1
• Definition/Related discussions
v Situaitions
⇒ Follow up/related questions to the situation given
-­‐ Answers/Sub discussions
Italicized words- Attys discussions/questions/Important
November 18, 2013
Corporation
• An artificial being created by operation of law, having the
right of succession and the powers, attributes and properties
expressly authorized by law or incident to its existence.
• It must be registered with the SEC because corporation
cannot exist unless a certificate of incorporation is issued by
the SEC.
Partnership
• Created by mere agreement of the parties. The state does
not interfere with the creation of the partnership, unlike in
corporation.
• It need not be registered since registration is only for
administrative purposes and convenience.
Example: if you want to own real estate, and you wanted to put it
in the name of the partnership, you cannot put it in the name of
the partnership unless the partnership is registered with the SEC.
That is the administrative purpose of registration. So, you cannot
use partnership name unless it is registered with SEC.
• If partnership is not registered with SEC, they can acquire
but they cannot use the name of the partnership. So, the
property acquired will be in the name of the partners
themselves.
- Property is owned by the partner whose name appears
in the title of the property.
- If all names appear, then, all of the partners are owner
of the property. Therefore, they are not partners but co-
owners.
- They are co-owners because: (1) The partnership name
does not appear; and (2) the partnership is not
registered with the SEC. So, while they are allowed to
buy the property, they are not allowed to register it in
the name of the partnership.
Partnership v. Corporation
Ø As to manner of creation
• A partnership is created by agreement of the
parties, while a corporation is created by law or
by operation of law (Sec. 2)
Ø As to number of incorporators
• A partnership may be organized by only two
persons, while a corporation (except a
corporation sole) requires at least five
incorporators (Sec. 10)
Ø As to Commencement of juridical personality
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• A partnership commences to acquire
juridical personality from the moment of the
execution of the contract of partnership, while a
corporation begins to have corporate existence
and juridical personality only from the date of the
issuance of the certificate of incorporation by the
SEC under its official seal (Sec. 19)
Ø As to Power
• A partnership may exercise any power authorized
by the partners provided it is not contrary to law,
morals, good customs, public order, or public
policy, while a corporation can exercise only the
powers expressly granted by law or implied from
those granted or incident to its existence.
Ø As to Management
• In a partnership, when the management is not
agreed upon, every partner is an agent of the
partnership, while in a corporation, the power to
do business is vested in the board of directors or
trustees (Sec. 23)
Ø Effect of Mismanagement
• In a partnership, a partner as such can sue a co-
partner who mismanages, while in a corporation,
the suit against a member of the board of directors
or trustees who manages must be in the name of
the corporation
Ø As to the rights of succession
• A partnership has no right of succession, while a
corporation has such right (Sec. 2.)
Ø As to Extent of liability to third persons
• In a partnership, the partners (except limited
partners) are liable personally and subsidiarily
(sometimes solidarity) for partnership debts to
third persons, while in a corporation, the
stockholders are liable only to the extent of their
investment as represented by the shares
subscribed by them (Sec. 66, 67)
Ø As to Transferability of interest
• In a partnership, a partner cannot transfer his
interest in the partnership so as to make the
transferee a partner without the consent of all the
other existing partners because the partnership is
based on the principles of delectus personarum,
while in a stock corporation, a stockholder has
the right to transfer his shares without the prior
consent of the other stockholders because a
corporation is not based on this principle (Sec. 63)
Ø As to the Term of Existence
• A partnership may be established for any period
of time stipulated by the partnerships, while a
corporation may not be formed for a term in
excess of 50 years extendible to not more than 50
years in any one instance. (Sec. 11)
Ø As to Law that governs
• The Civil Code governs a partnership while the
Corporation Code governs a corporation.
Ø As to its Firm Name

• A limited partnership is required by the law to add
the word “Ltd.” to its name, while a corporation
may adopt any firm name provided it is not
identical or deceptively similar to any registered
firm name or contrary to existing law
Ø As to the Dissolution
• A partnership may be dissolved at any time by
the will of any or all of the partners, while a
corporation can only be dissolved with the
consent of the state. (Sec. 117 – 122)
Situations
v 5 stockholders after organizing themselves decided to meet
and the meeting is in Singapore. On their return trip, ten
minutes after the take off, that was the last time the aircraft
was heard of. All the stockholders died. What will happen to
the corporation?
- the corporation will continue to exist as defined in Sec.
2, it having the right of succession. The right is passed
to the heirs.
v The stockholders were ranging from the age of 21 to 25 and
all their children are still infants. And during the corporate
meeting they will just “OJA OJA” (joking).
- Since the heirs are still minors, guardians shall be
designated in behalf of the minors. Succession
operates from the moment of death of the stockholders.
Rights enjoyed by a Corporation
1. Constitutional right to due process
-­‐ Due process contemplated in relation to
corporations is right to own property
-­‐ Therefore a corporation cannot be simply
dissolved by the state without due process
-­‐ Atty: my business is a property, from my business
I earn profit, I own properties. I have rights,
economic activities. You cannot take these away
without due process
2. It enjoys the right against unreasonable searches and
seizures. It means that the authorities cannot just enter in
the establishment without being equipped with a search
warrant.
3. Own property
4. Right against self-incrimination. Self incrimination does
not necessarily mean being detained in jail, it may involve
other penalties like FINES.
§ No Right to Bail because the corporation cannot be put to jail
becuase when we say bail, it involves detention.
§ A corporation does NOT possess the right to life. The
Constitutional provisions, in discussing the right to life, refers to
the life of a natural person. The corporation cannot say “you
cannot terminate my life because under the Constitution I am
guaranteed to my right to Life.” That's not the kind of life that is
meant here.
§ No right to Liberty. Liberty here means freedom to move. The
Corporation does not possess the right to liberty simply because
the corporation does not move around.
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-­‐ Atty: As a matter of fact, if a corporation is
dissolved without due process, can you insist that you
should not be dissolved? What have we learned from
our Constitution class. Recall that: “A person cannot be
deprived of life, liberty or property without due process
of Law.”
Situations
v A priest is supposedly exempted from income tax and if that
priest becomes a stockholder and earned dividends from his
stockholdings, should he be liable for income tax?
-­‐ The priest is liable because he is not exempted from
income tax there’s no such exemption. However,
churches are exempted from any taxes. If the
corporation that all stockholders are priests and they
put up a memorial park that memorial park earns an
income.
⇒ Will that memorial park be exempted?
-­‐ Even if the stockholders are priests, the corporation has
separate and juridical personality from its stockholders
regardless whether the corporation is composed of
priests or not. Exemption enjoyed by the church is not
available to that corporation because it has juridical
personality separate and distinct. Even if the church is a
stockholder of that memorial park and the church can
because it’s not prohibited to make investments,
engaged in maintenance of the memorial park. The
church cannot claim exemption over that corporation
because as it’s a stockholder to the corporation where it
invested is not exempted.
v You are now a stockholder of a corporation, but you owed
another party P10, 000. Can that other party demand
payment from the Corporation in which you are a
stockholder?
-­‐ No. Since the corporation has a separate and distinct
personality from its Stockholders, the personal
obligations of a Stockholder are separate and distinct
from the obligations of a Corporation. Hence in this
case, the creditor may only run after the Stockholder
personally.
v So, the Corporation therefore can never be liable for the acts
or the debts of its stockholders. What about Damages?
Can a Corporation claim for Damages?
-­‐ Yes. A corporation can claim for damages when its
rights are violated.
v If a customer for example destroyed equipment in
McDonald’s, of course it can demand for actual damages
which amount is equal to the value of the equipment
destroyed.
-­‐ Actual damages for cost of equipment and moral
damages
v Ronald McDonald’s head got cut off, the Manager of
McDonald’s could not sleep, therefore, can the corporation
sue for damages against that customer because of sleepless
nights?
-­‐ In that instance, a corporation does not have a nervous
system like a natural person. A corporation being a
juridical person cannot experience sleepless nights
because a corporation does not sleep! (class laughs)
and therefore cannot claim for moral damages on the
basis of sleepless nights.
v Can a corporation sue for Moral Damages based on Mental
Anguish?

-­‐ No because it is a juridical person, corporation does not
have a mentality of its own.
Sir: It does not have, as we have said, the necessary
nervous system that would involve emotions and anguish.
Ground for a corporation to seek Moral Damages
• A valid ground for a corporation to seek moral damages
is besmirched reputation, like for example the
goodwill of the corporation. Like for example there has
been an incident where the corporation’s name
degraded like in your example of sir of McDonald’s.
There has been an allegation (libelous statement) that
their food has become poisonous, which is not true then
that is the time the corporation can file for moral
damages because the corporation’s reputation is
affected, the corporation is affected as a whole and
their income as well will also be affected, then they can
claim for moral damages.
Veil of Corporate Entity
Atty: Once a corporation is given the right to exist, it acquires
a personality separate and distinct from the stockholders.
From that moment, the law places a veil over the head of its
incorporators. We cannot see the incorporators, or the law
does not see the incorporators anymore. The law simply
looks at the veil that covers the faces of the incorporators.
Insofar as the law is concerned, it can only the veil of
corporate fiction.
That’s what we now mean when we say “the veil of
corporate entity”. Because while there were 5 or more heads
before, the moment the law extends the certificate of
incorporation, that certificate serves as the veil. From now
on, that veil will not be opened. Insofar as the law is
concerned, it will only take a look at that veil. What the
stockholders do inside, hiding in that veil, it’s up to them.
Unless?
Atty: Generally, the law deals only with the juridical persons
and will not look at the faces of the stockholders because of
that corporate veil. But there are instances where the law will
lift that veil and deal directly with the corporate stockholders
• The veil of corporate entity be pierced when the corporation
is meant to
1. Defeat public convenience
2. Intended to over or perpetrate fraud
3. Justify a wrong
4. Defend a crime
-­‐ In other words, while generally the law will deal only
with the juridical person, the law will not take a look at
the faces of the stockholders because of that corporate
veil, there are instances when the law allows you to lift
that veil and kill directly the stockholders. So this is now
what we mean by piercing the veil of corporate entity.
- If indeed pierced, those persons under the corporate
veil would be liable for damages or criminal liability.
-­‐ So that while we said that stockholders will not be
personally liable because of the separate juridical
personality, we separate the liabilities of the
incorporators and stockholders from the liabilities of the
corporation, once acts are discovered that will indicate
that this corporate veil has been misused or this
corporate veil has been abused or was intended to
defend a crime, cover illegal acts or defeat public
convenience, then the stockholders can be personally
liable.
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-­‐ How do we illustrate when the veil of corporate entity
has been abused?
o Debtor who is insolvent and because of that,
he organized and formed a corporation and
placed all of his assets in that corporation as
to defraud his creditors.
o Meaning, somebody now owes a creditor and
he has already received demand letter,
anticipating that these personal assets will be
attached by this creditor, he hurriedly
organized a corporation and transferred all
his personal assets to that of the corporation.
Clearly, his transfer is to defraud so that once
the creditor will be able to get a favourable
decision against the stockholder and that
debtor happens to be a stockholder of that
corporation, then the creditor can lift the veil
and deal directly with the stockholder’s
assets.
Implied Powers
Section 2. Corporation Defined. A corporation is an artificial
being created by operation of law having the right of
succession and the powers, attributes, and properties
expressly authorized by law or incident to its existence.
-­‐ In other words, its powers are expressly provided by law but
does not limit there, there are also powers which are implied
or incident to its existence. By express provision of the law,
the law defines what these powers are.
-­‐ How could we know? The powers that can be exercised by a
corporation can be found in the articles of incorporation,
particularly in the Purpose to which it was created.
Ex.: a railroad company, it will be stated there in the purpose
for the creation of railroads
Atty: It could be in the purpose. That’s why you have to
define in the purpose, the business of corporations. If
you intend to sell and produce charcoal, then you
cannot sell and produce chocolate. CHARCOAL RAY
IMO. Define that if you intend to undertake vis-à-vis.
-­‐ If it’s not in the primary purpose you cannot perform such act
and you cannot bind the corporation.
Public Corporation v. Private Corporation
Ø Public corporations are those instituted by the state to
govern a particular portion of the state. Provinces, Cities,
Municipalities, Barangays. Whereas, Private corporations
are those that were created for private purposes such as
profit.
-­‐ Private Corporation examples: GSIS, SSS, Pag-
Ibig
-­‐ Department of Justice is not a corporation. It’s
an agency of government.
-­‐ GOCCs do not have to register with the SEC
because they have their own charters.
• VECO is a private corporation but technically it is a
quasi public corporation because it performs
public services.
Publicly listed corporation
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Ø Private corporations whose stocks are listed in the stock the cement production 2. They also provided for power
exchange. to their employees with a price? Is the company still within
their incidental power to have the power plant?

-­‐ Yes, because the power is provided to their own

employees serving some sort of an incentive to them to
encourage them to work better thus it is still within the
November 20, 2013 incidental power of the corporation.

Tests to determine WON the power exercised is incidental

Powers of a corporation
• First, it is in furtherance of the business.
• It has the powers, attributes and properties expressly
• Second, if it is reasonably necessary for the business.
authorized by law or incident to its existence. These powers
are in the articles of incorporation of the corporation,
specifically under its purpose. Situation

Example: when a corporation’s purpose is to produce and sell v Father President observed that after 8:30 the classrooms are
charcoal, it cannot produce and sell chocolate. not productive and it is idle. The buildings are worth millions
and it should be earning so they came up with the idea to put
up a dancing school. GOOD IDEA!!!
Situations
-­‐ But to go back to the primary purpose of San
v Where a railroad company, since it needs vast tracts of land Carlos, it is for the educational purposes.
to lay its tracks, has to acquire land owned by private
individuals, and these private individuals refuse to sell their
(Example by Sir: Dancing lesson, Physical education)
land, Can the corporation expropriate and compel the
owners to sell their land?
-­‐ The purpose of University of San Carlos is to give
education but not mainly on well-rounded
-­‐ YES. Being a railroad company it needs parcels of land
education. As much as the dance is so wonderful
to lay its tracks. So it will not be able to perform its
and enjoyable it is not part of USC’s mission vision
functions without acquiring parcels of land.
to students to become professionals who are
noble. USC is an educational institution and
⇒ Follow up: Can the owner of the land object, saying that the academic institution.
corporation has no power to expropriate under its articles of
incorporation and under the corporation code?
Sir: Academic institution, so its objective is to offer
academic education not physical education alone not
-­‐ NO. Though the power is not expressly provided under physical education alone. Physical education under real
the Code and it is not provided under the articles of sense not physical education arising from a dancing
incorporation of the railroad company, the corporation school not the education arising from voice lessons.
can still exercise the power to expropriate because this
power is incident to the corporation’s existence. If it Kinds of Corporations
cannot exercise this power, then it cannot perform its
function as a railroad company.
• As to number of incorporators:
v Where a cement factory corporation located far from the city
a. Corporation Aggregate - those corporations contrive
needed power to run the cement factory, so it maintains its
with more than one incorporators, these are the
own electric plant for that purpose. The power company
corporations applies in commerce.
objected saying that you don’t have power to sell, or operate
b. Corporation Sole - is associated with the clergy, like the
power plant so you cannot put up a power plant.
Roman Catholic Church, which is, comprise with one person,
which is the clergy
-­‐ Though the power to put up a power plant is not
expressly granted under its article of incorporation, this
• As to its purpose:
power is still considered as a power incident to its
existence. The cement factory decided to put up its own
a. Public Corporation -formed by the government for the
power plant to meet the needed supply of electricity of
common good and public welfare
its operation in which the power company might not be
b. Private Corporation -are those organize for private
able to provide.
purposes and profit
⇒ Follow up: if you were the lawyer of that company, how will • As to whether or not they are for religious purposes or
you support your argument on your incidental power of not:
putting up your own power plant?
a. Ecclesiastical Corporation – one which is organized
-­‐ Our cement company needs a supply of energy that the for religious purposes
power plant in the locality cannot supply. In order to b. Lay Corporation – organized for a purpose other than
secure the local power plant’s market, we will limit the for religion
use and consumption of our power supply only to our
operations.
• As to whether they are for charitable purposes or not:
⇒ FU: But in this situation, the company did not limit. Many of
the workers of the factory were from the city. They had to
a. Eleemosynary Corporation – established for
supply quarters and housing facilities for the employees
charitable purposes
because this compound was huge. The company was selling
b. Civil Corporation – established for business / profit
power to their employees within the compound at a
discounted rate? 1. They did not limit the use of the power to
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• As to their legal right to corporate existence:
a. De jure Corporation – corporation existing in fact and
in law
b. De facto Corporation – existing in fact but not in law
• As to whether they are corporation in a true sense or
only in a limited sense:
a. True Corporation – exists by statutory authority
b. Quasi-corporation – exists without formal legislative
grant; exception to the general rule that corporation can
exist only by authority of law
• As to their relation to another corporation:
a. Parent / Holding Corporation – which is so related to
another corporation that it has the power to elect
majority of the directors of such other corporation.
b. Subsidiary Corporation – which is so related to
another corporation that the majority of its directors can
be elected by such other corporation; one in which
another corporation owns at least a majority of the
shares and thus has control
c. Affiliated Corporation – one related by owning or
being owned by common management; exists between
a parent company and its subsidiary
Sir: There are also relationships that are related not only as
to relationship in shares but also as to operations. For
example in a shipping company, you may also operate a
trucking or forwarding company so that when your cargoes
arrive, they’re immediately delivered. You might also want to
operate a machine shop. You will have an advantage not
only in savings but also in the immediate servicing of your
vessels. You can also operate your own arrastre company
so that your cargoes will immediately be loaded and
unloaded the vessels. So it’s a conglomerate that you own.
You have your main business – the shipping company & you
have your arrastre, machine shop and forwarding, so all
these companies are owned by the same stockholders. The
idea is to maximize profit and to trim down operations
because if your vessels stay longer than necessary at the
pier, you are losing money. Your vessels must be moving
and the turn around of your vessels must be duly monitored.
Unless you monitor your vessels well, you might just one day
discover that you’re not earning as much as you ought to
earn with the assets you have.
• As to whether it is closed or open to the public
a. Closed corporation is one, which is limited to selected
persons or members of a family.
b. Open Corporation is one, which is open to any person
who may wish to become a stockholder or member
thereto.
Sir: In other words, when it is an Open Corporation,
everyone is welcome because shares can be transferred by
mere assignment or by mere ordinary conveyances, then
everybody can buy shares and you become a stockholder.
On the other hand, if it is a Closed Corporation, not just
anyone can buy shares.
This is very true in so far as family corporations are
concerned, because family corporations do not allow
anybody outside of the family to own shares.
To control this, they usually provide this is in the Certificate
of Stock where they will by providing that the stock
represented in the certificate can only be sold only to
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members of the family or to the existing stockholders. In
other words, you must first offer it to the existing
stockholders.
However, the prohibition cannot be absolute, because if you
will not allow someone to sell his property (absolute
prohibition), then you will be violating his right as an owner,
the right to use and abuse, the right to dispose.
So as a closed corporation, you could prohibit the disposal of
the shares of stocks. That prohibition should only be
qualified, in the sense that the stockholder must first offer it
among the existing stockholders.
It is giving the existing stockholder the “right to first refusal”.
However, if none of the existing stockholders are willing to
buy, then that stockholder who intends to sell may now offer
this already to other parties. So that cannot be an absolute
prohibition.
Parties in a Corporation
SEC. 5 Corporators and incorporators, stockholder and
members.
Corporators are those who compose a corporation,
whether as stockholders or as members.
Incorporators are those stockholders or members
mentioned in the articles of incorporation as
originally forming and composing the corporation
and who are signatories thereof.
Corporators in a stock corporation are called
stockholders or shareholders, Corporators in a non-
stock corporation are called members.
1. Corporators
-­‐ are those who compose the corporation, whether
stockholders or members. Hence, the term includes
incorporators and stockholders or members who become as
such after incorporation of the corporation.
2. Incorporators
-­‐ are those corporators mentioned in the articles of
incorporation as originally forming and composing the
corporation and who executed and signed the articles of
incorporation and acknowledged the same before a notary
public.
3. Stockholders
-­‐ are the owners of shares of stock in a stock corporation.
They are the owners of the corporation. Also called
Shareholders.
4. Members
-­‐ are corporators of a corporation which has no capital stocks.
5. Promoters
-­‐ are persons who bring about or cause to bring about the
formation and organization of a corporation by bringing
together the incorporators or the persons interested in the
enterprise, procuring subscriptions or capital for the
corporation and setting in motion the machinery which leads
the incorporation of the corporation itself.
6. Subscribers
-­‐ are persons who have agreed to take and pay for original,
unissued shares of a corporation formed or to be formed.
7. Underwriter
-­‐ a person, usually an investment banker, who:
(a) has agreed, alone or with others, to buy at stated terms
an entire issue of securities or a substantial part thereof;

