stock. Santamria was negligent and couldnt recover the shares of stock giv en that she should have asked the corporation to issue another certificate in her name . It held that a bona fide pledgee or transferee of a stock from an apparent owner is not chargeable with knowledge of the limitations placed on said certificates by the real owner or of any secret agreement relating to the use which might be made of the stock by the hol der When a stock certificate is endorsed in blank by the owner thereof , it constitutes what is termed as street certificate, so that upon its face, th e holder is entitled to demand its transfer into his name from the issuing corporation Neugene Marketing v. CA 303 SCRA 295 The registered owners of the stock certificate had indorsed them in blank fo r custody and safekeeping of the beneficial owners thereof, who kept them in the family vault but where subsequently stolen No negligence was found to have actuated the acts of the registere d owners. In addition, the proper officers of the corporation were aware of the blank endorsement of the certificates and therefore were adjudged to have acted in bad faith in assigni ng the certificates to other parties and in
recording the transfers in the stock and transfer book The court held in this case o When the certificates of stock have been endorsed in blank for purposes of sh owing nominee relations, the eventual delivery and registration of the shares in violation of the trust agreement and after their having been stolen, shall be v oid, even when such transfers have been registered in the stock and transfer boo k o When the certificates have been endorsed in blank and delivered for safekeepi ng and not in the process of negotiation, it was essential that the beneficial o wners must give their approval for the transfer of certificates for such transfers to be valid and effective SPECIAL RULES ON REGISTERED OR LISTED SHARES Rule on Uncertified Shares 43.1. A corporation whose securities are registered pursuant to this Code or li sted on a securities Exchange may: a) If so resolved by its Board of Directors and agreed by a shareholder, investo r or securities intermediary, issue shares to, or record the transfer of some or all of its shares into the name of said shareholders, investors or, securities intermediary in the form of uncertificated securities. The use of uncertificate d securities in these circumstances shall be without prejudice to the rights of the securities intermediary subsequently to require the corporation to issue a c ertificate in respect of any shares recorded in its name; and b) If so provided in its articles of incorporation and by-laws, issue all of the shares of a particular class in the form of uncertificated securities and subje ct to a condition that investors may not require the corporation to issue a cert ificate in respect of any shares recorded in their name. Binding Effect On Share Transactions 43.3. Transfers of securities, including an uncertificated securities, may be validly made and consummated by appropriate book-entries in the securities acco unts maintained by securities intermediaries, or in the stock and transfer book held by the corporation or the stock transfer agent and such bookkeeping entries shall be binding on the parties to the transfer. A transfer under this subsect ion has the effect of the delivery of a security in bearer form or duly indorsed in blank representing the quantity or amount of security or right transferred, including the unrestricted negotiability of that security by reason of such deli very. However, transfer of uncertificated shares shall only be valid, so far as the corporation is concerned, when a transfer is recorded in the books of the co rporation so as to show the names of the parties to the transfer and the number of shares transferred.
However, nothing in this Code shall preclude compliance by banking and other ins titutions under the supervision of the Bangko Sentral ng Pilipinas and their sto ckholders with the applicable ceilings on shareholdings prescribed under pertine nt banking laws and regulations.
Evidentiary Value of Clearing Agency Record SEC. 44. Evidentiary Value of Clearing Agency Record. - The official records and book entries of a clearing agency shall constitute the best evidence of suc h transactions between clearing agency and its participants and memb ers, without prejudice to the right of participants' or members' clients to prove th eir rights, title and entitlement with respect to the book-entry security h oldings of the participants or members held on behalf of the clients. Howeve r, the corporation shall not be bound by the foregoing transactions unless the c orporate secretary is duly notified in such manner as the Commission may provide . Pledging Security or Interest Therein SEC. 45. Pledging a Security or Interest Therein. - In addition to other method s recognized by law, a pledge of, or release of a pledge of, a security, inc luding an uncertificated security, is properly constituted and the instrument pr oving the right pledged shall be considered delivered to the creditor under Arti cles 2093 and 2095 of the Civil Code if a securities intermediary indicates by book-entry that such security has been credited to a specially designated pledge account in favor of the pledgee. A pledge under this subsection has the effect of the delivery of a security in bearer form or duly indorsed in blank re presenting the quantity or amount of such security or right pledged. In the ca se of a registered clearing agency, the procedures by which, and the exact time at which, such book-entries are created shall be governed by the regist ered clearing agency's rules. However, the corporation shall not be bound by the f oregoing transactions unless the corporate secretary is duly notified in such ma nner as the Commission may provide. Issuer's Responsibility for Wrongful Transfer To Registered Clearing Agency SEC. 46. Issuer's Responsibility for Wrongful Transfer to Registered Clearing Agen cy. - The registration of a transfer of a security into the name of and by a reg istered clearing agency or its nominee shall be final and conclusive unless the clearing agency had notice of an adverse claim before the registration was made. The above provision shall be without prejudice to any rights which the claimant may have against the issuer for wrongful registration in such circumstances. Power of SEC on Issuing Rules Covering Shares SEC. 47. Power of the Commission With Respect to Securities Ownershi p. - The Commission is authorized, having due regard to the public interest and the protection of investors, to promulgate rules and regulations which: 47.1. Validate the transfer of securities by book-entries rather than the del ivery of physical certificates; 47.2. Establish when a person acquires a security or an interest therein and when delivery of a security to a purchaser occurs; 47.3. Establish which records constitute the best evidence of a person's intere sts in a security and the effect of any errors in electronic records of ownershi p; 47.4. Codify the rights of investors who choose to hold their securities ind irectly through a registered clearing agency and/or other securities intermediar ies; 47.5. Codify the duties of securities intermediaries (including clearing age ncies) who hold securities on behalf of investors; and
47.6. Give first priority to any claims of a registered clearing agency agai nst a participant arising from a failure by the participant to meet its obligati ons under the clearing agency's rules in respect of the clearing and settlement of transactions in securities, in a dissolution of the participant, and any such r ules and regulations shall bind the issuers of the securities, investors in the securities, any third parties with interests
in the securities, and the creditors of a participant of a registered clearing agency. STOCK AND TRANSFER BOOK Section 63. Certificate of stock and transfer of shares. - The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or vice president, countersigned by the secretary or assistant se cretary, and sealed with the seal of the corporation shall be issued in accordan ce with the by-laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer . No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation showing the names of the p arties to the transaction, the date of the transfer, the number of the certifica te or certificates and the number of shares transferred. No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. (35) Section 72. Rights of unpaid shares. - Holders of subscribed shares not fully pa id which are not delinquent shall have all the rights of a stockholder. (n) Section 74. Books to be kept; stock transfer agent. - Every corporation shall ke ep and carefully preserve at its principal office a record of all business trans actions and minutes of all meetings of stockholders or members, or of the board of directors or trustees, in which shall be set forth in detail the time and pla ce of holding the meeting, how authorized, the notice given, whether the meeting was regular or special, if special its object, those present and absent, and ev ery act done or ordered done at the meeting. Upon the demand of any director, tr ustee, stockholder or member, the time when any director, trustee, stockholder o r member entered or left the meeting must be noted in the minutes; and on a simi lar demand, the yeas and nays must be taken on any motion or proposition, and a record thereof carefully made. The protest of any director, trustee, stoc kholder or member on any action or proposed action must be recorded in full on h is demand. The records of all business transactions of the corporation and the minutes of a ny meetings shall be open to inspection by any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may deman d, in writing, for a copy of excerpts from said records or minutes, at his expen se.
Any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder or member of the corporation to examine and copy excerpts from its records or minutes, in accordance with the provisions of this Code, sha ll be liable to such director, trustee, stockholder or member for damages, and i n addition, shall be guilty of an offense which shall be punishable under Sectio n 144 of this Code: Provided, That if such refusal is made pursuant to a resolut ion or order of the board of directors or trustees, the liability under this sec tion for such action shall be imposed upon the directors or trustees who voted f or such refusal: and Provided, further, That it shall be a defense to any action under this section that the person demanding to examine and copy excerpts from the corporations records and minutes has improperly used any information secure d through any prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in good faith or for a legitimate p urpose in making his demand. Stock corporations must also keep a book to be known as the "stock and transfer book", in which must be kept a record of all stocks in the names of the stockhol ders alphabetically arranged; the installments paid and unpaid on all stock for which subscription has been made, and the date of payment of any installment; a statement of every alienation, sale or transfer of stock made, the date thereof, and by and to whom made; and such other entries as the by-laws may prescribe. T he stock and transfer book shall be kept in the principal office of the corporat ion or in the office of its stock transfer agent and shall be open for inspectio n by any director or stockholder of the corporation at reasonable hours on busin ess days. No stock transfer agent or one engaged principally in the business of registerin g transfers of stocks in behalf of a stock corporation shall be allowed to opera te in the Philippines unless he secures a license from the Securities and Exchan ge Commission and pays a fee as may be fixed by the Commission, which shall be r enewable annually: Provided, That a
stock corporation is not precluded from performing or making transfer of its own stocks, in which case all the rules and regulations imposed on stock transfer agents, except the payment of a license fee herein provided, shall be a pplicable. (51a and 32a; P.B. No. 268.) Fua Cun v. Summers 44 Phil 704 Monserrat v. Ceran 58 Phil 469 whether a stockholders resolution was approved, despite the claim of the allege d transferee. On the other hand, a person who has purchased stock, and who d esires to be recognized as a stockholder for the purpose of voting, must sec ure such a standing by having the transfer recorded on the corporate books. Unti l the transfer is registered, the transferee is not a stockholder but an outside r. Batangas Laguna Transit v. Bitanga
362 SCRA 635 (Dissenting opinion of Puno) Chua Guan v. Samahang Magsasaka 62 Phil 472 Uson v. Diosomito 61 Phil 535 Escano v. Filipinas Mining Corporation 74 Phil 71 Bachrach Motors v. Lacson-Ledesma 64 Phil 681 Nava v. Peers Marketing Corporation 74 SCRA 65 Validity of Transfers The purpose of registration, therefore, is two-fold: to enable the transfere e to exercise all the rights of a stockholder, including the right to vote a nd to be voted for, and to inform the corporation of any change in share ownership so that it can ascertain the persons entitled to the rights and subje ct to the liabilities of a stockholder. Until challenged in a proper proceeding, a stockholder of record has a right to participate in any meeting; his vote can be properly counted to determine Under this provision, the sale of the stocks shall not be recognized as valid un less registered in the books of the corporation, but only insofar as third perso ns, including the corporation, are concerned.1 The reasons behind the registrati on requirement are: (1) to enable the corporation to know at all times who its actual stockholders a re, because mutual rights and obligations exist between the corporation and its stockholders; (2) to afford to the corporation an opportunity to object or refuse its consent to the transfer in case it has any claim against the stock sought to be transfer red, or for any other valid reason; and (3) to avoid fictitious or fraudulent transfers.2 The rule is intended to protect the interest of the corporation and third person s who may be prejudiced by the transfer of the shares of stocks. It follows, the refore, that as between the parties to the sale, the transfer shall be valid eve n if not recorded in the books of the corporation. The present controversy involves only the sellers and buyer of the BLTB shares o f stock the Potencianos and Bitanga. It has not been shown that either the c orporation or third persons are involved in the sale. Thus, the sellers, the Pot encianos, cannot deny that they no longer have rights as shareholders as they ha ve already relinquished said rights to the buyer, Bitanga, pursuant to the contr act of sale. Unless the sale of
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the shares is annulled, the rights of the buyer under the contract must be respe cted and upheld. Who May Make Entries? Entries made on the stock and transfer book by any person other than the c orporate secretary such as those made by the president and chairman, cann ot be given any valid effect Attachments Attachments of shares of stock are not included in the term transfer as prov ided for in Section 63 of Corporation Code Both the Revised Rules of Court and the Corporation Code do not require anno tation in the corporation's stock and transfer book for the attachment of shares t o be valid and binding on the corporation and third parties Meaning of Unpaid Claims Refers to any unpaid subscription and not to any indebtedness which a stockh older may owe to the corporation arising from any other transactions, like unpaid monthly dues Equitable Mortgage Assignment It seems that the assignment of voting shares as security for a loan operate s to give the assignee not only the right to vote on the shares, but would also treat the assignee as the owner of the shares SITUS OF SHARES OF STOCKS Section 55. Right to vote of pledgors, mortgagors, and administrators. - In case of pledged or mortgaged shares in stock corporations, the pledgor or mortgagor shall have the right to attend and vote at meetings of stockholders, unless the pledgee or mortgagee is expressly given by the pledgor or mortgagor such right i n writing which is recorded on the appropriate corporate books. (n) Executors, administrators, receivers, and other legal representatives duly appointed by the court may attend and vote in behalf of the stockholders or mem bers without need of any written proxy. (27a) RIGHTS OF STOCKHOLDERS AND MEMBERS WHAT DOES SHARE REPRESENT? While shares of stock constitute personal property, they dont represent pro perty of the corporation. A share of stock only typifies an aliquot part of th e corporation's property, or the right to share in its proceeds to that ext ent when distributed according to law and equity, but the holder is not the ow ner of any part of the capital of the corporation, nor is he entitled to the pos session of any definite portion of its assets. The stockholder isn't a co-owner of corporate property The registration of shares in a stockholder's name, the issuance of stock ce rtificate, and the right to receive dividends which pertain to the shares are all rights that flow from ownership RIGHT TO CERTIFICATE OF STOCK FOR FULLY PAID SHARES
Section 64. Issuance of stock certificates. - No certificate of stock shall be i ssued to a subscriber until the full amount of his subscription together with in terest and expenses (in case of delinquent shares), if any is due, has been paid
. (37) PREEMPTIVE RIGHTS Section 39. Power to deny pre-emptive right. - All stockholders of a stock corpo ration shall enjoy pre-emptive right to subscribe to all issues or disposition o f shares of any class, in proportion to their respective shareholdings, unless s uch right is denied by the articles of incorporation or an amendment thereto: Pr ovided, That such pre-emptive right shall not extend to shares to be issued in c ompliance with laws requiring stock offerings or minimum stock ownership by the public; or to shares to be issued in good faith with the approval of the stockho lders representing two-thirds (2/3) of the outstanding capital stock, in exchang e for property needed for corporate purposes or in payment of a previously contr acted debt.
RIGHT TO TRANSFER SHAREHOLDINGS Section 63. Certificate of stock and transfer of shares. - The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or vice president, countersigned by the secretary or assistant se cretary, and sealed with the seal of the corporation shall be issued in accordan ce with the by-laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer . No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation showing the names of the p arties to the transaction, the date of the transfer, the number of the certifica te or certificates and the number of shares transferred. No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. (35) Non-Transferability Of Membership Section 90. Non-transferability of membership. - Membership in a non- stock corp oration and all rights arising therefrom are personal and non- transferable, unl ess the articles of incorporation or the by-laws otherwise provide. (n) Section 91. Termination of membership. - Membership shall be ter minated in the manner and for the causes provided in the articles of incorporati on or the by-laws. Termination of membership shall have the effect of extinguish ing all rights of a member in the corporation or in its property, unless otherwi se provided in the articles of incorporation or the by-laws. (n) Restriction on Transfers Lambert v. Fox 26 Phil 588 Right of First Refusal: Padgett v. Babcock and Templeton 59 Phil 232
Flescher v. Botica Nolasco 47 Phil 583 RIGHTS TO DIVIDENDS Section 43. Power to declare dividends. - The board of directors of a stock corp oration may declare dividends out of the unrestricted retained earnings which sh all be payable in cash, in property, or in stock to all stockholders on the basi s of outstanding stock held by them: Provided, That any cash dividends due on de linquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinq uent stockholder until his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders representing not less than two-thirds (2/3) of the outstanding capi tal stock at a regular or special meeting duly called for the purpose. (16a) Stock corporations are prohibited from retaining surplus profits in excess of on e hundred (100%) percent of their paid-in capital stock, except: (1) when justif ied by definite corporate expansion projects or programs approved by the board o f directors; or (2) when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet bee n secured; or (3) when it can be clearly shown that such retention is nec essary under special circumstances obtaining in the corporation, such as when t here is need for special reserve for probable contingencies. (n) RIGHT TO VOTE AND TO ATTEND MEETINGS, SECTION 6 AND 89 Section 6. Classification of shares. - The shares of stock of stock corporations may be divided into classes or series of shares, or both, any of which classes or series of shares may have such rights, privileges or
restrictions as may be stated in the articles of incorporation: Provided, That n o share may be deprived of voting rights except those classified and issued as " preferred" or "redeemable" shares, unless otherwise provided in this Code: Provi ded, further, That there shall always be a class or series of shares which have complete voting rights. Any or all of the shares or series of shares may have a par value or have no par value as may be provided for in the articles of incorporation: Provided, however, That banks, trust companies, insurance comp anies, public utilities, and building and loan associations shall not be permitt ed to issue no-par value shares of stock. Preferred shares of stock issued by any corporation may be given preference in t he distribution of the assets of the corporation in case of liquidation and in t he distribution of dividends, or such other preferences as may be stated in the articles of incorporation which are not violative of the provisions of this Code : Provided, That preferred shares of stock may be issued only with a stated par value. The board of directors, where authorized in the articles of incorporation , may fix the terms and conditions of preferred shares of stock or any series th
ereof: Provided, That such terms and conditions shall be effective upon the fili ng of a certificate thereof with the Securities and Exchange Commission. Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the holder of such shares shall not be liable to the corporat ion or to its creditors in respect thereto: Provided; That shares without par va lue may not be issued for a consideration less than the value of five (P5.00) pe sos per share: Provided, further, That the entire consideration received by the corporation for its no-par value shares shall be treated as capital and shall not be available for distribution as dividends. A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal requirements. Except as otherwise provided in the articles of certificate of stock, each share shall be equal hare. Where the articles of incorporation provide for llowed by this Code, the holders of such shares o vote on the following matters: 1. Amendment of the articles of incorporation; 2. Adoption and amendment of by-laws; 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substa ntially all of the corporate property; 4. Incurring, creating or increasing bonded indebtedness; 5. Increase or decrease of capital stock; 6. Merger or consolidation of the corporation with another corporation or other corporations; 7. Investment of corporate funds in another corporation or business in accordanc e with this Code; and 8. Dissolution of the corporation. Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights. (5a) Section 89. Right to vote. - The right of the members of any class or classes t o vote may be limited, broadened or denied to the extent specified in the articles of incorporation or the by-laws. Unless so limited, broadened or de nied, each member, regardless of class, shall be entitled to one vote. Unless otherwise provided in the articles of incorporation or the by-laws, a mem ber may vote by proxy in accordance with the provisions of this Code. (n) Voting by mail or other similar means by members of non-stock corporations may b e authorized by the by-laws of non-stock corporations incorporation and stated in the in all respects to every other s non-voting shares in the cases a shall nevertheless be entitled t
with the approval of, and under such conditions which may be prescribed by, the Securities and Exchange Commission. CAPITAL STRUCTURE: SHARES OF STOCK PRINCIPLES CONTRASTING EQUITY INVESTMENTS FROM CORPORATE DEBTS EQUITY INVESTMENTS CORPORATE DEBTS Expects that his returns shall be tied-up with the success or loss of the operat ions of the corporation Therefore he places his investment ready and willing to take the risk with manag ement's style of operating the corporation entitled to the possession of any definite portion of its property or assets, an d the stockholder cannot be treated as a co-owner or tenant in common of the cor porate property CONCEPT OF CAPITAL STOCK Section 137. Outstanding capital stock defined. - The term "outstanding capital stock", as used in this Code, means the total shares of stock issued under bindi ng subscription agreements to subscribers or stockholders, whether or not fully or partially paid, except treasury shares. (n) SEC ruled that capital stock or authorized capital stock is the amount fixed in the articles of incorporation to be subscribed and paid by the stockholders of the corporation. When shares subscribed out of the authorized capital stock , that portion of that paid-in capital arising from subscriptions becomes the le gal Generally non-withdrawable for so long as the corporation hasnt been dissolved
