Escolar Documentos
Profissional Documentos
Cultura Documentos
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Table of Contents
TITLE I – General Provisions .......................................................................................................... 4
Definitions and Classifications................................................................................................... 4
I. Section 2 – Corporation Defined .......................................................................................... 4
II. 4 Attributes of a Private Corporation (ALSP) ....................................................................... 4
III. Natural Person vs. Corporation .......................................................................................... 5
IV. Stages in the Life of a Corporation ..................................................................................... 5
TITLE II – Incorporation and Organization of Private Corporation .............................................. 7
I. Section 14 – Contents of the Articles of Incorporation (AOI)................................................. 7
II. Section 14 and 15 - Contents of the AOI & Forms of AOI.................................................... 7
III. De Jure Corporation ........................................................................................................ 17
IV. Section 20 – De Facto Corporation .................................................................................. 18
V. Section 21 – Corporation by Estoppel (a.k.a. Ostensible Corporation) .............................. 18
VI. Once a certificate of incorporation was issued, the following subsequent conditions must
be complied with: ..................................................................................................................... 18
VII. Theory of Corporate Fiction ............................................................................................ 19
VIII. Piercing the Veil of Corporate Fiction (PFI) .................................................................... 20
IX. Section 16 – Amendment of AOI ...................................................................................... 21
TITLE V – By Laws ........................................................................................................................ 23
I. By-Laws (BL) ..................................................................................................................... 23
II. Section 46 – Kinds of BL Based on Time of Adoption: ...................................................... 23
III. Section 47 - Contents of the BL ....................................................................................... 23
IV. Section 48 – Amendment to BL ....................................................................................... 23
TITLE III – Board of Directors/Trustees/Officers ......................................................................... 25
I. Management of a Corporation............................................................................................ 25
II. Section 23 – The Board of Directors (BOD) of Trustees .................................................... 25
III. Section 24 – Election of Directors or Trustees ................................................................. 25
IV. Section 25 – Corporate Officers, Quorum ........................................................................ 26
V. Section 26 – Report of Election of Directors, Trustees and Officers .................................. 27
VI. Section 30 – Compensation of Directors .......................................................................... 27
VII. Section 27 – Disqualification of Directors, Trustees or Officers & Section 28 – Removal of
Directors or Trustees ............................................................................................................... 28
VIII. Section 29 – Vacancies in the Office of Director or Trustee ........................................... 28
IX. Delegated Powers............................................................................................................ 29
X. Section 33 – Contracts between Corporations with Interlocking Directors ......................... 31
XI. Section 31 – Liability of Directors, Trustees of Officers – What are the duties of the BOD
and officers as fiduciaries? – 3-Fold Duty – ODL ..................................................................... 32
XII. Self-Dealing Director or Officer ....................................................................................... 33
XIII. Section 33 – Contracts between Corporations with Interlocking Directors ...................... 34
XIV. Section 34 – Disloyalty of a Director .............................................................................. 35
XV. Violation of the 3-Fold Fiduciary Duties ........................................................................... 35
XVI. Doctrine of Forbidden Profits ......................................................................................... 36
TITLE IV – Powers of Corporations .............................................................................................. 37
I. Section 36 – Corporate Powers and Capacity – Theory of Special Capacities ................... 37
II. Section 37 – Power to Extend or Shorten Corporate Term – Special Powers ................... 38
III. Section 38 – Power to Increase and Decrease Capital Stock – Special Powers .............. 38
IV. Section 38 – Power to Incur, Create or Increase Bonded Indebtedness........................... 40
V. Section 40 – Sale or Other Disposition of Assets .............................................................. 41
VI. Section 42 – Power to Invest Corporate Funds in Another Corporation or Business or for
any Other Purpose................................................................................................................... 42
VII. Section 41 – Power to Acquire its Own Shares ............................................................... 43
VIII. Section 45 – Ultra Vires Act of Corporations .................................................................. 44
TITLE VII – Stock and Stockholders............................................................................................. 46
I. 3 General Ways for a Person to Own SS ........................................................................... 46
II. Subscription Contract (Sec. 60) ........................................................................................ 46
III. Treasury Shares .............................................................................................................. 48
IV. Section 70 – How may the Corporation Enforce the Delinquent Balance ......................... 49
V. Ownership of Shares in a Corporation Entails 3 Principal Rights in favor of the SH or
Subscriber ............................................................................................................................... 50
VI. Citizenship of a Corporation – Grandfather Rule .............................................................. 53
VII. Right to Transfer SS ....................................................................................................... 56
VIII. Section 73 – Lost or Destroyed Certificate ..................................................................... 57
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TITLE VIII – Corporate Books and Records ................................................................................. 58
I. Purpose for Recording in the Stock and Transfer Book (STB) ............................................ 58
II. What Transfers are Not to be Registered in the Books of the Corporation ........................ 59
III. Other Rights of a SH........................................................................................................ 60
IV. Section 74 – Stock and Transfer Agent ............................................................................ 62
TITLE VI – Meetings....................................................................................................................... 63
I. Exercising the Right to Vote through Representation ......................................................... 63
II. Section 58 – Proxies ......................................................................................................... 63
III. Section 59 – Voting Trust Agreement (VTA) .................................................................... 63
IV. When may the Right to Vote and be voted for be Exercised ............................................ 64
TITLE X – Appraisal Right ............................................................................................................. 66
I. Section 81 – Instances of Appraisal Right .......................................................................... 66
II. Surrender Value................................................................................................................ 66
III. Section 84 – When Right to Payment Ceases ................................................................. 67
TITLE IX – Merger and Consolidation .......................................................................................... 68
I. Merger or Consolidation ..................................................................................................... 68
II. Section 76 – Plan of Merger or Consolidation ................................................................... 68
TITLE XI – Non-Stock Corporations ............................................................................................. 70
I. Stock Corporation vs. Non-Stock Corporation .................................................................... 70
II. Chapter 1 - Members ........................................................................................................ 70
TITLE XIII – Special Corporations ................................................................................................ 72
Chapter I – Educational Corporations ...................................................................................... 72
I. Section 106 – Incorporation ............................................................................................... 72
II. Section 108 – Board of Trustees ....................................................................................... 72
III. Educational corporations are required to obtain a secondary franchise. .......................... 72
Chapter II – Religious Corporations ......................................................................................... 73
I. Classes of Religious Corporations ..................................................................................... 73
II. Section 110 – Corporation Sole ........................................................................................ 73
III. Section 116 – Religious Societies .................................................................................... 73
TITLE XII – Close Corporations .................................................................................................... 74
I. Section 96 – Definition and Applicability of Title ................................................................. 74
II. Section 97 – Articles of Incorporation ................................................................................ 74
III. Section 105 – Withdrawal of Stockholder or Dissolution .................................................. 75
IV. Appraisal Right ................................................................................................................ 75
V. Right of First Refusal......................................................................................................... 75
TITLE XIV – Dissolution ................................................................................................................ 76
I. Section 117 – Methods of Dissolution ................................................................................ 76
II. The dissolved corporation retains a limited civil personality for the following purposes
(powers at liquidation): ............................................................................................................. 77
III. Section 122 – Methods of Corporate Liquidation – Who may Enjoy the Powers During the
Liquidation ............................................................................................................................... 77
TITLE XV – Foreign Corporations ................................................................................................ 80
I. Section 123 – Definition and Rights of Foreign Corporations ............................................. 80
II. Section 125 – Requirements to Allow a Foreign Corporation here in the Philippines – Apply
for a License ............................................................................................................................ 80
III. Power to Sue and be Sued .............................................................................................. 82
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TITLE I – General Provisions
- The 1987 Constitution provides that no law shall be passed creating a private corporation.
- Congress is devoid of any authority to enact a law purposely creating a private corporation.
- Congress can only enact a law to establish a government owned and controlled corporation
either as stock or non-stock corporation.
- Private corporation, in turn, can only be created pursuant to a General Law.
- Thus, the general law which is the source of the formal existence of all private corporations in the
Philippines is the Corporation Code of the Philippines (BP Blg. 68)
- A private corporation may only be created by a general law. To make it a private corporation, the
following are the indications: (1) A portion of its capital stock belongs to the government; and (2)
No degree of control is exercised by the government in the management.
C. Right of Succession
- This right is understood as follows: That a corporation continues to exist regardless of changes
in its composition, since a corporation, once formed and organized, has a separate and distinct
personality from all other persons, the death, resignation or withdrawal of any of its
incorporators, stockholders, or members will not affect its legal existence. It will continue to exist
throughout the term stated in its Articles.
- This is actually the characteristic of a corporation which sets it apart from a partnership which is
dissolve once there is death, resignation, or withdrawal of the partners or any of the partners.
- This right should not be understood under the civil law perspective as the right to inherit.
D. Once formed and organized, the corporation can only exercise the following powers: (EII)
1. Express Powers
- Powers and authority that a corporation can exercise because they are granted explicitly by
the following:
a. 1987 Constitution
b. Statutes
c. Government rules and regulations
d. Articles of Incorporation (AOI); and
e. Corporation’s By-laws (BL)
- Here, there must always be a formal source of authority as to what the corporation can and
cannot do.
2. Implied Powers
- Those powers which are reasonably connected and in direct pursuit of furtherance of the
express powers.
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- This need not be written for as long as they seek to establish or create an act or contract that
is auxiliary to the purpose of the corporation.
3. Incidental power
- This need not be written or express because they are inherent in the corporation from the
moment of its formal establishment (e.g. power to have its own name)
- Under the fourth characteristic, we must abide by the Theory of Special Capacities
- This is the legal norm applicable to juridical entities that can only enjoy or exercise rights or
privileges granted by the law
- For corporations, whatever is not granted is deemed denied. It cannot do whatever it
pleases.
A. Promotion or Creation
- Here, there is yet no corporation legally existing but the idea of a corporation is already present
for some lawful undertaking
- The promoter carries the burden of forming a corporation for which the investment was
made.
- In case of contractual breach, only the promoter can be held liable.
- The corporation, once formed, may be held a party to said contracts thru express adoption or
implied ratification.
- Express Adoption
- Belated act of the corporation in holding itself liable under contracts entered into before it is
incorporated
- This requires positive action of the Board of Directors
- The Board shall resolve to bind the corporation under said contracts; once expressly
adopted, both the corporation and the promoter are considered bound by the same
contracts.
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- Implied Ratification
- Apply the principle of estoppel (if the corporation benefited from the act of the promoter and
another, the corporation may be held liable)
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TITLE II – Incorporation and Organization of Private Corporation
A. Charter
- The term Charter may be used in the following:
1. Public corporation
- Charter is the special law creating such corporation including GOCCs
2. Private corporations
- Charter means:
a. The Corporation law
b. The law special law regulating the business of the corporation; and
c. The AOI and BL
- For private corporations, the AOI is both a source of authority and limits or restrictions as to said
authority and by which its operations are monitored by the government.
- The name of an individual can only be used as a corporate name if that individual owner gives
his or her express consent.
- In case of dispute, follow the Priority Right Rule (Priority in time is priority in right)
- This means that the one who registered first under the said name is preferred over another
corporation seeking to use the same
- This is applicable if the name is exactly the same
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- If engaged in the same line of business and their names are confusingly similar, the one who
registered first is preferred and the subsequent one is compelled to change its corporate
name
- However, if the name is not identical but only similar, there is a need to make a comparison.
- Universal Mills, Inc. v. Universal Textile Mills, Inc., G.R. No. L – 28351, 28 July 1977
- SC: The Universal Textile Mills, Inc. was compelled to change its name. The corporate
names in question are not Identical, but they are indisputably so similar that even under
the test of "reasonable care and observation as the public generally are capable of using
and may be expected to exercise", confusion will usually arise, considering that under the
second amendment of its articles of incorporation on August 14, 1964, appellant included
among its primary purposes the "manufacturing, dyeing, finishing and selling of fabrics of
all kinds" in which respondent had been engaged for more than a decade ahead of
petitioner.
- Factually, the Commission found existence of such confusion, and there is evidence to
support its conclusion. Since respondent is not claiming damages in this proceeding, it is,
of course, immaterial whether or not appellant has acted in good faith, but We cannot
perceive why of all names, it had to choose a name already being used by another firm
engaged in practically the same business for more than a decade enjoying well earned
patronage and goodwill, when there are so many other appropriate names it could
possibly adopt without arousing any suspicion as to its motive and, more importantly, any
degree of confusion in the mind of the public which could mislead even its own
customers, existing or prospective.
- The corporate name can be subsequently amended. The change may be necessitated in the
change of the purposes of the corporation or in its structure such as by way of merger.
- When the name is later amended, the identity of the corporation does not change.
- Republic Bank v. CA
- A promissory note was issued by a corporation as a debtor under its original name. Because
of a merger, its name was subsequently changed. When the obligation matured, it refused to
pay its debt alleging that by reason of the change in its name, it is no longer liable under the
promissory note.
- SC: The SC did not agree to the contention. When the name is later amended, the identity of
the corporation does not change.
- Stock Corporations:
- The purpose may be any specific undertaking or profit or gain
- However, the stated purpose must be specific enough to permit government regulation
- How many corporate purpose/s may be stated in the AOI – there may be one or several,
there is no limit as to the number
- However, if there are multiple corporate purposes for the stock corporation, only one must be
designated as a primary purpose, all others are secondary purposes
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- All of the corporate purposes must be licit – not contrary to law, public order, public policy,
etc.
- When there are several corporate purposes written in the AOI, all of them must be
susceptible of lawful combination
- Under Philippine law, there are certain kinds of purpose that cannot be pursued or
undertaken by one and the same corporation because they are considered incompatible with
one another as they affect public interest
- Unlawful combinations:
1. Banking and insurance (both under the Insurance Code and the General Banking Act;
combined as the former a primary purpose and the latter a secondary purpose or vice-
versa)
2. Combinations of the forms of transportation (under Public Service Act)
3. Life and non-life insurances (under the Insurance Code)
4. Securities broker (one who buys shares of stocks or other securities for the account of
others or customers) and securities dealer (one who buys or sells shares of stocks or
other securities for its own account or for its own name) (under Securities Regulation
Code)
- Why do we need to distinguish between the primary and the secondary purpose?
- Any transaction related to the primary purpose requires Board approval because it is left
to the business judgment of the Board. No need to present it to the stockholders for
approval
- On the other hand, any transaction including expenditure of corporate funds for the
secondary purpose requires not just majority approval of the Board but also 2/3 of the
outstanding capital stock. Stockholder’s concurrence is mandatory
- Non-Stock Corporations:
- They should write in their AOI any non-profit purpose
- Thus, it may be for charity, religious, literary, scientific, or similar non-profit purposes
- How many purposes – one or more may be included in the AOI
- Should there be more than one corporate purposes, all of them must be non-profit and must
not change the character of the corporation as such
- Case: An opinion was sought from the SEC by a religious corporation already organized to
engage in retail service restaurants thru franchises. It sought that its AOI be amended to
include as secondary purpose those profit activities.
- According to SEC, they cannot because it is contradictory to its nature as a non-stock or
non-profit corporation
1. To sue
- Suits initiated by a corporation are subject to the regular rules of Civil Procedure
- A corporation may file a civil action in the appropriate court of its residence or residence
of the defendant
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- But when a corporation is impleaded as a defendant, service of summons can only be
made at its domicile or principal office stated in the AOI, otherwise motion to dismiss will
prosper on the ground of lack of jurisdiction over the person of the defendant
- Davao Light v. CA
- A civil case was filed against Davao Light for breach of contract and the prayer was
for payment of damages. After summons was served at its branch in Davao City, a
motion to dismiss was filed by the defendant citing that there was improper service of
summons because the plaintiff and the sheriff did not follow the principal office stated
in the AOI.
- SC: Upheld the dismissal of the complaint on the ground of lack of jurisdiction
because the AOI are clear that Davao Light has principal office in Cebu. So there was
no proper service of summons amounting to lack of jurisdiction over its person.
3. In general, the principal office is where fundamental decisions of the Board are adopted and
undertaken and where the corporation has its legal representation
- The principal office need not be the place of actual conduct of business, if this were so, you
cannot have branches
- If the proposed corporation is a stock, then all the incorporators must subscribe to at least 1
share in the capital stock of the projected corporation
- Since all incorporators in the stock corporation are required to be subscribers of the capital
stock, the citizenship requirement under the Constitution must be fulfilled at the time of said
incorporation. Because there are certain businesses or activities that are limited, either wholly or
partially, to Filipino citizens
- Example: Mass media – 100%
- If it is non-stock corporation, all incorporators must be members contributing his initial capital
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F. Directors or Trustees – Sixth Paragraph
- One advantage of a corporate structure is that there is centralized management exercised by the
Board
- In the AOI of a stock corporation, there is only one name – Board of Directors (BOD), numbering
at least 5 and no more than 15, except in the case of merged or consolidated banks, where the
Board may compose of 21 directors
- In the case of non-stock corporations, the minimum number of trustees is 5 but the maximum
may go beyond 15. For as long as a definite number is stated in the AOI
- In the case of non-stock corporations, the name may abide by the traditional Board of Trustees
but can go creative such as “Board of Counselors” or “Circle of Friends” or “Board of Regents”
(educational institution)
- In the AOI, the names of the incorporating directors or trustees must also be listed, along side
their respective nationalities and addresses. This is to be included so that there is an interim
board that will temporarily manage the corporation after it is issued a certificate until regular
elections can be conducted
- ACS: This is the maximum number of shares that corporation is legally permitted to issue or sell
- The maximum must be stated in order not to prejudice, specially the public, who may be
deceived into the buying shares of stock beyond what is permitted by law because shares issued
by the corporation outside or in excess of ACS are considered void shares, they will not create or
confer any right or obligation between the parties except reimbursement of what has been given
- One who acquires such excess shares or unauthorized shares cannot become a stockholder
- This refers to the total or maximum number of shares of stocks that the corporation is legally
permitted to issue and that must be stated in the AOI in order for the law and the State to
determine how many shares that a corporation is legally allowed and entitled to sell and dispose
of in order to obtain capital
- The sale of shares of stocks is actually the first form of corporate financing of the business, that
is why such form of corporate financing through sale of shares of stocks is regulated, not just by
the Corporation Code but also by the Securities and Regulations Code and other relevant
special laws
- Why is there a need to state shares of stock or what is the purpose of the ACS
- The shares of stock represents the aggregate number of shares
- Shares of stocks are an aliquot fraction of the whole
- The sale of shares of stock is the first form of corporate financing. It is the principal means by
which a corporation obtains cash or property needed to pursue its business.
- If you do not sell shares and rely merely on profit – profits come later once business has
begun, at the beginning you get the money from sale of shares acquired by incorporators or
initial subscribers
- Being the first form of corporate financing, the sale of shares of stocks by private corporation
is regulated by the SEC, both under Corporation Code and Securities Regulations Code
(SRC)
- Example:
- 5 friends wanted to go on pastry business. They each contributed 200 to bake their first cake.
- The cake is the ACS. Either it represents the actual contributions already in or may include
future capital to the business of the corporation.
- The cake must be sold to make profit and to be able to bake another cake.
- The question here in making the AOI is how many slices will you cut the cake, each slice
represents your shares of stocks
- If the cake cost 1,000 – will you slice it into 10 and then sell each slice at 100? – this is how
to determine the par value
- Under the ACS Clause, the shares of stocks may be classified as follows and must be
specifically written in the AOI. If the total number must be specified, such total may be further
classified into the following:
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1. Par vs. Non-Par Shares
a. Common Shares
- The basic class of stock ordinarily and usually issued without extraordinary rights and
privileges, and are considered voting stocks
- With respect to dividends and assets, it enjoys a mere pro rata distribution – they are
not accorded any special rights or privileges under the AOI
- Common shares enjoy full voting rights
b. Preferred Shares
- Share with a stated par value which entitle the holder thereof to certain preferences
over the holders of common stock and may be a non-voting stock
- Preferred to be paid corporate assets during liquidation
- Group of shares that enjoy special rights or privileges, either with respect to:
- Sales v. SEC
- In the AOI, the shares of stocks were only divided between A shares and
B shares. And customarily, only the A shares were given the right to vote,
to attend meeting to be entitled to notice, or to participate in the
management and affairs of the corporation. Those who own and hold
these shares were not notified, called to meeting, were not consulted, etc.
Later on, one person acquired or bought these shares from an existing
stockholder of the corporation and when he learned that there is a
forthcoming stockholder’s meeting and election for directors he went and
attended. But the corporate secretary refused to recognize him saying that
he owns B shares, he is not entitled to be notified of the meeting, therefore
he is not entitled to be present and neither can he enjoy the right to vote
during said meeting.
- SC: The denial of his right to notice, to be present and to vote is absolutely
wrong because the A shares were not classified as preferred shares.