(b) has guaranteed the sale of an issue by agreement to buy
from the issuing party any unsold portion at a stated price; or
(c) has agreed to use his “best efforts” to market all or part of
an issue; or
(d) has offered for sale stock he has purchased from a
controlling stockholder.
Sir: The Underwriters are the parties who undertake to sell the shares.
And even if they cannot sell, they have committed themselves to buy
the shares. In other words, they guarantee subscription.
Who are corporators?
Promoters
(Discussion) To start a corporation, normally we have promoters. They
promote the organization. They invite people to join the formation of
the corporation. They will explain the business, capital structure, plans,
the feasibility study if any, the potentials of making profit and how
operations will be done, who will carry out or manage the business.
These are the people who would really sell the idea of organizing the
corporation. So once there are takers, they will hold a meeting and
decide to organize the corporation. And once the plan is accepted,
people would start to subscribe.
Underwriters
Once the corporation is organized, the pledges made may not be
enough. But the organization will start, and the underwriters will not
come in. They will say, “don’t worry, we can get more capital. We can
find investors.” Usually the underwriters are banks. Because the
banks are the institutions who know who has idle funds. So
underwriters in a way promote. The only difference is the commitment.
Remember the lesson on commission guarantee in Partnership? They
make a commitment. Here, it’s the underwriter. The underwriter simply
commits to offer these shares to their own clientele, saying that if they
cannot sell, they will be the ones to buy.
Types of shares: How are they classified?
-­‐ See Sec. 6
De Leon’s annotation: Shares of stock may be
(1) Par value or no par value;
(2) Voting or non-voting;
(3) Common or preferred, and preferred shares may be voting,
convertible, or redeemable;
(4) Promotion share;
(5) Shares in escrow;
(6) Convertible share;
(7) Founder’s share;
(8) Redeemable share;
(9) Treasury share.
Sir: Shares can be classified according to several types. They
may be classified depending on certain rights, according to
privileges or restrictions.
Some shares may be given dividends monthly, some shares may
be given dividends 5-yearly, it depends upon the privileges. Then
they may be also classified according to their rights, maybe they
have voting rights. There are also shares which cannot vote. And
according to privileges, they have restrictions, so generally, voting
rights are given to each share. There are other certain shares
which may not be allowed to vote. Sample are those, preferred
shares or redeemable shares. When we say preferred shares,
they are shares enjoying certain preferences.
Preferences in terms of payment of dividends, preferences in
terms perhaps of other privileges which is extended by the
corporation. Redeemable shares on the other hand as the name
would indicate, these are the shares which may be redeemed by
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the corporation. Very similar to bonds, but only in so far as
they are termed, they are shares. There are occasions when the
corporation need additional fresh capital, that need for capital is
only temporary, it is only for a certain period. So instead of their
present stock holders making new investments, they have several
options to secure capital.
The most convenient option would be, banks through loan. The
only problem when you go to the bank is when they extend you
loan, they require you to put up a security or collateral, and the
collateral is not appreciated 100%. Sometimes they only
appreciate collateral or the property up to 40% or up to 60%. If
your collateral is worth a million, they allow you to borrow only
600k, that’s good enough. That’s the problem if you loan in a
bank. If you want to borrow without collateral, you can do that.
There’s a way of borrowing from the public, getting additional
capital without the need to offer any collateral.
All you have to do is to issue redeemable shares. These are
shares extended or sold to interested investors with the terms that
after a certain period, these shares will be reacquired or
redeemed by the corporation of course with a premium. So if you
acquire the share for 100k, the corporation will promise one year
after to give, 130k. We will redeem the share and give you 130K.
In other words, they borrow from the public. But we will not call it
“borrow”, because the lender becomes a stockholder, the lender
becomes an owner of the corporation, and therefore, whatever
happens, if the corporation earns profit, then, you would also earn
profit. So, redeemable shares are just sources of fresh capital.
Par Value Shares
• Shares that carry with it a value of that particular share. You
know, we have been discussing the authorized capital stock.
The authorized capital stock is divided into shares.
• These are the shares issued and which carry with them
already certain values. So that even if you already subscribe
to a certain number of shares, you do not have to pay your
subscription at one time. You pay at least 25%. The balance
of the subscription, as represented by the par values, may
be paid upon “call” by the board. Once called, you now have
to pay the balance.
Example: If the total capital stock is 1M, and this 1M is divided into
shares at 1peso per share, there shall be 1M shares at par value of
one peso per share.
• If our subs capital is 25% at one peso per share, that
would be 250k shares because the par value is one
peso per share. In other words, these represents the
value of the share and that’s what you will pay once you
pay your paid up capital. That is the value of your
share, however this 1m pesos later on could earn profit.
Situations
v And let us just assume that business was very good so that
on cash now, you have a total asset of 1.5M in the
corporation, you have earned, what has happened to the par
value of your share?
-­‐ the par value will be constant and fixed; it will remain
unless there is a change in the Article or amend the par
value, which will forever be the same par value.
⇒ However, since your capital now increase, what happens to
the actual value? Acquired a share at 1 peso but looking at
the books of the corporation now, there is increase, do think
somebody will buy it at 1 peso? Why should he buy?
-­‐ Yes. The assets have increased; the relationship of the
asset and the value of the shares have changed. While

the par value has remained, that relationship now
between the asset and shares has changed.
⇒ What do you now call the change? What has changed?
-­‐ Book value has now increased.
Book value v. Par value.
• Book Value is determined by dividing the net value of the
total corporate assets by the number of shares issued while
Par Value, on the other hand, is the amount of money or
property contributed by the stockholder as stated in the
certificate of stocks.
Sir: Shares may be classified but the classification must be reasonable
and fair, you cannot say that all common share that some may vote
and others may not If you belong to belong to the same classification
of shares, then you should enjoy all the rights appertaining to that
share.
Sec. 6. Classification of shares. - The shares of stock of
stock corporations may be divided into classes or
series of shares, or both, any of which classes or series
of shares may have such rights, privileges or
restrictions as may be stated in the articles of
incorporation: Provided, That no share may be
deprived of voting rights except those classified and
issued as "preferred" or "redeemable" shares, unless
otherwise provided in this Code: Provided, further, That
there shall always be a class or series of shares which
have complete voting rights.
Situation
v One day, the board decided that all common shares must be
allowed to vote and be voted upon as the director. One day,
the board tried to amend the by-laws that all holders of
shares may be qualified to be nominated as a director
provided that no shareholder who runs a company whose
business is in competition with our business cannot run; he
cannot be nominated. What do you think?
-­‐ The exception provided for in the by-laws is valid
because the provision protects the interest of the
corporation.
⇒ So that incidentally, when that amendment was introduced,
only one person was being referred to. That particular
amendment was intended to disqualify that person. Is it still
valid?
-­‐ It is valid if the prohibition was already there when the
shareholder acquired the share.
Sir: But if that amendment was done after you were already
a shareholder, that cannot be done, because that would now
indicate that you are trying to disqualify somebody from
becoming a member of the board. So there may be
restrictions, but these restrictions must be present the time I
acquired the shares, otherwise this becomes a deprivation of
a right which I acquired at the time of subscription.
Non-par value shares
• It must be fully paid upon subscription.
Sir: Because even if there is no value mentioned, it does not
mean that there is no value at all. If a value is assigned, it must be
fully paid. Unlike par value shares, non-par value shares are
deemed fully paid. If there is a non-par value share, creditors
could no longer expect that there are some receivables from the
shareholders. There are no more receivables because it is
deemed fully paid.
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-­‐ Minimum amount is at least 5pesos
Sec 6.
Xxx xxx xxx
Shares of capital stock issued without par
value shall be deemed fully paid and non-
assessable and the holder of such shares
shall not be liable to the corporation or to its
creditors in respect thereto: Provided; That
shares without par value may not be issued
for a consideration less than the value of five
(P5.00) pesos per share: Provided, further,
That the entire consideration received by the
corporation for its no-par value shares shall
be treated as capital and shall not be
available for distribution as dividends.
-­‐ Creditors can’t expect that there are receivables from stock
owners because non-par value shares are deemed fully
paid. So, if there are non-par value share, there will be no
receivables from the stockholders because these are
deemed fully paid. And the minimum amount is at least 5
pesos.
Founders Share
• Shares given to the founders of the corporation, giving them
privilege to vote and be voted as BOD for the next 5 years.
• Pupose: During the promotion stage, the founders of the
corporation will sell the idea as to how the business will be
pursued and the necessary steps to make the corporation
succeed. Because they have the idea, they have every reason to
stay in the BOD. Otherwise, if those voted as members of the
Board have no idea as to why the corporation was established
then the corporation is bound to fail. So to make sure that the
corporation will be able to take off for the next 5 years, then this is
a special privilege given to the founders---the privilege to own
founder’s shares that gives the exclusive right to vote or be voted
for in the BOD for the next 5 years. So we can be sure that for the
next 5 years, these same people will be there to implement the
plan and we can be sure that there will be no deviation to the
plan. Otherwise, without this guarantee we cannot be sure what
will happen to our investments.
November 25, 2013
Founders Shares
• Purpose: to guarantee, the people who have initiated the
formation of the corporation, and who have a vision and plan
for the success of the corporation, to stay in the Board of
Directors for 5 years.
• Why only 5 years? Can they not say that if it is for the
success of the corporation, then they should remain in the
Board of Directors? The law believes that Five years is long
enough to adopt, and organize the corporation. It is long
enough for these founders to pursue their plans for the
corporation. If they cannot do it in five years, then they better
change leaders for all you know other stockholders may
possess the necessary skills to attain the vision and plans
for the success of the corporation. What the law does not
want is for the holders of these shares to perpetuate
themselves. There has to be a limit.
Partcipation in the Management of SHs

• While management is vested in the Board of Directors, and
therefore stockholders do not participate in the management.
However, the stockholders up to a certain extent have some
participation in the management. This is through election of
the board of directors. This is an indirect participation as
compared to the direct participation of the Board of Directors
in the management.
• Strictly speaking, it is the board of directors who manages
the corporation but the stockholders have an indirect
participation in the management of the corporation.
• In what way they participate: In voting who among them
will manage the corporation. This is an indirect participation
in the part of the stockholder because although the board of
directors may have the direct power to manage, the
stockholder votes who will be in the board of directors, in
effect participating in management. (One may only be a
director if voted upon by the stockholders)
Non-voting shares
• These shares have no right to vote in the election of the
Board of Directors.
• If you have the right to vote, the implication is that you
may have a say in the management and governance of the
corporation.
• Exceptions:
Rule is not an absolute prohibition because where the
articles of incorporation provide for non-voting share in
the cases allowed by the corporation code, the holders
of such shares shall nevertheless be entitled to vote on
the following matters:
1. Amendment of the articles of incorporation
2. Adoption and amendment of by – laws
3. Sale, lease, exchange, mortgage, pledge or other
disposition of all or substantially all of the
corporate property;
4. Incurring, creating or increasing bonded
indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with
another corporation or other corporations;
7. Investment of corporate funds in another
corporation or business in accordance with this
code; and
8. Dissolution of the corporation. (Sec. 6)
• There are major decisions that even if youre an owner of a
non-voting share you retain your right to vote. This is in
consonance with the logic which we learned in Obligations
and Contracts. In contracts the parties suppose to
faithfully perform their obligations under the contract. Thats
what we agree-we have to faithfully comply.
• When the corporators and stockholders executed the
articles of incorporation, in effect they entered into a
contract. As a matter of fact, that could be the multi-lateral
contract other than being the contract among the
stockholders because once it is submitted to the Securities
and Exchange Commission and the SEC approved it is also
a contract between the stockholders and the State.
• Because the articles of incorporation is in effect a
contract, they are entitled to vote on the matters mentioned
under Sec. 6 Par. 6 because their rights as stockholders are
in effect changed and when the contract will be amended or
changed they are suppose to agree again. In the novation of
the contract they must be consulted. Everybody must agree
otherwise it will be a violation of that agreement.
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• Even though they have non-voting shares, what did you
notice?
Even if they are not voting shares they are entitled to a vote
in the management of the corporation pertaining to a
disposition of property and also in the amendments of their
contracts.
They are entitled to agree in this because these are now
deviations from their agreement, these are now going for
some changes in their agreement that’s why even if they are
not voting share they are entitled to vote because the
changes involves?
Involves changes in their contract, the very agreement of the
parties. The non-voting share may still vote on the
amendments of the articles of incorporations, the
amendments of its by laws, the sale or any disposition of
corporate assets, investment of corporate funds, dissolution
of corporation.
Situations
v This are matters did which from their original agreements.
They want to equate the authorized capital stock from 50M
to 100M so they are required to vote?
-­‐ They are required to vote. You are required to ask them
because this is different from what they have agreed
before. They agree that the capital would only be 50M,
now they are planning to make it 100M, the original
contracting parties, the stockholders must consulted.
v Want to invest in other business, that’s different from the
business they have agreed, voters must be consulted, if you
want to refer into mergers they should be consulted.
Merger?
-­‐ Merger means that two corporations joined/ come
together as one to make a big corporation. A merger is
a process whereby two large corporations agreed to
become one.
Two or more corporations agreed to organize
themselves to merge into one corporation. Whereas
before they are one, this is not our agreement before,
our agreement before was that we will be alone, now
you want someone to join us, you have to consult
everybody. That’s why even if they are non-voting
shares, so far as these matters are concerned they
should be consulted because this are deviations from
the original agreement.
Fresh Funds/Borrowing Money
• Incorporations needs funds, the sources of fresh funds
may could be that the corporations may borrow from the
banks or the board may call upon the unpaid subscribed
capital stocks and also may issue a redeemable shares,
means more capital. Options?
-­‐ First option, do we want to subscribe for more
shares? But not all existing shareholders maybe
interested.
-­‐ Second option, go to the banks. But banks require you
to put up a collateral to secure payment and your
assets may all be mortgaged already.
-­‐ Third option, borrow from the public in general by
issuing redeemable shares. No need for a collateral.
You are just telling the public, we will be issuing shares
for P10/share so that if you subscribe for 100 shares,