Since the equity investors clearly undertook to place their investment to the risk of the venture, they can only receive a return of their investment onl y from the remaining assets of the venture, if any, after payment to the cred itors Only looks at the financial condition and operations of the corporations as a means of gauging the ability of the corporation to pay-back the loan at t he specified period Since he doesnt place any stake to the corporation and his rights are based on contract, then the corporate venture must in case of insolvency, devote and pref er all corporate assets towards the payment of its creditors capital of the corporation which cannot be returned to the stockholders in any form during the lifetime of the corporation, unless otherwise allowed by law The definition of capital stock clearly shows that it is composed of two ite msthe paid-up capital and subscriptions receivables In defining the relationship between the corporation and the stockholders, t he capital stock represents the legal and proportional standing of the stockhold ers with respect to the corporation and corporate matters, such as their rights to vote and to receive dividends CLASSIFICATION OF SHARES Section 6. Classification of shares. - The shares of stock of stock c
orporations may be divided into classes or series of shares, or both, any NATURE OF SHARE OF STOCK FROM POINT OF VIEW OF CORPORATION It only signifies a aliquot part of the corporation's property, or the conting ent right to share in its proceeds to that extent when distributed according to law and equity, but its holder it not the owner of any part of the capital of the corporation, nor is he of which classes or series of shares may have such rights, privileges or restric tions as may be stated in the articles of incorporation: Provided, That no share may be deprived of voting rights except those classified and issued as "preferr ed" or "redeemable" shares, unless otherwise provided in this Code: Provided, fu rther, That there shall always be a class or series of shares which have complet e voting rights. Any or all of
the shares or series of shares may have a par value or have no par value as may be provided for in the articles of incorporation: Provided, however, T hat banks, trust companies, insurance companies, public utilities, and building and loan associations shall not be permitted to issue no-par value shares of sto ck. Preferred shares of stock issued by any corporation may be given preference in t he distribution of the assets of the corporation in case of liquidation and in t he distribution of dividends, or such other preferences as may be stated in the articles of incorporation which are not violative of the provisions of this Code : Provided, That preferred shares of stock may be issued only with a stated par value. The board of directors, where authorized in the articles of incorporation , may fix the terms and conditions of preferred shares of stock or any series th ereof: Provided, That such terms and conditions shall be effective upon the fili ng of a certificate thereof with the Securities and Exchange Commission. Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the holder of such shares shall not be liable to the corporat ion or to its creditors in respect thereto: Provided; That shares without par va lue may not be issued for a consideration less than the value of five (P5.00) pe sos per share: Provided, further, That the entire consideration received by the corporation for its no-par value shares shall be treated as capital and shall not be available for distribution as dividends. A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal requirements. Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be equal in all respects to every other s hare. Where the articles of incorporation provide for non-voting shares in the cases a llowed by this Code, the holders of such shares shall nevertheless be entitled t o vote on the following matters: 1. Amendment of the articles of incorporation; 2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substa ntially all of the corporate property; 4. Incurring, creating or increasing bonded indebtedness; 5. Increase or decrease of capital stock; 6. Merger or consolidation of the corporation with another corporation or other corporations; 7. Investment of corporate funds in another corporation or business in accordanc e with this Code; and 8. Dissolution of the corporation. Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights. (5a) Policies On Classification Of Shares 1. It expressly recognizes the freedom and power of a cop[oration to classify shares. a. The shares of stock of a corporationj may be divided into classes or serie s of shares or both, any of which classes or series of shares may have rights, p rivileges, or restrictions as may be stated in the articles of incorporation. b. However no share may be deprived of voting rights except those cla ssified and issued as preferred or redeemable shares, unless otherwise provided by the Code 2. Expressly adopts the presumption of equality of rights and features of shares when nothing is expressly provided to the contrary 3. The Code provides for voting rights for all types of shares on matters it considers as fundamental measures. Where the articles of incorporation prov ide for non-voting shares, the
holders of such shares shall nevertheless be entiled to vote on the following a. Amendment of the articles of incorporation; b. Adoption and amendment of by-laws; c. Sale, lease, exchange, mortgage, pledge or other disposition of all or sub stantially all of the corporate property; d. Incurring, creating or increasing bonded indebtedness; e. Increase or decrease of capital stock; f. Merger or consolidation of the corporation with another cor poration or other corporations; g. Investment of corporate funds in another corporation or busi ness in accordance with this Code; and h. Dissolution of the corporation. COMMON STOCK A common stock represents the residual ownership interest in the corporatio n. It is a basic class of stock ordinarily and
usually issued without extraordinary rights or privileges and entities the shareholders ton a pro rata division of profits Common stock dont have any special contract rights or preferences. Frequently, it is the only class of stock outstanding It generally represents the greatest proportion of the corpora tion's capital structure and bears the greatest risk of loss in the event of failu re of the enterprise PREFERRED SHARES One which entitles the holder thereof to certain preferences over the holder s of the common stock designed to induce persons to subscribe for shares of a corporation Preferred shares as to assets gives the holder thereof preference to the dis tribution of the assets of the corporation in case of liquidation Preferred shares as to the dividends give the holder the right to receive d ividends on said shares to the extent agreed upon before any dividends at all paid to the holders of common stock The contractual rights and preferences of an issue of preferred stocks must be provided for in the articles of incorporation Preferred stock may be issued only with a stated par value. The board of di rectors, where authorized in the articles of incorporation, may fix the terms an d conditions of preferred shares of stock or any series thereof The naming of shares wouldnt give such preferred shares any right in additi on to those enjoyed by common shares Republic Planters Bank v. Agana 269 SCRA 1 (1997) Private respondent corporation secured a loan from petitioner bank. The loa n wasnt given in full legal tender. Part was cash and part was preferred share s. Part of the conditions of the preferred shares was its entitlement to 1% qu arterly dividends and that it is redeemable by drawing lots after two years by t he corporation. Thereafter, the private respondent proceeded against the petit ioner to have the latter pay the dividends due to them allegedly as well as to r edeem the shares in accordance to the terms and conditions stated in the certifi cate A preferred share of stock, on one hand, is one which entitles the holder th ereof to certain preferences over the holders of common stock. The preferences are designed to induce persons to subscribe for shares of a corporation. Preferred shares take a multiplicity of f orms. The most common forms may be classified into two: (1) preferred shares as to assets; and (2) preferred shares as to divi dends. The former is a share which gives the holder thereof preference in the di stribution of the assets of the corporation in case of liquidation; the latter i s a share the holder of which is entitled to receive dividends on said share to the extent agreed upon before any dividends at all are paid to the holders of common stock. There is no guaranty, however, that the share will rece ive any dividends. Under the old Corporation Law in force at the time the contra ct between the petitioner and the private respondents was entered into, it was p rovided that "no corporation shall make or declare any dividend except from the surplus profits arising from its business, or distribute its capital stock or property other than actual profits among its members or stockho lders until after the payment of its debts and the termination of its existence by limitation or lawful dissolution." Similarly, the present Corporation Code pr ovides
that the board of directors of a stock corporation may declare dividends only ou t of unrestricted retained earnings. The Code, in Section 43, adopting the chang e made in accounting terminology, substituted the phrase unrestricted retained e arnings," which may be a more precise term, in place of "surplus profi ts arising from its business" in the former law. Thus, the declaration of divide nds is dependent upon the availability of surplus profit or unrestricted retaine d earnings, as the case may be. Preferences granted to preferred stockholders, moreover, do not give them a lien upon the property of the corporation n or make them creditors of the corporation, the right of the former being always subordinate to the latter. Dividends are thus payable only when there a re profits earned by the corporation and as a general rule, even if there are existing profits, the board of directors has the discretion to determine whether or not dividends are to be declared. Shareholders, both common and prefe rred, are considered risk takers who invest capital in the business and who can look only to what is left after corporate debts and liabilities are fu lly paid. The respondent judge also stated that since the stock certificate granted th e private respondents the right to receive a quarterly dividend of one Per Centum (1%), cumulative and participating, it "clearly and unequivocably (sic) indicates that the same are interest bearing stocks or stocks issued by a corporation under an agreement t o pay a certain rate of interest thereon. As such, plaintiffs (private respondents herein) become entitled to the payment thereof a s a matter of right without necessity of a prior declaration of dividend." There is no legal basis for this observation. Both Sec. 16 of the Corporation Law and Sec. 43 of the present Corporation Code prohibit the issuance of any stock divi dend without the approval of stockholders, representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or spec ial meeting duly called for the purpose. These provisions underscore the fact th at payment of dividends to a stockholder is not a matter of right but a matter o f consensus. Furthermore, "interest bearing stocks", on which the corporation ag rees absolutely to pay interest before dividends are paid to common stockholders, is legal only when construed as requiring payment of interest as dividends from net earnings or surplus only. Clearly, the respondent judge, in compelling the petitioner to redeem the shares in question and to pay the corresponding dividends, committed grave abuse of discretion amo unting to lack or excess of jurisdiction in ignoring both the terms and conditio ns specified in the stock certificate, as well as the clear mandate of the law. Cumulative and Non-Cumulative Preferred Shares Cumulative preferred shares entitle the holders thereof to payment n ot only of cumulative dividends but also of back dividends not previously paid, when and if dividends are declared, to the extend agreed upon, before holders of common shares are paid Fundamental characteristic of cumulative stock is that if the preferred divi dend isn't paid in full in any year, whether or not entered, the deficiency must b e made up before any dividend may be paid on the common stock Non-cumulative preferred stock entitle the holders merely to the payment of current dividends that are paid, to the extent agreed upon before the holders of common shares are paid Entitlement to Preferences The preference lawfully granted to preferred shares must be interpreted d construed in accordance with applicable Corporate Law doctrines and cannot be deemed absolute an
Participating and Non-Participating Preferred Shares Participating preferred shares that entitle the holders to participate with th e holders of common shares in the retained earnings after the amount of stipulated dividend has been paid to the preferred shares Non-participating preferred shares are those that entitle holders of preferr ed shares only to the stipulated preferred dividends and no more The nature and extent of participation on a specified basis with the common stock must be stated in the articles of incorporation REDEEMABLE SHARES
Republic Planters Bank v. Agana 269 SCRA 1 Redeemable shares, on the other hand, are shares usually preferred, which by t heir terms are redeemable at a fixed date, or at the option of either issuing co rporation, or the stockholder, or both at a certain redemption price. A redempti on by the corporation of its stock is, in a sense, a repurchase of it for cancel lation. The present Code allows redemption of shares even if there are no unrest ricted retained earnings on the books of the corporation. This is a new provisio n which in effect qualifies the general rule that the corporation cannot purchas e its own shares except out of current retained earnings. However, while redeema ble shares may be redeemed regardless of the existence of unrestricted retained earnings, this is subject to the condition that the corporation has, after such redemption, assets in its books to cover debts and liabilities inclusive of capi tal stock. Redemption, therefore, may not be made where the corporation is insol vent or if such redemption will cause insolvency or inability of the corporation to meet its debts as they mature. What respondent Judge failed to recognize was that while the stock certifica te does allow redemption, the option to do so was clearly vested in the petitioner bank. The redemption therefore is clearly the type known as "optional". Thus, except as otherwise provided in the stoc k certificate, the redemption rests entirely with the corporation and the stockholder is without right to either compel or refuse the redemption of its stock.[22] Furthermore, the terms and conditions set forth therein use the word "may". It is a settled doctrine in statutory construction that the word "ma y" denotes discretion, and cannot be construed as having a mandatory effect. We fail to see how respondent judge can ignore what, in his words, are the "very wo rdings of the terms and conditions in said stock certificates" and construe what is clearly a mere option to be his legal basis for compelling the petitioner to redeem the shares in question. The redemption of said shares cannot be allowed. As pointed out by the petit ioner, the Central Bank made a finding that said petitioner has been suffering f rom chronic reserve deficiency, and that such finding resulted in a directive, issued on January 31, 1973 by then Gov. G. S. Licaros of the Central Bank, to the President and Ac ting Chairman of the Board of the petitioner bank prohibiting the latter from re
deeming any preferred share, on the ground that said redemption would reduce the assets of the Bank to the prejudice of its depositors and creditors. Redemption of preferred shares was prohibited for a just and valid reason. The directive i ssued by the Central Bank Governor was obviously meant to preserve the status qu o, and to prevent the financial ruin of a banking institution that would have re sulted in adverse repercussions, not only to its depositors and creditors, but a lso to the banking industry as a whole. The directive, in limiting the exercise of a right granted by law to a corporate entity, may thus be considered as an ex ercise of police power. The respondent judge insists that the dire ctive constitutes an impairment of the obligation of contracts. It has, however, been settled that the Constitutional guaranty of non- impairment of obligations of contract is limited by the exercise of the police power of the state, the reason being that public welfare is superior to private rights Section 8. Redeemable shares. - Redeemable shares may be issued by the corporati on when expressly so provided in the articles of incorporation. They may be purc hased or taken up by the corporation upon the expiration of a fixed period, rega rdless of the existence of unrestricted retained earnings in the books of the co rporation, and upon such other terms and conditions as may be stated in the arti cles of incorporation, which terms and conditions must also be stated in the cer tificate of stock representing said shares. (n) When the certificates of stock recognizes redemption, but the option to do so is clearly vested in the corporation, the redemption is clearly t he type known as optional and rest entirely with the corporation and the stockholder is without right to either compel or refuse the redemption of its stock Redemptionrepurchase, a reacquisition of stock by a corporation w hich issued the stock in exchange for property, whether or not the acquired stock is cancelled, retired or held in the treasury and that essentially, the corporation gets back
some of its stock, distributes cash or property to the stockholder in payment fo r the stock, and continues in business as before Why would one want a redeemable share? It is a way to opt out of the invest ment midway Isn't a forced redemption not a violation of the trust fund doctrine ? There should be sinking fund for the creditors Taxability of Redemption of Stock Dividends When the corporation redeems shares coming from those issued upon establish ment of the corporation or from initial capital investment, the redemption to their concurrent value of acquisition wouldnt be subject to tax because that would constitute mer ely a return of investment On the other hand, redemption is from previously declared stock dividends, t he proceeds of the redemption constitute additional wealth, for it is no longer merely a return of capital but a gain thereon, and subject to tax FOUNDER'S SHARES
Section 7. Founders shares. - Founders shares classified as such in the articl es of incorporation may be given certain rights and privileges not enjoyed by th e owners of other stocks, provided that where the exclusive right to vote and be voted for in the election of directors is granted, it must be for a limited per iod not to exceed five (5) years subject to the approval of the Securities a nd Exchange Commission. The five-year period shall commence from the date of the aforesaid approval by the Securities and Exchange Commission. (n) The classification of founder's shares may be interpreted to be based on 2 asp ectsnomenclature or certain exclusive rights granted to such shares ISSUE! Whether founders' shares are such because they have been classified and have been given the nomenclature of founder's shares under the articles of incorporation Consequently, we must presume that what makes shares founders' shares would be that they are given the exclusive rights not given to other stockholders, and specially the right to vote and to be voted in the election of directors Effect When Exclusivity Period Expires Such exclusive right would only be transferred to common shareholders who are supposed to exercise such right had there been no founders' shares NO-PAR VALUE SHARES Shares of stock issued without par value shall be deemed fully paid and nonassessable and the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto Shares without par value may not be issued for a consideration less than P5 per share and that the consideration received by the corporation for its no-par shares be treated as capital and shall not be available for distribution as dividends TREASURY SHARES Section 9. Treasury shares. - Treasury shares are shares of n issued and fully paid for, but subsequently reacquired by ion by purchase, redemption, donation or through some other hares may again be disposed of for a reasonable price fixed ctors. (n) stock which have bee the issuing corporat lawful means. Such s by the board of dire
Treasury shares have no effect on the stated capital of the corporation unles s and until they are cancelled or retired, in which event the stated capital is reduced by the amount then representing the shares The acquisition of treasury shares doesnt reduce the number of issued share s or the amount of stated capital and their sale doesnt increase the number of issued shares or the amount of the stated capital Features of treasury shares o Although authorities differ on the exact legal and accountable statutes of socalled treasury share, they are more or less in agreement that treasury shares a re stocks issued and fully paid for and re-acquired by the corporation either by purchase, donation, forfeiture, and other means
o Treasury shares are therefore issued shares, but being in the treasury, they dont have the status of outstanding shares o Consequently, although a treasury share, not having been retired by the corpo ration reacquiring it, may be reissued or sold again, such share, as long as it is held by the corporation as a treasury share, participates neither in dividends, becau se dividends cannot be declared by the corporation to itself, nor in the meeting s of the corporation as voting stock, for otherwise equal distribution of voting powers among stockholders will be effectively lost and the directors will be ab le to perpetrate their control of the corporation, though it still represents a paid-for-interest in the property of the corporation STOCK WARRANTS A type of security which entitles the holder the right to subscrib e to, the unissued capital stock of a corporation or to purchase issued shares i n the future, evidenced by a warrant certificate, whether detachable or not, which may be sold or offered for sale to the public but doesnt apply to a right granted under an option plan duly appro ved by the SEC for the benefit of the employees, offices and/or directors of the issuing corporation SEC Amended rules recognizes 2 types of issuers of warrants o A duly registered domestic corporation which issues or proposes to issue subs cription warrants o A person or a group of persons who issues or proposes to issue covered warran ts Rules allow for two types of warrants o Subscription warrantwhich entitle the holder thereof the right to subscribe to a pre-determined number of shares out of the unissued capital stock of the issu er o Covered warrantentitles the holder thereof the right to purchase from the issu er a pre-determined number of existing shares Two types of warrant certificates o Detachable warrantwhich may be sold, transferred or assigned tto any person by the warranholder separate from and independent of the corresponding beneficiary securities o Non-detachable warrantwhich cannot be sold, transferred or assigned to any person by the warrantholder separate from, or independent of the beneficiary securities Warrantholders may exercise the right granted within a period approved by th e SEC which shall not be less than 1 year, nor more than 5 years from the date of issue of the warrants The exercise price for the warrants shall be the price per share at which th e issuer is required to sell the underlying shares, upon the exercise of the rights granted in the warrant, which shall be at the pr ice fixed at the time of application for registration of the warrant or com puted using the stated formula approved by the SEC The exercise price must be paid in full upon exercise, and shall not be less than the par value of the underlying shares, or not less than P5 if the underlying shares are without par value All warrants authorized for issuance by the SEC shall be transferrable witout need for approval of the SEC STOCK OPTIONS A privilege granted to a p-arty to subscribe to a certain portion of the uni ssued capital stock of a corporation within a specified period and under the terms and conditions of the grant, exercisable by the grantee at any time within the period granted Approval of the SEC is needed No exercise of the right of the option shall be valid unless accompanied by t
