INTRODUCTION A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence. (Sec.2). It is being invested by law with a personality separate and distinct from those of the persons composing it, as well as from that of any other entity to which it may be related. It was evolved to make possible the aggregation and assembling of huge amounts of capital upon which big business depends. It also has the advantage of non-dependence on the lives of those who compose it even as it enjoys certain rights and conducts activities of natural persons. (Reynoso v. CA, 345 SCRA 355). A corporation, being a creature of law, "owes its life to the state, its birth being purely dependent on its will," it is "a creature without any existence until it has received the imprimatur of the state acting according to law." A corporation will have no rights and privileges of a higher priority than that of its creator and cannot legitimately refuse to yield obedience to acts of its state organs. (Tanyag v. Benguet Corporation). presentation Attributes of a corporation 1. It is an artificial being – a juridical person capable of having rights and obligations with a personality separate and distinct from its members/stockholders; 2. Created by operation of law - mere consent of the parties to form a corporation is not sufficient. State must give consent through (a) special law, (b) general enabling act; 3. With right of succession - existence cannot be affected by change in members/stockholders; and 4. Has the powers, attributes, and properties as expressly authorized by law or incident to its existence. Advantages of corporate organizations 1) Separate juridical personality - personality separate and distinct from individual stockholders and members; 2) Limited liability to investors - stockholders are liable only to the extent of their contribution; 3) Free transferability of units of ownership - stockholders hold their shares as personal property with rights to dispose, assign or encumber them as they may desire; and 4) Centralized Management – all corporate powers are vested in the board of directors. Disadvantages 1. High capital requirement; 2. Takes time to organized; 3. complexity of organization; and 4. Shareholders control is limited. Kinds of corporations 1. Stock corporations - One which has a capital stock divided into shares and is authorized to distribute to the holders of such shares dividends or allotments of the surplus profits (Sec. 3). 2. Non-stock corporation All other corporations are non-stock corporations (Sec 3) 3. Corporation de jure - Organized in accordance with the requirements of law. 4. De facto corporation - A corporation with some flaw in its incorporation. 5. Corporation by estoppel - It is a status acquired by persons who assume to act as a corporation knowing it to be without authority. Such persons shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof (Sec 21)
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Public corporation - One formed or organized for the government or a particular state. Its purpose is for the general good and welfare.
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Private corporation - One formed for some private purpose, benefit, aim or end. Corporation created under corporation code. Close corporation one whose AOI restricts the numbers of corporator, the transfer of shares and the listing in stock exchange (Sec. 96). Educational corporation (Sec. 106) - Those corporations which are organized for educational purposes. Religious sole and aggregate A corporation sole is one formed for the purpose of administering and managing, as trustee, the affairs, property and temporalities of any religious denomination, sect, or church, by the chief archbishop, bishop, priest, rabbi, or other presiding elder of such religious denomination, sect or church. (Sec 110). A corporation aggregate is a religious corporation incorporated by more than one person. Eleemosynary corporation - One organized for a charitable purpose Domestic corporation - A domestic corporation is one formed, organized, or existing under the laws of the Philippines. Foreign corporation - One formed, organized or existing under any laws other than those of the Philippines and whose law allows Filipino citizens and corporations to do business in its own country and state. (Sec 123) Corporation created by special laws or charter (Sec. 4)
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Doctrine of Separate Juridical Personality A corporation has a personality separate and distinct from that of its stockholders and members and is not affected by the personal rights, obligations, and transactions of the latter. Since corporate property is owned by the corporation as a juridical person, the stockholders have no claim on it as owners, but have merely an expectancy or inchoate right to the same should any of it remain upon dissolution of the corporation after all corporate creditors have been paid. Such right is limited only to their equity interest. Corporation and partnership: Distinguished Corporation 1. Created by law 2. Managed by board 3. limited life 4. Powers – those expressly granted 5. Formed by persons 5-15
Partnership Created by agreement managed by partners no definite lifetime powers not contrary to law, morals, at least two persons
Stock Corporation is one which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividend or allotment of surplus profits on the basis of shares held. Nonstock corporations are allprivate corporation other than stock corporations. Piercing the Corporate Veil It is a rule that allows the state to disregard for certain justifiable reasons the fiction of juridical personality for the corporation, separate and distinct from the persons composing it. Three classes of Piercing: 1. Fraud Cases – when a corporation is used as a cloak to cover fraud, or to do wrong; 2. Alter Ego Cases – when the corporate entity is merely a farce since the corporation is an alter ego, business conduit or instrumentality of a person or another corporation; and 3. Equity cases – when piercing the corporate fiction is necessary to achieve justice or equity
Instrumentality Rule Where one corporation is so organized and controlled and its affairs are conducted so that it is in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the “instrumentality” may be disregarded. The control necessary to invoke the rule is not mere majority or even complete stock control but such domination of finances, policies, practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own, and is, but a conduit for its principal. Nationality of the corporation The corporation is a national of the country under whose laws it is organized or incorporated: the place of incorporation test. 1. Domestic corporations – organized and governed by the Philippine law. 2. Foreign corporations – organized under laws other than those of the Philippines Grandfather Rule Used to determine the nationality of a corporation by which the percentage of Filipino equity in corporations engaged in nationalized and/or partly nationalized areas of activities, provided for under the constitution and other nationalization laws, is computed, in cases where corporate shareholders are present in the situation, by attributing the nationality of the second or even subsequent tier of ownership to determine the nationality of the corporate stockholder. Stock and Non-stock Corporation: distinguished Stock non-stock 1. For profit -for Religious, charitable, education, scientific etc. 2.Profit distributed to shareholders - profit is used for furtherance of the purpose 3. stockholders - members 4. right to vote according to no. of shares, each member entitle to only one vote 5. voting right may be denied - voting right cannot be denied 6. voting by proxy may be denied - voting by proxy cannot be denied 7. voting by mail possible - not possible 8. Board of directors – control - members of the corporation 9. Board of directors - board of trustees 10. Term – 1 year - three years 11. Officers appointed by board - officers elected by members 1.Rights transferable - rights not transferable
FORMATION AND ORGANIZATION OF CORPORATIONS Definition of Terms 1. 2. 3. 4. 5. 6. 7.
Incorporators – Those stockholders or members mentioned in the AOI as originally forming and composing the corporation who are signatories thereof. Corporator – Those who compose the corporation, whether as stockholders or members. Stockholders – Corporator in a stock corporation; they are also known as shareholders. Members – Corporators in a non-stock corporation. Promoters – Person who bring about the formation and organization of a corporation by bringing in together the incorporators. Subscriber – Persons who have agreed to take and pay for original unissued shares of a corporation formed or to be formed. Underwriter – Person usually an investment bankers, who has agreed to buy or to sell the securities or stock of the corporation.
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Capital Stock – It is the money value assigned to a corporation„s issued shares, constituting generally the legal capital of the corporation. Authorized Stock – Refers to the amount of capital stock as specified in the AOI, synonymous to capital stock in a stock corporation that have par value. If shares of stock are non par value, corporation has no authorized stock. Subscribed Stock – amount of capital stock originally acquired by a subscriber of an unissued shares in a corporation. Outstanding Capital Stock – portion of the capital stock which is issued and held by persons other than the corporation itself. Paid Up Capital Stock - portion of the subscribed or outstanding capital stock that is actually paid. Unissued Capital Stock – that portion of the capital stock that is not issued or subscribed. Capital – the entire property or assets of the corporation. Shares Of Stock –unit into which the capital stock is divided. It represents the interest or right which the owner has in the corporation. It merely represents a distinct undivided share or interest in the common property of the corporation. Certificate Of Stock – is a written acknowledgment by the corporation of the interest, right and participation of a person in the management, profits, and assets of a corporation. Par Value Share – one with specific money value fixed in the AOI and appearing in the certificate of stock. It does not change regardless the market value of the stock. Watered Stock – shares issued less than the par value of the stock. (see section 65)
The first step in the formation of corporation is filing to SEC the AOI with corresponding treasurer‟s affidavit indicating that 25 percent of the capital stock has been subscribed and 25 percent of such subscribed stock has been actually paid and is in his possession. In case of banks, banking institution, insurance corporation etc. (see last par of Sec. 17), favorable recommendation of the government agency is necessary before such corporation may be formed. After payment of appropriate fees, SEC shall issue a certificate of incorporation which commence the corporate existence of the corporation (Sec. 19). Thereupon the incorporators, stockholders/members and their successors shall constitute a body politic and corporate under the name stated in the AOI for the period of time mentioned therein, unless said period is extended or the corporation is sooner dissolved in accordance with law (Ibid). In case SEC failed to act on a valid application, mandamus may be filed to compel SEC to issue such certificate; in case of rejection, petition for review under Rule 43 is applicable. Articles of Incorporation: Contents 1. Corporate name; 2. Primary and secondary purposes; 3. Principal office; 4. Term of the corporation (Sec. 11 and 14); 5. Names, nationalities and residences of incorporators; 6. Number of directors or trustees, 5-15; 7. Names, nationalities and residence of the Incorporating Directors; 8. Capital stock, number of which it is divided and par value and NNR of original subscriber and amount paid by each: in non-stock corporation, the capita and NNR of contributors and the amount contributed; 9. Treasurer‟s Affidavit of subscription; 10. Favorable recommendation of government agency (if necessary, Sec. 17); and 11. Other matter not inconsistent with law.
