TITLE IV - POWERS OF THE CORPORATION
Sec 40. Power To Sell Its Assets
GR: Corporation can dispose its assets
XPT:
If disposition of ALL OR SUBSTANTIALLY ALL assets of the
corporation, the following requisites must be present
1. Vote of majority of the Board
2. Authorized by the stockholders representing 2/3 of the
outstanding capital stock
When is it disposition of substantially all the assets?
The current interpretation of the Supreme Court is disposition of
atleast 80% of the assets
Situation:
Company had 10 buses travelling from Santander to
Daanbantayan. If we sell 3 buses/5 buses/6 buses, is that
substantially all?
A: No, still continue business. It will only be substantially all if 8 buses
or more were sold which constitutes 80% or more
Relevant Provision:
Sec. 40. Sale or other disposition of assets. - Subject to the provisions of
existing laws on illegal combinations and monopolies, a corporation may, by a
majority vote of its board of directors or trustees, sell, lease, exchange,
mortgage, pledge or otherwise dispose of all or substantially all of its property
and assets, including its goodwill, upon such terms and conditions and for such
consideration, which may be money, stocks, bonds or other instruments for the
payment of money or other property or consideration, as its board of directors or
trustees may deem expedient, when authorized by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock, or in case
of non-stock corporation, by the vote of at least to two-thirds (2/3) of the
members, in a stockholder's or member's meeting duly called for the purpose.
Written notice of the proposed action and of the time and place of the meeting
shall be addressed to each stockholder or member at his place of residence as
shown on the books of the corporation and deposited to the addressee in the
post office with postage prepaid, or served personally: Provided, That any
dissenting stockholder may exercise his appraisal right under the conditions
provided in this Code.
A sale or other disposition shall be deemed to cover substantially all the
corporate property and assets if thereby the corporation would be rendered
incapable of continuing the business or accomplishing the purpose for which it
was incorporated.
After such authorization or approval by the stockholders or members, the board
of directors or trustees may, nevertheless, in its discretion, abandon such sale,
lease, exchange, mortgage, pledge or other disposition of property and assets,
subject to the rights of third parties under any contract relating thereto, without
further action or approval by the stockholders or members.
Nothing in this section is intended to restrict the power of any corporation,
without the authorization by the stockholders or members, to sell, lease,
exchange, mortgage, pledge or otherwise dispose of any of its property and
assets if the same is necessary in the usual and regular course of business of
said corporation or if the proceeds of the sale or other disposition of such
property and assets be appropriated for the conduct of its remaining business.
In non-stock corporations where there are no members with voting rights, the
vote of at least a majority of the trustees in office will be sufficient authorization
for the corporation to enter into any transaction authorized by this section
This can also lead to the dissolution of the corporation - to the
prejudice of the remaining stockholders and of the creditors, if one day,
all the stockholders will be able to get back all their investments.
There will no longer be any investments for the corporation to
continue to operate.
When a corporation acquires back its own shares, there is partial
liquidation of its assets without the participation of the
creditors. Hence, you are not allowed to buy back your own shares.
XPT: WHEN A CORPORATION MAY ACQUIRE ITS OWN SHARES
1.
To prevent fractional shares
TN: It’s hard to compute ¼ share, ¾ share. Another option is
for them to offer the fractional share to the stockholder
holding the said share to just buy the remaining fraction or
sell the same to others.
2. Satisfy delinquent shares
When a stockholder who has unpaid subscriptions, and it is already
due, the corporation for it to collect, instead of waiting for the
payment, ought to just purchase.
TN: Because when you subscribe, you are not supposed to pay
immediately everything, you pay at least 25%. The remaining 75%
may be paid once the call is made; meaning, once the board makes
that call setting the duty to pay the unpaid subscriptions. If payment
was due and no payment was forthcoming, the corporation will have
to get it back.
3. Pay dissenting stockholders
This is a result of appraisal right of the dissenting stockholders
IMPT: The abovementioned exceptions shall only be taken
from the unrestricted retained earnings.
Author’s notes: A company may only acquire its own shares if
1. taken from Unrestricted Retained Earnings
2. For a legitimate purpose
A. Eliminate fractional shares
B. Repurchase delinquent shares
C. Pay dissenting SH
D. Redemption of redeemable shares (from spectra)
Advantage And Disadvantage
Situation:
Would you be happy if other stockholders already got back
their shares? For example there are 8 stockholders and 3
already got their shares. What would you feel? Is it
advantageous or disadvantageous to the remaining
stockholders?
A: It depends. It has advantages and disadvantages. For the
remaining stockholders, it is advantageous when the company is
expected to earn profits, they would have bigger dividends because
only few stockholders would be sharing in the profits. However, it is
disadvantageous when the company is expecting losses because only
few would be sharing the losses which is prejudicial on their part.
Relevant Provision:
Sec 41. Power To Acquire Own Shares
May a corporation acquire back its own shares?
GR: no, a corporation may not acquire back its own shares
It would be tantamount to distributing capital and it will be to the
prejudice of the creditors by virtue of the trust fund doctrine.
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Sec. 41. Power to acquire own shares. - A stock corporation shall have the
power to purchase or acquire its own shares for a legitimate corporate purpose
or purposes, including but not limited to the following cases: Provided, That the
corporation has unrestricted retained earnings in its books to cover the shares to
be purchased or acquired:
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation, arising out of
unpaid subscription, in a delinquency sale, and to purchase delinquent shares
sold during said sale; and
3. To pay dissenting or withdrawing stockholders entitled to payment for their
shares under the provisions of this Code.
Sec 42. Power To Invest Funds In Another Corp
Relevant Provision:
Sec. 42. Power to invest corporate funds in another
corporation or business or for any other purpose. - Subject to
the provisions of this Code, 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 when approved by a
majority of the board of directors or trustees and ratified by the
stockholders representing at least two-thirds (2/3) of the outstanding
capital stock, or by at least two thirds (2/3) of the members in the
case of non-stock corporations, at a stockholder's or member's
meeting duly called for the purpose. Written notice of the proposed
investment and the time and place of the meeting shall be addressed
to each stockholder or member at his place of residence as shown on
the books of the corporation and deposited to the addressee in the
post office with postage prepaid, or served personally: Provided, That
any dissenting stockholder shall have appraisal right as provided in this
Code: Provided, however, That where the investment by the
corporation is reasonably necessary to accomplish its primary purpose
as stated in the articles of incorporation, the approval of the
stockholders or members shall not be necessary.
Sec 43. Power To Declare Dividends
Dividends
These are portions of the profits of the corporation which are allowed
to be distributed to the stockholders depending on the number of their
shares. Dividends are income to stockholders.
It was equivalent to the SH dividends, but instead of declaring
dividends they made it appear that it was an expense of the company
to finance the SH seminar abroad. It will not be considered as income
on the part of the SH, hence no tax.
Amendment of NIRC to address IAE
However, the BIR discovered this scheme. They came up with the
amendment to the NIRC to impose improperly accumulated earnings
tax (IAET) as penalty for erring corporations. The corporation shall be
liable for IAET when its undistributed profits will exceed 100% of the
paid up capital.
XPT TO XPT: When accumulated earnings are allowed
1. When justified by definite corporate expansion projects or
programs;
2. When the corporation is prohibited under any loan agreement
with any financial institution or creditor from declaring cash
dividends without securing its/his consent; or
3. When it can be clearly shown that such retention is necessary
under special circumstances, such as when there is a need for
special reserve for probable contingencies.
Ex typhoons
4. Issue stock dividends
Will dividends be taxed?
Depends on the type of dividend received:
1.
2.
TN: In short, these are share of profits. These are civil fruits.
Cash Dividend – stockholder is liable for tax since it is income
already.
Stock Dividend – it is not taxable although they may have value.
It is not yet considered income since there is yet no transfer of
cash.
Can the stockholders demand for the declaration of dividends?
GR: No. The decision to declare dividends lies on the Board. The
Board has the power to manage the corporation. Hence, when the
corporation has profits, it is the Board who decides what to do with it.
The Board, in its discretion, may not declare it as dividends but rather
use it for business expansion projects.
Important: Until I am able to encash it, I have not yet earned an
income. Stock dividends are not subject to income tax because it is
not yet in cash. This is so because the value of the shares of stock
may fluctuate depending upon its market value, book value or par
value. Because the stocks fluctuate, it is still not taxable because it is
still unrealized gain, and we wouldn’t know the value
XPT: When there is improper accumulation of profits. This happens
when the corporation retains surplus profits in excess of 100% of
its paid-in capital stock. In which case, the stockholders can
demand for the declaration of dividends.
Recall: Value Of Shares
Situation:
You are a SH and in April of a taxable year, you heard that the
BOD intends to declare dividends. As per your computation,
your tax for the year would be high, excluding the taxes that
you would soon incur upon receiving the dividends. Would you
be happy that the BOD would declare dividends?
No. You would tell the BOD not to declare dividends because of the
additional taxes that you would incur.
1.
2.
3.
Book value - Assets/Number of Shares
Market Value - The value that the buyers in the market are
willing to buy and shareholders are willing to sell. Increases if
business of the corporation is good. Decreases if business is
doing badly. May be higher or lower than par value.
Par Value - Pre-determined value, the result of the total number
of shares to be issued divided into the number of shares that the
incorporators have
Types Of Dividends
Can you compel the Corporation to declare dividends if the
retained earnings has not reached more than 100% of the
paid up capital?
No.
Types Of Dividends
1. Stock dividends
2. Property dividends
3. Cash dividends
4. Combination of Cash, Stock or Property Dividends
Corporate Practice of Accumulating Earnings
When the corporation acquires income it will be subject to corporate
income tax then when it is distributed to SH as cash dividends it will
also be income of the SH and such are taxable income of the SH, in
effect there will be double taxation. The BOD will hesitate to declare
dividends and so even if the corporation has cash it will find ways and
make it appear that it was an expense of the company to avoid taxes.
Situation:
If your subscription has not been paid and declared due by the
Board, can you say “just charge my unpaid subscription to
future dividends”. Can he refuse to pay by saying that?
No because we are not sure whether indeed dividends will be declared
in the future, or how soon. If the subscription is due, it has to be paid.
Otherwise, you will be declared a delinquent shareholder.
Illustration:
The SH would be attending a seminar abroad to observe the latest
trends of the business and all expenses were paid by the corporation.
However, if dividends were declared and you still have unpaid
subscription?
Apply first the dividends to the unpaid subscription.
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Effect of Delinquency on Right to Dividends
Delinquent Stocks
These are unpaid subscriptions that
demandable and no payment is made.
have
become
due
and
When Unpaid subscriptions become due and demandable
1. Upon the arrival of the period / date specified within which to pay
2. Upon call of the board – it is a demand to pay
Rules on Delinquent Stocks:
When cash dividends are declared and there is still unpaid
subscription, would you still receive the dividends? How?
Cash dividends due on delinquent stock shall first be applied to the
unpaid balance on the subscription.
Important:
Apply first the receivable declared cash dividends to the unpaid
subscription of the stockholder then the excess will be given to him.
Offsetting will apply.
Here, there is debtor-creditor relationship between the corporation and
stockholder. On one hand, the corporation is creditor with regard to
unpaid subscription but debtor with regard to declared cash dividends.
On the other hand, the stockholder is creditor with regard to declared
cash dividends but debtor with regard to the unpaid subscription.
When stock dividends are declared and there is still unpaid
subscription, would you still receive the dividends? How?
Stock dividends shall be withheld from the delinquent stockholder until
his unpaid subscription is fully paid.
TN: We are assuming that the unpaid subscriptions are now
delinquent because they are already due and demandable for payment.
