Escolar Documentos
Profissional Documentos
Cultura Documentos
A. CORPORATION
1. Definition
The SC said the one who represented UPC, is the real party in
interest, the judgment may be enforced against him even if he
was not impleaded as a formal party defendant.
What is 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, attributes and properties expressly authorized by
law or incident to its existence.
Class: LOL
**************
Right now there is no one man corporation, its just a proposal.
To repeat, in a Single Proprietorship, the assets of the
proprietor may be held to answer for the obligation of the
business, as if it is the personal obligation of the proprietor
because here, there is no separate legal personality.
Juan Dela Cruz doing business under the trade name and
style of Mabango Flower Shop vs. Defendant. Juan dela
Cruz and Mabango Flower Shop are one and the same. In
contrast with the action involving Juan Dela Cruz himself
it must be captioned as Juan Dela Cruz vs. Defendant
Publishing
Corporation Code
Yes.
what is not
public policy
enter into a
as it is not
public policy
The term specified in the AOI but not to exceed fifty (50)
year and can be extended
************
DISCUSSION
Section 2 defines the corporation and at the same time gives all
its attributes.
The corporation can invoke the right against illegal search and
seizure (Stonehill v. Diokno), but it cannot invoke the right
against self-incrimination (PASECO vs. PCGG)
FILIPINAS BROADCASTINGNETWORK
MEDICAL AND EDUCATIONAL CENTER
v.
AGO
Yes.
The corporation has separate legal personality from the
persons composing the corporation, therefore the properties of
the corporation are neither the properties of the SH vice versa.
The obligations of the corporation are not enforceable against
the SH vice versa.
The cause of action of the corporation can be enforced by the
SH vice versa.
No.
So only in the transaction where the three elements were
present. The fact that you pierced the corporate fiction with
respect to one transaction does not mean that you have to
pierce the doctrine of corporate fiction in other cases or
transaction if these elements are not present.
BAR: You said that the State allows disregarding, for certain
justifiable reasons, the fiction of the legal personality. When
you mean State means court right? When the court pierces
the veil of corporate fiction over a corporation if it
does not acquire jurisdiction? This was asked in 2014.
Yes.
What makes Pacific Rehouse different from the Gold
Line case?
So we have cases with different rulings. In the first, the
court cannot pierce the corporate veil because the
corporation was not brought to the jurisdiction of the
court while the second case, Court said that you can pierce
the veil of corporate fiction as long as the RTC has
reasonable opportunity to assess the evidence and evaluate
the same, there is a basis to hold these two corporations as
one and the same entity.
So although at the outset, it was not brought to the courts
jurisdiction.
We discussed the circumstances which, by themselves, are
sufficient to disregard the separate legal personality of a
corporation.
No. This is because the suit was filed against PNB parent
company of PNB International. The fact that PNB is the
parent company of PNB International does not make them
one and the same entity. The loan was granted by PNB
International Finance Ltd. And not by PNB therefore the
action must be filed against the subsidiary PNB
International and not the parent company.
Now you know that the State can pierce the corporate veil.
Which agency, instrumentality, or ___ can pierce the
corporate fiction?
Courts all of them
v.
HEIRS
OF
MARIA
The SC took judicial notice that the two bus companies are
owned by one and the same family and they have common
officers. Moreover, it is common knowledge in the Albay region
that they are one and the same entity.
LIVESY v. BINSWANGER
The issue whether the writ of execution was valid against XYZ
Corporation even if it was not impleaded as a party to the case.
7
AC RANSOM v. NLRC
A group of laborers filed a complaint against AC Ransom for
the payment of monetary benefits. During the pendency of the
case, the stockholders of AC set up a run-away corporation
called Rosario Corporation. It is engaged in the same line of
business and the assets of AC was transferred to Rosario
corporation.
In this case, it was proven that there was bad faith and the
directors and the corporation was regarded as one and the
same. Hence, the arbitration agreement should continue
against them even if they are not parties to the arbitration
agreement.
EXCEPTION:
Control test
If you pierce the corporate veil, it does not mean that the
corporation is extinguished. It does not also mean that in
all transactions of the corporation, the veil should be
pierced. It just means that the veil can be pierced if all the
elements of the control test are present.
Fraud test
The control was used to commit fraud or evade a duty in
violation of the plaintiffs right
Harm test
The control and breach of duty are the proximate cause of
the harm or injury suffered by a third party.
BAR: What are the effects if the veil of corporate
fiction is pierced?
The corporation and the stockholders are treated as one
and the same
LANUZA v. BF CORPORATION
BF corporation was the contractor of Shangri-La corporation to
construct a building in Ortigas. BF was not paid so it filed an
action for collection ag. Included in the suit are the officers and
directors because the complaint alleges that there was bad faith
on the part of the said offices and directors. Shangri La moved
to suspend the case because the construction agreement
between them contains an arbitration clause which means that
resort to court should be preceded by arbitration.
Lanuza and the other directors are not parties to the
construction agreement. It is only between the 2 corps
B. CLASSES OF CORPORATIONS
purposes
of
on the declaration of
Section 87 defines
corporations
silent
Now, if Sec. 87 enumerates the purposes of the nonstock corporation, what is not allowed for a nonstock corporation? What are the purposes not
allowed? It says charitable, religious, civic, cultural,
literary, social, educational, and so on, so what are
the ones not allowed?
non-stock
Its not for profit okay (okay dean sure). Its a non-stock,
non-profit corporation.