Amendment of AOI Procedure 1. Majority vote of the BOD concerning the amendment of AOI(Sec. 16); 2. Notice to the stockholder together with the proposed amendment (Sec. 50); 3. Affirmative votes of the stockholders representing 2/3 of the outstanding shares; 4. Filing of the original and amended AOI, under oath (corporate secretary and majority of the BOD), to SEC; 5. in case of banks, banking institution (see last par of Sec. 17), favorable recommendation of the government agencies is necessary; and 6. Approval of SEC or non-action within six months from the date of filing for causes not attributable to corporation will commence the effectivity of the amendment. Grounds for Disapproval of AOI 1. AOI or amendment is not substantially with the form prescribed; 2. Purpose is patently unconstitutional, illegal, immoral, contrary to government rules and regulations; 3. Treasurer‟s affidavit is false; and 4. Percentage requirement of ownership as required by law was not complied with (Sec. 17). De Facto Corporations A de facto corporation is one which actually exists for all practical purposes as a corporation but has defect in the compliance with the mandatory legal requirements while de jure corporation has legal right as a corporation and has complied with all the requirements of the law. Section 20 of the code provides that question of the corporate existence cannot be attacked collaterally in any private suit; however, such immunity is not available against the State, which may file quo warranto proceedings to question the legality of the existence a corporation. Requisites of a de facto corporation 1. Valid statute under which a corporation might be incorporated; 2. Bona fide attempt to organize a corporation under such law: colorable compliance with the law; and 3. Actual use of the corporate powers as provided for by the law. Corporation by Estoppel When group of persons assume to act as corporation, knowing it to be without authority, such persons shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof (Sec 21). In case of action against such group of person, they cannot resist the performance on their obligation or raise the defense of lack of corporate personality to escape their liability (ibid). Non-use of Charter / Continuous Inoperation When corporation does not formally organize and commence the transaction of its business or the construction of its works within two years from the date of its incorporation, the corporation is deemed dissolved. When the corporation has commenced its business transaction, but becomes continuously inoperative for a period of five years, the same is ground for suspension or revocation of its certificate of
incorporation (Sec. 22). In the former, there is automatic dissolution of corporation while in the latter, proper notice and hearing is required. Commencement of business may take the form of contracting for lease or sale of properties to be used as business site of the corporation and other preparatory acts geared towards fulfillment of the purpose for which the corporation was established However, when the causes, non-use or non-operation of the corporation was due to causes beyond the control of the corporation as determined by SEC, e.g., mineral lands to be developed by the corporation as per its purpose are the object of court litigation and a court injunction against the corporate activities has been issued, said periods is not the point of recon but it shall from the point where such cause ceased. BOARD OF DIRECTORS All corporate powers, business conducted and all property of corporations are exercised by the BOD/T (Sec. 23). BOD/T are selected thru an election and they shall hold office for one year and until their successors are elected and qualified (ibid). Stockholders cannot interfere with the board‟s exercise of its powers and functions except when the law expressly gives them the authority. Directors owe their duties to corporation rather than to individual shareholders. The directors or trustees shall not act individually nor separately but as a body in a lawful meeting. Contracts entered into without a formal board resolution does not bind the corporation except when majority of the board has knowledge of the contract and the contract benefited the corporation. Qualification of Directors/Trustees Every director must own at least one (1) share of the capital stock of the corporation, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Majority of BOD/T should be resident of the Philippines (ibid).
Disqualifications: grounds 1. Conviction by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years; or 2. Violation of corporation code committed within five (5) years prior to the date of his election or appointment (Sec. 27). Election of BOD/T 4. Notice to the stockholder/members of the election as provided in AOI; 5. Presence of, in person or by proxy, majority of the outstanding capital stock / member entitled to vote; 6. Election by ballot; 7. Candidate receiving highest number of votes shall be declared elected; and
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Report to the SEC, within 30 days, the names, nationality and residences of the elected officers and directors/trustees. Deaths and resignation must likewise be reported.
In a stock corporation, stockholders may exercise cumulative voting or straight voting. Cumulative voting is done by casting as many votes as he has number of shares multiplied by the number of directors up for election. This provides the minority an opportunity to elect a representative to the board of directors. Straight voting is done by casting votes as he has number of shares multiplied by the number of directors to a single candidate. The total number of votes cast by a stockholder shall not exceed the number of shares owned by him as shown in the books of the corporation multiplied by the whole number of directors to be elected. Members of a non-stock corporation may cast as many votes as there are trustees to be elected but may not cast more than one vote for one candidate (Sec. 24 and 89). Cumulative voting is not specifically allowed in a non stock corporation; however, its by-laws or AOI may be broadened as to give that right to the members (Sec. 89). Take note that delinquent stock has no voting rights (Sec. 24 &71). Corporate officers The officers execute polices laid down by the board and perform the duties enjoined by them by the AOI and by-laws. Immediately after the election of BOD/T, the directors of a corporation must formally organize the election of: 1. A president, who shall be a director; 2. A treasurer who may or may not be a director; 3. A secretary who shall be a resident and citizen of the Philippines, and 4. Such other officers as may be provided for in the by-laws (Sec. 25) Any two or more positions may be held concurrently by the same person, except that no one shall act as president and secretary or as president and treasurer at the same time. Directors and trustees cannot attend or vote by proxy in a board meeting (ibid) compared to stockholders which can attend and vote by proxy in a stockholder‟s meeting( Sec. 58). The Corporation Code does not require that one elected or appointed as vice-president of a corporation should be the owner of shares of stock of the corporation (Baguio vs. CA, 226 SCRA 366, 1993) Executive Committee The by-laws of a corporation may create an executive committee, composed of not less than three members of the board, to be appointed by the board (Sec. 35). Such committee may act on specific matter within the competence of the board as may be delegated by the by-laws or majority vote of the board, except the following: 1. Approval of any action for which shareholders' approval is also required; 2. Filing of vacancies in the board; 3. Amendment, repeal or adoption of by-laws; 4. Amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable; and 5. Distribution of cash dividends to the shareholders.