Important: If it is not yet due, no offsetting/ withholding
Even if they are still unpaid subscriptions, and there are cash dividends
declared and to be distributed, if these unpaid subscriptions are not
yet due and demandable, no offsetting/ withholding. The corporation
cannot compel you to pay first the unpaid subscriptions. There can be
offsetting only when both debts are due and demandable.
Stock Dividends
If the authorized capital stock of the corporation have all been
subscribed, and additional capital is needed, the corporation
has the option to Increase the ACS.
Illustration:
If original ACS of 1M is fully subscribed, they increased it by another
million, the SCS should be 250K of the increased ACS and PUC is
62,500. Since all the SH do not have cash, they cannot pay. However
there are Unrestricted Retained Earnings of the corporation which they
wanted to declare as dividends, just enough to pay the minimum
requirement for subscriptions.
Therefore, there is enough money from the corporation. The money, if
declared as cash dividends, may be used by the shareholders to pay
their new subscriptions. However, once declared as dividends, the
corporation cannot be sure whether the SH would really invest the
stock—which the SH cannot be compelled to invest back.
To be sure that the money will remain with the corporation,
what dividends will the corporation instead declare?
Declare stock dividends - by transferring the URE to capital asset.
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TN: This is the amount that the corporation transfers from its surplus
profit account to its capital account. In effect, the capital stock is
increased without any corresponding increase in the corporate assets
by the issuance of stock dividends.
De Leon: If the actual capital is increased by accumulated profits and such
profits are distributed to the stockholders in the form of stock dividends, the
capital stock is increased, for the profits are reinvested in the corporation by
transferring the same from surplus account to a capital account. The amount
corresponding to the stock dividends declared may be used to cover the required
25% subscription to increase the authorized capital stock and, if sufficient, will
obviate the necessity of taking in new subscription.
Situation:
The ACS have all been subscribed, and the corporation needs
capital. There are available unrestricted retained earnings of
the corporation, but if they declare dividends, they will lose
some assets, and they are not sure whether or not they could
increase the capital with what’s left of the assets after
declaration of dividends. They are also not sure if the
stockholders will invest it back. What dividends should the
corporation declare to ensure that the money will remain with
the corporation?
ANS The corporation should take the unrestricted retained earnings
and invest it as capital so that the Authorized Capital Stock is increased.
Then issue new stock as dividends as a result of the increased capital.
Stock Splits
Stock Split
This is an increase in the number of shares but there is no increase in
the capital value.
Situation:
There are occasions where the par value of the share appears
to be expensive, and fractional shares cannot be issued, so to
attract investors, what must the corporation do? For example,
the value of each share was 10, 000 and somebody was
willing to invest only 5, 000. Since the corporation cannot
issue only one half, what must they do instead?
Do a stock split since issuance of fractional shares is neither allowed
nor encouraged. In fact, the corporation should eliminate the fractional
shares by buying them. So, instead of selling it a share at a value of 10,
000 per share, if only to attract more investors, the corporation may
split said share. We now have 2 shares with 5, 000 per share.
Reverse Stock Split
Decrease the number of shares and still retain the same capital value.
On the other hand, we may also increase the value of these
shares by reverse stock split.
Example: Php 10, 000 is the par value of two shares. These shares will
be made in two one and par value shall now be Php20,000.
Unlawful Declaration of Dividends
Situation:
One day, they declared stock dividends without consulting the
books of the corporation. They found out later on that at the
time they declared cash dividends, there were no retained
earnings at all. What in effect has happened here?
A: There was an invalid declaration of dividends. This is with respect
to the rule that dividends can only be declared provided there exists an
unrestricted retained earnings.
Remedies if there is unlawful declaration of dividends
1. Require all stock holders to return.
TN: However, this is not the popular decision because, chances
are, people will no longer invest.
2.
The better option: It would depend. Jurisprudence indicates:
A.
B.
That if the corporation was insolvent at that time dividends must be returned because there was nothing to
distribute. The company’s liabilities exceeds its assets so
they should return.
If the corporation is solvent - there is no need to
return because the creditors are still protected. However,
some authors would like to object saying there is still a
need to return because it violates the provisions of the
code which says dividends can only be declared if there
are unrestricted retained earnings.
TN: However, some say, if you will require them to return,
that is the end of the corporation because nobody will trust
the board anymore.
Relevant Provision:
Sec. 43. Power to declare dividends. - The board of directors 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 them: Provided, That any cash dividends due
on delinquent stock shall first be applied to the unpaid balance on the
subscription plus costs and expenses, while stock dividends shall be withheld
from the delinquent stockholder until his unpaid subscription is fully paid:
Provided, further, That no stock dividend shall be issued without the approval of
stockholders representing not less than two-thirds (2/3) of the outstanding
capital stock at a regular or special meeting duly called for the purpose. (16a)
Stock corporations are prohibited from retaining surplus profits in excess of one
hundred (100%) percent of their paid-in capital stock, except: (1) when justified
by definite corporate expansion projects or programs approved by the board of
directors; or (2) when the corporation is prohibited under any loan agreement
with any financial institution or creditor, whether local or foreign, from declaring
dividends without its/his consent, and such consent has not yet been secured; or
(3) when it can be clearly shown that such retention is necessary under special
circumstances obtaining in the corporation, such as when there is need for
special reserve for probable contingencies.
Sec 44. Management Contracts
Management Contracts
Under a management contract, a corporation delegates the
management of its affairs to another corporation for a certain period.
Important: It should not constitute a total abdication of the powers
of the board. What is being delegated by the board to the managing
corporation only pertains to operational activities which are highly
technical.
Illustration:
A shipping company may enter into a management contract with a
managing corporation wherein the latter will manage the maintenance
and repairs of all the engines of the former. This is important
considering that the shipping corporation does not have the expertise,
skill or experience with regard to maintenance and repair of its ship
engines unlike the managing corporation.
Relevant Provision:
Sec. 44. Power to enter into management contract. - No corporation shall
conclude a management contract with another corporation unless such contract
shall have been approved by the board of directors and by stockholders owning
at least the majority of the outstanding capital stock, or by at least a majority of
the members in the case of a non-stock corporation, of both the managing and
the managed corporation, at a meeting duly called for the purpose: Provided,
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That (1) where a stockholder or stockholders representing the same interest of
both the managing and the managed corporations own or control more than
one-third (1/3) of the total outstanding capital stock entitled to vote of the
managing corporation; or (2) where a majority of the members of the board of
directors of the managing corporation also constitute a majority of the members
of the board of directors of the managed corporation, then the management
contract must be approved by the stockholders of the managed corporation
owning at least two-thirds (2/3) of the total outstanding capital stock entitled to
vote, or by at least two-thirds (2/3) of the members in the case of a non-stock
corporation. No management contract shall be entered into for a period longer
than five years for any one term.
The provisions of the next preceding paragraph shall apply to any contract
whereby 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: Provided, however, That such
service contracts or operating agreements which relate to the exploration,
development, exploitation or utilization of natural resources may be entered into
for such periods as may be provided by the pertinent laws or regulations.
Sec 45. Ultra Vires Acts
ULTRA VIRES ACTS
Acts of the corporation which are not within its express, implied or
incidental powers.
Powers of the Corporation
1. Express – those which are expressly conferred by law, articles of
incorporation and by-laws
2. Implied – those which are necessary for the exercise of the
express powers
3. Inherent – those powers which are enjoyed by a corporation by
reason of its existence
4. Incidental - Powers that are necessary to the existence and
operation of the corporation
Important:
The purpose of the corporation is the basis for determining
whether an act is an ultra vires act.
This is because it is through the purpose that we can determine the
powers of the corporation.
Business Judgment Rule vs Ultra Vires Acts
Why is it that under the rule on ultra vires acts, one can
question the act of a corporation while under business
judgment rule, one cannot question the act of a corporation?
Is the rule on ultra vires acts inconsistent with the business
judgment rule?
Situation: (continuation to the question)
If the stockholder feels that the corporation is acting beyond
its powers, is he allowed to question the act because it is
already an ultra vires act, or is he prohibited from questioning
the act under the doctrine of business judgment rule?
It may seem that there is inconsistency between the two but the rule
is, it is only the State who can question the Board if there is an ultra
vires act because as to the other parties, the decision of the board is
final under the business judgment rule.
Rules On Ultra Vires Acts
Situation
Contract
was
already
performed by the parties
Solution
Nobody can question.
Atty. E: The parties have to stay
where they are. They have already
performed the act. It is useless to
find out whether the act is ultra vires
or not.
One party has performed
while the other has not,
and that other party has
benefited
from
the
performance of the other
The other party can either:
a. Demand the performance of the
contract; OR
b. Demand the recovery/return of
the thing.
Contract
is
still
in
executory stage or no one
has performed yet
The parties should not perform at all
because it is an ultra vires act.
Situation:
In a contract of sale, the corporation bought something from
the other party and received the item but has not paid it yet,
can the corporation tell the other party that it cannot pay
because the act is ultra vires?
No. The corporation has to pay. If it will not, it has to return the item
received. The rule is either pay or return.
Summary:
1. If the contract was already performed - stay as it is.
2. If the contract was partially performed - The party that
performed may either ask the other party:
i. Payment (Performance)
ii. Return what was received (Rescission)
3. If there is no performance, yet. Wherein, none was
executed - Do not perform the contract.
What do these rules say about ultra vires acts?
The moment we entertain questions about ultra vires act, imagine
what would happen to the business world. If everybody would
question the contract entered into by the corporation is ultra vires.
The business world would be in a stand still, the rules on ultra vires is
always look with disfavor, as much as possible do not talk about ultra
vires acts, except however to the STATE.
Important: The State granted power to the corporation, hence it is
the State that has the power to question the corporation in case of
ultra vires acts.
Author’s notes
GR: no one can question ultra vires acts
XPT: the state can question the act of the corporation as ultra vires
Ultra Vires Act vs Illegal Act
ILLEGAL ACTS
Important: All illegal acts are ultra vires acts but not all ultra vires
acts are illegal acts.
Ultra Vires Acts
Acts of the corporation which are
beyond the express, implied and
incidental powers granted to it.
Illegal Acts
Acts that are contrary to law,
public policy, morals, public
order.
Situation:
If a corporation borrows P50 million from the bank but the
bank allowed the corporation to borrow instead P70 million.
What kind of act is this?
A: It is not an ultra vires act since borrowing from the bank is within
the powers of the corporation. However, it is an unauthorized act.
2. Unauthorized act of an officer
Caveat: There seemed to be no answer given in class with regard to
what is the binding effect of an unauthorized act. He instead gave a
situation.
Situation:
If a treasurer is authorized to borrow P10 million and the
treasurer instead borrowed P20 million. What kind of act?
It is an unauthorized act of the treasurer and not of the corporation.
Can the bank demand tThe payment of the P20 million?
The bank may only demand from the corporation P10 million since it is
only the extent of such amount that the corporation gave its authority.
Caveat: It seems as though an unauthorized act binds the corporation only
to the extent of the authority it gave to the officer
TN: When you borrow from the bank, the bank would require a board
resolution authorizing the treasurer to borrow only P10 million but the
bank lent P20 million. During the time that the bank will collect, there
could be a new set of officers, they cannot be compelled to pay P20
million. The bank definitely cannot demand the full amount from the
corporation. That is importance of a board resolution.
Author’s notes:
The board resolution serves as the best proof that the officer has
acted within the authority granted by the corporation.
Relevant Provision:
Sec. 45. Ultra vires acts of corporations. - No corporation under
this Code shall possess or exercise any corporate powers except those
conferred by this Code or by its articles of incorporation and except
such as are necessary or incidental to the exercise of the powers so
conferred.