Is Boy Scouts
Corporation?
of
the
Philippines
Public
It exists in fact, but not in law. In the sense that the state
reserves the right to question its existence owing to an
infirmity in its incorporation.
Element:
Bona
Fide
Attempt
to
No De Facto Corporation.
If the AOI is signed, and filed with the SEC, but not approved
by them, and no Certificate of Incorporation issued? It is NOT
a De Facto Corporation.
10
11
In the last meeting we said that, if five persons sign the articles
of incorporation and gave the subscriptions to the treasurer in
trust and then included the filing fee and they were duped into
believing that the SEC issued a Certificate of Incorporation,
and a Falsified Certificate was issued to them, and in good faith
they conducted their operations even though they were not
registered, we said thats not a de jure corporation, not even a
de facto corporation, because there was no attempt to
incorporate. It is a corporation by Estoppel, and those who
assume themselves to be a corporation are liable as general
partners.
There was an attempt to bring it under the rules on intracorporate controversies on the argument that there was a
corporation by Estoppel among them. So the proposed
consolidated corporation, at the least, is a Corporation by
Estoppel and they argued that there is an intra-corporate
relationship between the partners.
BAR: Orayt, this was asked in the bar. Juan dela Cruz was
invited by four persons to invest in a financing company.
13
Foreign Corporation?
closed
corporation
in
the
ARTICLES
OF
INCORPORATION. In the case of San Juan Steel vs CA,
there were 5 incorporators/subscribers and the Husband
and Wife owned 98.7% of the corporation. Does that make
it a closed corporation? NO. Because it MUST have the
characteristics of a Closed Corporation to be considered as
such.
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C. NATIONALITY OF CORPORATIONS
1. Place of Incorporation Test
2. Control Test
3. Grandfather Rule
General Rule is that we dont apply control test, we only
follow control test in times of war and in case of investment in
economic activities reserved in whole or in part to Filipinos.
We follow instead Sec. 123 of the code which is the place of
incorporation.
Retail
GAMBOA v. TEVES
ABC Corporation is Family Corporation, its
authorized capital stock consists of common shares
60% owned by Filipinos, 40% from the foreigners.
And then suddenly the corporation decided to issue
preferred shares. And all the preferred shares are to
be given to Foreigners the non-voting preferred
shares. Is this issuance of the non- voting preferred
shares given to foreigners allowed?
Rice and
Corn
Small Scale
mining
Security
Agency
Watchman
and Detective
agencies
Recruitment
Agency
Advertising
Large Scale
Mining
Banks
In the First case the Supreme Court said that the term
Capital is limited to only Voting shares, so if the preferred
shares are voting they are included in the term Capital
stock, if they are not voting they are not included.
In the Motion for Reconsideration, the Supreme
Court clarified it further. What happens now when a
corporation issues a mixture of shares whether
voting or non-voting?
The Supreme Court said the 60-40 Filipino ownership
participation must be mirrored in all classification
shares. So across the board whether common,
preferred, voting or non-voting, the 60-40 Filipino
Foreign ownership limit must be mirrored in all
classification shares. So both economic rights and
voting rights must reside in the Filipinos by 60%.
Why?
The Rationale given by the Supreme Court under the
Constitution is that the state must adopt a self-reliant
economy effectively controlled by Filipinos. And the
term control applies to both voting rights and
economic rights.
17
Now, if we follow the term capital in the first case, then these
corporations comply with the Constitution. Because non-voting
preferred shares are not included in the term capital and the
Filipinos own 60% the Voting shares.
Thats why in the Motion for Recon, the Supreme Court said
that it is not the intention of the framers of the Constitution.
So now, if the corporation will issue a mixture of shares,
common and preferred, voting or non-voting. The 60-40
allocation must be mirrored in all classification of shares. So to
breathe more life to the provision of the Constitution that
Filipinos must control the Corporation. Both economic rights
and voting rights must reside in Filipinos.
(now, I had the chance to talk to marvic leonen about this case,
we came from a conference in manila sponsored by Philippine
Asssosiation of Law Schools. We talked about Gamboa vs Teves
case, and I said, Justice, what about those corporations where
the losses, 60% of the outstanding capital stock, do we apply
the same definition? That it should be limited only to voting
18
XYZ
(90%)
Filipinos
(50%)
Filipinos
(60%)
Foreigners
(50%)
(60%)
(10%)
XYZ
Foreigners
This is how the Grandfather Rule was played in the first case of
Nara vs Redmont.
Foreigners
(40%)
XYZ
Foreigners
(60%)
(40%)
Filipinos
(60%)
Foreign Corp
(40%)
Foreigners
(40%)
But XYZ is
60% owned by Filipinos,
19
control means the ability to elect the directors that will run
the affairs of the corporation.
Gamboa v. Teves (2012; Motion for Reconsideration)
There is no more qualification needed for shares to be
considered capital The 60-40 must be mirrored across the
board in ALL classification of shares. (ex: Voting shares must
be 60-40, non-voting shares must be 60-40, preferred shares:
60-40,)
And before the Motion for recon, we always thought that only
the control test applies, and the grandfather will apply if it is
less than 60% owned by Filipinos in the investment Corp.
ORYT, the SC in the motion for recon said and clarified that
these 2 test do not contradict each other, they can be
cumulatively applied.
Conclusion:
You apply control test if on its face, the 60-40 allocation is
complied with. BUT, if there is doubt on whether or not the
Filipinos really own 60% of these corporations, then you can
resort to the Grandfather Rule.