Quorum Majority of the number of director/trustees shall constitute the quorum for the transaction of the business unless the AOI or by-provide otherwise. Majority of the directors/trustees constituting the quorum shall be valid as corporate act except the election of officer which requires majority of all the members of the board (Sec. 23). Compensation of Directors 1. Reasonable per diem; 2. Provision in the by-laws fixing their compensation; and 3. Compensation granted by majority of the stockholders. In no case shall the total yearly compensation of directors, as such directors, exceed 10% of the net income before income tax of the corporation during the preceding year (Sec. 30). The said compensation is applicable only to directors; thus, when the director is an officer as well, the BOD/T may grant compensation to them because the prohibition in Sec. 30 does not apply [Western Institute of Technology v Salas]. Liability of Board of Directors BOD/Ts are jointly and severally liable in the following instances: 1. If they willfully/ knowingly vote for or assent to patently unlawful acts of the corporation; 2. They are guilty of gross negligence or bad faith in directing the affairs of the corporation; 3. They acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees (Sec. 31); 4. Issuance of watered stock (Sec. 65); 5. Disloyalty of directors (sec. 34); 6. He agrees to hold himself personally and solidarily liable with the corporation; and 7. He is made, by a specific provision of law, to personally answer for his corporate action (Tramat Mercantile, Inc. vs. CA). The director is liable when he takes advantage of information by virtue of his office to the disadvantage of the corporation (Special Fact Doctrine). BOD/T has authority to modify the proposed terms of the contracts of the corporation for the purpose of making the terms more acceptable to the other contracting parties. The test to be applied is whether the act in question is the direct and immediate furtherance of the corporation‟s business, fairly incidental to the express powers and reasonably necessary to their exercise. If so, the corporation has the power to do it; otherwise it is not [BusinessJudgment Rule] [Montelibano v. Bacolod Murcia Milling Co.]. Self-Dealing Directors Directors/Trustees and officer may enter into contract with the corporation in which he is a directors. However, this agreement is being frown upon by law because there can be no real bargaining where the same is acting on both sides of the trade. In fact, all contracts entered into by directors/trustees and officer is considered voidable unless the following requisites are present: 1.
The presence of the director/trustee in the board meeting approving the contract was not necessary for constituting a quorum for such meeting; 2. The vote of such director/trustee in the board meeting approving the contract was not necessary for the approval of the contract;
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The contract is fair and reasonable under the circumstances; and In the case of an officer, there was previous authorization by the board of directors (Sec. 32).
Although the following requisite was not followed, such contract may be ratified by 2/3 affirmative vote of the outstanding capital stock/members, provided that there is full disclosure of the adverse interest of the director/ trustee involved is made at such meeting, and that the contract is fair and reasonable (ibid) Interlocking Directors Interlocking directors are those who sit in the boards of two or more corporations that contract with one other, whether on isolated or regular basis. Contracts between two or more corporations having interlocking directors cannot be invalidated on that ground alone, except cases of [1] fraud and [2] the contract is fair and reasonable(Sec. 33). If the interest of the interlocking director in one corporation is merely nominal, the condition set in self-dealing directors will be imposed, thus, the contract voidable. Stockholdings exceeding 20 percent of the outstanding capital stock shall be considered substantial for purposes of interlocking directors (ibid). Hence, nominal interest means stockholdings of not exceeding 20 percent of the outstanding capital stock. Disloyalty of Directors Where a director, by virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, he must account to the latter for all such profits by refunding the same (Sec. 34). However, the same act may be ratified by a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding capital stock. The same is true notwithstanding the fact that the director risked his own funds in the venture (ibid). Doctrine of Corporate Opportunity When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a liability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation (Sec. 31 and 34). Special Facts Doctrine Granting the absence of a fiduciary relationship with the stockholders, when special circumstances or facts are present which make it inequitable for the director to withhold information from the stockholder, the duty to disclose arises and concealment is fraud. Removal of BOD/T Procedure 1. Call for meeting for the purpose of removing the BOD, by BOD or majority of stockholders; 2. Notice, by publication or registered mail, to the stockholder by the officer or by majority of the outstanding stock; 3. Election; and 4. Affirmative vote of 2/3 of the outstanding capital stock/members;
Removal of BOD may be with cause or without cause, however, removal without cause may not be used to deprive minority stockholder of the right of representation (sec. 28.) The board cannot remove a director or trustee as member of the board. Vacancy Any vacancy occurring in the BOD or BOT terms may be filled by the vote of at least majority of the remaining directors or trustees, if still constituting quorum. If quorum cannot be obtained, vacancies must be filled by the stockholders/members in a regular or special meeting for that purpose. Same rule applies if the vacancy is due to removal by the stockholder or by expiration of the director‟s term, or there is increase of number of directors in a corporation. A director or trustee filling the vacancy shall serve only for the unexpired term of his predecessor (Sec. 29). POWERS OF CORPORATIONS General Powers 1. To sue and be sued in its corporate name; 2. Succession; 3. To adopt and use a corporate seal; 4. To amend its AOI; 5. To adopt by-laws; 6. to issue or sell stocks and admit members; 7. To acquire and encumber properties; 8. To enter into merger or consolidation; 9. To make reasonable donations except in political parties; 10. To establish pensions and benefits for the employees and officers; and 11. Essential and necessary powers to promote its purpose. Specific Powers To Extend or Shorten Corporate Term Procedure 1. Majority vote of BOD/T; 2. Notice of the proposed action to the stockholders/members; 3. Affirmative vote of at least 2/3 of the outstanding capital stock/members(Sec. 37); 4. Amended and original AOI copy, certified under oath by the corporate secretary and majority of BOD/T shall be filed to SEC (Sec. 16); and 5. Shall take effect upon approval of SEC or upon 6 months of inaction (ibid). In case of extension of corporate term, any dissenting stockholder may exercise his appraisal right. Appraisal right is also available in case of shortening the corporate term under Section 81. To Increase or Decrease Capital Stock Procedure 1. Majority vote of BOD; 2. Written notice to the stockholder;
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Affirmative vote of (2/3) of the outstanding capital stock favoring the increase of decrease of capital stock; Certificate in duplicate must be signed by majority BOD and countersigned by the chairman and secretary of the stockholders meeting; Filing of the certificate with the original AOI to the SEC and Treasurer‟s affidavit indicating that at least 25% of the increased capital stock has been subscribed and at least 25% of such subscribed stock has been actually paid; Keeping of copy in the office of the corporation; Approval of the SEC (Sec. 38).
Any increase or decrease in the capital stock bonded indebtedness shall require prior approval of the Securities and Exchange Commission. From and after approval SEC and the issuance of certificate, the capital stock shall stand increased or decreased. Decrease of capital stock shall not be approved if it will prejudice the creditors of the corporation (ibid). To Incur, Create or Increase Bonded Indebtedness Procedure 1. Follow step 1,2,3,4, 5 (certificate only) and 6 of procedure to increase/decrease capital stock; 2. Bonds issued by a corporation shall be registered with the SEC, which shall have the authority to determine the sufficiency of the terms thereof.
Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the approval by a majority vote of the board of trustees and of at least two-thirds (2/3) of the members in a meeting duly called for the purpose. Any incurring, creating or increasing of any bonded indebtedness shall require prior approval of the Securities and Exchange Commission (supra). To deny pre-emptive rights Pre-emptive right is the right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, including subsequently issued shares, treasury shares or unissued stocks before it can be disposed of in favor of the others. The purpose of which is to enable the shareholder to retain his proportionate control in the corporation and retain equity to the surplus profit. This right may be denied by the AOI or by its amendment shall not extend to shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; or to shares to be issued in good faith,with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purpose (Sec. 39). To sell or dispose of corporate assets Sale by the corporation is considered a sale of all or substantially all of the corporate assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing its purpose (Sec. 40); such sale may be made by a majority vote of the BOD, sending notice to the stockholder and obtaining 2/3 affirmative votes of the stockholders/members (ibid). Take note that stockholder‟s vote is not necessary when the disposition is necessary in the usual and regular business of the corporation or the proceeds of such sales was appropriated for its regular business (ibid)
In non-stock corporations where there are no members with voting rights, the vote of at least a majority of the trustees in office is sufficient for the corporation to proceed in the disposition (ibid). Dissenting stockholder may exercise his appraisal right in relation to section 81. The BOD has authority to abandon the said disposition after the approval of the stockholders (ibid). To Acquire Own Shares A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purposes provided it has unrestricted retained earnings to cover the shares to be acquired (Sec. 41). This includes but not limited to the following: 1. To eliminate fractional shares; 2. To collect or compromise an indebtedness to the corporation:; and 3. To pay dissenting or withdrawing stockholders exercising appraisal rights (ibid). The subscribed capital stock of the corporation is a trust fund for the payment of debts of the corporation which the creditors have the right to look up to satisfy their credits. Corporation may not dissipate this and the creditors may sue stockholders directly for the unpaid subscription (Trust Fund doctrine). . Invest corporate funds in another corporation or business A private corporation may invest its funds in any other corporation or business or for any purpose other than the primary purpose for which it was organized (Sec. 42). When the investment is reasonably necessary to accomplish the primary purpose of the corporation, stockholder‟s voting requirement is not required and only the majority approval of the BOD is necessary. Any dissenting stockholder may exercise his appraisal rights (ibid). Procedure 1. Approval of majority of BOD/T; 2. Written notice of the proposed investment to the stockholder; and 3. Affirmative votes of two-thirds (2/3) of the outstanding capital stock/members. If an act of investing corporate fund is done pursuance of the corporate purpose, it does not need the approval of the stockholders but when the purchase of shares of another corporation is done solely for investment and not to accomplish the purpose of its incorporation, the vote of approval of the stockholders is necessary. When the purposes are stated in its AOI, the approval of the stockholders is not necessary (De la Rama vs Ma-ao 27 SCRA 247) To declare dividends Dividends are unrestricted retained earnings set apart from the general mass of funds of the corporation and distributed among the stockholders, in proportion to their shares or interest in the corporation, in the form of cash, property or stocks. The BOD of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held by stockholder (Sec. 43). If the stockholder is a delinquent stockholder, his cash dividend shall be applied to the unpaid balance on the subscription plus costs and expenses. If it be a stock dividend, it shall be withheld from them until his unpaid subscription is fully paid (ibid). Take note that the approval of
the stockholders is not necessary in the approval of cash dividend but such affirmative vote is necessary for declaring stock dividend (ibid). Stock corporations are prohibited from retaining surplus profits in excess of 100 percent of their paid-in capital stock, except: 1. When justified by definite corporate expansion programs;; or 2. When the corporation is prohibited under any loan agreement with any creditors from declaring dividends without its consent; or 3. When the retention is necessary under special circumstances. To enter into management contract Management contract is one where a corporation undertakes to manage or operate all or substantially all of the business of another corporation, whether such contracts are called service contracts, operating agreements or otherwise (Sec. 44). No management contract shall be entered into longer than five years for any one term (ibid). Procedure 1. Meeting duly called for the purpose; 2. Approval of the majority of the BOD and stockholders/members of both the managing and the managed corporation; 3. If the interest of the stockholder of one of the corporation is more than 1/3 of the total outstanding stock, or majority of the BOD of the managed corporation is also the members of the majority of the managing corporation, then 2/3 affirmative votes of the outstanding stockholders of the managed corporation is required.
Ultra Vires Acts Ultra vires literally means “beyond granted powers.” These are acts which a corporation is not empowered to do or perform because they are not based on the powers conferred by its AOI or by the Corporation Code on corporations in general, or because they are not necessary or incidental to the exercise of the powers so conferred.
Ultra vires act and Illegal Act: Distinguished An ultra vires act is voidable which may be enforced by performance, ratification, or estoppel, while the illegal act is void and cannot be validated. (Atrium v. CA) Ultra vires act is not necessarily illegal but an illegal act is necessarily ultra vires.
Wasting Asset Doctrine It permits corporations solely or principally engaged in the exploitation of “wasting assets” to distribute the net proceeds derived from exploitation of their holdings such as mines, oil wells, patents and leaseholds, without allowance or deduction for depletion. The justification of such rule is that as the business of Wasting Asset Corporation is to exploit and exhaust its assets, no one can expect that its capital would be
kept intact. Hence, that dividend cannot be paid out of the capital but only from the profits must not be applied as a rule. Effects of Ultra Vires 1. Executed contract – courts will not set aside or interfere with such contracts; 2. Executory contracts – no enforcement even at the suit of either party (void and unenforceable); 3. Partly executed and partly executory – principle of “no unjust enrichment at expense of another” shall apply; and 4. Executory contracts apparently authorized but ultra vires – the principle of estoppel shall apply. BY-LAWS By-laws are regulations, ordinances, rules or laws adopted by an association or corporation or the like for its internal governance. By laws define the rights and obligations of various officers, persons or groups within the corporate structure and provide rules for routine matters such as calling meetings. Within one month after receipt of the certificate of incorporation, corporations must adopt by-laws not inconsistent with the corporation code (Sec. 46). Affirmative vote and signature of at least majority of the outstanding stockholders/member is required and a copy of the by-laws shall be kept in the principal place of the corporation. A duly certified copy signed by the majority of BOD/T shall be filed with SEC for approval and shall be effective upon issuance of a certificate indicating that the by-laws is not inconsistent with the law (ibid). However, the same may be filed with SEC simultaneously with the AOI prior to incorporation. The by-laws should be signed and approved by all the incorporators (ibid). In case of bank, banking institution (and others) a certificate of the government agencies is an additional requirement (supra). Although the Corporation Code requires the filing of by-laws within one month after the issuance of the Certificate of Incorporation, it does not expressly provide for the consequences of non-filing within the said period. There is no automatic dissolution for failure to file by-laws within the required period. (Loyola Grand Villas Homeowners Ass v. CA) Amendment of By-Laws 1. Majority vote of BOD/T for the purpose of amending the by-laws; 2. Meeting; 3. Affirmative vote of majority of the stockholders/members; and 4. Filing of the certified copy, attached with the original by-laws, by the corporate secretary and majority of BOD/T, to SEC for approval. 5. Issuance of certification by Sec that the amended by-laws are not inconsistent with law. The owners of two-thirds (2/3) of the outstanding capital stock, members may delegate to BOD/T the power to amend or repeal any by-laws or adopt new by-laws. However, the same may be revoked by the majority vote of the stockholders/members withdrawing the delegated authority (Sec. 48). Revocation of the delegation of power to amend: Any power delegated to the board of directors or trustees to amend or repeal any by-laws or adopt new by-laws shall be considered as revoked whenever