he payment of not less than 40% of the total price of the shares so purchas ed, which payment shall be properly receipted for by the corporate treasurer , except where the grantee is an employee or officer who is not a director of th e corporation in which case only 25% of the total price shall be required, or al low a planned payroll deduction scheme Rules also provide for the following guidelines o Sotck options may be granted on the basis of proportionate in terests of stockholders in the capital stock
o Stock otpions granted to employees or officers who are not members of the boa rd may also be allowed after the review of the scheme since it would be in conso nance with the policy of the government to widen corporate base and to distribut e corporate profits wider and more equitable o Stock options granted to non-stockholders may be granted only upon sh owing that the board has been duly authorized to grant the same by its charter or by a resolution of the stockholders owning at least 2/3 of the outstanding ca pital stock of the corporation, both non- voting and voting o Options granted to directors, managing groups and corporate officers must be a pproved in a stockholde'rs meeting by stockholders owning at least 2/3 of the outs tanding capital stock, voiting and non-voting o The options must be exercised within a period of three years from the approva l thereof by the SEC or upon extension thereof duly approved by the SEC o No transfer of the right to an option shall be made without the approval of the SEC The rules anticipated possible circumvention through favorable subscriptions which are really stock options RECLASSIFICATION OF SHARES AND EXCHANGE Reclassification of shares doesnt always bring any substantial alteration in the subscriber's proportional interest, while an exchange would effect a shifting of the balance of stock features like priority in dividend declarations or absence of voting rights The mere exchange of shares without more produces no realized income to the stockholder because it would only involve a modification of the stockholder's righ ts and privilegeswhich is not a flow of wealth for tax purposes, since the issue of taxable dividend may arise only once a subscriber disposes of his entire inte rests and not when there is still maintenance of proprietary interest HYBRID SECURITIES Equity securitiesrepresent an ownership interest in the corporation and include both common and preferred stock. In addition, corporations finance much of their continued operations through debt securities Debt securitiesdont represent ownership interest in the corporation but rath er create a debtor-creditor relationship between the corporation and the bondholder Government v. Phil. Sugar Estate 38 Phil 15 (1918) This was an action on an alleged violation of the old Corporation Code. T he defendant corporation has allegedly committed a violation by engaging in the business of purchasing and selling real estate, which is prohibited under th
e old Corporation Code. The corporation has allegedly contracted with the Tayaba s Land Company in the purchase and later selling of real estate. The Attorney-G eneral sought for the revocation of the corporation's franchise. The lower court held that the agreement wasnt a loan but it was in the character of a co-partn ership. The old corporation code then provided that corporations are not authorized to conduct the business of buying and selling real estate or be permitted to hol d or own real estate such as may be reasonably necessary to enable it to carry o ut the purpose for which it is created. However, they are allowed to extend loa ns, etc. to real estate businesses. It is in this qualification that the defend ant corporation banks its defense that the agreement was a loan. There are a number of features that say that this is a partnership/co-partners hip agreement o There was no period fixed in the contract for the repayment of money, except t hat the first returns from the sale of the land was to be devoted to the payment of the capital o The entire amount of the credit was not to be turned over at once but was to be used by the Tayabas company as it was needed o The return on the capital wasnt by a fixed rate of interest but 25 % of the profits earned by the company in todo los negocios was to be paid by the defendant
o The defendant corporation agreed to pay 25% of necessary and gener al expenses for the development of the corporation o Consent of the corporation was desired to sell the land at a price under P.50 per sq.m but wasnt required if the selling price was over the amount o The defendant corporation acted as treasurer of the enterprise QUASI-REORGANIZATION 1. Through the use of the reappraisal surplus of a corporations' assets to wipe-out the deficit or negative retained earnings 2. By the reduction of a corporation's capital stock through the formal filing of an application for amendment of its articles of incorporation with the SEC REDUCTION OF CAPITAL STOCK Section 38. Power to increase or decrease capital stock; incur, create or increa se bonded indebtedness. - No corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority vote of the board of directors and, at a stockholders meeting duly cal led for the purpose, two-thirds (2/3) of the outstanding capital stock shall fav or the increase or diminution of the capital stock, or the incurring, creat ing or increasing of any bonded indebtedness. Written notice of the proposed increase or diminution of the capital stock or of the incurring, creating, or i ncreasing of any bonded indebtedness and of the time and place of the stockholde rs meeting at which the proposed increase or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be considered, mus t be addressed to each stockholder at his place of residence as shown on the boo ks of the corporation and deposited to the addressee in the post office with pos tage prepaid, or served personally.
A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by the chairman and the secretary of the stockhold ers 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 o f shares of no-par stock thereof actually subscribed, the names, nationalities a nd residences of the persons subscribing, the amount of capital stock or number of no-par stock subscribed by each, and the amount paid by each on his subscript ion in cash or property, or the amount of capital stock or number of shares of n o-par stock allotted to each stock-holder if such increase is for the purpose of making effective stock dividend therefor authorized; (4) Any bonded indebtedness to be incurred, created or increased; (5) The actual indebtedness of the corporation on the day of the meeting; (6) Th e amount of stock represented at the meeting; and (7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Any increase or decrease in the capital stock or the incurring, creating or incr easing of any bonded indebtedness shall require prior approval of the Securities and Exchange Commission. One of the duplicate certificates shall be kept on file in the office of the cor poration and the other shall be filed with the Securities and Exchange Commissio n and attached to the original articles of incorporation. From and after approva l by the Securities and Exchange Commission and the issuance by the Commission o f its certificate of filing, the capital stock shall stand increased or decrease d and the incurring, creating or increasing of any bonded indebtedness authorize d, as the certificate of filing may declare: Provided, That the Securities and E xchange Commission shall not accept for filing any certificate of incre ase of capital stock unless accompanied by the sworn statement of the treasurer of the corporation lawfully holding office at the time of the filing o f the certificate, showing that at least twenty-five (25%) percent of such incr eased capital stock has been subscribed and that at least twenty-five ( 25%) percent of the amount subscribed has been paid either
in actual cash to the corporation or that there has been transferred to the corp oration property the valuation of which is equal to twenty-five (25%) percent of the subscription: Provided, further, That no decrease of the capital stock shal l be approved by the Commission if its effect shall prejudice the rights of corp orate creditors. Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the approval by a majority vote of the board of trustees and of at le ast two-thirds (2/3) of the members in a meeting duly called for the purpose. Bonds issued by a corporation shall be registered with the Securities and Exchan
ge Commission, which shall have the authority to determine the sufficiency of th e terms thereof. (17a) STOCK SPLITS Each of the issued and outstanding shares is simply broken up into a greater number of shares, each representing a proportionately smaller interest in the c orporation Purpose for stock splits is to lower the price to a more marketab le price and thus increase the number of the potential shareholders STOCK CONSOLIDATION New shares are issued in replacement d value, without affecting the total issued shares Are resorted to make each share have value and thereof make them more expensive ithin higher end of the market old shares with a higher par or issue value of the a higher par or issued value or issued in acquiring and to bring the stock w
ACQUISITIONS, MERGERS AND CONSOLIDATIONS ACQUISITIONS AND TRANSFERS CONCEPT OF ECONOMIC UNIT/ENTERPRISE/GOING CONCERN A business enterprise apart from the juridical personality under which it op erates, has a separate being of its own Properly speaking, a buisness enterprise comprises more than just the proper ties of the business but includes a concern that covers the employees, goodwill, list of clientele and suppliers, etc. which give it value separate and distinct from itsd owner or the juridical entity under which it operates It is itself a concern that has a separate economic or selling value from its owner's other assets and that business men evaluating whether to purchaser such business enterprise dont look at the properties of the business but many other intangibles that really ha ve no definite monetary value, except when expressed as goodwill and assigned a value under principles of Accounting such as the moral and technical competence of the employees, etc. TYPES OF ACQUISITIONS/TRANSFERS 1. Assets only level a. The purchaser is only interested in the raw assets and properties of the business, perhaps to be used to establish his own business enterprise or to be used for his on-going business enterprise b. In such acquisition, the purchaser is not interested in the entity of the corporate owner of the assets nor of the goodwill and other factors relating to the business itself 2. Business-enterprise level a. The purchaser's interest goes beyond the assets or properties of the business enterprise b. The primary interest is essentially to obtain the earning capabili ty of the venture c. However, the purchaser isn't interested in obtaining the juridical entity that owns the business enterprise, and therefore purchases dire ctly the business from the corporate entity 3. Equity level a. Looking at the entirety of the business enterprise as it is owned and oper ated by the corporation b. The purchaser takes control and ownership of the business by purchasing the shareholdings of the corporate owner c. The control of the business is therefore indirect
ASSETS-ONLY TRANSFER
BUSINESS ENTERPRISE CONTRACTUAL LIABILITY Transferor liable Exceptions: 1. Assumption of liability 2. In fraud of creditors 3. Continuation 4. Merger (Edward Nell case laid down the premise on why there is transferee's liability in business enterprise transfer) Transferee liable technically, the business enterprise transfer is a continuation There could be exception when there is stipulation to the contrary LABOR CLAIMS Transferor liable
Transferor liable TAX averring that the latter is merely the alter-ego of Insular Farms, having purcha sed the properties of the latter. This case delves on the issue on whether or not the defendant was the alter-
ego of Insular Farms and that it could be held liable for the debts and liabilities of the latter? Generally, where one corporation sells or otherwise transfers all of its ass ets to another corporation, the transferee isn't liable for the debts and liabilities of the transferor Exceptions to the rule o Where the purchaser expressly or impliedly agrees to assume such debts o Where the transaction is entered into fraudulently in order to escape liabili ty for such debts o Where the purchasing corporation is merely a continuation of the selling corpo ration o Where the transaction amounts to a consolidation or merger of the corporation The following rules apply to the enforceability of liabilities again st the transferee regardless of the separate juridical personality of the transferor and transferee o In a pure assets-only transfer, the transferee isn't liable for the debts and l iabilities of the transferor, except where the transferee expressly or impliedly agrees to assume such debts, or when there was fraud o In a transfer of the business enterprise, the transferee is liable for the de bts and liabilities of the transferor EQUITY Transferor liable Transferor liable GENERAL RULES ON LIABILITY TRANSFERS Edward Nell Co. v. Pacific Farms 15 SCRA 415 Plaintiff sought a writ of execution against Insular Farms for the unpaid ba lance for a pump sold by the former. There was no execution however because the re was allegedly no leviable property. Plaintiff then sought recovery from Pac ific Farms, o In an equity transfer, the transferee is not liable for the debts and liabilities of the transferor, except where the transferee expressly or impliedly agrees to assume such debts McLeod v. NLRC 512 SCRA 222 (2007) Caltex v. PNOC Shipping and Transport Corp. 498 SCRA 400 (2006) ASSETS ONLY TRANSFER
Coverage of bulk sales lawif the transfer constitutes a bulk sale, it would t hen affect the transferee in the sense that if the sale has not complied with th e requirements of the law, the sale could be classified as fraudulent and void, and therefore title of the transferee over the assets would be void, even if he were a purchaser in good faith Special rule in corporate dissolutionwhen another corporation takes over the assets of another corporation which is dissolved, the succeeding corporation is liable for the claims against the dissolved corporation to the extent of the fair value of the assets assumed Voluntary assumption of liabilities: another instance when the transferee is held liable in an assets-only transfer
BUSINESS ENTERPRISE TRANSFERS The transferee is liable for the debts and liabilities of his tran sferor and this is to protect the creditors of the business by allowing them a r emedy against the new controller or owner of the business enterprise Otherwise, the creditors would be left holding the bag since they may not be able to recover from the transferor who has disappeared with the loot nor against the transferee who can claim that he is a purchaser in good faith and for value There is a question on whether this is a sub-classification of the piercing doctrine but it should be noted that in several cases, the Court didnt consider fraud as an essential ingredient for the application of th e business transfer doctrine Rationale for the doctrinereality in the business world is that although no f ormal mortgage contract is executed, creditors and suppliers extend credit to the business enterprise because they see the business' earning capacity and assets as security to the undertaking they will eventually be paid back AD Santos v. Vasquez 22 SCRA 1156 Laguna Transportation v. SSS 107 Phil 833 Free and Harmless Clause Such stipulations are valid and binding but only as to between the transfero r and transferee, and their respective successors-ininterest The jurisprudential doctrine on business-enterprise transfers has evolv ed for the protection of business creditors, therefore neither the transferor or transferee can waive or modify such right or cause of action of the creditors without the latter's consent EQUITY TRANSFERS The transferee isn't liable for the debts of the corporation unless he implied ly or expressly agrees to Logic of the doctrine finds support in the separate juridical perso nality and limited liability feature of a corporation MERGERS AND CONSOLIDATIONS CONCEPT Merger is a union whereby one or more existing corporations are absorbed by another corporation which survives and continues the combined busine ss Consolidation is the union of two or more exsiting corporations to form a ne w corporation called the consolidated corporation. it is a combination by agreement between two or more corporations b y which their rights, franchises, privileges and properties are united and becom e those of a single new corporation composed generally although not necessarily of the stockholders of the old corporation. PROCEDURE Plan Of Merger Or Consolidation Section 76. Plan or merger of consolidation. - Two or more corporations may merg e into a single corporation which shall be one of the constituent corporations o r may consolidate into a new single corporation which shall be the consolidated corporation.
The board of directors or trustees of each corporation, party to the merger or consolidation, shall approve a plan of merger or consolidation setting forth the following: 1. The names of the corporations proposing to merge or consolidate, herei nafter referred to as the constituent corporations; 2. The terms of the merger or consolidation and the mode of carrying the same in to effect; 3. A statement of the changes, if any, in the articles of incorporation of the s urviving corporation in case of merger; and, with respect to the consolidated co rporation in case of consolidation, all the statements required to be set forth in the articles of incorporation for corporations organized under this Code; and 4. Such other provisions with respect to the proposed merger or consolidation as are deemed necessary or desirable. (n) Stockholder's or Member's Approval Section 77. Stockholders or members approval. - Upon approval by majority vot e of each of the board of directors or trustees of the constituent co rporations of the plan of merger or consolidation, the same shall be submitted f or approval by the stockholders or members of each of such corporations at separ ate corporate meetings duly called for the purpose. Notice of such meetings shal l be given to all stockholders or members of the respective corporations, at lea st two (2) weeks prior to the date of the meeting, either personally or by regis tered mail. Said notice shall state the purpose of the meeting and shall include a copy or a summary of the plan of merger or consolidation. The affirmative vot e of stockholders representing at least two-thirds (2/3) of the outstanding capi tal stock of each corporation in the case of stock corporations or at least tw o-thirds (2/3) of the members in the case of non-stock corpora tions shall be necessary for the approval of such plan. Any dissenting stockhold er in stock corporations may exercise his appraisal right in accordance with the Code: Provided, That if after the approval by the stockholders of such plan, the board of directors decides to abandon the pla n, the appraisal right shall be extinguished. Any amendment to the plan of merger or consolidation may be made, provided such amendment is approved by majority vote of the respective boards of directors or trustees of all the constituent corporations and ratified by the affirmative vot e of stockholders representing at least two- thirds (2/3) of the outstanding cap ital stock or of two-thirds (2/3) of the members of each of the constituent corp orations. Such plan, together with any amendment, shall be considered as the agr eement of merger or consolidation. (n) Articles of Merger or Consolidation Section 78. Articles of merger or consolidation. - After the approval by the st
ockholders or members as required by the preceding section, articles of merger or articles of consolidation shall be executed by each of the constituent corporations, to be signed by the president or vicepresident and certified by the secretary or assistant secretary of each corporation setting forth: 1. The plan of the merger or the plan of consolidation; 2. As to stock corporations, the number of shares outstanding, or in the case of non-stock corporations, the number of members; and 3. As to each corporation, the number of shares or members voting for and agains t such plan, respectively. (n) Approval of the SEC Section 79. Effectivity of merger or consolidation. - The articles of merger or of consolidation, signed and certified as herein above required, shall be submit ted to the Securities and Exchange Commission in quadruplicate for its approval: Provided, That in the case of merger or consolidation of banks or banking insti tutions, building and loan associations, trust companies, insurance companies, p ublic utilities, educational institutions and other special corporations governe d by special laws, the favorable
recommendation of the d. If the Commission is ations concerned is not ng laws, it shall issue time the merger or
appropriate government agency shall first satisfied that the merger or consolidation of inconsistent with the provisions of this Code a certificate of merger or of consolidation, consolidation shall be effective.
be obtaine the corpor and existi at which
If, upon investigation, the Securities and Exchange Commission has reason to bel ieve that the proposed merger or consolidation is contrary to or inconsistent wi th the provisions of this Code or existing laws, it shall set a hearing to give the corporations concerned the opportunity to be heard. Written notice of the da te, time and place of hearing shall be given to each constituent corporation at least two (2) weeks before said hearing. The Commission shall thereafter proceed as provided in this Code. (n) Effects of Merger and Consolidation Section 80. Effects of merger or consolidation. - The merger or consolidation sh all have the following effects: 1. The constituent corporations shall become a single corporation which, in case of merger, shall be the surviving corporation designated in the plan of merger; and, in case of consolidation, shall be the consolidated corporation designated in the plan of consolidation; 2. The separate existence of the constituent corporations shall cease, except t hat of the surviving or the consolidated corporation; 3. The surviving or the consolidated corporation shall possess all the rights, p
rivileges, immunities and powers and shall be subject to all the duties and liab ilities of a corporation organized under this Code; 4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the rights, privileges, immunities and franchises of each of the con stituent corporations; and all property, real or personal, and all receivables d ue on whatever account, including subscriptions to shares and other choses in ac tion, and all and every other interest of, or belonging to, or due to each const ituent corporation, shall be deemed transferred to and vested in such surviving or consolidated corporation without further act or deed; and 5. The surviving or consolidated corporation shall be responsible and liable for all the liabilities and obligations of each of the constituent corporations in the same manner as if such surviving or consolidated corporation had itself incu rred such liabilities or obligations; and any pending claim, action or proceedin g brought by or against any of such constituent corporations may be prosecuted b y or against the surviving or consolidated corporation. The rights of creditors or liens upon the property of any of such constituent corporations shall not be impaired by such merger or consolidation. (n) SALIENT ADVANTAGES OF A MERGER OR CONSOLIDATION There is a continuous flow of the juridical personalities and busine ss enterprises of the constituent corporation, and under the clear rules under Section 80, there is no legal break in such juridical personalities and business enterprises as they end up combined in the surviving or consolidated corporation This allows corporate planners to achieve certain ends not available to other forms of transfers and acquisitions In the field of taxation (2) Exception. - No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation (a) A corporation, which is a party to a merger or consolidation, exchanges prop erty solely for stock in a corporation, which is a party to the merger or consolidation; or (b) A shareholder exchanges stock in a corporation, which is a party to the merg er or consolidation, solely for the stock of another corporation also a party to the merger or consolidation; or (c) A security holder of a corporation, which is a party to the merger or consolidation, exchanges his securities in such corporation, solely fo r stock or securities in such corporation, a party to the merger or consolidatio n. No gain or loss shall also be recognized if property is transferred to a corpora tion by a person in exchange for stock or unit of participation in such a corpor ation of which as a result of such exchange said person, alone or together with others, not
exceeding four (4) persons, gains control of said corporation: Provided, That st ocks issued for services shall not be considered as issued in return for propert y. Contrary ruling though when it comes to BOI incentives