Since the AOI were also silent as to what may be given and denied, A and
B shares are considered equal.
a. Voting Shares
- With a right to vote
- Accorded plenary or specific voting rights
- Usually the right to vote
b. Non-Voting Shares
- No right to vote
- Deprived of specific voting rights
- Holders of non-voting share are entitled to vote on matters allowed in the Corporation
Code, which are the following: (Sec. 6) (ABISIMID)
i. Amendments of AOI;
ii. Adoption and amendments of by-laws;
iii. Incurring, creating, or increasing bonded indebtedness;
iv. Sale, lease, exchange, mortgage, pledge, or other disposition of all or
substantially all of the corporate property;
v. Increase or decrease of capital stock;
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vi. Merger or consolidation of the corporation with another corporation or other
corporations;
vii. Investment of corporate funds in another corporation or business in accordance
with this Code; and
viii. Dissolution of the corporation
- No need to vote during liquidation
- These pertains to a fundamental change in the corporation and therefore must be
decided by the entirety of the constituency between the corporation – like sovereign
power
- In order to deprive voting rights, the AOI must be explicit as to said deprivation
- If the AOI is silent, the shares are presumed to be voting
- Example:
- Your services was engaged by a start-up company who wants to engage 10M and have
given you instructions whether or not the 10M would be classified into the following number
of shares:
- ACS = 10M
- Shares of stocks = 1M
- It was agreed among the incorporators that they would realize 10M in cash minimum out
of the sale or disposition of 1M shares. How to classify the shares?
- Preferred shares can also be no par value shares – False. It can only be issued with a stated par
value.
- Voting shares can be common shares – True. Common shares cannot be deprived of voting
rights. Only preferred and redeemable shares may be deprived of voting rights, but may be given
the right to vote.
- No par shares are always common shares – True. Because preferred shares cannot be no par
- No par value shares have no value = False. There is just no amount fixed in the AOI and
certificate of stock but it has value.
- There is no problem if all the shares, out of which the ACS to be divided into, are all similar
- If the AOI is silent, apply the Principle of Equality of Shares: That all shares are equal in all
respect
- However, the AOI may also provide for valid classification of the capital stock
- Based on the Classifications of Shares, the following are the minimum rules:
1. There should always be a class of shares enjoying full voting rights
2. Only preferred or redeemable shares may be deprived voting rights
3. Preferred and redeemable shares must always be with par value
H. Listing of the names of the initial subscriber to the capital stock of the proposed corporation –
Subscribed Capital Stock (SCS) – Eight Paragraph
- The name must also specify the number of shares subscribed
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- Subscribed Capital Stock
- This refers to the total number of shares and their respective aggregate value that are in the
hands of person other than the corporation
- Where the shares are the subject of existing subscription contracts
- As to number of shares, cannot go beyond the ACS because the ACS is the limit
- For purposes of incorporation, in order to secure the approval of SEC, the law requires that
the subscribed capital stock is at least 25% of the ACS
- The subscribers named in the AOI are also the incorporators – False
- The names of the incorporators must also be listed in the subscribers but not always
incorporators
- 25% refers to the ACS as basis. Both as to actual number of shares and value
- As to the value however, the law does not require that it must be paid – that is why we have
Paragraph 9
I. Listing of the subscribers who have paid, either partially or fully, their initial subscriptions – Paid-
Up Capital Stock (PCS) – Paragraph Nine
- For purposes of incorporation, the law requires that at least 25% of the subscribed capital stock
be already paid-up, otherwise SEC will not approve the registration and therefore will not issue
the certificate of registration
- Under the draft of the AOI, Pogi Inc. has OCS of total 30M shares. 20M common and
valued 1.00 per share and the last 10M shares are preferred valued at 10.00 per share.
Compute the subscribed capital stock and the paid-in capital stock.
- Is there a need to amend the AOI if all 20M common shares are actually issued
10.00/share? If the par value of the common shares is increased to 10.00/share while the
par value of the preferred shares is raised to 100.00/share?
- There is a need to amend the AOI. You are increasing the par value; therefore you are
increasing the capital stock.
- The AOI shall be signed by all incorporators and be notarized. The act of notarizing the AOI
converts it to a public instrument. After which, attach the following:
1. Treasurer’s Affidavit
2. When required by the SEC, bank certificates to prove the paid-up capital stock
3. Favorable recommendation (technically referred to in the Corporation Code as the Certificate
of Authority to Register) from the appropriate government agency (this attachment is
necessary only if the business of the corporation is imbued with public interest or is regulated
by special law)
a. If the business is insurance, it shall be the Insurance Commission which shall issue the
favorable recommendation
b. If it is banking, then the Bangko Sentral ng Pilipinas
c. If it is land transportation, then the LTFRB
d. For maritime transportation, it should be the MARINA
e. If it is air transportation, then the Civil Aeronautics Board (CAB)
f. If it is basic education, then the DEPED
g. If it is for higher education, then the CHED
h. For nursing or child – caring, then the DSWD
i. For power generation, then the Department of Energy
j. For pawnshops, it is the Bangko Sentral ng Pilipinas
k. For unregulated business, usually the DTI
- After submitting the abovementioned documents, then pay all the necessary fees.
- The SEC, after referring the same to the Legal Department, may recommend any of the
following:
A. Elements (LIPC)
1. There must be a valid law allowing the formation and incorporation of corporations;
2. There must be a bona fide attempt on the part of a group of persons to incorporate (meaning,
there is an agreement among a group of at least 5 persons trying to incorporate in good faith
a corporation)
3. There must be a bona fide user of corporate powers (meaning, the group of individuals
started assuming themselves as a corporation in good faith for the purpose of their
corporation in the latter’s name) – mere colorable title as a corporation
4. That the de facto corporation possesses a certificate of incorporation (here, the certificate
was issued in error because of some serious flaw in its incorporation; e.g. oversight)
- As far as all third persons, except the State, are concerned, a de facto corporation has all the
rights and powers as a de jure corporation. That is why, no collateral attack is allowed to
question the legal existence of a corporation.
- The error of the SEC may be corrected thru a Quo Warranto proceeding. This is actually an
action for the revocation of a certificate of incorporation. The provision against a de facto
corporation is enforceable only by the State.
- A de facto corporation can also sue in its own name as stated in the AOI. When impleaded as a
defendant, summons must be served in the principal office stated in the AOI. Here, if judgment
was rendered against the corporation, the properties subject of the levy would be that belonging
to the corporation alone.
- Example: A and B, doing business under the name and style of Pogi, Inc. Here, if judgment was
rendered against the ostensible corporation, the liability of the persons misrepresenting
themselves is akin to that of general partners (subsidiary and solidary). Subsidiary liability
because there is a need to exhaust first all the partnership assets.
VI. Once a certificate of incorporation was issued, the following subsequent conditions must
be complied with:
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- If the secondary franchise was not obtained and the corporation engaged in the prohibited
business, then, this would warrant the revocation of the primary franchise.
B. The corporation must organize itself and commence its business or purpose within 2 years from
the date of incorporation (Sec. 22)
- This requires that the corporation must exercise its privilege thru positive acts
- Example: Ribbon-cutting; hiring of employees; actually entering into contracts etc., otherwise, the
corporation will be guilty of non-user of corporate powers
- Consequence of non-user of corporate powers:
- Revocation of the Certificate of Incorporation vîs-a-vîs Automatic Dissolution – there is no
such thing as an automatic dissolution of a corporation; the corporation, although guilty of
non-user of corporate powers, is still entitled to notice and hearing
- Non-user is not the same as continuous inoperation. In continuous inoperation, the presumption
is that the corporation commences its business operation within the first 2 years except that it
was rendered inoperative for 5 years continuously. Continuous inoperation is also a ground for
the revocation of the certificate of incorporation upon notice and hearing conducted by the SEC
- Revocation will ensue only if the ground or cause is directly attributable to the fault or negligence
of the corporation.
- Breach of authority as a corporation will give the court the power to pierce the veil of corporate
fiction.
- Under the Doctrine of Corporate Fiction, the separate and distinct personality of a corporation
should be disregarded of the said personality was used to perpetuate fraud, commit crime,
defend wrongdoing, avoid lawful obligation, evade public convenience or confuse legitimate
issues.
- Kapamilya, Inc. was sued by Vivian for illegal dismissal and damages. Kapamilya, Inc.
was ordered to pay damages amounting to 5M in favor of Vivian. When a writ of execution
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as enforced there was no property to be seized in the name of the defendant. Can levy be
made on personal and real property owned by Kapuso, Inc., a duly registered corporation
and owns 90% of outstanding capital stock of Kapamilya, Inc., located in the same
address?
- No. Mere showing that one corporation owns 90% of the OCS of another corporation is not of
itself a basis for piercing the veil of corporate fiction, unless the 3 pronged test can be shown.
- Would levy and execution be proper on the personal and real property owned by Charot
Santos who owns 90% of the OCS of both Kapamilya, Inc. and Kapuso, Inc?
- No. Apply Doctrine of Corporate Fiction that the corporation has a distinct and separate
personality from that of its officers. The exception here is when there is convincing evidence
that the veil of corporate fiction should be pierced.
B. Fraud cases
- When the perpetration of malice, ill will, and other forms of deceit is concealed through a
corporation.
- A generic allegation of fraud committed under a corporate structure is sufficient to pierce the veil
of corporate fiction
- When a majority of these facts are proved, the subsidiary is considered the same as that of the
parent company. Thus, any liability incurred by the subsidiary may be enforced against the
parent company. The subsidiary is treated as an ordinary adjunct or extension of the parent.
Here, the piercing must apply only to that particular action. It does not justify subsequent
revocation of the certificate of incorporation of the parent or the subsidiary. Courts cannot pierce
the veil of corporate fiction unless there is an allegation to that effect.
- Here, the parent company is the principal whole the subsidiary is the agent (principal-agent
relationship)
- Requisites: (CFH)
1. Control test
- This shows that one corporation exercises absolute domination over another corporation.
- By absolute domination means not only majority control in the stockholdings but control in
the business policies and practices, finances, as well as in the management.
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- The controlled corporation is left without a separate and independent will. It cannot act out of
its volition.
- Probative factors:
a. That between the two corporations, there is identity of stockholders;
b. Identity of businesses;
c. Identity of management including Board of Directors;
d. And other similar factors as would lead to the conclusion that one of these corporations is
merely used as a business conduit for the convenience of the other
- After satisfying the control test, the next is the fraud test.
2. Fraud test
- There must be a showing that the control exercised by a corporation over another facilitated
or in fact the principal motivating factor for the commission of the fraud to injure or prejudice
the plaintiff
3. Harm test
- The control exercised by one corporation over another is the proximate cause of the injury
suffered by the plaintiff
- The concurrence of the three tests is sufficient to pierce the veil of corporate fiction and to
disregard the corporate entity.
- Whether the corporate fiction is to be pierced is a question of fact. The purpose of piercing the
veil of corporation is not to dissolve the corporation but merely to determine liability.
1. By written assent
- This does not require the conduct of actual meeting by the shareholders or members
- This is done by ballots sent to the addresses of stockholders or members of record (eg.
Check the box)
- It is the duty of the corporate secretary to appreciate the number of the ballots returned and
to determine whether a majority votes was obtained
- Example: Innocuous or innocent changes in the AOI such as change of name (here, the SHs
rights will not be unduly prejudiced by such change)
2. Through lapsation
- If within 6 months from the date the proposed amendments were submitted to the SEC and
the SEC does not take any specific course of action, then the amended AOI are deemed
approved and effective from the date of filing with the SEC (retroactive to the date of filing)
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TITLE V – By Laws
I. By-Laws (BL)
- Set of instruments that confer but likewise limit power and authority within the corporation.
- This serves as the internal rules for government within the corporation and regulate the
relationship of the corporation and its SHs or members.
- Since the by-laws are merely internal in both enforcement and application, third persons have no
positive duty to know the corporate by-laws.
A. Pre-Incorporation BL
- At the option of the incorporators, they may already draft and submit to the SEC along with the
AOI and favorable recommendation at the time when they applied for registration.
- This is optional.
- Here, all incorporators must sign the same.
B. Post-incorporation BL
- This is mandatory for all registrants who have not yet filed their BL with the SEC earlier.
- It must be submitted within 1 month from the issuance of the certificate of incorporation.
- Failure to file BL within the reglementary period is one ground under PD 902-A for involuntary
dissolution. Here, it is enough that the same is adopted and approved by a majority vote of
Board as well as a majority vote of the OCS or the members.
- Part of user of corporate powers
A. Contents (BSQPQ-EEPIO)
1. The time, place and manner of calling and conducting regular or special 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 them;
5. The qualifications, duties and compensation of directors or trustees, officers and employees;
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;
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 transaction of its
corporate business and affairs
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- When the BL are amended, or was totally rejected and a new one was adopted, the following is
the method to amend or adopt BL:
A. By a majority vote of the Board and majority vote of the OCS or membership
- Here, the majority vote of the OCS can only be obtained in a meeting; here, each and every
amendment must undergo this process; the vote must be reflected in a Board Resolution which
must be submitted to the SEC for approval
- When the BL are amended and the amendment is approved by the SEC, there must be a
Certificate of Amended BL issued by the SEC.
- Amendment BL must always be with the approval of the SEC as opposed to AOI which can take
effect by mere lapsation
- The new BL cannot be given retroactive effect if the same would prejudice or impair vested
rights.
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TITLE III – Board of Directors/Trustees/Officers
I. Management of a Corporation
- One benefit of a corporate structure is that regardless of the number of owners of the capital
stock, the law always vests management of the business or the corporation in a collective
collegial body known as the Board of Directors (BOD) that is why there is a centralized
management in a corporation.
- What is the legal consequence if Pinoy alone signs and executes alone the verification
and certificate of non-forum shopping in a complaint for collection of money filed against
the corporation?
- Cagayan Valley Case – Ideally, the persons who are allowed to sign such document are the
members of the BOD by a majority vote. In the absence of which, it is the person designated
by the BOD either by resolution or by way of provision in the by-laws. Exceptionally, if there
is no resolution or a provision in the by-laws, the President, the general manager can sign if
the complaint arises from the ordinary course of business, therefore considered inherent. In
the case of labor cases or disputes, even without written authority, the HR or personnel
manager can sign the same.
- If Pinoy alone without prior approval by the BOD enters into a 1-year contract with
another corporation for the latter to provide service contract of the products at a cost of
500,000 a month.
- Invalid. As a general rule, the power to bind the corporation into contracts is vested with the
BOD and so there must be a prior approval by them by a majority vote. Unless, it has been
customary within the corporation to allow the President alone to enter into said similar
contracts.
A. Stock Corporation
- Management body is always called BOD
- Minimum no. is 5
- Maximum no. is 15, except for consolidated banks or merged banks where 21 BOD is allowed
- For public companies, which are required to be stock corporations, at least 20% of the members
of the BOD must be independent
B. Non-Stock Corporation
- In case of non-stock corporations – minimum of 5 trustees is required but there is no maximum
fixed by the law, as long as a definite number is chosen
- In case of BOD for stock corporations – ownership may be mere legal title over the share – he
has legal title if his/her name appears as owner of the shares in the stock and transfer book of
the corporation, whether or not held in trust or for the benefit of another – nominee director
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- If it is stock corporation:
- GR: Every year – because maximum time of being a BOD is only 1 year
- If non-stock corporation
- If the AOI provides for a term of the Trustees longer than 1 year, then the election shall be
held at the end of such term – maximum term is 3 years
- For education non-stock corporations the maximum is 5 years
- Example: Based on the stock and transfer book of the corporation, the following are the
outstanding shares:
1. 1M common shares
2. 200,000 preferred shares
3. 300,000 redeemable shares
- How many of these shares are voting – All because in order to deny voting rights the AOI
must expressly deny the preferred and redeemable shares
- Quorum: 750,000 + 1
- Example:
- Based on the AOI, the following are the outstanding shares, shares held by persons not a
corporation, those that have been issued
1. 1M common shares
2. 200,000 preferred non-voting shares
3. 300,000 redeemable non-voting shares
- Since only the 1M common shares is voting, the quorum is 500,000 + 1
- Quorum is majority of those entitled to vote
- There must be 500,000 + 1 share either present or represented
- There is presence when the owner of the share is actually, physically present in the room
- If represented – this is usually used by corporations owning shares – the following are the
methods:
1. Proxy
2. Voting Trust Agreement (VTA)
3. Any other acceptable deed of assignment
4. Special Power of Attorney (SPA)
- Once there is a quorum, the elections must now be conducted in the manner prescribed in the
BL
- If the BL requires balloting, that is the only manner by which elections must be held
- If BL is silent, Corporation Code requires voting viva voce – raising the hand
C. Straight voting
- Example: SH 1 wants to do straight voting. He has a total of 2.5M votes. He can equally
distribute to all the candidates for BOD. Another choice is to give 2M to one candidate and then
the 500,000 remaining to several others. Apportion them as he may choose
D. Cumulative Voting
- This may be exercised by a group of minority SH and also majority SH
- The legal purpose and intention of this is to assure minority SH of representation in the BOD so
that cumulative voting allows them to vote as a block for a common candidate that they choose
- Basic principle for election of SH is that the BOD got elected as such because they voted for
themselves and they voted for themselves because they own the voting stock in the corporation
- In the example above, SH 1 can already install at least 3 BODs
- In case of stock corporations, the right to exercise cumulative voting is inherent and therefore
cannot be removed by AOI and BL of the corporation
- In case of non-stock corporation, the AOI and BL may remove or eliminate cumulative voting
- Case
- There were 2 respective BOD in the corporation. The incumbent directors were ousted,
meaning not re-elected by the SH, instead a new BOD was elected. The latter set of BOD
entered into transactions involving the corporation or in the name of the corporation. On the
other hand, the other set of BOD who was ousted refused to accept their defeat and also
continued representing the corporation in various transactions under the name of the
corporation. Who has legitimate right to bind the corporation in a contract?
- SC: Only the BOD whose names are registered and listed in the SEC can validly bind the
corporation.
- If the BL is silent or if there is no resolution of the majority of OCS, can BOD, in the discharge of
their given duties demand salaries? – No. They serve pro bono. Therefore, are entitled only for
reasonable per diems – reimbursement of actual expenses incurred in the performance of official
functions
- One view is that since BOD are SH, when they are not entitled to salaries, there is a greater
need or necessity on their part to earn profits for the corporation because whenever the
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corporation makes profit, the likelihood is that they are entitled to dividends – this is their
compensation that they can expect
1. Resignation
- Resignation as BOD does not mean termination of relationship as a SH.
3. Withdrawal as a SH
- This may take place thru transfer of all shares to another because the requirement that
s/he remains as SH is a continuing requirement
- Gokongwei v. SEC
- The BL provision of San Miguel Corporation was upheld by the SC even if it
prohibited an existing SH from running as BOD of corporation on the ground that the
SH candidate was also the incumbent or controlling SH of a competing corporation.
Such disqualification is a valid one although not expressed in the Corporation Code
because it is for the protection of the corporation against rival corporations.
5. Removal
- Who can remove an incumbent BOD – the same power that elected such BOD – the SH
- To remove an incumbent BOD, there must be an actual meeting called and conducted
and at least 2/3 of the OCS must vote to remove
- Since BOD are elected based on trust and confidence, when removed, there is no need
for SH to show cause of removal because the law already presumed that it is a
withdrawal or revocation of the trust and confidence. SH need not present any ground
- However, if the BOD being removed as elected as the minority representative, there must
be a just and valid cause for the removal to prevent the majority from exercising their
powers with oppression
- If the meeting to remove an incumbent BOD cannot be called by the President thru the
Corporate Secretary because they refuse, the meeting to remove may be held upon
order of the special commercial court – petition for conduct of a meeting – this is an intra-
corporate controversy – and in the same order, it may appoint a presiding officer –
furthermore, once a BOD is removed in said meeting, the said meeting may be continued
for purposes of electing the replacement
6. Expiration of term
2. Special Election
- If there is no longer a quorum in the BOD
- There must be a quorum of the voting stock, either present or
represented
- Votes must be cast in the manner provided by the AOI/BL
1. Removal 1. Election
2. Expiration of term - The only way to fill up the vacancy
3. Increase in the number
of BOD
- Africa v. Valleverde
- A, B, C, D and E were enjoying their first term as duly elected BOD. Their first term is from
2011-2012. However, before their regular term expired, they already called for an election.
Notices were sent to SH but during the appointed time and date, very few showed up so
there was no quorum so any election cannot be conducted. As a matter of law, the
incumbent BOD cannot abandon their offices. Thus, if no subsequent election is held by the
BOD, then the last one elected must remain in a hold over capacity. By 2012-2013, A, B, C,
D and E remained in office in a hold over capacity – hold over BOD. Hold over BOD de facto
officers because the right to office has already ceased, the right to hold office is only for the
purposes of preventing vacuum in the management of the corporation. When the first hold
over term was again about to expire, they called for elections, but the same happened so
they extended their hold over term for another year. It was during the last hold over term that
A and B resigned. C, D and E chose X and Y to serve the remaining term of A and B. Is this
valid?