REVIEW:
Gamboa v. Teves (2011):
The 60-40 capital requirement of public utilities where
interpreted. The term capital is limited to voting shares. If
shares are allowed to vote, they form part of capital. However,
if the shares are not allowed to vote, they are not considered
capital.
RATIO: It makes reference to a constitutional provision
wherein the State should adopt a self-reliant economy
effectively controlled by Filipinos. In the corporate setting,
20
1.
Natural persons
INCORPORATORS
from
STOCKHOLDERS/
SUBSCRIBERS
Incorporators
are
mentioned in the Articles of
Incorporation as those
originally forming part of
the corporation
EXPN: 1.)
Sole and
Incorporators
Corporation
EXPN: Incorporators of
Cooperatives/Rural Banks
may be a natural/juridical
person
Is Citizenship a requirement?
Not a requirement as long as majority of them are Philippine
residents except if it is engaged in nationalized activities. If it
is nationalized, obviously you cannot have foreigners as
incorporators of mass media, rice and corn etc. etc.
Majority
of
Incorporators must
Filipino Residents
21
the
be
No citizenship requirement
EXPN: Corporations engaged
in a Nationalized Activity
2.
3.
Verification Slip
-
6.
Treasurers Affidavit
-
5.
4.
May a corporation
profession?
Payment of fees
8.
9.
Issuance by
Incorporation
-
the
SEC
of
the
Certificate
of
1.
2.
3.
of
2.
practice
1. Promoter
Account and
1.
in
7.
engage
1.
As part of incorporation
2.
2.
5.
When I was with the bank, Equitable PCI Bank. The president
was on his way from Cabanatuan to Manila. He saw Equitable
Disco Club. You cannot preclude the use of a trademark or
tradename for goods not related to the certificate of
registration unless it will affect its goodwill.
6.
7.
8.
9.
special
1.
2.
3. Corporate Name
REFRACTORIES CORPORATION vs. CA
4. Corporate Term
1.
23
Yes.
Upon incorporation
2.
24
25
6. Articles of Incorporation
a. Nature and Functions of Articles
Also the term capital stock has a precise meaning under the
Corporation Code. As held in the case of MISCI-NACUSIP
Local Chapter v. National Wages and Productivity
Commission, the term capital stock is the portion of the
authorized capital stock subscribed and ACTUALLY PAID UP.
So for example, if a wage order says that employer whose paid
up capital is impaired by 25%, not obligated to pay minimum
wage, so when it says paid up capital stock, you dont include
the properties received by the corporation. You dont include
b. Contents
The contents. On the first part, theres your purpose or
purposes. As you all know there is only one primary purpose
and there can be many secondary purposes. You cannot have
more than one primary, its an inconsistency. You can only
have one primary but you can have various secondary
purposes. As long as these purposes are capable of being
lawfully combined. So there can be as many as possible, as
many as you want. As long as they are capable of being lawfully
combined. And what is your test to determine if they are
capable of being lawfully combined? If there is no law that
prohibits the combination of these purposes in the AOI. Now,
can it be a bank and insurance company at the same time? You
cannot because under the law, a bank cannot engage in
insurance business or vice versa. So you cannot have your
primary purpose as a bank and your secondary purpose an
insurance. What banks do is to put up a subsidiary, a
corporation engaged in insurance.
Why?
It is because foundations have been used for fraudulent
purposes. It has become the instrument or vehicle for money
laundering.
Dean: But then I realized that 1 million is small pa din
compared to the amount being funded to various NGOs or
foundations. I mean Napoles is just one of them, there are
many and there is someone even bigger than Napoles. Napoles
is peanuts compared to this guy. There are many Napoles. But
of course, as a lawyer, my lips are sealed. I will not discuss the
details but there are many. Napoles is not even a little player.
So that is the extent of corruption and the organized villains of
our country. Anyway, so we pray for them. That is what we do
as Thomasians, we pray for them to come to the right path.
c. Amendment
So the example I gave earlier was UCPB. In UCPB, they have
not called a single stockholders meeting for the last 13 years,
until 6 months ago. Because every time they call a stockholders
meeting, there will be picket among the coconut farmers
demanding the release of their cocolevy funds. The rallies and
pickets would be covered by the media and would convey the
impression that there is something wrong in the bank. So the
management decided that there will be no more stockholders
meeting unless absolutely necessary. 6 months ago, when the
term of the corporation was about to expire, I was asked a
question: Can we extend the term of UCPB by the mere written
assent of PCGG who has voting right of more than 2/3 of the
outstanding capital stock?
But just the same I was tasked to talk to the SEC chair if I could
convince the SEC chair to relax the rules given the peculiar
situation of the UCPB. I was able to convince the SEC chair to
dispense with the stockholders meeting. I said that the survival
of the bank is at stake every time we call a stockholders
meeting but then she retired. Before we could implement the
extension of the Corporate Term by mere Referendum, she
retired. She was replaced by Teresita Herbosa. Tesa Herbosa is
much stricter so I didnt bother talking to her because I do not
want to exhaust my good will on an account that does not give
me money anyway. UCPB is for free. So I might as well exhaust
my good will for clients that pay me, right?
Let us do are survey. What are the corporate acts under the
Corporation Code that have to be approved in a meeting
called for that purpose? Some not really part of amendment
but just the same needs to be in a meeting called for that
purpose
1.
2.
3.
4.
5.
6.
7.
29
For example, if the amendment is to deny preemptive right, it can be routed among the
stockholders and as the beliefs(?) are being
routed to the stockholders, a stockholder may
dissent on the proposed amendment. Of course,
your safe bet is to call a stockholders meeting.
