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LAW on CORPORATION (2007 edition) A corporation is an artificial being created by operation of law, having the rig ht of succession and

the powers, attributes and properties expressly authorized by law or incident to its existence. It is deemed organize when after issuance to it of its certificate of incorporat ion,it proceeds to adopt its by-laws, elect its board, which in turn elects its President, secretary, treasurer,and other officers nad occupies an office for th e transaction or business allowed it by its articles. 2 yr period to run from the date the certificate of incorporation is issued to t he corporation, if the corporation within 2 yrs from said date fails to perform the organizational acts above indicated, then it is a ground for involuntary dis solution.

Advantages: 1.easier to raise capital and to attract other persons as investors because of l imited liability 2.it has the attribute of perpetual succession and a juridical personality indep endent from its stockholders 3.managed by group of persons called the board of directors 4.transfer of interest is easier and will not dissolve the enterprise Disadvantages: 1.it takes time to organize 2.business decisions may be stalemated by differences of opinion among the board members

MINIMUM CAPITAL Now, as a rule, there is no minimum required capital, although the law requires the 25-25 rule which is that atleast 25% of the authorized shares(amount fixed i n the articles of incorporation to be subscribed and paid by stockholder) must b e subscribed, and at least 25% of that shares subscribed was already paid. You need not have everybody paying 25% (since individual subscriber may pay less than 25%, as long as the 25% of the aggregate amount of the subscribe shares is already paid). Although, the law says that paid-up capital should not be less than P5K, so you can form a corporation with a paid-up capital of P80K subscription would be 20K and paid-up would be 5K. But for certain lines of businesses, special laws requi re minimum, authorized capital, like banks, insurance companies, financing compa nies. In computing 25-25 rule, subscriptions made by a corporation will be included. C orporations can be subscribers, only that they can not be incorporators. 2006 notes:this 25-25 is only applicable in terms of par value shares since if n

o par value is involved, whatever is issued is fully paid. CORPORATE TERM It should have a corporate term which should not exceed 50 years. And it may be extended for another 50 years. But you cannot incorporate today, then tomorrow, extend the corporation life. You can only do that in the last 5 years of its exi stence (except for justifiable reasons like in securing a loan of 8 yr life and corp term remaining is only 7 yrs so dapat na i-amend for reason of securing a l oan) 2006 notes:corporation cannot be granted a usufruct over 50 yrs. DIFFERENCE FROM PARTNERSHIP: 1.How Created: Corpo is by law while partnership is by agreement 2.Powers: corp can exercise only those powers expressly granted or fairly infera ble from those granted to them while partnerships can exercise any power except those prohibited by law,morals,good customs and public policy 3.Corpo is managed through a board of directors while partnerships is by all par tners or through a managing partner 4.Corpo has 5 to 15 persons while partnership has 2 or more 2006 notes: If person does not want to risk his other properties, he can organiz e a private stock corporation where his liability will be limited to his stock s ubscription --if he do not want to manage, and wants others to manage,then he can form a par tnership with others with himself as capitalist partner and other person as indu strial partner or he can form a stock corporation and make other person as dire ctor and President or general manager and let latter run the business with the b oard. --if he wants to manage and control the business ,then he should form a sole pr oprietorship DIFFERENCE FROM COOPERATIVES: 1.coop members run the cooperative while employees of a corp run it. 2.coop members are entitled to one vote each. Stockholders vote according to the number of shares they hold. 3.coop member employee cannot assert collective bargaining .the employees of cor p can. DIFFERENCE FROM JOINT VENTURES: Joint ventures is a business organization between two corp where the participant s deviate from traditional matters on corporate management in the ff manner: 1.required vote might be greater than a mere majority 2.group of stockholders may be given the power to elect specified number of dire ctors 3.stockholders control the selection and retention of employees 4.venture may set up a procedure for settling disputes by arbitration. 2006 notes: corporations may enter into joint venture (pooling of resources or f ormal creation of another corporation) with another but not a partnership.

4blue 95 notes:SINGLE PROPRIETORSHIP is composed of one person doing business ei ther under his own name or a business name. It has no personality separate from

its owner. 4blue 95 notes: in JOINT ACCOUNT, it is a business arrangement whereby 2/more pe rsons contribute capital in a business and participate in the results thereof. N o common fund is formed and no juridical personality is created. ATTRIBUTES OF A CORPORATION

1.Personality distinct from the persons composing it Corporation is a creature without any existence until it has received imprimatur of the state acting according to law. It cannot legitimately refuse to yield ob edience to acts of its state organs. 2006 notes: incapable of intent ,so it cannot commit felony. But it can be fine due to officer s acts. 2006 notes: Corp not subject to Moral damages even if corporation may have estab lish a reputation of its own and created goodwill in the course of its business operations over the years. And even if they get besmirched ,corporation has sti ll no cause of action against the offender (ABS-CBN v CA). 2006 notes:where president is impleaded in his personal capacity, as such,he bec omes a real party in interest so he cannot sign in his own behalf (but he can si gn in behalf of the corporation due to the 2 signature rule 1st in behalf of the c orporation and 2nd in his personal capacity)

Corporate name: No corporation name may be allowed if it is identical or deceptively or confusin gly similar to that of any existing corp. And that the way the jurisprudence has developed, the name will not be allowed if it uses a dominant word in the name of another corporation, and they are engaged in the same line of business. On the other hand, the Court has said that Lyceum of the Phils. cannot prevent o ther schools from using lyceum because lyceum is a generic name. It means a scho ol. Like university, UE cannot prevent others from using university as part of t heir name because it's a generic name. So Lyceum of the Phils. cannot have an ex clusive right to use lyceum because it is a generic term for schools. 2006 notes: It may change its name by merely amending its Articles of Incorporat ion in the manner prescribed by law. 2006 notes: Change of name has no more effect upon the identity of the corporati on,since it is just a change of name, not of being. It remains and continues to be the original corporation. 2006 notes: in corporation corp , incorp may be used and xplanation must be included. 2006 notes:in partnership the words company and ltd may be 2006 notes: words in ordinary language are not susceptible of words use together ,attained a 2nd meaning, they are subject secondary meaning rule). 2006 notes:cannot use brgy, national, state and Philippines if it contain initials, an e used. appropriation ,but to appropriation ( as part of a name.

2006 notes:if name only lacks even a single word/entry you may dismiss the case si nce such constitute a substantial defect which would tantamount a lack of cause of action.

2.Perpetual succession Continued corporate existence irrespective of death or withdrawal of its compone nt members, limited in duration to the pds stated in charter. 3.Acquisition of Property, contracting obligations and bringing of suits Property of the corporation is not the property of its stockholders or members a nd may not be sold by the stockholders or members without express authorization from the corporation s board of directors. Obligations incurred by the corporation acting through its directors ,officers a nd employees are its sole liabilities. As such, corporate officers are not perso nally liable for money claims of discharged corporate employees unless they acte d with evident malice and bad faith in terminating their employment. Stockholder is not directly ,individually and/or personally liable for the indeb tedness of the corporation. Being the officer or stockholder of corporation does not make one s property the property also of the corporation for they are separat e entities. Interest of stockholders in corporate property is purely inchoate, and will not entitle them to intervene in a litigation involving corporate property(rights be longing to corp cannot be enjoined by stockholder). DOUBLE TAXATION. When a corporation earns profits, it pays income tax, when the corporation distributes the profits to the stockholders, the income will again b e subject to tax---as you know, dividends are subject to withholding tax. EVERY CORPORATION INCORPORATED UNDER THIS CODE HAS THE POWER AND CAPACITY TO SUE AND BE SUED IN ITS CORPORATE NAME. --if party wants to intervene, it must used its corporate name as the law requir es and not another name which it had not registered. (Laureano v CA)

(2000 BAR) suit will prosper against A Corp since it is the one renting the offi ce space as lessee from the owner of building as the lessor but the suit will no t prosper against Y,the President of A Corp since he has a legal personality dis tinct and separate from that of the corporation.

4.Receipt and enjoyment in common of privileges and immunities DOCTRINE OF PIERCING THE VEIL When the separate juridical personality of a corporation is used to defeat publi c convenience, to justify wrong, to protect fraud, to commit a crime, its separa te juridical personality will be disregarded. BUT, time and again, the Court sai d that the mere fact that one stockholder is the controlling stockholder of a co rporation, is not sufficient for disregarding the separate juridical personality . Mere control, in other words is not enough to constitute a ground for disregar ding the separate personality. It must be CONTROL + something else, like fraud. For example, somebody is sued there is a judgment against him so what does he do---he forms a corporation and transfers his properties to that corporation so that they can t levy upon the property by saying that they belong to the corporation. It is applicable when: 1.used as a cloak to cover fraud, illegality, or it results in injustice 2.defeat public convenience, justify wrong, defend crime 3.necessary to achieve equity or to protect creditors and other valid grounds 4.where two factories are made to appear as one and used as a device to defeat t he ends of law or as a shield to confuse legitimate issues 5.where parent corp assumes complete control of its subsidiary s business 6.when corporation is an alter ego of one of the principal stockholders 7.forum shopping since the corporate veil cannot be used to shield an otherwise blatant violation of the prohibition against forum shopping shareholders whether suing as the majority in direct actions or as the minority in a derivative suit cannot be allowed to trifle with the court processes. 2006 notes: Piercing applies to sale of stocks but not applicable to sale of ass ets or properties. 4blue 95 notes: Doctrine can only come into play if summons is served on the cor poration through any one of the persons named: President, Managing Partner, Corp orate secretary, Treasurer, or in-house counsel (Rule 14)

Not applicable when: 1.Director has no participation to a representation made by the President ,and t he execution of a promissory note with we as maker has a reference to the corporat ion and not to the directors. 2.for the separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and convincingly established it cannot be presumed 3.In Liddel v CIR, mere ownership by a single stockholder or by another corporat ion of all or nearly all of the capital stock of a corporation is not of itself a sufficient reason for disregarding the fiction of separate corporate personali ties.

Consequences if Viel is Pierced: 1.if only one corporation is involved, to regard its existence as an association of persons 2.if two corporations participate, to merge them, and consider them only as one entity. 4Blue 95 notes: members or stockholders of the corporation will be considered as the corporation that is liability will attach directly to the officers and stoc kholders. Test in determining applicability of Piercing the Veil: 1.control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the tran saction attacked so that the corporate entity as to this transaction had at the time no separate mind,will or existence of its own. 2.such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty or dishon est and unjust act in contravention of plaintiff s legal rights. 3.control and breach of duty must proximately cause the injury or unjust loss c ompliance of. The absence of any one of these elements prevents piercing the vei l.

INSTRUMENTALITY RULE (ALTER EGO) Where one corporation is so organized and controlled and its affairs are conduct ed so that it is a mere instrumentality or adjunct of the other. The fiction of the corporate entity of the instrumentality may be disregarded. In applying this rule,the courts are concerned with the reality and not form wit h how the corporation operated and the individual s relationship to that operation . The question of where corporation is a mere alter ego is one of fact, essenti ally then ,a matter of proof.

2006 notes: in Francisco v Mejia: SC states that mere ownership of substantial c apital in a corp is not enough that piercing is appied, since there should be di sregard of rights of third parties.

ARTICLES OF INCORPORATION It contains the following: 1.name of corporation 2.purpose primary and secondary 3.place of its principal office, which must be a city or municipality. 4.duration 5.the name, nationality, and residence of the incorporators 6.the name, number of directors [which should not be less than 5 nor more than 1 5], those who will act as directors until the regular directors are elected. 7.if stock corporation, amount of capital stock ,number of shares in case of par value stock corporations ,the par value of each share 8.names and residences and number of shares and amount of subscription of the su bscribers,which shall not be less than 25% of the authorized capital stock 9.name,residences and amounts paid by each subscriber on their subscriptions whi ch shall not be less than 25 % of total subscriptions 10.name of treasurer elected by subscribers 11.if the corporation engages in a nationalized industry, a statement that no tr ansfer of stock will be allowed if it will reduce the stock ownership of Filipin os to a percentage below the required legal minimum. 2006 notes: for Non stock ,# 1-6 in lieu of stock subscriptions and payments ,th e names of donors and their citizenship ,residences and amounts contributed or d onated should be indicated.

CONVERSION FROM STOCK TO NON-STOCK (BAR) X company is a stock corporation composed of the Reyes family engaged in t he real estate business. Because of the regional crisis, the stockholders decide d to convert their stock corporation to charitable non-stock corporation and non profit association by amending the articles of incorporation.

HELD: This can be legally done. In conversion by mere amendment, the stock corpo ration is not distributing any of its assets to the stockholders. On the contra ry, the stockholders are deemed to have waived their right to share in the profi ts of the corporation which is a gain not a loss to the corporation. If at inception, such company is a non-stock, then, the members are not entitled to share in the profits of the corporation since all present and future profits belong to the corporation. In converting the non-stock corporation to a stock c orporation by a mere amendment of Articles of Incorporation, the non stock corp is deemed to have distributed an asset of the corporation. Non stock must be dissolved first. 2006 notes:nonstock to stock di pwede since it would violate prohibition of nons tock to distribute surplus profits to members (an exception to such is when corp . has distribution plan approved by SEC and included in its articles of incorpor ation whereby assets are return to its assets or given to another nonstock to be used for a specific purpose and if there still remains ,it shall be returned to members. Documents accompanying the Articles: 1.treasurer s certificate 2.statement of assets and liabilities 3.bank statement of money paid in for subscriptions 4.letter of authority for SEC examiners to examine the bank acct 5. the favorable recommendation of the appropriate government agency -- like in an insurance corp it must be with recommendation of insurance commiss ioner, if it is a school it should be with the DECS or CHED (4blue 95)

Grounds for Rejection or Disapproval by SEC of Articles or Amendments: 1.not substantially in the prescribed form 2.purpose patently unconstitutional ,illegal or immoral 3.treasurer s affidavit false 4.non-compliance of required percentage of Filipino stock ownership in nationali zed corporations

Ways of proving corporate existence where this is put in issue are by producing: 1.original of the certificate of Incorporation with the seal of the SEC or a co py of the same certified by the SEC 2.copy of the Articles of Incorporation certified by the SEC 3.copy of the Articles of Incorporation filed with some government office like t he Register of Deeds ,and certified by the custodian of that document. 2006 notes:In a stock corporation, the articles of incorporation should mention a primary and secondary purpose (no need if it is a non-stock) Purpose should be specific and lawful. And the 1st and 2nd purpose must be combi nable. Corporations not allowed for more than 1 purpose are: banks/quasi-banks, trust c ompany and public utilities

Summary: Procedure for organizing a corporation: 1.execution of the Articles of Incorporation and accompanying documents and fili ng them whether or not together with the by-laws ,with the SEC.The accompanying documents consist of the treasurer s certificate of deposit of paid up capital, le tter authorizing SEC to examine said depositand other required documents 2.Issue by SEC of Certificate of incorporation 3.Election of the board and corporate officers and adoption of the by laws withi n 30 days from the issue of the certificate of incorporation if the by laws was not filed with the articles of incorporation. Procedure for amendment of the Articles: 1. board by majority vote approves the amendment 2. stockholders representing at least 2/3 of the outstanding capital stock on pr oper notice, approve the amendment without prejudice to the appraisal right of a dissenting stockholder 3. copy of the amended articles certified by the President, Corporate secretary and a majority of the board is filed with the SEC.

Procedure for amendment of the By-laws: 1. by majority vote of the board and approval of a majority of the outstanding c apital stock at a meeting called for the purpose In stockholders meeting ,those representing a majority of the outstanding capital stock approve the amendment to the by-laws. The amended by laws duly certified t o by the secretary and a majority of the directors is then filed with the SEC. 2. by board of directors : In a stockholders meeting ,those representing at least 2/3 of the outstanding cap ital stock approve a resolution delegating the power to amend or adopt new by la ws to the board The board ,by majority vote, then approves the amendments to the by-laws. The am endments duly certified by a majority of the directors and countersigned by the Secretary are then filed with the SEC. In case of banks and other special corporations, the amendments should be accomp anied by a certificate of the appropriate government agency. The amended or new by laws become effective upon issuance by SEC of a certificate of filing.