- SC: The appointment of X and Y are void because the mere fact that C, D and E were
already in their hold over term at the time they appointed X and Y shows that their regular
terms have already expired and as such under the Corporation Code, when the terms had
expired, there is only one way to fill up the vacancy which is election. Hold over BOD can no
longer fill up vacancies in the BOD.
- Once directors have been chosen and elected and have qualified and their respective names
registered with the SEC, the power to represent the Corporation in all its acts is inherent upon
them and in fact the representative capacity or power shall likewise be considered as exclusive
upon the BOD. That is the power to give consent to contracts or perfect the contract or bind the
corporation in a suit is lodged exclusively upon the BOD.
- They can enter into contracts or perform acts in the name of the corporation for as long as:
1. There is prior approval of the BOD
- Any act entered into by these corporate officers cannot bind the corporation and cannot
be enforced against the corporation until and unless there is subsequent approval by the
BOD itself
- Once approved, it is as if it is the act of the BOD and therefore, the act of the corporation
2. In the absence of such approval, the BL or resolution of the BOD authorizes them to do so
- If the BL or a written resolution of the BOD authorizes the specific acts, they need not go
back to the BOD for approval or ratification, the act per se is valid and binding upon the
corporation because there is a written instrument allowing them to exercise such power
or enter into said contract
- Under Civil Procedure, service of summons upon a corporation must be made upon the
President, Managing Partner, General Manager, Corporate Secretary, Treasurer or In-House
Counsel (Sec. 11, Rule 14, ROC)
- The law has put in place the system of checks and balances that is why:
1. President cannot concurrently serve as secretary not treasurer
2. Secretary can concurrently serve as treasurer
A. Interlocking interest
- When the majority of the members of the respective BOD of the 2 corporations are one and the
same
- This is to prevent or minimize conflict of interest
- There is interlocking interest when between both the managed corporation and the managing
corporation, at least 1/3 of their common capital stock is held by one and the same person or
group of persons
- Example: 40% of the managing corporation is owned by A and 35% of the managed corporation
also owned by A. Therefore, 2/3 of the OCS of the managed corporation must now approve the
same, not just by a mere majority.
- Under management contracts, both the managing and managed corporation retain their separate
and distinct personalities, unless when there are circumstances where there are particular
transactions that would lead to piercing the veil of corporate fiction
- Managed corporation is actually a “shell” corporation. It is passive and not actually engaged in
business because the purpose stated in the AOI is in fact operated by another corporation.
- Requisites:
1. The unauthorized person must first have acted in a manner that would lead a reasonable
person to believe that s/he is an officer, employee or agent of the corporation
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2. The corporation is guilty of knowledge of the acts of unauthorized person or acquiesced to
said acts
3. Third person relied on the appearance of said authority conferred by the corporation upon
the person
- The person really has no representative power as far as the corporation is concerned.
However, by performing acts that made it appear that authority or agency is present, when in
truth there is none and the corporation is guilty of allowing said person to act on its behalf,
then the corporation is bound.
- Francisco v. GSIS
- In the charter and by-laws of the corporation, all loan restructuring contracts or agreements
must be approved by the BOD upon proper review. However, one of the assets of the
corporation was facing default and in order to prevent the foreclosure of the mortgage
property, the debtor or borrower offered a loan restructuring agreement. The offer in writing
was referred to the legal counsel and vice-president of the corporation, the office of the vice-
president and legal counsel started to make communication with the borrower. When they
were in the midst of negotiation, the vice-president and legal counsel assured the borrower
that the foreclosure of the mortgage will not push through and that the loan restructuring
agreement is consistent with the requirements of the corporation. In the meantime, the
borrower has stopped the payment of monthly amortization of the mortgage debt because
the borrower was in belief that the loan shall be put in place. Under the loan restructuring
agreement, there will be lower monthly amortization, longer paying period, and lower interest.
After waiting for final word under the loan restructuring agreement and believing that it has
ben approved at least verbally, the borrower was surprised to find that her property was
already sold at public auction pursuant to foreclosure ordered by the BOD of the corporation.
Apparently, the BOD was unaware of the negotiation between the borrower and vice-
president and legal counsel. Thus, the borrower questioned the action of the BOD and
sought nullification of the foreclosure sale in order to restore the property contending that
there is a loan restructuring agreement perfected with the voce-president. Initially, the BOD
earlier repudiated the power of the vice-president and legal counsel to enter into such loan
restructuring agreement and that under BL; such power is exclusive to the BOD alone.
- SC: There is evidence that the BOD or at least some members of the BOD were aware of the
ongoing negotiation between its legal counsel and vice-president and the borrower, under
the principle of estoppel, the corporation is now deemed bound by the act of its unauthorized
vice-president and legal counsel because it appears to have clothe said vice-president and
legal counsel with apparent authority to deal with a third person.
XI. Section 31 – Liability of Directors, Trustees of Officers – What are the duties of the BOD
and officers as fiduciaries? – 3-Fold Duty – ODL
- They are not acting as ordinary agents for and in behalf of the corporation, their position is
reposed with trust and confidence given that the BOD exercises all corporate powers, it is the
BOD that has custody of all corporate property and it is the BOD that undertakes and
administers all business of the corporation, they mist observe their 3-fold duties as fiduciaries
- The 3-fold duty is expressed in the negative form under Sec. 31
A. Obedience
- Members of the BOD as well as all other officers of the corporation must observe the limits of
their authority by following the 1987 Constitution, all statutes specially the Corporation Code, and
the law that regulate their business. They must obey the AOI and the BL.
- Flagrant and deliberate violation of these instruments shall subject the offending BOD or officers
to criminal, civil and administrative liabilities.
- NBI v. Pi
- In an entrapment proceeding organized at the complaint of Shell, Caltex and Petron, it was
alleged that the respondents who were the members of the BOD of the corporation was
engaged in illegal refill of LPG tanks. The alleged crime was committed when they knew that
pursuant to PD, it was mandatory for all corporations and businesses, partnership or
individuals engaged in such kind of business to first secure a prior permit from DOE and yet,
it came to the knowledge of the big oil companies that their LPG tanks were being refilled by
the corporation without the necessary permit and without the consent of the owners of the
tanks. During the entrapment proceedings, they indeed discovered in the premises of the
corporation that various LPG tanks marked with the logos of another oil companies and they
are being refilled by a generic brand of LPG and refilling was committed by corporation’s
employees. What was included in the criminal charge are the BOD and other officers of the
corporation together with the employees.
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- SC: The criminal cases must stand against them because they should have known that
under the law a prior permit was necessary to engage in that kind of business and yet they
deliberately ignored or refused to secure said permit. It was also stated that for criminal
liability for corporate acts, only those officers mentioned in the law may be charged and held
liable. If the law does not mention the members of the BOD, they should not be included.
B. Diligence
- Opposite of negligence
- Diligence is taking the necessary steps to prevent harm or injury
- The duty of diligence is imposed upon the BOD whenever they decide on matters or enter into
acts for and in behalf of the corporation
- Under the business judgment rule – decisions of the BOD regarding policies and practices
pertaining to the business of the corporation are not subject to judicial review and court has no
authority to substitute its own judgment with that of the BOD
- Such respect must be accorded to decisions of the BOD only if said decisions were arrived at
with honesty and good faith and for as long as these decisions are toward the best interest of the
corporation, the BOD be held personally liable even if he decisions would result to losses
- Losses alone suffered by the corporation in its operations is not enough to hold the BOD
personally liable
- Steinberg v. Velasco
- Several SH of the corporation sued their BOD on their personal capacity alleging that the
BOD were guilty of abuses on office and mismanagement leading to the losses. Sued and
impleaded as defendants were all members of the BOD. Unique in the defense of one of the
BOD is that he cannot be held personally liable because he did not know any better.
Whenever he was told to vote yes, he voted yes or vice-versa. He did what the others told
him. He had no knowledge o anticipation that those transactions would lead to the financial
distress and suffering of the corporation.
- SC: The fact that he did not arm himself with the requisite knowledge and information as to
make an independent judgment makes him negligent. Ignorance is negligence for directors.
- Towards 3rd person, the degree of diligence required of the BOD is the same degree of diligence
imposed by the law depending on the business
- Degree of diligence for all businesses that involve public health, public safety, public order,
common carriage selling guns, banking – extraordinary diligence – the BOD must exercise the
same degree
C. Loyalty
- During the incumbency of BOD, they cannot serve 2 masters at the same time
- This requires that in all cases and in all matters, the best interest and welfare of the corporation
must be upheld by its agents rather their own personal benefit even if it means personal sacrifice
on their part, they have to protect the corporation
- There are safeguards under the Corporation Code to make sure that loyalty is always observed
by BOD and officers of the corporation
- Example: Pogi, Inc. is engaged in the business of estate developers; the contracts must always
be approved by the Board unless otherwise stipulated. Contract of Sale = 16 has. Parcel of land
for P 1 billion
- Buyer: Pogi, Inc.
- Seller: A (a member of the Board)
- Hence, A is a self-dealing director. The contract is voidable at the instance of the corporation
because the law presumes that there is either fraud or undue influence exerted in the
corporation.
1. If the presence of the self-dealing director is not necessary to obtain quorum in a meeting to
approve the contract. (no quorum, no meeting, unless, it is a close corporation) (if the
presence is necessary for the quorum, the contract is voidable)
2. The vote of the self-dealing director is not needed to approve the same.
- No approval because there is no majority of the quorum
A - abstained
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B - yes
C - yes
D – no
- To resolve the impasse, A voted. The contract is voidable because his vote is necessary for
the quorum.
4. Approved by BOD
6. Even if the three steps have been met, the courts may still inquire into said contracts and
determine whether it is fraudulent or whether it is fair and reasonable to the corporation
(Standard: fairness and reasonableness to the corporation)
- Example:
Pogi, Cutiepie,
Inc. Inc.
A 20% 80% Both nominal and substantial (here, in case of conflict, the likelihood is that
A will side with Cutiepie, Inc. because of his substantial interest in the said
corporation. This contract shall revert to Section 32 – meaning the
interlocking director is now a self – dealing director as far as the
corporation where he has nominal interest is concerned.) (A director must
serve the corporation with utmost loyalty)
A 15% 60% Self-dealing director (the net percentage difference is 45%)
A 30% 90% Not self-dealing (he owns substantial interest in both) (the net percentage
difference is 60%)
A 5% 20% Not self-dealing (he owns nominal interest in both) (the net percentage
difference is 15%)
A 20% 21% Self – dealing (he owns substantial interest in one corporation) (the net
percentage difference is 1%)
- The best way: the interlocking director should not participate at all in the decision.
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XIV. Section 34 – Disloyalty of a Director
- Doctrine of Corporate Opportunity – A director commits disloyalty when he acquires or seizes a
business opportunity rightfully belonging to the corporation that the corporation is able to
undertake but which the director acquires for himself. In short, directors are liable whenever they
compete their own corporation.
- Gokongwei v. SEC
- Provision in the BL of SMC: “any person shall be considered ineligible or if elected as a
director is disqualified as a director if he or she is a controlling stockholder or director of a
corporation whose business is antagonistic with San Miguel.”
A. Sanction
- All profits derived by the disloyal director in the competing business are deemed forfeited in favor
of the corporation even if he uses his own capital.
- You cannot profit from the idea of others.
- Under the law, the disloyal director is considered as a mere trustee of the corporation.
- If in the process, the disloyal director misappropriated corporate funds and property, then the
entire business may be forfeited in favor of the corporation.
A. However, personal liability may also be borne or acquire by the directors or officers in the
following instances in addition to Section 31:
1. Section 65 for assenting to the issuance of watered down shares;
2. Failing to object in writing after knowing of said watered down shares;
3. If the directors agree to hold themselves personally liable with the corporation; and
4. When they are held liable by specific provision of law
- Example:
1. Under the Labor Code, directors or officers may be help personally liable for illegal dismissal
if they acted with evident bad faith or malice;
2. Under SEC, directors or officers may be help personally liable for insider trading or for
manipulation of security prices and other frauds;
3. Under the Trust Receipts Law, directors or officers may be help personally liable for failing to
remit the proceeds of the sale of the entrusted goods or failing to return said goods under a
trust receipts;
4. Under BP 22, directors or officers may be help personally liable if they knowingly issue a
check which is unfunded or failing to maintain sufficient funds for the encashment of the said
checks;
5. Under the Corporation Code, directors or officers may be held personally liable for willful
violation of the Corporation Code or for refusing without a valid cause the inspection and
examination rights of the SHs
6. Under RPC, the white collar crimes such as monopoly and illegal combination of trade
1. By way of a criminal case (here, there is a need for a specific provision of law imposing
criminal liability upon a specific officer);
2. Civil liability by way of a civil action against an erring director either by a SH or by a third
person who suffered an injury (individual action or class suit);
3. As a derivative suit – civil action to enforced the civil liability of the offending directors or
officers of a corporation
- It may be in the form of:
a. An action for damages or action for specific performance; or
b. By a petition for mandamus when a director failed or refuse to perform a ministerial duty;
or
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c. An action to annul a contract entered into by the Board such as in the case of Section 32;
or
d. An action for injunction
- Requisites:
a. That it must be filed by a SH (regardless of the amount of shares held in the corporation)
or member at the time of the commission of the acts complained of;
b. That there is exhaustion of all available administrative or intracorporate remedies; (similar
to Article 151, FC)
c. That the corporation is impleaded or named in the derivative suit, otherwise, the case will
be dismissed (a derivative suit is a representative suit; the SH who initiates the suit is a
mere nominal party; the real-party-in-interest is the corporation because the suit is for its
protection against abusive officers); and
d. It must be proved that the appraisal right is not available – this is to prove that the
derivative suit is not a harassment suit filed by the minority SH
- A derivative suit is a deterrent to the members of the Board to continue with the business of the
corporation. It serves as checks against abuses committed by the Board.
- Once the offenses are proved, the damages awarded by the court will inure to the benefit of the
corporation since it is the real-party-in-interest. The SH who initiates the suit is only entitled to
reimbursement of the necessary expenses in bringing the suit, which expenses is recoverable by
way of cost.
- Since a derivative suit is for the protection of the corporation, it would be wrong for the court to
dissolve the corporation.
C. Appraisal right
- The right of a SH to demand from the corporation that the latter pay back or repurchase the
shares of stocks; surrendering back the shares of stocks to the corporation and the corporation
will pay those shares; this terminates the intra-corporate relation between the SH and the
corporation
- Appraisal right is available to the stockholders under those instances provided in Section 81.
- Legal consequence of Pinoy receives a 10% commission from one of the exclusive
dealers of Pinas, Inc. as a token of gratitude.
- Forbidden profits doctrine. This is a kickback. Apply Sec. 31.
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TITLE IV – Powers of Corporations
- A corporation can only enjoy rights or exercise powers that are expressly granted by law or
implied to those express powers or inherent or incidental to its existence as a corporation
- What a corporation can and cannot do is based on the law itself.
- General powers of a corporation: In the exercise of these powers, only the approval of the
members of the Board is necessary because the same is pursuant to the business judgment
prerogative of the management of the corporation.
- Special Powers of the corporation: The exercise of these powers requires the approval of both
the members of the Board and the shareholders representing 2/3 of the OCS
- No donation can be given by a corporation to any political candidate, political parties, or partisan
political activity (void donations)
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- Rationale: Corporations are not voters. They cannot directly or indirectly influence the outcome
of the election. Political elections are left by the Constitution to the electorate.
III. Section 38 – Power to Increase and Decrease Capital Stock – Special Powers
- The AOI must state the maximum number of shares, which the corporation is legally permitted to
issue. This is both a right and a limitation.
- Example: Original AOI = the ACS 10 million divided into 1 million par value common shares at 10
pesos per share
- This empowers the corporation to sell a total of 1 million shares (maximum)
- The sale of shares is the first corporate financing of the corporation.
- Assuming that all the 1 million shares are sold and subscribed, the corporation can realize at
minimum, P 10 million pesos.
- Remember that corporations cannot sell below par. Can only sell at par or above par.
- For expansion of business, the corporation decided to embark on an expansion program. It
needs a total of P 50 million. And the corporation does not want to contract loans. With P 10
million on hand, it still needs P 40 million. However, the corporation can no longer sell more
shares under its AOI since the maximum number of shares which it can sell were already
subscribed. The remedy of the corporation here is to amend its AOI to increase its capital
stock. The said amendment requires the approval of the majority of the members of the
Board and the assent of the SH representing 2/3 of the OCS. This shall be submitted for
approval to the SEC together with the certificate of favorable recommendation from the
appropriate government regulator. Lastly, a new treasurer’s affidavit shall likewise be
submitted in order to attest that at least 25% if the increased capital stock has been
subscribed and at least 25% of the increased subscribed capital stock has been paid.
- New AOI of the corporation now states: P 50 million divided into 5 million shares at 10 pesos
per share (of the 5 million, 1 million are the original shares and 4 million are the new shares)
- If the corporation sells all the 5 million shares: 10 million is old money; the additional 40
million comes from the new shares
- This also requires formal amendment to the AOI expressly approved by the SEC and the
government regulator
- Legal capital (imaginary value on paper) and assets must always be balanced.
- 2nd Ground for Reduction of the Capital Stock – To Reflect the Value of the Present Assets of the
Corporation
- Assets of the corporation depreciates overtime and those assets were acquired by the
corporation from the proceeds of the sale of its capital stock
- Example: Legal capital is an imaginary value on paper, it represents the total value of all
shares of the corporation that have been subscribed, less treasury shares, whether fully paid
or not. Assume that as of the end of December 2016 – status of the capital stock is that all
1M shares have been sold in the hands of the person not the corporation and the corporation
has 10M – it received 10M out of the sale of its SS. Its legal capital is 10M and it has no
liabilities. The 10M cash is asset. This 10M was used to purchase equipment, machineries,
motor vehicles, and all other assets necessary to pursue the business. But over time, the
equipment will depreciate in value that is why over 10 years, the equipment depreciated to
2M. Should also reduce the capital stock to 2M – reduce by 8M to reflect the value of your
assets.
- In such a case, the SH are not entitled to anything
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- 3rd Ground for Reduction of the Capital Stock – Forestall Losses of the Corporation Suffered by it
during its Operation
- Losses represents liabilities
- Example: In the course of the operation of the corporation it suffered losses amounting to
2M, so there is asset amounting to 8M. The 2M represents liabilities.
- In reducing the capital stock, there must first be a certification executed by the Secretary and
affirmed and signed by the majority of the BOD stating the present value of the assets, the total
liabilities of the corporation, as of the amended and a certification that creditor’s rights are not
affected by the reduction – This should be done because the reduction of the capital stock also
reduces the trust fund reserve for corporate creditors.
- If the reduction of the capital stock would be prejudicial to the rights of the creditors of the
corporation, the SEC will not approve the reduction. Under the trust fund doctrine, the assets of
the corporation represent a fund that corporate creditors may look upon for the satisfaction of the
debts
- When a corporation turns insolvent, all subscribers who have not yet paid in full their subscription
can be sued directly by the receiver or the assignee of insolvency.
B. Pre-Emptive Right
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- The disposition of the new shares is subject to the pre-emptive right of existing shareholders.
This is the statutory right of existing stockholders to be offered first and subscribe new shares to
be offered by the corporation.
- Rationale: to prevent dilution of the existing equity and interest of the existing SHs. In effect, to
maintain said interest or equity. The new shares must be offered first to the existing SHs in the
same proportion as their current interests in the corporation.
- In pre-emptive right offering, the Board may also set a time limit. This means that the offering
must be under reasonable terms and conditions as the Board may decide and at the price set by
the Board. The price here is not always at par value because the corporation has to make
money. The customary period for pre-emptive right offering is 30 days.
- Example: A owns 500,000 of the total 1 million shares. This means, that A has 50% of the voting
rights, dividends, and seats in the Board. This is actually a sufficient control of the corporation.
Without the pre-emptive right, X will own 500,000 over the 5 million shares if the
abovementioned amendment of the AOI was approved. Hence, A’s interest dwindles to 10%.
With the pre-emptive right however, the corporation must offer 2 million of the 4 million to A. It is
up to A whether to subscribe it or not. If A rejects it, the corporation can now sell it to others.
- If the corporation offers the shares to others without first offering the same to its existing SHs,
then any subsequent dispositions shall be considered null and void. The SHs who were
prejudiced of their rights may nullify the sales in order for them to exercise their pre-emptive
right. However, despite said offer, the SHs do not have the obligation to buy.
- Once the shareholder rejects the offer, the sale of the shares to others can no longer be
questioned, except in a close corporation. The pre-emptive right in a close corporation is
demandable in all cases and in every disposition of the shares.
1. When the issuances of the new shares are in compliance with legal requirements for
minimum ownership by the public
- There are certain businesses operated by corporations that are regulated by special laws
and many of these businesses are public utilities or service companies. Various special laws
require that a voting percentage of these public companies must belong to the public
indiscriminately.