But there is this foreign jurisprudence that it
need not be in a stockholders meeting. The
dissent could be articulated in some other way.
(But that is already going too far, that is going to
deep already)
8.
9.
When you adopt the by-laws obviously you do not need to hold
a stockholders meeting because when you adopt that is prior to
incorporation.
1.
2.
Misrepresentation
Corporation;
3.
4.
5.
as
to
the
purposes
of
the
First, that is what the law says and for practical purposes.
When is it effective?
d. Non-amendable Items
30
You have the case of Travel Tours Express vs CA, with regard to
sports federations, it is not enough that they are registered with
the SEC, not enough that they are approved for incorporation,
in addition to registration, they only acquire legal personality
from the time of accreditation by the appropriate government
agency as such sports federations.
In all cases, by-laws shall be effective only upon the issuance by the
Securities and Exchange Commission of a certification that the by-laws
are not inconsistent with this Code.
The Securities and Exchange Commission shall not accept for filing the
by-laws or any amendment thereto of any bank, banking institution,
building and loan association, trust company, insurance company,
public utility, educational institution or other special corporations
governed by special laws, unless accompanied by a certificate of the
appropriate government agency to the effect that such by-laws or
amendments are in accordance with law.
c. Binding effect
SC said in Citibank vs. Chua, the requirement of submitting bylaws as a condition to acquire legal personality is applicable
only to domestic corporations. As clear in the phrase
"corporations created under this code".
The court said that the provision in the by-laws is not binding
on Chinabank because the latter is a third person. Exception is
when the third person has actual knowledge of the provision.
The SC added that a corporation may refuse to transfer
ownership only when it has unpaid claims and the term unpaid
claims means and is limited to UNPAID SUBSCRIPTION.
Other obligations such as dues and assessments does not
preclude transfer of shares.
d. Allowable provisions
What about the provision in the by-laws that dues
are first lien on the shares?
32
AMENDMENTS
- Valid
3. All officers are not required to be directors of the
corporation.
- Not valid.
So in this case, you need 2/3 for the AOI but you only need a
majority of the outstanding capital stock to amend the by-laws
for the board approval by majority in both cases whether
amendment of AOI or by-laws.
Every director must own at least one (1) share of the capital stock of the
corporation of which he is a director, which share shall stand in his
name on the books 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 members thereof.
A majority of the directors or trustees of all corporations organized
under this Code must be residents of the Philippines.
No, because general counsel does not have the power. It has
to be the board unless authorized by the by-laws or board to
enter into a compromise agreement but the lawyer himself
without authority from the board or the by-laws cannot
approve any compromise agreement.
It is unreasonable.
Directors shall have all the qualifications under Sec. 23 and the
by-laws, and none of the disqualifications under Sec. 27 and
the by-laws.
PROVIDENT
Lets say the first set sided with the minority and the majority
directors filed an affidavit with the SEC that the stock and
transfer book (STB) is lost. So on the strength of the affidavit,
SEC issued a replacement STB but in truth and in fact, it is not
lost. It is in the possession of the corporate secretary.
Once the new STB is obtained by the board, the board passed a
resolution that all entries in the old book are void and all
entries in the new book are valid invoking the business
judgment rule.
Can the SEC decide WON the entries in the new book
be valid?
4. The form for proxies of stockholders and members and the manner
of voting them;
6. The time for holding the annual election of directors of trustees and
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;
QUORUM
PROXY
It should be in writing and signed by the stockholder, filed
before the meeting, but the by-laws may prescribe additional
requirements for the sufficiency of proxy.
By laws may for example require that the proxy be notarized.
So a voting trust agreement is required to be notarized under
Sec. 59. The proxy is not required to be notarized under Sec. 58
and yet the by-laws may require that the proxy be notarized.
COMPENSATION OF DIRECTORS
As a GR, directors as such are not entitled to compensation
because they are not presumed to render services gratuitously.
The presumption is the return of their investment is enough
compensation.
So the Corporation Code does not cover it, but only corporate
officers - the president, secretary, treasurer and other officers
whose offices are defined under the by-laws.
38
1.
2.
3.
4.
5.
QUALIFICATION:
Ownership
of
at
least
1
share
of
stock
registered in his name in the books of the corporation as
of the date fixed in the by-laws.
If there will be item in the articles that you have to amend but
is likewise mirrored in the by-laws, then you have to effect it in
the by-laws likewise.
But in the case of Lee vs. CA - ABC Corp obtained a loan from
XYZ Bank secured by a voting trust agreement on the shares of
A in ABC Corp. A is the controlling stockholder of ABC Corp, so
by signing a voting trust agreement in favor of XYZ Bank , A
conveyed the legal title to his shares in ABC Corp in favor of
XYZ Bank. The loan was not paid; promptly XYZ filed an action
for collection.
CONTINUING QUALIFICATION
BAR QUESTION: Lets say X is a director of ABC Corp. , six
months in his term he sold the shares to Y. So who is qualified
to continue discharging the duties of a Director?
2.
Final Judgment
40
4. Elections
41
2.
3.
4.
5.
6. Filling of Vacancies
Section 29. Vacancies in the office of director or trustee. Any vacancy occurring in the board of directors or trustees other than
by removal by the stockholders 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 special
meeting called for that purpose. A director or trustee so elected to fill a
vacancy shall be elected only or the unexpired term of his predecessor
in office.
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2.
3.
2.
AFRICA CASE:
The resignation of the director, may not be filled up the
stockholders and may be done by the board if the vacancy is
other that expiration, removal and increase in the number in
the board seats.