you get P1,000. If you subscribe for 1,000 shares, you
get P10,000. If you subscribe 1,000,000 shares, you
get P10,000,000.
Sir: When you issue redeemable shares, you are telling
the public to invest. But this is not an ordinary
investment. This is a special investment because the
investor becomes the owner of the corporation and as
an owner you’re not only entitled to the redemption of
your share but you are also entitled to dividends.
• (Redeemable Shares) If profits are realized
during the period, as owner or shareholder, you
are allowed dividends.
Sir: As issuer or shareholder, you will be entitled to
dividends because you are the owner. So you do
not only earn premiums or interest, you earn
dividends, if the business is good.
Investor v. Creditor
-­‐ A creditor can compel a corporation to pay
the debt. As an investor, you take risks.
Sir: As an investor, you take risks. Win or lose.
Profist or losses. That is an investor.
o But here, an owner of a redeemable share, he is a
creditor.
o When you are given RS, The shareholder may
compel the corporation to redeem the shares.
Sir: As a matter of fact, there is a redemption
period.
o When the corporation issues the redeemable
shares, there will be terms and conditions that will
specify when the corporation will redeem the
shares.
Situation:
v Here is a redeemable share that is issued to you
shares of stock and you have become a
shareholder. We issue it to you for P1 per share.
When we redeem it, how much will the
Corporation pay?
Redeemable Shares
-­‐ The corporation may pay more than the value
of each share.
Sir: The Corporation may pay P1.25 per
share. So if you bought P1,000,000 worth of
shares, the corporation will buy it back for
P1,250,000.00. When we talk about millions,
that is a lot.
Trust Fund Doctrine
• It is the subscribed capital stock, it is intended for the
protection of creditors
• Trust fund is composed of your assets, more particularly, it is
the subscribed capital stock
Situations
v If capital is P10M, how much should be subscribed and paid
up?
-­‐ P2.5M subscribed capital
-­‐ P625k paid up capital
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v Of the unpaid portion (P1.875M), can the corporation waive
collecting it?
-­‐ No, corporation cannot do this since its creditors will be
prejudiced
v Can the Corporation say later na ayaw nalang tog bayari ang
unpaid capital, paigo naning 625? Can the Corporation do
that?
-­‐ Under the corporation code, the corporation cannot
do that sir because the trust fund is not for the
benefit of the party sir. or for the benefit for the
stockholders or the board. The trust fund is created
for the benefit of third party creditors therefore the
corporation cannot condone.
⇒ In other words, the corporation cannot waive the collection,
the corporation has to collect because?
-­‐ This is for the protection of the creditors. This is not
for the corporation
So, the corporation cannot waive because that is
part of the trust fund. And it is intended for the
creditor.
v In another situation, assume that all subscriptions have been
paid, 2.5M in treasury of corporation, December came and
since they were new in the business, they did not have any
profit to divide for Christmas bonus. Board, decided on
December to take 500k to distribute it to stockholders as
bonus in form of dividends. Can they do this?
-­‐ Board cannot do this, because this is for the
protection of creditors.
SIR: They cannot do that, they cannot touch it because it is
protection of creditors,
v However, can the SHs say, will just return the certificates,
just give back our shares. You issue 500K to us, we return
the certificate for 500K, Can that now be done?
-­‐ No, basis is still the trust fund doctrine. Protection of
creditors
• General public loans to corporation for specific terms and
conditions for a fixed price and get in return from the
corporations their investment at a higher price than it was
issued
• Exactly. The corporation returns the money and gets back
the certificate, exactly the redeemable share. So why do we
allow it? Is it not a violation of the trust fund doctrine?
o It is an exception to the trust fund doctrine
because it is beneficial to the corporation
because the corporation gives back more
than what was issued.
o This is because a redeemable shareholder is
a creditor.
They are creditors and the amount the corporation
gives back to holders of redeemable share, the
corporation is not returning investments but the
corporation is paying debts. It would not violate the
TFD, there is a regulation from the SEC that a
corporation in issuing redeemable shares is

required to set aside another trust fund specifically
for the purpose of paying the redemption price of
the redeemable share. However, lets Stick to the
basic. We said that a holder of redeemable share
is allowed to get the money. Why? The holder of a
redeemable share is allowed to get back the
money provided the redemption period has
arrived.
• Exactly, the redemption period has already arrived. They are
allowed to get back the money because we said that the
holder is a creditor. They are creditors and it does not violate
the TFD because the payment of the redemption price is
merely a payment of their loan and besides, when you
acquire back the certificate of stock, it is already retired. It
does not violate this trust fund doctrine even if we return the
amounts, because the trust fund doctrine is precisely to
protect creditors. As we said, redeemable shareholders are
creditors.
Sir: THEY ARE CREDITORS! (Warrior Mode)
They are not ordinary investors. The law exempts
them. They are exempted from the trust fund
doctrine precisely because they are creditors.
Well, it is true now that there are SEC opinions
now because even if under the law sometimes
corporations say that they cannot pay. So the
corporations should set aside funds for the
redemption shares because they are not investors
but they are creditors, and you should appropriate
and be sure that you have money to pay.
• Remember that there is a period that must be satisfied. The
corporation can be compelled to redeem them even if there
are no profits. GR: The corporation cannot refuse to pay.
The non-availability of profits is not an excuse to pay
because again, they are creditors. You have to borrow
money if necessary to pay the redemptioners. Except:
When the corporation is insolvent.
o Insolvency is an instance where your current
assets are lower than your current liabilities. In
such a case, a creditor cannot be compelled to
pay its obligation precisely because he does not
have enough assets to pay the same.
Treasury Shares
• These are shares that were previously outstanding but were
re-acquired by the corporation. Once re-acquired, it goes
back to the treasury of the corporation, thus the name
treasury shares.
Ex. Redeemable shares
• Treasury Shares have no right to vote. Treasury share
loses the right to vote. Otherwise, if they still maintain the
right to vote, it will be the BOD who will exercise such right
and the tendency is, they will vote for themselves, thus
perpetuating their term in the board.
November 27, 2013
Outstanding Shares
• These are the subscribed capital stock. This is because the
stockholders have already committed to pay them. They are
already there for all intent and purposes, and these are
already part of the assets of the corporation.
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Legal Capital
• this is the subscribed capital stock. The capital which does
not fluctuate, it is fixed because it is the stockholders’
commitment. It is fixed under the article of incorporation and
has been committed upon by the stockholders.
• The stockholders own the subscribed capital stock. It might
not have been fully paid but sooner or later they will pay it.
Situation
v A situation where 10 stockholders decided to contribute 1M
each. What is the capital of the corporation?
-­‐ 10,000,000
⇒ Five years after, the 10,000,000 became 15,000,000, what is
the legal capital now of the corporation?
-­‐ the legal capital is still 10,000,000, but the actual capital
is 15,000,000. This is because actual capital is based
on the book value.
Book Value
-­‐ Total current assets/total number of shares
v So that in the situation where the capital is 10,000,000, and
there are 10,000,000 shares, what is the par value?, and the
book value?
-­‐ Par value=10,000,000/10,000,000 = P1/share
-­‐ Book value = 10,000,000/10,000,000 = P1/share
v In the situation where the capital has increased to
15,000,000 having the same number of shares, what is the
par value?, and the book value?
-­‐ Par value is still the same at P1/share (10M/10M)
-­‐ Book value = 15,000,000/10,000,000(shares) =
P1.50/share
Market Value
• It is the value as determined by the buyer and the seller. It is
the value in which the seller is willing to sell and the buyer is
willing to buy.
• A lot of buyers + fewer shares available = increase in MV
• Few Buyers + Many shares = decrease in MV
Redeemable Shares
• Redeemable or callable shares are shares, usually preferred
which by their terms are redeemable at a fixed date or at the
option of either the issuing corporation or the stockholder or
both at a certain redemption price. (P.104 Deleon)
• A corpo is allowed to issue RS if It is provided in the articles
of incorporation and perhaps indicated in the certificate
issued by the corporation because unless provided in the
articles of incorporation you cannot issue redeemable
shares.
• Redeemed Shares are property of the Corporation
Trust Fund Doctrine
• That the subscribed capital stock is held in trust for the
corporation’s creditors.

Situations
v Can a stock holder return his certificate of stock and ask in
return his investment of 2 million pesos?
-­‐ Generally, No because the subscribed capital is held in
trust for the creditors.
⇒ But in redeemable shares this is exactly what we do? So
does this violate the trust fund doctrine?
-­‐ Redeemable shares are in the nature of an exception to
the general rule because in such a case the holders of
the redeemable share are treated as creditors of the
corporation. In effect it does not violate the trust fund
doctrine.
SIR discuss: Because this doctrine protects the creditors and
holders of redeemable shares are all intents and purposes,
creditors. They did not really intend to become stockholder
this is merely an incident to the transaction. In the strict
sense of the word they are not stockholders they are
creditors.
v May a corporation in any circumstance buy back shares it
issued? Other than the redeemable shares? Situation: Lets
assume that you are a stockholder of 1 million worth of
shares and one day you were given a situation by your
girlfriend: If you will not come to America, you will lose your
girl fiend, NO COME, NO GIRLFRIEND. So what you did
was that you went to the corporation and wanted to return
the stock certificate and get your money back. Can you do
that? NO. Can a corporation buy back its own Shares?
-­‐ 1 instance is when there is a dissenting stock holder.
This occurs when the corporation for example decides
to go into a certain business and one stockholder
dissents or does not consent to the decision.
In this case what will happen? The stock holder could
exercise his appraisal right. Have his stocks appraised and
sell it other stock holders. However in what condition can the
corporation be compelled to pay? Only if there is unrestricted
retained earnings
In a case where there is a dissenting stockholder, the
corporation can be compelled to buy back the shares. If the
stockholder wanted to get out of the corporation he can tell
the corporation to buy his shares. Provided, the corporation
has unrestrcited retained earnings.
⇒ In what way does it not violate TFD?
-­‐ The corporation did not use the legal capital at all. The
creditors are still protected.
⇒ Therefore, we were saying in the question WON the
corporation can buy back the shares of the stockholder?
-­‐ Conclusion: The corporation may buy back the shares
of the stockholder, common or preferred, as long as
they have unrestricted retained earnings. So long as
they dont use the capital of the corporation.
v What happens to the shares when bought back by the
corporation?
-­‐ The shares are placed in the treasury of the
corporation.
v However, for the redeemable shares what money do they
use?
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-­‐ In the case of redeemable share the money used
is not from the Unrestricted Retained Earnings. Even if
there is no URE the corporation may still buy back the
redeemable shares because the holders are creditors
of the corporation.
v The corporation can be compelled to buy back the
redeemable shares provided?
-­‐ As long as it does not become insolvent. By insolvency
we mean that the liabilites are greater than its assets
that it can no longer pay its obligations.
⇒ When the corporation becomes insolvent what happens to
the holders of redeemable shares?
-­‐ The corporation is no longer allowed to redeem
because it will prejudice the other creditors. In this case
the holders are treated as any other creditors of the
corporation. We will follow the order of payment among
creditors.
⇒ They have joined the ranks of ordinary creditors. Once
redeemed, how much would be the price?
-­‐ at the agreed premium price otherwise if pay the same,
no point in buying the shares back.
ACS- P10M; SCS- P2.5M; PCS- P625K
The redeemable shares were part of the subscribed because
that is the portion where there were made commitment of the
shareholders.
⇒ What includes the outstanding shares?
-­‐ So that our outstanding shares that include all of the
subscribed shares the P2.5M, so that P200K
redeemable share was redeemed, it will not decrease
our subscribed capital because it is fix and it will not
fluctuate, the subscribed capital stocks is our
outstanding, it will remain the same.
⇒ What will happen to the outstanding capital?
-­‐ The outstanding will be decreased because the 200K
shares will no longer be outstanding because it was
bought back; they are now in the treasury shares, its no
longer out. The outstanding shares has been
diminished but the subscribed shares would remain at
2.5M, since there are treasury shares, it will still form
part of the assets of the corporation, still part of the
subscribed, they can sell it again to make it outstanding
again, however, they cannot give it away or throw it
away to the victims of Yolanda because it will now
affect or decrease the subscribed capital because they
are giving away shares with nothing in return. They
could resell.
Treasury Shares
• Treasury shares still part of the assets of the corporation, so
that during election, cannot they be voted upon because
they will be voting for themselves. There might be abuse, the
board will perpetuate themselves.
v Being in the treasury may they be issued so that when
December comes, the corporation wants to honor its BOD
and stockholders, so the board decided we’re not giving
away dividends today, we are giving you share of stocks
from our treasury. Can they do this?

-­‐ Cannot be done because it will affect the capital of the
corporation because they are giving it away as
dividends.
Dividends
• It is the return. It is your share in the profits. If the company
makes good for the year, they can declare dividends.
Situation
v Going back to redeemed shares with the corporation, sell
cash, we give you shares?
-­‐ No, cannot be done because you’re distributing part of
the capital and violate the trust fund doctrine.
v The corporation has profits in the bank but they don’t want to
touch it. But the corporation has shares that they were able
to redeem, can they distribute that?
-­‐ Yes, they can distribute the redeemed shares as
property dividends.
v We have profits, there are so many cash in the bank, let us
not touch the cash, let us distribute the treasury shares as
dividends, can it be done that way? Will we not be violating
the TRUST FUND DOCTRINE?
-­‐ Yes, when there are unrestricted earnings, the
corporation may distribute the treasury shares as
property dividends. Treasury shares are part of the
unrealized income therefore are not surplus so the
shares cannot be distributed as dividend. However,
when there are unrestricted earnings, the same can be
distributed as property dividend to stockholders.
v How could these treasury shares be distributed as property
dividends to the stockholders without violating the TRUST
FUND DOCTRINE? Because if we distribute it directly, we
will be in effect distributing capital because the treasury
shares are part of the subscribed capital. So how do we do
it? If we can resell these shares to outsiders, can we resell
these shares to the corporation?
-­‐ Yes, the shares can be resold to the corporation.
Sir: Use this cash in buying the shares. Because you do not
want to distribute this cash, you want this cash to remain
with the company. You want to release the shares, but you
cannot because there is a trust fund doctrine. Use this cash
for the company to pay the value of the shares. And once
company has paid the value of the shares, the treasury
shares are now free. This is no longer part of the subscribed
capital. Once the company pays the value of the shares, the
money is just being transferred to another pocket. But the TS
are not paid, and may now be distributed to the
stockholders. In effect, did the corporation earn from this?
Yes because the cash was used to pay the value of the
shares.
v So back again to Treasury shares, we've said that they can
be resold. For how much?
-­‐ The price should be as determined by the board of
directors. They may be sold to the stockholders again.
They usually sell these shares to anybody interested
and that includes the stockholders because the
stockholders may be interested to acquire more! In fact
they do possess the right to priority, and that is called
the pre-emptive right.
Pre-emptive right
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• If the company decides to issue additional shares, the
stockholders have a pre-emptive right which means they
actually have the right to be the first to buy these shares.
Because if a stockholder owns 25% of a company with
10million subscribed capital stock, he has 2.5 million shares.
So that if additional shares are offered to the public, these
shares may be acquired by some people. If for example, the
corporation decided to increase their authorized capital stock
to 20million and S (stockholder) is not given first the right to
acquire part of the additional 10, and this additional 10 is
given to others, what will happen to his 25%? While 25% of
10million before was his 2.5million shares. If the authorized
capital stock is subsequently increased to 20 million, his
2.5million shares will now be 12.5%. See, if he does not
subscribe for more and there is an increase in shares of
stock, his holdings in the company will be reduced. That's
not what the law would prefer. The law would like to give the
existing stockholders a preferential right, that is what we call
Pre-emptive right. This pre-emptive right can apply to
Treasury shares being resold.
Contents of the AOI
Sec. 14. Contents of the articles of incorporation. - All
corporations organized under this code shall file with the
Securities and Exchange Commission articles of
incorporation in any of the official languages duly signed and
acknowledged by all of the incorporators, containing
substantially the following matters, except as otherwise
prescribed by this Code or by special law:
1. The name of the corporation;
2. The specific purpose or purposes for which the
corporation is being incorporated. Where a corporation has
more than one stated purpose, the articles of incorporation
shall state which is the primary purpose and which is/are he
secondary purpose or purposes: Provided, That a non-stock
corporation may not include a purpose which would change
or contradict its nature as such;
3. The place where the principal office of the corporation is
to be located, which must be within the Philippines;
4. The term for which the corporation is to exist;
5. The names, nationalities and residences of the
incorporators;
6. The number of directors or trustees, which shall not be
less than five (5) nor more than fifteen (15);
7. The names, nationalities and residences of persons who
shall act as directors or trustees until the first regular
directors or trustees are duly elected and qualified in
accordance with this Code;
8. If it be a stock corporation, the amount of its authorized
capital stock in lawful money of the Philippines, the number
of shares into which it is divided, and in case the share are
par value shares, the par value of each, the names,
nationalities and residences of the original subscribers, and
the amount subscribed and paid by each on his subscription,
and if some or all of the shares are without par value, such
fact must be stated;
9. If it be a non-stock corporation, the amount of its capital,
the names, nationalities and residences of the contributors
and the amount contributed by each; and
10. Such other matters as are not inconsistent with law and
which the incorporators may deem necessary and
convenient.