stockholders owning or representing a majority of the outstanding capital stock or a majority of the members in non-stock corporations, shall so vote at a regular or special meeting MEETINGS Meetings of directors/trustees or stockholders/members may be regular or special (Sec. 49). Regular meetings of stockholders/members are those held annually on the date fixed in the by laws or on any date of April on the absence of which (Sec. 50.) Regular meeting of BOD is conducted monthly (Sec. 53) unless provided by the by-laws otherwise. Special meetings of stockholders/members are those called for good cause, as ordered by SEC, upon petition of stockholders/members (ibid). Notice in writing, indicating the time and place, is required before a meeting can be held (Sec. 51). Special meetings of BOD/BOT are those called by the President or as provided in the by-laws. Meetings of stockholders shall be held in the city/municipality where the principal office of the corporation is located (Sec. 51). In a non-stock corporation, the by-laws may allow the meeting of its members to be held anywhere in the Philippines (Sec. 93). Meetings of BOD/BOT may be held in or outside of the Philippines unless the by-laws provide otherwise (Section 53). Quorum in a stockholder‟s meeting consists of the stockholders representing the majority of the outstanding capital stock/members except the by-laws provide for a greater number (Sec. 52). Quorum in the BOD/T‟s meeting consists of majority of numbers of director fixed in AOI unless the AOI or by-laws provides for higher number (Sec. 25) The president shall preside at all meetings of the directors or trustee as well as of the stockholders or members, unless the by-laws provide otherwise (sec. 54). Right to Vote A mortgaged/pledge shares of stock does not give the authority to the pledgee or mortgagee the right to vote unless expressly given such right in writing and was recorded in the corporate book (Sec. 55). On the other hand, administrator, executor and other legal representative appointed by court may attend and vote in behalf of the stockholder without the need of any written proxy (ibid). In case of co-ownership of stocks, consent of all the co-owners is necessary in order to vote for the said stocks unless there is a written proxy signed by all the co-owners (Sec. 56). If the shares are owned in an “and/or” capacity, anyone can vote or appoint a proxy (ibid). Treasury shares have no voting right (Sec. 57). In a BOD/BOT meeting, no proxy is allowed to vote for the director or trustee. Proxy and Voting trust: Distinguished 5. The proxy votes as agent: the trustee votes as owner; 6. The proxy must vote in person: the trustee may vote by person or by proxy; 7. Principal does not cease to become stockholder: the ownership is transferred to the trustee; 8. Agreement need not notarized: notarized; 9. Agreement revocable: irrevocable; and 10. Limited to a particular meeting: includes rights and all meetings within 5 years (Secs. 58 &59). STOCKS AND STOCKHOLDERS
Subscription is an offer to acquire a specified number of unissued shares of an existing corporation or one still to be formed. It is an entire and indivisible whole contract; it cannot be divided into portions (Doctrine of Indivisibility of Subscription Contract). Any contract for the acquisition of the unissued stock is considered subscription notwithstanding the fact that the parties considered it as a purchase or any other contract (Sec. 60). However, sale of treasury stock by the corporation is a contract of sale because the stock referred was already issued and was reacquired by the corporation. Subscription of shares of stock of a corporation still to be formed shall be irrevocable at least six months from date of subscription, unless all of the other subscribers consent to the revocation or the incorporation of said corporation fails to materialize within six months or within a longer period as stipulated in the contract. If AOI was submitted to SEC, pre-incorporation subscription cannot be revoked (Sec.61). Considerations in Subscription Agreement 1. Cash; 2. Property; 3. Labor or services actually rendered to the corporation; 4. Prior corporate obligations; 5. Amounts transferred from unrestricted retained earning to stated capital; and 6. Outstanding shares in exchange for stocks in the event of reclassification or conversion (Sec. 62). Shares of stock shall not be issued in exchange for promissory notes or future services. After payment of such shares, a certificate of stock, signed by the president or VP and corporate secretary or asst. secretary, shall be issued to the stockholder (Sec. 63). However, no certificate of stock shall be issued until the full amount of his subscription, including interest, has been paid (Sec. 64 and 66). Shares of stock are considered personal property and may be transferred by delivery of the certificate of stock. The transfer will be valid to the contracting parties but not to the corporation unless said transfer is recorded to the book of corporation (ibid). However, if the corporation has an unpaid claim to that stock, the corporation may refuse to record such transfer (ibid). The purpose of registration is to enable the transferee to exercise all the rights of a stockholder and to inform the corporation of any changes in share ownership so that the latter may ascertain the persons entitled to the rights and liabilities of shareholders. Until the transfer has not been recorded to the book of the corporation, the transferee cannot vote or voted for; has inferior rights over attaching creditor; is not entitled to dividends; and cannot participate in the meeting. Watered Stocks Watered stocks are those issued less than the par value of the stock. “Water” in the stock refers to the difference between the fair market value at the time of the issuance of the stock and the par value of the said stock. The existence of such “water” is determined at the time of the issuance of stock. Section 65 held the consenting director or officer for the “Water” in the stock with the stockholder who inadequately paid the stock. Payment of delinquent stock Payment of stock becomes due and payable in the following manner: 1. The term prescribed in the subscription contract; and 2. In the absence of the provision contract, at any time specified by BOD.
Failure to pay on such period shall render the entire balance due and payable and renders the stockholder liable to interest. If no payment was made within 30 days after such period, the stock shall be considered delinquent stock(see article 43), which is subject to delinquency sale. Take note that unpaid subscriber (Sec. 72) is different from delinquent stockholder. The former has all the rights of a stockholder while delinquent stockholder is subject to section 43 and 71. Delinquency Sale Procedure 1. BOD‟s resolution indicating the time and place of sale which shall be not less than 30 days nor more than 60 days from the date of the stock became delinquent; 2. Notice of sale and resolution shall be sent to the delinquent stockholder; 3. Publication for two consecutive weeks in newspaper generally circulating in the province where the principal office of the corporation. Is located; 4. Public auction on the specified date; 5. Transfer of stock to the purchaser and issuance of certificate of stock to the highest bidder; and 6. Remaining shall be credited in favor of the delinquent stockholder.
If the delinquent stockholder pays the balance before the public auction, said sale shall not commence and the certificate of stock shall be issued to him. In case there is no bidder at the public auction who pays the full amount of the balance, the total amount shall be credited as paid and its title to all the shares of stock shall be vested in the corporation as treasury shares which may be disposed by the corporation (Sec. 68).
Actions questioning the delinquency sale should be commenced within six months from the date of sale, otherwise, it shall be barred forever. Also, the complainant should pay or tender to buyer of the stock the sum for which the stock was sold. Ground for irregularity or defect in the notice of sale or the sale itself is also unavailing for the complainant (Sec. 69). Delinquency sale does not bar the corporation to file a judicial action for the collection of the unpaid subscription (sec. 70). Effects OF Delinquency 1. Stockholder have no right to vote or be voted upon; and 2. Not entitled to any right except dividends (see section 43)
Lost or destroyed certificates Procedure 1. Owner shall file an affidavit on how the certificate is lost, number of shares and certificate number; 2. Publication for three consecutive weeks; 3. If no contest was filed within one year, the corporation will cancel in its books the certificate of stock and issue in lieu thereof new certificates of stock.
4.
If a contest was filed or there is pending suit regarding such stocks, the issuance of new certificate shall be suspended until the final decision of the court.
After the said procedure was followed, no action may be brought against the corporation who issued the certificates of stock in lieu of those lost, stolen or destroyed unless there is fraud, bad faith, or negligence on the part of the corporation and its officers (Sec. 73), BOOKS AND RECORDS Books and Records to be kept 1. Record of all business transactions; 2. Minutes of all meetings of stockholders or members; 3. Minutes of all meetings of BOD; and 4. Stock and transfer book (Sec. 74) This right of inspection or examination cannot be denied on the mere pretext that the shareholder is at loggerheads with the officers of the corporation (Veraguth vs. Isabela Sugars, 52 Phil 266). A wrongful denial of the right to inspect corporate books and records may be enforced by mandamus. The stock and transfer book shall be kept in the principal office of the corporation or in the office of its stock transfer agent and shall be open for inspection by any director or stockholder of the corporation at reasonable hours on business days. Any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder or member of the corporation to examine and copy excerpts from its records or minutes, shall be liable to such director, trustee, stockholder or member for damages and shall be guilty of an offense which shall be punishable under Sec. 144. If such refusal is made pursuant to a resolution or order of the board of directors or trustees, the liability for such action shall be imposed upon the directors or trustees who voted for such refusal. Right to Financial Statements Within ten (10) days from receipt of a written request of any stockholder or member, the corporation shall furnish to him its most recent financial statement, which shall include a balance sheet as of the end of the last taxable year and a profit or loss statement for said taxable year, showing in reasonable detail its assets and liabilities and the result of its operations At the regular meeting of stockholders or members, the board of directors or trustees shall present to such stockholders or members a financial report of the operations of the corporation for the preceding year, which shall include financial statements, duly signed and certified by an independent certified public accountant. However, if the paid-up capital of the corporation is less than P50,000.00, the financial statements may be certified under oath by the treasurer or any responsible officer of the corporation. MERGERS AND CONSOLIDATION Two or more corporations may merge into a single corporation which shall be one of the constituent corporations or may consolidate into a new single corporation which shall be the consolidated corporation (Sec. 76).