Vacancies due to EXPIRATION OF TERM, REMOVAL and
INCREASE IN THE NUMBER OF BOARD SEATS, IF BOD
DOES NOT CONSTITUTE A QUORUM
Is there a limitation
compensation?
the
amount
of
the
in
BAR QUESTION:
7. Compensation
Section 30. Compensation of directors. - In the absence of any
provision in the by-laws fixing their compensation, the directors shall
not receive any compensation, as such directors, except for reasonable
per diems: Provided, however, That any such compensation other than
per diems may be granted to directors by the vote of the stockholders
representing at least a majority of the outstanding capital stock at a
regular or special stockholders' meeting. In no case shall the total
yearly compensation of directors, as such directors, exceed ten (10%)
44
A1: No. A2: The SC said that the act constituting the
negligence or bad faith must be alleged; it is not enough
to make averments that they are in bad faith, otherwise it has
no basis.
Q: Can the stockholder be made personally liable?
A: No. It is not included in the enumeration of the directors,
officers and employees. Stockholders are liable only to
the extent of their subscription UNLESS they are
directors, officers or agents of the corporation.
Last Question
Q: What do you understand by the doctrine of corporate
opportunity?
A: When a director, by virtue of his office, acquires for himself
a business opportunity which should belong to the corporation,
thereby obtaining profits to the prejudice of such corporation.
There is a responsibility not just to account but to remit the
profits he realizes.
Last Question.. Dean: I think I lied. Class: LOL
The case of Lanuza vs BF Corporation, penned by J. Leonen
Q: If the complaint alleges bad faith or gross negligence on the
part of the director and officers of the corporation, and they are
found guilty of bad faith and gross negligence in the course of
the trial, is that tantamount to pierce the veil of corporate
fiction?
Section 31. Liability of directors, trustees or officers. Directors or trustees 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 interest in conflict with their duty as
such directors or trustees shall be liable jointly and severally for all
damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons.
DISCUSSION.
This was asked four times (4X) in the bar, what are the cases
were the liabilities will attach to the directors, officers and
employees?
1.
2.
3.
4.
5.
6.
not bind the non-party to the agreement. But in this case the
SC said, because there is an allegation of gross negligence and
bad faith and if this allegation is proven then there is no
distinction between the corporation and the directors and
officers. So the case therefore may continue.
sold these shares for an amount below par. Are those watered
shares?
NO, they are not watered shares because watered shares only
pertain to issuance of shares and not treasury shares. Treasury
shares are assets of the corporation. They are properties of the
corporation having been acquired through surplus profit and as
assets, properties of the corporation they can be disposed of for
any price, terms and conditions as the board may reasonably
determine. So for example if the par value of the share is 10
pesos and then the book value is 40 but it is trading at 20 pesos
per share. So it makes sense for the corporation to buy the
shares for in the market your book value is 40 and yet the
trade-in value is only 20 pesos. In its books each share is worth
40 pesos but it is traded only for 20 pesos so it is cheaper to
buy these shares. These shares acquired by the corporation
through surplus profit become assets of the corporation.
1.
2.
3.
4.
5.
Chairman,
President,
General Manager,
Human Resource Officer and
the Employment Specialist in Labor Case.
There was this bad very bad, bad in the sense that it does not
make sense, Supreme Court decision which makes the officer
liable in the case of closure of business. There was no finding of
gross negligence or bad faith simply a case of closure of the
establishment. That does not make sense right. Just because
the corporation has no more assets does not make the officers
liable. Dean was the Corporate Secretary daw of the Equitable
PCI when this decision was promulgated. The bank almost
closed. Kawawa daw siya kung nagclose yun hahaha.
Why?
SC said that because of their familiarity with the affairs of
the corporation they can certify as to the truthfulness and
accuracy of the allegations in the petition.
UCPB vs Planters
A manager signed a document he called pagares
which means to pay. XYZ wanted to buy property
from ABC. ABC said I would sell to you only if a bank
guarantees that you pay. SO this manager signed
this document called pagares. The bank will pay in
case the buyer does not pay. Buyer failed to pay,
seller goes to the bank. IS the bank liable?
Where any of the first two conditions set forth in the preceding
paragraph is absent, in the case of a contract with a director or
trustee, such contract may be ratified by the vote of the
stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or of at least two-thirds (2/3) of the
members in a meeting called for the purpose: Provided, That
full disclosure of the adverse interest of the directors or
trustees involved is made at such meeting: Provided,
however, That the contract is fair and reasonable
under the circumstances.
There is nothing wrong with this, because why would you give
business to your competitor? That is why the law is clear that
except if there is fraud or the contract is not fair and reasonable
under the circumstances, a contract cannot be invalidated just
because it is between 2 corporations with interlocking
directors.
Now if the contract with interlocking directors is a
management contract under sec. 44, then in addition to 33, you
must also apply sec. 44.
What
are the additional requirements
management contracts under sec. 44?
for
But I said it will take time to amend the AOI. He said so what
do I do that in the meantime so that my daughter will control
the corporation?
I said just enter into a management contract between the
daughter and the corporation. Question, is that subject to the 5
year limitation?
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 interlocking directors shall
not be invalidated on that ground alone: Provided, That if the interest
of the interlocking director in one corporation is substantial and his
interest in the other corporation or corporations is merely nominal, he
shall be subject to the provisions of the preceding section insofar as the
latter corporation or corporations are concerned.
comm.