2006 notes:amendment of by-laws cannot be used to defeat the security of tenure of an individual 2006 notes: Proposal to restrict election to all holders of majority of outstand ing cap stock is invalid since it deprives minority stockholders of right to ele ction. 2006 notes:Corporation Code so states that it will not allow a non-stockholder t o occupy President position whereby it requires among the directors elected by t he stockholders. 2006 notes:Proposal to give bonuses to directors equivalent to 10% of the gross revenues in any given year violates Corpo Code restricting the total directors sa laries to not more than 10% of the net income of the corp b4 income tax for the year. 2006 notes:It is only in the stockholders he principal place of business. INSPECTION OF BOOKS meetings where venue is restricted to t

Corporate books and records are open to the inspection of any director, stockhol der, or member of the corporation at reasonable hours during any business day, including the right to copy excerpts of the same. * it may be refused if shown that a prior right granted was improperly used or t hat he was not acting in good faith or for a legitimate purpose. * It may be exercise by stockholder personally or through his representative and if refused without justification, the Corporate officers responsible may be cri minally liable * This right to inspect is not absolute and corp may deny said right on the basi s of propriety of motive and purpose.

This right is subject to the ff limitations: * It must be done during reasonable hours on a business day * Right has not been used in the past by the stockholder improperly * He should act in good faith and for a legitimate purpose

4Blue 95 notes: Stockholder s right to inspection of books will have to bow to the provisions of the Law on Non-Disclosure of Deposits ,which provides as a genera l rule that the deposit account of a depositor in a bank cannot be inquired int o by any person even including the government. * The remedy of the stockholder is not an inquiry into the bank deposit but mere ly an order to the bank to inform the court whether or not the defendant has a d eposit therein * As such, stockholder must secure a writ of execution from the court to be ser ve on the bank.

Within 10 days from request of a stockholder or member ,the corporation shall fu rnish him a copy of its most recent financial statements including a balance she et and net income statement.(NCC) At regular meetings of stockholders and members ,the corporation should furnish th em a financial report of operations including certified financial statements (NC C) MERGERS AND CONSOLIDATION In merger, one corp. is absorbed by another as the surviving corporation. In consolidation, a new corp. is formed which will absorb two or more existing c orporations. 2006 notes: with regard mergers: a.a corpo engaged in transportation cannot engage in any other business alien to transportation. b.operation of a transpo business opens the operator to the risk of liability to passengers injured or killed in accidents. This liability might encroach on the investment in the clothing business if joined with the transportation business.

Procedure: a.approval of a plan of merger by the boards of directors or trustees of the con stituent corporations setting forth the terms of the merger or consolidation and a statement of changes in the articles of incorporation of the surviving/consol idating corporation b.approval of the plan by stockholders of each of the constituent corporations b y a vote of at least 2/3 of the outstanding capital stock of each in stock corpo rations, or 2/3 of the members in a non-stock corp in meetings separately held o n at least 2 wks advance notice stating the purpose of such meeting c.execution of the articles of merger/consolidation by each of the constituent c orporations,signed by the Pres/Vice Pres of each and certified by their respecti ve secretaries/asst secretaries. d.submission of 4 copies of the duly executed articles of merger/consolidation t o the SEC and issuance by the SEC of the certificate of merger/consolidation in the proper case. 4Blue 95 notes: If SEC believes such merger or consolidation to be contrary to l aw, a hearing will be conducted

Effect: a.in merger, the constituent corporation shall become one corporation ,in consol idation, new consolidated corp shall be the remaining corp. b.separate existence of the constituent corporation shall cease c.surviving or consolidated corp shall possess all rights and liabilities of a c orp(like with regard CBA of the old corporation) d.all rights, privileges,immunites and franchises of each are transferred to the surviving/consolidated corp. e.surviving/consolidated corp shall absorb and be liable for liabilities and obl igations of each of the constituent corporations. Due Diligence Rule: If a corporation is planned to be purchased on cash, the latter must exercise d ue diligence in order to maintain the stable standing of its assets for a period of time as to be observed by the one who is planning to bought such corporation . If a corporation is acquire by share of stocks of the acquiring corporation ,bot h corporation must maintain due diligence with regard the status of their assets .

NATIONALITY OF A CORPORATION Gen Rule: The country where the corporation was incorporated determines the nati onality of a corporation (Domiciliary Test) Foreign corporations classified under the domiciliary test are subject to the la ws of the country of their creation on the ff matters: 1.creation,formation, organization or dissolution of corporations 2.relations, liabilities, responsibilities and duties of members, stockholders o r officers of corporation to each other or to the corporation. In times of war or national emergency , the control test is used, whereby if the controlling stock of a corporation is owned by citizens of a particular country which is at war with the Philippines then that corporation although organized i n the Philippines is a foreign corporation.

FOREIGN OWNERSHIP IS LIMITED FOR REASONS OF SECURITY ,DEFENSE, RISK TO HEALTH AN D MORALS AND PROTECTION OF SMALL-AND-MEDIUM SCALE ENTERPRISES: Upto 40% Foreign Equity:

a. manufacture ,repair ,storage and distribution of products and ingredients req uiring PNP clearance b. manufacture, repair, storage and distribution of products requiring Dept of National Defense clearance c. manufacture and distribution of dangerous drugs

d. sauna and steam bathhouses, massage clinics and other like activities regulat ed by law due to risk posed to public health and morals e. all forms of gambling f. domestic market enterprises with paid in capital of less than the equivalent of $200,000. g. domestic market enterprise which involve advanced technology or employ at le ast 50% direct employees with paid in equity capital of less than the equivalent of $100,000. 2005 notes: there is no law prohibiting a foreigner from becoming a stockholder and consequently from becoming a director of a corporation engaged in the lumber business, irrespective of whether the lumber utilized is taken from private for est lands or from timber lands of the public domain, provided that in the latter case, at least 60% of the capital of said corporation is owned by Filipinos. C orporation cannot however engage in retailing of lumber. 4Blue 95 notes:A corp composed entirely of aliens may be organized in the Philip pines.The corp law only requires a majority of the incorporators to be residents not necessarily citizens of the Philippines.However,in nationalized corporation s (retail,agriculture, mining,tranpo and shipping)no aliens or some but not all can form the corporation depending on its percentage control. 2006 notes:Foreign corp can secure lease of lands but cannot own it.They can acq uire stock solely for investment but not to exercise control. FOREIGN OWNERSHIP IS LIMITED BY MANDATE OF THE CONSTITUTION AND SPECIFIC LAWS( N ATIONALIZED). Corporations with No Foreign Equity: 1.mass media except recording 2.retail enterprise with paid up capital of less than $2500000. 3.private security agencies 4.small scale mining 5.utilization of marine resources in archipelagic waters, territorial sea and ex clusive economic zone. 6.ownerhip, repair ,stockpiling and distribution of nuclear weapons 7.manufacture , repair ,stockpiling and distribution of biological chemical and radiological weapons and anti-personal mines 8.manufacture of firecrackers and other pyrotechnic devices 9.rural banks except shareholdings of corporations organized primarily to hold e quities in rural banks and of Filipino-controlled domestic banks. Upto 60% Foreign Equity a.financing companies regulated by SEC b.investment houses regulated by SEC

Upto 40% Foreign Equity a.exploration, development and utilization of natural resources b.ownership of private lands c.operation and management of public utilities d.ownership/establishment and administration of educational institutions e.culture, production, milling, processing, trading except retail of rice and co rn and acquiring by barter or purchase of rice and corn and by products thereof. f. contracts for the supply of materials , goods and commodities to GOCCs.

g.project proponent and facility operator of a BOT project requiring a public ut ilities franchise h.operation of deep sea commercial fishing vessel 2006 notes:if foreigner become head of board of directors of logging company(exp loitation of resources)it is possible, as long as share must not exceed 40%.

Upto 30% Foreign Equity a.advertising b.domestic banks except where new bank is established as a result of -local incorporation of any of the existing branches or agencies of foreign bank s in the Philippines pursuant to sec 68 of General Banking Act -consolidation of existing banks in any of which there are foreign owned voting stock at time of consolidation Upto 25% Foreign Equity: a.private recruitment ,whether local or overseas employment b.contracts for the construction and repair of locally-funded public works excep t: -infrastructure/development projects covered by RA 7718 -contracts for construction of defense-related structure -projects which are foreign funded or assisted and required to undergo internati onal competitive bidding Upto 20% Foreign Equity: Private radio communication network CLASSIFICATIONS OF A CORPORATION General classification of corporation is into Public and Private. a.as to organizers: Public-by state only Private-by private persons alone or with the state b.as to functions: Public-governmental and other public functions Private-private, usually for profit making c.governing law Public-special laws (with original charter) Private-law of Private Corporations 4Blue 95 notes: by engaging in a particular business through the instrumentality of a corporation, the government divest itself pro hac vice of its sovereign character, so as to render the corporation subject to the rules of law governing private corporations. -- when government enters into a commercial business, it abandons its sovereign capacity and is to be treated like any private corporation so as to render the c orporation subject to the rules of law governing private corporations. -- it therefore cannot invoke immunity from suit. 4Blue 95 notes: GOCC have personality of their own, separate and distinct from t he government and their funds although considered to be public in character are not exempt from garnishment (PNB v Pabalan)

There are distinctions between a corporation rivate

going public and a corporation

going p

1.corporation going public allows its stocks to be issued to person other than i ts registered stockholders Going private restricts the issue of its stocks to its registered stockholders o nly, and prevents transfers by stockholders of their stocks without first giving the corporation and its stockholders the first opportunity of acquiring the sam e. 2.going public may allow its stock to be sold in stock exchanges, going private may not allow its stock already issued to be traded in stock exchanges/ 3.articles of incorporation and by laws of a corporation going private usually c ontains right of first refusal clause giving corp and its stockholders preferenc e as against non-stockholders in the acquisition of stocks. The articles and or by laws of a corporation going public would not contain the right of first refus al.

New Corporation Code(NCC) classifies corporations into stock and non-stock corpo rations. And those created by Special laws and those incorporated under the NCC. NCC under scattered sections also provides for close corporations and special co rporations. No mention was made of public corporation. 8 CLASSIFICATIONS OF PRIVATE CORPORATION: 1.Stock Corporation Capital stock divided into shares and are authorized to distribute profits on th e basis of the shares thus held. a.Par value is where latter is stated in the articles and which value remains ge nerally unchangeable. b.No Par value are those which have stocks where the issue value ,which changes from time to time, is left to the discretion of the corporation to determine.jt may be issued at different prices. 2005 notes: A holder of one share of no par value stock is entitled to the same rights as another holder of one share of par value stock irrespective of the dif ference in issue values of the two shares. 2005 notes: when articles or by-laws are silent, the corporation is deemed to h ave the power to declare dividends. 2005 notes: prohibition in its articles that at dissolution the assets of the co rporation shall be given to a charitable corporation does not prohibit the corpo ration from declaring dividends before dissolution.

2.Non Stock Corporation Corporation organized for non profit purposes, and primarily for charitable ,re ligious, educational ,fraternal etc.. 2006 notes:di pwede ang stock and profit (like manufacture soap and sell it ,di ya n pwede pag non stock corporation)

3.Aggregate and Sole Aggregate are those with incorporators not less than 5 nor more than 15 in stock corp or up to more than 15 in non-stock corporations Corporation sole is a special form of corporation associated with the clergy co nsisting of one person only and his successors to give him some legal capacities and advantages for and in behalf of the church represented by him. 4.Ecclesiastical and Lay In Lay, it is divided into civil (organized for profit) and eleemosynary which i s a non religious corporation organized for charitable purposes. 5.Domestic and Foreign 6.De Jure, De Facto, by Estoppel & by Prescription Prescription is recognize by immemorial usage as a corp though not lawfully orga nized as corporation like the Roman Catholic Archbishop of Manila before the law on corporation sole took effect 7.Quasi-Public and Quasi-Corporation Quasi-public is a private corp performing functions where public has an interest (like MERALCO & PLDT) while Quasi-corp is a municipal society though not vested with gen powers of corporation is recognized as such (no charter like the BIR & AFP) 8.Condominium Corporation Private corporation organized for the construction of a building with complete l iving or office units which it sells creating full ownership for the buyers of t he units thus sold, and a co-ownership over the land and other portions of the b uilding used in common by the unit buyers. SPECIAL CORPORATIONS 1.EDUCATIONAL CORPORATIONS For educational corporations, where the trustees should be divided into multiple s of five. So you should have five, ten, or fifteen trustees if they are organiz ed as non-stock corporation. And unless otherwise provided in the articles of in corporation or by-laws, the terms of the trustees should be five years, and ever y year only one fifth (1/5) is elected, again to provide for continuity in polic ies. But you can provide that they will all be elected instead for a term of one year, so every year, everybody has to be elected.

2.CLOSE CORPORATIONS It is one whose articles provides : a.that its shares shall not be held by a group of more than 20 persons b.all of the issued stocks shall be subject to one or more restrictions on trans fer c.corporation shall not list in any stock exchange or make public offering of an y of its stocks

If at least 2/3 of the voting stock of the above corporations is owned or contro lled by another corporation which is not a close corporation, then the above cor poration shall not be deemed a close corporation. 4blue 95 notes: In a close corporation, the restriction as to the transfer of sh ares has to be annotated in the articles of incorporation ,the by-laws and the c ertificate of stock. This serves as notice to the person dealing with such share s ,as such, the person is bound by the pricing stated in the by laws.

3.RELIGIOUS CORPORATIONS There are three (3) ways by which a religious organization can provide for the a dministration of its properties: 1. by forming a non-stock corporation 2. by corporation sole 3. by religious aggregate or society

Corporation sole may constitute of one person only so the head of a religious se ct would incorporate himself for the purpose of administering the properties of a religious sect. To incorporate what you will file with the SEC is an affidavit

. The affidavit will state that the affiant is the head of a religious denominat ion or sect and would want to become a corporation sole. and the rules of his re ligion allow him to incorporate as a corporation sole and that he is charged wit h the administration of its properties and in fact he will be required to submit an inventory and the manner in which the successor will be chosen and the place where he will hold his office. The Roman Catholic Archbishop of Manila is a corporation sole so if Cardinal Sin dies the new archbishop will simply submit his appointment and he need not inco rporate again because the corporation is different from the occupant of the posi tion. The Iglesia ni Kristo is incorporated as a corporation sole. The court has held in Roman Catholic Apostolic Adm. of Davao, Inc. v. Land Regis tration Commission that although the Bishop was a foreigner, he could register a parcel of land in his name because he is a mere administrator the property real ly belongs to the faithful and since they are Filipinos they could register the land in the administrator s name . Under the law if a corporation sole wants to dispose of or mortgage real propert y, he has to get authorization from the Regional Trial Court unless the rules of the religious sect allow him to dispose of or mortgage real property and that i s usually the case. The last is the religious aggregate or religious society. It can incorporate for the purpose of managing its properties and the articles would indicate that the members constitute a religious order or society and that at least 2/3 of the me mbers have agreed to incorporate, that the rules allow them to incorporate they desire to incorporate to manage their properties in the place where located. The recollects are incorporated to manage their properties, they are the single big gest bloc of stockholder of San Miguel Corporation.

2006 notes:the test of nationality in corporation sole is not the nationality of the head in a corporation sole,but the nationality of the congregation, as such , even if foreigner is the head, if the whole congregation are Filipinos, then t he nationality is that of a Filipino.

4.CORPORATION BY ESTOPPEL It is a corp, which is a group of a persons, which is so defectively formed so t hat it is not a de jure or a de facto corp but is considered as a corp with resp ect to those who cannot deny its existence because of some agreement or admissio n or conduct on their part. This doctrine requires that there must be dealings among the parties on a corpor ate basis.

And there are differences between a de facto corp and a corp by estoppel. A de f acto corp has a real existence in law, while a corp by estoppel has none. A de facto corp may exist even if there are no dealings among parties on a corporate basis. In corps by estoppel, dealings on a corporate basis among the parties inv olved are required. Also, where not all requisites for corp de facto are presen t, you can have corp by estoppel. 2006 notes: The principle of estoppel can be invoked by the victim but not by th e corporation as duly organized as against the victim of said misrepresentation. Christian Children s Fund Case There was a teacher hired by the CCF, which was unincorporated. She wanted to g o after the one with money, the organization that was funding CCF, and she was c laiming I m an employee of that org and not the CCF. But the court said that since she accepted employment with CCF, she was estopped from claiming that CCF is not a corp. 2006 notes:the people who represented themselves as forming that corp would be l iable as general partners, they will be solidarily liable. That s why in one case the court said the people who represented themselves as the officers of a corpo ration that is really an unincorporated org they were illegally recruiting perso ns the court said they were liable as general partners, solidarily liable for al l claims.