- Example:
a. Oil Deregulation Law of 1998, as amended in 2001= at least 20% of the voting stock
must be sold or traded to the public thru the PSE
b. Public Service Act = all grantees of certificate of public convenience and necessity shall
sell at least 15% of the voting stock to the public to widen the ownership of the
corporations
- It is considered as a public utility because of the fact that the business is imbued with public
interest or that the business is in fact covered by the sovereign power of the State except
that it is conferred to a private entity.
2. If the issuance of the shares is for the payment of the existing rights of the corporation or to
acquire property needed by the corporation for the business
- Example: Dacion en pago such as a loan for equity swap – This means that the bank would
agree to have the loan be paid by way of shares of stocks of the debtor. This means that the
creditor becomes the shareholder of the debtor corporation.
- Barter – Such as paying shares of stocks in exchange with the supply or equipment given
3. If the pre-emptive right is expressly denied in the AOI, either in the original or amended AOI
- Here, the amended AOI shall be approved by majority of the Board and SHs representing 2/3
of the OCS.
- Once the approved, the dissenting SH can exercise his right of appraisal.
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1. Ordinary Loans
- The New Civil Code shall apply
- In case of loan, the practice is that the borrower shall deliver some security or collateral –
specific property belonging to the corporation is used as a mortgage in order to ensure the
payment of the principal loan
- Corporate securitization – corporate assets are used to ensure the payment of the principal
obligation
2. Bonded Indebtedness
- Borrowing from the public in general in the form of bonds or similar evidence of debt
- Bond as Debt Insurance: Evidence on writing of an obligation contracted by the corporation
that the public may subscribe to at a predetermined interest rate
- The consideration for the bond may be the same as consideration of SS under Sec. 62
- Floating of Bonds
- Public offer of bonds
- Bond holders are not SH, they are creditors of the corporation, unlike owners of redeemable
shares, they are co-owner of the capital stock of the corporation until the corporation buys
back their shares
- This activity must first have prior permit from the SEC
- To create such bonded indebtedness, there must be approval of the majority vote of the BOD
and 2/3 of the OCS
- Example: Prior to recession, X is a manufacturing company for the export market, producing
tablecloth, napkins, etc. for the market of the US. But the export business is continued based on
the equipment you have. You have 2,000 units of high speed swing machines and several units
of iron. And then recession hits. So the US does not necessarily need anymore X’s products. X
no longer has a market for its products. So it sold all its equipment – liquidating its assets – by
this it frees its capital – convert them into cash. One way to cut the losses. And from the
proceeds, X can now think a new business or embark on the secondary purpose.
- If the proceeds of the sale of all the assets are intended for an entirely new primary purpose, the
AOI must be amended.
- No amendment is necessary if the proceeds of the sale are to be invested for the secondary
purposes already laid down in the AOI.
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- In all cases however, the asset sale must comply with the bulk sales law:
a. That the prior written consent of all the creditors of the seller must be procured
- Otherwise, the sale may be annulled at the instance of any of the creditors because the
sale of the assets transfers your trust fund – the asset constitute a trust fund reserve by
law for the corporate creditors – if you sell all assets, then the creditors are bereft of such
assets
- If the sale of the assets is done in the ordinary course of the business, the transactions
are valid even without SH’s consent – e.g.: sale of mineral ores of mining companies
- Example: Real Estate Development Company’s asset was a raw parcel of land and which
was subsequently developed into subdivision and houses. Over the 69 has lot of he
corporation there are now 600-subdivision lot with uniform houses. Each house is sold to
a direct buyer. At the end of the sale, the corporation is no longer has any real estate
asset. Can the SH complain? – No because this is done in the ordinary course of
business.
VI. Section 42 – Power to Invest Corporate Funds in Another Corporation or Business or for
any Other Purpose
- The investment of funds here must be construed as a means by which the corporation acquires
passive income or additional profits.
- If the investment of corporate funds is for its secondary purpose or in a corporation whose
business is not related to the business of the investing corporation, majority vote of the BOD and
2/3 of the OCS is required
- The investment here is authorized by law but requires SH’s approval because it has both positive
and negative effect – positive because the investment tends to increase the sources of profits for
the corporation – negative because it poses a greater risk for the SH because their money will
now be used by the corporation to buy SS of another corporation, so there is additional risk for
the SH of the investing corporation
- If the investment is for a contract or a business or a corporation directly related or auxiliary to the
business of the investing corporation, SH’s assent is not necessary
- Example: When you are a SH of a corporation, your measure of profit is your dividends. San
Miguel corporation wants to use about 1B of its cash to buy SS of other companies.
1) Buy SS of PAL – 2/3 vote of the SH is necessary
2) Buy SS of ABC 5 – A television company – 2/3 vote of the SH is necessary because SMB is
a food and beverage corporation
3) Buy SS of Bank of Commerce – 2/3 vote of the SH is necessary
4) Buy SS of Nestles Philippines – 2/3 vote of the SH is not necessary because this is directly
contributory to the main business of the investing corporation – only requires BOD’s approval
- Example:
- Smart Company and PLDT – Both telecommunication companies. Consumer mobile
telecommunication was pioneered in the Philippines of Smart. All other telecommunication
companies followed – pioneered texting. PLDT went also in this business through its
subsidiary – PilTel but it failed. PLDT bought all Smart’s assets including its legislative
franchise, the name Smart, all its equipment – an asset sale made by Smart to PLDT. For
Smart to sell to PLDT all its assets what does it require? – Majority vote of the BOD and 2/3
of OCS. But for PLDT to buy all of those assets, it only requires the vote of the BOD because
done only in the ordinary course of business.
a. The reacquisition must be for a valid purpose – valid if legitimate and authorized by law or by
AOI and BL
- When you reacquire the shares from holders thereof you are actually diminishing your
assets and trust fund because you treat the reacquired shares as treasury shares
- In order to treat these shares as treasury shares, the purpose must be any of the
following:
2) To compromise any indebtedness owing to the corporation arising out of the sale of
its shares
- This arises from delinquency of subscription
- In the absence of unrestricted retained earnings, the corporation cannot reacquire its own
shares except in the case of redeemable shares.
- Redeemable shares constitutes debts incurred by the issuing corporation – when they
are redeemed or bought back this is tantamount to paying the obligations or liabilities of
the corporation – redemption of redeemable shares is not reacquisition of shares per se
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but it is payment of debt by the corporation – payment of debt is not anchored on
unrestricted retained earnings
- The following are limitations:
1. The corporation must not be insolvent;
2. The corporation should not suffer from illiquidity as a consequence of such
redemption
- If in the meantime the corporation is suffering cash flow or liquidity problem the right
of the holder of the redeemable share is simply suspended until such time that the
corporation has sufficient cash but not invalidated – can still demand pay back from
the corporation
- Why does the law as a GR may require unrestricted retained earnings before a
corporation may reacquire its own shares – to protect the trust fund reserve for corporate
creditors because by obtaining the fund necessary for said reacquisition out of the
unrestricted retained earnings, then the legal capital of the corporation remains
untouched or unimpaired
2. Illegal Acts
- Not all ultra vires acts are illegal but all illegal acts of the corporation are ultra vires
- Consequences:
a. As to the Corporation
- Sufficient ground for revocation of the certificate of incorporation
- PD 902-A – This is involuntary dissolution
c. As to SH
- They are held directly and personally liable for:
i. Any crime – corporation itself cannot commit a crime, any criminal liability is
imputable upon the agent or officer of the corporation
ii. Civil case filed by any party who may be injured
iii. Administrative case
- Asebedo Optical v. CA
- The allegation of the City Mayor is that Asebedo Optical is committing an illegal act of
practicing its profession. The issue arose when Asebedo Optical tried to get a business
permit from the City but the Mayor refused to issue the same on constitutional grounds that
the practice of profession is only restricted to Filipino individuals and not corporations. It
stated that Asebedo Optical is engaged in the illegal practice of profession because it was
directly engage in optometry and ophthalmology.
- SC: Asebedo Optical is not engaged in the illegal practice of optometry and ophthalmology
because as stated in its AOI it is engage in manufacture of optical lenses – this is legitimate.
And in selling and manufacturing these lenses it is necessary for it to hire and engage the
help of professional – ophthalmologist – in engaging the services of these professionals, it is
not itself engage in the practice of profession. Part of the pursuit of the business for which
the corporation is created.
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TITLE VII – Stock and Stockholders
These provisions are optional for non-stock corporations and are mandatory for stock corporations
First Way
A. Parties
- Depends as to the time of perfection of the contract – As to time:
1. Pre-incorporation subscription
- This is irrevocable from the moment of perfection.
- Once the draft of the AOI and the Treasurer’s Affidavit has been submitted to the SEC, no
revocation of the pre-incorporation subscription shall be permitted.
- The pre-incorporation subscriber’s name is listed in the AOI.
- Violation of this rule will justify denial of the issuance of the certificate of incorporation on the
ground of misrepresentation.
- Parties:
a. The promoter (whether acting in his own name of for and in behalf of the proposed
corporation); and
b. The subscriber
- Example: 10 million common shares @ par value of 10 pesos per share for a total of 100
million
SCS = 25 million
PCS = 6,250,000
2. Post-Incorporation subscription
- Parties:
a. Corporation, as represented by the Board; and
b. The subscriber (individual or another juridical entity)
- Note:
a. With par value: Sell not below the par value
b. No par value: Sell not below the stated value which cannot be less than P 5.00
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- Here, the debtor is the subscriber as to the obligation to pay the full consideration. Once
there is full payment, the obligation of the corporation to issue certificate of stocks now
arises. (Reciprocal obligation)
- The obligation of the subscriber to pay is mandatory and absolute. The moment the contract is
perfected, the entirety of the consideration forms part of the trust fund.
- No rescission is allowed because it will be prejudicial to the creditors. The only remedy of the
corporation is to enforce the obligation.
- The trust fund doctrine should be observed in all subscription contracts.
- Example: Pogi, Inc. decided to perfect a subscription contract in favor of X. (1 million shares @
minimum 10 pesos shares = 10, 000,000) = here, the 10,000,000 already forms part of the trust
fund.
2. Property other than cash needed by the corporation for its business (real or personal)
- Form of barter
- The property must first be appraised by the Board and the appraisal shall be approved by the
SEC.
- This is to prevent the watering down of shares.
- Example: Watering down of shares – overvaluing the property
3. Labor or services
- Minimum requirement here is that the shares shall be issued only after the service has been
performed to the corporation. Hence, it always pertains to past services.
- The appraisal rule shall likewise be applied here.
5. Pursuant to conversion rights stated in the AOI, by-laws and subscription contracts
- This is unique to those shares of stocks where the AOI permit their conversion from one
class to another. Without any express stipulation in the AOI, the conversion will not be
allowed.
- Example: AOI allows conversion of preferred shares into common shares after the
preferences or privileges have lapsed. 100,000 preferred shares, the preference is good for 5
years from subscription. Here, the shareholder has two options: (1) to sell back to the
corporation the preferred shares, if allowed; or (2) exercise the right of conversion
- Example: 1 preferred share shall be equivalent to 10 common shares. Thus, if there is 1,000
preferred shares, then the common shares will be 10,000 common shares. The original
certificate of stocks corresponding to the 1,000 preferred shares will be cancelled and a new
one will be given for the 10,000 common shares.
D. When are shares issued in violation of Section 65? Watering down of shares
1. When shares are issued below par or stated value
2. When the stock dividends are declared and distributed to the shareholders without
unrestricted retained earnings
3. When shares are issued in exchange of property less than the par or stated value of the
shares
4. When shares are donated by the corporation to another (the donation is void)
2. If no date was stipulated, then the remaining balance is due upon Call by the Board.
- For as long as not delinquent, one who subscribes already has all the rights of a fully paid
stockholder even if the subscription is not yet paid or fully paid. He can already enjoy voting and
dividend rights as well as asset rights in case of dissolution. But, he cannot still have the right to
transfer the shares and demand a certificate of stock.
- For as long as not delinquent, one who subscribes already have all the rights of a fully paid SH
even if the subscription is not yet paid.
- As far as proprietary rights pertain to the shares concerned, there is really no crucial difference
between one who has paid in full and one who has not paid in full. In fact, once the subscription
contract has been perfected, the subscriber, even if did not pay anything; can already demand
that his/her name be entered in the corporate stock and transfer book or records.
- Example: 1M shares for 10M. There was a stipulation in the subscription between Pogi Inc. and
X that X should make a down payment of 2M in cash at the time of signing the subscription
contract, leaving a balance of 8M. And then, the balance of 2M, there was no stipulation as to
when it shall be paid. Therefore, X, from the moment that this contract was perfected, X has all
the rights as a fully paid SH and can already enjoy voting rights, dividend rights or if the
corporation is dissolved, is already entitled to asset rights. Thus, the only rights that X cannot
demand yet from the corporation would be the right to transfer to shares and the right to demand
a certificate of stock.
- X still has a pending balance of 2M. 2 months after the contract has been perfected, election
is to be conducted in the corporation. Can X vote during said election? – Yes. He can also be
voted for because as far as qualification of BOD, only legal title is necessary which is
determined by the mere fact that the name appears in the stock and transfer book
- In case of the right to vote and the right to be voted for, how many votes is X entitled to cast?
– All 1M shares.
- If dividends are to be declared, he is entitled to 10M even if he has not yet paid in full
because he is not delinquent.
- In voting the subscribed shares, the right may be exercised personally and directly or by way
of representation.
- In the above example, X is entitled to notice in case of meeting. He is also entitled to attend
such meeting and to vote in the same for 1M shares either personally or by representation.
- Legal title: Once the name of the subscriber is entered in the STB of the corporation
Second Way
IV. Section 70 – How may the Corporation Enforce the Delinquent Balance
A. Judicially
- By filing an action for collection against the subscriber
- This is an intra-corporate controversy even if it is a simple collection case
- Regardless of the amount due, it must be filed before the commercial court
1. Extra judicially
- Cheapest means
- By the corporation conducting a delinquency sale – auction – the highest bidder will be the
one who offers the least number of shares for the highest price
- A notice of delinquency must also be served upon the affected subscribers – so that they can
still pay before the auction
- Example: A tenders a bid of 8M for 1M shares (10.00/shares). B tenders a bid of 8M for
800,000 shares (8.00/share). C tenders a bid of 10M for 800,000 shares (12.00/share). The
highest bidder is C. once C pays the 10M, the corporation must issue a certificate of stock in
favor of the highest bidder C for 800,000 shares. The corporation is now allowed to
compromise the sale because the subscription contract is for 1M- meaning the corporation
may opt to issue to X a certificate of stock for the 200,000 because as far as the corporation
is concerned, all the shares are now fully paid and this is the only concern of the corporation
which is to obtain full payment.
- In the meantime, before the certificates are issued to C, C’s right as SH are suspended.
Delinquent shares are not voting shares.
- Are they entitled to dividends during the delinquency – yes except that in case of cash
dividends, the cash will be applied to the balance; in case of stock dividends the stock
certificate shall be issued until full payment
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- Can X allege that he is entitled to a certificate of stock at least for the number of shares
partially paid – No. It violates the law because a subscription contract is an indivisible
contract. One certificate shall only issue for one subscription regardless of the number of
shares subscribed.
- The condition of X to be entitled as a matter of right for the issuance of certificate of stock
is full payment
- The subscription is already paid. It is now a ministerial duty on the part of the corporation to
issue a stock certificate. It must be:
1. In writing under the name of the corporation
2. Stating the number of shares
3. Par value or stated value
4. Name and address of SH
5. Serial number of the certificate
6. Signature of both president and corporate secretary.
- Once a stock certificate is issued by the corporation, the proper entry in the stock and transfer
book must now be made as well
- The certificate of stock, once issued is itself personal property of the SH but it is paper
representative of ownership of capital stock in the corporation
- In general, a certificate is not necessary to enjoy rights as a SH. All that is sufficient is the name
must be in the stock and transfer book
- Because the issuance of stock certificate is ministerial on the part of the corporate secretary
once there is full payment, it may now be compelled by mandamus
- The stock certificate, being a property itself, is actually a convenient tool to transfer the shares
and the certificate itself – acquiring the shares of an existing SH (3rd mode of how to acquire SS)
Third Way
- Under the Corporation Code, in order to transfer the property represented by the certificate and
all the rights pertaining thereto, there must be indorsement and delivery of the physical certificate
to the transferee
- A stock certificate is a quasi-negotiable instrument
- Example: X has now paid in full so all that he needs to do is follow the quasi-negotiability
principle as regard the stock certificate to sell his shares. Indorse the certificate of stock – the
indorsement must contain the name of the transferee. If it is indorsed in blank, it becomes a
street certificate – similar to negotiable instrument – it is now a bearer instrument – Street
Certificate – Any certificate of stock indorsed in blank – one that does not contain the name of
the transferee – that is why it becomes a bearer instrument.
- When Y makes full payment, Y must insure that he obtains physical custody of the certificate,
that is why there must be indorsement plus delivery and from that moment on, when the 2
step process has been completed the transferee is placed in ownership over the property
and has now a right against the corporation to have the transfer registered.
- If it was indorsed but was not delivered – the transferee cannot compel the registration of the
transfer – No.
- If it was delivered but was not indorsed – the corporate secretary can refuse registration
- Complete the 2 step process
- XPN: Uncertificated securities under the SRC/over the counter transactions
- Transfer of shares in the stock exchange, there is no physical certificate because of the
volume of transactions in the stock exchange in a given date
- Only for SRC regulated transactions is the 2 step process applicable
- Once the transfer is complete and regular, it now becomes a ministerial duty on the art of the
corporation to register the same.
- There is valid transfer only if the indorsement and delivery was made by the SH of record or the
latter’s agent. If there was no valid transfer because it was unauthorized or a result of a forgery
or theft of the certificate – the corporate secretary can refuse to register the transfer – when the
title of the transferee is in doubt no registration can take place
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- It is merely residual management right because in a corporate set-up, there is a centralized
management vested by law in favor of the BOD
- How do SH exercise this residual management right – Through voting
- The right to vote includes the right to be voted for.
- However, this right to vote and be voted for cannot be invoked by the holders or owners of the
following shares:
1. Delinquent Shares
- Subscribed shares that have outstanding balances on their total subscription price and where
there is already default in the payment of said balance
- During the period of delinquency, the subscriber on record is deprived of the right to vote and
be voted for
3. Treasury Shares
- Shares reacquired by the corporation which are former outstanding shares whether the
reacquisition is by redemption, buy-back or even donation to the corporation
- While they are in the treasury, they are not outstanding it would be absurd for the corporation
to vote its own treasury shares
- Every SH has a reasonable expectation to receive a proportionate distribution of the profits of the
corporation in the form of dividends
- The power to declare dividends is exclusive to stock corporations, absolutely prohibited for non-
stock corporations
- Dividends
- Constitutes a proportionate distribution of the profits earned by the corporation out of its
business
- The source of said dividends must be limited to the so-called surplus profits or unrestricted
retained earnings
- The basic rule is that no part of the CS, whether subscribed or paid-in may used by the
corporation to pay its own SH dividends
- Whenever the corporation has unrestricted retained earnings, it is absolutely discretionary
upon the BOD whether to declare all or some of the unrestricted retained earnings for
distribution
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- Such action for mandamus may be dismissed based on the following: (Sec. 43)
1. URE or surplus profits are needed by the corporation to finance a definite expansion
program already approved by the BOD
2. That the corporation is bound by a subsisting agreement with a creditor prohibiting it from
declaring dividends without the consent of the creditor and such consent has not been
obtained
3. That there is a need to provide for possible contingencies such as probable losses and
similar external factors where the URE may be used
- Whenever these defenses are proved that the corporation cannot be compelled to declare
dividends and therefore can keep the excess profits for itself
- The power to declare dividends if the BOD in all cases regardless of class, but if they are
cash or property dividends, assent of the SH are not necessary but in case of stock
dividends, 2/3 of the OCS must assent
- The right to dividends constitute beneficial ownership of the shares
1. Cash Dividends
- Kind of dividend payable in actual cash denominated in a sum of money per share
belonging to a SH
- Example: 5 centavo dividend for every share
- Whenever cash dividends are declared and already announced, the declaration is
deemed irrevocable and therefore, the corporation must now pay to the SHs of record
- Whenever they are paid by the corporation, their arises a depletion in the assets of the
corporation commensurate to the amount necessary for the dividends
2. Property Dividends
- Actually cash dividends but they are payable by way of property belonging to the
corporation and no longer needed for the business
- Example: SH of SM, SM will issue a gift certificate
- Whenever they are paid by the corporation, their arises a depletion in the assets of the
corporation commensurate to the amount necessary for the dividends
3. Stock Dividends
- This is the better alternative of cash and property dividends
- The URE derived by the corporation is used by the corporation to acquire unissued SS
- The amount of URE never leaves the corporation – know as capitalization of profits –
URE are merely transferred from assets to legal capital – this is a paper transfer – it is as
if the URE will be used by the corporation to buy its own SS so that its own shares will be
distributed to its SHs – there is no diminution in the property, assets or money of the
corporation even if dividends are distributed – but on the part of the SH, there is an
increased in the actual number of shares held of record
- Example: At the time when stock dividends are declared, the outstanding shares of the
corporation are 8M. The unsubscribed or unissued is 2M. It earned URE amounting to
50M. When stock dividends are declared, the 50M will be used to acquire the
unsubscribed portion of the capital stock and distribute them to SH of record. There may
be an increase in the number of shares in the book of record but there is no increase in
the interest, equity or control in the corporation.