Approve
compromise
But save for these cases governed by special laws, under its
provisions under government agencies, there is nothing
wrongful in a contract between 2 corporations with
interlocking directors as long as there is no fraud and the
contract is fair and reasonable under the circumstances, and
then to repeat, if it is a management contract under section 44,
in addition to the requirements of under 33, you have to add
likewise the approval of the board of directors of each
corporation (managing and managed) and through the
stockholders owning majority for the managing corporation
and 2/3 for the managed corporation.
Now under sec.44, you dont need majority of the entire board,
majority of the quorum will suffice. This is clear from the
language of sec.44. It says that the board of directors unlike
Now you remember this case of DBP vs CA was also the factual
background of DBP vs Hydro Resources. So DBP vs Hydro
Resources Corporation on separate legal personality, same
facts right? DBP foreclosed the mortgage, and then transferred
the assets to Nonoc Mining Company and Nonoc Mining
Company engaged a consultant to render services to Nonoc
Mining Company, who was not paid and then filed an action to
enforce his consultancy fees.
But for 43 and 44, it only talks about the board of directors,
which means that for 43 and 44, you only need majority of the
quorum.
Thats your guide, if the Corp Code says the board of directors,
quorum suffices. So as distinguished from the majority of the
entire board.
52
Anyway, for the purpose of the bar, execom cannot take the
place of the board for these matters but it can replace the board
of directors for all other matters as long as it is created by the
by-laws.
2.
3.
4.
5.
53
F. CORPORATE POWERS
Board of Directors
Sec. 16 Amendment of AOI
Cash Dividends
Stock Dividends
Adopted
within
1
month
incorporation majority of OCS
Majority of the entire board
after
Majority of quorum
OR Majority of OCS
2/3 of OCS
2/3 of OCS
1. How Exercised
a. By the Shareholders
- Corporate Officers
- Ordinary officers of the Corporation
Secretary YES
Treasurer as to the 2012 SEC Circular, treasurer need not be
a resident of the corporation
President
2.
Secretary
3.
Treasurer
4.
BAR: What is the only position that can be held at the same
time by the same individual?
10. To establish pension, retirement, and other plans for the benefit of
its directors, trustees, officers and employees; and
11. To exercise such other powers as may be essential or necessary to
carry out its purpose or purposes as stated in the articles of
incorporation.
56
1.
2.
3.
INCIDENTAL
VITO CASE
Derivative Suit
A minority SH filed a derivative suit in behalf of ABC
Corporation to assail the acts of mismanagement on
the part of the majority of the board and key
corporate officers. The board convened and then
adopted a resolution instructing its counsel to move
to dismiss the complaint on the ground that it has not
been authorized by the board. Will you grant the
MTD?
EXPRESS
Note: Previous decisions say that a suit filed during its lifetime
can go beyond the 3 year period.
2.
IMPLIED
3.
investor
be
engaged
1.
Filing a suit
2.
in
1.
Chairman
2.
President
3.
General Manager
4.
5.
Employment Specialist
Paragraph 6 contemplates:
1.
2.
Benefit Programs
6.
2.
3.
4.
59
1.
2.
3.
One of the duplicate certificates shall be kept on file in the office of the
corporation and the other shall be filed with the Securities and
Exchange Commission and attached to the original articles of
incorporation. From and after approval by the Securities and Exchange
Commission and the issuance by the Commission of its certificate of
filing, the capital stock shall stand increased or decreased and the
incurring, creating or increasing of any bonded indebtedness
authorized, as the certificate of filing may declare: Provided, That the
Securities and Exchange Commission shall not accept for filing any
certificate of increase of capital stock unless accompanied by the sworn
statement of the treasurer of the corporation lawfully holding office at
the time of the filing of the certificate, showing that at least twenty-five
(25%) percent of such increased capital stock has been subscribed and
that at least twenty-five (25%) percent of the amount subscribed has
been paid either in actual cash to the corporation or that there has been
transferred to the corporation property the valuation of which is equal
to twenty-five (25%) percent of the subscription: Provided, further,
That no decrease of the capital stock shall be approved by the
Commission if its effect shall prejudice the rights of corporate
creditors.
1.
60
Yes. When you increase your capital stock, you are sure to
obtain funds.
3.
Yes. But they are not equity, they are not shares of stock. They
are considered securities under the SRC. They are not yet
equity, they are not yet converted to shares, but the corporation
still receives additional funds.
4.
Loans
No because equity is not a loan. Its only a loan that would earn
interest. Thats why the cheapest way to obtain funds is to issue
shares because there is no obligation to pay any interest. You
only pay interest on a loan but not on equity. For equity, as you
know, dividends. The expectation of the stockholder for
infusing equity to the corporation is dividends, but the right to
receive dividends is
a.
b.
MAJORITY
OF
STOCKHOLDERS
CORPORATION V. MIGUEL LIM (2011)
OF
RUBY
1.
61
2.
3.
4.
3.
1.
Under Section 38, there is one item there that you are
supposed to state the amount of bonded indebtedness in the
certificate of amendment. There is increase of stock in one case
that we handled, we did not indicate the amount of bonded
indebtedness assuming there is none but the SEC looked for it.
So just state that there is no amount of bonded indebtedness to
fully comply with the requirements under Section 38.
There is no DST unless there is a loan. Doc stamps are not tax
on the document but a tax on the transaction.
You dont see that when you increase the capital stock. Why?
Because every time you increase your capital stock, there can
be no impairment of rights of the third parties there. It is for
the interest of the third parties that they will have additional
funds for the corporation.
