CORP LAW ATTY QUIMSON 1 SECTIONS 55-59

Section 55 Right to Vote of Pledgors, Mortgagors (Who Remain Stockholders) and Administrators Q: Can Pledgors/Mortgagors (who remain stockholders) attend meetings? A: Yes. Debtors who remain stockholders may attend meetings and are entitled to vote. Q: Are there any exceptions? A: Yes. Debtors may attend and vote in meetings, unless the right is given instead to the creditor (pledgee/mortgagee) in writing recorded in the proper corporate book. Q: May Executors, Administrators, Receivers & other legal representatives (appointed by the court) also attend meetings and vote? A: Yes. They are entitled to vote without the need of a written proxy. Section 56 Voting in case of Joint Owners Q: How do joint owners vote? A: All must vote, unless one or some of them is/are given a written proxy. Also, if the shares are owned in an and/or capacity, all need not vote. Section 57 Voting Rights of Treaury Shares Q: What are Treasury Shares? A: Treasury shares are those shares which have been previously issued and fully paid out but subsequently reacquired by the Corporation. Q: Does ownership of treasury shares carry with it voting rights? A: No. There are no voting rights as long as they remain in the treasury. Q: Why do they not carry voting rights? A: This is because, if they are given voting rights, the proportionate distribution of voting powers will be effectively lost, and Directors or Trustees can perpetuate themselves in office, as effectively, the Board controls these shares. (The corporation can only act through the Board, and since the Corporation owns these shares, the Board will have to vote at meetings in behalf of the real owners, the Corporation.) Case: Commissioner v Manning Facts: A trust agreement was executed between the majority shareholder, Reese, and the 3 minority shareholders of Mantrasco. This was to ensure that the Mantrasco Corporation, and its 2 subsidiaries, Mantrasco Guam and Port Motors Inc., would continue to be managed by the minority stockholders, upon the death of Reese. And upon his death, it was provided that his shares will be transferred to the name of the Corporation, and pending such the shares would be held in trust by the law firm of Ross, Selph, Carrascoso and Janda. In 1954, Reese died. The projected transfer of his shares however did not take place, as the corporation did not have sufficient funds to pay for them. A year later, a portion of Reeses shares were transferred to the Corporation, with the remaining shares being transferred to the Law Firm, as trustees for and in behalf of the Corporation. In 1958, a stockholders meeting was held, and a resolution was passed, wherein the shares of stock purchased from Reese was reverted back to the capital account of the Corporation, to be distributed as stock dividends to the shareholders at the close of the same business day. Years later, in 1963, the entire purchase price of Reeses shares was finally fully paid, and the trust agreement was terminated, and the trustees delivered the shares of stock to the Corporation. Meanwhile, the BIR ordered an examination of the Corporations books, wherein it was found that the Corporation failed to declare the stock dividends distributed to its stockholders, which were actually the shares of stock the corporation

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obtained from Reese. The BIR concluded that the distribution of Reeses shares as stock dividends was in effect a distribution of the assets/property of the corporation, as gleaned from the payment of cash for the redemption of said stock and distributing the same as stock dividend. Thus, the CIR assessed the Corporation for deficiency income taxes, which was challenged by the respondent stockholders in the CTA, which absolved them of any liability for the said assessment. Issue: Whether the distributed shares of stock were treasury shares, which are not subject to taxable income. Held: No. The shares redeemed from Reese, which were subsequently distributed as stock dividends, should be taxed as income of the corporation. Treasury shares are stocks issued and fully paid for and reacquired by the corporation either by purchase, donation, or other means. They are issued shares, but not outstanding shares. As long as they are held by the corporation, they cannot become dividends because dividends cannot be declared by the corporation to itself. It also cannot participate in the meetings of the corporation as voting stock, because otherwise directors would be able to perpetuate their control of the corporation. Such features of treasury stocks are not present in this case, because the shares of Reese under the trust agreement were given to the trustees, who were allowed to vote, and who also had the right to receive dividends. The intention of the trust agreement was to treat the shares as outstanding stock, thus, their declaration as stock dividends is null and void. The obvious purpose of the trust agreement was to use it as a technical device to bestow upon the respondents the full worth of Reeses corporate holdings. Section 58 Proxies (of Stockhlders/Members) Q: How may the stockholders/member vote? A: Stockholders/members may vote in all stockholders/members meetings in person or by proxy. Q: How may a stockholder/member vote by proxy? A: Such shall be stated in writing, signed by the stockholder/member, filed before the stockholders meeting with the corporate secretary, and is valid only for the intended meeting. Q: May such authorization be continuous? A: Yes. The general rule is that such writing providing for a proxy for a stockholder/member in a meeting is valid only for that particular meeting indicated therein. The exception is when it is otherwise provided in the writing, but such must not exceed 5 years. Q: Are the rules the same for voting in non-stock corporations? A: No. section 89 provides that restrictions in non-stock corporations on the right to vote by proxy must be stated in the Articles of Incorporation or the By-laws. Voting by mail may be allowed so long as it is allowed in the By-laws, and there is only one vote per member unless broadened, limited or denied in the By-laws. Case: Alejandrino v De Leon Unreported Section 59 Voting Trusts Q: What is a Voting Trust? A: One or more stockholders confer upon other persons, called trustees under the voting trust or voting tustees, the right to vote and other rights. Q: For how long may this voting trust last? A: It lasts for a maximum of 5 years, unless due to a loan which may last for more than 5 years, as long as the loan remains unpaid. Q: How are voting trusts created?