EFFECTS OF TRANSFERS ON EMPLOYEES 1. Assets only transfer a. The transferee isn't bound to retain the employees of the transferor since t he former doesnt really step into the shoes of the latter b. Issue of whether or not the purchaser of the assets can be considered the successor employer has been answered in the negative following the p rinciples and rationale behind the assets only transfer 2. Business enterprise transfers a. Following the general rule, the transferee should be bound to retai n the services of the employees of the business that it has acquired, although i t is not liable for the violations that the transferor had committed in the past and for which the transferor remains liable solely b. Following Sunio case, the termination of employment by the transferor and payment of all the proper benefits prior to actual sale is recognized as the pro per means to avoid a situation where the transferee shall then be bound to c ontinue with the employments of the employees if the assumed business enterprise c. Following Central Azucarera case, the change of ownership or management of a business enterprise is not of the just causes under the law and may not be cons trued as synonymous to closing or cessation of operation of an establishme nt or enterprise and therefore cannot exempt the transferor from liability for separation pay. But i t is recognized that it is within the employer's legitimate sphere of management c ontrol of the business to adopt economic policies to make some changes or adjust ments in the organization that would ensure profit to itself or protect the inve stments. It may merge or consolidate its business with another or sell or dispose all or substantially all of its assets and properties which may bring about the dismissal or termination of its employees in the process provide d it is done in good faith and in which case is not liable to the employees for termination pay. On the other hand, the transferee has no liability unless it a ssumes it. d. The rule on business enterprise transfers therefore is not applicable when it comes to labor cases 3. Equity transfers a. Since the only result of the transaction is a change in the ownership or c ontrol of the corporate employer, the employees remain with the corporate employer in exactly the same manner as before the equity transfer, and therefore the p urchaser doesnt assume any personal liability to the employees 4. Mergers and consolidations a. The surviving or consolidated corporation must necessarily assume the liabi lities of the constituent corporations, it would be logical to expec t the contractual rights of employees and the existing collective bargaining a greement, if any would have to be absorbed by the surviving or consolidate d corporation b. Filipinas Port Services (1989)employees of the predecessor corporation cannot avail of their previous tenure when determining their termination benefits with the surviving corporation in the merger and this is in direct opposition to the subsequent Filipinas Port Services case (1991) wherein the employees have the right to their retirement be nefits computed from the time worked with the predecessor-constituent corporatio ns saying there was no break in the employee-employer relationship SPIN OFFS Has the opposite effect of a merger or consolidation whereby a department, d ivision, or portions of a corporate business enterprise is sold-off or assigned into a new corporation that will
arise by the process which may constitute it into a subsidiary of the original c orporation It exists when a parent corporation organizes a subsidiary to which is trans ferred part of its assets in exchange for all of capital stock of subsidiary and stock of subsidiary is transferred to parent's stockholders without surrender of their stock in parent Where part of assets of corporation is distributed to shareh olders of transferor without surrender by them of stock to transferor Section 40. Sale or other disposition of assets. - Subject to the provisions of existing laws on illegal combinations and monopolies, a corporation may, by a ma jority vote of its board of directors or trustees, sell, lease, exchange, mortga ge, pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon such terms and conditions and for such consideration, which may be money, stocks, bonds or other instruments for t he payment of money or other property or consideration, as its board of di rectors or trustees may deem expedient, when authorized by the vote of the s tockholders representing at least two-thirds (2/3) of the outstanding capital st ock, or in case of non-stock corporation, by the vote of at least to two-thirds (2/3) of the members, in a stockholders or members meeting duly called for the purpose. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of reside nce as shown on the books of the corporation and deposited to the addressee in t he post office with postage prepaid, or served personally: Provided, That any di ssenting stockholder may exercise his appraisal right under the conditions provi ded in this Code. A sale or other disposition shall be deemed to cover substantially all the corpo rate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorpo rated. After such authorization or approval by the stockholders or members, the board of directors or trustees may, nevertheless, in its discretion, abandon s uch sale, lease, exchange, mortgage, pledge or other disposition of property and assets, subject to the rights of third parties under any contract relating thereto, without further action or approval by the stockholder s or members. Nothing in this section is intended to restrict the power of any corporation, wi thout the authorization by the stockholders or members, to sell, lease, exchange , mortgage, pledge or otherwise dispose of any of its property and assets if the same is necessary in the usual and regular course of business of said corporati on or if the proceeds of the sale or other disposition of such property and asse ts be appropriated for the conduct of its remaining business. In non-stock corporations where there are no members with voting rights , the vote of at least a majority of the trustees in office will be sufficient a uthorization for the corporation to enter into any transaction authorized by thi s section.
DISSOLUTION NO VESTED RIGHTS TO CORPORATE FICTION Gonzales v. Sugar Regulatory Administration 174 SCRA 377 (1989) Juridical persons, whether incorporated or not, whether owned by the governm ent or the private sector, may come to an end at one time or another for a varie ty of reasons. Thus, the corporation was set up. Thus, the corporation code p rovides for termination of corporate life, the dissolution of the corporation, t he winding up of operations, the liquidation of assets, the payment of its oblig ations, and dissolution of any residual assets to its stockholders The termination of the life of a juridical entity doesnt by itself imply th e diminution or extinction of rights demandable against a juridical entity. Con sequently, when the assets of a dissolved entity are taken over by another entit y, the successor entity must be held liable for the obligations of the dissolved entity pertaining to the assets so assumed, to the extent of the fair value of assets actually taken over.
NATURE OF DISSOLUTION Dissolution of the corporation signifies the extinguishment of its franchise and the termination of its corporate existence for business purpose It may either be de jure or de facto o De jureone adjudged and determined by administrative or judicial sentence, or brought about by an act of the sovereign power, or which results from the ex piration of the charter period of corporate life o De factoone which takes place in substance and in fact when the corporation by reason of insolvency, cessation of the business, or suspension of all i ts operations, as the case may be, goes into liquidation, still retaining its prima ry franchise of the corporation (dissolution of the business enterprise) METHODS OF DISSOLUTION Section 117. Methods of dissolution. - A corporation formed or organized under t he provisions of this Code may be dissolved voluntarily or involuntarily. (n) VOLUNTARY DISSOLUTION 1. Where no creditors are affected, by an administratrive appli cation for dissolution filed with the SEC 2. Where creditors are affected by dissolution, by a formal petition for diss olution filed with the SEC, with due notice, and hearing to be duly conducted 3. Shortening of corporate term by the amendment of the articles of incorpora tion 4. Another is allowing the expiration of the corporate term as indic ated in the articles of incorporation VOLUNTARY DISSOLUTION WHERE NO CREDITORS AFFECTED
Section 118. Voluntary dissolution where no creditors are affected. - If dissolu tion of a corporation does not prejudice the rights of any creditor having a cla im against it, the dissolution may be effected by majority vote of the board of directors or trustees, and by a resolution duly adopted by the affir mative vote of the stockholders owning at least two- thirds (2/3) of the outstan ding capital stock or of at least two-thirds (2/3) of the members of a meeting t o be held upon call of the directors or trustees after publication of the notice of time, place and object of the meeting for three (3) consecutive weeks in a n ewspaper published in the place where the principal office of said corporation i s located; and if no newspaper is published in such place, then in a newspaper o f general circulation in the Philippines, after sending such notice to each stoc kholder or member either by registered mail or by personal delivery at least thi rty (30) days prior to said meeting. A copy of the resolution authorizing the di ssolution shall be certified by a majority of the board of directors or trus tees and countersigned by the secretary of the corporation. The Se curities and Exchange Commission shall thereupon issue the certificate of dissol ution. (62a) VOLUNTARY DISSOLUTION WHERE CREDITORS ARE AFFECTED Section 119. Voluntary dissolution where creditors are affected. - Where the dis solution of a corporation may prejudice the rights of any creditor, the petitio n for dissolution shall be filed with the Securities and Exchange Commi ssion. The petition shall be signed by a majority of its board of directors or t rustees or other officers having the management of its affairs, verified by its president or secretary or one of its directors or trustees, and shall set forth all claims and demands against it, and that its dissolution was resolved upon by the affirmative vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members at a meeting of its stockholders or members called for that purpose. If the petition is sufficient in form and substance, the Commission shall, by an order reciting the purpose of the petition, fix a date on or before which objec tions thereto may be filed by any person, which date shall not be less than thir ty (30) days nor more than sixty (60) days after the entry of the order. Before such date, a copy of the order shall be published at
least once a week for three (3) consecutive weeks in a newspaper of general cir culation published in the municipality or city where the principal office of th e corporation is situated, or if there be no such newspaper, then in a newsp aper of general circulation in the Philippines, and a similar copy shall be post ed for three (3) consecutive weeks in three (3) public places in such municipali ty or city. Upon five (5) days notice, given after the date on which the right to file obje ctions as fixed in the order has expired, the Commission shall proceed to hear the petition and try any issue made by the objections filed; and if no such objection is sufficient, and the material allegations of the petition are t rue, it shall render judgment dissolving the corporation and directing such disp osition of its assets as justice requires, and may appoint a receiver to collect such assets and pay the debts of the corporation. (Rule 104, RCa)
VOLUNTARY DISSOLUTION BY SHORTENING THE CORPORATE TERM Section 120. Dissolution by shortening corporate term. - A voluntary dissolutio n may be effected by amending the articles of incorporation to shorten the corpo rate term pursuant to the provisions of this Code. A copy of the amended article s of incorporation shall be submitted to the Securities and Exchange Commission in accordance with this Code. Upon approval of the amended articles of incorpora tion of the expiration of the shortened term, as the case may be, the corporatio n shall be deemed dissolved without any further proceedings, subject to the prov isions of this Code on liquidation. (n) INVOLUNTARY DISSOLUTION Section 121. Involuntary dissolution. - A corporation may be dissolved by the Se curities and Exchange Commission upon filing of a verified complaint and after p roper notice and hearing on the grounds provided by existing laws, rules and reg ulations. (n) Section 6L, PD 902-A Section 2, Rule 66 Grounds for Involuntary Dissolution 1. If the corporation doesnt formally organize and commence the transaction of its business or the construction of its works within 2 years from the date of its incorporation, its corporate power ceases and the corporation shall be deemed dissolved 2. If the corporation has commenced the transaction of its bus iness, but subsequently becomes continuously inoperative for a period of at least 5 years, the same shall be a ground for the suspension or r evocation of its corporate franchise or certificate of incorporation 3. When the corporation fails to adopt and file a code of by-laws in the mann er provided for by law 4. When the corporation has offended against a provision of law for its creation and renewal 5. When it has committed or omitted an act which amounts to the surrender of its corporate rights, privileges or franchises 6. When it has misused a right, privilege, or franchise conferred upon it by law, or when it has exercised a right, privilege or franchise in contravention o f law, such as commission by the corporation of ultra vires or illegal acts 7. When on the basis of findings and recommendations of a duly appointed mana gement committee or rehabilitation receiver, or based on the SEC's own findin gs, the continuance of the business of the corporation would not be feasible or profitable nor work to the best interest of the stockholders, parti eslitigants, creditors or the general public 8. When the corporation is guilty of fraud in procuring its certific ate of registration 9. When the corporation is guilty of serious misrepresentation as to what the corporation can do or is doing great prejudice of or damage to the general publ ic 10. Refusal of the corporation to comply with or defiance to the general order of the SEC restraining commission of acts which would amount to grave violation of its franchise 11. Failure of the corporation to file required reports in appropriate forms as determined by the SEC within the prescribed period
NON-USER OF CHARTER AND CONTINUOUS INOPERATION Section 22. Effects on non-use of corporate charter and continuous inoperation o f a corporation. - If a corporation does not formally organize and commence the transaction of its business or the construction of its works within two (2) years from the date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved. However, if a corporation has commenc ed the transaction of its business but subsequently becomes continuously inopera tive for a period of at least five (5) years, the same shall be a ground for the suspension or revocation of its corporate franchise or certificate of incorpora tion. (19a) This provision shall not apply if the failure to organize, commence the transact ion of its businesses or the construction of its works, or to continuously oper ate is due to causes beyond the control of the corporation as may be de termined by the Securities and Exchange Commission. When Corporation Deemed Organized Organize when used in reference to corporations, involves th3e election of o fficers, providing for the subscription and payment of the capital stock, the adoption of the by-laws, and such other steps as are necessary to endow the legal entity with the capacity to transact the legitimate business for which it was created Organization relates to the systematization and orderly arrangement of the inte rnal and managerial affairs and organs of the corporation A corporation is deemed formally organized if it has accompl ished the following o Adoption of the by-laws and the filing and approval of the same with and by t he SEC in the event the same is not adopted and filed simultaneously with the ar ticles of incorporation o Election of the board of directors or trustees and of the officers o Establishment of the principal office o Providing for the subscription and payment of the capital stock and the taking of such other steps as are necessary to endow the legal entity with capacity to transact the legitimate business for which it was created When Corporation Deemed To Have Commenced Business 1. Entering into contracts or negotiations for lease or sale of properties to b e used as business or factory site 2. Making plans for and the construction of the factory 3. Taking steps to expedite the construction of the company's working e quipment SEC RULES ON SUSPENSION/REVOCATION OF REGISTRATION C ERTIFICATE 1. Corporations which have failed to formally organize and comm ence the transaction of their business or the construction of their works within 2 years from the date of incorporation 2. Corporations which have been inoperative for a continuous period of at least 5 years 3. Corporation which have failed to file by-laws within the prescribe d period
4. Corporation which have failed to file/register for a period of 5 years the ir financial statements, general information sheet, or stock and transfer book or membership book In any of the foregoing, the SEC shall mail the corporation and the controll ing stockholders a show-cause order within 30 days from receipt thereof why the certificate of registration shall not be suspended or revoked A second show-cause order shall be published in a newspaper of general circ ulation, directing the corporation which failed to failed to respond to the first order to appear before the SEC on asset date and time dated in the order If the corporation doesnt comply with the directives of the orders or when the corporation fails to appear, the SEC may issue the lesser sanction which is suspension which shall immediately be executory The corporation shall have 90 days from receipt thereof within which to file petition for reconsideration of the order. After the lapse of the 90-day period and no petition for reconsideration
has been filed, the order of revocation shall be issued which shall become final and executory The SEC has opined that notwithstanding Section 22, there is no automatic di ssolution of a corporation after its incorporation has been approved by the SEC OF MINORITY STOCKHOLDERS TO DEMAND DISSOLUTION Minority stockholders dont have a common law right nor a statutory right to demand for the dissolution of a corporation Why? This is based on the principle that minority stockholders invest in th e corporate vehicle fully aware that the affairs of the corporation would be subject to the control of the majority stockholders Remember Gokongwei case where it was held that any person who buys stock in a corporation does so with the knowledge that his affairs are dominated by a maj ority of the stockholders and that he impliedly contracts that the will of the m ajority shall govern in all matters within the limits of the act of incorporatio n and lawfully enacted by-laws and not forbidden by law Peculiar ruling though in Financing Corporation v. Teodoro ture that the general rule is that the minority stockholders of a corporation ca nnot sue and demand its dissolution. However, there are cases that hold that e ven minority stockholders may ask for dissolution, this, under the theory that s uch minirty members if unable to obtain a redress and protection of their rights within the corporation, must not and should not be left without redress and rem edy. Take note that the ruling in the aforementioned has became a part of PD 902A when it rules that the SEC has the power to rule on the dissolution of the cor poration after a n appointment of a management committee or receiver JURISPRUDENTIAL ATTITUDE TOWARDS INVOLUNTARY DISSOLUTION The court has a solicitous attitude in remedying violations of corporations before resorting to the extreme punishment for RIGHT
forfeiture of franchise and dissolution OBTAINING TAX CLEARANCE Every corporation shall within 30 days after the adoption of the resolution or plan for its dissolution, or for the liquidation of the whole or any part of the capital, including corporations which have been notified of possible involuntary dissolution by the SEC, or for its reorganization, file the nexessary return with the BIR, setting rforth the t erms of such resolution or plan; and that prior to the issuance of the SEC of the certificate of dissolution or reorganiza tion, such corporation must secure a tax clearance from the BIR to be submitted to the SEC Whenever a corporation undergoes dissolution, whether voluntary or involunt ary, a tax clearance must be first obtained by filing with the BIR income tax returns covering the income earned by them from the beginning of the taxable year to the date of dissolution NATURE OF CORPORATE LIQUIDATION Liquidationsettlement of affairs of a corporation which consists of adjusting the debts and claims, that is, of collecting all that is due the co rporation, the settlement and adjustment of claims against it and the payment of its debts Process by which all assets of the corporation are converted into liquid ass ets in order to pay for all claims of corporate creditors and the remaining bala nce if any is to be distributed to the stockholders or members of the corporation Dissolution always precedes liquidation, and there is no legal basis to proc eed with liquidation without the corporation first having been dissolved METHODS OF LIQUIDATION 1. Liquidation through board of directors or trustees a. The normal method of procedure is for the directors and executive officers to have charge of the winding up operations, through there is an alternative me thod of assigning the property of the corporation to the trustees for the benefits of it s creditors and shareholders. While the appointment of the receiver rests withi n the judicial discretion of the court, such discretion must however always be e xercised with caution and governed by legal
and equitable principles, the violation of which will amount to its abuse, and i n making such appointment, the court should take into consideration all the fact s and weigh the relative advantages and disadvantages of appointing a receiver t o wind up the corporate business 2. Liquidation through trustees Section 122. Corporate liquidation. - Every corporation whose charter exp ires by its own limitation or is annulled by forfeiture or otherwise, or whose c orporate existence for other purposes is terminated in any other manner, shall n evertheless be continued as a body corporate for three (3) years after the time when it would have been so dissolved, for the purpose of prosecuting and defendi ng suits by or against it and enabling it to settle and close its affairs, to di spose of and convey its property and to distribute its assets, but not for the p
urpose of continuing the business for which it was established. At any time during said three (3) years, the corporation is authorized and empo wered to convey all of its property to trustees for the benefit of sto ckholders, members, creditors, and other persons in interest. From and after any such conveyance by the corporation of its property in trust for the benefit of its stockholders, members, creditors and others in interest, all interest which the corporation had in the property terminates, the legal interest vests in the trustees, and the beneficial interest in the stockholders, members, creditors or other persons in interest. Upon the winding up of the corporate affairs, any asset distributable to any cre ditor or stockholder or member who is unknown or cannot be found shall be eschea ted to the city or municipality where such assets are located. Except by decrease of capital stock and as otherwise allowed by this Code, no co rporation shall distribute any of its assets or property except upon lawful diss olution and after payment of all its debts and liabilities. (77a, 89a, 16a) Board of Liquidators v. Kalaw 20 SCRA 967 3. Liquidation through receiver a. The appointment of a receiver by the court to wind up the affairs of the c orporation upon petition for voluntary dissolution doesnt empower the court to hear and pass on the claims of the creditors of the corporation at first hand..a ll claims must be presented for allowance to the receiver or trustee or other pe rsons during the wind-up proceedings which in this jurisdiction would be within 3 years provided by Sections 77 and 78 of the Corporation Law as the term for th e corporate existence of the corporation, and if a claim is disputed or unliquid ated so that the receiver cannot safely allow the same, it should be transferred to the proper court for trial and allowance, and the amount so allowed then pre sented to the receiver or trustee for payment. The rulings of the receiver on t he validity of claims submitted are subject to review of the court appointing su ch receiver though no appeal is taken to the latter's ruling. b. A receiver in liquidation stands on a different legal basis from a trustee in liquidationa trusteeship is basically a contractual relationship governed by the Law on Trust and gene rally centered upon property, such the trustee assumes naked title to the proper ty placed in trust. It is therefore a relationship that can be created by the c orporation through its board of directors without the need of judicial authoriza tion. A receivership on the other hand is created through quasi- judicial or judicial ap pointment of a receiver. c. When liquidation is done, either by a receiver or by a trustee, the corpor ate personality isn't important. For the next 3 years after dissolution, there is no corporate personality to do business other than to pursue liquidation. After the 3-year period, there is no more corporate personality e ither in these two cases, but even then it no longer matters, s8ince from the time the assets of the corporation are transferred to the trustee or rece iver pursuant to a liquidation, all such assets are