TITLE VI. BY-LAWS
Sec. 46. Adoption of by-laws
BY- LAWS
Internal rules and regulations of a corporation.
When should a corporation file its by-laws?
1. Within 1 month after receipt of official notice of issuance of its
certificate of incorporation by SEC; or
2.
It may be adopted and filed prior to incorporation, together with
the articles of incorporation.
Important:
You could already submit your by-laws even if you have not yet been
given the authority to exist.
Requisites for its adoption
1. Vote of the stockholders representing at least a majority of the
outstanding capital stock for stock corporations, or at least a
majority of the members in case of non-stock corporations
2. It shall be approved and signed by all the incorporators
3. Submitted to SEC
UNAUTHORIZED ACTS
Act by which the person has no authority to perform.
Binding effect of by - laws to public
Binding effect
1. An ultra vires act cannot bind the corporation.
GR: It does not bind the public.
XPN: A third person may be bound by the by-laws where he has
knowledge about it, either actual or constructive.
Important: But a stockholder cannot question an ultra vires act of a
corporation since it is only the State which can question such act.
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Relevant Provision:
Sec. 46. Adoption of by-laws. - Every corporation formed under this Code must,
within one (1) month after receipt of official notice of the issuance of its certificate of
incorporation by the Securities and Exchange Commission, adopt a code of by-laws for
its government not inconsistent with this Code. For the adoption of by-laws by the
corporation the affirmative vote of the stockholders representing at least a majority of
the outstanding capital stock, or of at least a majority of the members in case of nonstock corporations, shall be necessary. The by-laws shall be signed by the stockholders
or members voting for them and shall be kept in the principal office of the corporation,
subject to the inspection of the stockholders or members during office hours. A copy
thereof, duly certified to by a majority of the directors or trustees countersigned by the
secretary of the corporation, shall be filed with the Securities and Exchange
Commission which shall be attached to the original articles of incorporation.
Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted
and filed prior to incorporation; in such case, such by-laws shall be approved and
signed by all the incorporators and submitted to the Securities and Exchange
Commission, together with the articles of incorporation.
In all cases, by-laws shall be effective only upon the issuance by the Securities and
Exchange Commission of a certification that the by-laws are not inconsistent with this
Code.
The Securities and Exchange Commission shall not accept for filing the by-laws or any
amendment thereto of any bank, banking institution, building and loan association,
trust company, insurance company, public utility, educational institution or other
special corporations governed by special laws, unless accompanied by a certificate of
the appropriate government agency to the effect that such by-laws or amendments are
in accordance with law.
Sec. 47. Contents of By-Laws
Contents Of By- Laws
1. The time, place and manner of calling and conducting regular or
special meetings of the directors or trustees;
2. The time and manner of calling and conducting regular or special
meetings of the stockholders or members;
3. The required quorum in meetings of stockholders or members
and the manner of voting therein;
4. The form for proxies of stockholders and members and the
manner of voting them;
5. The qualifications, duties and compensation of directors or
trustees, officers and employees;
6. The time for holding the annual election of directors of trustees
and the mode or manner of giving notice thereof;
7. The manner of election or appointment and the term of office of
all officers other than directors or trustees;
8. The penalties for violation of the by-laws;
9. In the case of stock corporations, the manner of issuing stock
certificates; and
10. Such other matters as may be necessary for the proper or
convenient transaction of its corporate business and affairs.
Qualifications and duties of board/ officers
It is important to define the qualifications and duties of directors or
trustees, officers and employees in the by-laws in order to know the
boundaries of their functions.
Elections and appointment; Provisions on Election include
1. Time and Manner of conducting the election
2. Manner of giving notice
3. Term of office of all officers and directors
Sec. 48. Amendments to By-Laws
Process of Amendment
1. Required votes met
A.
Approved by majority of the BOD/T in a meeting and
Approval by majority vote of the SH in a regular/ special
meeting called for that purpose; or
B.
It can be delegated by the stockholders to the BOD by a
vote of 2/3 of stockholders owning OCS.
2. File to SEC for approval
3. SEC issues Certification of approval
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TN: Once approved (as evidenced by the certification of the SEC), the
amended By-laws is the new By-laws of the corporation.
Summary of Votes Required
1. For Adoption of the by-laws
a. Affirmative vote of the stockholders representing at least a
majority of the OCS
2. For Amendments of the by-laws
a. Majority vote of the BOD and approval of majority of
stockholders representing the OCS; or
b. It can be delegated by the stockholders to the BOD by a
vote of 2/3 of stockholders owning OCS.
TN: In adoption of the by- laws, no requisite of board approval yet
because we still don’t have a board at that time
Situation:
Zanganeh was a treasurer of USC. The BOD discovered that
the she is also acting as treasurer of another corporation (UV)
– thus creating a potential problem in finance and accounting.
The Board wanted to disqualify but they cannot come out with
any provision in the By-Laws where she could be disqualified.
Can the board disqualify just the same?
No, because it is not stated in the By-laws. But, they can amend the
By-laws to include a provision for the disqualification of holding a
position in a competing business.
Proposed Amendment Examples:
1.
“No person shall be appointed as treasurer if the same
person is also a treasurer of a competing corporation.” VALID.
2. “Zanganeh should be disqualified as treasurer because
she is also treasurer of UV.” - INVALID. It is discriminatory
provision.
Important:
By laws and its amendments shall not be discriminatory.
By-laws, to be valid, must be reasonable. They must be general and
uniform in their operation and not directed against particular
individuals.
Prospective Application of Amendments of By-Laws
Situation (continuation of Zanganeh):
If the amendment was then carried out and Zanganeh was
terminated, can she file a case with the Labor Arbiter and later
on, appeal to the NLRC?
Yes. The termination is unlawful. The amended By-laws cannot bind
her since she is already the elected treasurer at the time the amended
By-laws became effective.
What could be a good argument in the proceedings in the
NLRC?
The by-laws were amended after the treasurer was in office so it could
not affect her. Furthermore, the bylaws may be amended but it should
be fair and reasonable. It is clear that the bylaws were amended
specially to for her.
Author’s note: this is an invalid amendment for being discriminatory
and for applying retroactively.
Important:
The amended or new By-laws should be made to apply
prospectively, not retroactively.
Situation (Gokongwei Case):
A director and owner of a beer company A, was also a SH of
another beer company B. He wanted to become a director of
the beer company B so he bought more shares so that he can
be elected for the board next year. So Beer Company B
amended there by laws stating that “no person holding at
least 10% of shares in another competing company shall be
allowed to be elected for the board.” Was this amendment
discriminatory? Can the director complain?
ANS:Firstly, he cannot complain. The amendment disqualifying a
director in a corporation whose business is in competition with or is
antagonistic to another corporation from election to the board of
directors of the latter corporation is valid.
Secondly, it is not discriminatory as the terms of the amended by-laws
provides that, “No person shall be allowed to be elected who is also a
director of another corporation who is in competition or antagonistic to
thereto.” This provision is general in nature it does not single out a
particular individual such as the party involved herein.
Third, it does not also run counter to the prospective application of the
amendment as the party involved has yet to be elected.
Atty E: This is a case involving Gokongwei and San Miguel. The
lawyers of Gokongwei said it is discriminatory because no one else in
the Philippines owns so much in Asia Brewery and at the same time
own stocks in San Miguel; thus, it should be an invalid amendment and
should not be approved.
TN: But the keyword here is ANTAGONISTIC. In other words, the
Supreme Court did not only look at the prospective or retroactive
effect but more on its being antagonistic, fierce competition, or direct
clash between two corporations involved in the same market. The SC
is just trying to prevent a situation whereby one could take advantage
over the other.
Atty E: Because imagine if Gokongwei in one meeting of San Miguel
says “I understand that the sales of our corporation is going down,
maybe there is problem with the formula, it no longer taste the way it
should taste.” Most probably, the brew master might be compelled to
present themselves to the board and explain what happened, and be
required to present the formula. Once he gets his own copy of the
formula, he will give it to the rival company. We have copied the bottle,
we will now copy the formula.SC said we do not want that situation.
Summary (Author’s notes)
1. By laws or amendment shall not be discriminatory
2. The amendment applies prospectively
3. An amendment disqualifying a director in a corporation whose
business is in competition with or is antagonistic to another
corporation from election to the board of directors of the latter
corporation is not discriminatory, and valid
Relevant Provision:
Sec. 48. Amendments to by-laws. - The board of directors or trustees, by a
majority vote thereof, and the owners of at least a majority of the outstanding
capital stock, or at least a majority of the members of a non-stock corporation,
at a regular or special meeting duly called for the purpose, may amend or repeal
any by-laws or adopt new by-laws. The owners of two-thirds (2/3) of the
outstanding capital stock or two-thirds (2/3) of the members in a non-stock
corporation may delegate to the board of directors or trustees the power to
amend or repeal any by-laws or adopt new by-laws: Provided, That 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.
Whenever any amendment or new by-laws are adopted, such amendment or
new by-laws shall be attached to the original by-laws in the office of the
corporation, and a copy thereof, duly certified under oath by the corporate
secretary and a majority of the directors or trustees, shall be filed with the
7|U N I V E R S I T Y O F
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Securities and Exchange Commission the same to be attached to the original
articles of incorporation and original by-laws.
The amended or new by-laws shall only be effective upon the issuance by the
Securities and Exchange Commission of a certification that the same are not
inconsistent with this Code.
TITLE VII. MEETINGS
Sec 49. Kinds of Meetings
Relevant Provision:
Sec. 49. Kinds of meetings. - Meetings of directors, trustees,
stockholders, or members may be regular or special.
Sec. 50-52. Regular and Special Meetings of Stockholders
Types Of Meetings
1. Regular Meeting
a. Held annually on a date fixed by in the by-laws, or if not so
fixed, on any date in April of every year as determined by
the board of directors or trustees
b. Written notice of regular meetings shall be sent to all
stockholders or members of record at least two (2) weeks
prior to the meeting, unless a different period is required by
the by-laws
c. Shall be held in the city or municipality where the principal
office of the corporation is located, and if practicable in the
principal office of the corporation
2.
Special Meeting
a. Held at any time deemed necessary or as provided in the bylaws
b. At least one (1) week written notice shall be sent to all
stockholders or members, unless otherwise provided in the
by-laws
c. Shall be held in the city or municipality where the principal
office of the corporation is located, and if practicable in the
principal office of the corporation
Relevant Provision:
Sec. 50. Regular and special meetings of stockholders or members. Regular meetings of stockholders or members shall be held annually on a date
fixed in the by-laws, or if not so fixed, on any date in April of every year as
determined by the board of directors or trustees: Provided, That written notice of
regular meetings shall be sent to all stockholders or members of record at least
two (2) weeks prior to the meeting, unless a different period is required by the
by-laws.
Special meetings of stockholders or members shall be held at any time deemed
necessary or as provided in the by-laws: Provided, however, That at least one (1)
week written notice shall be sent to all stockholders or members, unless
otherwise provided in the by-laws.
Notice of any meeting may be waived, expressly or impliedly, by any stockholder
or member.
Whenever, for any cause, there is no person authorized to call a meeting, the
Secretaries and Exchange Commission, upon petition of a stockholder or member
on a showing of good cause therefor, may issue an order to the petitioning
stockholder or member directing him to call a meeting of the corporation by
giving proper notice required by this Code or by the by-laws. The petitioning
stockholder or member shall preside thereat until at least a majority of the
stockholders or members present have been chosen one of their number as
presiding officer.