The Securities and Exchange Commission shall not accept
the articles of incorporation of any stock corporation unless
accompanied by a sworn statement of the Treasurer elected
by the subscribers showing that at least twenty-five (25%)
percent of the authorized capital stock of the corporation has
been subscribed, and at least twenty-five (25%) of the total
subscription has been fully paid to him in actual cash and/or
in property the fair valuation of which is equal to at least
twenty-five (25%) percent of the said subscription, such
paid-up capital being not less than five thousand (P5,000.00)
pesos.
In a nutshell J , the articles of incorporation is a contract between the
incorporators will which be submitted to the state in accordance with
the corporation code
Purpose
• It is necessary to provide the primary purpose
• The purpose of the purpose is to know the scope or the
authority of the corporation. Otherwise, If its not stated it is
considered ultra vires.
• Then there should be a secondary purpose. This is
provided because in case the primary purpose is not
successful, the corporation can resort to the secondary
purpose stated in the articles of incorporation
If it’s a stock corporation, it is necessary to give amount of the
authorized capital stock,
In par value shares, it should state the par value, the subscribers and
the amount they paid
Non stock corporation – capital, name, nationality, residence of the
contributors and the amount contributed
A sworn statement of the treasurer that the corporation complied
with the required that 25% of the authorized has been subscribed and
25% has paid up
The articles of incorporation should include the warning to the public of
the allowed percentage of the capital stock to be owned by foreigners
in nationalized corporations
The name of the corporation – to distinguish it from other
corporations
The principal office – this is for the SEC for regulation purposes
The name, residences, citizenship of the incorporators
The incorporators should be at least 5 to not more than 15
Situation
v 1 filipino, 1 japanese, 3 germans – form a corporation?
-­‐ Yes, if MAJORITY of the incorporators are residence in
the Philippines, citizenship is irrelevant unless it is a
nationalized corporation
⇒ Even if they are all Japanese, can they form a corporation
here?
-­‐ Yes they can form a corporation here provided they
comply with the provisions under the law in forming the
corporation and provided they abide the laws regarding
nationalized corporations.
⇒ Nationalized corporations, can they form such corporation?
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-­‐ No they cannot since they are all Japanese
nationals.
⇒ So it is not citizenship but rather residence. To form a
corporation here, what is important is residence. Anybody
can form a corporation, provided?
-­‐ Provided that it is not a nationalized corporation.
⇒ And even if it is not nationalized corporation?
-­‐ If it is a nationalized corporation, provided that majority
of them are residents of the Philippines
⇒ Only majority of them, unless, we said if it is a nationalized
corporation?
-­‐ If they engage in a nationalized corporation, they must
follow the law regarding the percentage ownership of
citizens. Here, citizenship becomes important.
⇒ Citizenship of what?
-­‐ Filipino citizens
⇒ Again, when we say nationalized?
-­‐ When we say nationalized, this requires a certain
percentage of Filipino ownership as stockholders of the
corporation.
v 3 Filipinos, 1 Chinese, 1 Japanese, nationalized?
-­‐ What is required under the law is that, 60% of the
stockholdings of the nationalized corporation must be
owned by Filipinos.
Sir: It is not the number of Filipinos but the ownership of
stocks.
For as long as in the example, 3 Filipinos, 1 Japanese, 1
Chinese, then if the Filipinos only own 10% of the
stockholdings, then that would not be allowed because what
is required is 60% Filipino ownership of the stockholdings.
Nationalized Business
• Nationalized business has something to do with like for
instance, public transportation or electricity.
• It has something to do with public service or utilities
Sir: Retail business, rice and corn, education, transportation,
telecommunication, these are nationalized. Imagine if the
transportation business is owned by all Chinese, national holiday
in China, then no transportation here. If there’s a war in the South
China Sea, then the Chinese government say stop the business
in the Philippines and the telecommunication is owned by all
Chinese nationals, our telecommunication here will shut down,
anyway, they are all Chinese, so easy to cut down. Education,
imagine if all our schools now are controlled by foreigners, Arabic
will now be the language. So that’s the problem. These types of
business are considered nationalized and therefore, any
corporation that will engage in this type of business must be
owned at least 60% Filipinos.
Amendment
• Amendments are done by majority decision of the Board of
Directors and 2/3 vote from all the shareholders.
• Initiated by the BOD

Sec. 16. Amendment of Articles of
Incorporation. - Unless otherwise prescribed by
this Code or by special law, and for legitimate
purposes, any provision or matter stated in the
articles of incorporation may be amended by a
majority vote of the board of directors or trustees
and the vote or written assent of the stockholders
representing at least two-thirds (2/3) of the
outstanding capital stock, without prejudice to the
appraisal right of dissenting stockholders in
accordance with the provisions of this Code, or the
vote or written assent of at least two-thirds (2/3) of
the members if it be a non-stock corporation.
Incorporator
• A partnership cannot be an incorporator because only
natural persons should be incorporators.
-­‐ A partnership can be a stockholder but not an
incorporator
• Necessary to become an incorporator:
a. An incorporator must be of legal age,
b. Should comply with the residence qualification,
c. Natural person,
d. There should be at least 5 incorporators but not
more than 15,
e. Each incorporator must at least own 1 share.
Sec. 10. Number and qualifications of
incorporators. - Any number of natural persons
not less than five (5) but not more than fifteen
(15), all of legal age and a majority of whom are
residents of the Philippines, may form a private
corporation for any lawful purpose or purposes.
Each of the incorporators of s stock
corporation must own or be a subscriber to at
least one (1) share of the capital stock of the
corporation.
Situation (purpose)
v The purpose of the corporation was to promote statehood;
the purpose was to endeavor to make the Philippines the
rd
53 state of America. That was your purpose. What do you
think?
-­‐ The purpose must be lawful. The purpose is not
beneficial to the state. It is a violation of the law.
v Purpose: to promote, sell, deal, and transact, any business
in the promotion of JOY and FUN. Proper purpose?
-­‐ The purpose in unclear. We cannot know the extent of
its powers.
v The purposes and contents of the articles of incorporation
may be changed. And to effect the change, what do we do?
-­‐ Amend the articles of incorporation. After, we can now
file in the SEC
Sir: The SEC will now have to go over the changes and
approve the same.
v If your Corp’s purpose is to promote, introduce, and sell
hope and faith, is that acceptable?
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-­‐ No, the purpose is too broad.
Appraisal Right
• Not everyone will agree. For example, there is a change in
purpose of the business which will be a competition with the
business of one stockholder. Exercise AR.
• Simply, it is the right of the stockholder to have his stock
appraised because he intends to leave the corporation.
Sir: It could be any reason, like competing his business or an
increase of the capital stock, which the stockholder could express
his dissent.
Corporate Name
• It is to identify you from the others.
Sir: The process is you submit your name first before filing the
articles for verification of the name.
• Reason why important: It identifies and distinguishes
corporation from others. Also it is through the corporate
name wherein the corporate powers are exercised. (e.g to
sue or be sued under its corporate name)
• Proposal of corporate name: The corporate name is
proposed, checked, and verified by SEC to see if it is not
identical or deceptively similar to other existing corporations
who have prior registration
v How about Hikap2x corporation? Purpose to open, operate
and maintain place of clean, clinical massage. Will this name
be accepted?
-­‐ Yes, it can be accepted if it is not identical or
deceptively similar or confusing with other corporate
names.
Certificate of Incorporation
• A corporation start to exist upon issuance of certificate of
incorporation by the SEC.
• Why important: It is the best evidence that a corporation
exists, so when you required to prove your existence you
just have to bring your certificate of incorporation to the court
December 2, 2013
Amendment
• Majority vote of Board of directors, and 2/3 vote of the
stockholders.
Unrestricted Retained Earnings
• These are accumulated profits of the corporation available
for distribution to its stockholders as dividends, or this can
also be used to pay the dissenting stockholder for the value
of his shares.
• The stockholders can compel the corporation to buy its
shares when the corporation has unrestricted retained
earnings to cover for such purchase.
Improper accumulation of profits

• Under the law, the corporation cannot hold unrestricted
retained earnings exceeding 100% of its authorized capital
stock. The corporation must declare dividends.
Some corporations do not declare dividends because they do not
want the same money to be taxed for the second time. Because
when the corporations earn income it will be subjected to income
tax, and when that same money will be distributed to stockholders
as dividends and that will be income to stockholders. So it will be
taxed again by the government.
So corporations might decide to keep the unrestricted retained
earnings and use this later on by making it appear that when the
stockholders went to Europe and in their travelling it is part of their
educational tour. So the government does not want that. They
have to declare dividends.
Effects on non-use of corporate charter and continuous
inoperation of a corporation. (Dissolution/Suspension)
• If after two years from the date of its incorporation the
corporation failed to organize and commence is transactions
it shall be deemed dissolved.
However, if a corporation has commenced the transaction of its
business but subsequently becomes continuously inoperative for
a period of at least five (5) years, the same shall be a ground for
the suspension or revocation of its corporate franchise or
certificate of incorporation.
Sec. 22. Effects of non-use of corporate
charter and continuous inoperation of a
corporation – If a corporation does not
formally organize and commence the
transaction of its business or the construction
of its works within two (2) years from the date
of its incorporation, its corporate powers
cease and the corporation shall be deemed
dissolved. However, if a corporation has
commenced the transaction of its business but
subsequently becomes continuously
inoperative for a period of at least five (5)
years, the same shall be a ground for the
suspension or revocation of its corporate
franchise or certificate of incorporation.
• Does not formally organize and commence transaction of its
business within 2 years from date of incorporation
• When corporation has commenced its business but became
continuously inoperative for a period of at least 5 years
De Jure Corporation
• Attained by complying with all these requirements to create a
corporation
• De Jure Corporation – is one created in strict or substantial
conformity with the mandatory statutory requirements for
incorporation and the right of which to exist as a corporation
cannot be successfully attacked or questioned by any party
even in a direct proceeding for that purpose by the state. (P.
197 DeLeon)
De facto Corporation
• De facto corporation - is one which actually exists for all
practical purposes as a corporation but which has no legal
right to corporate existence as against the state. It is a
corporation from the fact of its acting as such, though not in
law or right a corporation. It is one which has not complied
with all the requirements necessary to be a de jure
corporation but has complied sufficiently to be accorded
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corporate status as against third parties although not
against the state. (P. 198 De Leon)
• Requisites:
(1) A Valid law under which a corporation with powers
assumed might be incorporated
(2) A bona fide attempt to organize a corporation under such
law
(3) Actual user or exercise in good faith of corporate powers
conferred upon it by law
• In their mind they already have corporate existence.
Because if they don’t have this idea on their mind, would
they be a de facto corporation? No, they will be a corporation
by estoppel
Similarities between De facto and De Jure
• The acts of the de facto corporation, like the acts of the de
jure corporation, are binding. It binds anyone. It binds the
public. They both enjoy the veil of corporation fiction
because the law recognizes their existence.
Difference between De facto and De Jure
Ø In so far as their existence is concerned, only the State can
directly question / attack the existence of a de facto
corporation because only the State was offended. And that
offense was the non-compliance of the requirements. The
State giveth, the state taketh
Corporation by Estoppel
• Anyone can question because the state did not recognize
them at all. Only the law recognizes the acts of the parties.
Sec. 21. Corporation by estoppel. - All persons who
assume to act as a corporation knowing it to be
without authority to do so shall be liable as general
partners for all debts, liabilities and damages
incurred or arising as a result thereof: Provided,
however, That when any such ostensible
corporation is sued on any transaction entered by it
as a corporation or on any tort committed by it as
such, it shall not be allowed to use as a defense its
lack of corporate personality.
One who assumes an obligation to an ostensible
corporation as such, cannot resist performance
thereof on the ground that there was in fact no
corporation.
Sir: they acted as a corporation even if they knew that they do not
have the power , they pretended to be possessing of that power.
That is why they are now prevented from denying .
Corporation by Estoppel v. De facto Corporation
• They acted as a corporation because they thought that they
have the authority and the power. They represented to the
public that they are a corporation because they honestly
thought that they are. A corporation by estoppel , from the
start they knew that they were not.
Ø As to effects:
-­‐ The acts of a de facto corpo is binding to the public. It
is as if it is a de jure corporation.
-­‐ on the other hand the act of a corporation by estoppel
is binding only between the parties, binding only with

whom it was transacted. It binds the corporation by
estoppel because it misrepresented to the particular
party that it is.
Ø As to liability:
-­‐ Corporation By Estoppel; their liability would be just
like a GENERAL PARTNER because under the law
they do not exist as a corporation, therefore they do not
enjoy the veil of corporate entity. The logic in
establishing why the corporation by estoppel does not
enjoy the veil of corporate entity because the law does
not recognize them, does not recognize its existence;
the law recognizes only the ACT
-­‐ De Facto Corporation; same as that of a De Jure
Corporation
Ø As to what is recognized by the law:
-­‐ Corporation by Estoppel; While the law does not
recognize its existence, the law recognizes the act of
that group between the two parties. Otherwise, had it
recognize its existence, it could be binding on anyone.
In corporation estoppel, you can only bind the particular
parties with whom you transacted by making it appear
that you’re a corporation knowing fully well you’re not.
-­‐ De Facto Corporation; both its existence and acts are
recognized
So that as a De Facto Corporation, we said nobody can
attack except the state so far as the business is concerned.
And we said that they enjoy the “veil of corporate entity”,
which means that even stockholders of a De Facto
Corporation, again, the extent of their liability is only
limited to their investment
Ø As distinguished from the liability of those alleged
stockholders of a Corporation by Estoppel
-­‐ COE; liable as general partners meaning they are liable
up to the extent of their personal liabilities.
-­‐ De Facto; protected under the veil of corporate fiction
and liable only up to the extent of their share in the
Corporation
Situation
v So when a corporation by estoppel executed a promissory
note as a corporation and when the creditor now demanded
the payment, what will happen?
-­‐ They cannot say that there is no such corporation that
the person/corporation signing does not exist. The law
provides that they can be held as general partners and
because of there misrepresentation they are precluded
from having that defense unlike a de facto corporation
protected by veil of corporate fiction. Corporation by
estoppel you cannot take that advantage of the
misrepresentation that you made, it was bad enough
that you deceive somebody else it will be worse if you
will be allowed to disown it just to avoid any liability/ to
comply obligation so you’re now estopped.
− Same concept applies if roles are reversed (if
corporation by estoppel is creditor, and debtor raises
defense that the former does not exist). Because the
law recognizes the act, so the parties are still
bound by their acts. It works either way because it is
the act that is recognized. Still it is binding.
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v So that one day, Kim HENARES, the BIR
Commissioner, sent a demand letter for alleged failure to
pay taxes against a De Facto Corporation. Can a De Facto
Corporation be liable for taxes?
- Yes, because the State recognizes their existence so
they can be liable for taxes.
v What is now the relationship between the De Facto
Corporation and the Stockholders?
- The corporation and the stockholders have a separate
and distinct personality.
The Corporation now enjoy separate personality, the BIR
can now tax them separately. They are liable as a corporate
entity because the law recognizes De Facto Corporations.
So that the lawyer of a De Facto Corporation cannot deny
any tax liability because it is recognized as a Juridical
Person.
The laywer of the de facto corporation cannot say that we
are not liable for taxes because we are a de facto
corporation. The law still recognizes them, as distinguished
from a corporation by estoppel where only the act is
recognized. The contracting parties in a corporation by
estoppel should be made bound.
Management of the Corporation
Ø The Board of Directors. (or Trustees when it is a non-stock
corporation) has the responsibility of managing the
Corporation
Ø Therefore, the stockholders may not change the decision of
the board. Under the Corporation Code, management is
vested with the Board. The stockholders only indirectly
manage the corporation by electing the members of the
board.
Sir: The stockholder’s responsibility is limited to electing the
members of the Board of Directors. Once they are elected, the
stockholder’s should have nothing to do, it is enough.
Ø Source of the power to manage: The law gave the board the
power, not the stockholders. The stockholders responsibility
is limited to electing them. Once they are elected, the
stockholders should have nothing to do.
Situations
v Starting Dec 20 up to Jan 2, we will no longer have work,
holiday straight but we will pay. The stockholder’s said, sigi
lang tag holiday, bantog ra diay ning dividend nato gamay
kaayo, so when the stockholders discovered that the board
declared a holiday, the stockholders meet and overruled the
decision of the board? Can they do that?
-­‐ The stockholder’s cannot overrule the
stockholders
v 50 ra kabuok stockholders, unya 5 ra na sila kabuok? Why
can’t they overrule?
-­‐ The power of control of business in the board is
deemed necessary to efficiency. It is clearly
impractical or unwise to entrust the administration
to stockholders who are too numerous and
unfamiliar with the business.
SIR: the stockholders power is only up to the extent in
electing the board. They do not have the authority to control
or reverse the decision of the board because the power to
manage (the story about the house of the ninja)

v So if the stockholders would want the Board’s decision to
reflect their own vision, their own ideas, what should the
stockholder’s do?
-­‐ Elect the good ones.
Sir: You want your ideas to be brought to the Board, then, elect
someone whom you think could cascade your ideas in the Board.
Powers of the Board
Ø The power of the Board are:
(1) to conduct business,
(2) manage property of the corporation,
(3)exercise corporate powers.
Sir: Alright, property, business and administration. Those are
the basic fundamental powers of the Board.
Director
Ø They are elected by the SH
Corporations have a Tri-Leveled Structure (1) Stockholders, (2)
Board of Directors, (3) Managing Officers
A corporation is tri-leveled. At the bottom of this pyramid would be
the Stockholders, and the stockholders themselves elect the
Board. And the board themselves, to they manage directly the
corporation? The corporation actually is run by the Officers. So
you have the Officers on top, the Board in the Middle, and the
Stockholders at the base. In other words, the stockholders elect
the board, they have the power to constitute and organize the
Board.
Ø They are allowed to run the corpo for efficiency, smoother
business transactions. Otherwise, it would be chaotic to
allow all the stockholders of a corporation to participate in
direct management of the latter.
Ø One can be a director if one possess all the qualifications, if
elected, then own at least one share of stock.
Ø There should be ownership, such as a voting trust
agreement. (to be discussed later) For now, what is required
is ownership IN YOUR OWN NAME. This is important.
Sir: Thus a proxy or a pledgee may not be elected as a
director.
Ø Other qualifications:
(1) Legal ownership of at least 1 share of stock
(2) Must be natural person
(3) Legal capacity
(4) Majority of the BOD must be residents of the Philippines
(not citizenship)
Situations
v Alright, you are at least a subscriber and elected to the
Board. So that in one meeting Yntig, you went to Miss Olvis.
Vis, ganahan gyd ko mo tambong sa meeting sa BOD pero
wa koi share, pwd mo hulam ko sa imo certificate of stock, in
short, you borrow the share of Miss Olvis, can you now go to
that meeting and say that I have the share of Miss Olvis and
I am attending this meeting because I want to be elected as
director. Can you do that?
-­‐ No because you need to be the owner and this case sir,
I am not the owner of the share, I just borrowed it.
⇒ Let’s change the situation, it was Olvis who came to you. Tig,
gusto ko mopalit ug bag-ong cellphone, pwede ko mo hulam
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ug kwarta, 30,000, don’t worry, I will pledge to you my
certificate of stock in the corporation. I will pledge to you my
stock certificate. There was a letter pledging to you the stock
certificate. And in pledge we learned, as distinguished from
mortgage, a chattel mortgage?
-­‐ A: There is a transfer of physical possession. (RD
Pawnshop, Bras are expensive, Nawng ni Yntig buotan,
etc2x)
-­‐ Still, you can’t be voted on because ownership over the
pledged stock certificates still remain with Olvis. There
is no transfer of ownership in pledge.
⇒ Can you borrow shares of another person to be elected as
director?
-­‐ No, you need to have legal title over the share. In other
words, you need to be the owner or at least a
subscriber of a share of the corporation to qualify as
director. In a contract of pledge, the pledgee cannot be
elected as a director because he holds the share
merely as security and not as owner, there was only
transfer of possession of the share but no transfer of
ownership
v If corporate officers have power to run the corporation, can
they change the decision of the board?
-­‐ no, corporate officers can only exercise powers
delegated to them, they cannot change acts of the
board of directors
-­‐ even stockholders cannot overrule decision of the
board, they only exercise indirect control of the
corporation by electing the board of directors. They
have no direct control over the corporation.
o board has sole authority to determine policy
and exercise corporate powers
o stockholders should, therefore, elect board
members who are able to represent their
interests
Delegation of powers of the BOD
Ø Board cannot delegate ALL its powers to the president
because it would prejudice the interest of the stockholders.
From the start, the stockholders intended to have a
deliberative body to intelligently decide upon corporate
matters rather than having only one person leading the
corporation.
Ø Board can only delegate those affecting day-to-day activities
of the corporation
Ø Board cannot delegate policy-making powers
Situation
v Corporation wanted to put up a new building in davao, and
would have to comply with OBO in davao. Should the entire
board go to davao to apply?
-­‐ No, such task can be delegated because it only affects
day-to-day activities of the corporation
December 4, 2013
Situations