then held by and in the name of the trustee or receiver who can lawfully proceed with liquidation even if the corporation no longer exists, because he has title to the assets. LEGAL EFFECTS OF DISSOLUTION AND LIQUIDATION Section 122. Corporate liquidation. - Every corporation whose charter expires by its own limitation or is annulled by forfeiture or otherwise, or whose corporat e existence for other purposes is terminated in any other manner, shall neverthe less be continued as a body corporate for three (3) years after the time whe n it would have been so dissolved, for the purpose of prosecuting and de fending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was established. At any time during said three (3) years, the corporation is authorized and empow ered to convey all of its property to trustees for the benefit of stockholders, members, creditors, and other persons in interest. From and after any such conve yance by the corporation of its property in trust for the benefit of its stockho lders, members, creditors and others in interest, all interest which the corporation had in the property terminates, the legal interest vests in the trustees, and the beneficial interest in the stockholders, members, credi tors or other persons in interest. Upon the winding up of the corporate affairs, any asset distributable to any cre ditor or stockholder or member who is unknown or cannot be found shall be eschea ted to the city or municipality where such assets are located. Except by decrease of capital stock and as otherwise allowed by this Code, no co rporation shall distribute any of its assets or property except upon lawful diss olution and after payment of all its debts and liabilities. (77a, 89a, 16a) No Authority To Enter Into New Business The general rule is there is no judicial personality after dissolut ion. If there is, there is only juridical personality to serve one purposefor a ll transactions pertaining to liquidation. Any matter entered into that is not f or the purposes of liquidation will be a void transaction because of the non-exi stence of the corporate entity. Summary on Dissolution and Liquidation Proceedings 1. The termination of the life of a juridical entity doesnt by itself cause the extinction or dimunition of the rights and liabilities nor those of its owne rs and creditor 2. The corporation continues to be a body corporate for three years after its dissolution for purposes of prosecuting and defending suits by and against it and for enabling it to settle and close its affairs, cu lminating in the disposition and distribution of its remaining assets 3. It may during the 3-year term, appoint a trustee or a receiver who may act beyond that period 4. If the 3-year extended life has expired without a trustee or rece iver having been expressly designated by the corporation, within that period, the board of directors or trustees themselves, following the rationale in Gelano v. CA may be permitted to do so continue as trustees by leg al implication to complete the corporate liquidation 5. Still in the absence of a board of directors or trustees, those having any pecuniary interest in the assets, including not only the shareholders but likewise the creditors of the corporation, acting for and i n its behalf, might make proper representations with the SEC, which has primary and sufficient broad jurisdiction in matters of this nature, for working out a f
inal settlement of the corporate concerns REINCORPORATION Chung Ka Bio v. IAC 163 SCRA 534 Philippine Blooming Mills' term was supposed to end at a certain date . Four months after this date, the corporation has issued a deed of assignment of all its assets in favor of the
treasurer, indicating therein the corporation was under the process of reincorpo ration. One month later, a certificate of incorporation was issued to the new PBM. This prompted the stockholders of the old and new PBM to seek l iquidation, averring that the failure to extend the corporate life meant that th e corporation has ipso facto been dissolved. It was held that since there is no proof that the 2/3 vote wasnt for liquidation when its original term of existence has already expired, as the same would constitute new business Distinction Between Extension of Corporate Life, Revival, and Reincorporation Extension Revival Reincorporation given by the stockholders, there is the presumption of regularity which must operate in favor of the private respondents, who insist that the prop er authorization as required by the corporation law was obtained in the meeting called for that purpose. It was further held that had not the required approval of the stockholders been obtained, the new PBM wouldnt have been issued a certificate of incorporation. There is nothing to prevent the stockholders from conveying their respecti ve shareholdings toward the creation of a new corporation to continue the busine ss of the old. Winding up is to the sole activity of a dissolved corporation that does not intend to incorporate anew. If it does, however, it is not unlawful for To increase the time for the existence of one which would otherwise rea ch its limit at an earlier period To give a new existence to one which has been forfeited, or which has lost it s validity by lapse of time Taking out of a new charter of the corporation in order to correct errors or d efects in the original incorporation, or to enlarge the power or limit the liabi lities of the corporation, or to lengthen or revive the corporate life the old board to negotiate and transfer the assets of the dissolved co rporation to the new corporation intended to be created as long as the stockhold ers have given their consent.
DEFINITION CLOSE CORPORATIONS There is nothing in the new Corporation Code prohibiting this Note that this case failed to discuss the rights of creditors and dissenting stockholders
Extension of Corporate Life During Period of Dissolution It would be illegal for the corporation when it takes the stage of dissoluti on, to seek to extend its corporate life, even with the amendment of the articles of incorporation, because the same would constitute new business contrary to the injunction of the law that upon di ssolution the corporation cannot go into transaction for the purpose of continui ng the business for which it was established When the corporate life expires, the corporation ceases to be a body corpora te for the purpose of continuing the business for which it was organized A corporation cannot extend its life by amendment of its articles of incorpo ration effected during the three-year statutory period Under American jurisprudence, close corporations are those in which the majo r part of the persons to whom the powers have been granted, on the happening of vacancies among them, have the right of themselves to appoint others to fill suc h vacancies, without allowing to the stockholders in general any vote o r choice in the selection of such new offices, or where the business policy an d activities are entirely dominated for practical purposes by the m ajority stock ownership of a family whose stock isn't traded in any market and is very infrequently sold Section 96. Definition and applicability of Title. - A close corporation, within the meaning of this Code, is one whose articles of incorporation provide that: (1) All the corporations issued stock of all classes, exclusive of treasury sha res, 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 sub ject to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in
any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall not be deemed a close corpor ation when at least two-thirds (2/3) of its voting stock or voting rights is own ed or controlled by another corporation which is not a close corporation within the meaning of this Code. Any corporation may be incorporated as a close corporation, except mini ng or oil companies, stock exchanges, banks, insurance companies, public utiliti es, educational institutions and corporations declared to be vested with publi c interest in accordance with the provisions of this Code. The provisions of this Title shall primarily govern close corporations: Provided , That the provisions of other Titles of this Code shall apply suppletorily exce pt insofar as this Title otherwise provides. What Are The Problems With The Abovementioned Statutory Definition? 1. By limiting the applicability of the statutory provisions to corporations ha ving all the three enumerated requisites, a significant portion of what otherwise would be generally accepted close corporations wouldnt be cover ed by the pertinent provisions on close corporations but instead would still be covered by p rovisions applicable to publicly held corporations
2. By requiring that all the three requisties must be stated in the articles of incorporation, it would seem that those corporations possessing all the requi sites in actual practice wouldnt be covered by the provisions if their articles of incorporation are silent on the matter 3. Even for corporations which has mentioned the 3 requisites in the articles of incorporation, the provisions wouldnt still apply if in actual operations, one of the requisites is absent. Manuel Dulay Enterprises v. Court of Appeals 225 SCRA 678 San Juan Structural v. CA 296 SCRA 631 NEED FOR A CLOSE CORPORATION A close corporation is a progeny of a marriage of convenience between the es sence of a partnership and that of a corporation The same is considered a distinct type of business organization embodying wh at businessmen perceive to be the best features of a corporation and partnership Under the free market system, businessmen should be left at liberty to adopt a business medium which they feel is best for the pursuit of their commercial affairs so long as the route chosen by them is not contrary to law, morals, public policy and public order ARTICLES OF INCORPORATION REQUIREMENTS Section 97. Articles of incorporation. - The articles of incorporation of a clos e corporation may provide: 1. For a classification of shares or rights and the qualifications fo r owning or holding the same and restrictions on their transfers as may be state d therein, subject to the provisions of the following section; 2. For a classification of directors into one or more classes, each of whom may be voted for and elected solely by a particular class of stock; and 3. For a greater quorum or voting requirements in meetings of stockholders or di rectors than those provided in this Code. The articles of incorporation of a close corporation may provide that the busine ss of the corporation shall be managed by the stockholders of the corporation ra ther than by a board of directors. So long as this provision continues in effect : 1. No meeting of stockholders need be called to elect directors; 2. Unless the context clearly requires otherwise, the stockholders of the corpor ation shall be deemed to be directors for the purpose of applying the provisions of this Code; and
3. The stockholders of the corporation shall be subject to all liabilities of di rectors. The articles of incorporation may likewise provide that all officers or employee s or that specified officers or employees shall be elected or appointed by the s tockholders, instead of by the board of directors. Comparing The Two Types of Corporations Close corporation PRE-EMPTIVE RIGHTS Section 102. Pre-emptive right in close corporations. - The pre-emptive right of stockholders in close corporations shall extend to all stock to be issued, incl uding reissuance of treasury shares, whether for money, property or personal ser vices, or in payment of corporate debts, unless the articles of incorporation pr ovide otherwise. AMENDMENT For a classification of shares or rights and the qualifications for owning or ho lding the same and restrictions on their transfers as may be stated therein, sub ject to the provisions of the following section The restriction on the transferability of shares of stock i n a close corporation is limited to what in general parlance is called a ri ght of first refusal and it is the most onerous restriction allowed. For a class ification of directors into one or more classes, each of whom may be voted for a nd elected solely by a particular class of stock For a greater quorum or voting requirements in meetings of stockholders or dir ectors than those provided in this Code. The articles of incorporation of a close corporation may provide that the bus iness of the corporation shall be managed by the stockholders of the corporat ion rather than by a board of directors. Has the same feature as close corporations Publicly-held corporation
The power to classify the directors in ordinary corporations seems to be denied under Section 24 The same is also granted for ordinary corporations An ordinary corporation is managed and controlled by a board of directors or trustees Section 103. Amendment of articles of incorporation. - Any amendment to the art
icles of incorporation which seeks to delete or remove any provision re quired by this Title to be contained in the articles of incorporation or to redu ce a quorum or voting requirement stated in said articles of incorporation shall not be valid or effective unless approved by the affirmative vote of at least t wo-thirds (2/3) of the outstanding capital stock, whether with or without v oting rights, or of such greater proportion of shares as may be specificall y provided in the articles of incorporation for amending, deleting or removing a ny of the aforesaid provisions, at a meeting duly called for the purpose. RESTRICTIONS ON TRANSFER OF SHARES Section 98. Validity of restrictions on transfer of shares. - Restrictions on th e right to transfer shares must appear in the articles of incorporation and in t he by-laws as well as in the certificate of stock; otherwise, the same shall not be binding on any purchaser thereof in good faith. Said restrictions shall not be more onerous than granting the existing stockholders or the corporation the o ption to purchase the shares of the transferring stockholder with such reasonabl e terms, conditions or period stated therein. If upon the expiration of said per iod, the existing stockholders or the corporation fails to exercise the option t o purchase, the transferring stockholder may sell his shares to any third person . Section 99. Effects of issuance or transfer of stock in breach of qualifying con ditions. -
1. If stock of a close corporation is issued or transferred to any person who is not entitled under any provision of the articles of incorporation to be a holde r of record of its stock, and if the certificate for such stock conspicuously sh ows the qualifications of the persons entitled to be holders of record thereof, such person is conclusively presumed to have notice of the fact of his ineligibi lity to be a stockholder. 2. If the articles of incorporation of a close corporation states the number of persons, not exceeding twenty (20), who are entitled to be holders of record of its stock, and if the certificate for such stock conspicuously states such numbe r, and if the issuance or transfer of stock to any person would cause the stock to be held by more than such number of persons, the person to whom such stock is issued or transferred is conclusively presumed to have notice of this fact. 3. If a stock certificate of any close corporation conspicuously shows a restric tion on transfer of stock of the corporation, the transferee of the stock is con clusively presumed to have notice of the fact that he has acquired stock in viol ation of the restriction, if such acquisition violates the restriction. 4. Whenever any person to whom stock of a close corporation has been issued or t ransferred has, or is conclusively presumed under this section to have, notice e ither (a) that he is a person not eligible to be a holder of stock of the corpor ation, or (b) that transfer of stock to him would cause the stock of the corpora tion to be held by more than the number of persons permitted by its articles of incorporation to hold stock of the corporation, or (c) that the transfer of stoc k is in violation of a restriction on transfer of stock, the corporation may, at
its option, refuse to register the transfer of stock in the name of the transfe ree. 5. The provisions of subsection (4) shall not be applicable if the transfer of s tock, though contrary to subsections (1), (2) or (3), has been consented to by a ll the stockholders of the close corporation, or if the close corporation has am ended its articles of incorporation in accordance with this Title. 6. The term "transfer", as used in this section, is not limited to a transfer fo r value. 7. The provisions of this section shall not impair any right which the transfere e may have to rescind the transfer or to recover under any applicable warranty, express or implied. AGREEMENTS BY STOCKHOLDERS Section 100. Agreements by stockholders. 1. Agreements by and among stockholders executed before the formation and organi zation of a close corporation, signed by all stockholders, shall survive the inc orporation of such corporation and shall continue to be valid and binding betwee n and among such stockholders, if such be their intent, to the extent that such agreements are not inconsistent with the articles of incorporation, irrespective of where the provisions of such agreements are contained, except those require d by this Title to be embodied in said articles of incorporation. 2. An agreement between two or more stockholders, if in writing and signed by th e parties thereto, may provide that in exercising any voting rights, the shares held by them shall be voted as therein provided, or as they may agree, or as det ermined in accordance with a procedure agreed upon by them. 3. No provision in any written agreement signed by the stockholders, relating to any phase of the corporate affairs, shall be invalidated as between the parti es on the ground that its effect is to make them partners among themse lves. 4. A written agreement among some or all of the stockholders in a close corporat ion shall not be invalidated on the ground that it so relates to the conduct of the business and affairs of the corporation as to restrict or interfere with the discretion or powers of the board of directors: Provided, That such agreement s hall impose on the stockholders who are parties thereto the liabilities for mana gerial acts imposed by this Code on directors. 5. To the extent that the stockholders are actively engaged in the management o r operation of the business and affairs of a close
corporation, the stockholders shall be held to strict fiduciary duties to each o ther and among themselves. Said stockholders shall be personally liable for corp orate torts unless the corporation has obtained reasonably adequate liability in surance.
NO NECESSITY OF BOARD Section 101. When board meeting is unnecessary or improperly held. - Unless the by-laws provide otherwise, any action by the directors of a close corporation wi thout a meeting shall nevertheless be deemed valid if: 1. Before or after such action is taken, written consent thereto is signed by al l the directors; or 2. All the stockholders have actual or implied knowledge of the action and make no prompt objection thereto in writing; or 3. The directors are accustomed to take informal action with the express or impl ied acquiescence of all the stockholders; or 4. All the directors have express or implied knowledge of the action in question and none of them makes prompt objection thereto in writing. If a directors therein within ho failed to h the secretary meeting is held without proper call or notice, an action taken the corporate powers is deemed ratified by a director w attend, unless he promptly files his written objection wit of the corporation after having knowledge thereof.
Sergio Naguiat v. NLRC 259 SCRA 564 DEADLOCKS Section 104. Deadlocks. - Notwithstanding any contrary provision in the articles of incorporation or by-laws or agreement of stockholders of a close corporatio n, if the directors or stockholders are so divided respecting the management of the corporations business and affairs that the vot es required for any corporate action cannot be obtained, with the consequence t hat the business and affairs of the corporation can no longer be conduc ted to the advantage of the stockholders generally, the Securities and Exchange Commission, upon written petition by any stockholder, shall have the power to ar bitrate the dispute. In the exercise of such power, the Commission shall have au thority to make such order as it deems appropriate, including an order: (1) canc elling or altering any provision contained in the articles of incorporation, bylaws, or any stockholders agreement; (2) cancelling, altering or enjoining any resolution or act of the corporation or its board of directors, stockholders, or officers; (3) directing or prohibiting any act of the corporation or its board of directors, stockholders, officers, or other persons party to the action; (4) requiring the purchase at their fair value of shares of any stockholder, either by the corporation regardless of the availability of unrestricted retained earni ngs in its books, or by the other stockholders; (5) appointing a provisional dir ector; (6) dissolving the corporation; or (7) granting such other relief as the circumstances may warrant. A provisional director shall be an impartial person who is neither a stockholder nor a creditor of the corporation or of any subsidiary or affiliate of the c orporation, and whose further qualifications, if any, may be determined by the C ommission. A provisional director is not a receiver of the corporation and does not have the title and powers of a custodian or receiver. A provisional director shall have all the rights and powers of a duly elected director of the corporat ion, including the right to notice of and to vote at meetings of directors, u ntil such time as he shall be removed by order of the Commission or by all the stockholders. His compensation shall be determined by agreement between him and the corporation subject to approval of the Commission, which may fix his co
mpensation in the absence of agreement or in the sagreement between the provisional director and the corporation. WITHDRAWAL AND DISSOLUTION
event
of di
Section 105. Withdrawal of stockholder or dissolution of corporation. - In addit ion and without prejudice to other rights and remedies available to a stockholde r under this Title, any stockholder of a close corporation may, for any reason, compel the said corporation to purchase his shares
at their fair value, which shall not be less than their par or issued value, whe n the corporation has sufficient assets in its books to cover its debts and liab ilities exclusive of capital stock: Provided, That any stockholder of a close co rporation may, by written petition to the Securities and Exchange Commission, c ompel the dissolution of such corporation whenever any of acts of the directors, officers or those in control of the corporation is illegal, or fraudulent, or dishonest, or oppressive or unfairly prejudicial to the corporation or a ny stockholder, or whenever corporate assets are being misapplied or wasted. PIERCING THE VEIL OF CORPORATE FICTION When a close corporation is being used to promote fraud, injustice, illegality, or wrong, such circumstnaces would always warrant a piercing of the veil of the corporate fiction In alter0ego cases, with the formal recognition of a close corporation there c an be no application of the above doctrine to a close corporation as defined under Section 96 thereof, when such a close corpora tion is merely intended as an alter ego or conduit of the stockholders For the de facto corporations, on the other hand, they would be susceptible to the application of the doctrine for being mere conduits or alter-egos of the stockholders NON-STOCK CORPORATIONS, FOUNDATIONS AND COOPERATIVES NON-STOCK CORPORATIONS One where no part of its income is distributable as dividends to its member s, trustees or officers and that any profit it may obtain as an incident t o its operation shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized It may be formed for organized for chartiable, religious, educational, profe ssional, cultural, recreational, fraternal, literary, scientific, social, civil service, or similar purposes, like trade, industry, agriculture and like chambers or any combination thereof The articles of incorporation may not include a purpose which would change o r contradict its nature as such The abovementioned is quite interesting as they clearly recogn ize that a non-stock or non-profit corporation may actually realize profits from its operations so long as its profits are devoted for its eleemosy nary purpose Distribution of Net Assets and Profits Upon Dissolution In the event of dissolution, after the payment of all liabilities and after