Sec. 51. Place and time of meetings of stockholders or members. Stockholders' or members' meetings, whether regular or special, shall be held in
the city or municipality where the principal office of the corporation is located,
and if practicable in the principal office of the corporation: Provided, That Metro
Manila shall, for purposes of this section, be considered a city or municipality.
Notice of meetings shall be in writing, and the time and place thereof stated
therein. All proceedings had and any business transacted at any meeting of the
stockholders or members, if within the powers or authority of the corporation,
shall be valid even if the meeting be improperly held or called, provided all the
stockholders or members of the corporation are present or duly represented at
the meeting.
Sec. 52. Quorum in meetings. - Unless otherwise provided for in this Code or
in the by-laws, a quorum shall consist of the stockholders representing a majority
of the outstanding capital stock or a majority of the members in the case of nonstock corporations.
Sec. 53 . Regular and Special Meetings of
Directors/Trustees
1.
Regular Meeting
a. Held monthly, unless the by-laws provide otherwise
b. Notice of at least one (1) day prior to the scheduled
meeting, unless otherwise provided by the by-laws
c. May be held anywhere in or outside of the Philippines,
unless the by-laws provide otherwise
2. Special Meeting
a. Held at any time upon the call of the president or as
provided in the by-laws
b. Notice of at least one (1) day prior to the scheduled
meeting, unless otherwise provided by the by-laws
c. May be held anywhere in or outside of the Philippines,
unless the by-laws provide otherwise
Relevant Provision:
Sec. 53. Regular and special meetings of directors or trustees. - Regular
meetings of the board of directors or trustees of every corporation shall be held
monthly, unless the by-laws provide otherwise.
Special meetings of the board of directors or trustees may be held at any time
upon the call of the president or as provided in the by-laws.
Meetings of directors or trustees of corporations may be held anywhere in or
outside of the Philippines, unless the by-laws provide otherwise. Notice of regular
or special meetings stating the date, time and place of the meeting must be sent
to every director or trustee at least one (1) day prior to the scheduled meeting,
unless otherwise provided by the by-laws. A director or trustee may waive this
requirement, either expressly or impliedly.
Sec. 54. Who Presides at Meetings
Sec. 54. Who shall preside at meetings. - 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. 55. Right to Vote of Pledgors, Mortgagors and
Administrators
Certificate of Stock
It is the best evidence of ownership of shares of stocks
Important: Being personal properties, you may use this certificate of
stock as security to guarantee payments of obligations like in pledge
and mortgage
Voting rights in a pledge/ mortgage
GR: The pledgor or mortgagor shall have the right to attend and vote
at meetings of stockholders
XPT: the pledgee or mortgagee is expressly given by the pledgor or
mortgagor such right in writing which is recorded on the appropriate
corporate books
Voting
Rights
of
Executors/
administrators/
legal
representative
The Executors, administrators, receivers, and other legal
representatives duly appointed by the court may attend and vote in
behalf of the stockholders or members without need of any written
proxy
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Relevant Provision:
Sec. 55. Right to vote of pledgors, mortgagors, and administrators. - In
case of pledged or mortgaged shares in stock corporations, the pledgor or
mortgagor shall have the right to attend and vote at meetings of stockholders,
unless the pledgee or mortgagee is expressly given by the pledgor or mortgagor
such right in writing which is recorded on the appropriate corporate books.
Executors, administrators, receivers, and other legal representatives duly
appointed by the court may attend and vote in behalf of the stockholders or
members without need of any written proxy.
Sec. 56. Voting in Joint Ownership of Stock
Joint Ownership of Stocks
If there are two owners, the consent of the two are required otherwise
they cannot exercise their right to vote
If there are 3 persons who jointly owned the stock, is the
consent of the 3 required to cast a vote?
No. Only a majority of them. Hence, the consent of 2 is sufficient.
Caveat: We cannot find a legal basis for this answer. In fact, Section 56 of the
Corporation Code requires the consent of ALL the co-owners and NOT the majority.
However, when we once again asked sir outside class, he answered the same way
But what if the shares are owned in an "and/or" capacity?
Any one of the joint owners can vote.
Summary
GR: If joint ownership over stock, consent of ALL required in voting
XPT: shares owned in an “and/or” capacity, any one of the joint
owners may vote
Relevant Provision:
Sec. 56. Voting in case of joint ownership of stock. - In case of shares of
stock owned jointly by two or more persons, in order to vote the same, the
consent of all the co-owners shall be necessary, unless there is a written proxy,
signed by all the co-owners, authorizing one or some of them or any other
person to vote such share or shares: Provided, That when the shares are owned
in an "and/or" capacity by the holders thereof, any one of the joint owners can
vote said shares or appoint a proxy therefor.
Sec. 57. Voting Rights of Treasury Shares
Voting Rights Of Treasury Shares
Treasury shares have no voting right.
Reason: If treasury shares are given voting right, then it will be the
Board who can cast the votes considering that treasury shares are not
outstanding to the public for having been reacquired by the
corporation. If this is allowed, the Board may abuse this right by
casting the vote to themselves in order to perpetuate in power to the
prejudice of the corporation. That is why the law does not allow
treasury shares to have voting right.
Relevant Provision:
Sec. 57. Voting right for treasury shares. - Treasury shares shall have no
voting right as long as such shares remain in the Treasury.
Sec. 58 – 59. Management Control Devices
Management Control Devices
A tool or device used by management to regulate or control the
decisions of the stockholders so that these decisions will conform to
the preferences of management
Management devices
1. Proxy (sec 58)
2. Voting trust agreement (sec 59)
Sec 58. Proxy
PROXY
An instrument that refers to the authority given by stockholder to
another to represent the former during meeting
Situation:
Majority of the board has decided and approved the
amendment of by-laws. So, they will now have to present it in
the forthcoming stockholders’ meeting. Now, they want to
ensure that they get the majority of the stockholders. What
will they do?
Use management device for the management to be sure that the
proposed amendment will be approved by getting majority vote of the
stockholders. If they don’t do anything and just wait for the results,
there is a risk that the stockholders may not approve.
Illustration:
If I were the President and I want to ensure that I will get the majority votes
during the stockholders’ meeting, I’ll send out proxy forms to all stockholders,
which reads:
“Dear stockholder,
During the forthcoming meeting on February 14, 2017,
the following proposed amendments will be submitted for your
ratification and approval:
(Quote the proposed amendment)
This has been approved by the board and management
encourages the approval of this proposal. If you cannot attend in that
meeting and you wish for the management to act in your behalf,
kindly sign the attached proxy, authorizing your president to cast
your vote during election.”
Effect of proxy
The moment it is returned and signed by the stockholder, you
now have in your possession the proxy. What would that now
mean?
It means that the President can now cast the votes of the
stockholders in their behalf. The President is now sure to the vote of
“yes” to the amendment.
Atty E: In this case, the president can now vote in behalf of the
absent SH, and vote favorably for the amendment. For example, 55%
of proxy will assure the amendment, hence, proxy is considered as a
management device. The proxy is a very good tool to control the
decision of the stockholders.
Rules if more than 1 proxy holder
Between two proxy holders, who is entitled to vote?
1.
2.
3.
4.
Proxy whose proxy instrument bears the latest date.
If same date – Proxy whose proxy instrument bears the later time.
If same time – proxy holder who presents it first.
All things being equal (same date, same time and presents at the
same time – proxy committee decides.
Revocation of Proxy
Situation:
A proxy was declared and recognized as the proper and
appropriate proxy holder. However, when he went to the
meeting, the stockholder was also there. Who will vote?
ANS: The Stockholder votes. It would constitute a revocation of proxy
because the rule says that proxies are generally revocable – expressly
or impliedly.
Important: The presence of the stockholder in the meeting is an
implied revocation.
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Voting Trust Agreement v. Proxy
Situation:
Charles was designated as proxy of a certain stockholder. He
was already recognized as proxy in the meeting. However,
while socializing with the other stockholders, he met someone
holding a Voting Trust Agreement bearing the name of the
same stockholder who granted him the proxy. In effect, the
person holding the VTA and Charles will be voting in behalf of
the same stockholder. The VTA was executed in February 1,
2017 while the proxy was executed in February 5, 2017. Who
is now entitled to vote in the stockholder’s meeting?
The Voting Trust Agreement prevails. It is the voting trustee who will
be entitled to vote because the voting trustee has the legal title and
the Voting Trust Agreement is irrevocable despite the subsequent
execution of proxy.
What if the proxy was executed in February 1, 2017 while the
VTA was executed in February 5, 2017. Who is now entitled to
vote in the stockholder’s meeting?
The voting trustee, because the Voting Trust Agreement operates to
revoke the proxy.
Sec 59. Voting Trust Agreement
VOTING TRUST AGREEMENT
It is an agreement in writing whereby one or more stockholders of a
stock corporation transfer his or their shares to any person or person
or to a corporation having authority to act as trustee for the purpose
of vesting in such person or persons or corporation as trustee or
trustees voting or together rights pertaining to the shares for a certain
period not exceeding that fixed by the Code and upon the terms and
conditions stated in the agreement. (Sec. 59, par. 1)
A voting trust agreement is a FORMAL document
This is a formal document because it is notarized. It shall be notarized
because there is transfer of legal title (not ownership)
A voting trust agreement transfers legal title
There is transfer of legal title to the trustee and NOT ownership,
because beneficial ownership is retained with the trustor. Hence, the
trustee can exercise the rights of the shareholders (vote, to be voted
upon, etc).
Once dividends are declared, what happens?
ANS: Will still redound to the benefit of the trustor, being the
beneficial ownership
Important:
In a voting trust agreement, only the legal title is transferred.
Beneficial ownership is retained by the trustor, which means that the
fruits shall redound to the benefit of the trustor.
Proxy vs Voting Trust Agreement
Proxy
No legal Title to the shares of the SH
Revocable at any time unless coupled
with interest
Can only act at the specified SH’s
meeting
Votes only in the absence of the owner of
stock
Shorter duration
Need not be notarized nor a copy be filed
with the SEC
No right of inspection of corporate books
Voting Trust Agreement
Acquires legal title to the shares of
the SH
Irrevocable for a definite and
limited period of time
Not limited to any particular
meeting
Can vote and exercise all the rights
of the transferring SH even when
the SH is present
Longer Duration
Notarized and filed with SEC
Has such right
Rights of a trustee in a Voting Trust Agreement
1. The right to vote
2. The right to be voted upon
3. The right to be represented
4. Right of inspection of all corporation books and records
Important: Basically, all the rights of the stockholders because he
has the legal title except the right to dividends because the beneficial
ownership is retained by the trustor.
In contrast, the proxy holder has limited rights in attending the
meeting (e.g. right to vote) because the proxy holder has no legal title
of the shares of stock.
Term of VTA
Voting Trust Agreement is valid for a period not exceeding five (5)
years at any one time. Once expired, everything will be returned to the
real and lawful stockholder (trustor).
Prohibition against the use of management devices
Commission; otherwise, said agreement is ineffective and unenforceable. The
certificate or certificates of stock covered by the voting trust agreement shall be
canceled and new ones shall be issued in the name of the trustee or trustees
stating that they are issued pursuant to said agreement. In the books of the
corporation, it shall be noted that the transfer in the name of the trustee or
trustees is made pursuant to said voting trust agreement. The trustee or trustees
shall execute and deliver to the transferors voting trust certificates, which shall
be transferable in the same manner and with the same effect as certificates of
stock.
The voting trust agreement filed with the corporation shall be subject to
examination by any stockholder of the corporation in the same manner as any
other corporate book or record: Provided, That both the transferor and the
trustee or trustees may exercise the right of inspection of all corporate books
and records in accordance with the provisions of this Code.