v In one Christmas party where all directors were present in
the same table. Table for 10, 5 directors, other 5 were
occupied by other guests. One director mentioned they
would acquire certain property, everybody agreed. Following
day, president went to owner of property and finalized
acquisition of property, payment by installment. When owner
nd
demanded payment of 2 installment, there was a new set
of the board, the corporation refused to pay saying there is
no resolution authorizing acquisition of this property. Corpo
wanted to return property, can owner compel corpo to
compel transaction?
- No, corpo cannot be compelled
- Must act as the board of directors, a deliberative body
having exchange of ideas with matters having to be
discussed intelligently for the protection of the
corporation and stockholders
o they didn’t act as such during the meeting
o if it was allowed, it would be prejudicial to the
corporation’s stockholders
o law does not allow them to act at random
v If prince was one of 5 directors, one morning while he was
singing, somebody knocked at his door, “naay ipa pirma
niya” but was signed by the subordinate of prince. It turned
out to be a resolution, was the act binding?
- No, because it was not constitutive of an act of the
board since it failed the requirement that matters need
to be discussed AS A BOARD
Exceptions where above requirement need not be satisfied
- see page 228-230 de leon 2010 ed., (10 exceptions)
- Take note on the emphasis on Ratification and BOD as
SHs themselves
v if you were given power by the board, authorized and
empowered to decide on any and all acquisitions of real
estate properties which you feel will redound to the benefit of
the corporation
- While a corporation may delegate its power, it may not
abandon its power
- in this instance, the board is practically abandoning its
power
Meeting
• To have a valid meeting, there must be a quorum, which
means that more than 50% of the members of the board
must be present in the board meeting unless provided
otherwise by the articles or by-laws (may be less or more
than the majority)
Quorom
• Number of members of the board required to be present in
order for it to convene a valid meeting.
• Without a quorum, anything discussed or approved there
would not be binding.
v In a board of 10 directors, what is the quorum?
-­‐ It depends on what is provided in the articles, unless if
the articles is silent on what the quorum is it would be
[50% + 1, or the simple majority]
o qualified majority, depends on what is stated
in the articles of incorporation
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Stockholders (SH)
• They elect the BOD
• Management Participation: the participation of the
stockholders in the management is indirect, that is through
the election of the board of directors. It is the board of
directors that directly manage the corporation.
• Review of the decision of the BOD: No right to review. The
authority of the stockholders is to elect them, and put them
there. The board’s power is not derive from the stockholders
because it is the law that provides them the power. Thus,
their decision cannot be reviewed by the stockholders.
o Exceptions:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or
other disposition of all or substantially all of
the corporate property;
4. Incurring, creating or increasing bonded
indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation
with another corporation or other
corporations;
7. Investment of corporate funds in another
corporation or business in accordance with
this Code; and
8. Dissolution of the corporation.
They can participate in the instances mentioned because
these are fundamental changes in their agreement. As we
said, basic principle in contract that the contract itself must
be binding between the parties, any changes to the contract,
then the contracting parties should be involved. This is the
reason why insofar as these things are concerned. The
stockholders who are parties in the articles should be
consulted because this is now a change in their
fundamental agreement.
Merger
• This involves an agreement between two or more
corporations whereby the corporations involve will merge
themselves together and agree that there will one surviving
corporation. But this is not the original agreement. Because
of this change, then the stockholders should be consulted.
Delegation of the powers of the BOD
• The board can delegate their power to specific officers or
even to an executive committee.
• The board may delegate the powers as stated in the by-laws
or the articles of incorporation subject to the limitation that a
delegation of power must not amount to abdication of power.
• Decisions or exercises of power that requires the skill and
competence of the board may not be delegated because that
is the reason why you are elected to be in the board. This is
in order for you to use such skills for the benefit of the
corporation.
Sir: In other words, the duty of a director is personal. You
yourself have to act as a director. Being personal it cannot
be delegated.

Situation
v In effect, may an officer who wants to go on a Christmas
vacation tell someone, “Mr. Lumapas, I execute a special
power of attorney to authorize you to act as a director for the
corporation in my absence” can this be done?
-­‐ No, because the requirement of the board in a meeting
is to act as a deliberative body and directors cannot
attend board meetings by proxy.
-­‐ Because of the very nature of their duty. It is fiduciary in
nature in the sense that you are in the position by virtue
of the trust reposed in you by the SH or members.
Thus is contradictory to delegate to another person
whom such trust was not given to by the SH or the
members of the corporation.
v If the corporation is into selling real estate, should the board
of directors go out and sell the land?
-­‐ No, because these acts are routinary and such
acts do not require the skills and competence of
the board.
Pledge
Sir: In order for one SH to vote for the BOD, one must own 1
share of stock and such stocks are personal properties. Being
personal properties, can you pledge them? Yes.
• The possession of the personal property is transferred thus
one only transfers the possession of the certificate of stock
to the pledgee. So between the pledger and the pledgee,
who can vote? It is the pledger, because what was
transferred was merely the possession and not ownership of
the shares of stock.
• Personal properties can be pledged. The possession of the
personal property is transferred. They are represented by a
certificate. Your possession of the certificate is equal to the
possession of the shares.
• Vote: It is the pledgor who has the right to vote since what is
transferred is merely the possession and not the ownership.
Ownership is retained by the pledgor.
Election of the BOD
• Generally, voting can be by viva voce or roll call. Exception,
when there is a request that the election be by ballot.
• Votes needed: What is required is only PLURALITY and not
majority of the votes cast at the election.
• As to how many voted a SH is entitled to: For stock
corporation, the voting system is Cumulative voting. By
this method, a stockholder is allowed to concentrate his
votes and give one candidate as many votes as the number
of directors to be elected multiplied by the number of shares
shall equal. He may also distribute it to as many nominees
he would wish.
Situation
No. of directors to be voted : 5
No. of shares no. of votes entitled
A-5 25
B-5
C-5
D-5
E-5
F-5
v If A,B,C,D and E are nominated. F being an outcast
nominated himself. Can F win?
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-­‐ Yes, under cumulative voting.
Cumulative voting is that the stockholder may accumulate
his votes to one director. The purpose of it is the
representation of minority stockholders. So ABCDE decide
that they will cast their votes to 5 of them. 5 votes to each of
them, all of them got 25, so F will accumulate all his votes to
him. It will result to draw. No winner.
A-25; B-25; C-25; D-25; E-25; F-25
Then they requested E to give 1 each to them, ABCD gets
26, E -21, F- 25, the directors are ABCDF. The intention of
Cumulative voting is to allow the minority to have a
voice in the board, to be represented in the board.
A-26; B-26; C-27; D-26; E-21; F-25
Therefore, we did not attain the majority, they did not win by
majority there but they won by plurality votes.
Majority
• Its 50%+1. And for the board to conduct a meeting there
should be a quorum the number required in order to conduct
a valid meeting without a quorum there could be no valid
meeting, this could either be simple or qualified majority.
Quorum
• quorum is the number required to conduct a valid
meeting, so there could be a quorum of less the majority, so
if the articles or the by-laws would say that number of 10
directors 3 would constitute quorum.
After electing the BOD
• The law requires the board to report to the Securities and
Exchange Commission.
Section 25. Corporate officers, quorum. – Immediately after
their election, the directors of a corporation must formally
organize by the election of a president, who shall be a director,
a treasurer who may or may not be a director, a secretary who
shall be a resident and citizen of the Philippines, and such
other officers as may be provided for in the by-laws. Any two
(2) or more positions may be held concurrently by the same
person, except that no one shall act as president and secretary
or as president and treasurer at the same time.
The directors or trustees and officers to be elected
shall perform the duties enjoined on them by law and the by-
laws of the corporation. Unless the articles of incorporation or
the by-laws provide for a greater majority, a majority of the
number of directors or trustees as fixed in the articles of
incorporation shall constitute a quorum for the transaction of
corporate business, and every decision of at least a majority of
the directors or trustees present at a meeting at which there is
a quorum shall be valid as a corporate act, except for the
election of officers which shall require the vote of a majority of
all the members of the board.
Directors or trustees cannot attend or vote by proxy at board
meetings.
Sir: they will now elect officers that would complete our pyramid. At the
bottom are the stockholders, in the middle the board of directors, and
at the top the officers.
Officers
• Mostly this are the President, Secretary, Treasurer and
other officers
• President must be a director, so he owns at least one
share since to be director, you must own one share.

• Secretary doesn’t need to be a director but a resident
and citizen of Philippines.
• Treasurer may not be a director.
• Vice President may not be director. But if President
dies, he must acquire one share and be voted as
director before he can assume the presidency.
Moral lesson: Before running for Vice President, you’ll be better
off if you get yourself elected as a director.
v One day, Barcenas, a director, was singing and strumming
in the shower and the helper knocked in the door, “Sir nay
pa permahan”, Barcenas said “Unsa mana? Naglugod pa
ko.” He opened the door and signed but what he saw was a
board resolution. It authorized president to mortgage
property to secure loan. Was it a valid resolution?
-­‐ No. To be valid, the board must convene and act as a
board. In this case, they didn’t act as a board.
Sir: The purpose of the board to act as a board is for there to be a
deliberation, exchange of ideas and discussion of what is to be
decided and agreed upon so that board resolutions will represent
the decision of the board and for the benefit of the stockholders &
corporation itself. But this may not be true all the time.
Circumstances when the board doesn’t have to act as a board
• When the directors are sole stockholders themselves
because the intention is to protect the stockholders.
Whenever they meet, they can sign. If they meet on the
same aircraft, on the same flight, they can discuss & it is
valid.
Situation
v If we happen to meet in the same aircraft, aboard the same
flight, near the comfort room, can they do it?
-­‐ If they are the only stockholders, it can be done.
Circumstances may the decision of the board be made even
without a meeting
• When the decisions of the board have been ratified
subsequently.
They can be ratified by a subsequent board, especially if they
were ratified by the stockholders themselves. Although there
was a defect at the time it was approved, it can be ratified.
The reason why during an annual stockholders meeting, this is a
usual item in the agenda. There could be some resolutions that
which may have been executed which may have been defective.
And that defect may be cured through the stockholders ratification
by the stockholders. In an annual meeting of the stockholders for
example, one important agenda is the ratification of all decisions
and resolutions entered into or executed by the board. The
intention is to cure whatever defect there was insofar as those
resolutions are concerned. So board resolutions are given to the
stockholders, unless there are questions regarding what these
resolutions are all about, somebody may move during
stockholders meeting that all the decisions and resolutions that
board may have executed during the past year, may be approved
and ratified in this stockholders meeting. Any decision and
resolutions is cured. So while generally, the law requires that as
a medial or a deliberate body, the board must act together in a
meeting, there are situations when there is no meeting, it may still
be considered valid.
Diaqualifications of BOD/T/SH
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Sec. 27 Disqualification of directors, trustees or officers. -
No person convicted by final judgment of an offense
punishable by imprisonment for a period exceeding six (6)
years, or a violation of this Code, committed within five (5)
years prior to the date of his election or appointment, shall
qualify as a director, trustee or officer of any corporation.
There are disqualifications. The purpose is to promote good
governance. You must see to it that a corporation is run and
manage by people who are qualified and who have integrity The
intention is promote further the interest of the stockholders. So if a
person is guilty of any crime, he has no moral duty being in the
board, because the board is supposed to represent the interest of
the stockholders. As a matter of fact, while you are in the board,
while your decisions may not be reviewed by the stockholders,
there is a remedy.
• If a stockholder continues to misbehave and continues
to act against the interest of the stockholders, they may
be removed with 2/3 vote from the stockholders and
therefore vacancy will occur.
Vacancy; causes
1. Death,
2. Resignation,
3. Abandonment,
4. Disqualification,
5. End of term, or
6. Incapacity of a director
7. If there is an amendment increasing the number
of directors in the articles.
• All these could create vacancy, and therefore a special
election could follow to elect a successor.
Ammendment of AOI as means of vacancy
• It may be filled by a stockholders or members if the vacancy
is caused by an expiration of term, death, abandonment,
disqualification, if the remaining directors do not constitute a
quorum. If it still constitutes a quorum, at least majority of
the members are empowered to fill any vacancy occurring
in the board other than by removal by the stockholders
or by expiration of term.
Removal of the President; Procedure
• It must be done in a regular meeting or in a special
meeting done for that purpose. And it must be with notice
given to all stockholders. So the notice must state the time
and date of the meeting and the removal must be on the
agenda.
• Who send notice: It could be the Secretary, upon the
order of the President, or by written demand of the
Stockholders who hold at least majority of the outstanding
capital stock.
• Howerever, if you are the President, you wouldn't send out
that notice. Because sending out that notice will be like
signing your own death warrant. So no way will the
President allow that notice and no way will the Secretary
send it out. So can you still remove the President? If not
the president, then the stockholders who own at least
majority of the outstanding capital stock may cause the
notice to be sent.
Situation
v Majority of the outstanding capital stock. So, if there were 10
stockholders, can 8 already call for the notice to be sent?

-­‐ It would depend, if 8 of the stockholders own majority of
the outstanding capital stock. So we don't count by
the number of stockholders, but by the number of
shares.
And so they did. The outstanding shares were represented
in the meeting except the President. The president tried to
peep through the window and said, “nabuang na mo, kinsa
kahay mu convene anang inyong meeting kung wala ko?”.
So do we have a problem? (addtl facts: The CEO and
Secretary also refuses to preside. There is no provision
under the Law or the Articles of Incorporation on presiding
officer.)
• Presiding Officer of the meeting called upon by the
majority of the stockholders: If the consensus of the
stockholder, shall elect a temporary presiding officer.
The body will designate a presiding officer. And perhaps,
if the secretary is absent, designate a temporary
secretary to write the minutes of the meeting. But if the
corporate secretary is present, he HAS TO act as the
secretary, it is his responsibility. So, we have now the
presiding officer, and the secretary, now Miss Otero, the
presiding officer will now call this meeting to order.
• Next: Now, the presiding officer will announce the
agenda. “The purpose of this meeting is to decide
whether or not to remove the president. Unless there
are some discussions needed, we will now proceed
with the voting. Those who are in favor of the removal
of the president, please raise your right hand.” The
secretary will take note of the votes. Now the secretary
will announce the result of the voting and he will put it in
the minutes that the president is removed.
• Then: After the removal, there is vacancy, and so an
election will follow and the cumulative voting is applied.
Compensation of BOD
• Unless stated in the by-laws, they are not entitled to
compensation since being an owner, you are supposed
to serve the corporation.
• If the by-laws provides for a compensation, it should not
exceed 10% of the net income before income tax of the
preceding year.
• Even if they are not given compensation, they are
still entitled to a reasonable per diem . The board may
declare allowances, sometimes, these are even bigger
than salaries. Per meeting, if you are a director of San
Miguel for example, 100K per meeting. (wwooowww)
They do not have salaries. Sometimes also, these
corporations do not make it appear that the directors are
receiving compensation, or it will be subjected to income tax.
These directors don’t want that. So, they just make it appear,
that instead of receiving cash, the board has a special
meeting in Singapore or in Europe and they are compelled to
bring along their wives, and children. No withholding tax and
no income tax because these are expenses for official
business of the directors. So they enjoy allowances without
taxes, because these are expenses.
Sir: So the BODs enjoy allowances without taxes. Otero, if
you were a director and you have a personal business, you
were engaged in catering service and the corporation which
you are a director intends to hold a party for all the five
thousand employees of San Carlos which is the corporation.
Conflict of Interest
Situations
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v Do you think your catering business could serve and
cover your business to the corporation to which you are a
director?
-­‐ Yes
⇒ I do not see the conflict. I am a director but I own a catering
service so if my corporation intends to run a party and I have
a catering business, why can't I offer?
-­‐ If the act will prejudice the corporation or if it will
amount or if a director has a personal or pecuniary
interest. As long as it will not prejudice the corporation
however, it is also provided that the contract entered
into by the corporation may be rendered voidable sir if it
does not conform with the requisites provided by law.
The requisites includes that the presence of the director
upon which that contract was entered into was not
necessary in order to constitute quorom and the
contract is fair and reasonable.
⇒ There is no conflict. Why? When would conflict arise?
-­‐ The conflict arise if aside from the pecuniary interest
that the director has. Aside from that fact sir, conflict
arises when the business of the director is in
competition or will prejudice the business of the
corporation.
⇒ That's one. There is conflict of interest if there's
competition. But in that illustration, how could conflict
arise? Do you think it's possible for conflict to arise?
-­‐ In that situation, conflict will arise if the director will
insist that for the corporation to get the services of
his catering services, if the director would not allow
the corporation to engage other catering services
aside from his own catering service.
Conflict will arise in that situation if the director will
insist in getting his own catering services.
Sir: But here he did not do that. If the Corporation says
there should be a bidding, the director has no decision. So
as the bidding committee fucntions, there’s no conflict. The
deal is valid. There will be conflict however, as you said
when there is a comptetition, but specifically conflict
arises when there is a DUTY of that specific director to
look for a catering business. Maybe there was a resolution
authorizing the director to get the catering service, for
example Ms. Otero is authorized to offer food and
beverages. If she is designated, and she has a catering
business. Can she still offer her business? No. There is now
a conflict because of her duty. But without a duty, there’s no
conflict. THERE WILL CONFLICT ONLY WHEN THERE IS
A DUTY TO PERFORM, YET HE OFFERED HIMSELF,
because he takes advantage of his duty.
v In another SITUATION, you are director, and in a board
meeting, it was decided that the corporation will acquire a
parcel of land near IT PARK. After the meeting, you went to
the owner, because you also saw a good opportunity,
offered to buy the property for yourself. Can you do that?
-­‐ No. In this situation there is DISLOYALTY.
Sir: Here he was disloyal. He was disloyal because there
was no duty. If it was his duty, there would be conflict. Here
there was no duty. He was disloyal because he took
advantage of the information obtained from the board
meeting. He took advantage of the business opportunity for
himself. That is now the difference between a disloyal
director from the conflict of interest.