the payment of all liabilities and return of assets received subject to limitations permitting their use, the remaining assets may be distributed to the members, or any classes of member s, as provided for in the articles of incorporation and by-laws; in the absence of distribution rules, the remaining a ssets may be distributed to such persons, societies, organizations or associatio ns, whether or not organized for profit, as may be specified in a plan for distr ibution as adopted by the board of trustees and ratified by the members Applicability of Stock Corporation Provisions Provisions applicable to stock corporations shall be applicable when pertine nt to non-stock corporations THEORY ON NON-STOCK CORPORATIONS While all net earnings and residual value of the business of a stock corpora tion can be distributed to its stockholders, there is an expressed legal prohibition from making such distributions in a non-stock cor poration Rationale for the use of non-profit form for eleemosynary endeavors lies in the chief function of the non-distribution constraint, namely, that it helps to overcome contractual failure in situations where such failure is quite likely to occur Contractual failureinability of the buyer of services to assure himself that he is getting what he intends to be contracting for; in general terms, it denotes high monitoring and enforcement costs Whenever general goals cannot be reduced or agreed upon to operationally def ine set of particular objectives and results, it is obviously difficult or impossible to monitor and assess performance of those who undertake to provide services aimed
at achieving the general goals. Accordingly, consumers may have a preference f or non-profit service organizations. Section 14. Contents of the articles of incorporation. - All corporations organi zed under this code shall file with the Securities and Exchange Commission artic les of incorporation in any of the official languages duly signed and acknowledg ed by all of the incorporators, containing substantially the following matters, except as otherwise prescribed by this Code or by special law: 2. The specific purpose or purposes for which the corporation is being incorpora ted. Where a corporation has more than one stated purpose, the articles of incor poration shall state which is the primary purpose and which is/are the secondary purpose or purposes: Provided, That a non- stock corporation may not include a purpose which would change or contradict its nature as such; Section 43. Power to declare dividends. - The board of directors of a stock corp oration may declare dividends out of the unrestricted retained earnings which sh all be payable in cash, in property, or in stock to all stockholders on the basi s of outstanding stock held by them: Provided, That any cash dividends due on de linquent stock shall first be applied to the unpaid balance on the subscription
plus costs and expenses, while stock dividends shall be withheld from the delinq uent stockholder until his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders representing not less than two-thirds (2/3) of the outstanding capi tal stock at a regular or special meeting duly called for the purpose. (16a) Stock corporations are prohibited from retaining surplus profits in excess of on e hundred (100%) percent of their paid-in capital stock, except: (1) when justif ied by definite corporate expansion projects or programs approved by the board o f directors; or (2) when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet bee n secured; or (3) when it can be clearly shown that such retention is nec essary under special circumstances obtaining in the corporation, such as when there is need for speci al reserve for probable contingencies. (n) Section 87. Definition. - For the purposes of this Code, a non-stock corporation is one where no part of its income is distributable as dividends to its members, trustees, or officers, subject to the provisions of this Code on di ssolution: Provided, That any profit which a non-stock corporation may obtain as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organiz ed, subject to the provisions of this Title. The provisions governing stock corporation, when pertinent, shall be appl icable to non-stock corporations, except as may be covered by specific provision s of this Title. (n) Section 88. Purposes. - Non-stock corporations may be formed or organiz ed for charitable, religious, educational, professional, cultural, fraternal, li terary, scientific, social, civic service, or similar purposes, like trade, indu stry, agricultural and like chambers, or any combination thereof, subject to the special provisions of this Title governing particular classes of non-stock corp orations. (n) Section 94. Rules of distribution. - In case dissolution of a non-stock corporat ion in accordance with the provisions of this Code, its assets shall be applied and distributed as follows: 1. All liabilities and obligations of the corporation shall be paid, satisfied a nd discharged, or adequate provision shall be made therefore; 2. Assets held by the corporation upon a condition requiring return, trans fer or conveyance, and which condition occurs by reason of the dissolut ion, shall be returned, transferred or conveyed in accordance with such requirem ents; 3. Assets received and held by the corporation subject to limitations permitti ng their use only for charitable, religious, benevolent, education al or similar purposes, but not held upon a condition requiring
return, transfer or conveyance by reason of the dissolution, shall be tr ansferred or conveyed to one or more corporations, societies or organizations en gaged in activities in the Philippines substantially similar to those of the dis solving corporation according to a plan of distribution adopted pursuant to this Chapter; 4. Assets other than those mentioned in the preceding paragraphs, if any, shall be distributed in accordance with the provisions of the articles of incorporatio n or the by-laws, to the extent that the articles of incorporation or the by-law s, determine the distributive rights of members, or any class or classes of memb ers, or provide for distribution; and 5. In any other case, assets may be distributed to such persons, societies, orga nizations or corporations, whether or not organized for profit, as may be specif ied in a plan of distribution adopted pursuant to this Chapter. (n) Collector of Internal Revenue v. Club Filipino 5 SCRA 321 Collector of Internal Revenue v. University of Visayas 1 SCRA 669 NON-APPLICABILITY OF NATIONALIZATION LAWS A foreigner maybe a member or an officer of a non-stock corporatio n Save for the position of Secretary, who must be a Filipino citizen and a r esident of the Philippines, the prohibition on foreign citizens becoming officers of a corporation which dont fail within the coverage of a nationalized industry or area of business reserved by law exclusively to Filipino citizens CONVERSION OF NON-STOCK CORPORATION TO STOCK CORPORATION The SEC has ruled that while it was possible to convert a stock corporation into a non-stock corporation by mere amendment of the articles of incorporation, the converse is not true This is based on Section 87 as mentioned above The SEC has held that for purposes of transformation, it is fundamental that the non-stock corporation must be dissolved first under any of the methods allowed by law and thereafter, the members may organize a stock corporation dire cted to bring profits and pecuniary gains to themselves The amendment of the articles of incorporation to convert the non-stock corp oration doesnt seek to dissolve the corporation but to change its nature to a stock corporation, the crediting of the member's equ ity to stockholder's equity would constitute a distribution of the profits and div idends of the corporation to its members which is prohibited by the Corporation Code Also, the change of the purpose clause would violate Section 14 (2) of the C orporation Code, which in enumerating the contents of the articles of incorporation, clearly prohibits a non-stock corporation in including the purpose clause of its articles of incorporation any purpose which would change or contradict its nature as such WHAT IS A FOUNDATION? The code doesnt have specific provisions nor does it even refer to foundati ons as separate types of corporations different from non-
stock corporations A foundation is a non-stock corporation governed by the same rules governing the latter What distinguishes it are privileges granted by special laws, essentially i n the field of taxation SEC. 30. Exemptions from Tax on Corporations. - The following organizations shal l not be taxed under this Title in respect to income received by them as such: (E) Nonstock corporation or association organized and operated exclusively for r eligious, charitable, scientific, athletic, or cultural purposes, or for the reh abilitation of veterans, no part of its net income or asset shall belong to or i nures to the benefit of any member, organizer, officer or any specific person;
(F) Business league chamber of commerce, or board of trade, not organi zed for profit and no part of the net income of which inures to the benefit of a ny private stock-holder, or individual; (G) Civic league or organization not organized for profit but operated exclusive ly for the promotion of social welfare; (H) A nonstock and nonprofit educational institution; Under existing revenue regulations, in order to have tax exemption, it is nece ssary that they file an affidavit with the Commissioner of Internal Revenue showing the character of their organizations, the purpose for which they are organized, their actual activities, the source of their income and the dispositi on thereof, and whether or not any of the income is credited to surplus or inure s or may inure to the benefit of any private stockholder or individual When it comes to charitable contributions, a foundation is limited i n the manner by which it distributes the same by the 30% limitation on its administrative expenses, whereas no limitation applies to regular non-stock corporations In addition, both the donors to, the management of, foundations are saddled with reportorial requirements on donations given and received, as the case may be Because donations to foundations are fully deductible in ascertaining taxabl e income, this might become a bigger motivation to donate to foundations rather than non-stock corporations DISSOLUTION Section 94. Rules of distribution. - In case dissolution of a non-stock corporat ion in accordance with the provisions of this Code, its assets shall be applied and distributed as follows: 1. All liabilities and obligations of the corporation shall be paid, satisfied a nd discharged, or adequate provision shall be made therefore; 2. Assets held by the corporation upon a condition requiring return, trans fer or conveyance, and which condition occurs by reason of the dissolut ion, shall be returned, transferred or conveyed in accordance with such requirem
ents; 3. Assets received and held by the corporation subject to limitations permitt ing their use only for charitable, religious, benevolent, educatio nal or similar purposes, but not held upon a condition requiring return, transf er or conveyance by reason of the dissolution, shall be transferred or co nveyed to one or more corporations, societies or organizations engaged in activi ties in the Philippines substantially similar to those of the dissolving corpora tion according to a plan of distribution adopted pursuant to this Chapter; 4. Assets other than those mentioned in the preceding paragraphs, if any, shall be distributed in accordance with the provisions of the articles of incorporatio n or the by-laws, to the extent that the articles of incorporation or the by-law s, determine the distributive rights of members, or any class or classes of memb ers, or provide for distribution; and 5. In any other case, assets may be distributed to such persons, societies, orga nizations or corporations, whether or not organized for profit, as may be specif ied in a plan of distribution adopted pursuant to this Chapter. (n) Section 95. Plan of distribution of assets. - A plan providing for the distribu tion of assets, not inconsistent with the provisions of this Title, may be adopt ed by a non-stock corporation in the process of dissolution in the following man ner: The board of trustees shall, by majority vote, adopt a resolution recommending a plan of distribution and directing the submission thereof to a vote at a regular or special meeting of members having voting rights. Written notice set ting forth the proposed plan of distribution or a summary thereof and the date, time and place of such meeting shall be given to each member entitled to vote, w ithin the time and in the manner provided in this Code for the giving of notice of meetings to members. Such plan of distribution shall be adopted upon
approval of at least two-thirds (2/3) of the members having voting rights presen t or represented by proxy at such meeting. (n) FOREIGN CORPORATIONS DEFINITION Section 123. Definition and rights of foreign corporations. - For the purposes o f this Code, a foreign corporation is one formed, organized or existing under an y laws other than those of the Philippines and whose laws allow Filipino citizen s and corporations to do business in its own country or state. It shall have the right to transact business in the Philippines after it shall have obta ined a license to transact business in this country in accordance with this Code and a certificate of authority from the appropriate government agency. (n) Although wrongfully placed, the inclusion of the element of reciprocity in t he definition emphasizes the Philippine policy that unless our own nationals are granted business access in a foreign state, then the corporate entities of such foreign state would likewise not be granted legal business access in the Philip pines
STATUTORY CONCEPT OF DOING BUSINESS As defined in the Foreign Investments Act Soliciting orders, service contracts, opening offices, whether called l iaison offices or branches Appointing representatives or distributors domiciled in the Philippines or who may in any calendar year stay in the country for a period or periods totaling 180 days or more Participating in the management, supervision, or control of any domestic bus iness, firm, entity or corporation in the Philippines Any other act or acts that imply a continuity of commercial dealings or ar rangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial ga in or the purpose or object of the business organization It doesnt include Mere investment as a stockholder by a foreign entity in a domestic corporation duly registered to do business, and/or exercise of rights as such investor Having a nominee director or officer to represent its interest in such corpo ration Appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account Publication of a general advertisement through any print or broadcast media Maintaining a stock of goods in the Philippines for the purpose of having the same processed by another entity in the Philippines Consignment by a foreign entity of equipment with a local company t o be used in the processing of products for export Collecting information in the Philippines Performing services auxiliary to an existing isolated contract of sale which are not on a continuity basis, such as installing in the Philippines machinery it has manufactured or exported to the Philippines, servicing the same, training domestic workers to operate it, and similar incidental services Application for License Section 125. Application for a license. - A foreign corporation applying for a l icense to transact business in the Philippines shall submit to the Securities and Exchange Commission a copy of its articles of incorporation and by-laws, certified in accordance with law, and their translation to an offic ial language of the Philippines, if necessary. The application shall be under oa th and, unless already stated in its articles of incorporation, shall specifical ly set forth the following: 1. The date and term of incorporation; 2. The address, including the street number, of the principal office of the corp oration in the country or state of incorporation;
3. The name and address of its resident agent authorized to accept summons and p rocess in all legal proceedings and, pending the establishment of a local office
, all notices affecting the corporation; 4. The place in the Philippines where the corporation intends to operate; 5. The specific purpose or purposes which the corporation intends to pursue in t he transaction of its business in the Philippines: Provided, That said purpose o r purposes are those specifically stated in the certificate of authority issued by the appropriate government agency; 6. The names and addresses of the present directors and officers of the corporat ion; 7. A statement of its authorized capital stock and the aggregate number of shar es which the corporation has authority to issue, itemized by classes, p ar value of shares, shares without par value, and series, if any; 8. A statement of its outstanding capital stock and the aggregate number of shar es which the corporation has issued, itemized by classes, par value of shares, s hares without par value, and series, if any; 9. A statement of the amount actually paid in; and 10. Such additional information as may be necessary or appropriate in order to e nable the Securities and Exchange Commission to determine whether such corporati on is entitled to a license to transact business in the Philippines, and to dete rmine and assess the fees payable. Attached to the application for license shall be a duly executed certificate und er oath by the authorized official or officials of the jurisdiction of its incor poration, attesting to the fact that the laws of the country or state of the app licant allow Filipino citizens and corporations to do business therein, and th at the applicant is an existing corporation in good standing. If such ce rtificate is in a foreign language, a translation thereof in English under oath of the translator shall be attached thereto. The application for a license to transact business in the Philippines shall like wise be accompanied by a statement under oath of the president or any other person authorized by the corporation, showing to the satisfaction of t he Securities and Exchange Commission and other governmental agency in the prope r cases that the applicant is solvent and in sound financial condition, and sett ing forth the assets and liabilities of the corporation as of the date not excee ding one (1) year immediately prior to the filing of the application. Foreign banking, financial and insurance corporations shall, in addition to the above requirements, comply with the provisions of existing laws applicable to th em. In the case of all other foreign corporations, no application for license to transact business in the Philippines shall be accepted by the Securities and Ex change Commission without previous authority from the appropriate government age ncy, whenever required by law. (68a) Rationale for Requiring License To Do Business To subject the foreign corporations to the jurisdiction of the cour ts Issuance of License Section 126. Issuance of a license. - If the Securities and Exchange Commission is satisfied that the applicant has complied with all the requirements of this C ode and other special laws, rules and regulations, the Commission shall issue a license to the applicant to transact business in the Philippines for the purpose
or purposes specified in such license. gn corporation may commence to transact to do so for as long as it retains its the laws of the country or state of its oner surrendered, revoked, suspended or other special laws.
Upon issuance of the license, such forei business in the Philippines and continue authority to act as a corporation under incorporation, unless such license is so annulled in accordance with this Code or
Within sixty (60) days after the issuance of the license to transact business in the Philippines, the license, except foreign banking or insurance corporation, shall deposit with the Securities and Exchange Commission for the benefit of pre sent and future creditors of the licensee in the Philippines, securities satisfa ctory to the Securities and Exchange Commission, consisting of bonds or other ev idence of indebtedness of the
Government of the Philippines, its political subdivisions and instrumentalities, or of government-owned or controlled corporations and entities, shares of stock in "registered enterprises" as this term is defined in Republic Act No. 5186, s hares of stock in domestic corporations registered in the stock exchange, or sha res of stock in domestic insurance companies and banks, or any combination of th ese kinds of securities, with an actual market value of at least one hu ndred thousand (P100,000.) pesos; Provided, however, That within six (6) months after each fiscal year of the licensee, the Securities and Exchange Commission shall require the licensee to deposit additional securities equivalent in actual market value to two (2%) percent of the amount by which the licensees gross in come for that fiscal year exceeds five million (P5,000,000.00) pesos. The Securi ties and Exchange Commission shall also require deposit of additional securities if the actual market value of the securities on deposit has decreased by at lea st ten (10%) percent of their actual market value at the time they were deposite d. The Securities and Exchange Commission may at its discretion release part of the additional securities deposited with it if the gross income of the licensee has decreased, or if the actual market value of the total securities on deposit has increased, by more than ten (10%) percent of the actual market value of th e securities at the time they were deposited. The Securities and Exchange Com mission may, from time to time, allow the licensee to substitute other securitie s for those already on deposit as long as the licensee is solvent. Such licensee shall be entitled to collect the interest or dividends on the securities deposi ted. In the event the licensee ceases to do business in the Philippines, the sec urities deposited as aforesaid shall be returned, upon the licensees applicatio n therefor and upon proof to the satisfaction of the Securities and Exchange Commission that the licensee has no liability to Philippine resid ents, including the Government of the Republic of the Philippines. (n) Amendment of License Section 131. Amended license. - A foreign corporation authorized to transact bus iness in the Philippines shall obtain an amended license in the event it changes its corporate name, or desires to pursue in the Philippines other or additional purposes, by submitting an application therefor to the Securities and Exchange Commission, favorably endorsed by the appropriate government agency in the prope r cases. (n) JURISPRUDENTIAL CONCEPT OF DOING BUSINESS
Doing business implies continuity of commercial dealings and arrangements a nd the performance of acts or works or the exercise of some of the functions normally incident to the purpose or object of its organization Single transactionwhere a single act or transaction, however, isn't merely in cidental or casual but indicates the foreign corporation's intention to do other business in the Philippines, said single act or transaction constitutes doing business Territoriality ruleto be doing or transaction business in the Philippines for purposes of Section 133 of the Corporation Code, the foreign cor poration must actually transact business in the Philippines, that is, perform specific business transactions within the Philippine territory on a continui ng basis in its own name and for its own account Acts of solicitationssolicitation of business contracts constitutes doing b usiness in the Philippines On insurance businessa foreign corporation with a settling agent in the Philippines which issues 12 marine policies covering different shipmen ts to the Philippines is doing business in the Philippines Summary of Doing Business 1. If a foreign corporation does business in the Philippines without a licens e, it cannot sue before the Philippine courts 2. If a foreign corporation isn't doing business in the Philippines, it needs n o license to sue before Philippine courts on an isolated transaction or on a cause of action entirely independent of any business transac tion 3. If a foreign corporation does business in the Philippines without a licens e, a Philippine citizen or entity who has contracted with said corporation may b e estopped from challenging the foreign corporation's corporate personality in a s uit brought before the Philippine courts 4. If a foreign corporation does business in the Philippines with the require d license it can sue before Philippine courts on any transaction
JURISPRUDENTIAL TEST: Isolated Transactions Not every activity undertaken in the Philippines amounts to doing business a s to require the foreign corporation to obtain such license Single acts or transactions of foreign corporations are not regarded as doing or carrying on a business in the Philippines Take note! The fact that a foreign corporation isn't doing business in the Philippines must be alleged if a foreign corporation desires to sue in Philippine courts under the isolated transactions rule Twin Characterization Test Whether the foreign corporation is continuing a body or substance of the business or enterprise for which it is organized or whether it has substantially retired from it and turned it over to another. The term implies a continuity of commercial dealings or arrangements, and cont