5. DE FACTO CORPORATIONS A de facto corporation is one that is defectively created so as not to become a de jure corporation. It is the result of an attempt to incorporate under an exi sting law coupled with the exercise of corporate powers.

(while a dejure on the other hand is a corporation formed with all of the requir ements of law) The existence of a de facto corporation can only be attacked directly by the sta te through quo warranto proceedings. If the corporation does not qualify as a d e facto corporation, its existence may be attacked collaterally. This doctrine is based on public policy to ensure stability in business transactions. 4blue 95 notes: a corporation was created by special law, later, the law creatin g it was declared invalid. May such corporation claim to be a de facto corporati on? No, a private corporation may be created only under the corporation code. O nly public corporation may be created under a special law. 2006 notes:where private corporation is created under a special law ,there is no attempt at a valid incorporation, such cannot claim a de facto status. 2006 notes: where a person convinces others to form a corporation, which however was not formed at all, the parties are partners inter se and are governed by th e law on Partnerships .the relationship is not that of a de facto corporation. (BAR) 7 persons form a corporation by registering their articles of incorporatio n with SEC. but after the certificate of incorporation has been issued ,it is di scovered that only 5 of the 7 have acknowledged the articles of incorporation be fore a notary public. HELD: It is a de facto corporation , although defectively formed ,it may nevert heless exercise corporate powers validly until the state dissolves it by quo wa rranto proceedings.

4 REQUISITES OF A DE FACTO CORPORATION: 1.Valid law under which the corporation was incorporated. Attempt in good faith form a corporation according to the requirements of the la w. Here the SC requires that you must have filed with the SEC articles of incor poration and gotten the certificate with the blue ribbon and gold seal. For ins tance the majority of the directors are not residents of the Philippines or the statement regarding the paid up capital stock is not true, those are defects tha t may make the corporation de facto. 2.User of corporate powers. The corporation must have performed acts which are peculiar to a corporation like entering into a subscription agreement, adopting by-laws, electing directors. 3.It must act in good faith. So the moment, for example, there is a decision de claring the corporation was not validly created, it can no longer claim good fai th. 4.A de facto corporation will incur the same obligations, have the same powers a nd rights as a de jure corporation. It can acquire property, sue or be sued, en ter into contracts. Likewise, the officers, directors, and stockholders will ha ve the same rights, powers, and liabilities as those of a de jure corporation. 6.FOREIGN CORPORATIONS

Section 123 defines what is a foreign corporation, one formed, organized, or exi sting under any laws other than those of the Philippines and whose laws allow Fi lipino citizens and corporations to do business in its own country or state. Not e the element of reciprocity is included in the definition of a foreign corporat ion as an ingredient of a foreign corporation. There are different ways by which a foreign corporation can establish its presen ce here. one is by setting a branch office, another is by setting up subsidiary, for tax purposes there are no trade-offs because a branch and a subsidiary are taxed in the same way but a subsidiary may be beneficial in the sense that it li mits the exposure of the mother company to its subscription instead of risking a ll the assets of the mother company. Another is the regional headquarters which does not do business, it is just a coordinating and communication center. Foreig n companies are setting up regional headquarters here because it has subsidiarie s in Southeast Asia or licensees and franchisees and its function is to supervis e and coordinate with those subsidiaries or franchisees so normally a regional headquarters would have a one room office here probably with country manager an d secretary, a telephone, computer and fax machine. If a foreign corporation wants to do business here it has to appoint a resident agent who may be a corporation, partnership or individual, if individual he must be of good moral character, sound financial standing, although his only functio n is to receive summonses in behalf of the corporation. If a foreign corporation is being sued, the summons must be served on the reside nt agent. The corporation is also required to file with the SEC a power of attor ney or resolution which says that if it has no resident agent it agrees that the summons be served with the SEC which will forward the summons and the complaint to the foreign corporation. If no resident agent and any officer who will be in the Philippines may be served with summons. Section 133 says that if the foreign corporation will be doing business without a license it cannot sue or intervene in any action in court or administrative ag ency. The SC had said that if a foreign corporation is doing business here without a l icense, a contract it entered into is valid, it is not rendered void so the cour t said the legislature made a judgment call that imposing penal sanctions and de nying access to the courts are sufficient penalties for doing business without a license. The legislature did not provide that the contract it entered into is v oid. Although the foreign corporation did not have license to do business when i t entered into in that contract, it could sue if later on it acquired a license to do business. (BAR) If a foreign corporation which has been licensed to do business in the Phi lippines by the BOI and SEC ,wants to expand its business activities in the Phil ippines, is further approval from the BOI necessary? HELD: Board of Investments (BOI) approval of the expansion of business of a fore ign corporation already licensed on or before the effectivity date of the forei gn investments law(1968) to engage in business is not necessary. BOI approval i s needed only in situations where foreign enterprise desires to exceed the permi tted percentage of equity of its investments under the Foreign Investments Law.

The Foreign Investment Act and its implementing regulations define what is doing business. It includes:

* Soliciting orders. When we talk of soliciting orders we mean negotiations of the specific terms and conditions of the contract. If you just advertise, that is not doing business. * Opening offices * Appointing representatives or distributors * Operating under full control of the foreign corporation * Domiciled in the Philippines or who in any calendar year stay in the Philippin es for at least 180 days * Participating in the management, supervision or control of any domestic corpor ate entity * Any other acts that involve continuity of commercial dealings, and * Performance of acts or functions incident to or in progressive prosecution of commercial gain The rules also state certain acts which do not constitute doing business like: * Mere investment in a domestic corporation. This repudiates the ruling in the Granger case where Justice Cruz said that being a mere investor is doing busines s. That is wrong. It could have been just a passive investment. So that decis ion is being repudiated here. * Having a director to represent you in a corporation because of your investment . * Appointing a representative distributor which transacts business in the distri butor s own name. The usual distributorship agreement will contain a provision so mething like this, The relationship between the parties is that of seller and buy er. This means that the local distributor has to pay for the goods he purchased irrespective of whether he is able to resell them or not. And it is up to him t o sell them for whatever price he can get. Now if the distributor is transactin g business not in his own name, but as agent of the foreign corporation, then th e foreign corporation will be doing business. This is what happened to BMW. Th ey have a distributor here but if somebody wants to buy a car, the distributor w ill merely forward the order to BMW in Bavaria and he will send the payment to B MW in Bavaria and BMW in Bavaria will ship the car to him. So the court said th at BMW was actually doing business here, because the agent was dealing with cust omers in the name of BMW. * Publication of advertisement. Like the advertisement in magazines which are s old here. * Maintaining stock of goods to have them processed like this garment business i n the United States which send their textiles to be processed into dresses which are then shipped back to United States or components for electronic products wh ich are sent here to be processed and sent back to Silicon Valley. * Consignment of the equipment to be used in processing the products for export. So that if the foreign company sends its equipment to be used by the local pro cessor, that is not doing business. * Gathering information about the Philippines * Performing service auxiliary to an isolated contract not in a continuing basis such as installing in the Philippines machinery, servicing the same, and traini ng workers to operate it. 2006 notes: Consequences on Foreign corporations engaging in business in the Phi lippines without license : (1) it shall not be permitted to transact business in the Philippines (2) it cannot sue, but it can be sued. Contract Test- foreign corporation not doing business in RP and entered into con tract w/ a domestic corporation whereby the perfection and consummation was done outside, the same would not constitute doing business in RP. When Unlicensed Foreign Corporation can sue:

1. corporation not doing business in the Philippines can bring suits on isolated acts, If it can sue, it can likewise be sued. -- if a foreign corporation not engaged in business is not barred to seek redres s from Philippine courts, with more reason can said corporation not claim exempt ion from being sued in Philippine courts. Isolated transactions means a series of transactions set apart form the common b usiness of a foreign enterprise in the sense that there is no intention to engag e in a progressive pursuit of the purpose and object of the business organizatio n. The fact that a foreign corporation does not do business here,that is a matter t hat should be ventilated in the trial on the merits but not in a motion to dismi ss. 2.action to protect good name ,good will and reputation of foreign corporation 3.where contract provides Philippine court as venue for controversies 4.license subsequently granted enables foreign corporation to sue on contracts e xecuted before grant of license 5.recovery of misdelivered property 6.where the unlicensed foreign corporation has domestic corporation as co-plaint iff 7.estoppel

Acquisition by Philippine courts of Jurisdiction over Foreign Corporation 1. by serving upon the resident agent designated in accordance with law to accep t service of summons when corporation designated a person to receive service of summon pursuant to co rporation code, that designation is exclusive and service of summons on other pe rson is inefficacious. 2.it there is not resident agent ,by service on the government official designat ed by law (like the SEC) 3.by serving on any officer or agent of said corporation without the Philippines . IMPORTANT RULES:

GRANDFATHER RULE The test being used here is the nationality/ citizenship of the stockholders. Ac cording to the formula under the grandfather rule, if you have a corporation own

ed by another corporation, you trace who are the owners of In other words, if a company is 60% Filipino and such 60% y w/c is 50%fil & 50% foreign, so it is 30% Filipino (60 x acquiring company is 60% Filipino, so since lampas 50 then acquired corporation is Filipino

this owning corp. is acquired by compan 50%); but if it the the whole 60% of the

2006 notes: in JG Summit v CA (2005 case)- the stockholders are not limited to t ransfer their shares to another even if it is a foreigner, such limitation only apply to the corporation. An illustration is that you can sell your 60% shares to foreign corporation whic h would not violate the 60-40 rule, the only effect of such undertaking is that such foreign corporation cannot acquire real property. 4blue 95 notes: However, the Foreign Investment Act has disregarded the grandfa ther rule. It adopted the liberalized interpretation of Filipino-ownership.

ONE MAN CORPORATION 2006 notes: A one man corporation is a corporate entity where one person holds d irectly or indirectly all or substantially all of the stocks of the corporations . -- this form of corporation enjoys all the attributed of a corporation although it always faces the risk of its corporate existence being attacked of said corp orate fiction is utilized for unlawful pruposes. -- to assure that corporation will continue to enjoy the attributes, the corpora tion should have a duly constituted board which should meet regularly to pass u pon the problems of the corporation. The stockholder who holds substantial stock s should consider his holdings as merely for investment purposes.

2006 notes: in concession theory the state concedes that you re a person (the corp) and once it is created, it should be for public purpose. As such, congress cannot enact law creating private corp with special charter. All waterworks are public corp, exception to such is a de facto corporation whe re it failed to comply in a fatal matter resulting to a fatal defect but once a special law is enacted ,it is not anymore a defacto corp COMPONENTS OF A CORPORATION.

1.INCORPORATORS - Stockholders or members who appear in the articles of incorpor ation, as originally forming and composing the corporation and who are signatori

es thereof.

2.CORPORATORS - those who compose a corporation.

3.PROMOTER Person who undertakes to form a conrporation and to produce for it the rights ,instrumentalities,and capacity by which it is to carry out the purposes set forth in its charter ,and to establish it as fully able to do its business. 2005 notes: a promoter although an agent of the incorporators is not an agent of the corporation unless prevented by estoppel or ratification from honoring a co ntract executed by the promoter in its behalf before incorporation, the corporat ion may validly refuse to accept the sale. 2005 notes: corporation, if it accepts the sale, may validly claim the 30% commi ssion. The acceptance by the corporation of the sale ratifies the agency relatio nship and all benefits acquired by the agent inure to the corporation.

4.EXECUTIVE COMMITTEE By-laws may create an executive committee composed of not less than 3 directors appointed by the board It cannot act on the following (1) matters needing stockholder s approval (2) fil ling up of board vacancies (3) amendment ,repeal or adoption of by laws (4)amen dment or repeal of board resolution and (5) cash dividend declarations. 2006 notes:it can only perform delegate acts by the board. 2006 notes:purpose of an executive committee is to remedy situation in between b oard meetings (sec 35) 2006 notes:to bind corporation,it must act by a majority vote of all its members ,thus ,the committee cannot delegate its authority to one of its members

5.OFFICERS- President, Secretary and Treasurer. However ,law does not limit cor porate officers to these three.(secretary of the president is not the secretary mentioned by law) 2006 notes: suit for damages for illegal outster of a corporate officer prescrib es in 4 years. 2006 notes:An officer appointed at the pleasure of the board, per the corporate by-laws may be terminated at any time. 2006 notes: where a loan procured for corporate purposes and an official signed for and in behalf of corporation solidarily with himself in his personal capacit y, both corporation and official are solidarily liable. A Corporate director, trustee or officer may be held personally liable with the corporation under the ff circumstances:

a.when he assents to a patently unlawful act of the corporation b.when he acts in bad faith or with gross negligence in directing the affairs of the corporation ,or in conflict with the interest of the corporation resulting in damages to the corporation, its stockholders or other persons. c.when he consents to the issuance of watered stocks or who having knowledge the reof ,does not forthwith file with the secretary his written objection d.when he agrees to hold himself personally and solidarily liable with the corpo ration e.when he is made by a specific provision of law to personally answer for the co rporate action.

(BAR) the trial court erred in holding D, President and General Manager of Turtl e jointly and severally liable with Turtle Mercantile. In issuing the check issued to SHAMRON and thereafter stopping payment thereof, S was acting in his capacity as an officer of Turtle. He was not acting in his p ersonal capacity. Furthermore, no facts have been provided which would indicate that the action of S was dictated by an intent to defraud SHAMRON by himself or in collusion with Turtle. Having acted in what he considered as his duty as an officer of the corp oration, S should not be held personally liable.

2006notes: there is no law which prohibits a corporate officer from binding hims elf personally to answer for a corporate debt while the limited liability doctri ne is intended to protect a stockholder by immunizing him from personal liabilit y for corporate debts ,he may nevertheless divest himself of this protection by voluntarily binding himself to the payment of corporate debts. 2006notes: corporate officer is not personally liable for the money claims of di scharged corporate employees unless he acted with evident malice and bad faith i n terminating their employment. 2006 notes:appointment/election of a corporate officer is with the board; the s tockholders has no say in the election or appointment.

6.STOCKHOLDERS - corporators in a stock corporation. MEMBERS - corporators in a non-stock corporation. 2006 notes:PROXY- only allowed if stockholder (di pwede sa board of director), a nd as such it is only the stockholder who may revoke it either expressly or imp liedly. Proprietary Rights of Stockholders: A.RIGHT TO DIVIDENDS NCC prohibit the issuance of any stock dividend without the approval of the stoc kholders representing not less than 2/3 of the outstanding capital stock at a me eting called for that purpose. Payment by a corporation of dividends to a wrong party will not absolve the corp oration from paying the party adjudged by the court to be lawful owner of the st ocks.

(BAR) for past 3 yrs , X Company has been earining tremendously in excess of 100 % of the corporation s paid in capital. All of the stockholders have been claiming their share in the profits by way of dividends but the board of directors faile d to lift its finger . a. Is corporation guilty of violating the law? It is guilty of violationg sec 43 of Corporation code since this provision prohi bits stock corporations from retaining surplus profits in excess of 100% of thei r paid-in capital b. Are there instances when a corporation shall not be held liable for not decla ring dividends? 1.when justified by definite corporate expansion projects or programs approved b y the board of directors 2.when corporation is prohibited under any loan agreement with any financial ins titution/creditor whether local or foreign ,from declaring dividends without its consent and such consent has not yet been secured 3.when it can be clearly shown that such relation is necessary under special cir cumstances obtaining in the corporation such as when there is need for special r eserve for probable contingencies. 2005 notes:dividend has no existence until declared; profits are part of the ass ets of a corporation and do not belong to the stockholders individually. 2005 notes: dividends are declared by the board, but in case of stock dividends ,approval by stockholders representing 2/3 of the outstanding capital stock is necessary and in all cases only if unrestricted retained earnings exist. 2005 notes: corporation can pay cash dividends when declared by the board and ca n have stock dividends when declared by the board and approved by stockholders o wning 2/3 of the capital stock outstanding. 2005 notesDividends ,whether cash or stock can be paid only from unrestricted re tained earnings. This fund is the balance of net profits, income and gains of a

corporation from the date of incorporation after deducting losses and contributi ons of stockholders and transfers to capital stock accounts when made out of suc h surplus. 2005 notes:If dividends was made from a source other than surplus profits, it wo uld constitute a violation of sec 43 and of the trust fund doctrine and would be a fraud against creditors. B. APPRAISAL RIGHT Right to withdraw is called Appraisal right and is available in favor of a stock holder who dissents to the : a.amendments of the articles to change ,restrict existing rights or to authorize new preferences of stockholders -extension/reduction of corporate term b.sale or other dispositions of all or substantially all of the corporate assets c.merger or consolidations d.investment of corporation funds in another corporation or for a different purp ose. (BAR) X subscribed and paid for P10t worth of shares of stock of R Mines as an incorporator and original subscriber. He was employed as the mine superintendent . After some time, the corporation suffered a loss of which it accused X of infi delity and breach of trust and confiscated his shares. HELD: Action of Board is not legal. The rights of X as a stockholder and his ob ligation as a mine superintendent are two different matters.Code provides for th e manner by which the corporation may become owner of the stocks of a stockholde r (like where the stockholder is declared delinquent, his stocks sold at auction , and there is no person interested in the bidding as a consequence of which the corporation becomes owner of the stocks).His being remiss as an employee in his obligations is not a ground for the corporation to confiscate his shares.