Now an example in the reduction of the capital stock. Lets say
your authorized capital stock is 1 billion divided into 1 billion
shares, you have a par value of one peso per share. Now the
subscribed capital stock is 600 million divided into 600 million
shares, par value of one peso.
62
Now of course, if you are a listed company and you want you
trade shares in the stock exchange and it is .000001, No one
will take you seriously. Sino bibiling stocks mo kung .000001
ang value. So after we reduce the capital stock and wipeout the
losses, we again amended the articles to increase the par value.
So this is what we did to wipe out the losses, we reduce the
capital stock and then again increase it to make it viable. And
the point is, there is no minimum par value according to the
SEC. As long as there is a value attached to it. The 5 peso
limitation is applicable only to no par value shares.
BONDED INDEBTEDNESS
Is in the form of the bond.
63
There was an old Supreme Court decision, that the preemptive rights is only applicable in case of increase in the
capital stock and not from the issuance of shares from the
original capital stock.
You cannot issue bond to the public unless you have a SEC
approval. Under SRC, remember that you cannot issue
securities to the public unless you secure SECs approval.
Bonds are securities.
2.
3.
Shares
issued
in
compliance
with
laws requiring minimum stock ownership to t
he public
4.
5.
ownership
Issuance
of
shares
in
exchange for
property
given
for
a
corporate
purpose, if approved by the SH owning at least
2/3 of the outstanding capital stock.
2.
3.
66
You just notify them right, so better to give the list to the buyer
so the buyer can inform the creditors at least 10 days before the
sale and what will it take to notify the DTI? Nothing, just a
paper, just a letter.
BAR: Supposing Juan Dela Cruz sought the advice of his lawyer
on how he can save on estate tax upon his death. So he was
advised by his lawyer that he can put up a holding company
and that he can transfer all of his real properties in the holding
company in exchange for shares of stock, and he was advised
further that a transfer of real properties in exchange for shares
is a tax exempt transaction provided he acquires control of the
transferee corporation. So he heeded the advice of his lawyer,
he assigned and transferred all of his properties to a transferee
corporation. It turns out that he has a creditor. Oryt, creditor
filed a case against him, obtained a judgment which became
final and executory and implemented judgment the against
transferor, only to find out that there are no real properties to
be levied on execution because they have been transferred to
the holding company.
67
Appraisal right.
The Bulk Sales Law does not provide for the formula or test but
it is found in the Corporation Code. If after the sale, the
corporation cannot continue with the purpose for which it was
organized, then the sale is considered as a sale of substantially
all of the corporate assets. It is not a question of quantity; it is a
question of effects after the sale.
Purchase
Example: If the economy is not doing well and the shares are
being traded in the amount below book value, it makes sense
for the corporation to acquire those shares because those
shares acquired become assets. Basically they are cheap assets
because they are acquired below their real worth.
3.
70
1.
2.
FOR
A
DECLARE
3.
BUT then, given the language of Sec. 43, there are THREE
exceptions, and these exceptions make the general rule look
like nothing, especially the third exception.
The third one is the all-encompassing, flexible, vague-ofthem-all exception. The special reserve to meet contingencies.
The corporation can always say, We need extra reserves. You
never know what will happen. You can never tell. A new
73
STOCK DIVIDENDS
payable in cash
payable in shares
REGARDLESS OF THE
RECIPIENT, SDs are not
subject to tax.
Revocation
Example:
Yes, because you have not yet issued the shares. But
revoking it is different from acceptability. Legally allowed
but PR wise, its a nightmare. Can you imagine the feelings
of your SH, you whet their appetite diba? You declared SD
tapos, ay di pala.
Only SH.
NIELSON v. LEPANTO
ABC company enters into a management contract with XYZ
mining company and one of the features of the management
contract is the right of ABC to receive 10% stock dividends but
ABC is not a SH of the mining company.
Increase in wealth
Cash dividends increase the wealth of the SHs, while stock
dividends do not. This the academic distinction good for bar
purposes. But in the real world, you can make money in stock
dividends if you can sell the shares above par. What do I mean?
Cash dividends, there is wealth because the stockholder
receives cash but stock dividends, stockholder receives shares
not cash yet they have the same book value because dinamihan
mo lang yung shares mo pero pareho parin yung capital mo.
You can make money if you can sell your shares above par but
its the selling after the stock dividend that results in increase
in wealth not the stock dividend per se.
74
GR: Wait until the end of the fiscal year before you can
determine if you have surplus profit. Thus, its not generally
allowed to declare dividends midway to the year.
Likewise, the trust fund doctrine is limited only to the par value
shares of the corporation. So in excess of the par value is not
covered by the trust fund doctrine. So it can be argued either
way when it comes to cash dividends. But for stock dividends,
no room for argument, it can be declared as stock dividends.
A: Yes.
Q: What is the basis? Your authorized shares or
subscribed shares?
A: Based on the subscribed shares. Based on the example, the
authorized capital is fully subscribed, so if you have 650 M
surplus profits and your subscribed shares is 1 billion par value
is 1php, one-half (1/2) of that is 500 M, so you can declare 50%
stock dividends your surplus profits is more than 500 M, more
than of your subscribed shares.
A: 100.
Can the corporation apply the cash dividends against
the unpaid subscription?
A: No. Under section 43 of the CC, the power of the corporation
to apply the cash dividends applies to delinquent stocks.
75
Example:
Lets say the corporation is allowed to invest its funds in the
primary purpose, no problem right?
Approval requirements:
-
Or secondary purpose.