emplates, to that extent the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of, the purpose and object of its or ganization Contract Test As may be implied in jurisprudence, the implication of this doctrin e is that if the salient points of a contract dont find themselves in the Philippines, Philippine authorities have no business subjec ting the parties to local registration and licensing requirements This test has also been applied as part of the jurisprudential ruling subjec ting the foreign corporation no doing business in the Philippines to the jurisdiction of local courts on isolated contracts that have been entered into or performed within Philippine territorial jurisdiction DIFFERENT RULES ON TRADEMARKS AND TRADENMAES The right to use of the corporate name and trade name of a foreign corporati on is a property right which it may assert and protect in any of the courts of t he world even in countries where it doesnt personally transact any business There has been an evolution of rulings with regard to the matter given the c hange in laws applicable With the passing of the Intellectual Property Code, any foreign national or juridical person who meet the requirements of Section 3 of the Act and doesnt engage in business in the Philippines may bring a civil or administrative action hereunder for opposition, cancellation, infrin gement, unfair competition, or false designation of origin and false description , whether or not it is licensed to do business in the Philippines under existing laws EFFECT OF FAILURE OF A FOREIGN CORPORATION TO OBTAIN A LICENSE WHEN IT CONDUCTS BUISNESS IN THE PHILIPPINES 1. To be denied access in Philippine courts and administrative bodies to obtain relief on the contracts and transactions it has entered into 2. And yet to be amenable to suits on those contracts and transactions it has e ntered into 3. But that the subsequent obtaining of a license prior to the filing of a su it would cure the defect and allow the foreign corporation to sue in local court s and administrative bodies on said contracts and transactions Section 133. Doing business without a license. - No foreign corporation transact ing business in the Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene in any action, suit or pro ceeding in any court or administrative agency of the Philippines; but such co rporation may be sued or proceeded against before Philippine courts or adm inistrative tribunals on any valid cause of action recognized under Philippine l aws. (69a) In Pari Delicto Doctrine The local party to a contract with a foreign corporation that does business in the Philippines without license cannot maintain suit against the foreign corporation just as the foreign corporation cannot maintain suit, under the principle of pari delicto Estoppel Doctrine
A foreign corporation doing business in the Philippines may sue in Philippin e courts although it is without license to do business here against a citizen wh o had contracted with and had been benefited by said corporation and knew it to be without the necessary license to do business under the principle of estoppel Proper Doctrine (Erik's Ltd. v. CA) Given the facts of this case, we cannot see how petitioners busin ess dealings will fit the category of "isolated transactions" considering that i ts intention to continue and pursue the corpus of its business in the country ha d been clearly established. It has not presented any convincing argument with eq ually convincing evidence for us to rule otherwise. Accordingly and ineluctably, petitioner must be held to be incapacitated to maintain the action a quo against private respondent. It was never the intent of the legislature to bar court access to a foreign corporation or entity which happens to obtain an isolated order for business in the Philippines. Neither, did it intend to shield debtors from their legitimate liabilities or obligations. 15 But it cannot allow foreign corporations or entities which conduct regul ar business any access to courts without the fulfillment by such corporations of the necessary requisites to be subjected to our governments regulation an d authority. By securing a license, the foreign entity would be giving assurance that it will ab ide by the decisions of our courts, even if adverse to it. The requirement of a license is not meant to put foreign corporations at a dis advantage. Rather, the doctrine of lack of capacity to sue is based on considerations of sound public policy. While we agree with petitioner that the county needs to develop trade relations and foster friendly commercial relations with other states, we also need t o enforce our laws that regulate the conduct of foreigners who desire to d o business here. Such strangers must follow our laws and must subject themselves to reasonable regulat ion by our government. SUITS AGAINST FOREIGN CORPORATIONS When it is shown that a foreign corporation is doing business in the Philipp ines, summons may be served on o Its resident agent designated in accordance with law o If there is no resident agent, the government official designated by law to that effect o Any of its officers or agents within the Philippines Although doing business is the nexus by which local courts are granted the right to obtain jurisdiction over the person of foreign corporation, consent may also authorize local courts and administrative agencies to exercise jurisdiction over foreign corporations even when they are not doing business in the Philippines Objection to Jurisdiction Appearance of a foreign corporation to a suit precisely to question the tribunal's jurisdiction over its person is not equivalent to service of summons nor does it constitute an acquiescence to the court's jurisdiction Facilities Management Corp. v. De La Osa 89 SCRA 131
FMC may be considered as "doing business in the Philippines" within the scope of Section 14 (Service upon private foreign corporations), Rule 14 of the Rules of Court which provides that "If the defendant is a foreign corporation, or a nonresident joint stock company or association, doing business in the Philippines, service may be made on its resident agent designated in accordance with law for that purpose or, if there be no such agent, on the government official designate d by law to that effect, or on any of its officers or agents within the Philippi nes." Indeed, FMC, in compliance with Act 2486 as implemented by Department of L abor Order IV dated 20 May 1968 had to appoint Jaime V. Catuira, 1322 A. Mabini, Ermita, Manila "as agent for FMC with authority to execute Em ployment Contracts and receive, in behalf of that corporation, legal services fr om and be bound by processes of the Philippine Courts of Justice, for as long a s he remains an employee of FMC." It is a fact that when the summons for FMC was served on Catuira he was still in the employ of the FMC. Hence, if a foreign co rporation, not engaged in business in the Philippines, is not barred from seekin g redress from
courts in the Philippines (such as in earlier cases of Aetna Casualty & Surety Company, vs. Pacific Star Line, etc. [GR L-26809], In Mentholat um vs. Mangaliman, and Eastboard Navigation vs. Juan Ysmael & Co.), a fortiori, that same corporation cannot claim exemption from being sued in Philippine court s for acts done against a person or persons in the Philippines. Avon Insurance PLC v. CA 278 SCRA 312 In the alternative, private respondent submits that foreign corporations not doi ng business in the Philippines are not exempt from suits leveled against them in courts, citing the case of Facilities Management Corporation vs. Leonardo Del a Osa, et. al. 20 where we ruled "that indeed, if a foreign corporation, not engaged in business in the Philippines, is not barred from seeking redress from Courts in the Philippines, a fortiori, that same corporation cannot claim e xemption from being sued in Philippine Courts for acts done against a person or persons in the Philippines." We are not persuaded by the position taken by the private respondent. In Facilit ies Management case, the principal issue presented was whether the petitioner ha d been doing business in the Philippines, so that service of summons upon its ag ent as under Section 14, Rule 14 of the Rules of Court can be made in order that the Court of First Instance could assume jurisdiction over it. The Court r uled that the petitioner was doing business in the Philippines, and that by serving summons upon its resident agent, the trial court had effectively acquir ed jurisdiction. In that case, the court made no prescription as the absolute su ability of foreign corporations not doing business in the country, but merely di scounts the absolute exemption of such foreign corporations from liabilities par ticularly arising from acts done against a person or persons in the Philippines. RESIDENT AGENT Concept of Residence The domicile of a corporation in the strict technical sense belongs to the state wherein it was incorporated and is single in its essence and a corporation can only have one domicile which is the state of i ts creation The residence of a corporation on the other hand is where it exercises its c
orporate functions or the place where its business is done A foreign corporation licensed to do business in a state is a resident of an y country where it maintains an office or agent for transactions of its usual and customary business for venue purposes That a corporation may be domiciled in one state and be a residen t in another Its legal domicile is the state of its creation which presents no impediment to its residence in a real and practical sense in the state of business activities Section 127. Who may be a resident agent. - A resident agent may be either an in dividual residing in the Philippines or a domestic corporation lawfully transact ing business in the Philippines: Provided, That in the case of an individual, he must be of good moral character and of sound financial standing. (n) Section 128. Resident agent; service of process. - The Securities and Exc hange Commission shall require as a condition precedent to the issuance of the l icense to transact business in the Philippines by any foreign corporation that s uch corporation file with the Securities and Exchange Commission a written p ower of attorney designating some person who must be a resident of the Philip pines, on whom any summons and other legal processes may be served in all action s or other legal proceedings against such corporation, and consenting that servi ce upon such resident agent shall be admitted and held as valid as if served upo n the duly authorized officers of the foreign corporation at its home office. An y such foreign corporation shall likewise execute and file with the Securities a nd Exchange Commission an agreement or stipulation, executed by the proper autho rities of said corporation, in form and substance as follows: "The (name of foreign corporation) does hereby stipulate and agree, in considera tion of its being granted by the Securities and Exchange Commission a license to transact business in the Philippines, that if at
any time said corporation shall cease to transact business in the Philippines, o r shall be without any resident agent in the Philippines on whom any summons or other legal processes may be served, then in any action or proceeding arising ou t of any business or transaction which occurred in the Philippines, service of any summons or other legal process may be made upon the Securities and Exchange Commission and that such service shall have the same force and effect a s if made upon the duly-authorized officers of the corporation at its home offic e." Whenever such service of summons or other process shall be made upon the Securit ies and Exchange Commission, the Commission shall, within ten (10) days thereaft er, transmit by mail a copy of such summons or other legal process to the corpor ation at its home or principal office. The sending of such copy by the Commissio n shall be necessary part of and shall complete such service. All expenses incur red by the Commission for such service shall be paid in advance by the party at whose instance the service is made. In case of a change of address of the resident agent, it shall be his or its dut
y to immediately notify in writing the Securities and Exchange Commission of the new address. (72a; and n) to inspect the books and records, but was denied. He invoked the Philippine laws. The Court has held that intramural matters such as the qualificati on to inspect corporate records are governed by the laws where the corporation w as incorporated. AMENDMENT OF ARTICLES OF INCORPORATION OR BY- LAWS Section 130. Amendments to articles of incorporation or by-laws of fore ign corporations. - Whenever the articles of incorporation or by-laws of a f oreign corporation authorized to transact business in the Philippi nes are amended, such foreign corporation shall, within sixty (60) days after th e amendment becomes effective, file with the Securities and Exchange Commission, and in the proper cases with the appropriate government agency, a duly authenti cated copy of the articles of incorporation or by-laws, as amended, indicating c learly in capital letters or by underscoring the change or changes made, duly ce rtified by the authorized official or officials of the country or state of incor poration. The filing thereof shall not of itself enlarge or alter the purpose or purposes for which such corporation is authorized to transact business in the Philippines. (n) LAWS APPLICABLE TO FOREIGN CORPORATIONS Section 129. Law applicable. - Any foreign corporation lawfully doing business i n the Philippines shall be bound by all laws, rules and regulations applicable t o domestic corporations of the same class, except such only as provide for the c reation, formation, organization or dissolution of corporations or those which f ix the relations, liabilities, responsibilities, or duties of stockholders, memb ers, or officers of corporations to each other or to the corporation. (73a) An illustration of this is the case of Grey v. Insular Lumber Co., wherein a foreign corporation was doing business here in the Philippines. According to the Stock Corporation Code then of New York, only stockholders owning at least 3 % of the shares may inspect the books and records of the corporation. Grey was a stockholder who owned less than 3% of the shares. He wanted MERGERS AND CONSOLIDATIONS Section 132. Merger or consolidation involving a foreign corporation licensed in the Philippines. - One or more foreign corporations authorized to transact busi ness in the Philippines may merge or consolidate with any domestic corporation o r corporations if such is permitted under Philippine laws and by the law of its incorporation: Provided, That the requirements on merger or consolidation as pro vided in this Code are followed. Whenever a foreign corporation authorized to transact business in the Philippine s shall be a party to a merger or consolidation in its home country or state as permitted by the law of its incorporation, such foreign corporation shall, w ithin sixty (60) days after such merger or consolidation becomes e ffective, file with the Securities and Exchange Commission, and in proper ca ses with the appropriate government
agency, a copy of the articles of merger or consolidation duly authenticated by the proper official or officials of the country or state under the laws of which merger or consolidation was effected: Provided, however, That if the absorb ed corporation is the foreign corporation doing business in the Philippines , the latter shall at the same time file a petition for withdrawal of its licens e in accordance with this Title. (n) REVOCATION OF LICENSE TO DO BUSINESS Section 133. Doing business without a license. - No foreign corporation transact ing business in the Philippines without a license, or its successors o r assigns, shall be permitted to maintain or intervene in any action, suit or pr oceeding in any court or administrative agency of the Philippines; but such c orporation may be sued or proceeded against before Philippine courts or ad ministrative tribunals on any valid cause of action recognized under Philippine laws. (69a) Section 134. Revocation of license. - Without prejudice to other grounds provide d by special laws, the license of a foreign corporation to transact business in the Philippines may be revoked or suspended by the Securities and Exch ange Commission upon any of the following grounds: 1. Failure to file its annual report or pay any fees as required by this Code; 2. Failure to appoint and maintain a resident agent in the Philippines as requir ed by this Title; 3. Failure, after change of its resident agent or of his address, to submit to t he Securities and Exchange Commission a statement of such change as required by this Title; 4. Failure to submit to the Securities and Exchange Commission an authentic ated copy of any amendment to its articles of incorporation or by-laws or of any articles of merger or consolidation within the time prescribed by this Title; 5. A misrepresentation of any material matter in any application, report, affida vit or other document submitted by such corporation pursuant to this Title; 6. Failure to pay any and all taxes, imposts, assessments or penalties, if any, lawfully due to the Philippine Government or any of its agencies or political su bdivisions; 7. Transacting business in the Philippines outside of the purpose or purp oses for which such corporation is authorized under its license; 8. Transacting business in the Philippines as agent of or acting for and in beha lf of any foreign corporation or entity not duly licensed to do busin ess in the Philippines; or 9. Any other ground as would render it unfit to transact business in the Philippines. (n) Section 135. Issuance of certificate of revocation. - Upon the revocation of any such license to transact business in the Philippines, the Securities and Exchan ge Commission shall issue a corresponding certificate of revocation, furnishing a copy thereof to the appropriate government agency in the proper cases. The Securities and Exchange Commission shall also mail to the corporation at its registered office in the Philippines a notice of such revocation accompanied by
a copy of the certificate of revocation. (n) WITHDRAWAL OF LICENSE Section 136. Withdrawal of foreign corporations. - Subject to existing laws and regulations, a foreign corporation licensed to transact business in the Philippi nes may be allowed to withdraw from the Philippines by filing a petition for wit hdrawal of license. No certificate of withdrawal shall be issued by the Securiti es and Exchange Commission unless all the following requirements are met; 1. All claims which have accrued in the Philippines have been paid, compromised or settled;
2. All taxes, imposts, assessments, and penalties, if any, lawfully due to the P hilippine Government or any of its agencies or political subdivisions have been paid; and 3. The petition for withdrawal of license has been published once a week for thr ee (3) consecutive weeks in a newspaper of general circulation in the Philippine s. MISCELLANEOUS PROVISIONS Section 137. Outstanding capital stock defined. - The term "outstanding capital stock", as used in this Code, means the total shares of stock issued under bindi ng subscription agreements to subscribers or stockholders, whether or not fully or partially paid, except treasury shares. (n) Section 138. Designation of governing boards. - The provisions of specific provi sions of this Code to the contrary notwithstanding, non-stock or special corpora tions may, through their articles of incorporation or their by-laws, designate t heir governing boards by any name other than as board of trustees. (n) Section 139. Incorporation and other fees. - The Securities and Exchange Commiss ion is hereby authorized to collect and receive fees as authorized by law or by rules and regulations promulgated by the Commission. (n) Section 140. Stock ownership in certain corporations. - Pursuant to the duties specified by Article XIV of the Constitution, the National Economic and Development Authority shall, from time to time, make a determination of whether the corporate vehicle has been used by any corporation or by business or industr y to frustrate the provisions thereof or of applicable laws, and shall submit to the Batasang Pambansa, whenever deemed necessary, a report of its findings, inc luding recommendations for their prevention or correction. Maximum limits may be set by the Batasang Pambansa for stockho ldings in corporations declared by it to be vested with a public interest purs uant to the provisions of this section, belonging to individuals or groups of individuals related to each other by consanguinity or affinity or by close business interests, or whenever it is nece
ssary to achieve national objectives, prevent illegal monopolies or combinations in restraint or trade, or to implement national economic policies declared in l aws, rules and regulations designed to promote the general welfare and foster ec onomic development. In recommending to the Batasang Pambansa corporations, businesses or industries to be declared vested with a public interest and in formulating proposals for li mitations on stock ownership, the National Economic and Development Authority shall consider the type and nature of the industry, the size of the enterprise, the economies of scale, the geographic location, the extent of Filipino ownership, the labor intensity of the activity, the export potential, a s well as other factors which are germane to the realization and promotion of bu siness and industry. Section 141. Annual report or corporations. - Every corporation, domestic or for eign, lawfully doing business in the Philippines shall submit to the Securities and Exchange Commission an annual report of its operations, together with a fina ncial statement of its assets and liabilities, certified by any independent cert ified public accountant in appropriate cases, covering the preceding fiscal year and such other requirements as the Securities and Exchange Commission may requi re. Such report shall be submitted within such period as may be prescribed by th e Securities and Exchange Commission. (n) Section 142. Confidential nature of examination results. - All interrogatories p ropounded by the Securities and Exchange Commission and the answers thereto, as well as the results of any examination made by the Commission or by any other of ficial authorized by law to make an examination of the operations, books and rec ords of any corporation, shall be kept strictly confidential, except insofar as the law may require the same to be made public or where such interrogatories, an swers or results are necessary to be presented as evidence before any court. (n) Section 143. Rule-making power of the Securities and Exchange Commission. - The Securities and Exchange Commission shall have the power and authority to impleme nt the provisions of this Code, and to promulgate rules and regulations reasonab ly necessary to enable it to
perform its duties hereunder, particularly in the prevention of fraud and abuses on the part of the controlling stockholders, members, directors, trustees or of ficers. (n) Section 144. Violations of the Code. - Violations of any of the provisions of th is Code or its amendments not otherwise specifically penalized therein shall be punished by a fine of not less than one thousand (P1,000.00) pesos but not more than ten thousand (P10,000.00) pesos or by imprisonment for not less than thirty (30) days but not more than five (5) years, or both, in the discretion of the c ourt. If the violation is committed by a corporation, the same may, after notice and hearing, be dissolved in appropriate proceedings before the Securities and Exchange Commission: Provided, That such dissolution shall not preclude the inst itution of appropriate action against the director, trustee or office r of the corporation responsible for said violation: Provided, further, That nothing in this section shall be construed to repeal the other causes for dissolution of a corporation provided in this Code. (190 1/2 a)
Section 145. Amendment or repeal. - No right or remedy in favor of or against an y corporation, its stockholders, members, directors, trustees, or officers, nor any liability incurred by any such corporation, stockholders, members, directors , trustees, or officers, shall be removed or impaired either by the subsequent d issolution of said corporation or by any subsequent amendment or repeal of this Code or of any part thereof. (n) Section 146. Repealing clause. - Except as expressly provided by this Code, all laws or parts thereof inconsistent with any provision of this Code shall be deem ed repealed. (n) Section 147. Separability of provisions. - Should any provision of this Code or any part thereof be declared invalid or unconstitutional, the other provisions, so far as they are separable, shall remain in force. (n) Section 148. Applicability to existing corporations. - All corporations lawfully existing and doing business in the Philippines on the date of the effectivity o f this Code and heretofore authorized, licensed or registered by the Securities and Exchange Commission, shall be deemed to have been authorized, licensed or re gistered under the provisions of this Code, subject to the terms and conditions of its license, and shall be governed by the provisions hereof: Provided, That if any such corporation is af fected by the new requirements of this Code, said corporation shall, unless othe rwise herein provided, be given a period of not more than two (2) years from the effectivity of this Code within which to comply with the same. (n) Section 149. Effectivity. - This Code shall take effect immediately upon its app roval.