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A: Voting trusts must be in writing specifying the terms & conditions thereof, which must be notarized and a certified copy thereof filed with the corporation and with the SEC. Q: What happens when the voting trust is not executed in the prescribed manner? A: It becomes ineffective and unenforceable. Q: Are voting trust agreements corporate records? A: Yes. They are subject to examination by any stockholder like any other corporate record. Q: What are the powers of a Trustee of a Voting Trust? A: A trustee of a voting trust has the same powers as a stockholder, but this is dependent on the terms of the voting trust agreement. Q: What happens when a voting trust agreement is executed and filed? A: Stock certificates covered by the voting trust agreement are cancelled and new ones are issued in the name of the trust/trustees. However, in the books of the corporation, it shall be noted that the transfer in the name of the Trustees is pursuant to the said voting trust agreement. Thereafter, the trustee shall issue voting trust certificates to the transferors (the former stockholders), which are transferrable like stock certificates. Q: When does the agreement expire? A: The trust AUTOMATICALLY expires upon the expiration of the period provided in the agreement or the attainment of the purpose of the agreement. Q: what happens upon such expiration? A: Voting trust certificates are deemed cancelled and new stock certificates reissued in the name of the transferors (the former stockholders). Q: May a trustee vote by proxy? A: Yes. A trustee may vote by proxy unless prohibited in the Voting Trust Agreement. Q: Who has the right to inspect corporate books under the Voting Trust? A: The Beneficial owner (the Trustor) and the Trustee both have the right to inspect corporate books. Q: Are there any limitations/restrictions to Voting Trust Agreements? A: Yes. The Voting Trust Agreement must not be entered into for the purpose of circumventing laws on monopolies and illegal combinations in restraint of trade, or for the purposes of fraud. Cases: Everett v Asia Banking Corporation Facts: Petitioners are the majority stockholders of Teal and Co., a corporation engaged in the business of merchandising automobiles, trucks, tractors, spare parts, and accessories, and the repair thereof. Teal and Co. have been transacting business with 3rd party corporations, through the letter of credit opened with Asia Banking. Teal and Co.s banking businesses and financing transactions were done exclusively with the said Bank. In 1922, the Company was indebted to the Bank in the amount of P750,000, secured by various real and chattel mortgages. In the said year, the Banks officer, Mullen, proposed and induced petitioners to enter into a voting trust agreement with the bank, whereby Mullen and Asia Bank (respondents) would become the trustees of Teal and Co.s shareholdings. The petitioners agreed, and under such agreement, the