4blue95 says: If I were a stockholder who did not vote to authorize the action o f the board, I will compel the corporation to buy my stocks. To avail of this re medy , I will have to do the following: a.within 30 days after action was taken by corporation, I should object in writi ng and demand payment of my shares. b.if I and corporation agree with the price, or in case of disagreement(a 3-man committee of disinterested persons is created within 60 days), where the committ ee of appraisers fixes the price, the corporation pays me the price within 30 da ys from agreement or from award (in case of disagreement). c.upon payment, I will indorse my certificate of stock and deliver the same to t he corporation.

(BAR) ABC Corp has an authorized capital stock of P1M divided into 50000 common shares and 50000 preferred shares.At its inception, the Corporation offered for subscription all the common shares.however, only 40000 shares were subscribed.R ecently,the directors thought of raising additional capital and decided to offer to the public all the authorized shares of the corporation at their market valu e.Assuming a stockholder disagrees with the issuance of new shares and the prici

ng for the shares, may the stockholder invoke his appraisal rights? Stockholder cannot exercise appraisal right since the matter that he dissented f rom is not one of those where right of appraisal is available. Obligation of a corporation to pay a withdrawing stockholder for his stocks avai ling of his appraisal right is dependent on the existence of unrestricted retain ed earnings otherwise the preference of creditors to corporate assets is violate d C.PRE-EMPTIVE RIGHT OF STOCKHOLDERS Right at time of issue of capital stock, in preference to other persons and as between themselves, to subscribe for , or purchase ,the unissued stocks in propo rtion to the number of shares of the original stock held by them respectively. It applies to all issues or disposition of shares of any class unless such right is denied by the corporate articles or its amendments like in the following (de nial of right): 1.shares to be issued in compliance with laws requiring stock offerings or minim um stock ownership by the public 2.shares to be issued in good faith with the approval of stockholders representi ng 2/3 of the outstanding capital stock in exchange for property needed for corp orate purposes or in payment of debt. 2006 notes:The additional issue of unissued shares from the original stock may b e made by the board without need of getting stockholder approval. Shares will be offered at a price fixed by the board of directors but not less than the par value of such shares. A stockholder cannot invoke his appraisal right and demand payment for his share holdings under the pre-emptive right.

The remedies of the stockholder in case his pre-emptive right is denied are: 1.he may maintain an action to compel the corporation to give him that right 2.if denial is by an appointment of the articles of corporation, he may exercise his appraisal right. (BAR) X as stockholder of 4000 shares or 1/10 of the total outstanding share of 40000 has pre-emptive right to subscribe to 1/10 of the unissued common shares or 1/10 of 10000. * aside from that , the law allows the stockholder to subscribe to all issues or disposition of shares of any class(preferred or common) in proportion to his sh areholding. * Stockholder can exercise the pre-emptive right after the corporation has comp lied with the notice requirement to all examining stockholders of record. 2006 NOTES: IF THE UNRESTRICTED RETAINED EARNINGS IS AT 100% OF PAID UP CAPITAL ,THEN , CORP MAY DECLARE DIVIDENDS.

D.ISSUANCE OF STOCK CERTIFICATE A stockholder is entitled to the issuance of a certificate of stock to him after his compliance of the conditions for its issuance , usually full payment of th e subscription. 2006 notes: A corporation against whom stocks are claimed by two different perso ns should initiate an interpleader suit between the claimants, and not wait for the claimants to file a suit against it (Dy v Enage)

Right of First Refusal (Swiss Challenge) no stockholder shall transfer any share of corporation to any other person w/Io first notifying the secretary-treasurer in writing and under same conditions the corporation shall have the right to acquire for itself the shares intended to b e transferred . This is valid under certain conditions: 1.right should appear in the Articles or by-laws 2.it should be stated in the stock certificate 3.reasonable time limit to the exercise of said right 4.terms and conditions for its exercise should be reasonable

TRUST FUND DOCTRINE It always involved the stockholder. The usual question asked : is there authoriza tion in giving back of capital to stockholder? It considers the subscribed capital stock as a trust fund for the payment of the debts of the corporation, and to which the creditors have a right to look up to for the satisfaction of their credits. Hence , the corporation cannot dissipate it to the prejudice of its creditors. It is an extablished doctrince that subscription to the capital stock of a corpo ration constitute a fund to which the creditors have a right to look put to for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the pa yment of its debtors. 2006 notes:in connection with this rule,a corporation cannot issue a share below par value(or else it would violate trust fund doctrine). 2006 notes:trust fund doctrine is not about mismanagement (like buying property which is not really necessary) (BAR) A,B &C are shareholders of X Corp. A has an unpaind subscription of P100T, B s shares are fully paid up while Cowns only nominal but fully paid up shares an d is a director and officer. X Corp becomes insolvent, and it is established tha t the insolvency is the result of fraudulent practices within the company. HELD: If I were counsel for a creditor of X Corp, I would advise my client that his course of actions are: 1.he can claim against the unpaid subscription of A to answer for the company s li ability by virtue of the Trust Fund. 2.he can no longer run after B since B s subscription have been fully paid up and being a mere stockholder, his personality and liability is separate and distinct from X Corp 3.he may hold C personally liable not as a stockholder but as director and offic er for fraudulent practices in the company that produced its insolvency.

(BAR) A corp executed a promi note binding itself to pay its president who had t endered his resignation a certain sum of money in payment of the latter s shares a nd interest in the company. The corp defaulted in paying the full amount so that said former President filed suit for collection of sum of money with the SEC. HELD:Agreement is dependent on the existence of unrestricted retained earnings ( same fund available for dividends) otherwise, the disbursement would result in a

preference to persons other than the creditors of the corporation hence would c onstitute a violation of trust fund doctrine.

Acts in violation of trust fund: 1.Corp condone/excused/released non payment of a subscription (or unpaid portion ) 2.Payment of dividends without Unrestricted Retained earnings 3.Properties transferred in fraud of creditors 4.Properties disposed or undue preference given to stockholders ahead of credito rs (especially when corp is insolvent)

VOTING TRUST AGREEMENT Agreement in writing whereby one or more stockholders of a stock corporation tra nsfer their share to any person/s or to a corporation having authority to act as a trustee for the purpose of vesting in such person/s or corporation as trustee voting or other rights pertaining to the shares for a certain period not exceed ing that fixed by the code and upon the terms and conditions stated in the agree ment. Trustees may vote by person or by proxy

Distinction between Voting Trust and Proxy 1.Proxy has no legal title to the shares of the stockholder giving the agency Trustee acquires legal title to the shares of the transferring stockholder 2.Proxy unless coupled with interest is revocable at any time while a voting tr ust agreement if validly executed is irrevocable 3.Proxy can only act at the specified stockholder s or members meeting (if the prox y is not continuing in nature) while a trustee is not limited to any particular meeting. 4.Proxy votes only in the absence of the owner of the stock while a trustee can vote and exercise all the rights of the transferring stockholder even when the l atter is present 5.Proxy is usually of shorter duration than a voting trust agreement, although u nder the law the maximum duration of both cannot exceed 5 years at any one time.

Limitations on a voting trust agreement:

1.no voting agreement can be entered into: a.for period exceeding 5 years at any one time except in case of a voting trust specifically requiring a longer period as a condition in a loan agreement, in wh ich case, the period may exceed 5 yrs but shall automatically expire upon full p ayment of the loan. b.for purpose of circumventing the law against monopolies and illegal combinatio ns in restraint of trade.

2.agreeement must not be used for purposes of fraud 3.agreement must be in writing and notarized and specify the terms and condition s thereof 4.certified copy of said agreement must be filed with the corporation and with t he SEC otherwise it is ineffective and unenforceable 5.agreement is subject to examination by any stockholder of the corporation in t he same manner as any other corporate book or record. 6.unless expressly renewed, all rights granted shall automatically expire at the end of the agreed period. STOCKHOLDER S SUIT AND REMEDIES 1.individual suit One brought to assert a right by a stockholder peculiar to himself. Suits brought by a stockholder for the issuance to him of a stock certificate , payment of his dividend, payment to him of the book value of his stocks , in tho se instances where the law allows him the right of appraisal are individual suit s. 2.representative suit One brought by a stockholder in his own behalf and in behalf of other stockholde rs similarly situated and having a common cause against the corporation.

3.derivative suit Action brought by a minority shareholders in the name of the corporation to redr ess wrongs committed against it for which the directors refuse to sue. It is a remedy designed by equity and has been the principal defense of the mino rity shareholders against abuses of the majority.

Requisites before it can be filed 1.cause of action in favor of the corporation 2.refusal of corporation to sue 3.party filing the suit is a stockholder

The minority shareholder suing must allege in his complaint before the proper fo rum that he is suing on a derivative cause of action on behalf of the corporatio n and all other shareholders similarly situated who wish to join (Tan v Makasiar ) A derivative suit will be dismissed if the petitioners fail to show that they ha ve a legal basis for representing their co-members and have not shown what acts of the board are detrimental to the interests of the corporation and its members (PPSTA v Quisumbing) Fact that no other stockholder has made common cause with the plaintiff is irrel evant since the smallness of plaintiff s holding is no ground for denying him reli ef (Rep v Cuaderno) 2005 notes: stockholder has a cause of action to annul certain actions of the bo ard of directors of a bank which actions were considered anomalous and a breach of trust prejudicial to the bank. 2005 notes: A person cannot bring a derivative suit in the name of the corporati on concerning an act that took place before he became a stockholder,but if it s a continuing one, then the person may do so. 2005 notes:third party cannot question the right of a stockholder to sue in beha lf of the corporation since in derivative suit ,the action is instituted in the name of the corporation, and reliefs are prayed for therein by a minority stockh older. (SMC v Khan) (BAR) As counsel for minority stockholders, I will file an action in behalf of m y clients and other stockholders for the benefit of the corp.(aka stockholders de rivative suit To succeed in this action ,I will have to prove the following 1.wasting away and fraudulent disposition by the management of corporate assets 2.refusal of the board to sue after the matter was brought to the attention of t he board 3.injury to the corporation 4.exhaustion of intra-corporate remedies Such a suit need not be authorized by the corporation where its objective is to nullify the action taken by its manager and the board of directors ,in which cas e, any demand for intra corporate remedy is futile. When corporate directors are guilty of breach of trust or abuse of discretion, t hen , intra corporate remedies is futile, a stockholder may bring a derivative s uit. GenRule: It is the board of directors which determines whether or not the corpor ation should file a case in court, however, if the board itself or members of it are the defendants,then a stockholder may file a derivative suit.

5.that they are suing on a derivative cause of action on behalf of the corp and all other stockholders similarly situated. 2005 notes: stockholder may sue for mismanagement ,waste or dissipation of corpo rate assets because of special injury to him for which he is otherwise without r edress. In effect, the suit is an action for specific performance of an obligation owed by the corporation to the stockholders to assist its rights of action when the c orporation has been put in default by the wrongful refusal of the directors or m anagement to make suitable measures for its protection. 2005 notes:It is not a derivative suit where a stockholder was merely praying th at she be allowed to subscribe to the additional issuances of stocks in proporti on to her shareholdings to enable her to preserve her percentage of ownership in the corporation. She was not acting in behalf of the corporation. (Lim v Lim-Yu )

LIABILITIES OF STOCKHOLDERS a. to corporation for unpaid subscription plus interest b. to creditors for unpaid subscription stockholder may be sued directly by creditors to the extent of their unpaid subs cription to the corporation (Keller v COB) c. to corporation for watered stock (sec 65) 7.BOARD OF DIRECTORS The directors must be owners of at least one share of stock in a stock corporati on, must be subsisting members in a non-stock corporation. Cessation as stockhol ders or members, respectively automatically disqualifies them as directors. A ma jority of them must be Philippine Residents. The corporation law now provides that an incorporator must be a stockholder. Tha t was not required before in the corporation law. Moreover, only natural person may be incorporators, but a corporation may be a subscriber but not an incorpora tor coz he is not a natural person. Directors are elected by the SHs. And the law says they should be elected annua lly except in the case of corps where the law allows directors to hold a longer term like schools, non-stock corps. But for ordinary stock corps, they have to be elected every year. So you cannot put a provision there that the outgoing pr esident will automatically be a director because they must be elected. 2006 notes:like in case of Gokongwei v SEC, whereby former is hindered from bein g Director of SMC, the SC said that before a stockholder is disqualified ,there should be an opportunity to be heard. 2006 notes: A person cannot be a director because he ceased to be a stockholder by the sale of all his stocks. A director is required to be owner of at least o

ne share of stock in a corporation, and the moment he totally disposes of his st ocks, he automatically terminates his directorship. 2006 notes: A person cannot be a director since he was not elected as such, neit her can he claim appointment as such to replace the person who sold his stocks t o him since he was never appointed to the position by the remaining members of t he board his basis of claim being that he acquired all of the shares of the stock holder who sold his shares to him. 2006 notes: the acquisition by a person of all the stocks of an incumbent direct or of a corporation will not make him (the transferee) a director of that corpor ation.

(BAR) The board of directors of C Corp amended its by-laws so as to disqualify a ny stockholder who is also a stockholder and director of a competitor ,from bein g elected to its board of directors. S,a stockholder holding sufficient shares to assure him a seat in the board file d a petition with the SEC for a declaration of nullity of the amended by-laws an d the cancellation of the certificate of filing of amended by-laws. He alleged a mong others that as a stockholder, he had acquired rights inherent in stock owne rship such as the right to vote and be voted upon in the election of directors. HELD: Petition of S should be denied. It is within the authority of the stockhol ders of a corp to enact by-laws which would disqualify as a candidate for a dire ctor any of its stockholders who holds a substantial equity in a competing corpo ration. Matters taken up in board meetings could involve trade secrets which ought not t o go out of the board room for the protection of the corporation s business intere sts. The presence as a member of the board a person who holds a substantial inte rest in a competing corp can destroy that secrecy on many business matters. (BAR) A group of stockholders of S Corp filed a court suit against the members of the Board of Directors to make good to the shareholders, in proportion to the ir shareholdings, the losses incurred by the corporation due to the board s misman agement. HELD: Action will not prosper. It is not enough to show that losses were incurre d due to mismanagement. It is necessary that the stockholders who brought the su it should show that the losses were incurred due to the fraud and malice of the defendant directors. If cause of loss is merely error of business judgemtn, the directors could not be held liable for the loss. 2006 notes: Remedy in this situation is to remove the errant directors by resolu tion of the stockholders representing 2/3 of the outstanding cap stock in a meet ing called for the purpose.

2006 notes:In a board of nine members, the quorum would be 5 and it remains as s uch inspite of the death of the two and the absence of one who is abroad. 2006 notes: The President of a corporation or the chairman of its board of direc tors cannot bind the corporation because the powers of a corporation generally r eside in the board unless the board delegates specific powers to the President . Resolutions passed by the board of directors in a duly constituted meeting or a

person delegated by said board binds the corporation (and not by stockholders no r a compromise agreement by its corporate lawyer) .