- Until such time that the stock dividends for the dividends are issued to the SH, the stock
dividend declaration may still be revoked
C. Right to Assets
- The assets cannot be distributed to any of the shareholders for as long as the corporation is still
existing because those assets, whether in the form of cash, equipment, or land, are reserved by
law for the benefit of corporate creditors.
- Any distribution of assets during the existence of the corporation may be questioned by the
creditors if such distribution impairs the rights of the creditors.
- Distribution of the assets during the term is allowed only in the following: If there is surplus
capital
- Public utilities (e.g. telecommunications): 60-40 requirements (this represents a maximum and a
minimum: 60% is the minimum for Filipino citizens while the 40% is the maximum for non –
Filipino citizens). Breach of this threshold is a violation of the Constitution.
A. To determine compliance with the Constitution, apply the two pronged tests: (concurrent
requirements)
- SC: In issuing mix classes of shares, this is how the 60-40 requirement shall be observed: 60-40
in each type of share issued and the total must still result to 60-40
1. MPSA (1)
SMMI
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Covered by MMC (60% Filipino corporation + 40% MBMI) (MBMI is 100% Canadian – owned
company)
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2. MPSA (2) 3. MPSA (3)
60% MBMI
40% SMMI (OLMDC 60% and MBI 40%) MBMI = 40%
PLMDC = 60% (PASRDC 60% + MBI 40%)
- All the three MPSAs were declared null and void for violating the 60-40 requirement.
- The grandfather rule is to be applied when the citizenship of the corporation is in doubt.
Under this rule, there is a necessity to look into the various layers of corporate ownership to
determine the ultimate owners of the corporation. It is a way of piercing the veil of corporate
fiction.
- Example: Pogi, Inc. = organized and registered with the SEC. It has OCS:
a. 60% of the controlling stock belongs to A, B, and C. All of them are Filipino citizens. Each
owns 20%
b. 40% belongs to X, an American citizen
- Pogi, Inc. is a Philippine corporation. As such, it can enter into the exploration, development,
and utilization of natural resources through joint venture agreement, production – sharing or
co – production agreement with the State. It can even own private lands in the Philippines. It
can apply for a leasehold contract with the DENR for alienable lands of the public domain or
it can even acquire alienable lands by purchase. It is even allowed to operate an educational
institution.
- Example: Cute, Inc. = registered with the SEC. It has 1 million voting and outstanding shares. Of
the 1 million, Pogi, Inc. owns 600,000 (60% of the voting stock). The remaining 400, 000 belongs
to X directly.
- X is an indirect stockholder of Cute, Inc. and at the same time a direct stockholder of Cute,
Inc.
- A, B, C and X are the grandfather shareholders. Pogi, Inc. is their child corporation. Cute,
Inc. is their grandchild corporation.
- Question: WON Cute, Inc. can acquire lands in the Philippines or enter into contracts involving
the exploration, development and utilization of natural resources or qualified to operate an
educational institution or hold a public utility franchise?
- Multiply the percentage of Filipino shareholders owned in the child corporation by the actual
number of shares owned by that child corporation in the grandchild corporation. Hence:
- 60% x 600,000 = 360,000 of 600,000 are treated as Filipino – owned shares
- Out of the 600,000 owned by Pogi, Inc. in Cute, Inc., 240,000 is not Filipino – owned
- For the 240,000 indirectly held by a foreigner and the 400,000 directly held by a non –
Filipino = 640,000 is not Filipino – owned.
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- Hence, Cute, Inc. cannot enter into the abovementioned agreements.
1. Inscription on the stock certificate as well as on the AOI and BL classifying shares as non-
transferable
- This is void because it restricts the ownership right of the SH
2. If the consent of the proper government agency is required to be first obtained prior to
recording of the transfer
- This is a legal regulation to allow the government to determine whether there is compliance
with citizenship requirement
- Example: For transfer of shares in corporations that are registered with the Department of
Tourism, the DOT Secretary must first be obtained; or companies which are granted a
franchise or privilege under Environmental Laws for EDU of natural resources – DENR’s
consent must first be obtained
3. No Transfer Clause
- Constitutionally founded
- This is any transfer that would reduce ownership that would reduce Filipino ownership that is
below that which prescribed by the Constitution or special law shall not be recorded in the
books of the corporation
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- For as long as the transfer was validly made – it is by the owner or the latter’s agent and in the
manner prescribed by the corporation and the law, whoever holds and whose name appears as
the indorser of the certificate acquires all the rights founded thereon and therefore will have the
right to compel the corporation to register the transfer
- Example: The certificate of stock of X was stolen by Y. Y sold the stolen certificate to Z for a
valuable consideration. X discovered the loss of the certificate and applies for the replacement of
the certificate with the corporate secretary – should the corporate secretary issue a new
certificate?
- No.
- The certificate is not lost, it is with Z.
- Only when the certificate is lost or destroyed
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TITLE VIII – Corporate Books and Records
- Only those transfers that convey upon the transferee absolute title or ownership of the shares
may be registered or should be registered
- Any transaction that creates a mere lien or encumbrance whether voluntary or involuntary of the
shares are not registerable
- Modes to transfer absolute title: Sale by way of indorsement and delivery; donation
- Question: If you want to donate your SS covered by a certificate, do you need to indorse and
deliver the certificate?
- Yes. There is no need to execute a deed of donation as far as the corporation is concerned.
From the perspective of Civil Law, the deed of donation is necessary to show a perfected
donation – there must be acceptance by the donee
- Question: Writ of attachment over SS – can this be registered in the books of the corporation?
- No.
- Question: Writ of execution covering SS supported by a certificate – can this be registered in the
books of the corporation?
- No. There is not yet a conveyance of title
- Question: Confirmation of sale – can this be registered in the books of the corporation?
- No. Title is not yet absolute
- Question: Registration of the sale of SS is also registerable in the register of deeds – can this be
registered in the books of the corporation?
- No. There is still one year redemption period – the title is not yet absolute
- Only absolute conveyances may be registered in the books of the corporation
- Question: Can the attaching creditor compel the corporate secretary to register the writ of
attachment in the books of the corporation?
- No because it is not an absolute conveyance of title
- Regardless of the writ of attachment issued by the court, the writ itself cannot be registered
in the books of the corporation – the corporate secretary cannot be compelled by mandamus
to do so
- Without registration of this writ in the books, does the attaching creditor lose the priority
under the NCC over the SS?
- No. Because the writ of attachment created a legal lien on the SS
- Debtor sells the SS by indorsing and delivering the certificate to another, after the writ of
attachment has been issued. If those shares are used to pay a judgment debt, who has a better
right?
- Attaching creditor even if the attachment is not recorded in the books of the corporation
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- During the pendency of the writ of attachment indorsement + delivery of the certificate was made
by the debtor to a 3rd person – X. X was able to have the corporate secretary issue a new one.
Who has a better right over the shares?
- Buyer. The lien is only as to the old certificate before it was cancelled – if a new one was
issued to the transferee – the transferee acquires a better right over the SS
II. What Transfers are Not to be Registered in the Books of the Corporation
A. In all instances where the title of the transferee is in doubt the corporate secretary may validly
refuse any request or demand for registration
- When may such doubt arise or exist?
1. In case of unauthorized transfers
2. In case of forged indorsements or falsified indorsements
3. Where the certificate itself was stolen
- Example: At the back of the certificate of stock it contains blank lines for the purpose of
accommodating any indorsement made by the SH or the latter’s agent in favor of the transferee.
If the indorsement appearing at the back of the instrument is X to Y. Y must obtain physical
delivery of the certificate in order to present it to the corporate secretary, so that she may register
the sale in the name of Y. the corporate secretary would register the transfer in favor of Y by
cancelling the certificate of stock by X and then a new certificate will be issued in the name of Y.
- Example: Let us say that X kept the certificate of stock in his office drawer and Y stole it. Y made
it appear that X indorsed and delivered it to him. This is a complete forgery. Can Y present this
certificate and compel the corporate secretary to register the transfer?
- No. A thief cannot acquire a right over the stolen property even by prescription.
- But Y now indorses the same certificate to Z. Z pays 10M to Y for the SS and the certificate
itself. Z is not aware that Y merely stole the SS of X. This indorsement is not a forgery. Z is
an innocent purchase for value. Z now presents to the corporate secretary. Can Z compel the
corporate secretary to register the transfer?
- No.
- Because Z acquired no title over the property.
- Z acquired it from the thief and the forger and therefore, no title passed even to an
innocent 3rd party or innocent purchaser.
B. Rules
1. The principle here is that while a certificate of stock is a quasi-negotiable instrument, it is not
a negotiable instrument because there are only 2 negotiable instrument under the Philippine
law – PN and BoE
2. In stock certificates, the holder in due course defense is not applicable.
- Whoever acquires. Even if in good faith, a certificate stock that was transferred without
authority from its lawful owner cannot assert rights superior to the lawful owner
- Regardless of how many transferees and no matter how innocent these subsequent
transferees are – no one can defeat the right of the owner
- Example: X and Y are best friends. Y needs assistance because he plans to go abroad. Y goes
to X and borrows the certificate of X and promises that once he gets his visa, he will re-indorse it
to X. X indorses and delivers the certificate to Y. In violation of their agreement, Y sells the
certificate to Z who pays valuable consideration. Between X and Z, who has a better right?
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- Z. Because X was negligent by clothing Y with apparent title over the property. A stock
certificate is validly conveyed through indorsement + delivery made by the owner or the
latter’s agent. Z can validly cause the registration of the transfer.
- What if X goes to the corporate secretary and reports the loss and demands a certificate.
- Do not issue a certificate of stock and force the parties to litigate and settle the ownership
dispute.
- Rivera v. Florendo
- X indorsed the certificate to Y but their agreement is that X will not deliver until Y pays him in
full. Y pays in full and presents a receipt showing that he paid in full but X refuses to deliver
the certificate of stock. Can Y go to the corporate secretary and demand to issue a certificate
of stock for him?
- SC: No. Because as far as the corporation is concerned, the transfer is not yet complete.
There was indorsement but there is not yet delivery. The remedy of Y is to file an action for
specific performance against Y to compel him to deliver the certificate.
- Abejo v. CA
- X delivered the certificate without indorsement. The condition is that the indorsement will be
made once certain conditions agreed upon the parties have been fulfilled. The other party
fulfilled none of these conditions that is why the SH refused to sign the indorsement of the
certificate. Can the one in physical possession of the certificate demand registration? Can an
unendorsed certificate, but which was delivered later be the basis of registration?
- SC: No. The transfer is not yet complete. Only those that are complete can be the subject of
registration in the books of the corporation.
- Example: X and Y agreed to transfer the shares. X is the transferor and the registered owner of
the shares. Y is the transferee-buyer. However, instead of indorsing and delivering the certificate
of stock, they executed a deed of sale of SS duly notarized. It is now the deed of sale being
presented to the corporate secretary for registration, is this sufficient basis to register the
transfer?
- No. He must present the certificate of stock.
- Books that are required to be kept and maintained under the law
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2. Non-public and inspectable books and records
- They are required to be kept and maintained within the corporation
- Books required under the Corporation Code
- They are inspectable only by SH or members of the corporation – they are not accessible to
the public in general – any subsisting SH or member of the corporation may demand as a
matter of right inspection and examination which includes the right to make copies and
excerpts
- The inspection and examination right may be exercised directly by the SH of record or by the
latter’s duly authorized agent anytime during reasonable hours of business days of the
corporation
- Any restriction on this right, even if found in the BL should be nullified
- Case
- The corporation refused to have the books be inspected by a SH by signing a provision in
the BL which states that inspection rights may only be exercised within 1 month prior to
annual SH’s meeting.
- SC: The BL provision is an absolute null.
- Case
- SH appointed some other person by way of SPA to make copies of certain contracts to
which the corporation was a party but the corporate secretary refused to give copies of
said contracts because the BL of the corporation. In the BL, it stated that inspection may
only be done personally.
- SC: That BL provision is void because it is absurd for the SH requesting the copies is a
corporation. So how could corporate SH examine the books of the corporation.
- Examples:
a. All minutes of meetings of SH;
b. Minutes (reflects matters that are resolved or decided; summary) of all meetings of the
BOD;
c. Records of all business transactions;
d. All contracts or dealings where the corporation is a party to, including all communications
prior to said contract and subsequent thereto;
e. For stock corporations – stock and transfer book which is an alphabetical listing of all
subscriber and SH of the corporation – beside the name if each must be the number of
shares; class of such share; par value; consideration or price; payment; balance to be
paid; and if fully paid, serial number of the certificate of stock
f. Financial statements
- Required for all stock and non-stock corporations on an annual basis
- These are under the custody of the corporate treasurer – any request must be forwarded
to him
- The financial statements include:
i. SALN of corporations
ii. Statement of financial condition
iii. Profit and loss statement
iv. Audit report by an independent auditor – required for all corporations
- Any unjustified denial of the right to inspect and examine corporate books and records gives
rise to personal liability on the part of the secretary and if the denial was affirmed by the
BOD, then all of them shall be solidarily liable to the injured SH
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- When an action to compel access to the books and record is filed, and the same is denied,
the corporation through its BOD or corporate secretary may invoke the following grounds:
a. That the requesting SH is not founded by a legitimate purpose or interest
b. That the requesting SH is motivated by bad faith in exercising the rights
c. That the requesting SH has misused information obtained from prior inspection to the
prejudice of the corporation
- Corporate Espionage: Very lucrative illegal undertaking – knowledge is proprietary –
knowledge as to one’s corporation is flowed outside of it
- PNB v. Gonzales
- The right to inspect and examine corporate books and records must be coupled with a
legitimate purpose. It must be connected with the proprietary interest, which the stockholder
has in the corporation.
- Te v. Te
- Mere pendency of a criminal case against a shareholder who happens to be in this case to
be the corporate secretary will not terminate nor suspend inspection and examination rights.
This right is effective for as long as he or she is a shareholder.
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TITLE VI – Meetings
a. Legal authority conferred by the SH or subscriber to another for the latter to attend and vote
in a meeting – refers to agency
b. Refers to the written form containing such legal authority – under the Corporation Code it
must be in writing and submitted to the corporate secretary before the meeting, unless the
BL prescribes a different form
- Regardless of the provision in the BL, it is only for maximum period of 5 years
- If the proxy is silent, it is good and valid only for 1 year
c. It refers to the person authorized – agent – pursuant to the rules on agency, the agent can
only vote to what that is instructed
- The proxy cannot be voted for on the basis of the proxy, he acquires no legal title to the shares
represented
- Other SH may accede other existing VTA, that is why a VTA is a contract of adhesion – belated
parties may join in an existing one
- Once VTA expires, then the parties are restored to their original status quo
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- The voting trust certificate is transferable like a stock certificate by indorsement and delivery –
The VTC is held by the trustor so the trustor can indorse and deliver it to another even while the
VTA is still pending, however, the transferees of the VTC cannot vote – because the right to vote
is inherent in the trustee
- It is a management controlled device
- Example: In the unending saga of the SMC shares arising from the heavily contested coconut
levy funds were used to create the so-called Coconut Industry Investment Fund (CIIF) Industries.
The CIIF Fund was used to incorporate about 14 corporations and these corporations have their
own subsidiaries and that both the 14 corporations and their subsidiaries through various
transactions acquired SS of the San Miguel Corporation. One of the targets of the PCCG was
the ill-gotten shares of stocks in the San Miguel Corporation. If SMC, through writs of
sequestration affirmed by the Sandiganbayan, about 33% of the voting shares were held by the
PCGG. Even if sequestered, 20% of the voting stocks is in SMC was retained by N. Cojuangco –
If you have 20% then you are entitled to at least 1 seat in the BOD. In the basis of these
sequestered but still registered in the name of N. Cojuangco, he remained a director of the SMC.
There were about 3 directors nominated by the PCGG. Whenever N. Cojuangco would suggest
on new matters, the PCGG BOD would refuse it he was always overpowered. He cannot get his
will enforced in the SMC unlike he was used to. Then he invited a person from Japan to invest in
the Philippines who invested buy buying SS of SMC which were VTAs – 15%. N. Cojuangco has
now 35% - slightly higher than that of the government. He also has another 15% SMC retirement
fund which were also under VTAs in favor of N. Cojuangco. He now holds 50% of the control
through VTA.
- A management controlled device is formed in the form of VTA
- Just have to persuade the SH to make a VTA for you
IV. When may the Right to Vote and be voted for be Exercised
- In the absence of specific dates prescribed in the subscription contract between the parties –
GR: Any portion of the entire balance of the subscription is due and must be paid when a call is
made by the BOD – a call is a demand of payment of the subscription – a call must be embodied
in a resolution passed by the BOD stating the:
1. Amount of percentage of the total balance due
2. The date when payment must be made
3. Any interest and penalties that may be imposed on the balance
4. The same call must also carry a warning that if no payment is received by the corporation
under on the date specified, then the SS will be declared delinquent and may be sold at
public auction
- Each affected subscriber is entitled to a notice of call at the address specified in the books of the
corporation
- Case:
- Involves a proprietary shares in a golf club. He SH here were unable to pay their
membership dues as well as the unpaid balance despite repeated written calls from the
BOD, their shares were sold at public auction.
- SC: The sales in public auction were nullified on the ground of improper notice and the
improper notice violated the right to due process of the delinquent SH. The notice of call and
delinquency was sent to the SH after he has died, necessarily, he could have not received it.
Also the corporation was guilty of fraud because despite the notice if the death of said SH, it
still sent repeated calls of the same address. Having known of the death of the SH, it now
became the duty of the corporation to send the demand to the estate or the administrator of
the estate of the decedent.
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- Case
- The notices were sent to a PO Box address. When no payment was received by the
corporation, the shares were sold to another and that was the only time when the SH learned
of the same when he was not allowed to paly golf.
- SC: According to the corporation, when the SHs are asked to provide an address, it is his
own representation that his address was a PO Box address but the fault of the corporation is
that the letters were indicated as return to sender. The corporation did not make an effort to
send those letter to a home address.
- For all SHs who received a valid call, they must pay as required
- In case they fail to pay, then those who renege on his obligation may now be declared delinquent
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TITLE X – Appraisal Right
A. Shareholders who dissented or objected to specific corporate acts (the dissenting vote must be
in writing or reflected in the minutes of the meeting)
- That it is invoked under the following instances:
1. Any amendment to the AOI with the following effects:
i. Restricting the rights of current shareholders
ii. Granting preferences not presently enjoyed by the OCS;
iii. Shortens or extends corporate term;
2. Proposed sale of all or substantially all assets of the corporation;
3. Merger or consolidation;
4. Investment of corporate funds in another corporation;
5. All other instances as may be described in the AOI or BL
B. That the dissenting stockholder has paid in full the subscription price
- Example: May 15, 2015. The resolution was approved. X = minority SH who dissented; his
dissent must be recorded in the minutes of the meeting; without the record, the appraisal right
cannot be exercised. Within 30 days from the said meeting, the dissenting shareholder must
write a demand letter addressed to the Board asking payment of the fair value of the his shares.
From the time that the letter was received, all the rights of the dissenting shareholder shall be
suspended including the right to vote and be voted for. Within 10 days from the written demand,
the dissenting shareholder shall now surrender the certificate of stock to the corporate secretary.
The surrender enables the corporate secretary to annotate the fact of the exercise of the right of
appraisal.
- The only right left to the dissenting stockholder at this point is the right to be paid the value of
the shares.
- Who will pay? – The corporation
B. If they did not agree, then the price fixed by the Corporation Code
- Price of the share prior to the time the dissenting vote was cast – in the example above, its May
14, 2015
C. Either:
1. By way of final judgment of a court in an appropriate proceeding (action for sum of money or
consignation) (this is an intra-corporate controversy)
- The decision of the court is considered final and executory and the cost of judicial appraisal
shall be borne by all.
- If the price determined is equal to or near the offer of the corporation, the shareholder pays
for the cost of judicial appraisal.
- If the price determined is equal to or close to the amount demanded by the dissenting
shareholder, the cost of judicial appraisal shall be borne by the corporation.
2. Extrajudicial means
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- Convening an ad hoc committee of three:
a. Appointed by the corporation;
b. Appointed by the shareholder; and
c. Appointed by the both the corporation and the shareholder
- The decision of the committee is final and executory. The corporation must pay within 30
days.
- Once paid, the stock certificate will be cancelled. The re-acquired shares are called treasury
shares.
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TITLE IX – Merger and Consolidation
I. Merger or Consolidation
- Marriage or union between 2 or more corporations to form among them a single entity.
- The parties here are called constituent corporations.