Any other stockholder may transfer his shares to the same trustee or trustees
upon the terms and conditions stated in the voting trust agreement, and
thereupon shall be bound by all the provisions of said agreement.
No voting trust agreement shall be entered into for the purpose of circumventing
the law against monopolies and illegal combinations in restraint of trade or used
for purposes of fraud.
Nationalized Corporations
These are corporations which must be either be:
(a) Wholly owned by Filipinos
(b) 60% is owned by Filipinos, 40% is of foreign ownership
Unless expressly renewed, all rights granted in a voting trust agreement shall
automatically expire at the end of the agreed period, and the voting trust
certificates as well as the certificates of stock in the name of the trustee or
trustees shall thereby be deemed canceled and new certificates of stock shall be
reissued in the name of the transferors.
Purpose of 60% requirement
To make sure that the control shall be in the hands of the Filipino
stockholders, so that our natural resources will not be exploited by
foreigners.
The voting trustee or trustees may vote by proxy unless the agreement provides
otherwise.
Example: 40% were Koreans in a legitimate Korean business. If there is
voting and 40% are Koreans, they cannot control the corporation, because
majority of the control is held by the 60% Filipino ownership.
STOCKS
For the purpose of measuring the value of the investment of the
shareholders, it’s the unit by which the stocks can be ascertained by its
value.
Situation:
Koreans gave bonuses to the Filipino Shareholders, in
exchange, they asked that the shareholders execute proxies in
their favor. Thus, 60% of the Filipinos executed the proxy in
favor of the Koreans. As a result, anything that will be decided
in the Stockholders’ meeting will be controlled by the Koreans.
Is there a problem with this?
Yes. This violates the nationalization law. Although they were not
forced to sign the proxy, the execution of the proxy is considered
invalid on the ground of being against public policy.
TN: Although in the books, there are 60% Filipino
stockholders/owners, but they have surrendered the power which
accompanies ownership. The intention of the law, to maintain the
exclusive control with the Filipinos to certain industries as enshrined in
the Constitution, is violated.
Important: These management control devices cannot be used to
circumvent or violate existing laws against monopoly, restraint of trade,
and other similar laws.
Relevant Provisions:
Sec. 58. Proxies. - Stockholders and members may vote in person or by proxy
in all meetings of stockholders or members. Proxies shall in writing, signed by
the stockholder or member and filed before the scheduled meeting with the
corporate secretary. Unless otherwise provided in the proxy, it shall be valid only
for the meeting for which it is intended. No proxy shall be valid and effective for
a period longer than five (5) years at any one time. (n)
Sec. 59. Voting trusts. - One or more stockholders of a stock corporation may
create a voting trust for the purpose of conferring upon a trustee or trustees the
right to vote and other rights pertaining to the shares for a period not exceeding
five (5) years at any time: Provided, That in the case of a voting trust specifically
required as a condition in a loan agreement, said voting trust may be for a
period exceeding five (5) years but shall automatically expire upon full payment
of the loan. A voting trust agreement must be in writing and notarized, and shall
specify the terms and conditions thereof. A certified copy of such agreement
shall be filed with the corporation and with the Securities and Exchange
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OF SAN
CARLOS
TITLE VII. STOCKS AND STOCKHOLDERS
How do you become a stockholder?
1. Subscription
2. Purchase of treasury shares
3. Acquisition from existing stockholders’ outstanding shares
Buying shares v. Subscribing shares
Buying
Subsequent acquisition of shares from
either an existing SH (outstanding
shares) or treasury shares of the
corporation
Subscribe
You only subscribe newly issued
shares or virgin shares directly from
the corporation
Sec 60. Subscription Contract
Subscription Contract (SC)
The agreement entered into when subscribing for shares.
Important: Like any other contract, it shall have the elements of the
contract, which are:
1. Object or subject matter – In the subscription contract, it
pertains to newly issued stocks.
2. Consideration – In the subscription, it shall not be less than the
par value or issued value. It could be paid through any of these
means:
a) Actual Cash
b) Property
c) Labor or services actually rendered
d) Amount transferred from unrestricted retained earnings to
capital
e) Shares which are reclassified
3. Consent – consent of the parties (meeting of the minds)
Stock Options
Stock Options
It is a privilege given by a corporation to persons not necessarily
stockholders, giving them a period within which to decide whether or
not to buy shares in a company at a specified price.
Is there value to stock options?
Yes. They are valuable because it gives a person the right to buy
shares of stocks at a specific price.
Illustration:
Stock option gives person A, the right to buy shares of stock of Corp.
ABC for a price of P10. Later on, because of the good performance of
the corporation, the stocks of the corporation from P10 already
increased to P15. There is value to stock option because here, person
A can already purchase the stock at P10 instead of P15.
Atty E: Do not underestimate when you are given an option. The
moment the price will increase, you can sell it to someone interested
to buy it even at a higher price. You may make profit out of the option.
Pre- emptive Right
Pre - Emptive Right
It is not a privilege but a right of existing stockholders to subscribe to
new unissued shares of the corporation in proportion to their existing
shareholdings.
Stock Option
Privilege given by the corporation
Can be given to third parties
Pre-emptive Right
Right
Only
given
to
existing
stockholders
Stockholder has the right to buy
shares in proportion to his
existing shareholdings.
Relevant Provision:
Section 61. Pre-incorporation subscription. - A subscription for shares of
stock of a corporation still to be formed shall be irrevocable for a period of at
least six (6) months from the date of subscription, unless all of the other
subscribers consent to the revocation, or unless the incorporation of said
corporation fails to materialize within said period or within a longer period as
may be stipulated in the contract of subscription: Provided, That no preincorporation subscription may be revoked after the submission of the articles of
incorporation to the Securities and Exchange Commission.
Sec 62. Consideration for Subscription
How much should be paid as payment for subscription?
GR: Partial payments are allowed. The law only requires that you need
to pay only 25% of your subscription
XPN: Full payment as condition of issuance of shares (When later on,
after being incorporated, the corporation will no longer allow issuance
of subscriptions unless full payment is done or made)
Forms of Payment of Subscription
Forms Of Payment Of Subscription
1. Actual cash paid to the corporation
2. Property actually received by the corporation
3. Labor performed for or service actually rendered to the
corporation
4. Previously incurred Indebtedness of the corporation
5. Amounts transferred from unrestricted retained earnings to the
capital
6. Outstanding shares exchanged for stocks in the event of
reclassification or conversion.
Sec 61. Pre- Incorporation Subscription
Situation:
Tumagan became the President of the Corporation. One day,
he went to the barbershop and was asked by the barber if he
can purchase shares of stocks knowing the former being the
President of the Corporation. They agreed that the barber will
purchase 10 shares of stock, in exchange for the barber
services he will render to the President for the next 10 months.
Stocks were issued and the contract of subscription was then
signed. Is that allowed?
No, payment of the subscription in the form of future services is not
allowed. What is prescribed in the rules refers only to actual services
rendered or past services.
Pre- Incorporation Subscription
This is a subscription to stocks of the corporation even before the
incorporation of the corporation. (Before SEC approves the AoI)
Why are future services not allowed?
Because of the inherent uncertainty of future services. The barber may
stop cutting hairs or the President will no longer need or require his
services.
No maximum amount. Depends
on the agreement between the
company and that person.
Relevant Provision:
Section 60. Subscription contract. - Any contract for the acquisition of
unissued stock in an existing corporation or a corporation still to be formed shall
be deemed a subscription within the meaning of this Title, notwithstanding the
fact that the parties refer to it as a purchase or some other contract
Important:
A pre - incorporation subscription is irrevocable for a period of 6
months unless the AoI has already been submitted to the SEC.
The moment you decide to buy, you enter in to a pre- subscription
agreement and it is irrevocable for 6 months. This means you are
compelled to stay.
Purpose of irrevocability: to ensure creation of the corporation
For pre-incorporation purposes in relation to the requirement of 25%
subscribed capital and 25% paid-in capital. To give the organizers the
chance to organize.
Atty E: If allowed revocation within the 6 months, the organization of
the corporation will be highly jeopardized, and nobody might be able
to start at all if the subscribers keep on withdrawing. The timetable
and the filing of the articles might be unduly affected.
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Dividends as consideration of subscription
Situation:
Tumagan subscribed for 10,000 shares and he only paid 5,000
shares. When will the unpaid subscriptions be due?
1. Upon the arrival of the period specified in the contract of
subscription, or
2. Upon the call of the BOD (if there is to time specified)
Can a subscriber just pay his unpaid subscription on a future
month, say December because he will have dividends then?
No, future dividends cannot be used to pay off delinquent shares
because they are uncertain.
Important: However, once dividends are declared, the following rules
shall be followed:
A. Cash dividends – apply first to the delinquent shares (set-off)
B. Stock dividends – withheld, until the delinquent shares or amount
due is paid.
Author’s note: You cannot pay the unpaid subscription using future
dividends, but once they are declared already, you may apply the rules
above (offset/withhold).
Return of Stocks as Payment for New Subscriptions
Situation:
Here is stockholder X of a corporation, his original
subscription is 100 shares worth 100,000 of which he paid
only 50,000. The corporation decided to increase its ACS.
Stockholder X now wants to subscribe in the increase of
capitalization for another 100 shares worth 100,000. He said
he will return the 50 fully paid shares as payment for the
newly issued shares. Is that allowed?
No, it cannot be allowed because if we will allow the stockholder to
return his shares of stocks, it would if in effect be returning capital
(liquidation) to the stockholder in violation of the trust fund doctrine.
Application of Payments
How are payments of shares of stocks applied?
There is an option. In the absence of provisions in the by- laws to the
contrary, a corporation may apply payments made by subscribers
either:
1.
Payment pro rata to each and all the entire number of shares
subscribed for; or
Illustration: Apply the 50,000 to all the 100 subscribed shares in effect
there is no single share is fully paid
2.
Full payment for corresponding number of shares
Illustration: apply it to the 50 shares therefore the 50 shares are
already fully paid.
Important:
These 2 alternatives can not be availed of by the corporation at the
same time (de Leon)
Amounts Transferred from URE to capital
Situation:
The authorized capital stock (ACS) was increased from 1m to
2m. Five (5) stockholders owned 20% each of the original 1m
ACS. They then wanted to subscribe another 20% each of the
1M increase but they don’t have cash. However, there are
unrestricted retained earnings. What could be done?
The 5 stockholders may subscribe, and their subscription will be paid
out of the unrestricted retained earnings which should just be
transferred to the capital. Hence, instead of issuing cash dividends, the
corporation will issue stock dividends to them.
TN: A good justification by the corporation in doing this is that such
will increase the capital of the corporation considering that the
unrestricted retained earnings are ploughed back to the corporation. In
the same way, the investments of the stockholders are also increased.
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Waiver of Right to Unpaid Subscription
Situation:
The Corporation wanted to grant bonuses but has no cash.
Hence, it instead declared that all unpaid subscriptions are
deemed fully paid. Is it valid?
No, it is not allowed because this will violate the trust fund doctrine
since there will be no more capital coming in the corporation. In the
books, it is supposed to show that certain stocks are still unpaid and
therefore, it must be paid.
Waiving the unpaid subscriptions is no different from just returning to
the stockholders their investment. If the return of stocks is not allowed,
then it should not be allowed to waive the payment of unpaid
subscriptions.
If you declare all unpaid subscriptions as fully paid, you are making it
appear to the public and to creditors that the capital is inside already
when in fact, no money came in. You are therefore, misleading the
public.
If unpaid subscriptions are not paid when the date for payment arrives
or when the Board makes the call for payment, they become
delinquent shares which means that they are due and demandable and
can be sold in a delinquent sale.