(BAR) S Cement was organized primarily for cement manufacturing. Anticipating su bstantial profits, its President proposed that S invest in (a) power plant proje ct, (b) concrete road project and (c) quarry operations for limestone used in th e manufacture of cement. What corporate approval or votes are needed for the proposed investments? HELD: Unless the power plant and the concrete road project are reasonably necess ary to the manufacture of cement by S (and they do not appear to be so) then ,th e approval of the said projects by a majority of the Board of Directors and the ratification of such approval by stockholders representing at least 2/3 of outs tanding capital stock would be necessary. As for the quarry operations,the same is an indispensable ingredient in the manu facture of cement and may be considered reasonably necessary to accomplish the p rimary purpose of S, in such case, only the approval of the Board of Directors w ould be necessary.(BP 68)

2 ways by which members of the board can be granted compensation apart from reas onable per diems: 1.when there is a provision in the by-laws fixing their compensation 2.when the stockholders representing majority of the outstanding capital stock a t a regular or special meeting agree to give it to them. 2005 notes: bonus or other forms of compensation not per diems should not exceed 10% of the net income before income tax of the corporation during the preceding year. DOCTRINE OF CORPORATE OPPORTUNITY: Rule expressly provided for by the corporation code making the director account to his corporation ,gains and profits from any transactions entered into by him or another competing corporation or entity where he has a substantial interest W HICH SHOULD HAVE BEEN a transaction undertaken by his corporation. 2006 notes:which means the officer should account any transaction which he enter ed on his benefit whereby dapat sana it should be entered and for the benefit of the corporation. 2006 notes: A corporation is authorized to prescribed qualifications for its dir ectors (Gokongwei v SEC) A director stands in a fiduciary relation to the corpo ration and its stockholders. The disqualification of competitor from being elect ed as the board is a reasonable exercise of corporate authority. 2006 notes: ABC Pigery is engaged in the raising and selling of pigs in the loca l market. The sale of pig skins for leather goods manufacture is different from the business of ABC of raising and selling pigs.The act of Director de dios of o rganizing another company to export pig skins does not violate the doctrine of c orporate opportunity. (it is because it is a pig skin and not raising and sell ing pigs which the former is not related to the primary business of the corporat ion)

Consequences of the Board of Directors being the organ of management are: 1.stockholder cannot disapproved contract entered into by the board. 2.dismissal of a general manager is not with the stockholder (even if there is r esolution passed), it is with the board. 2006 notes: a stock corporation may have not less than 5 nor more than 15 direct ors (exception to such is under the General banking Law which allows 21 director s in cases of merger and also another exception is in non stock corporation wher eby it is more than 15) 2006 notes: a mere pledgee of stock is not a stockholder and therefore disqualif ied to become a candidate, and to be elected a director of the corporation. 2006 notes: subsequent act of X,Y and Z of electing A as the sixth director(or p resident) is invalid as only one of the 3 was a valid director.

2006 notes: director must not be convicted of final judgment of an offense carry ing a penalty of 6 years and not disqualified by law and the by-laws (since latt er may provide for additional requirement for the director but qualification in the Code must first be met) 2006 notes:term of director is 1 yr and until his successor is elected and quali fy( while waiting for successor,he is called HOLD OVER DIRECTOR) Independent Directors: The Securities Regulation Code so provides that there must be atleast 2 independ ent directors on any of the ff grounds: 1.corporation is listed on the stock exchange 2.sold on open market 3.atleast P50 Million in assets whereby it has 200 or more stockholders, of whic h 20% atleast owns 200 shares of stock. 2006 notes: the purpose of the independent directors are for the public (not for the minority nor majority stockholders)

An independent director should have the following: 1.not a holder of more than 10% of shares of the corporation

2.not related to any of the directors 3.not employee of the corporation within the last 5 years 4.not retained for service by the company (like an external auditor) 5.lastly, if the corporation is a bank or a quasi-bank, the independent auditor should pass the fit and proper rule (sec16 Gen Banking law) Central Bank has powe r to prescribe additional qualifications of a board member

2006 notes: members of the board can be granted compensation when there is a pro vision in the by-laws fixing their compensaton or when stockholders representing majority of outstanding capital stock at a regular/special meeting agree to gi ve it to them 2006 notes: aside from that he may receive a fee when they render services to th e corporation in a capacity other than as a director/trustees and also per diem (it usually signifies a reimbursement of expenses incurred in trade or professio n) 2006 notes:compensation of all directors must not exceed 10% of income of corp ( applicable also to trustees of non-stock) BUSINESS JUDGEMENT RULE Resolutions or contracts transactions of the board cannot be set aside by the s tockholder or by the court. Directors and officers cannot be held liable personally for acts done in exercis e of their business function. Except when 1.corporation code so provides (when stockholder directly manage a close corpora tion) 2.when directors or officers acted with fraud, gross negligence or in bad faith 3.guilty of conflict of interest 4.contractually the director holds himself personally liable

then stockholder may seek judicial relief (derivative suit)

In voting for the members of the board of directors: stockholders may only elect board members on the ff ground: (all else it is wi th the board of directors) 1.removal of director 2.at beginning/expiration of term of a director (annual meeting) 3.when remaining directors no longer constitutes a quorum 4.amendment of the by-laws that increases number of directors (and as to increas e ,it is the stockholders who will elect)

2006 notes: Proxies are not allowed in a board of director s meeting and also in c onstitution of by-laws However, in stockholder s meetings, pwede and proxy (except in a condominium corpo ration) 2006 notes: in stock corporation, you cannot prohibit cumulative voting ( which is no. of shares x no.of directors to be elected) -- since it is the only way that the minority may have a chance to be represente d. In Non-stock corporation, if silent, no cumulative voting (it should be explicit ly stated)

2006 notes: A director of the majority can be remove w/ or w/o cause by 2/3 vote . 2006 notes:A director of the minority can be remove only with cause. 2006 notes: holders of non-voting shares and owners of delinquent shares are no t allowed to vote 2006 notes:an officer appointed at the pleasure of the board per corporate by-la ws may be terminated any time. Liability of Directors: As a general rule, the directors are not liable personally since obligations inc urred by the corporation acting through its directors ,officers and employees ar e its(corporation) sole liabilities .

Nevertheless , being a mere fiction of law, peculiar situations or valid grounds can exist to warrant ,albeit done sparingly ,the disregard of its independent b eing and the lifting of the corporate veil. As a rule, it should only be the corporation, not the person acting for and on i ts behalf ,that a property could be made liable under the ff questioned transac tions: 1.a corporation is used to evade a just and due obligation or to justify a wrong , 2.to shield or perpetrate fraud , 3.to carry out similar other unjustifiable aims or intentions 4.as a subterfuge to commit injustice and so circumvent the law. Exception to this is when corporation is no longer existing and is unable to sat isfy judgment in favor of employee, the officers should be liable for acting on behalf of the corporation. Members of the board who acted in good faith and in behalf of the corporation ke ep within the lawful scope of their authority in so acting do not become liable whether civilly or criminally for the consequences of their acts which are consi dered acts of the corporation itself. Unauthorized used/distribution of the Central Bank certificate of indebtedness b y a corporate officer cannot bind the said corporation ,not without the approval of its board and the maintenance of the required reserve fund. A director is not liable for the misconduct or dishonesty of his co-directors or other officers of the corporation since a director is not an insurer of the fid elity of agents of the corporation. --he may be held liable if it is shown that he neglected his duty to supervise t he business with attention or to use proper care in the appointment of agents.

CORPORATE POWERS Corporate Powers exercisable through the Board of Directors fall under three cla ssifications: 1.Express

Powers expressly vested in the corporation by purpose clause of its articles of incorporation ,the corporation law and by special laws 2.Implied Those which can be fairly inferred from the express powers and fall under 5 clas sification to wit: a.acts in the usual course of business b.acts to protect debts owing to the corporation c.embarking in different business d.acts to aid employees e.acts to increase business

3.Incidental Powers inherent in all corporations as legal entities such as perpetual successi on.

2005 notes: The concession theory is followed in the Philippines in the creation of the corporations.Under this theory, a group of persons wanting to create a c orporation will have to execute documents and comply with the requirements set b y the state before the latter gives to the group corporate personality. -- the grant being a privilege, the state provides for the causes and reasons by which such privilege may later on be withdrawn by it.

3 levels of Control in a Corporation 1.board of directors ,which is responsible for corporate policies and the genera l management of the business affairs of the corporation. 2.officers, who in theory execute the policies laid down by the board, but in pr actice often have wide latitude in determining the course of business operations 3.stockholders who have the residual power over fundamental corporate changes li ke amendments of the articles of incorporation.

2005 notes: However, just as a natural person may authorize another to do certai n acts in his behalf, so may the board of directors of a corporation validly del egate some of its functions to individual officers or agents appointed by it 2005 notes: corporation has no power except those expressly conferred on it by t he corporation code and those that are implied or incidental to its existence. CORPORATE LIABILITIES Contractual

Corporation is bound by contracts entered into, or authorized to be entered into by its board. The residence of the corporation is the place where its principal office is esta blished .It can be sued in that place not in the place where its branch is locat ed (Clavecilla v Antillon) Principal place of business of the suing corporation ,not the place of residence of its President, determines venue for suits by the corporation. Jurisdiction under the Civil Procedure, persons eligible to receive service of s ummons for a domestic juridical entity are now limited to the President Managing Partner General Manager Corporate Secretary Treasurer In-house counsel 2006 notes: The requirement that the petitioner should sign the certificate of n on-forum shopping applies even to corporations that the mandatory directives of the circular and the Rules of Court make no distinction between natural and juri dical persons. 2006 notes: Certification should have been signed by a duly authorized director or officer of the corp who has knowledge of the matter being certified.

Torts Corporation is liable for torts committed by its agents or subordinates in the p erformance of their duties under the Principle of its negligence in the selectio n or supervision of its employees. A principal or master is liable for every tort which he expressly directs or aut horizes and this is just as true of a corporation as of a natural persons.

Crimes Criminal case can only be filed against the officers of a corporation and not ag ainst the corporation itself. It does not follow however that the corporation ca nnot be a real party in interest for the purpose of bringing a civil action for malicious prosecution.

ACTS NEEDING STOCKHOLDER S VOTE a.Vote of Stockholders Holding Majority of Outstanding Capital Stock 1.fixing of issue value of no par stocks 2.adoption, amendment or repeal of by-laws (in adoption of bylaws ,no stockholder is involved but if late na nagawa, then s tockholders are involved) -- by laws is either through the stockholder or delegated to board of directors (but it must have assent of stockholders holding 2/3 of subscribed capital stock ) -- to repeal such delegation,it needs the majority of outstanding capital stock. 3.compensation, other than per diems for directors. 4.entering into management contracts (an additional requirement is that 2/3 stoc kholder vote is needed if common shareholder is 1/3 owner managed corporation see #9)

b.Vote of Stockholders Holding 2/3 of Subscribed Capital Stock(after Absolute Ma jority vote of directors approved such) -- the 2/3 includes non-voting shares except in acquiring own shares, declaring stock dividends,entering management contracts and revocation of delegation to a mend by-laws --items mentioned needs a qualified notice 1.extension or shortening of corporate term (appraisal right is also applicable) 2.amendment of articles to increase or decrease capital stock In decreasing capital stock, it requires amendment of the articles 3.approval of issue shares in exchange for property needed for corporate purpose s or payment of prior debts. 4.sale/disposition of all or sublstantially all of corp assets (appraisal right is also applicable) 5.investment of fund for purposes different from those stated in the articles of incorporation 6.investment in another corporation or business (appraisal right is applicable) 7.stock dividend declaration (no qualified notice) 8.execution of management contracts 9.delegation of board of directors of power to amend the by-laws or adopt new b y-laws 2006 notes: in delegation, there is qualified notice, but in amendment of by-law s,qualified notice do not exist. 2006 notes:revocation of delegation do not require a qualified notice. 10.other amendments to the articles of incorporation 11.ratification of certain corporate contracts with a director or officer 12.ratificaiton of acquisition of business opportunity by a director or officer 13.approval of merger or consolidation(appraisal right exist)

2006 notes: every amendment or change in plan of merger needs vote of 2/3 14.removal of directors 15.voluntary dissolution of corporation 16.incurring, creation or increase of bonded indebtedness Bond--Certificate of indebtedness issued by the corporation for money borrowed f rom the public in general.It is used by the corporation where the corporation ne eds capital in big amounts but does not have any desire to increase its capitali zation(4blue 95). Registered Bond , which by nature is registered in the books of the corporation in the name of the bondholder, can be transferred but only by assignment It is n ot negotiable since it is made payable in the name of a specificed person only. Coupon Bond is one with detachable coupons bearing dates and amounts, which on s urrender to the corporation on the dates stated, entitles the holder to receive cash which represents interest on the bond up to that date. It is payable to bea rer and negotiable by delivery Detachable Bonds may be sold apart from the bond Non-Detachable Bond warrant are those which cannot be sold separately from the b ond. Convertible Bond is one entitling the holder to exchange it with other types of bonds Mortgage Bond are secured by a lien or mortgage on specific property of the corp oration Collateral Trust Bond are secured by pledge of personal property which may consi st of shares of stock, bonds or both which are deposited with a trustee. Debenture do not have any specific fund or property as security for their paymen t. They rest on credit of the corporation and not on security. Usual protection is a negative pledge clause against new mortgages on corporate assets. Callable/Redeemable Bonds are due and payable at a specific time but may be rede emed at the pleasure of the issuing entity(but not obliged to do so until date o f maturity) Equipment Bonds are secured by specific equipment of the issuer such as its buse s,cars,trucks,locomotives and similar properties. Bond v Shares of stock Corporation code Dividends is paid Surplus profit must exist before payment dividend depends on profit stockholder waits for dissolution and after all creditors are paid has right to participate

Govern by Civil code Since it is a mutuum Interest is paid Interest paid on bond Whether corp has profit or non Interest is fixed Creditor gets his money back On a specific period No right to participate In management

IN ACQUIRING OWN SHARE, ONLY THE BOARD ACTION BY MAJORITY VOTE IS NEEDED --and only when there is unrestricted retained earnings. if it buys back its own shares, it is not decreasing, since the corporation is u sing the unrestricted retained earnings however, after you redeem, then you retire it so capital is reduced , however the reduction is limited so as to protect th e right of creditors --in reissued treasury shares, the stockholders has no right to such except when it is a close corporations. SPECIAL CORPORATE POWERS 1.Eminent Domain (Private Land) No private corporation may occupy or use property without the consent of the own ers or prior condemnation proceedings and paying or tendering just compensation.

2.Franchise Primary (Gen Franchise)- right to exist, as such it is vested on an individual w ho compose the corp and not on the corp itself. Such is not subject to transfer (sale) Secondary(Special Franchise)- right granted by the state to use public property for public use but with a private profit.it is a right/privilege confirmed on co rp (like right to engage in business), it may be transferred so subject to levy, execution etc.. The special corporate power referred to here is the secondary franchise. An exa mple is the right to operate a messenger and delivery service by virtue of a leg islative enactment.

3.Investment in other corporations for purposes other than those stated in artic les Corporation may invest its funds in another corporation only if they can comply with the ff requirements(NCC): a.investment must be approved by a majority of the board of directors or trustee s b.invetment must be ratified by the stockholders representing at least 2/3 of th e outstanding capital stock or by at least 2/3 of the members in case of non sto ck, in a meeting called for that purpose c.written notice of the proposed investment and the time and place of the meeti ng shall be addressed to each stockholder or member at his place of residence.

Requisites in order that a corporation may validly sell,lease ,exchange or other wise dispose of all or substantially all its assets: 1.sale must be authorized by the board of directors or trustees 2.authorization of the board must be approved by all the stockholders representi ng 2/3 of the outstanding capital stock or 2/3 of the members(non stock) as the case may be

3.authorization must be done at a stockholders or members meeting duly called for the purpose.

2006 notes:any stockholder who dissents shall have appraisal right to demand pay ment of the fair value of his shares in case of sale or other disposition of all or substantially all of the corporate property and assets 2006 notes:board may sell or dispose without authorization any of its property o r assets if such is necessary in the usual and regular course of business & proc eeds is appropriated for the conduct of its remaining business in case of its di ssolution.(Approval of SH and right of appraisal is not required in case of ord inary disposition) SPECIAL LIMITATIONS ON CORPORATE POWERS Corporations engage in agriculture are prohibited from having any interest in an y other corporation organized for the purpose of engaging in agriculture. The s ame extends to mining corporations A Philippine corporation not a realty corporation can acquire real estate only u p to the extent that the purpose for which the corporation may permit and up t o the extent that the lawful business of the corporation may require .It cannot engage in buying and selling of public lands.