A. Merger
- A Corp + B Corp = A Corp
- Some of them being absorbed in one of them; the latter being the surviving corporation
B. Consolidation
- A Corp + B Corp = C Corp
- An entirely new corporation
- In case of consolidation, the plan, in writing, shall set forth all contents of the AOI that are
required by law (new corporation).
- Once the plan is complete, submit it for the approval of the constituents (majority vote and at
least 2/3 OCS for each constituent).
- Thereafter, submit the plan to the SEC, Fair Competition Commission, and the government
regulator.
- The government regulator can reject the proposed merger or consolidation on the following:
1. Unlawful combinations of trade;
2. The merger or consolidation will result to unfair competition (takes place when one entity or
merchant gains undue advantage of a market segment – e.g. predatory pricing (pricing the
product too low)
3. If it creates monopoly (Anti-trust)
- If any of the said causes are not present, then the plan shall be approved. The SEC will issue the
so-called Articles of Merger or Consolidation which is an offshoot of the duly approved plan.
- The plan of merger or consolidation must be expressly approved by the SEC. Once approved,
the following are the legal consequences:
1. Only a single entity will exist (the surviving corporation or the new corporation);
2. That corporation will have powers and privileges like any corporation;
3. The corporate personality of the constituents shall be extinguished;
4. The assets and liabilities except those expressly excluded in the plan shall be transferred
without further act or deed.
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- A is entitled to indemnity from an insurance secured by B. There is no transfer since B
became A.
- As to action filed in court, the action will be continued in the name of the surviving
corporation. Notify the court about the merger.
- As to employees, without any stipulation in the plan of merger, the employees of B
automatically become the employees of A.
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TITLE XI – Non-Stock Corporations
- The membership does not entitle the member to a share in the profits derived by the corporation.
- Dividend declarations are absolutely prohibited.
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- All the profits earned by the corporation must be devoted to the furtherance of its non-profit
purpose.
- For taxation purposes, there must be proof that not more than 30% of the funds of the
corporation is used for administrative purposes and the remainder shall be utilized for its non –
profit purposes.
- Non-stock educational and religious corporations – express exemption from RPT and income tax
under the Constitution.
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TITLE XIII – Special Corporations
Initial 5 years
2005
1 2005-2006 2006-2011
2
3 2005-2007 2007-2012
4
5 2005-2008
6
7 2005-2009
8
9 2005-2010
10
- Not all tertiary educational corporations can use the term university in their names.
- College: Bachelor’s degree only
- University: Confers post-graduate degrees
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Chapter II – Religious Corporations
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TITLE XII – Close Corporations
- An example of a closed corporation is a family corporation but not all family corporations are
closed corporations.
A. As to its management, there are two ways by which it may decide to manage itself:
- Example: 10 members of the Board – the first 8 shall be elected only by Class A
shareholders while the last 2 shall be elected by Class B shares within the corporation
- For actions which are intra-corporate in character, provisional remedies can only be resorted to
by way of an intra-corporate complaint. The SEC is no longer possesses of the authority to issue
provisional orders or remedies.
- Controversies within a close corporation are intra-corporate in nature; hence, it is RTC which has
jurisdiction.
- The most drastic provisional remedy is the order of the dissolution of the close corporation.
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III. Section 105 – Withdrawal of Stockholder or Dissolution
- In a close corporation, every shareholder has the right to petition the dissolution of the
corporation for any ground but especially for the following as provided by the Corporation Code:
1. Dissipation or wastage corporate assets by the management or members of the Board
2. When any of the members of the governing body is guilty of fraud or misrepresentation
- The petition shall be filed either with the SEC or the RTC.
- Example: if a stranger pays for the shares of one of the shareholders in a close corporation, he
can enforce his right over the shares by obtaining the consent of the corporation by the
unanimous consent of all the other shareholders and if necessary, the corresponding
amendments to the articles.
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TITLE XIV – Dissolution
A. Expiration of the term or lapse of time when the term has not been extended or renewed by
amendment or if the extended period has also expired; it is ipso facto dissolved the day after its
last day
- Without waiting for the original period to elapse, the corporation may file a petition for the
shortening of its corporate term (amend the AOI to shorten the term = does not require the
approval of the Articles of the Amendment to take effect); dissolved upon the expiration of the
shortened term
B. By way of a petition
- This is voluntary because it is initiated by the corporation itself
- Must be approved by majority of the Board and 2/3 of the OCS (this must be alleged in the
petition)
- SEC has jurisdiction.
- In involuntary dissolution, jurisdiction belongs either to the SEC or RTC depending on the
ground.
1. SEC:
a. Failure to comply with the reportorial requirements
b. Non-user or continuous inoperation
c. Willful defiance to SEC
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2. RTC
- All other grounds (since they affect the franchise, file a petition for quo warranto)
- Once the corporation is dissolved, its civil personality is terminated but only for the purpose for
which it was created. That is why it is prohibited to enter into any transactions that would further
its business operations.
II. The dissolved corporation retains a limited civil personality for the following purposes
(powers at liquidation):
1. To prosecute and defend suits
2. To settle or wind up its affairs; Liquidate the assets and close the business
3. Convey assets or property in favor of another who will acquire legal title while retaining
beneficial ownership in favor of creditors and ultimately the shareholders or members
III. Section 122 – Methods of Corporate Liquidation – Who may Enjoy the Powers During the
Liquidation
B. Receiver/Assignee
- The liquidator in case of involuntary dissolution of the corporation
- They are always court appointed and therefore cease the power of the BOD for purposes of
closing the business and enjoying transactions
- If the liquidation process is not limited to the 3-year period unlike if the liquidation is taken by the
corporation itself
C. Trustee
- The trustee is voluntarily named by the corporation – not judicially appointed
- The selection of the trustee may be done prior to dissolution or during the 3-year period
- If the liquidation process is not limited to the 3-year period unlike if the liquidation is taken by the
corporation itself – it may continue for as long as necessary until the business and all its affairs
will be finally terminated
- Example: Y Corporation was dissolved as of 31 December 2010. After its voluntary dissolution,
the corporation did not bother to appoint a trustee. So within the 3-year period from 31
December 2010 to 31 December 2013 – the corporation attempted to liquidate the corporation
but could not finish all the transactions. Within the 3-year period, the corporation may still enter
into contracts under its own name, prosecute and defend suits in its own name because the
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BOD is empowered to do acting now as liquidators. But, by 01 January 2014, no new suit may
be filed in the name of the dissolved corporation. It should now be under the name of the
receiver/assignee/trustee
- Example: Within the 3-year period, there is a case Pogi, Inc. v. X. This is still a valid complaint
but the corporation is no longer existing so indicated “duly registered corporation but has been
subsequently dissolved and the action is filed pursuant to its liquidation.” In case the liquidation
is done by some other entity or person – “A, on behalf of dissolved Pogi, Inc. v. X” – can be done
even after the 3-year period
- Questions:
1. Dissolved corporation sell shares – cannot be done within the 3-year period
2. Dissolved corporation declare dividends – if the dividends are earned by the dissolved
corporation, it is prohibited within the 3-year period; if liquidating dividends – a pro rata
distribution of the assets of the dissolved corporation after creditors has been paid – can be
done within the 3-year period
3. Dissolved corporation conducting an annual elections – cannot be done within the 3-year
period
4. Would the BOD be required to conduct meetings – can be done within the 3-year period
because they hold the powers at liquidation, unless they have appointee a receiver or trustee
5. Can the dissolved corporation enter or perfect contracts – can be done within the 3-year
period provided the contracts are related to liquidation
a. Contract for sale of its property – can be because this is inherent in liquidation
b. Purchase of new property or new assets – GR: No
c. Perfect a lease or renew a lease – can be assuming it has no own office – necessary for
liquidation purposes. In one decision of the SC the dissolution of the corporation does not
ipso facto terminate a subsisting lease contract to which the corporation is a party. If the
lease is for a definite period and in the intervening period the corporation is dissolved,
this is not a valid ground for the lessor to pre-terminate the lease
6. Do the SH of such corporation has the same rights as against the corporation as they have
prior to dissolution (right to vote, right to be voted for, right to dividends, right to assets, right
to inspect and examine books, right to attend meetings) – No with respect to right to vote and
be voted for except in decisions necessary to liquidation where they have limited right. Right
to dividends is absolutely prohibited except for liquidating dividends. Right to inspect and
examine books still subsists for them to know how much is the asset of the corporation and
their shares.
7. If after dissolution, still some of the SH has not yet paid in full their subscriptions – The
balance will not be extinguished, they must still pay the same
- Metrobank v. CA
- SC: In the absence of a duly appointed trustee or receiver or assignee, then the BOD are
ipso facto and ipso jure considered as trustees of the corporation. They must continue
representing their corporation in their capacity as their trustees. Even if the 3-year period
has been expired, the members of the BOD may still be sued and sue in their own name
representing the dissolved corporation because by law, they are now considered as
trustees.
- Helano v. CA
- The lawyer in this case filed a motion to be discharged as counsel of the corporation
alleging that the corporation has already been dissolved and he has experiencing
difficulties in continuing the case for lack of instruction from his principal. The case was
already appealed before the CA.
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- SC: In such a situation in cases of pending litigation when no new trustee or receiver is
appointed, counsel of record is deemed to be the trustee of the corporation, therefore
cannot be discharged as counsel.
- Chung Ka Biok v. CA
- The corporation had so many assets that they were undivided several years after it was
dissolved. The members of the BOD abandoned their offices after dissolution after the
termination of the life of the corporation. Some of the SH petitioned for distribution of the
assets.
- SC: One of the SH was appointed as trustee of the corporation.
- Case
- SC: A creditor was appointed as trustee subject to specified safeguards in order to
prevent abuse.
- When there is full distribution of the assets, the corporation ceases for all legal intents and
purposes, it is now considered as fully terminated but this corporation does not prevent it from
incorporating with the same persons and personalities
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TITLE XV – Foreign Corporations
II. Section 125 – Requirements to Allow a Foreign Corporation here in the Philippines –
Apply for a License
A. License
- That license is necessary whenever it seeks to engage or transact in business in the Philippines
B. Acts of doing or transacting business here in the Philippines: Under Foreign Investments Act
2. It opens a branch or an office in the Philippines even if such office is called a liaison office
- For the first 2, and example is that not all foreign airlines are granted landing rights in the
Philippines and they are able to sell tickets here in the Philippine through agents or agencies
or partnerships with other airlines to sell ticket for them; they are considered as doing
business here in the Philippines – for the foreign airlines granted landing rights they are
definitely doing business here in the Philippines
3. Appointing any person or representative for the conduct of its business here in the
Philippines where such agent is domiciled in the Philippines for at least 180 days in a given
year
- The 180 days may be continuous or cumulative
- From point of view of the Corporation Code, the domestic agents of foreign recruitment
agencies are in fact doing business here in the Philippines through their domestic licensees
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5. When the foreign corporation engages in series of commercial dealings intended to
prosecute and promote the main body of the business for which it was organized
- It is not the number of dealings but it is the nature and purpose of such dealing to determine
whether or not it is doing business
- If there is showing that the dealings entered into by the foreign corporation in the Philippines
is toward a progressive prosecution of its business, then it must obtain a license
- The application for license must specify the kind of business that the foreign corporation seeks to
engage in in the Philippines – if this business is regulated, a secondary franchise must also be
obtained from the BSP, IC, etc.
- The license to do business is limited to the business applied for and approved – no other
transactions may be validly entered into if it is not directly connected to the licensed business
- The license may be amended to add other businesses, subject to approval of SEC and other
government agencies
- For current and new laws have opened or allowed foreign business to engage in retail, specially
in categories of B, C and D of Retail Trade (open to at least 100% to foreign corporation because
it is as to retail of high end and luxury goods) – category A is exclusive to Filipinos
- Once the license has been issued, whether the original or the expounded one, the foreign
corporation is now subject to Philippine laws – agrees to bind itself to Philippine law, rules and
regulations
- Once it is already enjoying such license (privilege), it may surrender the same. However, as a
condition for such surrender, it must prove that it has paid all its outstanding liabilities in the
Philippines
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5. A misrepresentation of any material matter in any application, report, affidavit 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 subdivisions;
7. Transacting business in the Philippines outside of the purpose or purposes for which such
corporation is authorized under its license;
8. Transacting business in the Philippines as agent of or acting for and in behalf of any foreign
corporation or entity not duly licensed to do business in the Philippines; or
9. Any other ground as would render it unfit to transact business in the Philippines.
Doing Business
With License Without License
To ✓ GR: ✗
sue By establishing domicile in the Philippines for its business without
the requisite authority, it cannot seek the intervention of Philippine
courts for the protection of its interest.
XPNs: ✓
1. May prosecute any case under the RPC or other penal laws – no
need to show license because criminal cases in the Philippines
are instituted in the name of the People of the Philippines –
therefore it may be a private offended party or complainant in a
criminal case – no need to show capacity to sue
2. Estoppel on the part of the defendant to question the legal
personality of the corporation– no need to show capacity to sue
Case
- A foreign corporation was a manufacturer of computers and it
entered into 2 contracts for the sale and repair or servicing of
these computers sold in the Philippines. The contracts were
called representative agreement. The domestic dealer as well as
the domestic providers for repairs were not allowed to enter in
their own name but always in the name of the foreign corporation
and before any employee can be hired by the domestic
corporation, the said employee must first be approved and must
pass the standards imposed by the foreign corporation.
Furthermore, in all communications entered into by the domestic
dealer and domestic service provider, they must always use the
letterhead provided for by the foreign corporation. Under the
representative agreement, all sales made by the domestic dealer
it will be entitled to a commission, however it is absolutely
prohibited from selling computer products of other companies
and it bound itself to sell and distribute in the Philippines only
products of the foreign company. The domestic service provider,
whenever it enters into repair or any of these computers, he is
also entitled to only a commission and does not charge or fix the
fees for its services – percentage agreement. The foreign
corporation discovered that the dealer was selling computers
bearing brands of other companies and because of such, the
foreign corporation suffered losses by reason of such breach of
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trust and confidence prompting it to file a suit in the Philippines
against its own dealer for breach of contract and for accounting
and for breach of damages. In am motion to dismiss filed by the
domestic corporation, it alleged that the plaintiff is an unlicensed
foreign corporation and therefore has no legal capacity to sue. Is
the foreign corporation doing business in the Philippines, for
which a license was necessary?
- SC: Yes. A scrutiny of the representative agreement shows that
the domestic dealer and service provider are both reduced to
mere agents of the foreign corporation and they have no will and
volition of their own as to the manner by which the business may
be conducted because the entire methodology and
administration of the business is dictated by the foreign
corporation. Thus, the domestic corporations are agents of the
foreign corporation and under the Foreign Investment Act,
appointment of agents is an act of doing or engaging in
business. The foreign corporation can also maintain the
complaint because the defendant is in estoppel – after so many
years of maintaining the arrangement with the unlicensed foreign
corporation, knowing it to be without the authority to do such
business, the domestic corporations reap benefits out of said
arrangement. They cannot now repudiate their arrangement
whenever they are held liable.
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Sued Can be held liable Sanction for failing to comply with Philippine law.
for any claim arising
from its business in How to sue: Where to serve the summon – if it has an office in the
the Philippines Philippines, then send it in their office or to the person representing
the foreign corporation for its business in the Philippines
If it has no office here in the Philippines: Amended rules for service
of summon to unlicensed foreign juridical entities
a. By personal service of summon to the unlicensed juridical
entity at the place of its residence or domicile abroad through
the DFA and a court in said foreign jurisdiction
b. Summons by publication in a newspaper of general
circulation abroad where the unlicensed foreign corporation
has its domicile or last known address – this must be
accompanied by proof of service through registered mail of
the summons
c. Electronic mail – facsimile – cannot use personal e-mail to
serve summon it must be the court’s e-mail
d. Any other means with leave of court
- Case
- A foreign bank not licensed to do business in the Philippines was able to negotiate
and extended a loan to a domestic company. All the phases of the contract were
done abroad and the proceeds of the loan were forwarded by the foreign bank to
the local deposit of the domestic borrower. Unfortunately, the domestic borrower
reneged on its obligation to pay back so it negotiated for a loan restructuring.
Foreign corporation agreed under new conditions and terms but again the domestic
borrower failed to pay the loan. Foreign bank files an action in court for collection of
sum of money against the domestic borrower. Borrower moves to dismiss on the
ground that the foreign bank is doing business without license. The foreign bank
raised the defense that the suit arose from a single loan contract and it cannot be
deemed doing business on the basis of one loan transaction it granted.
- SC: The business of banking is the business of lending and therefore, when it
extended that single loan to a domestic borrower; it was already engaged in
business. The suit was barred.
- Case
- Import-export transaction – Importer: Japan; Exporter: US – the exporter loaded the
imported cargo on board a vessel, the vessel en route to its final destination in
Japan. Vessel made a stop at the port of Manila. Because of negligence of the
arrastre operator, vessel and cargo got burned. The importer and exporter sued the
arrastre operator for negligence to recover both the vessel and cargo on board.
Arrastre operator filed a motion to dismiss citing that these foreign corporations are
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not licensed to do business in the Philippines, so they cannot file a case here in the
Philippines.
- SC: The suit is not related to any of the business of these foreign corporations. The
suit arose from a quasi-delict liability enforced against the arrastre operator – this is
an isolated transaction – it should be given due course
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Securities Regulation Code
86
Table of Contents
CHAPTER I – Title and Definitions ............................................................................................... 88
I. Securities Regulation Code ................................................................................................ 88
II. Capital Markets ................................................................................................................. 88
III. Section 31 – Definition of Terms – Securities................................................................... 88
IV. In securities transactions, there are 2 stages regulated by the SRC: (1) Primary Market
Transaction .............................................................................................................................. 89
V. How does SRC Regulate Primary Market Transaction – Registration Statement (Sec. 8),
Chapter III ................................................................................................................................ 90
VI. In Securities Transactions, there are 2 staged regulated by the SRC: (2) Secondary
Market Transactions ................................................................................................................ 92
CHAPTER II – Securities and Exchange Commission ................................................................ 95
I. Securities and Exchange Commission (SEC) .................................................................... 95
II. Section 5 – Powers and Functions of the Commission...................................................... 96
III. Section 7 – Reorganization .............................................................................................. 96
CHAPTER VII – Prohibition on Fraud, Manipulation and Insider Trading................................ 104
I. Insider Trading ................................................................................................................. 104
II. Tender Offer ................................................................................................................... 105
III. Margin Trading .............................................................................................................. 106
IV. Fraudulent Transactions and Manipulations of Security Prices ...................................... 107
V. Short Sale/Short Order.................................................................................................... 109
CHAPTER XIII – General Provisions .......................................................................................... 110
I. Settlement Offer ............................................................................................................... 110
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CHAPTER I – Title and Definitions
2. Debt Market
- What is being sold or traded here are debt instruments – the purpose of the debt is to raise
capital or finance a business
- Provisions on the Corporation Code regarding the power to create or increase bonded
indebtedness
- Capital market is governed by SRC that is why the primary object in the capital market are the
so-called securities – SS or debt instruments are securities
- Reason why there is a need to regulate this: To prevent unscrupulous parties from committing
fraud by promising high rate of return of investment – this is also called the Blue Sky Law
- Blue Sky because they promise very high impossible returns as high as the sky only that
once they get what they want they will leave you with nothing – run away with your money
- The SRC requires that no security shall be sold or offered for sale in the Philippines without a
permit or license from the SEC
B. Non-Capital Market
- You have the so-called commodities market (agricultural products), foreign exchange market –
no centralized location
- Forward Contracts – contract for the sale or delivery of future things – like oil companies
- This is not governed by the SRC
A. Howey Test
- It is pursuant to the decision of the United States SC in the case of Howey v. SEC
IV. In securities transactions, there are 2 stages regulated by the SRC: (1) Primary Market
Transaction
- Initial regulations of these contracts take place in the so-called primary market transactions
- Who are the parties in a primary market transaction:
a. Issuer
b. Initial subscribers of the security
c. Underwriter – between the 2
- Example: Pogi, Inc. after it recently amended its AOI to increase the capital stock – there are
now 100M new common shares available for disposition. The issuer here the maker or originator
of the security. Pogi, Inc. is the issuer. It wants to raise, out of the 100M common shares, 1B
worth of new capital within a period of less than 6 months. For Pogi, Inc. to sell all 100M new
shares – it may not have the time or inclination to do so and it wants to do a public offering of
such – what it can do is to appoint an underwriter under an underwriting agreement so that the
underwriter will guarantee that all or a portion of the 100M new shares will be sold within a
definite period. The 10M new shares are the securities.
- The business of underwriting can be performed by investment houses as well as universal
banks
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- BDO Capital, Inc. entered into an underwriting contract with Pogi, Inc. as the underwriter,
BDO guarantees that all 100M new shares of Pogi, Inc. shall be sold within 3 months. Thus,
BDO capital will sell or offer for sale to its own customers said 100M new shares under a so-
called Initial Public Offering (IPO) of those securities in the form of SS. They are being sold
publicly because the sale or disposition is being done unlimited to the existing SH of the
corporation – anyone who may have the money to buy can buy.