Difference between Disloyalty and Conflict of Interest?
Ø There is Disloyalty when the director, taking advantage of his
being a director, takes and deprives the corporation of a
business opportunity, which should have belonged to the
corporation. In conflict of interest, the director is given a
DUTY, and he himself offered and entered into the
transaction.
v Dealing by a director between the corporation proper and
valid?
-­‐ It is proper and valid.
Sir: It is. There is no prohibition. Otherwise, no one will want to be
a director. There could be a valid transaction.
⇒ However, what is the status of the transaction?
-­‐ It is voidable.
⇒ Under what circumstances?
Sec. 32. Dealings of directors, trustees or officers with
the corporation. - A contract of the corporation with
one or more of its directors or trustees or officers is
voidable, at the option of such corporation, unless all
the following conditions are present:
1. That the presence of such director or trustee
in the board meeting in which the contract
was approved was not necessary to constitute
a quorum for such meeting;
2. That the vote of such director or trustee was
nor necessary for the approval of the
contract;
3. That the contract is fair and reasonable under
the circumstances; and
4. That in case of an officer, the contract has
been previously authorized by the board of
directors.
⇒ The transaction is valid but can be annulled, under what
circumstances?
-­‐ If his presence is needed to constitute a quorum to
approve a particular contract, the contract is voidable
(when his vote is also necessary to approve a contract)
-­‐ The contract is unfair and unreasonable
Interlocking director
• An interlocking director is a director of two or more
corporations doing business with each other.
Situation
v Here is a trucking company which Mr. Uy is a director and
here is another company, who sell tires, of which Mr. Uy
again is a director. So Mr. Uy is a director of two corporation.
The trucking company buys its tires from the tire company. Is
this allowed?
-­‐ Yes, this is allowed. They can enter into any
transactions. However, the contract would be voidable.
⇒ Why is it made voidable?
-­‐ If his presence is needed to constitute a quorum, his
vote is needed to approve a particular contract or the
contract is unfair and unreasonable then it is voidable.
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Disqualifications of the Directors
Section 27. Disqualification of directors, trustees or
officers. – No person convicted by final judgment of an
offense punishable by imprisonment for a period exceeding
six (6) years, or a violation of this Code committed within
five (5) years prior to the date of his election or
appointment, shall qualify as a director, trustee or officer of
any corporation.
Situations
v What is the effect if the stockholders do not know of the
conviction of the director, and the latter has already
participated in various meetings and voted on different
issues? What could be the effect of those decisions or
resolutions that have been approved by the disqualified
director?
- The decisions or resolutions made will be considered
as valid because the director’s disqualification is not yet
known at the time those resolutions were made. Thus,
he becomes a de facto director.
v A situation where the vote of the a disqualified director was
included in a decision to borrow money from the bank, and
when the loan becomes due and demandable the
corporation refuses to pay the bank saying that the
resolution was defective because without the vote of the
disqualified director, the resolution would not have been
passed.
- The Corporation cannot escape its liability on the
ground of defective resolution because at the time it
was made, the disqualified director was acting under
the colorful authority.
Difference between De Facto and De Jure Director
Ø The difference lies in its ability to remain.
Ø Votes: A de jure director’s position will always remain as
such while a de facto director’s existence will continue until
he is disqualified.
A de jure director’s position or existence cannot be
questioned while a de facto director, his position may be
questioned, but until that happens he remains to be a
director. So the votes he has made will remain binding.
Situation
v Practically is there such thing as a de facto director? In so
far as binding effect is concerned?
- No, the difference lies in his ability to remain also the
difference lies in being subject to disqualifications until
this happens he is just like any other de jure officer.
Unless in public corporations, de facto officers are
different so that if the judge is discovered to be a BAR
flunker his decisions may be questioned. The decision
may be nullified because the qualification of the Judge
is important. He cannot assume authority or jurisdiction
unless he has proper qualification. Thus it makes a big
difference in a private corporation director and in a
public corporation officer.
Disloyalty

• In disloyalty as compared to conflict of interest, it is not
necessary that you have that duty to perform, however the
director is taking advantage of such business opportunity
towards his own advantage.
Review of the decision of the BOD by the Courts
• GENERAL RULE: The courts have no power to review the
decisions of the BOD. We have this what we call BUSINESS
JUDGMENT RULE. So far as business is concerned their
decision is the rule. Nobody could tell them how to manage
the corporation or tell them that their decision was wrong.
Otherwise, what is the point of electing the BOD when as a
matter of fact their decision is subject to review by someone
else. The courts cannot even question the decision of the
BOD if that is how they think the business should be
conducted and how the corporation should be managed.
Courts have nothing to do with their judgment.
• Liabilities of the directors (instances when a director could be
held liable)
1. Assent to patently unlawful acts
2. Gross negligence
3. Conflict of interest
• Self-dealing directors
- the corporation has a contract with the business of the
directors
- generally, it is voidable and annulled if the presence of
the director was necessary to constitute a quorum, if
the vote was necessary for the approval and if it’s unfair
and unreasonable.
• Disloyal directors
• Interlocking directors
- Generally, this is valid unless the provision of self-
dealing directors will be applicable
Sec.31 . Liability of directors, trustees or
officers. - Directors or trustees who willfully
and knowingly vote for or assent to patently
unlawful acts of the corporation or who are
guilty of gross negligence or bad faith in
directing the affairs of the corporation or
acquire any personal or pecuniary interest in
conflict with their duty as such directors or
trustees shall be liable jointly and severally for
all damages resulting therefrom suffered by
the corporation, its stockholders or members
and other persons.
When a director, trustee or officer attempts to
acquire or acquire, in violation of his duty, any
interest adverse to the corporation in respect of
any matter which has been reposed in him in
confidence, as to which equity imposes a disability
upon him to deal in his own behalf, he shall be
liable as a trustee for the corporation and must
account for the profits which otherwise would have
accrued to the corporation. (n)
Powers of the Corporation
Section 32. Dealings of directors, trustees or
officers with the corporation. – A contract of the
corporation with one or more of its directors or
trustees or officers is voidable, at the option of
such corporation, unless all the following
conditions are present:
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1. That the presence of such
director or trustee in the board
meeting in which the contract was
approved was not necessary to
constitute a quorum for such
meeting;
2. That the vote of such director
or trustee was not necessary for
the approval of the contract;
3. That the contract is fair and
reasonable under the
circumstances; and
4. That in case of an officer, the
contract has been previously
authorized by the board of
directors.
Where any of the first two conditions set forth in
the preceding paragraph is absent, in the case of
a contract with a director or trustee, such contract
may be ratified by the vote of the stockholders
representing at least two-thirds (2/3) of the
outstanding capital stock or of at least two-thirds
(2/3) of the members in a meeting called for the
purpose: Provided, That full disclosure of the
adverse interest of the directors or trustees
involved is made at such meeting: Provided,
however, That the contract is fair and reasonable
under the circumstances. (n)
Section 33. Contracts between corporations with
interlocking directors. – Except in cases of fraud,
and provided the contract is fair and reasonable
under the circumstances, a contract between two
or more corporations having interlocking directors
shall not be invalidated on that ground alone:
Provided, That if the interest of the interlocking
director in one corporation is substantial and his
interest in the other corporation or corporations is
merely nominal, he shall be subject to the
provisions of the preceding section insofar as the
latter corporation or corporations are concerned.
Stockholdings exceeding twenty (20%) percent of
the outstanding capital stock shall be considered
substantial for purposes of interlocking directors.
(n)
Section 34. Disloyalty of a director. – Where a
director, by virtue of his office, acquires for himself
a business opportunity which should belong to the
corporation, thereby obtaining profits to the
prejudice of such corporation, he must account to
the latter for all such profits by refunding the same,
unless his act has been ratified by a vote of the
stockholders owning or representing at least two-
thirds (2/3) of the outstanding capital stock. This
provision shall be applicable, notwithstanding the
fact that the director risked his own funds in the
venture. (n)
Section 36. Corporate powers and capacity
1. To sue and be sued in its corporate name;

2. Of succession by its corporate name for the
period of time stated in the articles of
incorporation and the certificate of
incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in
accordance with the provisions of this Code;
5. To adopt by-laws, not contrary to law,
morals, or public policy, and to amend or
repeal the same in accordance with this Code;
6. In case of stock corporations, to issue or
sell stocks to subscribers and to sell stocks to
subscribers and to sell treasury stocks in
accordance with the provisions of this Code;
and to admit members to the corporation if it
be a non-stock corporation;
7. To purchase, receive, take or grant, hold,
convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal
property, including securities and bonds of
other corporations, as the transaction of the
lawful business of the corporation may
reasonably and necessarily require, subject to
the limitations prescribed by law and the
Constitution;
8. To enter into merger or consolidation with
other corporations as provided in this Code;
9. To make reasonable donations, including
those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or similar
purposes: Provided, That no corporation,
domestic or foreign, shall give donations in aid
of any political party or candidate or for
purposes of partisan political activity;
10. To establish pension, retirement, and other
plans for the benefit of its directors, trustees,
officers and employees; and
11. To exercise such other powers as may be
essential or necessary to carry out its purpose
or purposes as stated in the articles of
incorporation.
v Can the corporation call VP Binay, who has already
announced his intention to run as president in 2016, “NayBi,
I understand you’re running as President and here is a good
exposure for you: I will donate P10M to victims of Typhoon
Yolanda”. Is this valid?
• The law provides that the prohibition is a donation for
partisan political activity. Since the purpose is for the
Yolanda victims, then it should be valid.
Atty: I am inclined to agree with Mr. Robles because there is
no election yet. If you talk about partisan politics, it is only
during election. Well the fact that Binay has declared his
intention to run for President, we still do not know whether he
will file a certificate of candidacy or whether he will use the
amount directly for that purpose. But I am inclined to believe,
even if he is exposed to that kind of money but is used for the
Yolanda Victims, there is a good purpose. But if in that case
Binay will be given good exposure because of his pictures
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distributing noodles, bottled water and two kilos of rice,
that may be however this is merely theoretical because there is
no case filed yet. But in this case, I am inclined to call it a valid
donation because the Yolanda Victims are real. Just food for
thought.
Sec. 36 Corporate powers and capacity – Every
corporation incorporated under this Code has the
power and capacity:
2. xxx
9. To make reasonable donations, including those for
the public welfare or for hospital, charitable, cultural,
scientific, civic, or similar purposes: Provided, That no
corporation, domestic or foreign, shall give donations in
aid of any political party or candidate of for purposes of
partisan political activity;
Shorten or extend the term of the corporation
• It may be shorten or extended by amending the articles
of incorporation, with a majority vote of the board of
directors and at least 2/3 vote of the outstanding capital
stock.
Sec. 37. Power to extend or shorten corporate term - A
private corporation may extend or shorten its term as
stated in the articles of incorporation when approved
by a majority vote of the board of directors or trustees
and ratified at a meeting by the stockholders
representing at least two-thirds (2/3) of the outstanding
capital stock or by at least two thirds (2/3) of the
members in case of non stock corporations. Written
notice of the proposed action and of the time and place
of the meeting shall be addressed to each stockholder
or member at his place of residence as shown on the
books of the corporation and deposited to the
addressee in the post office with postage prepaid, or
served personally: Provided, That in case of extension
of corporate term, any dissenting stockholder may
exercise his appraisal right under the conditions
provided in this code. (n)
You have to process the amendment. It starts with the decision
of majority of the directors, with ratification from 2/3 of the
stockholders if it is a stock corporation or 2/3 vote of the
members
if it is a non-stock corporation. So you have to amend the
articles or the by-laws and go through the proper process and
submit your required documentations with the SEC.
Increase or decrease capital stock
• There should be a majority vote by the board of
directors and should be ratified by 2/3 vote of the
stockholders. There should be sworn statement from
the treasurer that 25% of the authorized capital stock is
Current Increase Decrease Decrease
Authorized 1,000,000 2,000,000 500,000 200,000
Subscribed 250,000 500,000 125,000 50,000
Paid up 62,500 125,000 31,250 12,500
subscribed and 25% of the subscribed capital stock is
paid.
Situations

v With only 250k subscribed, and there is still 750k
unsubscribed, is the increase from 1M to 2M allowed?
• Valid since it is intended for Increase corporate assets
and Issuance of stock dividends
Atty: This can be done, sometimes however, SEC does not
follow the law since they will require you to subscribe the
entire authorized capital stock first – sir thinks this is crazy.
This is the law, there is no prohibition here, but wa tay
mahimo because they will tell us that “mao may ingon sir”.
It’s only under SEC rules that they will require you to
consume ACS first, apply subscription to old authorized
before asking for an increase.
When you say increase, you increase the capital stock. But,
you could also decrease capital stock.
v So, can the corporation decrease its ACS?
• Yes, provided that its creditors will not be prejudiced
• If ACS will be decreased to 200k, it will not be allowed
because of the trust fund doctrine, creditors would be
prejudiced because the decrease to 200k would
amount to a waiver on the corporation to collect the
unpaid subscribed capital stock
If allow your decrease from 1M to only 200k, your SCS will
only be 50k instead of 250k. the creditors will be prejudiced.
⇒ What is covered by the trust fund doctrine?
• The subscribed capital stock. Because we said, this is
the asset of the corporation. And therefore, you should
not touch that bec that is intended to protect the
creditors. SO if the authorized capital stock now is
200k, necessarily, now the subscribed capital stock is
only 50K. they were protected before up to 250k but
now they are just protected only to 50k.
⇒ So can they do that?
• No, the law said you are allowed to decrease but you
should not jeopardize your creditors
Sir: You are allowed to decrease your authorized capital
stock but you should not jeopardize your creditors. If you
allow the decrease from one million to 200,000, then the
assets will now only be 50,000 but your creditors are
supposed to be protected up to 250,000, and so they cannot
decrease up to that point.
Pre-emptive right.
• Pre-emptive right refers to the right granted to the
stockholders to purchase or subscribe to all issues or
disposition of shares of any class in proportion to their
respective shareholdings.
Sir: This is intended to maintain the interest of the
stockholders, the extent of their hold in the corporation.
• Purpose: purely a business deal to encourage you to
consummate the sale
Situation
v So here, you must enjoy that right. So that Robles, I sold to
you my shares and I told you, you buy the shares Robles I
have 100 shares and I still have 200 shares with me, if you
buy this 100 shares, I will give you the right of first refusal to
buy my 200 shares. Is that pre-emptive right?
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• No sir because the pre-emptive right of a
shareholder is only where the whole share is being
sold. That is not an illustration of a pre-emptive right.
• Instead, this is an example of an agreement with right
of first refusal
⇒ So, what’s the difference then? Right of first refusal or an
option given or pre-emptive right?
-­‐ The difference lies when the stockholder tries to sell his
shares as a stockholder of that company, you have the
right to buy first the shares being sold, in that case that
was just an option given by the stockholder. On the
other hand, in the illustration, it was just an option
because in a pre-emptive right there is no qualification
as to when you can exercise that right.
o Pre-emptive right: in order for stockholder to
protect his interest in the corporation. First
refusal: a business option, it is different from pre-
emptive right
v Generally, a stockholder enjoys the pre-emptive right. Can it
be denied?
-­‐ Generally, they cannot be denied their pre-emptive
right. It can be denied under the following
exceptions:
Sec. 39. Power to deny pre-emptive right. - All
stockholders of a stock corporation shall enjoy
pre-emptive right to subscribe to all issues or
disposition of shares of any class, in
proportion to their respective shareholdings,
unless such right is denied by the articles of
incorporation or an amendment thereto:
Provided, That such pre-emptive right shall not
extend to shares to be issued in compliance
with laws requiring stock offerings or
minimum stock ownership by the public; or to
shares to be issued in good faith with the
approval of the stockholders representing two-
thirds (2/3) of the outstanding capital stock, in
exchange for property needed for corporate
purposes or in payment of a previously
contracted debt.
Sir: So here are the instances. First, when the corporation is
in the process of going IPO. When you go public, the law
requires that you must allot at least 10% of your shares to
your employees. The purpose is to make your employees
feel that they are owners of the company and that they are
expected to work harder because not only to they get
salaries, but they can now get dividends. So that is the
purpose of allotting at least 10%. So these employees may
be encouraged to buy them because these stocks may be
offered to them in very soft terms: salary deductions,
monthly deductions, even sometimes at a discounted price.
Again, the idea is to make them feel that they own the
company, and as owners, they will trying hard to make the
company more profitable so that in the end, they will enjoy
the fruits of their industry by gaining dividends.
Bonded Indebtedness
• Bonded indebtedness is when a corporation acquires fresh
funds from the public secured by bonds or notes with fixed
rates of interest and maturity date. When maturity date
comes, the corporation will just redeem these bonds by
paying these off
Promissory Note v. Redeemable Shares