CONSTITUTIONAL RIGHTS OF CORPORATIONS Entitled to immunity against unreasonable searches and seizures. While an individual may lawfully refuse to answer incriminating question unless protected by an immunity statute, it does not follow that a corporation vested w ith special privileges and franchises may refuse to show its hands when charged with an abuse of priviledge. Corporations are not entitled to all constitutional protections which private in dividuals have. They are not within the privilege against self incrimination alt hough that privilege runs very closely with the search and seizure provisions ( Baseco v PCGG)

ULTRA VIRES ACTS Acts done by a corporation outside of the express or implied powers vested in it by its charter and by the law. (Ex: merchandise corp engaging in buying and sel ling of real estate)

1.BY THE CORPORATION ITSELF Settled rules: 1.wholly executory ultra vires contract cannot be enforced 2.wholly executed ultra vires contract on both sides will not be set aside nor i nterfered with by the courts 3.in ultra vires contracts executed by one party but executory on the other, rec overy may be had under the principle of unjust enrichment. 2005 notes: contracts ultra vires entered into by board of directors are binding upon the corporation and courts will not interfere unless such contracts are so oppressive and unconscionable as to amount to a wanton destruction of the right s of the minority.

An Ultra Vires act may be differentiated from illegal act in the ff manner: 1.ultra vires is an act not necessary unlawful but outside the purposes and auth ority of the corporation to perform

Illegal act is an act which goes against the law,morals, public policy and publi c order and therefore unlawful for the corporate to perform 2.ultra Vires Acts may be ratified, an illegal act cannot 3.unlta vires act ,if fully or partly executed ,can bind the parties to ti, an i llegal act can never be binding.

2.BY CORPORATE OFFICERS A corporate officer entrusted with the general management and control of its bus iness has implied authority to make any contract or do any other act which is ne cessary to the conduct of the ordinary business of the corporation. -- he may without special authority from the board of directors perform all act s of an ordinary nature which by usage or necessity are incident to his office a nd may bind the corporation by contracts in matters arisng in the usual course o f business. Ratification can be made by the corporate board either expressly(it hold out age nt to public as possessing power to do those acts) or impliedly. Implied ratificationi may take various forms (like silence or acquiescence, by a cts showing approval or adoption of contract or by acceptance or retention of b enefits)

(BAR) X,a domestic corp, owns and operates a sugar central. In 1965,President in vested P1M of company funds in shares of A, a domestic corporation engage in the manufacture of sugar bags out of bagasse as basic raw materials. X became the b iggest consumer of the bags produced by A. In 1967, A shut down its operation du e to high cost of production and huge losses already suffered. Stockholder B of X Corp assailed the investment as violative of Corporation law. Board of Directors of X then met and ratified the investment made by the Preside nt. HELD: Effect of such ratification by the board of the act of the President inve sting the funds of the corporation did not operate to validate the President s act

. * the investment of funds of a corporation in the equity of another corporation is an extraordinary corporate power which can be exercised by its board of direc tors only on authority from stockholders holding atleast 2/3 of the outstanding capital stock of the corporation, the decision being made in a regular or specia l meeting of said stockholders. * Claim of B is not valid since corporations are expressly authorized by New Co rporation Code (NCC) to invest in equity of other corporations. However, before either boards can do so, they should be authorized by stockholders holding at l east 2/3 of the outstanding capital stock. This authority for the stockholders i s what is missing in the problem

Effect when no Ratification (under the 1898 Civil code) Acts of agent beyond the scope of authority do not bind the principal unless the latter ratifies the same expressly or impliedly. It also bears emphasizing that when third persons knows that agent was acting be yond his authority, the prinicipal cannot be held liable for the acts of the age nt . If said third person is aware of such ,he is to blame and is not entitled to recover damages from the agent unless the latter undertook to secure the pri ncipal s ratification.

CONFLICT OF INTEREST Section 32. A contract between a corporation and (one of its directors or trust ees or) its officers is voidable at the option of such corporation, unless all t he following (4) conditions are satisfied/ present: 1.That the presence of such director or trustee in the board meeting in which th e contract was approved was not necessary to constitute a quorum for such meetin g; 2.That the vote of such director or trustee was nor necessary for the approval o f 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 ab sent, 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 trust ees involved is made at such meeting: Provided, however, That the contract is fa ir and reasonable under the circumstances. Now, if the presence of that director is needed to have a quorum or to approve t

he contract, to validate the contract, it should be ratified by the stockholders . You would need the 2/3 vote of the stockholders to ratify the contract. When the stockholders are asked to ratify the contract, there must be full disclosur e. In other words, you must tell the stockholders that there s this contract, one of our directors wants to buy this parcel of land and these are the terms and c onditions.

2006 notes: Teleconferencing as a general rule is not allowed in corporation cod e but in SEC issued memo, this is allowed only with regard board of directors me eting but not in a stockholder s meeting since a stockholder is allowed a proxy) -those entering into teleconferencing ,the secretary of the corporation m ust specify the type of device used, that the director & secretary can clearly c omprehend the event occurring and he receives the documents in the meetings and the secretary must state that a quorum was attained and lastly that all director s must sign in the minutes of the meeting.

1.(BAR) L is the chairman and President while R is a director of NT Corp. On on e occasion, NT represented by L and A Enterprise, a single proprietorship owned by R entered into a dealership agreement whereby NT appointed A Enterprise as ex clusive distributor of its products in Northern Luzon. HELD: Dealership agreement is voidable at option of NT inasmuch as the facts do not indicate that the same was approved by the Board of NT before it was signed or assuming such approval that it was approved under the ff conditions: a.presence of R, the owner of A, in the meeting of the Board at which the agreem ent was approved was not necessary to constitute a quorum for such meeting b.vote of R was not necessary for the approval of the agreement c.agreement is fair and reasonable under the circumstances (NCC)

2006 notes: As such, kung walang approval ng board, hindi valid ang transaction in isang individual or president or chairman. 2006 notes: NCC provides that a corporation may conclude a management contract w ith another corporation for a period not exceeding 5 years, which contract shoul d be approved by the board of both corporations -- and by the stockholders holding a majority of the outstanding capital stock o r by majority of member of both. The majority requirement is increased to 2/3 in case of interlocking directors or ownership by same person of at least 1/3 of the stock in both corporations.

2.(BAR) C is a director of both P and K Corporations.He owns 1% of the outstandi ng capital stock of P and 40% of K. P plans to enter into contract with K that w ill make both companies earn very substantial profits. The contract is presented at the respective board meetings of P and K.. In order the contract will not be voidable, what conditions will have to be complied with? HELD:At meeting of Board of Directors of P to approve the contract, C would have to make sure that: 1.his presence as director at the meeting is not necessary to constitute a quoru m for such meeting 2.his vote is not necessary for the approval of the contract 3.contract is fair and reasonable under the circumstances At the meeting of Board of K, C would have to make sure that: 1.no fraud involved 2.contract is fair and reasonable under the circumstances

4Blue 95 notes: If conditions relating to quorum and required number of votes no t met. Contract must be ratified by the vote of stockholders representing at lea st 2/3 of the outstanding capital stock in a meeting called for the purpose. Fur thermore, the adverse interest of C in the contract must be disclosed and the co ntract is fair and reasonable CAPITAL STOCK It is the actual property or estate of a corporation whether in property or in m oney including surplus and undivided profits. Capital stock of a par value stock corporation is called authorized capital stoc k while that of no par it is stated capital (corp fixes the issue value of these s hares at the time of issue for consideration which shall not be less than P5). Authorized Capital s the amount fixed stockholders Subscribed Capital agreement and that (only in stock corp,and it is fixed by corp unless amended) i in the articles of incorporation to be subscribed and paid by is the portion of authorized capital covered by subscription at least 25% of such authorized capital is subscribed.

Paid-up Capital is the portion of authorized capital that has been subscribed an d actually paid (at least 25% of subscribed capital has been paid) Outstanding Capital is the total shares of stock issued whether or not fully pai d (it is issued less treasury) Share of stock is a unit of capital stock representing the proportionate interes

t of its owner in the management ,dividends ,and assets on liquidation of the co rporation. 2006 notes: even if there s stock but if dividends not declared and no RE is distr ibuted, it is still not a stock corporation.

Difference from Capital: 1.capital stock is amount of money stated in articles to be subscribed and paid in while capital represents the actual property of a corporation. 2.capital stock remains fixed unless changed by proper amendment of the articles , capital varies according to the results of the business operations of a corpor ation. 2006 NOTES:IF SOBRA SA PAR- - IT CAN ONLY BE DISTRIBUTED BY WAY OF STOCK DIVIDEN D. 2006 notes: shares cannot be issued lower than the par value (only when selling Treasury shares can it be lower than par since treasury shares are only bonus si nce entire capital is still there,it is not impaired)

(BAR) a.the name of the corporation should contain the word incorporated or corporation . b.principal office should mention the town and province or the city where it is located. The board by resolution cannot designate the principal office of the co rporation or change the same from time to time. c.the seventh article should not only mention the amount of capital stock, but a lso the number of shares into which said capital stock is divided and the par va lue for each shares, if the shares are of the par value type. INCREASE OR DECREASE OF CAPITAL STOCK It may be increased/decreased at a stockholder s meeting called for the purpose wh erein 2/3 of the outstanding capital stock shall favor such increase or decrease , after prior approval by a majority vote of the board of directors. Three practical reasons for a corporation to increase its capital stocks are: 1.generate more working capital 2.to have more shares with which to pay for the acquisition of more assets like acquisition of company car etc 3.to have extra shares with which to cover or meet the requirement for declarati on of stock dividend. Procedure 1.notice to stockholders specifying the purpose of the meeting 2.affirmative vote of 2/3 of the entire corporate capital stock 3.certificate signed by majority of the directors and countersigned by the chair man and secretary of the stockholder s meeting 4.treasurer s certificate that 20% of the increase has been subscribed and 25% of such subscription paid up.

Limitation on Power to Decrease or Increase Capital Stock: 1.a corporation cannot lawfully decrease its capital stock if such decrease will have the effect of relieving existing subscribers from the obligation of paying for their unpaid subscriptions w/o a valuable consideration for such release,as such an act of the corporation constitutes an attempted withdrawal of so much c apital upon which corporate creditors are entitled to rely. 2.corporation cannot issue stock in excess of the amount limited by its articles of incorporation; such issue is ultra vires and the stock so issued is void eve n in the hands of a bona fide purchaser for value 3.reduction or increase of the capital stock can take place only in the manner a nd under the conditions prescribed by law.

(BAR) Action of the board is not correct and is not sufficient. The act to incre ase capital stock from P800T to P1M is in effect an amendment to the seventh art icle .The approval of the board of this increase of capital requires the furthe r approval by stockholders representing 2/3 of the outstanding capital stock in a meeting called for the purpose. Furthermore, the setting aside by the board of P200T worth of shares (the whole of the increase) in exchange for a 5 hectare land at the same time stipulating t hat existing stockholders would have no preemptive right to said increase ,requi res again the vote of approval of stockholders, representing at least 2/3 of the outstanding capital stock in a meeting called for said purpose.

(BAR) Suppose X corp has an authorized capital stock of P1M divided into 100000 shares of stock with par value of P10 each.Give two ways whereby said authorize d capital stock may be increased to about P1.5M HELD: 1.increase the number of shares from P100000 to P150000 shares with the same par value of P10 each. 2.increase par value of the 100000 shares to P15 each. CASH DIVIDEND V STOCK DIVIDEND : 1.cash dividends withdraw assets from the corporation , stock dividends do not. 2.cash dividend, money is received by the stockholder ,stock dividend the stock instead of money is received 3.cash dividend is taxable while stock dividend is not 4.cash dividend may be declared by the board alone , a stock is declared by .

(BAR) X Corporation has an authorized capital stock of P500T divided into 50000 shares with each share having a par value of P10. 30000 shares of which have be en subscribed. The total payment on these shares is P200t only. As of July 16, 2005 (birthday ni 4blue95) ,the corporation had a surplus of P150t .May the corp oration declare a stock dividend? If so, to what extent? HELD: Yes, corporation can declare a stock dividend .it can do so up to the full extent of its surplus of P150T or 15000 shares. Since the only limit is that the stock dividend can be absorbed by the unissued shares of the corporation. Only 30000 shares of the 50000 authorized number of shares were issued by the co rporation, leaving a balance unissued of 20000 shares. 15000 shares only are ne

eded to absorb the P150000 stock dividend.

(BAR) A company was incorporated in 1999 with an authorized and paid-in capital in cash of P1M .it has not engaged in business up to now and its cash of P1M is intact at the PNB .may the board of directors declare dividends of P50t from th at cash? HELD: NO, board may not declare dividend from its paid in capital. The only f und available for dividends is the unrestricted retained earnings .since such co rporation not having engaged in business, then it cannot possibly earned profit.

(BAR) P Corporation has an authorized capital stock of P500t all subscribed and outstanding as of Dec 31,2004. the corporation also has an unrestricted retaine d earnings in its books amounting to P375T. Since the corporation needed the cas h surplus to carry out its expansion projects, the board of directors, in its me eting held on Jan 5,2005 approved a resolution declaring and ordering the issuan ce of 50% stock dividends in lieu of cash dividends. HELD: Resolution of the board declaring 50% stock dividend is invalid for the fo llowing reasons a. no unissued capital stock. b. Stock dividend declarations need further approval of stockholders holding at least 2/3 of the outstanding capital stock of the corporation. In order that stock declaration may be implemented ,the following steps should b e taken a.articles should be amended to increase the capital stock by at least P250T,thi s needs approval by a majority of the board and approval by stockholders holding atleast 2/3 of the outstanding capital stock of the corp filed with the SEC b.declaration of 50% stock dividend already approved by the board, should be ap proved by stockholders holding atleast 2/3 of outstanding capital stock of the c orporation c.notice to stockholders d.issuance of stockholders of stock certificates corresponding to the stock divi dend. NO PAR VALUE When a corporation has no par value shares, no amount will be mentioned. Unlike corporations with par value shares, for ex., the Authorized Capital Stock (ACS) of the corporation shall be P1M consisting of 10,000 shares with a par value of P100 each, if you have a corporation with no par value shares, it will simply be , the ACS of the corporation consists of 10,000 no par value shares---no amount is mentioned. That's why these banks, trust companies, etc. are not allowed to have no par value shares because these are enterprises which are required by law to have a minimum paid-up capital - so that you can easily see right away - ha s it met the minimum paid-up capital, because if its shares have no par value you cannot see if it has satisfied the required minimum paid-up capital. 2006 notes: No par value shares are issued to allow flexibility in the price at which they may be issued, the issue value being usually pegged to their book val ue. 2006 notes: issue value of no par is fixed by the articles of incorporation. Any updated value cannot be had especially so when there has been surplus at retain

ed earnings (usually no par by this time is issued at a premium w/c is higher th an par value)

Following corporations may not issue no-par value shares: 1.banks 2.insurance companies 3.building and loan associations 4.public utility companies without approval of any of the appropriate boards cr eated to replace the PSC 5.trust companies 6.public utilities

Following shares of stock may not be issued without a stated par value: 1.preferred shares 2.shares issued issued by the above stated corporations

PAID UP CAPITAL Amount actually paid in money or property on account of the subscribed capital s tock.It is the actual money paid or property delivered to the corporation on acc ount of the subscription of a stockholder.

SUBSCRIBED CAPITAL STOCK It is the capital stock or a portion of it which has been issued the corporation to its stockholders or subscribed, and paid for in part or in whole. For purpose of incorporation, law requires that at least 25% of the authorized s hares of capital stock has been subscribed. CLASSIFICATION OF SHARES I. Voting shares Founder s shares these shares may be given rights and privileges not enjoyed by owners of other stocks. Where however, the exclusive right to vote and be voted for in the elect ion of directors is granted ,said right cannot exceed 5 yrs, subject to SEC appr oval and counted from the date of said approval(not renewable).