- Let us say the agreement is that within 3 months, BDO shall be able to sell those 100M
shares and generate in favor of Pogi the desired target of 1B. Within the 3-month period, out
of the 100M shares, only 90M were sold. But despite best and diligent effort, 10M are unsold.
For the 90M shares sold through BDO – A, B, C and so on are now considered as SH –
Under a clearing agency, their names will now be entered in the books of Pogi, Inc – they are
required to pay under the terms of IPO (usually in cash). The compensation of BDO is
entitlement to a commission.
- The 10M unsold – because BDO underwrote the entire 100M SS, it is now obligated for the
unsold shares – BDO capital is now the SH of Pogi, Inc. – in banking, a universal bank has
the power of a commercial bank as well as an investment house and every licensed
investment house does not just engaged in the business of underwriting but also it engages
in the business of securities dealer – this means BDO would be interested in acquiring this
shares so that in some future time, it can resell them (buys SS for its own account and in the
ordinary course of business)
- From the time that Pogi, Inc. made available for sale or disposition those 100M shares and up to
the time the IPO period expired – the parties are the issuer and the subscribers
- From issuer to subscriber – that is a primary market transaction – it refers to the original
disposition of the security
- Under the Corporation Code, from corporation to another under a subscription contract – that is a
primary market transaction
V. How does SRC Regulate Primary Market Transaction – Registration Statement (Sec. 8),
Chapter III
- First requirement is that no security of any class or kind may be offered for sale in the Philippines
without a registration statement
- Registration statement is an application filed by the issuer with the SEC to obtain a license or
permit to sell the security publicly
- Example: Before Pogi, Inc. can offer these 100M new shares to the public, it must comply with a
registration statement
C. Disclosure Regime
- It mandates that all necessary and relevant information for investment decisions are available to
the public
- How: Through requiring disclosures in every step of the securities transaction
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D. Registration Statement must be accompanied by the Following:
1. Resolution of the BOD of the issuer authorizing the filing of registration statement
2. If any, a due diligence
- In securities transaction, a due diligence is actually an independent third party review of the
financial condition of the issuer and the security
3. Written consent of the SH if the public offering includes securities currently owned by person
other than the issuer
4. Prospectus
- This is the selling document that is circulated to the public
- SEC must approve the contents thereof
2. Grounds arising from the issuers officers and directors if any of them should have been
convicted by a final judgment for the following crimes:
a. Involving moral turpitude
b. Fraudulent transactions
c. Has been legally restrained from engaging in any securities transaction
- Such conviction by final judgment may come from a domestic or even foreign tribunal
- If rejected, the issuer or any of its Directors, Officers, Employees or Agents cannot sell or offer
for sale the security
- If the SEC approves the registration statement, the SEC will now issue in favor of the issuer a
license or permit to sell – this is the time that the issuer can publicly offer for sale the shares and
enter into an underwriting agreement with an underwriter or make any transaction related to that
original disposition
- The security now covered by the permit will now be entered by the SEC in its own registry of
securities
- All licensed securities must be entered in this registry of security
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G. Section 9 – Exempt Securities
- Exempt from registration requirements – thus no permit is necessary from the SEC before these
securities may be sold in the Philippines
1. Those issued by the Republic of the Philippines or any of its agencies, instrumentalities,
including LGUs – Sovereign Bonds
- Treasury bonds – issuer is the Republic
- Code NGO v. BIR
- The Peace Bonds offered for sale and actually sold by Code NGO belong to this category
of exempt securities because, while the Philippine Government does not directly issue
them, the same guarantees them. In order for these Peace Bonds to be sold, there is no
necessity for them to be covered by the SEC – because sovereign bonds are licensed by
a different government agency – Department of Finance through the Bureau of Treasury
2. Securities Sold by a Foreign Government with who the Philippines enjoy diplomatic relations
and that also allows securities of the Philippine government to be sold in its territory
3. Securities Regulated by the Following Agencies:
a. HLURB – Contracts to Sell subdivisions or condominium units – you are already paying
for a unit when the building has not been constructed yet – this is an investment
b. Insurance Commissioner (IC) – Insurance contracts – this is an investment because
premium payments earn dividends overtime
c. BIR – Tax credit certificate (TCC) – these are overpayments to the BIR
d. Similar specialized government agencies
5. Securities which are authorized for sale but are by a court pursuant to a bankruptcy or
insolvency proceedings or other similar proceedings
- Increase of capital stock in FRIA – those new SS for a corporation under rehabilitation are
already judicially authorized
- These are exempt from registration because there is no need for a registration statement to
protect public interest because of the status of the issuer as a trusted entity and that the security
is not speculative in character – return to investor is somewhat guaranteed
VI. In Securities Transactions, there are 2 staged regulated by the SRC: (2) Secondary Market
Transactions
- Under the SRC, all transactions involving securities shall likewise be registered.
A. Requirements:
1. Registration
- All transfers involving or arising from secondary market transactions must in themselves be
registered because of the disclosure regime enforced by the SRC so that people can keep
track of the changes in the ownership of the registered security.
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a. Original registration; and
b. Subsequent registration
- Akin to registration of property.
B. Stock Exchange
- Stock Exchange = public market for shares of stocks. Transactions here are secondary market
transactions since the issuer corporation is no longer involved. The parties here are existing
holders of the security in favor of buyers. This is still governed by the SRC.
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- Secondary market transaction under the Corporation Code is acquiring shares of stocks of an
existing shareholder. This is done by indorsement coupled with delivery.
- Securities broker:
- A person, whether natural or juridical, licensed to engage in the business of buying and
selling securities for the account of others (either buyer or seller).
- They are required to incorporate.
- And for them to enjoy the facilities of the Philippine Stock Exchange (PSE), they must be
members of the PSE, Inc.
- They do business through associated persons who must in themselves be licensed by the
SEC.
- The associated persons are those who are authorized to trade in the name of the broker.
They must be individually licensed. Salesmen are not necessarily associated persons.
- The transactions in the PSE are uncertificated because there are no certificates of stocks which
are indorsed and delivered. The PSE follows a digital book entry system.
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CHAPTER II – Securities and Exchange Commission
- SEC, as far as the Corporation Code is concerned, is the primary government agency that is
tasked in enforcing and implementation of the provisions of the Corporation Code
- SEC has exclusive power, authority and jurisdiction and supervision over all associations and
corporations as well as partnerships that are the grantees of a primary franchise
A. However, the SEC also grants secondary franchises to the following corporations:
- Financing Company: A company or entity engaged in the business of lending for agricultural,
consumer or similar loans
- Financing: A special arrangement whereby the purchase price of certain facilities or
equipment shall be advanced by the financing company payable on installment by the
borrower – aside from banks, all financing companies are required to comply with the Truth
and Lending Act
- Financial Leasing Company: A specie of financing; under the jurisdiction of the SEC – This is
a company advances the purchase price of certain machineries or equipment for purposes of
agriculture, industrial or commercial purposes and the borrower is given one or two or more
options: Metrobank v. CA
a. To pay rental on a regular or periodic basis
- At the end of the period fixed in the contract, the machinery or equipment shall be
returned to the financing company
- It is an ordinary lease arrangement
- The repairs will be paid by the financing company and not the borrower
b. Traditional financing scheme
- The borrower shall pay the purchase price back at periodic installment
- At the end of the period fixed in their contract, ownership shall vest upon the borrower
- If the machineries are in need of repair in the course of the period of the contract, the
repair is paid by the borrower because it is the borrower’s asset
2. Investment Houses
- Under Investment House Act, these are entities engaged in business of underwriting
securities
- Business of underwriting: Guaranteeing the sale of any class of securities within the
Philippines
C. Investigate Compliance or Violations by Companies of the Corporation Code and All other
Special Laws placed under its enforcement
E. Policy-Making Body
- Most important power of the SEC
- SEC has the power to promulgate rules and regulations
A. The following are various categories of cases covered by the so called transferred jurisdiction
(Sec. 5, PD 902-A)
- Special Commercial Courts (SCC)
- SEC has no quasi-judicial powers they are now judicial and special jurisdiction was conferred
under RA 8799 to the SCC, which is a branch of the RTC
1. Devices or schemes amounting to fraud or misrepresentation committed by the corporation,
partnership or association, its directors or officers, SH or members or their agents and
associates
2. All cases involving intra-corporate relations
3. All cases arising out of hiring or termination as well as election or appointment of corporate
officers
4. All petitions for suspension of payments by corporations
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- However, under Financial Rehabilitation and Insolvency Act (FRIA) – the 4th cognizable
cases cognizable under the SCC is not limited to suspension of payments but petitions under
the FRIA – petitions under the FRIA but applicable to corporate debtors
B. SCC has the Power to Hear and Decide all so-called Intra-Corporate Controversies
- It is an intra-corporate controversy when:
- While it may appear on its face that it is an ordinary civil action, if the 2-pronged test is
applicable then it is the RTC that should exercise jurisdiction as a special commercial court –
it does not belong to the general jurisdiction of the MTC or RTC – usual rules on jurisdiction
shall not apply for this category of cases – because, first and foremost, under the 2-pronged
test, plaintiff and defendant has an existing intra-corporate relationship
- In order to vest jurisdiction upon the SCC, that intra-corporate relationship must have been
present and existing at the time when the dispute or controversy arose between the parties
- There is an intra-corporate relationship when:
1. Relationship Test
a. Corporation vis-a-vis:
- To the State: A quo warranto petition for the revocation of the certificate of
incorporation – involuntary dissolution – this falls under the jurisdiction of the SCC
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said branch and opened another branch. A case was filed against him for
recovery of public funds and property.
- SC: This is an intra-corporate controversy despite the fact that the defendant
is no longer a member or a treasurer of the company. First, because of the
presence of intra-corporate relationship between the parties at the time the
controversy started – he was still a treasurer and a member. When he
continued such fraud, he used company property to entice unwitting members
of the public to become members of the same. He did not tell them that he
was merely operating on his own and that they are not formally members of
the main corporation. He perpetrated a fraud upon the public and he used the
corporation as a device to continue such fraud. This case belongs to the SCC.
- All civil actions for recovery of money and property or for specific performance for
a fraud committed by a company must be filed with the SCC.
ii. SH or members
- Under the relationship test, to confer special jurisdiction upon the RTC, there must
exist an intra-corporate relationship at the time of the commission of the act
complained of
- Case:
- The following subscription contract was executed between the corporation and
another. For 100 SS at 100/share coming form the capital stock of the
company payable through a potestative condition (“kapag ako’y
nakapagpahuli na ng isda”)
- SC: This contract is void because the obligation to pay the subscription price
is entirely dependent on the sole will of the debtor – whether or not she will
caused fish to be harvested is left entirely to her discretion and therefore it is a
purely potestative one and a potestative condition makes a contract void
- If this is decided today when the corporation now judicially demands the
payment of the SS – it is the regular court that has jurisdiction – there is no
intra-corporate relationship because the contract is void because of the
potestative condition – the contract was never perfected at all
98
- If the subscriber’s name is not indicated in the stock and transfer book –
collection of sum of money must be filed before the regular courts –
depending on the amount
- Example: If the name of the subscriber has been entered in the stock and transfer
book and that the entire consideration has been paid. Upon full payment, the
subscriber can now demand for a certificate of stock. The corporate secretary
refuses to issue one. Subscriber who has paid in full filed a mandamus. Is this
intra-corporate or not?
- Yes. Certificate of stock is not material for the exercise of a subscriber of his
right as such for as long as he is already fully paid; it becomes a matter of
right for the subscriber to be issued a certificate of stock.
- Example: A certificate of stock was issued to X. X now sells the shares to Y. Valid
method to transfer this is indorsement + delivery. The agreement between X and
Y is that the purchase price shall be paid by Y in 2 installments. There was initial
payment by Y so X indorsed the same but does not deliver the same until the final
payment is given by Y. Y now pays the last installment but X still refuses to deliver
the certificate. Y now requests the corporate secretary to register the stocks in his
name but the corporate secretary refuses.
- This is under the jurisdiction of the regular court because Y is a complete
stranger. Under the Corporation Code, to bind the corporation, there must be
indorsement + delivery. Y’s remedy is against X
- Embassy Farms v. CA
- Agreement between X and Y is for the sale and transfer of the SS covered by
a certificate. X owns 90% of the outstanding controlling stock of the company.
The agreement is that X shall deliver the 90% plus several other parcels of
land belonging to X (not to the corporation) in favor of Y. It is also stipulated
that Y shall pay in installments. Once Y has paid the earnest money, he will be
given control of the business operated by the company. Y did not pay. X now
files an action to rescind their agreement on the ground of non-payment. Is
there an intra-corporate relationship?
- SC: None. The company here was improperly impleaded because the
company here is not privy to the contract between X and Y. As such, it is an
ordinary breach of contract case between the seller and buyer. The mere fact
that the buyer was given temporary control over the business does not make
him a SH of the corporation specially that he has not yet paid in full.
- Razon v. IAC
- Pursuant to their conditional sale, buyer must first pay in full the contract price
before the seller will indorse the certificate of stock. Upon down payment, the
unendorsed certificate will be delivered to the buyer as a token of trust
between them, but the seller will not yet indorse it. The buyer will merely have
physical possession of the certificate. Full payment was already made but
seller refuses to indorse. Buyer presents the certificate of stock to the
corporate secretary. Is there an intra-corporate relationship?
- SC: None. Transfer is binding upon the corporation if there is indorsement +
delivery. The transfer was never complete under the law. There is no prima
facie title over the certificate.
99
- Effect: The certificate of stock is converted into a street certificate (whoever holds
it is presumed to have acquired title over the certificate; same with bearer
instrument)
- Case: Transferee pays in full and transferee presents the certificate to the corporate
secretary. The secretary refused to register the transfer on the following grounds:
- Violates the right of first refusal of the secretary (private agreement between the
transferor and the corporate secretary);
- SC: Despite the private agreement between the transferor and the corporate
secretary, that agreement did not divest the transferor of the right to sell the
shares. The remedy of the secretary is to file a case against the transferor. He
cannot refuse the registration because there was already an indorsement and
delivery. Since the transfer is complete, registration becomes ministerial.
- Example: A (registered owner). B stole the certificate and forged the indorsement. B
presents it to the corporate secretary for registration. The secretary refused to
register. B filed a case. Is there an intracorporate relationship?
- None. He did not acquire title to the certificate. The case is not within the
jurisdiction of the commercial court.
- How to end the intra-corporate relationship? (here, the commercial court losses
jurisdiction over the case)
- PSBA v. SEC
- During the stockholders meeting, elections were also conducted. After the
election, the Board immediately assumed office. As their first act, they declared all
100
other management positions in the corporation as vacant (termination). Hence, a
case for illegal dismissal was filed by the vice – president whose position was
affected by the said declaration.
- SC: Even if the position is not the AOI or BL of the corporation, there still remains
an intra-corporate relationship because by way of further allegations in his
complaint, he alleged that he was appointed as the Vice-President on the
condition that he is a stockholder. Meaning, for as long as stockholders are
qualified to a particular position, the Board would give preference to those inside
the company. Aside from that, his complaint also alleged that his position was
declared vacant by an illegal act of the Board because the meeting was without
notice (illegal meeting). Hence, he has the right to maintain an action against the
Board. (Filing the case as a stockholder)
- Would the case survive in the special commercial court without the intra-corporate
relationship?
- If no, it is not an intra-corporate controversy. If yes, it is.
- To make it an intra-corporate controversy the cause of action must pertain to the
enforcement of rights and obligations under the Corporation Code, and or the AOI or BL
of the corporation. If the cause of action is different, then regular courts have jurisdiction.
- If the two tests concur, then definitely, it shall be the special commercial courts that shall take
cognizance of the case.
- Ang Co v. NLRC
101
- He is a stockholder of a corporation but still has a pending subscription balance (balance is
payable upon call). He was chosen as a director and president of the Corporation. He later
resigned as President. He demanded that the corporation pay him his salaries and other
money claims. The corporation ignored said demand. He then filed a money claim with the
NLRC. Does the NLRC have jurisdiction?
- If a corporate officer is not questioning his dismissal and all he is questioning is his
entitlement to his money claims, then it should be the NLRC which has jurisdiction.
- Answer if the corporation = that the corporation refuses to pay his claim because the same
was applied to his pending subscription balance. As such, NLRC dismissed the case. The
matter is an intra-corporate controversy. As such, the matter was brought to the commercial
court which however dismissed the case on the ground that since the NLRC has already
acquired jurisdiction, then it should continue hearing the case. When the matter was brought
back to the NLRC, NLRC dismissed it again. Hence, the case was brought to the SC.
- SC: The answer effectively converted the matter into an intra-corporate controversy because
there is a need to determine the validity of the set-off alleged by the corporation. The fact that
he resigned as president did not terminate his relationship with the corporation as a
stockholder. The trial court should have heard the case.
102
- The derivative suit (action for accounting of corporate funds and property as well as nullification
of certain contracts) is actually a suit inherent/intrinsic in the liquidation process. There is
necessity, in liquidation, to gather all assets to pay off all creditors.
103
CHAPTER VII – Prohibition on Fraud, Manipulation and Insider Trading
ITMFS
I. Insider Trading
- Criminalization or prohibition of insider trading
- There is insider trading whenever insiders buy or sell securities while in possession of material
non-public information
2. Directors or officers of the issuer when by virtue of their position they come into possession
of information which are not generally available to the public
- See: Section 31 and 34 of the Corporation Code
3. Any person who by virtue of said relationship or past relationship has access to material and
non-public information
B. Material information
- Any information that will affect or likely to affect the price of the security on being made public.
This refers to objective facts such as:
1. Any propose or plan merger of consolidation;
2. Infusion of new capital;
3. Increase or decrease in the capitalization;
4. Losses or profits in the operation of its business;
5. Election of officers or directors
6. In the case of companies engaged in wasting assets, discovery of new mines or minerals
7. Other similar information
- Under the SRC, all material information are required to be covered by a disclosure statement
filed with the SEC and publish in a newspaper of general circulation in the Philippines.
- The disclosure statement under the SRC is different from that of the Truth and Lending Act.
- Disclosure statement is also required for facts of special significance: These are facts that a
reasonably prudent person would consider important in making an investment decision (to buy,
to sell, or to hold on to those shares)
- Example: Apple Company (Steve Jobs)
104
- Strong v. Rapide
- The respondent here is the President of the company. He was appointed by the company to
negotiate with the Republic of the Philippines. The Philippine government offered to buy all
the lands belonging to the company. As a negotiator, he knew that the government is very
willing to buy the lands which would actually have a positive effect on the company as the
market price of the shares will eventually increase upon consummation of the contract. He
then instructed his brokers to buy shares of stocks of the existing shareholders of his
company and not to his disclose his identity to the sellers. After the contract, Rapide owned
80% of the shares.
- SC: Rapide is guilty of insider trading.
- Insider trading warrants the imposition of imprisonment of 7 to 21 years or a fine of not more than
P 1 million, but civilly, triple the amount of the transaction.
- Correlate with the duties of the officers and directors of the corporation not to take advantage of
information which come into their knowledge by reason of their position.
A. Voluntary
- May be made at any time and for any reason
B. Mandatory
1. Whenever a person or a group of persons acquire in a single transaction atleast 15% of the
outstanding controlling equity in a company. If they acquired 30% (may be in a series of
transactions) over a 12 -month period, this is known as a creeping transaction.
2. Acquires more than 50%, whether in a single or a series of transactions regardless of the
stand of the company
- Current Rules on Mandatory Tender Offer: (pursuant to the rule-making power of the SEC)
- If a person or group of persons acquires in a single or series of transaction atleast 15% of the
outstanding equities in public company, then a declaration shall be filed with the SEC. the
declaration is tantamount to disclosure. The declaration, however, will not yet trigger a
mandatory tender offer.
- When is mandatory tender offer triggered? = When a person or group of persons actually
acquire atleast 35% of the outstanding voting equities in the company or acquires such
percentage of the outstanding voting stock as would influence and control the company.
(Even below 35% for as long as it translates to control)
105
- Example: Coca – Cola Company sought to buy a controlling interest in Cosmos Bottling
(under a Concepcion group of companies) without need of entering into a formal merger.
Both of their stocks are listed in the stock exchange; hence, both are public companies. Offer
of Coca – cola is to buy the shares at market price. The Concepcion family refused. Coca –
cola made another offer at P 5 per share. Again, it was refused. Next offer was P 20 above
market price. The final price was around P 70. This offer was accepted. (320 million shares
were then bought by Coca – cola). Thereafter, the members of the Concepcion family were
removed in the Board since they were no longer shareholders of Cosmos. Coca – cola then
placed its own directors in the Board without the necessity of calling for a meeting.
- The aim of the mandatory tender offer is to afford the minority stockholders of the public
company an equal opportunity to withdrawal under the same terms and conditions and for
the same price as the controlling shareholders
- A tender offer is not an unlimited tender offer. The acquirer can fix the time within which the
tender offer may be exercise by the minority shareholders. The customary period is 30 days.