Now lets say the board of directors approved the investment of
funds for the secondary purpose, but no stockholders approval
was obtained.
Q: Is that act ultra vires on the part of the
corporation?
A: Its not. Because the corporation is authorized to invest
funds for secondary purpose.
But that act is ultra vires because the board acted beyond the
scope of its authority. By itself it cannot approve investment
funds in secondary purpose; it must be approved likewise by
the stockholders owning 2/3 of the outstanding capital stock.
In sec. 33, there is only one director seating in the board of the
two corporations. however under sec.44 majority of the
managed corporation is also the majority of the managing
corporation and the stockholder owns more than 1/3 of the
managing corporation. In which case, the approval requires
majority of the outstanding capital stock of the managing
corporation and 2/3 of the OCS in the managed corporation
Now that kind of act may be ratified because what you only
need to do is to get the approval of the stockholders
representing 2/3 of the outstanding capital stock.
What about ultra vires act on the part of the officer, is it
possible that the act is intra vires because it is the power of the
corporation and yet unenforceable because the officer has no
authority or acted beyond the scope of his authority?
Example:
Lets say a person signed a deed of sale without the consent of
the corporation. Lets say its a purchase of a property in the
ordinary course of business, but the one who signed the deed of
sale was not the one authorized by the board, so the act is intra
vires but still unenforceable against the corporation because
the officer was not authorized to transact business for the
corporation unless the act is ratified with the doctrine of
apparent authority ___.
G. MEETINGS
A: 1 day
There are only 2 kinds of meetings under the code. BOARD and
STOCKHOLDERS. Management meeting is not indicated.
Q: should it be in writing?
Quick review.
Stockholders meetings, there are 2 kinds. Regular and Special.
Q: Regular, how often?
A: once, annual regular stockholders meeting
Q: notice requirement?
A: it is valid, because it can be even outside the country unless
the by-laws provides otherwise.
BAR
Q: Who presides over the meetings?
Q: When?
Q: Where?
Q: Notice requirement?
77
RULE ON ABSTENTION
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 corporation or to its creditors in respect thereto: Provided;
That shares without par value may not be issued for a consideration
less than the value of five (P5.00) pesos per share: Provided, further,
That the entire consideration received by the corporation for its no-par
value shares shall be treated as capital and shall not be available for
distribution as dividends.
2.
3.
PROPRIETARY
economic benefits
RIGHTS
anything
about
a.
b.
MANAGEMENT RIGHTS
a.
b.
REMEDIAL
a.
Appraisal right
b.
Pre-emptive right
c.
Right to inspect
d.
e.
CLASSIFICATIONS OF SHARES
1.
Par value
2.
No par value
3.
Voting
4.
Non-voting
5.
Common
6.
Preferred
7.
Founders (Section 7)
8.
Treasury (Section 8)
9.
Redeemable (Section 9)
80
2. Participation in Management
How does a SH participate in the management of the
corporation?
1.
By voting and
corporation
electing
directors
of
the
2.
a. Proxy
Presence of
SH
or
principal
b. Voting Trust
Revokes
authority of
proxy holder
the
the
In person
2.
Through a proxy
3.
As to form
PROXY
VTA
In writing, signed by
the SH, filed with
the
corporate
secretary before the
meeting.
Not
required
to
be
notarized.
Only the
vote. No
inspect
separately
authorized
purpose.
Rights
conferred
right to
right to
UNLESS
for that
Term
Period
or
81
i. by a majority vote
ii. by a two-thirds vote
iii. by cumulative voting
2. Merger or consolidation
3. Proprietary Rights
a. Right to Dividend
b. Right of Appraisal
OR
Take note the amendment has to be in the AOI and has to have
the effect of changing or restricting the rights of stockholders
or any shares of any class.
Example:
The value of the shares the day before the vote was taken
regardless of any depreciation or appreciation of the value
of the shares as agreed upon by the corporation and the
stockholders and in case of disagreement, by three
appraisers, one chosen by the corporation, the second by
That's why you remember the anecdote I told you about Dean
Dimayuga and I. We were called by the Father Rector about the
problem caused by the minority SH. That there was increased
in capital stock and denying pre-emptive right, then issue new
shares to third party. It was done in good faith.
Appraisal Right.
And the last one, of course, once the corporation pays the fair
value of the shares, the shares are acquired by the corporation
making them treasury shares. So the stock certificates named
before the stockholder will be cancelled and the shares become
the properties and assets of the corporation.
Now the Supreme Court did not answer the question however.
What happens now to the 30 days or the 30-day period to make
the demand for payment. Is it not under the Code, you
suppose that tomake the demand for payment within 30 days
right after the date the vote was taken. So supposing that
the 30 days is about to lapse and you have no surplus
profit? So when do we start counting now the 30-day
period?
If you are the buyer, why would you buy the shares only to
demand the fair value of the shares? Might as well not buy
if that is what you are interested anyway.
So because that was asked in the bar, we have to answer.
And the answer under the Code is that the buyer cannot
exercise appraisal right because the sale of the dissenting
shares cleansed the effects of appraisal right. So all of the
rights pertaining to the shares will be acquired by the
buyer so the effects of appraisal right are removed. He
becomes a regular stockholder of the corporation.
c. Right to Inspect
Right to inspect is more interesting.
84
2.
3.
4.
a.
b.
Generally, right
to
inspection
includes
information about the amount of attorneys fees if
there is no confidentiality clause, you can
demand because you have every reason to know
how much funds is being paid to your lawyer.
86