II. Non-voting Shares

Voting Rights exercisable by owners of Non-voting shares Except for treasury shares which cannot be voted upon on any corporate matter, h olders of other non voting shares shall nevertheless be entitled to vote on the ff matters: 1.amendment of articles (effected by SEC or after 6 months where no action from SEC occurs) 2.adoption and amendment of the by laws 2006 notes:it should be consistent with articles of incorporation, consistent wi th law and reasonable not arbitrary or oppressive.

3.sale or other disposition of all or substantially all of the corporate propert y 4.incurring bonded indebtedness 5.increase/decrease of capital stock 6.merger or consolidation with other corporations 7.investment of funds in another corporation or for a different purpose 8.corporate dissolution

2006 notes: in cases of shortening or lengthening the life a notice for a meeting should be had and in the meeting there should be atleast 2/3 vote that is requir ed (no written assent is needed) 2006 notes:in cases where there is increase/decrease of number of directors there should be a written assent (directors should be by odd numbers in order to preve nt tie) 2006 notes: if corporation has no by-laws, then it is considered as de facto. a.Par Value and No Par Value shares Shares issued without par value are deemed fully paid and non assessable and the ir holders are not liable to the corporation or to its creditors in respect ther eto. They cannot be issued for a consideration less than P5 per share, and payme nt thereon are treated as capital and are therefore not available for dividend d istribution.

Price at which no par value shares may be issued may be fixed by articles of inc orporation or by the board or by law or in absence, by the stockholders at a mee ting called for the purpose representing atleast a majority of outstanding capit al stock.

(classifications as to what occurred to the stock)

Guaranteed stock entitled to receive dividends at fixed annual rate .payment is guaranteed by 3rd person or by corporation. Promotion stock is stock issued by corporation usually a mining company to owner s of mining ground deeded to the corporation and to promoters and other persons for services rendered before incorporating. Escrow stock is stock deposited with a third person to be delivered to the stock holder or his assigns after complying with certain conditions usually the paymen t of the full subscription price. 2006 notes:it occurs since dati, corporation would give option to management off icers to buy such option at less than market value (not par). GAAP dictates that it should be reported at cost. Option is not part of financial statement since no payment of cash but only options. As such,instead of options, corporations is sues escrow stock. Over-issued stock is stock issued in excess of the authorized amount or number o f shares of the capital stock hence null and void. Watered stocks are issued by corporation gratuitously, for money or property or services less than par value in form of dividends when no unrestricted retaine d earnings exist. Liability of officer consenting (having knowledge)of issuance of such stock is solidarily liable with the one who issued such as against the c orp and the creditors for the difference between the fair value received at the time of issuance of the stock and the par or issued value of the same b.Preferred Shares One which entitles the holder thereof to certain preferences like preference as to dividend/assets upon dissolution.

However, preferred shareholders do not give them a lien upon the property of the corporation nor make them creditors of the corporation since their right is sub ordinate to the creditors. Dividends are only payable where there are profits earned by the corporation and as a general rule ,even if there are existing profits, the board of directors h as the discretion to determine whether or not dividends are to be declared.

Preferred v

Common Shares

Doctirne of Equality of Shares: All stocks issued by corporation are presumed eq ual with the same privileges and liabilities provided that the Articles of Incor poration is silent on such differences. Common stock represents residual ownership interest in the corporation. It is a basic class of stock ordinarily and usually issued without extraordinary rights or privileges and entitles shareholder pro rata division of profits. Preferences to preferred shareholders may be (1) on the dividends (if there are unrestricted retained earnings left) up to a stated percentage and (2) on liqui dation of assets (they are refunded of their investments after creditors are pa id).

-Redeemable Shares Usually preferred which by their terms are redeemable at a fixed date or at opti on of either issuing corp or stockholder or both at a certain redemption price. A redemption by the corp of its stock is in a sense a repurchase of it for cance llation. The present code allows redemption of shares even if there are no unres tricted retained earnings on the books of the corporation. Redemption may not b e made where the corporation is insolvent or if such redemption will cause insol vency or inability of the corporation to meet its debts as they mature. Upon maturity, it should be paid by corporation even if latter has no unrestrict ed retained earnings. It should be retired (since Capital stock is reduced) unlike in treasury shares where latter do not reduce capital since it came from surplu s of the shares. 2006 notes:redemption cannot be made if such would result to insolvency/inabilit y of corp to pay its obligation. 2006 notes: Optional redeemable shares are option to redeem is vested on corp, a nd stockholder cannot compel nor refuse redemption of the shares that he hold. 2006 notes: Compulsory redeemable shares pertains to the corporation ,it must re deem after stated period or if demanded by the holder .It can be restricted by p olice power. -Treasury Shares

It is not classified as such,it only becomes as such due to what happens to it. Stocks previously issued by corporation, fully paid for and reacquired by it by lawful means( purchase, donation, forfeiture). It is not considered as outstandi ng shares (so no dividends) ,but if there s surplus in retained earnings,its may b e distributed as property dividend but not as stock dividend. Conditions whereby a stock corporation empowered to acquire its own shares: 1. 2. 3. 4. eliminate fractional shares compromise an indebtedness arising out of unpaid subscriptions purchase delinquent shares exercise its right of appraisal

2006 notes:before corp may purchase or acquire its own shares,the ff must be pre sent: 1.acquisition must be for a legitimate purpose 2.execise in cases allowed by law 3.corporation has unrestricted retained earnings to cover the shares to be purch ased or acquired

2006 notes:source of corporate assets are: 1.contributions of shareholders 2.loans by creditors 3.profits 4.declaration of stock dividends the effect of which is to convert retained earn ings into capital

2006 NOTES: STOCK SPLIT UP OCCURS LIKE IF IT IS FORMERLY P100/SHARE AFTER SPLIT UP IT IS CHANGE TO 100 SHARES AT P1.

CERTIFICATE OF STOCK Written acknowledgement by the corporation of the stockholder s interest in the co rporation. It should be signed by the President or Vice President countersigned by the secretary or assistant secretary and sealed with the corporate seal. As soon as stockholder pay for the subscription, he is entitled to the issuance of a certificate of stock. Where stock certificate prepared by the corporation in the name of a registered stockholder are claimed by another person who alleges that they are merely held in trust by said registered stockholder,an interpleader filed by the issuing c orp against the two claimants is a proper remedy. 2006 notes:stock certificate is not necessary for stockholder to exercise his ri ghts as long as his name is listed in the corporate books. 2006 notes:if stated books closed by March 30 - - it means that it will not enterta in any new stockholder after such date (so no voting right to the latter)

As a general rule, stockholder who pays partially his subscription is not entitl ed to the issue of prescribed stock certificates to him, the requirement being t hat the total par value of stocks subscribed by him should first be paid. Exception: 1.by laws of corporation allows it 2.corporate board does not prohibit it. 2005 notes: Under the NCC, stock certificates issued in an and/or capacity may b e voted upon by any of its joint owners, who can also appoint a proxy to vote fo r the stocks.

PLEDGE/ MORTGAGE OF SHARES a.Pledge of Shares It is enough that the pledge to affect the third persons must be in a public ins trument containing among others a description of the thing pledged and the date of the pledge. Registration either with the Register of Deeds or with the books of the corporation is unnecessary. A pledge or chattel mortgagee does not have voting rights in stockholder s meeting s unless such right is expressly given in the contract and recorded in the books of the corporation. b.Chattel Mortgage Rules of Court and NCC do not require annotation in the corporation s stock and tr ansfer books for the attachment of shares of stock to be valid and binding on th

e corporation and third parties. To protect right of mortgagee, the chattel mortgage of the certificate should be registered with the Register of Deeds of the province of the domicile of the mo rtgagor ,and with the Register of Deeds of the province of the corporate domicil e, the corporation should be notified of said mortgage and or furnished a copy o f the contract. Lost and Stolen Certificates 2006 notes:If certificate of stock is lost , then there should be an affidavit of lost and state that it is lost beyond retrieval and there must be publication . However, period is shorten by depositing with the corporation a bond or other security in satisfaction of the board. The moment it is issued, if certificate is lost (by stockholder or by the corpor ation) then follow the above rule. Finder or one who steals does not become owner and cannot vest in his transferee a valid title, even if latter acquires it in good faith and for value. Procedure for reconstitution: 1.stockholder executed an affidavit in triplicate stating the circumstances of t he loss, destruction or stealing and submits the same to the corporation 2.corp shall publish in a newspaper of gen circulation once a wk for 3 wks. 3.if after lapse of one year from last publication, no contest is made by any th ird person, the corp shall cancel from its book the said lost, stolen or destroy ed certificate and issue a new one to the stockholder who will file a bond accep table to the board in which case ,the certificate may be issued even before the expiration of said period 4.if contest is presented to the corp or a case is pending in court, issuance sh all be suspended until final decision is rendered. 2006 notes:Intracorporate controversy is now lodged with theRTC.

(BAR) A is the registered owner of a certificate. He B who borrowed said endorsed certificate to support B r for purpose other than a transfer) but B sold it to o relied on the endorsed certificate and believed him an A claim the shares of stocks from X?

entrusted possession to s application for passport(o X,a bonafide purchaser wh to be the owner thereof. C

HELD: No, since certificate have been duly endorsed by A and entrusted by him to B. by his act ,A is now estopped from claiming said shares from X. But if A lost it ,then he has right to claim the certificate of stock from the t hief who had no right or title to it.

2006 notes: stock certificate are not negotiable instruments, but it is quasi-ne gotiable since it can be transferred by delivery and indorsement. 2006 notes:a street certificate is indorsed in blank, as such the holder of whic h is prima facie to be the owner of the same.

TRANSFER OF SHARES OF STOCK A stockholder has an absolute and inherent right as an incident of ownership to sell and transfer his stocks at will, except as may be restricted by the article s, the general law, the by laws or the agreement between him and the corporation . Transfer of shares, it must be transferred by the selling stockholder with inten t to make the purchaser the owner, and that the latter must bring to the secreta ry of the corporation such certificate and demand issuance of new stock certific ate. Transfer be effected by (1) indorsement of the certificate followed by delivery and (2) sale or assignment evidenced by a notarial document. Requisites to be valid: (1)there must be delivery of stock certificate (2)it must be endorsed by owner or atty in fact or other persons legally authori zed to make transfer (3)to be valid against third persons, transfer must be recorded in the books of the corporation. 2006 notes:the person who acquires such share is already a shareholder, but he i s not entitled to certificate if there is still a balance. When balance of subscription be paid: (1)date fixed on day of subscription contract w/o need of a call (2)in absence of subscription contract, upon call of board of directors. As far as the corporation is concerned, no transfer is valid except as between t he parties, until the transfer is recorded in the stock and transfer book of the corporation showing the names of the parties to the transfer ,date of transfer and the number of certificates and shares transferred. 2006 notes: a corp cannot refuse payment before date fixed in subscription cont ract or before call of board of directors.

2006 notes:A corporation cannot refuse registration as such ,MANDAMUS can be mai ntained in the RTC to compel a corporation to register stock transfer especially s o if there is substantial compliance and if corp will not register it ,you may a lso go to SEC and latter will give you a receipt w/c is equivalent to recording. 2006 notes: A stock certificate already delivered to the transferee recorded in the stock and transfer book and reported to the SEC but returned to transferor f

or indorsement which he refused to make -- it does not prevent the transferee from being owner of the stocks represented by said unendorsed stock certificate.

A corporation cannot inquire into or pass upon the legality of the transaction n or can it question the consideration upon which the transfer is made. Stamping of cert as non-negotiable constitutes undue limitation on transfer if shares are still unpaid, then,corp may refuse registration EFFECT OF THE FAILURE TO REGISTER A TRANSFER OF SHARES: 1.as between the transferor and transferee valid and binding 2.as between the corporation and transferee -- invalid 3.between corporate corporation and transferor latter is still the stockholder b ut he is the trustee of the real owner (transferee) 4.between corpo creditors and transferor transfer of shares is invalid, transfer or is still liable to the corporation for any unpaid subscription 5.between transferee and transferor s creditors it is invalid as against the credi tor of the transferor without the notice of transfer. 2006 notes: it is the corporate secretary(purely ministerial who will not decide question of ownership) who is duly authorized to make entries in stock and tra nsfer books and not the chairman or the owner since if they do it ,that would ta ntamount to an invalid transfer.

A transferee of 20 shares out of the 80 shares subscribed by the transferor who has paid P2T or only of the par value of said subscription cannot compel the cor poration to record said sale in the corporate stock and transfer book --only transfers evidence by indorsements by the stockholder at the back of duly issued stock certificates may be thus recorded, the indorsed stock certificate cancelled and a new one issued to said transferee.

2006 notes: for transfer to be effective, certificate must be properly indorsed and that title to said stock certificate is vested in the transferee by delivery of such indorsed stock certificate to the latter. 2006 notes:shares may be transferred by delivery of certificate indorsed by the owner or his atty-in-fact or other persons legally authorized to transfer (sec62 ) or by issuing deed of sale.

VALID DENIAL (REASONABLE RESTRICTION) When a corporation holds any unpaid claim on shares of stock (whether for unpai d subscription or loans), transfer of said shares shall not be recorded in corpo rate books. (Sec63) There is reasonable restriction on transfer so long as it is necessary and conve nient to the attainment of the object for which corporation was incorporated.

2006 notes:the restriction to be valid must appear in the by-laws , in the artic les of incorporation and in the certificate of stock. 2006 notes:there should be a right of first refusal on behalf of the stockholder s (swiss challenge) Corporation are given option to match to match the price offered to third person (this is the most common restriction as to transfer) In close corporation,the most common restriction as to transfer is that the num ber of shareholders is either not more than 20 or that stated in the articles w hichever is lower.- - - as such, if 1 died, it will not transfer to heirs of the deceased the shares of the latter but the remaining shareholders may choose if 1 of them will buy the shares or sell it to 3rd party. MODES OF ISSUANCE OF STOCKS (1) by subscription If it is through subscription, then it must be fully paid before issuance.

SUBSCRIPTION CONTRACT Contract for acquisition of an unissued share (since corporation is still to be formed.) This is a pre-incorporation subscription w/c is irrevocable for atleast 6 months unless all other subscribers consent to the revocation or the corpor ation fails to materialize. A subscription for shares of stock of a corporation may be revoked either by the subscriber or by the corporation, provided that(sec61): 1.all of the other subscriber consent to the revocation or 2.if the incorporation of the corporation fails to materialize within the said p eriod or within a longer period as may be stipulated in the contract of subscrip tion unless in either case, the articles of incorporations has already been subm itted to SEC in which case the pre-incorporation is irrevocable. 2006 notes: subscription is irrevocable (a)for a period of at least 6 months from date of subscription notwithstanding a ny agreement to the contrary (b)after submission of the articles of incorporation to SEC although beyond the said period

SUBSCRIPTION CONTRACT

V ORDINARY SALE OF SHARES

in any form and not covered by statute of frauds fraud

if over P500,it is covered by statute of

deemed subscriber even if not fully not become holder paid unless fully paid if subscription not fully paid, it is not complete the corporation who may demand payment,transferring payment (by filing with ordinary court) stockholder cannot or make the share delinquent resort to corporation, he has to go to court and file an ordinary suit (since not an intra corporate dispute) subscriber cannot be release from subscription unless all stockholders agreed and no creditor is prejudice corporation may rescind for non fulfillment

corporate creditors may proceed against creditors cannot subscriber in case the asset of proceed corporation is insufficient CONSIDERATION Stocks shall not be issued for a consideration less than the par or issue value. The consideration may take any of the following forms (sec62): 1.cash paid 2.property delivered at fair value to the corporation 3.labor or services actually rendered to the corporation 4.prior corporate obligations 5.amounts transferred from unrestricted retained earnings to stated capital 6.outstanding shares exchanged for stocks in the event of reclassification or co nversion. 2006 notes: Services actually rendered to the company is a lawful consideration for the issuance of stocks. 2006 notes: A lawyer who has already rendered service to the corporation is enti tled to be paid for such service which credit is considered as property the valu e of which is ascertainable. Stocks may be issued for this purpose.

(2) by sale or exchange of unissued stock, 2006 notes: where unissued stocks are merely exchanged for real property, there is no transfer of ownership but merely a change of form of ownership in the same hands. The right of first refusal is not violated. (3) in payment of obligations (4) stock dividends (BAR) On Jan 1,1972, C signed a written subscription to the corporate stock of S in the ff terms: I hereby subscribe for 100 shares of capital stock of S payable form the first d ividends declared on any or all shares of said company owned by me at time divid ends are declared until the full amount of this subscription has been paid Will this stipulation to the first dividends declared has effect of relieving t he subscriber C from personal liability in an action to recover the value of the share?