Relevant Provision:
Section 62. Consideration for stocks. - Stocks shall not be issued for a
consideration less than the par or issued price thereof. Consideration for the
issuance of stock may be any or a combination of any two or more of the
following:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation and
necessary or convenient for its use and lawful purposes at a fair valuation
equal to the par or issued value of the stock issued;
3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital;
and
6. Outstanding shares exchanged for stocks in the event of reclassification or
conversion.
Where the consideration is other than actual cash, or consists of intangible
property such as patents of copyrights, the valuation thereof shall initially be
determined by the incorporators or the board of directors, subject to approval by
the Securities and Exchange Commission. Shares of stock shall not be issued in
exchange for promissory notes or future service. The same considerations
provided for in this section, insofar as they may be applicable, may be used for
the issuance of bonds by the corporation. The issued price of no-par value
shares may be fixed in the articles of incorporation or by the board of directors
pursuant to authority conferred upon it by the articles of incorporation or the bylaws, or in the absence thereof, by the stockholders representing at least a
majority of the outstanding capital stock at a meeting duly called for the purpose.
Certificate of Stock & Transfer of Shares
Sec 63. Certificate of Stocks
Certificate of Stocks (Stock Cert)
It is the best evidence of ownership. It looks like a diploma which may
be worth 2 or 5 centavos, depending on the par value of the shares.
Contents
1.
Name of the corporation (in bold, nicely written font) and the
year it was founded
2.
The name of the stockholder
3.
The number of shares issued to stockholder
4.
5.
The serial number of the certificate of stock
Date of issuance
Signatures required
1.
Certificates signed by the president or in his absence, by the vice
president;
2.
Countersigned by the secretary or in his absence, by the
assistant secretary.
Nature of Certificate of Stocks
1. It is NOT a negotiable instrument
2. It is, however, transferrable
3. It is a personal property
A stock certificate is NOT negotiable instrument
What is a negotiable instrument?
Section 1. Form of Negotiable Instruments. – An instrument to be
negotiable must conform to the following requirements:
a) It must be in writing and signed by the maker or drawer
b) Must contain an unconditional promise or order to pay a sum
certain in money
c) Must be payable on demand, or at a fixed or determinable future
time
d) Must be payable to order or to bearer
e) Where the instrument is addressed to a drawee, he must be
named or other indicated therein with reasonable certainty.
It lacks the 2nd requisite: to pay a sum certain in money
Certificates of stocks are not negotiable instruments because of the
absence of the 2nd requisite. The object of the certificate is the stock,
while in a negotiable instrument, it is the sum certain in money.
Sec 64. Issuance of Stock Cert
When will the corporation issue the stock cert?
The Certificate of Stock will only be issued by the corporation upon the
full payment of the subscription.
TN: Initially, you only need to pay 25% of your subscription. However,
if you only paid 25%, you still can not demand for your certificate
Situation:
If you subscribed to 100 shares and paid 25% only, are the
100 shares fully paid? Can you demand a certificate already?
No. If you paid 25% and subscribed for 100 shares, the shares are not
yet considered fully paid.
Important:
However, You can still demand certificates of stocks if you exercised
the 2nd option in the rules of application of payment.
Recall: Options in application of payment
1. Apply payment proportionately to all subscriptions
2. Apply payment to as many shares that may be fully paid
Important: Applying the 2nd option, the certificates of stocks for the
shares fully paid, or 25 shares in the given example, may be
demanded.
Author’s note:
GR: No issuance of stock cert until full payment of subscription
XPT: exercise the 2nd option, where some shares will be considered
fully paid, you may be granted the stock cert for those shares
However, the certificate of stock is transferable.
Transferability is different from negotiability.
MINISTERIAL DUTY OF CORP TO ISSUE STOCK CERT
Once the entire subscription has already been paid, it is the ministerial
duty of the corporation to issue the certificate.
What is transferrability?
When you transfer from one person to another, the intention is to
constitute the transferee as the lawful holder
Remedy of the SH if company refuses
The Stockholder can file an action against corporation for the issuance
of the certificate.
Important:
A Certificate of Stock is not a negotiable instrument but it is a
transferable instrument. It is transferable because it can confer rights
over the property. The intention is to constitute the transferee the
lawful holder of the Certificate of Stock.
Relevant Provision:
Section 64. Issuance of stock certificates. - No certificate of stock shall be
issued to a subscriber until the full amount of his subscription together with
interest and expenses (in case of delinquent shares), if any is due, has been paid.
How is it transferred?
By delivery with indorsement. The reverse side of the certificate has an
indorsement space where the stockholder signs
Certificate of stock is a personal property
Once fully paid, you are entitled to the certificate. You need to be in
possession of the certificate because it is a personal property. It could
be offered as a security, or for any obligation or contract that you may
have entered into.
Relevant Provision:
Section 63. Certificate of stock and transfer of shares. - The capital stock
of stock corporations shall be divided into shares for which certificates signed by
the president or vice president, countersigned by the secretary or assistant
secretary, and sealed with the seal of the corporation shall be issued in
accordance with the by-laws. Shares of stock so issued are personal property
and may be transferred by delivery of the certificate or certificates indorsed by
the owner or his attorney-in-fact or other person legally authorized to make the
transfer. No transfer, however, shall be valid, except as between the parties,
until the transfer is recorded in the books of the corporation showing the names
of the parties to the transaction, the date of the transfer, the number of the
certificate or certificates and the number of shares transferred.
No shares of stock against which the corporation holds any unpaid claim shall be
transferable in the books of the corporation.
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Section 66. Interest on unpaid subscriptions. - Subscribers for stock shall
pay to the corporation interest on all unpaid subscriptions from the date of
subscription, if so required by, and at the rate of interest fixed in the by-laws. If
no rate of interest is fixed in the by-laws, such rate shall be deemed to be the
legal rate.
A Stockholder is NOT a Co- owner of the Corporate
Property
Situation:
If you own up to 25% of the entire capital of the corporation,
and you saw a property belonging to the corporation. Could
you mortgage ¼ of the property to secure the payment of
your own personal obligation?
No. Ownership of the stock does not mean ownership to the
corporation’s property. A Stockholder is not a co-owner but only a
mere investor of the corporation. There is no co-ownership because
the property is owned by the corporation alone who has a separate
and distinct personality.
Sec 65. Watered Stocks
Metaphor: Story of the watered chicken
You go to the market and buy a chicken. When weighed, the chicken’s
weight is 1.5 kg and then you bought it. However, when you went
home and checked the weight of the chicken, it is already 1.2kg. This
is because the chicken was injected with water and then placed inside
the freezer so the water becomes ice. When placed in the weighing
scale, the chicken now weighs heavier. So when the chicken’s weight
was already 1.2kg, all the water was gone. This is why they call it the
watered chicken.
Watered stock
This happens when you pay lower than the par value of the stock. It is
a stock issued not in exchange for its equivalent or issued for less than
its value.
It is a reverse of watered chicken because in watered chicken you pay
more for a less chicken. In watered stock, you pay less for more
shares.
Atty E: Always remember that watered stock is the opposite of
watered chicken.
Important: That is why the law does not allow the issuance of
watered stocks, because you pay lower than the par value of the stock
Liability for Watered Stocks
What happens when there is a watered stock?
SH becomes liable for difference between FMV and par value
Who will be liable?
1. Consenting directors and officers
2. The stockholder
When liable?
1. By consenting to the issuance of stocks for a consideration less
than its par or issued value or for a consideration in any form
other than cash valued in excess of its fair value.
2. By not expressing his objection in writing and filing the same with
the corporate secretary despite having knowledge of such
issuance.
Nature of liability
Such director or officer shall be solidarily liable with the SH concerned
for the difference between the FV received at the time of issuance of
the stock and the par or issued value of the same.
To whom liable
To the corporation and its creditors.
Situation:
In the earlier situation when the board declared all the stocks
fully paid (bonus situation), were those watered stocks?
No. Watered stocks only apply to unissued or virgin shares.
Difference between two situations:
Other situation (bonus)
Issued at par value.
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Watered stocks
Newly issued shares are issued for a
price lower than the par value
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Relevant Provision:
Section 65. Liability of directors for watered stocks. - Any director or
officer of a corporation consenting to the issuance of stocks for a consideration
less than its par or issued value or for a consideration in any form other than
cash, valued in excess of its fair value, or who, having knowledge thereof, does
not forthwith express his objection in writing and file the same with the
corporate secretary, shall be solidarily, liable with the stockholder concerned to
the corporation and its creditors for the difference between the fair value
received at the time of issuance of the stock and the par or issued value of the
same.
Section 66. Interest on unpaid subscriptions. – Subscribers for stock shall
pay to the corporation interest on all unpaid subscriptions from the date of
subscription, if so required by, and at the rate of interest fixed in the by-laws. If
no rate of interest is fixed in the by-laws, such rate shall be deemed to be the
legal rate. (37
Delinquent Stocks
Sec 67. Payment of Balance of Subscription
Delinquent Stocks
These are unpaid subscriptions that
demandable and no payment was made.
have
become
due
and
When unpaid balance becomes due and demandable
1. Upon the arrival of the date stipulated in the contract of
subscription; or
2. If there is no stipulation, upon call by the BOD
Relevant Provision:
Section 67. Payment of balance of subscription. - Subject to the provisions
of the contract of subscription, the board of directors of any stock corporation
may at any time declare due and payable to the corporation unpaid subscriptions
to the capital stock and may collect the same or such percentage thereof, in
either case with accrued interest, if any, as it may deem necessary.
Payment of any unpaid subscription or any percentage thereof, together with the
interest accrued, if any, shall be made on the date specified in the contract of
subscription or on the date stated in the call made by the board. Failure to pay
on such date shall render the entire balance due and payable and shall make the
stockholder liable for interest at the legal rate on such balance, unless a different
rate of interest is provided in the by-laws, computed from such date until full
payment. If within thirty (30) days from the said date no payment is made, all
stocks covered by said subscription shall thereupon become delinquent and shall
be subject to sale as hereinafter provided, unless the board of directors orders
otherwise.
Sec 68 -71. Effect of Delinquency
Effect of Delinquency
Once declared delinquent, you are longer treated as a Stockholder and
you lose all the rights pertaining to it
Rights denied to stockholders w/ delinquent stocks
1. Right to vote
2. Right to be voted upon
3. Right of representation at any stockholder’s meeting.
4. Other rights of a stockholder except the right to dividends
Important: also, when stocks have been declared delinquent, it will
now be subject to a delinquency sale. The right to sell is given to the
corporation because the shares are now delinquent.
Author’s note: effects of delinquency
1. lose all rights of a stockholder except right to dividends (sec 71)
2. The delinquent stocks are subject to delinquency sale (sec 67)
Sec 68. Delinquency Sale
Sec 69. When Auction Sale may be questioned
Procedure
1. Resolution by the BOD for the order of sale of delinquent stocks.
Specifying the amount due and date, time and place of the sale
which shall not be less than thirty (30) days nor more than sixty
(60) days from the date the stocks become delinquent
2. Notice of said sale sent to every delinquent stockholder either
personally or registered mail.
3. Publication of Notice of sale, once a week for two (2) consecutive
weeks in a newspaper of general circulation in the province or
city where the principal office of the corporation is located
4. Sale at a public auction to the highest bidder.
Questioning Of Auction Sale
If there is irregularity in the conduct of the sale, the same may be
questioned.
Who is the “highest Bidder”?