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Bank intended to obtain temporary control of the Companys management for the supposed mutual protection of the Bank and Teal and Co. Despite this, contrary to the agreement, Asia Bank caused the replacement of the members of the Board of the Company, with its own appointees who were not bona fide shareholders thereof, which was also concealed by the Bank from the Companys stockholders. Respondents actually incorporated a new corporation, The Philippine Motors Corporation, to who almost all of Teal and Co.s assets were transferred. Petitioners thus sought the assistance of the courts to rescind the Voting Trust Agreement with the Bank. The RTC dismissed the action, saying that petitioners are not the real parties-in-interest, as such action should had been brought by Teal and Co, through its Board of Directors. Issue: Whether the action should have been brought by Teal and Co., and not the majority stockholders thereof. Held: No. Teal and Co., including its Board, was already under the control of Asia Banking. Thus, it would have been useless to ask the Board to institute the present suit, and the law does not require litigants to perform useless acts. The court held that the stockholders could bring the said action (in the nature of a derivative suit) on behalf of Teal and Co. When the Board of Directors in a Corporation is under the complete control of the principal defendants in the case and it is obvious that a demand upon the board of directors to institute an action and prosecute the same effectively would be useless, the action may be brought by one or more of the stockholders without such demand. The Court however, did not rule on the propriety or impropriety of the Voting Trust Agreement between the Bank and the Company. (N.B. However, it may be inferred that the stockholders may bring suit against the trustee/s if the voting trust agreement is being used by the said Trustee/s to perpetuate fraud against the corporation, as is present in this case. The stockholders would still have legal standing to institute the suit in behalf of the corporation for acts done by the trustee/s to defraud the corporation, when the said trustee/s already have control of the Board of the said corporation. A derivative suit is still proper.) Lee v. CA Facts: A Voting Trust Agreement was executed by ALFA and DBP, wherein Lees and Lacdaos shares of stock in ALFA were transferred to DBP. Lee and Lacdao thus ceased to be corporate officers of the said Company. ALFA, Lee and Lacdao were impleaded in a 3rd party complaint filed by SACOBA Man. and Gonzales, in a complaint filed by ICB for recovery of a sum of money against SACOBA and Gonzales. The RTC issued an order requiring that an alias summons be issued upon ALFA through DBP, as a result of a letter sent to the court by Lee, informing it of the transfer of the management of ALFA to DBP. Thus, it concluded that the service of summons on ALFA was erroneous as it should have been served upon DBP. DBP countered that it is not authorized to receive summons for ALFA, as it had not yet taken over the Company, and it still maintained a separate and distinct corporate personality from DBP. The RTC declared that the service upon Lee and Lacdao were valid, thus an alias summons need not be served on DBP. Lee and Lacdao however further argued that service of summons upon them could not be service of summons upon ALFA, as they were no longer officers thereof, thus SACOBA should have availed of the other modes of service of summons, such as service by publication. The RTC still upheld the validity of the service of summons upon Lee and Lacdao. The latter again filed an MR, stating that by virtue of the Voting Trust Agreement, they were no longer the officers of ALFA, and hence, they could not have received summons on behalf of ALFA. The RTC reversed its previous decision, but the same was dismissed by the CA. Issue: Whether the execution of the Voting Trust Agreement deprived the Lee and Lacdao of their positions as directors of the corporation; Whether the service of summons upon ALFA (through Lee and Lacdao) was valid and proper. Held: The Voting Trust Agreement (VTA) deprived the 2 petitioners of their positions as directors of the corporation, wherein they disposed of all their shares through assignment and delivery in favor of DBP as trustee, thus the service of summons should not have been made upon them. There was a transfer of legal ownership of the stocks to DBP, who became the stockholder of record. Hence, they ceased to own at least one share of

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ALFA stocks in their names, and consequently, ceased to be directors. This is because in order to be a director, one needs to own at least one share in his own right, which must be based on legal and not beneficial ownership. The execution of a VTA may create a dichotomy between the equitable and beneficial ownership of the corporate shares of a stockholder, on the one hand, and the legal title thereto on the other hand, in favor of the trustee. This shall take effect for a period not exceeding 5 years upon fulfillment of statutory and agreed conditions in the agreement. However, DBP cannot also rely on the inference that the 5-year period of the VTA had expired in 1986, so that legal title of the shares in question ipso facto reverted back to the petitioners as the beneficial owners thereof. It is manifestly clear in the VTA that the agreement between ALFA and DBP was that the duration of the agreement is contingent upon the fulfillment of the obligations of ALFA with DBP. The said obligations being not yet fulfilled, the VTA is still valid and subsisting, and DBP still continues to be the trustee with legal ownership of the said shares of stock. Service of summons must still be made upon them in behalf of ALFA.

DE TORRES SULIT ATILLO WEIGAND