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CORPORATE LAW NOTES PAGE - 1 -

ermine the nationality of the ultimate

NOTARY PUBLIC (Notarial Acknowledgment) My commission expires on , 19 Doc. No. ;

Page No. TREASURERS AFFIDAVIT Book No. ;

Generally, purely members of the Board of Directors exercise this

Generally, purely members of the Board of Directors exercise this

the stockholders' assent are needed

Any ber at in ted

at least a majority ckholders meeting. as such directors, of the corporation

board entered into a contract this, his effects were sold

Duties and Functions

Specific Duties and Responsibilities of a Director

conflict of interest of a material nature should consider resigning.

MA. ANGELA AGUINALDO ATENEO LAW 2010

CORPORATE LAW NOTES PAGE - 71 -

MA. ANGELA AGUINALDO

ATENEO LAW 2010 CORPORATE LAW NOTES PAGE - 77 -

The unpaid subscription is a debt to the corporation

MA. ANGELA AGUINALDO

ATENEO LAW 2010 CORPORATE LAW NOTES PAGE - 92 -

MA. ANGELA AGUINALDO ATENEO LAW 2010

CORPORATE LAW NOTES PAGE - 95 -

MA. ANGELA AGUINALDO ATENEO LAW 2010

CORPORATE LAW NOTES PAGE - 98 -

be obtaine the corpor and existi at which

MA. ANGELA AGUINALDO ATENEO LAW 2010

CORPORATE LAW NOTES PAGE - 130 -

MA. ANGELA AGUINALDO ATENEO LAW 2010

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