In merger, one of the constituent corporations remains as an existing juridical person, the surviving corporation, whereas the other corporations shall be absorbed by the former. The constituent corporation will acquire all assets, rights of action, and assume all the liabilities of dissolved corporation. Although there is dissolution of the latter corporation, there is no winding up because the constituent corporation automatically acquires all their assets, privileges, powers as well as their liabilities. The merger is deemed instituted from the time the SEC issues a certificate of merger (Sec. 79). In consolidation, the constituent corporations shall be dissolved and a new consolidated corporation will emerge into new corporate entity which shall obtain all the assets of the disappearing corporations, as well as all their liabilities. Procedure 1. Approval by majority vote of each of the board of directors or trustees of the constituent corporations of the plan of merger or consolidation (Sec. 76); 2. Notice of such meetings shall be given to all stockholders or members of the respective corporations, at least two (2) weeks prior to the date of the meeting, either personally or by registered mail (Sec. 77); 3. Affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock/members of the constituent corporations (Sec. 77); 4. Articles of merger will be executed by the constituent corporations, signed by the Presidents and Secretaries (Sec, 78); and 5. Articles of merger will be filed in SEC in quadruplicate copy for approval (Section 79). When SEC is satisfied that the merger/consolidation is not inconsistent with the laws, it shall issue a certificate of merger/consolidation at which time the merger/consolidation shall become effective (Sec. 79). Effects of a Merger/Consolidation 1. The constituent corporations shall become a single corporation which shall be the surviving corporation in merger and the consolidated corporation in consolidation. 2. The separate existence of the constituent corporations shall cease, except that of the surviving or the consolidated corporation; 3. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and powers and shall be subject to all the duties and liabilities of a corporation; 4. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and franchises of each of the constituent corporations and properties belonging to the constituent corporation which are deemed transferred without further act or deed; 5. The surviving or consolidated corporation shall be responsible and liable for all the liabilities and obligations of each of the constituent corporations as if the remaining corporations themselves had incurred the obligation; 6. Any claim against the constituent corporation may be prosecuted by and against the surviving or consolidated corporation; and 7. The rights of creditors or liens upon the property of any of such constituent corporations shall not be impaired.
APPRAISAL RIGHT Appraisal right is a right to demand payment of the fair value of his shares, after dissenting from a proposed corporate action involving fundamental changes in the corporation. These fundamental changes in the corporation include the following instances: 1. Amendment of AOI which has an effect of changing or restricting the rights of any stockholders or authorizing preferences in any respect superior to outstanding shares or extending or shortening the corporate term; 2. Encumbering all or substantially all of its corporate properties; 3. Merger or consolidation. (Sec. 81); 4. Investing corporate funds in another corporation or business (Sec. 42); and 5. For any reason in close corporation (Sec. 105). Procedure 1. Written demand on the corporation within thirty (30) days after the date on which the vote was taken; 2. Surrender of certificate of stock within 10 days for notation (Sec. 86); 3. Payment of fair value; and 4. Shareholder shall transfer his shares to the corporation.(Sec. 82) If within 60 days after the corporate action was approved and the dissenting (uncooperative) stockholders and the corporation cannot agree in the fair value of the shares, it shall be determined by three disinterested person: one chosen by the stockholder, one by the corporation and the other one chosen by the two. Their determination of the fair value is final and shall be paid within 30 days. Purpose of Notation Notation is necessary so as to guide the secretary of the corporation who shall deny to the dissenting stockholder the right to vote and the right to receive dividends in the proper situation contemplated under Section 83. Failure to do so shall give right to the corporation to terminate the rights of the stockholder (Sec. 86). Transfer of Dissenting Shares When the shares of a dissenting stockholder are transferred or assigned, the assignee becomes a regular stockholder and the appraisal right of the dissenting stockholder shall cease (Sec. 86). All dividends which accrue on such shares shall be paid to the transferee. (ibid) Conditions for Valid Exercise of Appraisal Rights 1. The demand for payment of shares arise from the instances provided in Corporation Code; 2. Existence of unrestricted retained earnings; 3. The demand was made within 30 days after the corporate action; failure to exercise of such constitutes waiver of this right (Sec. 82)
Effect of Demand of Payment of Stockholder’s Share
1. 2. 3.
All rights accruing to such shares, including voting and dividend rights, shall be suspended; The stockholder is entitled to payment of his shares; If the dissenting stockholder is not paid within 30 days, his voting and dividend will be restored. (Sec. 83); and 4. Demand for payment may not be withdrawn unless with consent of the corporation (Sec. 84). Termination of Right of Appraisal 1. If demand for payment is withdrawn with the consent of the corporation; 2. If the proposed corporate action is abandoned or rescinded by the corporation; 3. If the proposed corporate action disapproved by the SEC; and 4. If the SEC determines that such stockholder is not entitled to the appraisal right In these cases, the right of appraisal of the stockholder ceases, his status as a stockholder shall be restored, and all dividend distributions which would have accrued on his shares shall be paid to him (Sec. 84). Costs of Appraisal 1. By the corporation: a. If the value as determined by the appraiser is higher than what was offered by the corporation; and b. If the action is filed to recover the fair value of the shares and the stockholder‟s refusal to receive payment is justified. 2. By the stockholder: a. If the value is determined by the approximately the same as the price offered by the corporation; and b. Where an action to recover is filed and the refusal of such stockholder to receive payment is unjustified. NON-STOCK CORPORATIONS A non-stock corporation is one where no part of its income is distributable as dividends to its members, trustees, or officers. Non-Stock and Stock Corporations: Distinguished 11. Income is not distributable to members: may be distributed in form of dividend; 12. For charitable, education, etc: for lawful purposes, usually for profit; 13. Members entitled to one vote; depends on the number of shares acquired; 14. Right to vote by proxy may be denied in AOI; cannot be denied in AOI; 15. Voting by mail may be allowed in AOI: not allowed; 16. Right and interest may not be transferred unless allowed by AOI: can be transferred as a matter of right; 17. BOT may be more that 15: BOD should not be less than 5 but not more than 15; 18. BOT‟s term is three years: 1 year; 19. Place of meeting may be outside the principal place: should be in the principal place; and 20. Cannot exercise appraisal rights: can exercise appraisal rights;
Purpose For charitable, religious, educational, fraternal, social, civic service etc (Sec. 88). Incidental Profits A non-stock corporation is not empowered to engage in business with the object of making income, nonetheless, they are not prohibited to make income as an incident to its operation. However, these profits should be used in furtherance of its purpose. In this sense, a non-stock corporation is considered a non-profit corporation. Non-stock corporations may not lawfully engage in any business for profit unless it is necessary to carry out the purpose for which it was organized. Conversion from Non-Stock to Stock Corporation A non-stock corporation cannot be converted into a stock corporation by mere amendment of the articles of incorporation (SEC OPINION, February 24, 1989). It can only be dissolved under Sec. 177 to 122 of the Corporation Code.On the contrary, stock corporations can be converted to non-stock corporations by amending its AOI.
MEMBERS Right to Vote 1. Each member is entitled to one vote, unless broadened or denied by AOI and by-laws; 2. May vote by proxy; and 3. May vote by mail if allowed in AOI or by-laws (Sec. 89). Non-transferability of Membership All rights arising from the membership are personal and nontransferable unless AOI or by-laws otherwise provide (Sec. 90). Effects of Termination Members may be terminated on the grounds that may be provided for in the AOI or by-laws. All rights of members in the corporation or in its properties shall be extinguished after such termination unless otherwise provided in the AOI or by-laws (Sec. 91) TRUSTEES AND OFFICERS 1. A non-stick corporation may designate their governing board by any name other than board of trustees. (Sec. 138); 2. Numbers of trustees may be more than 15 as fixed by AOI (Sec. 92) but their incorporating trustees may not be more than 15 (Sec. 15); 3. The term of the first trustees is staggered, Sec. 24 and 29 should also be followed; and 4. Term of officer is three years except the first directors (Sec. 92) Place of Meeting Meetings may be held outside the principal office of the corporation but not outside the Philippines provided proper notice were given to the members indicating time, place and date of the meeting (Sec. 93). CLOSE CORPORATIONS
A close corporation is one whose AOI provide: a. That its shares shall not be held by a group of more that 20 persons; b. All the issued stock of all classes is subject to one or more specified restrictions on transfer; and c. That the corporation shall not list in any stock exchange or make any public offering of any of its stock. If at least 2/3 of the voting stock of the said corporation is owned or controlled by another corporation which is not a close corporation, then the corporation will not be deemed close corporation. The mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding their separate personalities. A narrow distribution of ownership does not, by itself, make a close corporation. (San Juan Structural and Steel Fabricators vs. CA 296 SCRA 631) Corporation that cannot be considered close corporations 1. Mining or oil companies; 2. Stock exchanges; 3. Insurance companies; 4. Banks; 5. Public utilities; 6. Education institution; and 7. Corporation declared to be vested with public interest
Close Corporations and Regular Corporations: Distinguished 1. There can be classification of directors into one or more classes, there are no classifications of board of directors; 2. AOI may provide that corporate powers may be exercised by stockholders, only to board of directors; 3. Stockholders subject to liabilities of directors, stockholder not subject to liabilities; 4. AOI may give powers to stockholders to appoint corporate officers, exercised by the Board of directors; 5. There is a restriction on the transfer of rights, there is no restriction; 6. AOI may provide for greater voting quorum, fixed by the corporation code; 7. Preemptive right extends to treasury shares, does not extend to treasury shares; and 8. Stockholder may compel the corporation to purchase his shares; shareholders may not compel the corporation except in right of appraisal. Validity of restrictions on transfer of shares Restrictions on the right to transfer shares must appear in the AOI, by-laws and certificate of stock, otherwise, the same shall not be binding on any purchaser in good faith. Restriction on the transfer must not be onerous than granting the existing stockholder or corporation the option to purchase the shares. If upon the expiration of said period, the existing stockholders or the corporation fails to exercise the option to purchase, the transferring stockholder may sell his shares to any third person. (Sec. 98) Effects of issuance or transfer of stock in breach of qualifying conditions 1. A person is conclusively presumed to have notice of the fact of ineligibility to be a stockholder if issued to any person who is not entitled under any provision of AOI and the certificate of stock shows the qualifications of the title to be entitled to become holders; 2. A person is conclusively presumed to have notice If the AOI of a close corporation states the number of persons, not exceeding twenty (20), who are entitled to be holders of record of its
3.