The person who offers to pay the Highest Amount for the Least
Number of Shares
Section 70. Court action to recover unpaid subscription. - Nothing in this
Code shall prevent the corporation from collecting by action in a court of proper
jurisdiction the amount due on any unpaid subscription, with accrued interest,
costs and expenses. (49a)
Situation:
Section 71. Effect of delinquency. - No delinquent stock shall be voted for or
be entitled to vote or to representation at any stockholder's meeting, nor shall
the holder thereof be entitled to any of the rights of a stockholder except the
right to dividends in accordance with the provisions of this Code, until and unless
he pays the amount due on his subscription with accrued interest, and the costs
and expenses of advertisement, if any. (50a)
First bidder
Second bidder
Their offer
10k shares for 100k
5k for shares for 75k
Value per share
10/share
15/share
Who is the highest bidder/best bidder in this case?
The second bidder is the best bidder. This is because the 2nd bidder
bought the least amount of shares at the highest price. So if the
corporation goes with the best bidder, they can still sell 5k shares to
someone else at a good price. The law says best bidder, not highest
bidder.
Author’s Note: To put this in perspective. We could say that the first bidder
buys 5k shares for 50k, but the 2nd bidder buys the same amount of shares
at 75k.
Relevant Provisions:
Section 68. Delinquency sale. - The board of directors may, by resolution,
order the sale of delinquent stock and shall specifically state the amount due on
each subscription plus all accrued interest, and the date, time and place of the
sale which shall not be less than thirty (30) days nor more than sixty (60) days
from the date the stocks become delinquent.
Notice of said sale, with a copy of the resolution, shall be sent to every
delinquent stockholder either personally or by registered mail. The same shall
furthermore be published once a week for two (2) consecutive weeks in a
newspaper of general circulation in the province or city where the principal office
of the corporation is located.
Unless the delinquent stockholder pays to the corporation, on or before the date
specified for the sale of the delinquent stock, the balance due on his subscription,
plus accrued interest, costs of advertisement and expenses of sale, or unless the
board of directors otherwise orders, said delinquent stock shall be sold at public
auction to such bidder who shall offer to pay the full amount of the balance on
the subscription together with accrued interest, costs of advertisement and
expenses of sale, for the smallest number of shares or fraction of a share. The
stock so purchased shall be transferred to such purchaser in the books of the
corporation and a certificate for such stock shall be issued in his favor. The
remaining shares, if any, shall be credited in favor of the delinquent stockholder
who shall likewise be entitled to the issuance of a certificate of stock covering
such shares.
Should there be no bidder at the public auction who offers to pay the full amount
of the balance on the subscription together with accrued interest, costs of
advertisement and expenses of sale, for the smallest number of shares or
fraction of a share, the corporation may, subject to the provisions of this Code,
bid for the same, and the total amount due shall be credited as paid in full in the
books of the corporation. Title to all the shares of stock covered by the
subscription shall be vested in the corporation as treasury shares and may be
disposed of by said corporation in accordance with the provisions of this Code.
(39a-46a)
Relevant Provisions:
Section 69. When sale may be questioned. - No action to recover
delinquent stock sold can be sustained upon the ground of irregularity or defect
in the notice of sale, or in the sale itself of the delinquent stock, unless the party
seeking to maintain such action first pays or tenders to the party holding the
stock the sum for which the same was sold, with interest from the date of sale at
the legal rate; and no such action shall be maintained unless it is commenced by
the filing of a complaint within six (6) months from the date of sale. (47a)
Section 72. Rights of unpaid shares. - Holders of subscribed shares not fully
paid which are not delinquent shall have all the rights of a stockholder.
Sec 73. Lost, Stolen or Destroyed Certificates
Procedure When Cert Is Lost/ Destroyed/ Stolen
If the owner of the Certificate of Stock wants to reconstitute
his/her certificates of stock in lieu of those which have been
lost, destroyed or stolen, the following procedure must be
followed:
1. Registered owner shall file with the corporation an affidavit of loss
stating the following:
a. How the certificate was lost, stolen or destroyed;
b. Number of shares represented by the certificate;
c. Serial number of the certificate;
d. Name of corporation which issued the same;
2. Submit a verified affidavit and other information and evidence
with the books of the corporation;
3. Publish a notice in a newspaper of general circulation where the
corporation has its principal business once a week for 3
consecutive weeks at the expense of the registered owner.
4. After the expiration of 1 year from the date of the last publication
and no contest has been presented to said corporation , right to
make such contest shall be barred and corporation shall cancel in
its books the certificate of stock.
5. If, however, there is a contest, the registered owner should file a
bond or other security for a period of one year, in which case a
new certificate may be issued before the expiration of the one
year period.
In steps 4 and 5, what is the purpose of the waiting period for
one year?
Public is given one year within which to file any claim and disprove the
affidavit of loss and inform the corporation of the falsity of the claim.
However, if it is lost truly, then we will have to wait for one year so we
can issue a new certificate of stock; otherwise, if you don’t have any
patience to wait, the stockholder may have an option to file a bond.
Should a legitimate claimant turn out to have been
jeopardized by the affidavit of loss, what should the claimant
do?
The claimant will have the rights over the bond posted.
Relevant Provision: (check codals, too long)
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TITLE VIII. CORPORATE BOOKS AND RECORDS
TITLE IX. MERGER AND CONSOLIDATION
Sec 74. Books to be Kept
Corporate Combinations
Books To Be Kept
1.
Articles of Incorporation
2.
By-laws
3.
Stock and transfer books
4.
Stock certificates
5.
Minutes of the stockholders meeting
6.
Minutes of the board meeting
7.
Records of all business transactions of the corporation
(journals, ledgers, financial statements)
Right of Stockholders: Inspect Books And Records
The stockholders have the right to inspect these books and records at
are reasonable time during business days. The purpose of which is for
them to be informed of the status of the corporation. It is a way to
check whether the corporation is operating according to the purpose of
the corporation.
TN: The purpose why the corporation should keep these corporate
books and records is because these are the best evidences that may
be used in order to resolve in case there are conflicts. If these books
and records are not kept, the conflicting litigants may just present any
records and that will result to chaos.
One fundamental rule in business is full transparency so that
everything must be transparent. It is the right of every stockholder to
protect his investment and the only way to do this is to know
everything
Can the stockholder authorize his boyfriend to inspect the
corporate books?
A: Yes. There is no prohibition. There is nothing wrong with it as long
as the boyfriend is duly authorized.
Relevant provistion: check codals, too long
Sec 74. Right to Financial Statements
Section 75. 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.
Corporate Combinations
The corporation could always use some options to improve productivity,
make the company more successful and profitable. This is what they
call Corporate Combinations. Some of these are:
1. Sale of Assets
2. Stock Asset Swap
3. Sale of Stocks
4. Lease of Assets
5. Merger
6. Consolidation
Atty. E: Although the law speaks only of merger and consolidation,
there are several corporate combinations that can be resorted to by
the corporation to address certain concerns.
Acquisitions and Merger
Acquisitions and Merger
This is the term used in the business world for these corporate
combinations.
Acquisition vs merger
MERGER
Defined under the Corp. Code
Certain
exist
corporations
(dissolution happens)
Examples:
1. Merger
2. Consolidation
cease
to
ACQUISTION
Not defined but allowed under
the Code especially in the
provision of sale of all or
substantially all of the assets of
the corporation.
Corporations continue to exist.
(no dissolution)
Examples:
1. Sale of Assets
2. Sale of Stocks
3. Stock Asset Swap
Sale of Assets
Sale of Assets
A union of corporations may be effected by one corporation selling all
or substantially all of its assets to another. (see Sec. 40) Such sale is
usually, though not necessarily, made in the course of the dissolution
of the vendor corporation. (De Leon)
Atty E:
Time may come that you may have to switch business, because your
old business is no longer as good as before (called as the sunset
business)
Example: Pentax has closed because no one uses cameras
anymore, because today everyone has a camera.
TN: In that instance, the company may choose to sell their assets, in
cash or capital, and engage in another business.
Important:
In this instance, we have to amend Articles of Incorporation and
change our purpose.
Important: The selling corporation does not necessarily dissolve. The
corporation will not be dissolved, we’re just trying to engage or invest
in another business. Juridical personality will not necessarily be
affected.
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If it sells all of its assets, what will happen?
Since the corporation has nothing to operate on then it may lead to
liquidation.
Atty E: It is a “washed cash”
What may the corporation do with its cash?
It may invest/venture in to another business, to diversify and look for
another business (and possibly become a sunrise corporation)
Does it still have assets?
Yes. Liquid assets in the form of cash.
TN: A corporation receives cash in this situation. The corporation may
distribute said cash and dissolve OR they may venture into another
business. It is up to them on how they would use their assets.
Sale of Stocks
Sale of Stocks
The purpose of a holding company is to acquire a sufficient amount of
the stock of another corporation for the purpose of control. The
acquiring corporation is called the parent or holding company. The
corporation whose stocks are acquired is known as the subsidiary
corporation. The legal identity of the corporation is retained. (De Leon)
Illustration:
The existing corporation perhaps wants to engage in another business,
instead of selling the assets, they decided to buy a corporation.
Corporation B is operating a boat business, who was also no longer
interested in pursuing its boat business. Your corporation may choose
to buy their business through buying their shares of stocks. There can
also be stocks – assets swap here.
Important: The selling corporation does not cease to exist.
Why may a corporation want to sell stocks?
Because the corporation needs additional capital.
Recall: Options of a corporation to increase capital
1. Borrow from the financial institutions
2. Issue shares of stocks
3. Issue redeemable shares.
When Sale of Stocks becomes a Corporation Combination
Sale of Stocks is a normal day to day activity of corporation especially
when the corporation is publicly listed, where there may be sale every
minute of the day.
Important: Sale of Stock as it is, is not a corporate combination
because it may be a normal day to day activity. It may be a sale
through the stock market or through another person. Sale of Stocks
becomes a corporate combination when consequently control is
transferred. Maybe when there is sale of 60% or above.
Recall:
1.
2.
3.
How one becomes a stockholder:
Subscription
Buying shares from existing stockholders
Buying of treasury shares from corporation itself.
TN: You do not subscribe to treasury shares but you buy treasury
shares. Subscription refers to subscribing newly issued shares.
Lease of Assets
Lease Of Assets
When the corporation can just lease all their assets and wait for the
rentals without necessarily dissolving especially when the stockholders
are in the sunset of their lives.
Stock - Asset Swap
Stock - Asset Swap
A corporation sells all of their assets, and in exchange, gets paid with
stocks of the other corporation.
Atty E: It is up to them to keep the stocks in the name of the
corporation. It may earn dividends or subsequently sell it and receive
cash and then distribute the cash. Or the corporation may distribute
the stocks among themselves and dissolve. So they now become
stockholders of the acquiring corp.
Important: The corporation that assigned its assets does not cease
to exist. It only acquired stocks of the other corporation.
Illustration:
Stock-Asset Swap happens when the assets of Corpo. A are sold to
Corp. B and in exchange, Corp. B issues shares of stocks to Corp. A.
The stockholders of Corp. A become the stockholders of Corp. B. No
need to close corporation A in this instance.
Merger and Consolidation
Merger
Two or more corporations join together and only of them subsists
which is the surviving corporation (A + B = A/B)
Important: One ceases to exist and the other survives.
Consolidation
Two or more corporations join together a new and separate
corporation is created (A + B = C)
Important: All the constituent corporations cease to exist and a new
corporation is formed.
Merger
Purpose of Merger
Why do you intend to marry?
1. Companionship: To grow old w/ me or to have a lifetime partner.
2. Expanding my relationship and go bigger.
3. To have children.
In merger, why would companies merge?
Companies merge for the following reasons:
1. They would want to expand their business operations.
2. A company may have the necessary capital but not the necessary
managerial or technical skills.