Ø Promissory Note: One is a Creditor. Holds no equity in
corporation. Not entitled to dividends but is entitled to
interest by virtue of the promissory note.
Ø Redeemable share: You are an investor, holds equity in
corporation. Other than payment, you may also be entitled to
dividends.
December 18, 2013
Creditor v. Investor
Ø Creditor: entitled to payment, even when capital is used to
pay
Ø Investor: sinks or swims with the corporation, earns only if
corporation earns profit
-­‐ A holder of redeemable share is both a creditor
and investor
§ He is entitled to payment whether profits
exist or not through redemption (capital
can be used), while at the same time
entitled to dividends as well being a
stockholder of a corporation if
corporation earns profits
Sale of Corporate Assets
• It is decided upon by the board
o Ratification needed by stockholders representing
2/3 of outstanding capital stock if sale of assets
will render corporation unable to operate (all or
substantially all of corporate assets)
o If done in ordinary course of business,
ratification of stockholders is not necessary
§ because board possesses corporate
powers and its decision cannot be
reviewed by the stockholders
• Sale of substantially all is tantamount to dissolving the
corporation. In effect, it is a liquidation of corporation’s
assets. Hence, requires consent of stockholders.
As a matter of fact we are trying to shorten the period, in which
case, we have to consult the stockholders
Situation
v Land transportation company engaged in operating public
buses having 10 units plying cebu-daanbantayan route. It
decided to sell 6 of its 10 units, do you think stockholders
should be allowed to review and therefore require its
consent?
-­‐ No, ratification not required since sale of assets is
not substantial or all
⇒ If 8 buses are sold?
-­‐ Ratification of stockholders is needed.
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-­‐ Substantially all, meaning if disposition will
push through, it will be very hard for the
corporation to pursue its business.
-­‐ SC held that disposition should amount to 80% of
corporation’s assets in order for it to be substantial
disposition.
⇒ This land transportation company decided again to sell
only 5/10 units and instead of selling this to anyone, this
company has been the usual supplier of bus services to a
travel & tourism agency. Because of this, the tourism
company offered to the bus company who has been its
partner for quite a time, using their buses, asked to buy 5
of their buses. But they did not have cash, they could only
pay using shares of stocks of the same value as the selling
price of the buses. The land transpo company agreed. So
the land transportation company became a stockholder of
the company. Is the ratification of stockholders of
trucking company required?
-­‐ Yes, because corporation invested in a new
corporation, see sec 42
-­‐ No, because investment was still related to land
transpo co’s primary purpose, see sec 42
Although different from land transpo business, it
is still related. It may even be more profitable
that way by devoting its buses to carrying
tourists. It still carries passengers.
Investment in another Corporation
• When investment is for other purpose other than the
primary purpose of the investing corporation
ratification of the stockholders is needed.
If the corporation decides to invest in another corporation, it
has to secure the ratification of the stockholders unless such
new business is incidental to its existing business.
Situation related to (SoCA)
⇒ Instead of selling only 5 buses, the land trasnpo co
transferred to the travel company all of its units. The travel
company again issued shares of stocks worth the value of all
the 10 units. Does it need approval?
-­‐ sale of all its units means there is disposition of
all its assets, amounting to a dissolution of the
corporation i.e. cutting short its corporate term.
In the mind of the board, it is no longer interested to
pursue its land transportation business.
⇒ What is now the asset of the bus co?
-­‐ The shares of stock of the travel co.
⇒ If the corporation decides to distribute these assets,
what is necessary?
-­‐ Ratification of stockholders
⇒ What would happen to creditors?
-­‐ The creditors could complain since it violates
the trust fund doctrine
These shares of stock now form part of the
capital, trust fund doctrine. If they want to
distribute these to stockholders, they have to
liquidate and satisfy first the creditors.
 27

the right to have your shares appraised and the

January 8, 2014 corporation will buy back the shares.

• Even if corpo already agreed to buy back, the SH

cannot immediately demand payment. They will have to
Situation (Merger) wait until the corporation have surplus because the
corporation cannot pay them out of the capital.
v Where a corporation sold its assets to another corporation in
exchange for shares, was there a merger? Treasury Shares

-­‐ No. In merger, there’s an agreement between two or • Once the shares are bought back they become treasury
more corporations where there will be a surviving shares.
corporation that will absorb the other corporations,
which personality will cease to exist. So it is a situation
• Who votes? Nobody. Because once they become
where two corporations agreed to become one with the
treasury shares they lose the voting rights because if
agreement that one of them will survive.
they retain the voting rights the directors may abuse it
to put themselves in power.
Acquisition of a Corporation of its own Shares
Treasury shares do not have voting rights because the
• General rule: It is not allowed because it will prejudice directors will use/abuse this to perpetuate themselves in the
the creditors of the corporation. This is because when corporation.
the corporation acquires its own shares, it is in effect
distributing to its shareholders their investment thus Investment
violating the trust fund doctrine. Under the trust fund
doctrine, the capital of the corporation cannot be
• Why invest? To realize profits, it’s a return of your
distributed back to its shareholders because it is
investment.
intended for the creditors.
Being an investor, not certain that you will have profits
Trust fund doctrine is the doctrine, which tells us that
because there is an element of risk. It does not guaranty
the capital is reserved in trust for the creditors.
success. A corporation does not guarantee to you a certain
return of profits. However, if there are profits, then the
• Other stockholders may complain to the acquisition of
investors are entitled to dividends.
the shares because their investments will be used to
buy the shares of other stockholders and they will
Dividends
assume risk because the other stock holders have
already been bought out. In effect there is partial
liquidation where other stockholders have already • It is a portion of profits that are set aside that will be
received back what they have earlier invested while the distributed to stockholders ratably at a specified/fixed
others are still taking the risk. The complaint of these time.
stockholders is “what will be left for them in case the
company would fail. This is why the general rule is that Forms of dividends
the law prohibits reacquisition of shares. However that
is just the general rule, as such, there could be some • Cash dividends- cash come from the portion of the
instances where shares may be reacquired? profits set aside or the unrestricted profits that needs
the approval of the board of directors before distributing
• Exceptions: to the stockholders.

Sec. 41. Power to acquire own shares – a • Property dividends- instead of distributing cash,
stock corporation shall have the power to distributes other property like in the forms of investment
purchase or acquire its own shares for a in another corporation. It’s not part of the capital but
legitimate corporate purpose or purposes, part of the profits.
including but not limited to the following
cases: Provided, that the corporation has Example: have 10 units of buses and wants to declare
unrestricted retained earnings in its books dividends and will tell the stockholders “get one unit each,
to cover the shares to be purchased or that’s property dividends”. Cannot do that it cease operation,
acquired: not the kind of property that may be distributed as property
dividends rather it’s the property that is not part of the capital
1) To eliminate fractional shares but forms part of the profits.
arising out of stock dividends;
2) To collect or compromise an Sir: If I were a lending corporation, we were able to foreclose
indebtedness to the corporation, arising some properties & we don’t need these properties. I’m not
out of unpaid subscription, in a engaged in real estate so these properties can be given
delinquency sale, and to purchase away as property dividends. If a corporation bought stocks in
delinquent shares sold during said sale; another company and they don’t need these stocks anymore
and so we can distribute these as property dividends. Although
3) To pay dissenting or they’re in the form of stocks, they belong to another
withdrawing stockholders entitled to corporation and so property dividends.
payment for their shares under the
provisions of this code. On the other hand, stock dividends are newly issued stocks
of the company issuing the stock dividends.
Dissenting Stockholder
v The reacquired shares have now become treasury shares.
• There are instances wherein the other SH will dissent to Once the corporation decides to distribute these, are they in
the decision of the majority. They are the dissenting the form of stock dividends or property dividends?
SH and they can exercise the appraisal right. This is
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• Property dividends. When the corporation reacquired
the shares, it formed part of the capital of the
corporation. And since we cannot distribute dividends
using capital without violating the trust fund doctrine,
the company must use its profits to buy its treasury
shares in order to distribute them as property dividends.
Stock dividends vs. Property Dividends
• Property dividends: real or personal properties that
are given to stockholders as a share in the profits
§ But must be property that is no longer
intended to be used by the corporation
§ Not part of capital, but part of the profit
(properties that form part of the profit)
§ Example: Shares of stock in another
corporation--these are properties of the
owner corporation, and therefore may be
distributed as property dividends
• Stock dividends: dividends given by the corporation in
the form of their own shares of stock in lieu of
undistributed profits
§ Must be additional shares, or unissued
shares
§ Dividends in the form of treasury shares are
not stock dividends but instead property
dividends since it is the capital of the
corporation – they are reacquired shares,
already existing) |see sec 9, pp. 111 of de
leon 2010 ed.|
When we say stock dividends, we refer to
unissued shares (virgin shares). When stocks as
property dividends, we refer to issued shares
(used shares).
Three (3) Types of Dividends.
• Cash dividends. Distributed direct from the account of
the corporation in cash.
• Stock dividends. Still we have unsubscribed shares,
remember our authorized capital stock need not be fully
subscribed. We have profit of say P20 million but the
corporation may decide that “we need the money!” But
this should already be distributed, so we will not give
the P20 million cash to you, we will transfer the money
in a different pocket and use it to subscribe new shares
and distribute them and instead distribute the shares to
you.
• Property dividends. Again we might have P20 million
profits but we need the P20 million, meanwhile we have
property which we do not need, idle property. So we
use this P20 million to replace these idle assets and we
will distribute these idle assets to you. Incidentally one
of those idle assets might be the treasury shares.
Declaration of Dividends
• Generally a stockholder has no power to compel the
board because the power to declare dividends rests
with the board. Except, if the profits are in excess of
100% of the paid-in capital, that is one instance where
the SEC can compel the board to declare dividends
because in excess of that amount the policy is to
declare.
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• Other corporations not immediately declare
dividends for tax purposes. To avoid double taxation.
Because the corporation is taxed for corporate tax and
when the stockholders receive dividends they are also
subject to tax.
• However, even if the corporation has retained in excess
of 100% of paid-in capital and this would generally be
considered improper accumulation of earnings, your
defense if you do not really want to distribute would be:
Sec. 43 (2) Stock corporations are
prohibited from retaining surplus profits in
excess of one hundred (100%) percent of
their paid-in capital stock, except: (1) when
justified by definite corporate expansion
projects or programs approved by the
board of directors; or (2) when the
corporation is prohibited under any loan
agreement with any financial institution or
creditor, whether local or foreign, from
declaring dividends without its/his consent,
and such consent has not yet been
secured; or (3) when it can be clearly
shown that such retention is necessary
under special circumstances obtaining
in the corporation, such as when there is
need for special reserve for probable
contingencies.
Future Contingencies
For example, the corporation in Leyte, before, they receive
the Yolanda warnings. Instead of distributing dividends
tomorrow, they reserve their money so that they can transfer
their business to Cebu.
Sir: Di sa ta mag distribute, ato hiposon kay naa unyay laing
Yolanda. We will not distribute , we are reserving our money
for future yolandas, for future contingencies. Very easy to
justify, or expansion projects. We won’t distribute because
we have a lot of projects in mind. Its booming time and we
should be ready when the opportunity comes. There might
be an opportunity and we don’t have money and so it will be
a waste of golden opportunity. or as you said, loan
agreements.
Loan agreements
When a corporation enters into agreement with a bank, there
might be a stipulation that the corporation should not
distribute dividends without the banks consent to assure the
banks that the corporation can pay its obligation according to
schedule. They don’t want you to later on say that: ‘we will
miss one installment because we don’t have profits because
we have declared dividends.” It is a standard provision in
any loan agreement with the bank.
The loan agreement provision says: The borrower shall not
declare/ distribute dividends without the prior conformity or
consent of the bank. Because the bank wanted to be sure
that you will not unnecessarily declare dividends,
otherwise if this will be allowed, it might be prejudicial
to the bank. Matter of fact, in big loans, the bank sometimes
requires the corporation to allow a bank rep in the board.
“The borrower shall assign one share to any nominee of the
bank and will be voted as one of the directors and must be
allowed board meetings. So in that case, if a representative
of the bank is one of the board of directors, the bank is
always updated to the activities, or performance of the
borrower. At the same time, it is to insure that they can pay
despite all the mortgages and securities.
Retained Earnings
 29

• Formula: Retained Earnings = Assets – (Liabilities + Legal Ultra vires acts vs. Illegal acts
Capital)
Ø Illegal acts cannot be ratified by the stockholders in contrast
Situations to ultra vires acts that may be ratified.

v Assets of a corporation, valued at 10 million. One year after,
the assets, the value of the property increased, there was
already a new mall constructed, the 10 million worth of the
property is now worth 15 million, should we now declare
dividends because we now have a profit of 5 million?
Ø Illegal Act is not be binding because the act is void and
cannot be subject to ratification. Whereas Ultra vires, will
generally not be binding because it is beyond the powers of
the corporation, however, it can be binding if it is ratified by
the stockholders.

-­‐ The rule with regards to dividend is that, to

declare dividends is left to the discretion of the
board, so it does not automatically mean that
every time the corporation has profits, that the
board should always declare dividends. January 13, 2014
⇒ So that if the board says, yes we have 5M profit, one year
after, we will now distribute this profit, can they do that?
(Assuming the corporation has no liabilities and no
dissenting directors, unanimous decision in calling for
dividends in the board.)
Ultra Vires Act vs. Illegal Acts
-­‐ The corporation cannot distribute dividend out of
the appraisal of 5M because in distributing • Illegal acts are contrary to law, morals, good customs,
dividends, the profit should be a bona fide public order, or public policy while ultra vires act is an act
thing, the appraisal is merely theoretical. which is beyond the express, implied, and incidental powers
of a corporation.
-­‐ Before the sale of the property, its profits are still
unrealized. The value of the property would • All illegal acts are ultra vires acts
fluctuate, meaning its value can increase or
decrease. • Not all utra vires acts are illegal acts because ultra vires acts
are beyond the express, implied, and incidental powers of
the corporation, and these acts are not necessarily criminal
⇒ It may be 15 M now, but if the mall is razed to the ground,
acts because the corporation can enter into a lawful
what will happen to the value?
transaction but it is however, beyond its powers, then it is
ultra vires but not necessarily criminal acts.
-­‐ The price will fluctuate.
Situation
Sir: So it is fluctuating and therefore cannot be part of the
profits because these are not realized. It’s only in the books.
v A president of the corporation acquired property in behalf of
It is an appreciation in value, but not basis for profit.
the corporation. However, it was discovered that this
acquisition was not supported with board resolution. Is it
⇒ However if somebody will knock at the door and say, we will ultra vires or criminal act?
buy the property for 15 M. What will happen to the
corporation?
-­‐ It only lacks authority. It does not necessarily make the
act ultra vires.
-­‐ The corporation now has profits of 5 Million. I
can now distribute them as dividends.
Unauthorized Acts vs. Ultra Vires Acts
Management contracts
• Ultra vires act is an act which is beyond the express,
implied, and incidental powers of a corporation while
• The corporation may enter into management contracts. It unauthorized acts are acts which might be within the
would not be abandonment by the board to manage the powers of the corporation, however, it require some
corporation. formalities for it to be binding.
• This is resorted to when the corporation intends to focus on Binding effect of Ultra vires, illegal act, and unauthorized act
its main business and delegate to more technically
prepared to manage a portion of the activities of the corp.
• Illegal acts can never bind the corporation.
Sir: A shipping company for example wants to focus on
• Unauthorized act is binding if it is ratified.
marketing. It focuses on getting cargo. But when the vessels need
some repair, I could tap the skills of a high profile corporation
engaged in repair. So that if anything happens to my vessel, I Ultra vires act is the closest to validity because it is valid and
binding until the state questions the act of the corporation.
could always call into that corporation and enter into an
agreement with that corporation for them to retain my vessels, in
so far as in maintenance is concerned. It depends now on the As a matter of fact among the three, the closest to validity is the
needs of the corporation. THIS IS NOT AN ABDICATION OF ultra vires act because the only one that can question is the state.
AUTHORITY OF THE BOARD TO MANAGE. So long as the Generally only the state can question such act because it is the
board continues to control management. That management state who granted the power thus it is only the state who may
agreement must not tantamount to an abdication of authority. question whether or not it is acting within its power.