4. 5. 6.
stock, the certificate for such stock conspicuously states such number, and the issuance or transfer of stock would cause the stock to be held by more than such number of persons; The transferee of the stock is conclusively presumed to have notice that he has acquired stock in violation of the restriction if a stock certificate of any close corporation conspicuously shows a restriction on transfer of stock of the corporation; In case of 1,2, and 3 the corporation may refuse to register the transfer of stock in the name of the transferee; If the all the stockholders consent in the transfer despite the violation, right to refuse to register of the corporation ceases; and The right of the transferee to rescind the transfer or to recover under any applicable warranty is not impaired.
Pre-emptive Right of Stockholder The pre-emptive right shall extend to all stocks to be issued, including re-issuance of treasury share, whether for money or property or personal services, or in payment or corporate debts, unless the articles of incorporation provide otherwise (Sec. 102) Amendment of articles of incorporation Any amendment to the AOI which seeks to delete or remove any provision required by this Title to be contained in the AOI or to reduce a quorum or voting requirement stated in said AOI shall not be valid or effective unless approved by the affirmative vote of at least two-thirds (2/3) of the outstanding capital stock, whether with or without voting rights, at a meeting duly called for the purpose (Sec. 103). Deadlocks A situation in which the directors or stockholders of a close corporation are so divided with regard to the management of corporate affairs and the votes required for any corporate action cannot be obtained with the consequence that the business affairs of the corporation can no longer be conducted to the advantage of the stockholders (Sec. 104). SEC’s Powers in Case of Deadlocks Upon written petition of a stockholder, the SEC may arbitrate the dispute and shall have the following authority: 1. Canceling/altering any provision contained in AOI, by-laws, or any stockholder's agreement; 2. Canceling, altering or enjoining any resolution or act of the corporation or its board of directors, stockholders, or officers; 3. Directing or prohibiting any act of the corporation or its board of directors, stockholders, officers, or other persons part to the action; 4. Requiring the purchase at their fair value of shares of any stockholder, either by the corporation regardless of the availability of unrestricted retained earnings in its books, or by the other stockholders; 5. Appointing a provisional director; 6. Dissolving the corporation; or 7. Granting such other relief as the circumstances may warrant. Provisional Director
An impartial person appointed by the SEC who is not a stockholder, creditor or receiver of a corporation exercising all the rights and powers of a duly elected director of the corporation during the pendancy of arbitration proceeding due to deadlock (Sec. 104). Compulsory Purchase of Shares of Stock Any stockholder of a close corporation may, for any reason, compel the said corporation to purchase his share at their fair value, which shall not be less than their par or issued vale, when the corporation has sufficient asset to cover its debts and liabilities excluding capital stock. (Sec. 105). Said right is not available in a regular corporation. Dissolution of a Close Corporation Upon written petition to SEC, stockholder may compel the dissolution of the corporation whenever any of the acts of the directors, officers or those in control of the corporation is illegal, or fraudulent, or dishonest or oppressive or unfairly prejudicial to the corporation or any stockholder, or whenever corporate assets are being misapplied or wasted (Sec. 105). DISSOLUTION OF CORPORATION Dissolution of corporation may be voluntary or involuntary (Sec. 117). Voluntary dissolution with no creditors: Procedure 9. Resolution having majority vote of the board of directors/trustees; 10. Call for meeting of stockholder and publication of the notice on the same once a week for three consecutive weeks/registered mail at least 30 days prior to meeting; 11. Affirmative vote of the stockholders/members owning at least two-thirds (2/3) of the outstanding capital stock; 12. Certification of the resolution by majority of the board and countersigned by the secretary and filing in SEC; and 13. Issuance of certificate of dissolution by SEC. (Sec. 118) Voluntary dissolution with creditors: Procedure 1. Call for meeting of stockholders for the purpose of dissolving the corporation; 2. Affirmative vote of stockholder holding at least 2/3 of outstanding stock; 3. Petition filed in SEC signed by the majority of the corporation and verified by the president and secretary; 4. Order setting a date of filing of objections, not less that 30 days but no more than 60 days, after entry of the order; 5. Publication of the order in a newspaper once a week for three weeks (Municipality)/ newspaper of general circulation (Philippines) plus posting for three consecutive weeks in three public place; 6. Hearing of petition by the SEC; and 7. Judgment and appointment of receiver. By Shortening Corporate Terms: Procedure
A voluntary dissolution may be done by amending the AOI to shorten the life, and submitting copy to the SEC of the amendment (Sec. 120, see Sec. 37). Upon approval of the amended AOI or the expiration o the shortened term, the corporation is deemed dissolved without any proceedings (ibid). Mere filing of the Articles of Dissolution with the SEC, without more, is not enough to support the conclusion that actual dissolution of an entity in fact took place. (Avon vs. NLRC, 246 SCRA 733) Involuntary Dissolution SEC may dissolve a corporation upon filing of a verified complaint and after notice and hearing on the following grounds: a) Continuous inoperation for a period of at least five years (Sec. 22); b) Failure to organize and commence business within two years from incorporation (ibid); c) Commission of ultra vires acts (Sec. 45); d) Serious dissention in close corporation (Sec. 104); e) Illegality, fraud and misused of asset of close corporation (Sec. 105) f) Quo warranto proceedings under rule 66; g) Issuance of watered stock; h) Sec. 2 PD 902-A; i) Sec. 144 BP 168; and j) Sec. 104 BP 168 Liquidation Liquidation is the winding up of the affairs of a corporation by converting assets and property to cash, settling with the creditors and debtors and the apportioning the amount of profit and loss. The company's liabilities and obligations are paid off and any remaining assets are divided between those persons authorized to receive them. A liquidation proceeding is a proceeding in rem so that all other interested persons whether known to the parties or not may be bound by such proceedings. Period of Liquidation Corporation shall continue as a body corporate for three (3) years after the time when it would have been so dissolved for the purpose of prosecuting and defending claims, to settle its affair, dispose its assets and distribution of assets but not to purpose of continuing the business. However, in case the corporate assets are conveyed to a trustee or a receiver appointed by the SEC, the three year limitation will not apply. Although the three year period may have expired, it does not necessarily follow that a creditor who was unable to collect his claim before three years would lose his rights. It is still possible for him to sue the trustee, if there be one, or if the circumstances so warrant, to follow the assets in the hands of the stockholders who may have received the same as liquidating dividends. Properties of Unknown Stockholders/Creditors Properties of unknown creditors or stockholders will be escheated to the city or municipality where such asset is located (Sec. 122). Conditions before the distribution of assets Before corporation may distribute its assets to the stockholders, the following must be present:
3. 4.