When the tender offer is mandatory, it must be publish once a week for three consecutive
weeks in a newspaper of general circulation before the offer period begins.
- Before the CEMCO v. National life, the interpretation of the mandatory tender offer is limited
to direct acquisition.
- If the mandatory tender offer is violated, the SEC will not approve the acquisition by the
acquirer and it has the power to invalidate it. This is to protect the minority shareholders.
- Example: X = investor and customer of broker A; he places an order of 1 million shares from
Pogi, Inc.. Usually, he must already pay the same. P 10 per share. Hence, pay 10 million. But X
only has P 1 million. X predicted that the amount of the shares will double the following year.
- Broker A can open a margin account for X (this must consist of a margin and debit balance =
credit advance or lent by the broker for the customer). Margin is the amount of cash deposited by
the customer to the broker to effect the transaction. This is a collateralized loan, the shares being
the collateral.
106
- The following year, the prediction of X came true. The shares are now at P 20 per share. X can
then get P 20 million from the sale of said shares.
- As a whole, he makes a profit of 10 million (20 million – 9 million loan – 1 million initial
investment)
- If the prediction however proves to be wrong, then cut the losses by selling all shares
- The regulation of the margin trading is to protect the credit and banking system.
- Maximum: The debit balance or credit cannot exceed 65% of the current market price of the
security (based on the trading price at the stock exchange) or 100% of the lowest market price
over the last 36 months but not more than 75% of current market price, whichever is higher
- Example: P 10 per share at trading price = 10 million for 1 million shares = can only lend P 6.5
- Example: In the last 36 months, the lowest market price of Pogi shares is P 2.00 per share. =
only 2 million can be lent
107
has applied a gaming license with PAGCOR; (2) He is applying the first online gambling
franchise in favor of BW Resources; (3) He will go into gambling partnership with Stanley
Ho; (4) Stanley Ho will invest in a joint venture with Dante Tan not on land-based casinos
but on floating casinos; (5) Stanley Ho came into the Philippines and they went to
Malacañang. From 1.00 per share, BW Resources’ shares went up to 140.00 per share.
When Stanley Ho went bank to Macau, he announced that he has no plans in investing in
the Philippines. At this point, BW Resources’ shares steeply went down.
4. Wash Sales
- Period is 60 days (under Tax Code)
- Under SRC, a wash sale involves a transaction or series of transactions involving the same
security of the same size or volume without a change in the beneficial ownership
- Example:
108
9. Squeezing the Float
- Float means the availability to the public
- When you hold, you stifle the supply side while the demand side is increasing – the tendency
is to increase the price
- The existing SH has the capacity to squeeze the float
- The only agency that can investigate or make formal inquiries regarding such violation is the
SEC and it can invoke all of its powers in order to determine violations and impose administrative
sanction is whenever necessary
- All civil or criminal prosecutions involving violations of the SRC must come from an investigation
coming from the SEC
- Nonetheless, when a person or group of persons, natural or juridical, broker, dealers or
investors, are the subject of an inquiry by the SEC, they may stop said investigation by making a
so-called settlement offer to the SEC
109
CHAPTER XIII – General Provisions
I. Settlement Offer
- It is a combination of a consent decree and nolo contendere plea
- Under settlement offer, the person under investigation may make an offer to the SEC which may
include a promise not to commit similar acts in the future as well as payment of a sum of money
to SEC
- The sum of money is not in the nature of a fine
- When settlement offer is received by the SEC the SEC must desire to meet based on the
following:
1. Timing – if you make a settlement offer too late in the course of investigation and a decision
is about to be reached, SEC will accept it
2. Public Interest – If there is no material interest in the public confidence in the stock market
caused by said wrongdoing, the SEC may accept the settlement offer
- If settlement offer was accepted by the SEC, SEC must publish it and in the absence of any
objection, the SEC will conform said offer biding upon the offeror – so the offeror now must
comply with whatever is stipulated and then pay sum of money to SEC
- The acceptance of the settlement offer will stop the inquiry by SEC
- The money paid by the offeror to the SEC becomes public and not money to be paid to the victim
- Whether acceptance of the SEC of the settlement offer is tantamount to dismissal of criminal
cases – not yet settled by any jurisprudence – Ma’am Lulu: No – what evidence will you have, all
the records are with the SEC – under seal against the public – it takes a court order to unseal
110
Financial Rehabilitation
and
Insolvency Act of 2010
FRIA
111
Table of Contents
CHAPTER I – General Provisions ............................................................................................... 113
I. FRIA ................................................................................................................................ 113
II. Old Insolvency Law: Remedies for individual and corporate debtors ............................... 113
III. Remedies of Corporate Debtors under the FRIA: .......................................................... 113
IV. Corporate debtors under FRIA: ...................................................................................... 113
V. Since corporations exist for profit or gain, the operation of their business may be beset by
internal or external problems. ................................................................................................ 113
CHAPTER II – Court-Supervised Rehabilitation ........................................................................ 114
Remedies of Corporate Debtors ............................................................................................. 114
I. Petition for Corporate Rehabilitation ................................................................................. 114
II. Petition for Approval of Pre-Negotiated Rehabilitation Plan............................................. 121
III. Petition for Assistance in Out of Court/Informal Restructuring Agreement (OCRA) ........ 121
IV. Petition for Liquidation ................................................................................................... 122
112
CHAPTER I – General Provisions
I. FRIA
- It completely repealed the old insolvency act, which came into force in the Philippines in 1902.
II. Old Insolvency Law: Remedies for individual and corporate debtors
1. Filing of a petition for suspension of payments (a.k.a. technical insolvency) = allowed only if
the debtor has sufficient assets to cover all the liabilities but cannot pay the obligations as
they fall due because of lack of liquidity; the objective here is to defer and to re-schedule
payments
2. Filing a petition for insolvency = the objective of insolvency is to effect a pro-rata distribution
of the assets of the debtor and to comply with the preferences and concurrences of credit
under the NCC
- In either petition, it shall be filed with the RTC of the place where the debtor resides.
A. Juridical Debtors
- Partnerships, corporations, associations duly registered with the SEC and even sole
proprietorships which are franchised by their respective LGUs and duly recorded in the DTI
B. Individual Persons
- Natural persons who operate business in their own name
V. Since corporations exist for profit or gain, the operation of their business may be beset
by internal or external problems.
113
CHAPTER II – Court-Supervised Rehabilitation
A. Two Kinds:
1. Voluntary
- This is a debtor-initiated petition.
- It is the financially distressed corporation itself that is filing the petition.
- Who is a debtor?
- Any of the juridical entities.
- But for purposes of corporate rehabilitation, it may include a group of companies who are
affiliated with one another.
- If it can be shown that the financial difficulties of one of the member group shall affect the
other companies within the same group, then the petition may cover all of them even
those who are not suffering from financial difficulties Because it may happen that the
close affiliation of these companies may pertain to certain commonality of ownership in
the assets.
- The petition shall be approved by majority of the Board and 2/3 OCS.
- It must be alleged in the petition that the corporation is suffering from insolvency and that it
consistently failed to answer for its outstanding obligations as they fall due.
2. Involuntary
- Creditor-initiated petition
- To vest legal personality to file the petition, the following must be alleged and proved:
1. The creditors or group of creditors hold at least 1 million worth of liabilities or claims
against the corporation; or That their aggregate claims is equivalent to at least 25% of the
subscribed capital stock of the corporation, whichever is higher (non-compliance of this
requirement shall cause the dismissal of the case because the petitioner is devoid of any
right to initiate the proceeding)
114
- Example: SCS of the corporation is valued at 100 million representing 10 million shares
(25% of that is 25 million)
- Creditors X, Y, and Z = combined claim of 30 million, then X, Y, and Z can already file
the petition for corporate rehabilitation.
2. It must likewise be alleged that there is no substantial issue in fact regarding the
outstanding liabilities of the corporation;
3. That the corporation is remiss in paying its obligations to various creditors at least 60
days prior to the petition; and
4. That another creditor/s not the petitioners have initiated foreclosure proceedings or about
to perfect a lien over the assets of the debtor.
- Between ordinary and unsecured creditors and preferred and secured creditors, the former will
ordinarily file a petition for corporate rehabilitation.
- Once the petition has been filed in court, the court must immediately make an ex-parte
determination as to whether the petition is sufficient in form and in substance.
- If it sufficient in form and in substance, it must now issue a commencement order.
- On the other hand, if it finds that the petition is deficient either in form or in substance, then the
court can simply issue a corrective order to be addressed to the petitioner specifying the
rectifications to be made to the petition. It will require an amended petition.
- One common ground for a corrective order is the failure to attach a rehabilitation plan in the
petition.
B. Rehabilitation Plan
- This is a detailed plan specifying the various methods by which the rehabilitation or restoration of
financial viability of the corporation may be achieved.
- It must be based on logical assumptions as to how profit may be obtained to address the
condition of the corporation and to eliminate or reduce its current debts.
2. Debt condonation
- Gratuitous abandonment of the debt. It may pertain to accrued penalties and interest or
principal, or both
115
5. White knight
- Infusion of new capital
- An entirely new entity or individual may express interest in bringing in new money to the
corporation in exchange for shares of stocks; a professional investor.
- The money is not necessarily from the white knight. Usually it is from investment baking
(consortium of lenders).
- The infusion of capital may also come from existing shareholders.
Voluntary Petition
Pogi, Inc.,
Petitioner
Involuntary Petition
In re:
____________________________________
Creditors X, Y, and Z,
Petitioners
v.
Pogi, Inc.,
Defendant
C. Commencement Order
- Deemed effective from the date of issue.
- This is required to be publish is a newspaper of general and national circulation in the Philippines
once a week for two consecutive weeks after its issuance.
- Without the publication, the proceedings cannot commence formally to trial.
1. Set the case for initial hearing with a statement that all creditors of the debtor corporation
must file verified claims with the court at least 5 days before the said hearing.
- As a summary proceeding, the notice by publication vest jurisdiction upon the rehabilitation
or special commercial court not just jurisdiction upon the matter but also jurisdiction over all
persons.
- Should there be any creditor holding at least 10% of the total liabilities of the corporation, that
creditor is entitled to separate notice as a matter of right (separate summons). If the creditor
is not furnished with any notice, he can contest any matter taken up during the proceeding.
116
- The commencement order serves as a valid and legal basis to declare null and void all
unauthorized or voluntary unilateral actions or acts made by the debtor from the moment that
the proceeding started. It is under court supervision.
D. Receiver
- The receiver must be capable of the exercise of independent judgment in order to prevent
allegations of fraud or partiality. He must not be in a position as to be materially influenced by
either party.
- There must be an investigation by the court to determine whether or not the nominees for
rehabilitation receiver are suffering from any of the disqualifications under the FRIA.
- The one who qualifies and is willing shall be appointed by the court as the receiver. Mere
appointment does not automatically vest powers upon the appointee because he is still required
to take an oath.
- The receiver has a series of positive legal duties under the FRIA, like:
1. Filing an initial report that would serve as a basis whether or not the rehabilitations court can
give due course or dismiss the petition. The report is due 20 days from the initial hearing.
2. To meet with creditors. At least one meeting for each class of the creditors to obtain the
approval of the creditors to any propose rehabilitation plan.
3. The most important duty of the receiver is to draft and finalize the rehabilitation plan so that it
may be approved by the creditors and confirmed by the court. Finalization of the
rehabilitation plan is by the receiver, approval thereof is by the creditors, and confirmation of
the plan is by the court.
- Once approved and confirmed, the plan must now be implemented. The plan is legally
binding upon all involved whether or not consented to by all.
4. The receiver shall ensure that the duly approved plan is properly implemented. Nonetheless,
the receiver will not directly manage or operate the business of the corporation because the
corporation still has its Board of Directors. The receiver, however, has the power to review
the action of the Board and recommend nullification or annulment of any transaction entered
into by the Board that would obstruct, delay or violate the rehabilitation plan.
117
- The receiver is entitled to compensation from the moment of assumption to the office. He is
also allowed to engage the services of professionals to assist the court in the proceedings
(akin to that of trial by commissioners).
- From the moment of appointment, all the assets of the corporation will be placed under
custodia legis and under trust by the receiver (fiduciary).
5. Prohibition imposed upon all suppliers of goods and services to the debtor from withholding
or stopping said supplies and delivery. This is because the corporation is still open for
business.
6. Authorize the payment of administrative expenses (expenses incurred in the filing and
continuation of the court proceedings, expenses requiring payment incurred in the course of
business as well as professional fees of the receiver and the professionals engaged by the
receiver)
- Conserve all present assets of the debtor for the benefit of all creditors and to prevent any of
them from taking said assets to the detriment of the others.
- The rehabilitation court shall notify the other courts (taking cognizance of cases involving the
debtor) regarding the rehabilitation proceeding. The petitioner (voluntary or involuntary petition)
has the duty to inform the rehabilitation court of the pendency of such cases. The parties
involved in the pending case/s shall file their respective claims in the rehabilitation court
(consolidation of all claims in one proceeding).
- The suspension of all actions has several exceptions like – not covered by suspension order:
2. All other actions pending against sureties (personal liability) of the debtors or those solidarily
liable with the debtor;
118
already pending, Puerto Azul underwent rehabilitation. The Panlilios sought the outright
dismissal of the criminal cases against them citing that since there is now corporate
rehabilitation ongoing, then the corporate rehabilitation proceedings pose a prejudicial
question to their criminal liability because the reason why they did not remit the
contributions is that the corporation did not have cash.
- SC: There is no prejudicial question because the mere fact that they deducted from the
salaries of their employees and the fact that they are registered with the SSS means that
they have the mandatory obligation, regardless of the financial condition of the
corporation, to remit said contributions.
6. All other cases pending before highly specialized administrative or quasi-judicial tribunals
- At the discretion of the rehabilitation court
- If the rehabilitation court finds that these specialized administrative or quasi-judicial bodies
can resolve the claim more fairly, expeditiously, then the rehabilitation court can yield its
authority – this constitutes as a waiver on the part of the rehabilitation court for highly
specialized courts such as the Insurance Commission (dispute involving an insurance policy
or claim by the debtor) – rehabilitation court can waive its jurisdiction momentarily – or in
favor of the SEC or NLRC
- This is discretionary upon the rehabilitation court
- Without the express waiver by the rehabilitation court, all these cases are deemed
consolidated in the rehabilitation proceedings
- The enforcement of any judgment, attachment or provisional remedy against the debtor
- Even if there is already a writ of execution issue against the debtor corporation at the time
when the commencement took effect, no levy on execution, sale on execution must be
conducted – because if sale was remove, such property will be removed from the reaches of
the rehabilitation court – that is why there shall be no enforcement even of final judgment
- All forms of voluntary payment made by the debtor in favor of any of its creditors
- In fact, these are prohibited
- The only payments allowed, once the proceedings begin, would be the so-called
administrative expenses – expenses incurred in the ordinary course of business
- Extrajudicial claims or enforcement or remedies against the debtor are likewise prohibited
and suspended
- Example:
- As of December 5, 2015 – NLRC already rendered a final and executory judgment
awarding 30M to several allegedly illegally dismissed employees of Pogi, Inc. – Effect of
the stay order on this judgment by the NLRC is that it cannot be enforced from December
15. The illegally dismissed workers entitled to the award will have to file a claim with the
rehabilitation court. However, because the award is already final, it will be considered as
an undisputed claim – workers do not have to prove their right over the same before the
rehabilitation court
- For the current employees of Pogi, Inc. the schedule of payment of salaries is every 15 th
and 30th of the month. As of December 15 (first day of effectivity of commencement
order) should the employees be paid their salaries? – No payment shall be made if the
expense or obligation is incurred prior to commencement date
119
- Payroll for December 31 (from period of December 16-30) – it must be paid –
administrative expenses
- Rentals due from Pogi, Inc. for the period January 1, 2015 up to December 31, 2015 –
the lease contract stipulates that the rentals shall be paid per annum – should it be paid?
– No because it was incurred prior to the effectivity of the commencement order
- Present rentals should be paid if authorized by the rehabilitation court because they
are in the nature of administrative expense
- You represent a creditor-bank – that holds a mortgage right of a land belonging to Pogi,
Inc. The maturity date of such loan is November 30, 2015. After the period expired
without payment, the bank has the right to either demand cash or foreclose the mortgage.
Can you file for extrajudicial foreclosure of the mortgage? – Under Act No. 3135 – after
December 15 no more – you must now file and prove your claim over the property with
the rehabilitation court
- For purposes of commencement or stay order, all creditors are considered on equal footing – all
of them will be affected by the prohibition of transfer of assets, payments and suspension of all
their claims – this is to prevent one unscrupulous creditor from having unnecessary advantage to
the detriment of the others
- With all the assets reserved and in tact, it have the rehabilitation receiver the opportunity to craft
a rehabilitation plan
- From the time of filing, a rehabilitation plan must be approved and confirmed within 1 year – if
none is approved within said period, the proceedings are deemed terminated – the petition must
be dismissed by the court – dismissal on said ground will now restore the creditors to all their
prior rights and claims – all proceedings must now be resumed
- Once a petition for rehabilitation is filed, all taxes, fees and duties due to the Philippine
Government are waived for that 1 year period – the period is directory rather than mandatory
- While ideally, the rehabilitation plan, being reflective of collective nature process, must be
consented to by at least majority of the creditors per class should any of them object to any
proposed rehabilitation plan recommended by the receiver to the court, their objective may be
overridden, and the rehabilitation plan confirmed and implemented
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corporation rehabilitation plan is to be closed, hundreds of employees and their respective
families will be rendered without livelihood – the State itself will be deprived of potential
source of taxes and other revenues and the business to be closed will open for the creditors
to have the company pay without any rational allocation or distribution. Thus, even objections
of these creditors, they must accept the rehabilitation plan.
- Rehabilitation plan is a summary proceeding in rem. After the confirmation and approval of the
rehabilitation plan, all orders by the court may be issued ex parte.
- Until such time that the corporation is rehabilitated or restored to financial viability, in such a case
the court will issue a termination order.
- If the rehabilitation plan is not successfully implemented, the court will likewise issue a
termination order to convert the proceedings into a liquidation petition.
- For judicial approval – it must be alleged and shown that the pre-negotiated rehabilitation plan is
with the consent of the debtor and creditors representing 2/3 of the total liabilities, provided that
the 2/3 includes more than 50% of secured and 50% of the unsecured creditors
- Example: 30B outstanding liabilities of Pogi, Inc. A holds 20B with security – various real estate
mortgages. B and C hold 2.5 B each. The remaining 5B is to various hundred creditors. The
parties to the negotiated rehabilitation plan are Pogi, Inc. (debtor) and A. Should the court
approve it?
- No. The 2/3 does not include the unsecured creditors.
- Assuming the minimum requirements are present, the court shall likewise issue, upon approval
of the petition a commencement order
- This is the same legal concept as the commencement order in a court supervised
rehabilitation – binding upon all even those who objected or even those who did not
participate
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- The policy of the law is to encourage such out of court to settle any dispute among the parties
- Parties to the negotiation are the debtor and the creditor
- Forms of Assistance the Law Gives the Parties Negotiating under OCRA
- How may the petition for liquidation of a corporation come about? 2 Ways
1. When a petition for rehabilitation is converted by the court into a liquidation petition
a. Voluntary
- It is debtor-initiated
- It must be through a majority vote of the BOD of the debtor-corporation and 2/3 of the
OCS – secretary certificate must be attached
- Allegation: When the corporation is no longer able to discharge its obligations as they fall
due
b. Involuntary
- It is creditor initiated
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- Requirement: Creditor or group of creditors holding at least 1M or at least 25% of the
equivalent of the subscribed capital stock, whichever is higher
- Allegations: (1) No substantial issue of fact or law; (2) That the debtor corporation has
been unable to pay its maturing obligation for the last 180 days
- RCBC v. CA
- If a corporation is ordered dissolved and liquidated, and its assets severely deficient to pay
all creditors, the court may order a pari passu distribution of the assets. Pari passu is equity
in equality that all creditors regardless of class or rank shall be treated alike.
- This is not as if you will disregard the preference
- Example: Total assets amount to 1B. Inclusive of the 1B are the mortgage assets amounting
to 100M subject of other secured assets. Unsecured assets 600M. If there are 12 creditors
who hold liens or securities over these 400M worth of assets – apply pari passu – they do not
really lose their preference as far as these assets are concerned they will still be the first to
be paid except that it will be distributed pro rata among them. Out of the 12 creditors who
hold 800M total. From the 1B segregate the secured assets – they are the ones with
preference. Therefore, distribute that among them proportionately – from the 800M pay them
400M from the assets, which they hold in their favor. The unpaid is 400M – add this to the
unsecured claims. Among themselves, they are equal but they enjoy priority from others.
- Alemars v. Ilbiñas
- The preferences were disregard. All were distributed pro rata.
- Property in trust held by the corporation in trust for another shall be excluded. These belong to
the beneficiary or the trustor.
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