Ultra Vires Acts So an ultra vires act as a matter of fact, although defective, may
be cured by ratification of the stockholder.
• Acts that are beyond the express, implied, or incidental
powers of a corporation. Effects of ultra vires acts
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• It is binding on the corporation until annulled, this also
means that ultra vires acts are voidable. Thus these acts are
binding unless the state would question such act.
• However, there are situations where we might be confronted,
where the courts are left to decide issues as to the dispute
arising from the ultra vires acts. How do courts settle
disputes?
This will now depend on the status or the stage where the
contract is in. Because if we would keep on complaining on
the acts of a corporation, no one might even trust a
corporation and would have to always check the by-laws, the
articles of incorporation of that corporation. So generally,
ultra vires acts are ignored, because only the state may
question ultra vires acts.
Rules on resolving utra vires issues
• But although there may be serious problems and ultimately
the court decide whether or not ultra vires acts exist? How
would courts resolve the issue?
The court may use the principle of estoppel. So for example
the corporation has already received benefit from the
transaction, it cannot annul the contract on the grounds that
the officers exceed their authority. The same is applicable to
the person who is contracting with the corporation in the
sense that he also is estopped If he rescind the contract
because he has already benefited from said contract.
“YOU COME TO COURT WITH CLEAN HANDS (Joke
about estoppel)”
• If acts are already consummated, either party may not raise
the defense of ultra vires acts. If both are at fault, the law
keeps them where they are. On the other hand, where the
act is not yet consummated, the court may annul the
contract.
• An ulta vires contract, while executory on both sides, cannot
be enforced by either party thereto.
• When an ultra vires act has been performed on one side and
the other has received benefits by reason of such
performance, recovery is permitted on behalf of the former.
1. Situation. The seller has delivered and the buyer has not paid yet.
It was discovered that it was an ultra vires act by the seller, can
the buyer insist on keeping the property without paying?
-­‐ In this case the buyer cannot keep the property without
paying. If he intends to annul the agreement then he should
return the property received.
Meeting
• Notice is required
o It must state the date, time and place of the
meetingand the business to be transacted thereat
o It shall be sent depending if its is a regular
meeting must be given 2 weeks from the
scheduled meeting, if a special meeting it must be
given 1 week prior to the scheduled meeting.
Notices are very important, must contain the date,
time, place, item to be discussed and the last
portion of the notice the catch-all clause “such
other matters that will arise during the meeting.
• The president will preside unless another officer stated in
the by-laws, sometimes it will be the chairman.
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o However are there occasions or meetings
that the president may not preside where the
person authorized fails to preside, like when the
meeting is called for the removal of the president
of the corporation. There are times when the
president would not call such meeting
o A stockholder may petition to the SEC to
convene a meetingwhen no person is authorized
to call a meeting or when the person authorized
refuses or fails to call a meeting
Example: When the president is aware that the
purpose of the meeting of the stockholders is to
remove him, he may not call the meeting so this is
the remedy of the stockholders. The SEC will
make the petitioning stockholder the temporary
presiding officer of the meeting until they elect who
among them will be the presiding officer.
Types of Meeting
• Stockholder
o Regular: meeting of SH held annually at any date
provided by the by-laws otherwise it will be any
day of the month of April.
o Special meeting: may be called any time deemed
necessary
o If no date is fized for the SH’s meeting, it will be
held at any date of the month of April, it’s the
time of the passing of the ITR of the corporation by
this time the corporation the financial statement of
the company, reports for purposes of submitting to
the BIR for the corporate income tax. The SH want
to know to find out how the corporation report for
the year before.
Section 50. Regular and special meetings of
stockholders or members. - Regular meetings
of stockholders or members shall be held
annually on a date fixed in the by-laws, or if not
so fixed, on any date in April of every year as
determined by the board of directors or
trustees: Provided, That written notice of
regular meetings shall be sent to all
stockholders or members of record at least two
(2) weeks prior to the meeting, unless a
different period is required by the by-laws
Special meetings of stockholders or members
shall be held at any time deemed necessary or
as provided in the by-laws: Provided, however,
That at least one (1) week written notice shall
be sent to all stockholders or members, unless
otherwise provided in the by-laws.
• Board of Directors
o Regular meeting: done monthly on a date
provided in the by-laws
o Special meeting: may be held at any time
Section 53. Regular and special meetings of
directors or trustees. – Regular meetings of the
board of directors or trustees of every
corporation shall be held monthly, unless the
by-laws provide otherwise.

Special meetings of the board of directors or
trustees may be held at any time upon the call
of the president or as provided in the by-laws.
Requisites of a Valid Meeting
1. Notice
2. Quorum – no. of persons required to convene meeting and a
SH meeting, quorum is determined in the by-laws; if not
stated, presence of stockholders holding majority of the
outstanding capital stock
3. Proper place
4. At stated date and time
5. States the purpose
Situation
v If there are 100 million outstanding capital shares, what is
the quorum?
- 50,000,001 shares
In other words, this is now majority of the outstanding capital
stock. We now have a quorum.
⇒ So that if a resolution is presented, for that resolution to be
approved, how many votes are needed?
- Majority of the stocks represented, which is 25 million
and 1.
⇒ So in that meeting, do you think they could increase the
capital?
- In an increase capital, it requires not only the votes of
those who were present, but a 2/3 vote of the
stockholders representing the outstanding capital stock.
⇒ If in the meeting, can 40 million of the shares represented,
which is almost 90% of 50 million, would that be enough to
approve the increase?
- No, because what is required for an increase capital
stock is 2/3 vote of the outstanding capital stock, not
2/3 of those present.
⇒ Even if the 50 million unanimously approve the resolution of
the increase in capital stock, would it be valid?
- No, it will not be valid.
That will therefore illustrate, that although, there is a quorum
and things could be approved in that meeting, when it now
involves the major changes that we have been talking about,
such as increase in capital, investment in new business or
another corporation, mergers and acquisitions, sale of all or
substantially all of the assets of the corporation, all this will need
2/3 vote of the outstanding capital stock. Here, even if all of
those who were present approved that resolution in increase in
capitalization, that will be not be enough to be a valid resolution.
Proxy
• A proxy actually refers to the instrument, although in
layman's terms everyone thinks the proxy is the person, the
proxy correctly refers to the instrument itself. The proxy is an
instrument that refers to the authority given by a stockholder
to another person to represent the stockholder during
meetings.
• They consider a proxy as a 'control mechanism' for
management to control the affairs of a corporation. In what
way?
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Management, through the proxy, could ascertain the
outcome or to make sure that the results of the meeting
would turn out in their favor. The outcome is ascertained
because the representative (proxy) will not just represent the
stockholder in a meeting, he may also vote in that meeting.
Also, proxy ensures the management of the necessary
attendance. Not just for purposes of quorum, but also to
gather the necessary votes required.
For example. You are a stockholder of a PLDT share and
every year they will send out to you, notices of annual
meetings and annual reports. In these notices of annual
meetings, you are not just informed about the meeting,
something is attached to that. In the notice, you will see, ms
baya, we are attaching for your reference, a proxy. If you
wish that the management will represent you in the meeting,
kindly fill out the proxy form. And in the notice, it may even
say that there are proposed amendments, and if you wish,
you may even authorize the president approving the
proposed amendment.
And now, if you receive that proxy, you are now sure of one
vote and you will be sure that you are represented. Because
the president or anyone you authorized will be there. And so,
imagine all the stockholders are being send these notice,
and if they all accomplish that proxy and it intends to
authorize the president, so while he has the proxy, he will
now be sure that he will cast these votes in favor of any
proposed changes. In which case, thru these proxy, he can
now control the outcome of the meeting. It is not just an
ordinary authorization to represent in a meeting, but a
management control. And if management has a plan to
pursue some changes thru proxy, it can be sure that it can
achieve that object.
• Conditions in order for the proxy to be issued:
- Sec 58.
1. In writing
2. Signed by the stockholder
3. Filed with the corporate secretary before the meeting
as stated in the by-laws
4. Must only for a specific meeting
5. In continuing proxy, it must not exceed 5 years
• In the absence of any period the proxy will subsist for a
maximum period of 5 years. No exception. (Note: Ayaw
pailad. There is a situation below that says that loan
agreement is an exception to the 5-yr limit sa proxy but Sir
said in the subsequent meeting nga there is no exception)
Situation
v So if the proxy you receive, this will authorize miss ong , my
proxy to represent my share on the meeting to be held on
Jan 15 2014, 1 PM, that was the proxy. However when you
went there, you were told, Ong, uwan kayo, napostpone
sunod semana ang meeting, and so the meeting is
cancelled. Can you use the proxy on the postponed date?
- No, because it is no longer the same meeting that was
stated in the proxy.
⇒ So how should you word the proxy?
- Meeting on Jan 15, 1PM and all other meetings for that
particular purpose. However, that proxy should not last
longer than 5 years.
v Here’s a corporation, wants to borrow a money from a bank
and that loan may be payable in 6 years. According to their
program, it could be payable in six years. The bank would
make it sure that they are upgraded, that they are updated

on what is discussed during meetings and through this
proxy, a bank representative could attend the meetings and
therefore the bank would be fully aware of what is happening
in the corporation. So that in every meeting, the bank
representative through the proxy can participate and even
vote. So that if a resolution is passed in a meeting, saying
that it will declare all the profits as dividends distributed to
the stockholders, let’s not pay the bank yet, let’s wait until
next year to pay the bank. What do you think the bank
representative will do?
- The bank will react and they will contest.
A: Of course the bank will object, NO, there is a provision in
our loan agreement that we have to allot a certain amount
for payment of the loan, we cannot violate that agreement.
So that if they will insist that anyway, ikaw ra mang isa…
⇒ We were saying that the bank representative necessarily will
have to object. He will have to oppose. Do you think the
proxy, the bank representative, could do anything in that
meeting?
- Although his number of shares may not be enough to
contest the board resolution during that meeting, he can
report to the bank.
Sir: They are not going to pay us. If that is reported, the bank
will have to react. There is usually an acceleration clause.
⇒ What happens in an acceleration clause?
- Should the borrower fail to pay or default one or more
instalments, the entire amount would become due and
demandable.
Sir: Therefore the bank can move. So because of the
proxy document, the interest of the bank is well
protected. So that is the purpose.
v Should the stockholder execute a proxy in favor of one
person?
- Not necessarily. A stockholder can execute a proxy in
favor of more than 1 person.
Ex. Paul or prince, or santos
o either of the three can represent the stockholder
Ex. Paul, then prince, then santos
o paul first, but if unable to attend, then prince, then
santos
(in the order of succession)
Ex. Paul, and prince, and santos
o all of them must be present
v If there are 30 shares of stock represented, what can the
representatives do?
- Rule of majority the representative governs, so decision
of 2/3 representatives govern.
Ex. Paul-yes; Prince-yes; Santos-no
o the rule of majority governs the situation.
Ex. Paul-yes; Prince-no; santos- abstain
o if there is a deadlock, then the measure must
necessarily fail
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January 15, 2014
Proxy
Situations
v When there is a deadlock, whose vote among the proxies
will be considered by the corporation?
- During a deadlock, if the proxies cannot obtain a
majority, then the proxy will be revoked. A: Hala,
pamauli mo!
v Can stock be in the name of one or more stockholders? In
the name of Olvis and yntig.
- If no decision can be made among the co-owners, then
they cannot vote.
Otherwise, the meeting will be disturbed by their
disagreements and the corporation does not have authority
to settle a personal dispute. If you cannot agree, then sorry,
we have to proceed with the voting without you.
⇒ As olvis suggested, long before that meeting a proxy should
have been appointed to prevent disputes on the day of the
meeting. When should the proxy be presented?
- Before the meeting, to the corporate sexytary
v Generally, stockholders are those allowed to vote. If sold,
what happens? On the day of the meeting, aika sold her
shares to cabergas, who among them can vote?
- If sold, all rights remain with the transferor of stock until
such time the transfer is recorded in the corporate
books
If the transfer is not recorded, the transferee has no
business in the meeting.
v Short of selling you can pledge or mortgage shares of stock.
Once mortgaged, who can then vote?
- Generally, it is the owner of the shares of stock unless
there is an agreement allowing the pledgee or
mortgagee to vote
v If the stockholder is dead, who votes?
- If there has been no partition, then it is the legal
representative of the estate that is allowed to vote
The court appointment or the will may be enough to
establish the fact that indeed the administrator or
executor is enough for him to vote in behalf of the
estate
Requisites for a valid proxy
• Must be in writing, signed by the stockholder, and
filed with the corporate secretary before the meeting
• No need to be notarized
o it’s a simple form, indicating among others
the name of the rep, date of the meeting, and
the authorization given by the stockholder to
appear on his behalf in that meeting

Proxy as a management control
• It is a management control in the sense that
management will be able to control the outcome of a
meeting
• Other purpose: in order for the corporation to be able
to successfully obtain a proxy which would otherwise be
impossible considering that stockholders are spread far
out, hence, save on expenses in stockholder’s meeting
To address the practicability and the geographical problems
that may arise if a proxy is not allowed.
Situation
v in the proxy, can the stockholder be allowed to stipulate that
the representative must first hear mass and receive holy
communion before the proxy is allowed?
-­‐ The condition restricts the right of the owner to vote.
Tantamount to deprivation of your right as an owner.
Because of that, the condition in the proxy might not be
allowed.
v A proxy may be issued to more than one proxy. But this
time, each proxy having a different document. There were
three proxies, with each of them attending the meeting.
Which among the three will be allowed?
-­‐ Determined by the proxy committee
o Determine the date of the proxy, where the
last proxy reflects the true will of the
stockholder
o If it was mail, and it was undated, the latest
timestamp will be considered
o If it was not mailed, undated, the one
presented last will be considered
Ang katapusan muhatag, because that reflects the
true will of the stockholder. That is how crazy our
law is.
Voting Trust Agreement
• Where the stockholder transfers his voting rights to
another stockholder, but retains beneficial ownership
over his shares
• The corporation issues voting trust certificates in favor
of the voting trust allowing the representative to
participate and vote
Voting Agreement
• When shareholders pool together their votes so they
can concentrate their votes
VTA vs VA
• VTA: voting rights are transferred to a representative.
• VA: voting rights are not transferred to a representative
but are exercised by the stockholders
VTA vs. Proxy
• See page 524-525 in de leon 2010 ed.
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When a stockholder is present at a meeting, the proxy
is revoked. Because just like agency, it is revocable unless it
is coupled with an interest.
But in a voting trust agreement, even if the stockholder is
present in the meeting, the trustee can still exercise the right
to vote to the exclusion of the stockholder.
Period of voting trust agreement
• Maximum of 5 years at any one time but in a loan
agreement, it may exceed 5 years and is valid until the
loan is fully paid
Stock Subscription
• Refers to persons acquiring unissued shares of a
corporation whether before or after incorporation
• Pre-incorporation subscription
o subscription made before a corporation is
incorporated
• Post-incorporation subscription
o subscriptions made after a corporation has
been incorporated for unissued shares
• All these, because you are selling shares of stock to the
public, what is required for there to be a valid
agreement is an offer by the subscriber, acceptance by
the corporation (?)
• If there are dividends, the basis that should be used is
your subscription. Meaning, I am already the owner of
everything that I have subscribed.
• The subcan be assigned but if the subscription is not
fully paid, there must be other requirements that the
transferor must comply with
Stock Option vs Subscription Agreement
• Stock option
o He is only given an option to buy
o Has value, but to realize it you must exercise
your option within a certain agreed period
• Subscription agreement
o Subscriber will have to pay
o You will now own your subscription
How can the value from stock options be realized
• Person must exercise his option
Situation
v At the time stock option was to be exercised, and the option
should be exercised within 6 months the par value was 3
pesos, but at the time you wanted to buy the shares, the
value was already pegged at 2 pesos. Should you exercise
this option?
-­‐ No, because you committed to buy it at 3 pesos when
the value has already gone down to 2 pesos
⇒ If after 2 months, the value of the shares increased to 5
pesos. Should you buy it?
-­‐ Yes, the option should be exercised since the
committed price was 3 pesos. You can sell it at 4.50
and realize a profit from it
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A mere option is valuable and should be priced at the right Because as consideration for stock, pre-existing debts
amount because there is value in the option. So a mere can be considered as payment. But when the debt of the
option is not just an empty option. It’s something of value. corporation after the subscription, no offsetting is allowed.

⇒ Having subscribed a certain number of shares, what Watered Stocks

happens after subscribing to these shares?
• Where stockholders pay less than what they actually receive
-­‐ Your subscription will be irrevocable for 6 months from
the date of subscription In the market, chickens are injected with water to make it
heavier, so watered chicken, so you will pay more. In
Consideration of the subscription watered stocks, you pay less.

1. Cash, property, labor, previously incurred This is not allowed because it will jeopardize creditors,
indebtedness, outstanding shares, amounts transferred stockholders, and other stakeholders of the corporation.
from URE to capital Because what the corporation receives is actually less than
what it should have actually received according to its true
2. Can be any two or more of these price.

-­‐ see sec 62 Situation

Consideration must be given to the corporation before v Pasatiempo owns shares of stocks, valued at P5/share.
issuing shares. Because your boyfriend also wanted to be a stockholder in
the same corporation, your boyfriend said that “pwede
Situations magtunga ta sa imong shares of stocks? Akong paliton
v What happens now after you paid your subscription? imong katunga nya discounti ko ug discount nya P4 nalang?”

-­‐ You can demand issuance of a certificate of stock -­‐ Not considered as watered stock anymore because it
provided that you have fully paid your subscription is a subsequent sale. Watered stocks pertain to the
original issue of stocks and not to a subsequent
v If you bought shares worth P10,000, but you only paid transfer of stock
P5,000, can you ask for a certificate of stock?
So when we say watered stock, it refers to unissued
-­‐ Fully paid shares of the corporation which is being issued less
o You can ask for a stock certificate for the fully than the actual price
paid portion worth P5,000
⇒ Treasury shares sold less than par value, watered stock?
-­‐ Pro-rata
o You cannot ask for a stock certificate since -­‐ No, it may be sold for less than par value provided that
you only paid P5 for every share the price is reasonable

See sec 64 Unpaid subscriptions

Certificate of stock • Paid at due date or when the board of directors makes a call

• Purpose: It serves as evidence of ownership in the Delinquent shares

corporation
• Once being declared delinquent, it loses certain rights
• Presumption when you hold a COS: it serves as proof to including the right to vote, and to be transferred
your ownership of shares of stock
• If you are delinquent, the cash dividends will first be applied
Situation to the delinquency

v You subscribed 10,000 but only paid for 5,000 shares. Can Stockholder refuses to pay
the shareholder say he would return the unpaid shares and
call it quits? • It is still valid between the parties
-­‐ No, this would be a violation of the trust fund doctrine • Not valid as to the corporation and third persons, since the
sale cannot be recorded in the books of the corporation
v Since I owe the president 50k, can I assign to him my shares
of stock to pay my indebtedness to the president?

-­‐ Yes, because it is a personal transaction.

-­‐ What is not allowed is when unpaid subscription will be

paid only through dividends

v Can the corporation say “we will not pay you anymore what
we owe you, but we will condone your unpaid subscription”.
When can this (offsetting) be done?

-­‐ It can be done provided that the corporation’s debt was

existing prior to the issuance of stock

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