HELD: NO, stipulation to have the subscription payable from first dividends decl ared is null and void since the dividends which can be the consideration for the issue of stocks are those coming from operations at the time the stocks are iss ued. The dividends contemplated in the problem have no right to exist yet. 2006 notes: Source of fund for dividends is the unrestricted retained earnings. (BAR) S bought shares of stock from a stock broker who delivered a street certif icate to S. As security for a loan, S delivered the certificate to R who in turn pledged the certificate to a bank to secure his own loan. After S paid R,S dema nded the return of the certificate from R and from the bank. Can S recover the c ertificate? HELD: NO, a street certificate is a stock certificate endorsed by the registered holder in blank and upon its face, the transferee is entitled to demand its tra nsfer into his name from the issuing corporation .When so indorsed in blank,the certificate is transferable by mere delivery. When delivered by R to the bank still with the blank indorsement,the latter had perferct right to assume that R was its holder.Hence, until the bank returns it to R after R has paid in full his loan ,S cannot recover it.If it is in possessi on of R ,S can recover it because of their contract. COLLECTION OF UNPAID SUBSCRIPTION A stockholder cannot ask to be release from his subscription(if he has still an unpaid balance), such is illegal and violating the trust fund doctrine. Even if he is released, the assignee of the insolvent corp or the creditor can still col lect from the released holder the unpaid balance of his subscription.

1.Call , delinquency and sale at auction of delinquent shares (BAR) Victor was employed in NAIA. He subscribed to 1500 shares of the corporati on at P100 per share or a total of P150000. He made an initial down payment of P 37500. He was appointed President and General Manager. Due to disagreement with the Board ,he resigned and demanded payment of his unpaid salaries ,his cola,his bonus and reimbursement of his gasoline and representation expenses. NAIA admits that it owed Victor P40000 but told him that this will be applied to the unpaid balance of his subscription in the amount of P100T.there was no call or notice for the payment of the unpaid subscription. Victor questioned the set off. HELD: NAIA cannot set off the unpaid subscription with Victor s claim for salaries . The unpaid subscription is not yet due as there is no call. If there had been a call for the unpaid subscription ,still the corp cannot set it off since Victor is entitled to the payment of his salaries which NAIA has no right to withhold in payment of unpaid subscription.To do so would violate Labo r Laws(Apodaco v NLRC)

Extrajudicial Remedy for collecting Unpaid subscriptions, steps: 1.Call- subject to the provisions of the subscription contract, if any, a decla ration is made by the board as to the percentage of the subscription due and whe n it is to be paid. 2.if no payment is made within 30 days from said date, the whole subscription is declared delinquent and subject to sale. 2006 notes:30 days from due date will interest begin,but board must declare that

subscriber has become delinquent. 3.board shall fix the date ,time and place of SALE which shall not be less than 30 nor more than 60 days from the date the stocks became delinquent. 4.notice is sent to all delinquent stockholders and publication of the declarati on of delinquency and fixing the date, time and place of sale ,is made in a news paper of general circulation, once a week for two weeks. 5.sale at auction and award to highest bidder. The highest bidder is the one who bidsthe lowest number of shares (in it ,the delinquent subscriber has a share i f there is excess in the proceeds) 4Blue 95 notes: if no bidder, the corporation may buy back all subscription (w/c would make it Treasury shares), therefore delinquent subscriber has no share in the proceeds. Or corporation, if they don t want to buy the shares, may file in court asking the subscriber to pay the unpaid amount then execute it against latter s personal pro perty. 6.issue of certificate of stock to highest bidder. (BAR) Corporate secretary can validy refuse to issue a stock certificate for 25 shares to allegedly correspond to the 25% that X paid on his subscription for 10 0 shares. When a subscriber makes a partial payment on his subscription ,the amo unt is applied proportionately to all the number of shares subscribed by him. ---X is not correct also in refusing to pay for the balance of his subscribed sh ares since unpaid subscription is a trust fund the creditors of the corporation may look up to for the payment of their credits should anything adversely affec t the corporation. (BAR) The board of Directors of a corporation ,by a vote of ten in favor and one against ,declared due and payable all unpaid subscription to the capital stock. The lone dissenting director failed to pay on due date his unpaid subscription. Other than the shares whereon he was unable to complete the payment ,he did not own any share in the corporation. He was later informed by board that unless du e payment is meanwhile received, he: a.could no longer served as director of the corporation: INVALID, removal is not valid due to prerequisite of prior notioe to the stockho lders of the company is missing b.would not be entitled to cash and stock dividend which were declared and payab le a day after such information . INVALID, shares although unpaid has not yet become delinquent, since it is deli nquent only upon failure of the stockholders to pay the unpaid subscription or b alance thereof within the grace period of 30 days from the date stated in the ca ll. Owners of delinquent stocks are entitled to cash dividends.cash dividends due on delinquent stocks should be applied first to the unpaid balance on the subscrip tion plus cost and expenses. c.could not vote in the stockholder s meeting INVALID, since not yet delinquent ,they shall have all the rights of a stockhold er, including right to vote.

2.Ordinary Court Action

3.Collection from cash dividends and other amounts due to the stockholder, if al lowed by the by-laws or agreed by him.

2006 NOTES:if there is no interest stated in the by-laws, then the subscriber mu st not pay interest, but if it becomes delinquent, then subscriber must pay inte rest even if not stated in the by-laws. 2006 notes:as a general rule, the corporation will not release subscriber from s ubscription,an exception is when shares become delinquent as declared by the boa rd. DISSOLUTION OF A CORPORATION Publication is needed and SEC will require to get a tax clearance from the BIR and the stockholders will be required to sign an undertaking that they will answ er for the claim of the creditors to the extent of the liquidating dividends the y will receive. Once dissolution is approved, the Board of Directors is dissolved and so the cor poration have either an assignee dissolution or a receiver dissolution. Effect of dissolution is that there is a transfer of legal titles of property to stockholder, and corporation exist for 3yr period for it to liquidate (it is no t anymore conducting business since no Board of Directors anymore) however, wit h regard cases filed by Corporation for sum of money, it would still goes on and if it goes beyond 3 years, the lawyer of corporation becomes the assignee for the successful recovery of the money. Then you can have a voluntary dissolution. This could be done by filing a quo wa rranto case under rule 66 of the ROC on the ground mentioned there or a corporat ion can be dissolved for certain violation of the corporation code as mentioned in the Corporation Code or PD 902-A and also a minority stockholder may file a p etition to dissolve the corporation where the majority is mismanaging the assets of the corporation, dissipating its assets, and fraudulently disposing of its p roperties and a receiver may be appointed in an action for involuntary dissoluti on.

Board of Directors cannot pass a resolution to extend corporate life after the c orporation was dissolved since: 1.corporate life terminates , so there is no more life to extend 2.if board is given 3 years grace period after its dissolution to wind up and li quidate, that grace period can be utilized for nothing more than a liquidation. Board cannot pass resolution not germane to the liquidation process. 3.even if extension was done by the board before its dissolution, the extension and filing of an amendment to the articles of incorporation need the approval of stockholders holding atleast 2/3 of the outstanding capital stock of the corpor ation.

2006 NOTES:FULL LIQUIDATION CAN BE EFFECTED ONLY AFTER 3 YEARS.

MAIN MODES OF DISSOLUTION 1.VOLUNTARY BY FILING THE PROPER PAPERS W/ SEC .NO HEARING IS REQUIRED IF THERE ARE NO CREDI TORS AFFECTED. a.where no creditors are affected In all the methods of voluntary dissolution, you need a resolution approved by a majority of directors and a resolution approved by at least 2/3 of the stockhol ders In Section 118, where no creditors are affected the directors and the stock holders pass the resolution dissolving the corporation and that will be filed in the SEC for approval. In a case where a suit was filed and the corporation said , we have already been dissolved and they submitted a board resolution, the SC h eld that it is not enough to dissolve a corporation. b.where creditors are affected Here the board and the stockholders will approve the dissolution but a petition will be filed signed by the majority of the directors and verified by the presi dent, secretary or one of the directors which will indicate the claims of credit ors. That will be set for hearing and not less than thirty (30) days nor more th an sixty (60) days after the entry of the issuance of the order and a copy of th e order will be published once a week for 3 consecutive weeks in a newspaper of

general circulation and that will also be posted for three weeks in three public places like the bulletin board of a municipal hall, post office, the plaza and then the SEC will set that for hearing and determine w/n the corporation should be dissolved c.by shortening corporate term this is the simplest and fastest way of dissolving the corporation voluntarily l ike when Ford Philippines decided to close its subsidiary they simply amended th e articles of corporation that the corporation will exist until December 31, 197 8.

2.INVOLUNTARY Upon verified complaint filed w/ SEC Grounds: a.continuous inactivity of the corporation for a period of at least 5 years. b.commission by the corporation of ultra vires/illegal acts c.corporation was illegally organized d.serious dissension in the corporation The Court said the employees of a railroad are required to wear uniform indicati ng their positions in their nameplate, now you mean tell me if one employee did not have such a nameplate you are going to dissolve a corporation because that i s a legal requirement, it has to be a serious violation. But in one case, the SC dissolved a corporation which was engaging in banking wi thout authorization from the monetary board, it was accepting deposits from the public, the court considered that as a serious violation. When a minority stockholder files a case and asks to dissolve the corporation, t he court said that that is a harsh remedy unless the situation is really beyond redemption you should not impose that remedy. WINDING UP OR LIQUIDATION Liquidation means the winding up of the affairs of the corporation by getting in the assets,settling with creditors and debtors and apportioning the amount of profit and loss. Liquidation ,in corporation law, connotes a winding up or settling with creditor s and debtors. It is the winding up of a corporation so that assets are distribu ted to those entitled to receive them. It is the process of reducing assets to cash, discharging liabilities and dividing surplus or loss. 2005 notes: On the opposite end of the spectrum, it is rehabilitation which conn oted a reopening or reorganization .Rehabilitation contemplates a continuance of corporate life and activities in an effort to restore and reinstate the corpor ation to its former position of successful operation and solvency.

Methods of Winding Up:

1.upon voluntary dissolution of a corporation ,the court may direct such disposi tion of its assets as justice requires and may appoint a receiver to collect suc h assets and pay the debts of the corporation (Rule 104 of Rules of Court) 2.corporation whose corporate existence is terminated, shall nevertheless be con tinued as a body corporate for 3 years after the time when it would have been so dissolved for the purpose of prosecuting and defending suits by or against it a nd of enabling it gradually to settle and close its affairs ,to dispose of and c onvey its property and to divide its capital stock but not for the purpose of co ntinuing the business for which it was established. 3.by vitue of which the corporation, within 3 year period just mentioned, is aut horized and empowered to convey all of its property to a trustee for the benefit of members, stockholders ,creditors and others interested.

The corporation has three years after it should have been dissolved for the purp ose of winding up its affairs. The SEC has said the three year period should be counted from the time the dissolution was approved by the SEC even if the direct ors and stockholders pass a resolution dissolving the corporation that is not ef fective until it has been approved by the SEC. For three years , the corporation will continue to exist it will no longer be a going concern but only for the purpose of winding up that is why the SC has said that the corporation cannot for example renew its contract of lease because it is no longer a going concern. During the three year period, it should devote its time prosecuting and defendin g law suits, winding up its affairs disposing its properties so they can be used to pay off its creditors and to distribute balance to the stockholders. 2005 notes:As such, cases can still be pursued even beyond the date when its cor porate existence is terminated for a period of 3 years. As such ,prosecution of cases within the 3 year period of liquidation is allowed.

Partition of Properties: 1.physical division or partition based on the proportion of values of their stoc kholdings 2.selling the property to a third person and dividing the proceeds among themsel ves in proportion to their stockholdings. 3.after determination of value of property, by assigning or transferring the pr operty to one stockholder with the obligation on the part of said stockholder to pay the other stockholders the amounts in proportion to value of their stockho ldings.

2005 notes: lawyer who handled the case in the trial court may be considered as trustee for the dissolved corporation, with respect to the matter in litigation only ,although no appointment as such was extended to him. 2005 notes:trial court has jurisdiction to order a receiver of a corporation und er receivership to do any act so as to protect and preserve its properties and t o that end it may order the secretary of the corporation to do an act within the internal affairs of the corporation aimed at protecting the interest of the sto ckholders(Hodges v Lezama) 2005 notes: at any time during the said 3 years(for winding up) said corporation is authorized and empowered to convey all of its properties to the trustee for the benefit of stockholders, creditors and other interested persons.The trustee holds legal title to these assets but beneficial interest remains with the stock holders and creditors.

Take over of Assets of a Dissolved Corporation Corporation taking over the assets of a dissolved corporation becomes liable for the obligations of the dissolved corporation ,even if the charter of a corpora tion taking over limits its liabilities with respect to obligations of the diss olved corporation (Gonzales v SRA) How assets distributed: 1.creditors starting with the preferred and continuing with all common if the as sets can pay all 2.refund of the par value of stocks of preferred stockholders 3.refund of the par value to common stockholders 4.if assets still remain, then they are proportionately distributed to all stock holders ,common or preferred. There can be no distribution of assets to stockholders without first paying the creditors. Assets distributable to any creditor ,stockholder or member who is unknown or wh o cannot be located shall be escheated to the city or municipality where such as sets are located (Sec 122) Other Modes of Dissolution: 1.expiration of term (involuntary) 2.shortening of corporate term 3.failure to organize and commence business within 2 yrs from date of issuance o f certificate of incorporation The effect of non use of corporate charter and continouos inoperation of the cor poration within 2 yrs from the date of its incorporation, its corporate powers s hall cease and the corporation shall be deemed dissolved (not automatically sinc e there should be a notice and hearing)

However, if a corporation has commenced the transaction of its business but subs equently becomes continouosly inoperative for a period of at least 5 yrs, the sa me shall be a ground for the suspension or revocation of its corporate franchise or certificate of incorporation. 2006 notes:this is not applicable if failure to organize or commence is due to c auses beyond the control of the corporation as may be determined by SEC.

4.legislative dissolution

INSOLVENCY, REHABILITATION & DISSOLUTION

INSOLVENCY (BANKRUPTCY) Objective is to discharge a corporation from debt since there is still intention that corporation can still continue its transactions

PROCEEDINGS INVOLVED:

1.suspension of payments Occurs when a corporation has sufficient assets but latter do not mature at same time with the debt. As such ,it operates whereby the amount of debt is not reduced, only the payment is postponed However, it must involved publication and authentication of debts and that after debts are proven, the plan of repayment are approve by the regular court.

2.voluntary insolvency or involuntary insolvency In this scenario, the corporation or the person do not have sufficient assets to meets its obligation. Since the liabilities are greater than assets, then the law followed is the conc urrence and preference of credit. But there must be publication for 60 days.

In voluntary insolvency, it is the debtor who filed, while in involuntary insolv ency, it is the creditiors who filed such proceeding (since the debtor might abs cond, or remove a security from place where it should be like transferring a car from Manila to Davao, or that debtor is out of country and no intention to retur n).

After applying the payment in accordance with the concurrence of credit, the nat ural debtor is discharge, however, if the debtor is a corporation it is not disc harge. 2006 notes:if after discharge, you win lotto, la na habol ang mga creditors sa y o

REHABILITATION Objective is for the approval of the plan of rehabilitation and its implementati on. If court finds it adequate that a plan of rehabilitation must be carried out, th en it orders that no creditors can touch property of the corporation (even those already foreclose by creditors and applied shall be stop ,as such, even secured creditors are covered by suspension of payments---- so there is automatic stay) Once plan of rehabilitation is approved, it is subject to its implementation / e xecution.

End Result: Corporation continues to carry on its business. 2006 notes: Aside from plan of rehabilitation, the corporation may also propose for an interim plan.

DISSOLUTION Objective is to liquidate since corporation is already dead(read the corporatio n lectures by 4blue 95). In voluntary dissolution ,it is the debtor who files it on grounds of fraud or c orporate officers mismanage the corporation resulting to depletion of its assets . As such, if liabilities is greater than assets, it can be a ground for insolvenc

y or the creditors may propose for rehabilitation.