There should be lawful dissolution; and Payment of liability and debts(ibid)
Exceptions: 1. Decrease in capital stock/s resulting in a surplus which can then be distributed to stockholders provided no creditors are prejudiced; 2. Appraisal right (Sec. 81); 3. Deadlock in a close corporation; and 4. Shareholder compelling the purchase in close corporation. Liquidating dividends is the share of stockholder in assets upon liquidation of the corporation. Methods of Liquidation: 1. By the corporation itself through the board of directors – The corporation during the winding up may negotiate and transfer the assets of the dissolved corporation, provided the stockholders give their consent (Chung vs. AIC 163 SCRA 534); 2. By receivership – A trial court has jurisdiction to order a receiver of a corporation under receivership to do any act so as to protect and preserve its properties, and to 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 stockholders (Hodges vs. Lezema 8 SCRA 717); and 3. By trustees – (Sec. 122) Effects of Dissolution, Winding up and Liquidation: 1. loss of juridical personality; 2. Non-continuance of business; 3. Cannot even be considered as a de facto corporation, hence subject to collateral attack 4. cannot enter into new contracts which would have the effect of continuing the business 5. No right or remedy in favor of or against any corporation, (Sec 145) Extension and Representation in Liquidation of Corporation If the three year extended life has expired without a trustee or receiver having been expressly designated by the corporation itself within that period, the board of directors or trustees itself may be permitted to so continue as “Trustees” by legal implication to compete the corporate liquidation. Still in the absence of a board of directors or trustees, those having any pecuniary interest in the assets, including not only the shareholders but likewise the creditors of the corporation, acting for and in its behalf, might make proper representations with the SEC, which has primary and sufficiently broad jurisdiction in matters of this nature, for working out a final settlement of the corporate concerns. (Clemente vs. CA) Trustees may commence a suit which can proceed to final judgment even beyond the three-year period. No reason can be conceived why a suit already commenced by the corporation itself during its existence, not by a mere trustee who, by fiction, merely continues the legal personality of the dissolved corporation should not be accorded similar treatment allowed – to proceed to final judgment and execution thereof (Reburiano vs. CA and Pepsi cola Bottling Company).
Distribution of assets of a Non-Stock Corporation 1. All debts and obligation of the corporation should be paid; 2. All assets to be returned upon dissolution of the corporation; 3. All assets held subject to specific use only must be transferred to other corporations, societies, or organizations having the same purpose as the corporation dissolved; 4. Other assets not included I the above, according to distributive rights provided in the AOI; and 5. Any other remaining assets, according to plan of distribution of asset mentioned in article 95. (Sec. 94) Plan of distribution of assets: Procedure A provision in the AOI may include the plan providing for the distribution of assets may be adopted by a non-stock corporation in case of dissolution: 1. Adoption of a resolution by the majority vote recommending a plan of distribution; 2. Written notice setting forth the proposed plan to the members; and 3. At the date, time and place given, affirmative vote of at least 2/3 of the members having voting power. FOREIGN CORPORATION Foreign Corporation is a corporation formed, organized or existing under any law other than those of the Philippines, and whose laws allow Filipino citizens and corporations to do business in its own country or state (Sec. 123).Once issued the certification, foreign laws is governed by the domestic law except to the formation organization and dissolution of corporation, and relation, duties and responsibilities of stockholders/members and BODT to each other or to corporation (Sec. 129). Doing Business Implies a community of commercial dealings and arrangements, and contemplates to some extent the performance of acts or works or the exercise of some functions normally incident to and in progressive prosecution of, the purpose and object of its organization. (Continuity Test) Doctrine of Isolated Transaction Foreign corporations can sue or be sued on a transaction or series of transaction set apart from the common business of a foreign enterprise in the sense that there is no intention to engage in a progressive pursuit of the purpose and object of business transaction. Suability of Foreign Corporations 1. Foreign corporations doing business in the Philippines; a. With license: may sue and be sued in the Philippines; b. Without license: cannot sue but may be sued in the Philippines. (Sec. 133) 2. Foreign corporation not doing business in the Philippines: on isolated transaction, it may sue and be sued. Application for License In case of foreign corporation authorized to conduct business in the Philippines prior to effectivity of the Corporation code, no new license is necessary (Sec. 124) but those subsequent foreign corporation should apply for license under section 125. Procedure A. Documentary requirements: 1. Application, under oath, filed in SEC including AOI and by-laws;
2.
Attach certificate that the laws of their incorporation allows Filipino citizens and corporation to business in their country and that the corporation is in good standing; 3. Certification that the corporation is solvent and in sound financial condition; and 4. Other requirements as provided for by laws and authority from appropriate authority (Sec. 125). B. Appointment of Resident Agent: 1. SEC shall require the designation of a resident agent of the corporation (Sec. 128). A resident agent is an individual residing in the corporation or domestic corporation lawfully transacting business in the Philippines (Sec. 127). 2. File to SEC the contract of agency. C. Bond requirements: 1. SEC will issue such license after complying with the documentary requirements; and 2. Within 60 days from the issuance of the license, foreign corporation shall deposit bonds at least P100, 000 (see section 126). Necessity of obtaining a license to do business: The reason for the license is to subject the foreign corporation doing business in the Philippines to the jurisdiction of the courts, otherwise a foreign corporation illegally doing business here may successfully though unfairly plead such neglect or illegal act so as to avoid service and thereby impugn the jurisdiction of the local courts.
Amendments AOI or By-laws and License of Foreign Corporations Within sixty (60) days after the amendment becomes effective, file with the SEC, and in the proper cases with the appropriate government agency, a duly authenticated copy of the articles of incorporation or bylaws, as amended, indicating clearly in capital letters or by underscoring the change or changes made, duly certified by the authorized official or officials of the country or state of incorporation. The filing thereof shall not of itself enlarge or alter the purpose or purposes for which such corporation is authorized to transact business in the Philippines (Sec. 130). A foreign corporation authorized to transact business in the Philippines shall obtain an amended license in the event it changes its corporate name, or desires to pursue in the Philippines other or additional purposes, by submitting an application therefor to the SEC, favorably endorsed by the appropriate government agency in the proper cases (Sec. 131). Merger or consolidation involving a foreign corporation One or more foreign corporations authorized to transact business in the Philippines may merge or consolidate with any domestic corporation or corporations if such is permitted under Philippine laws and by the law of its incorporation and the requirements on merger or consolidation as provided in corporation code are followed. Within sixty days after such merger or consolidation, the foreign corporation shall file in SEC and appropriate government agency the articles of merger or consolidation, duly authenticated by the official of the state which such merger was effected. If the foreign corporation is the absorbed corporation, the same shall file a petition for withdrawal of its license (sec. 132).
Revocation of license Without prejudice to other grounds provided by special laws, the license of a foreign corporation to transact business in the Philippines may be revoked or suspended by the SEC upon any of the following grounds: 1. Failure to file its annual report or pay any fees; 2. Failure to appoint and maintain a resident agent in the Philippines; 3. Failure, after change of its resident agent or of his address, to submit to the SEC a statement of such change; 4. Failure to submit to the SEC an authenticated copy of any amendment to its articles of incorporation or by-laws or of any articles of merger or consolidation; 5. A misrepresentation of any material matter in any application, report, affidavit or other document submitted by such corporation; 6. Failure to pay any and all taxes, imposts, assessments or penalties; 7. Transacting business in the Philippines outside of the purpose or purposes for which such corporation is authorized under its license; 8. Transacting business in the Philippines as agent of or acting for and in behalf of any foreign corporation or entity not duly licensed to do business in the Philippines; or 9. Any other ground as would render it unfit to transact business in the Philippines (Sec. 134). Upon the revocation of any such license to transact business in the Philippines, SEC shall issue a corresponding certificate of revocation, furnishing a copy thereof to the appropriate government agency in the proper cases. The SECshall also mail to the corporation at its registered office in the Philippines a notice of such revocation accompanied by a copy of the certificate of revocation (Sec. 135). Withdrawal by a foreign corporation If a foreign corporation duly licensed to do business desires to withdraw, it must file a petition for withdrawal, and must meet the following requirements: 1. All claims accrued in the Philippines must be settled; 2. All taxes must be paid; and 3. Petition must be published once a week for three (3) consecutive weeks (Sec. 136)