3. It might be a way to increase their assets.
4. It may be a means of reducing cost.
Atty. E: Marriage and merger have just about the same objectives.
Learn technical skills
I might not be able to perform something but I need the technical
skills of someone else to be able to perform.
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Examples:
1. A banking corporation wants to engage into the food business. It
only knows how to count money, not prepare food. It should
rather look for someone who could to immediately start the food
business rather than train itself to produce food which might take
time. Under the learning curve, it might not be easy. Better
merge with someone who has the skill and expertise to perform
the new business in mind.
2. A bank in Cebu, wants to put up a branch in Mindanao. Rather
than looking for people in Cebu and bring them to Mindanao, it
can just look for existing banks who might be willing to partner
with it and share the same vision. Hopefully, establish a perfect
marriage.
Secs. 76 – 79. Process of Merger/Consolidation
1. Conducting due diligence through verification process
2. Approval of plan by majority of the board
3. Approval of stockholders
4. Execution of formal contract
5. Submission to SEC for approval
6. Conduct of hearing by SEC
7. Issuance of Certificate by SEC
1. Conducting due diligence through verification process
Before getting married, what should you do?
You must first check his assets, his background, his attitude, his age
and health, his family.
TN: In the same way, you must also check the background of the
other corporation.
a.
Illustration:
Corporation A has net worth of 50M assets and 20M liabilities. Thus, its
net worth is 30M. Corporation B has 100M assets, 30M liabilities. Its
net worth is 70M.
If the total shares in their capitalization to be distributed is 100K, then:
1. Corporation A is allotted with 30k shares – this is 30% of the
100K which is A’s share in proportion to its net worth
2. Corporation B is allotted 70K - 70% of the 100K of the sharing in
proportion to B’s net worth
Important: In the articles of merger, the distribution of the
capitalization is presented according to its percentage share in the
capital. It is in the articles of merger that we delegate that the total
If the articles of merger would provide 50% to A and 50% to
B, what could happen?
It would be prejudicial on the part of corporation B when it holds more
than 50%. Once presented to the respective stockholders of the
constituent corporation, this plan will not approved by the stockholders
of Corporation B.
2. Approval of plan
The BOD/BOT or each corporation, party to the merger or
consolidation, shall approve a plan of merger or consolidation.
Important: this must be authorized by Majority of the BOD or BOT
3. Submission to stockholders or members for approval
The plan shall be submitted for approval by the stockholders/members
(stockholders representing 2/3 of the outstanding capital stock or 2/3
of the members) of each of such corporation.
Plan the merger and check the assets.
The corporation should look at the assets and liabilities of the
other corporation before merging. Corporation has to check
also the stockholders and officers of another corporation. Also,
it has to check the parent and sister company of another
corporation.
4. Execution of formal contract
After approval by the prescribed vote of the stockholder/members, a
formal contract known as articles of merger or of consolidation shall be
executed by each of the constituent corporations, to be signed by the
president or VP and certified by the secretary or assistant secretary of
each corporation.
Atty E: the corporation should investigate as to the assets and
liabilities of another corporation in actual inspection because the
condition reflected in the list of assets as to status might be different.
One should also look if the assets have claimants or have pending case
in court.
5. Submission to SEC for approval
The articles shall then be submitted for approval to the SEC in
quadruplicate for its approval.
Important: Due diligence must be conducted.
b.
Check the background, the attitude
After conducting due diligence through verification process,
we now know the value of assets and its liabilities of each
constituent corporation. It is important to know the net worth
of each constituent corporation in order to know their
respective share in the outstanding capital of each constituent
to the surviving/consolidated corporation.
Importance of knowing the net worth of the corporation
After conducting due diligence through verification process, we now
know the value of assets and its liabilities of each constituent
corporation. It is important to know the net worth of each constituent
corporation in order to know their respective share in the outstanding
capital of each constituent to the surviving/consolidated corporation.
The net worth is the basis of the sharing of the constituent
corporations. The purpose of knowing the net worth is to be able to
know how much each constituent corporation would share in the
capital.
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TN: In case of merger or consolidation governed by special laws, the
favorable recommendation of the appropriate government agency shall
first be obtained.
6. Conduct of hearing by SEC
SEC may or may not conduct a hearing. It will conduct a hearing if it
has reason to believe that the proposed merger or consolidation is
contrary to or inconsistent with the provisions of the Code or existing
laws.
7. Issuance of certificate by SEC
The SEC shall issue a certificate or merger or consolidation and the
merger or consolidation shall be effective.
Relevant Provisions:
Section 76. Plan or merger of 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.
The board of directors or trustees of each corporation, party to the merger or
consolidation, shall approve a plan of merger or consolidation setting forth the
following:
1.
The names of the corporations proposing to merge or consolidate, hereinafter
referred to as the constituent corporations;
2.
The terms of the merger or consolidation and the mode of carrying the same
into effect;
3.
A statement of the changes, if any, in the articles of incorporation of the
surviving corporation in case of merger; and, with respect to the consolidated
4.
corporation in case of consolidation, all the statements required to be set forth
in the articles of incorporation for corporations organized under this Code; and
Such other provisions with respect to the proposed merger or consolidation as
are deemed necessary or desirable. (n)
Section 77. Stockholder's or member's approval. - Upon approval by majority
vote of each of the board of directors or trustees of the constituent corporations of the
plan of merger or consolidation, the same shall be submitted for approval by the
stockholders or members of each of such corporations at separate corporate meetings
duly called for the purpose. 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. Said notice shall state the purpose
of the meeting and shall include a copy or a summary of the plan of merger or
consolidation. The affirmative vote of stockholders representing at least two-thirds (2/3)
of the outstanding capital stock of each corporation in the case of stock corporations or
at least two-thirds (2/3) of the members in the case of non-stock corporations shall be
necessary for the approval of such plan. Any dissenting stockholder in stock
corporations may exercise his appraisal right in accordance with the Code: Provided,
That if after the approval by the stockholders of such plan, the board of directors
decides to abandon the plan, the appraisal right shall be extinguished.
Any amendment to the plan of merger or consolidation may be made, provided such
amendment is approved by majority vote of the respective boards of directors or
trustees of all the constituent corporations and ratified by the affirmative vote of
stockholders representing at least two-thirds (2/3) of the outstanding capital stock or
of two-thirds (2/3) of the members of each of the constituent corporations. Such plan,
together with any amendment, shall be considered as the agreement of merger or
consolidation. (n)
Section 78. Articles of merger or consolidation. - After the approval by the
stockholders or members as required by the preceding section, articles of merger or
articles of consolidation shall be executed by each of the constituent corporations, to
be signed by the president or vice-president and certified by the secretary or assistant
secretary of each corporation setting forth:
1)
The plan of the merger or the plan of consolidation;
2)
As to stock corporations, the number of shares outstanding, or in the case of
non-stock corporations, the number of members; and
3)
As to each corporation, the number of shares or members voting for and
against such plan, respectively. (n)
Section 79. Effectivity of merger or consolidation. - The articles of merger or of
consolidation, signed and certified as herein above required, shall be submitted to the
Securities and Exchange Commission in quadruplicate for its approval: Provided, That
in the case of merger or consolidation of banks or banking institutions, building and
loan associations, trust companies, insurance companies, public utilities, educational
institutions and other special corporations governed by special laws, the favorable
recommendation of the appropriate government agency shall first be obtained. If the
Commission is satisfied that the merger or consolidation of the corporations concerned
is not inconsistent with the provisions of this Code and existing laws, it shall issue a
certificate of merger or of consolidation, at which time the merger or consolidation
shall be effective.
If, upon investigation, the Securities and Exchange Commission has reason to believe
that the proposed merger or consolidation is contrary to or inconsistent with the
provisions of this Code or existing laws, it shall set a hearing to give the corporations
concerned the opportunity to be heard. Written notice of the date, time and place of
hearing shall be given to each constituent corporation at least two (2) weeks before
said hearing. The Commission shall thereafter proceed as provided in this Code.
Sec. 80. Effects of Merger/Consolidation
Effects Of Merger/ Consolidation
1. In the case of merger, the constituent corporation ceases to exist
while the surviving corporation survives.
2. In the case of a consolidation, the constituent corporations ceases
to exist while the consolidated corporation is created.
3. The surviving or consolidated corporation possess all the rights,
liabilities, powers and franchises of the constituent corporation.
4. It will possess the properties of the constituent corporation
ANS: Yes, you cannot blame the bank. The bank has nothing to do
with the merger. They do not know how the merger worked. So you
have to go to the Register of Deeds to transfer the names from Corp A
to Corp B. You do not need to present the Deeds of Sale for the
parcels, all you need to show is the Articles of Merger. That would be
sufficient to establish the transfer of these properties.
What would you do if you really want to borrow money?
1. Go to the Register of Deeds and have the title transfer from the
previous owner’s name to the surviving corporation’s name.
2. Present the Articles of Merger which will indicate that certain
properties have been transferred from one corporation to the
surviving corporation.
Important: There is no need for presentation of deeds of sale; it is
enough to present the articles of merger to establish the transfer of
these properties
Situation:
The records of deed showed that there was a pending case
filed against Corporation A by a Plaintiff Debtor. When the
hearing resumes, who will now appear in behalf of A?
Ans: The surviving or new corporation will appear in behalf of A.
Important: Explain the circumstance to the court.
As Counsel of B, the surviving Corporation, should manifest that:
1. Has entered into a merger agreement and corporation b has
decided to be the surviving corporation;
2. Present a copy of the articles of merger for the guidance of the
court and other counsels; and,
3. Invite the attention of the Honorable Court to a certain paragraph
which states that all cases filed in behalf of the corporation
should now be assumed by the surviving corporation.
Important: Assets, claims and other debts due to the constituent
corporation are automatically transferred to the surviving corporation.
What else will be automatically transferred?
Liabilities, rights, privileges, franchises without need of execution of a
separate deed of assignment. The transfer is automatic.
What advantage will I have in entering into a merger?
Transfers, assignments, conveyances need not be contained in a
separate document. The execution of the articles of merger will be
sufficient to effect the transfer and conveyance of all these things.
Relevant Provision:
Section 80. Effects of merger or consolidation. - The merger or
consolidation shall have the following effects:
1.
The constituent corporations shall become a single corporation which, in
case of merger, shall be the surviving corporation designated in the plan
of merger; and, in case of consolidation, shall be the consolidated
corporation designated in the plan of 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 organized under this Code;
4.
Automatic Transfer of Assets, Claims and other Debts due
Situation:
Corporation A and corporation B decided to merge. Before the
merger, Corp A was an owner of 10 parcels of land with titles.
After the merger, B was the surviving corporation. The titles
were transferred to them. Corp B now went to the bank to
borrow money with the parcels of land as security, but the
bank refused because it claims that the titles belong to Corp A
and not Corp B. If you were the bank would you refuse?
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5.
The surviving or the consolidated corporation shall thereupon and thereafter
possess all the rights, privileges, immunities and franchises of each of the
constituent corporations; and all property, real or personal, and all receivables
due on whatever account, including subscriptions to shares and other choses in
action, and all and every other interest of, or belonging to, or due to each
constituent corporation, shall be deemed transferred to and vested in such
surviving or consolidated corporation without further act or deed; and
The surviving or consolidated corporation shall be responsible and liable for all
the liabilities and obligations of each of the constituent corporations in the same
manner as if such surviving or consolidated corporation had itself incurred such
liabilities or obligations; and any pending claim, action or proceeding brought by
or against any of such constituent corporations may be prosecuted by or
against the surviving or consolidated corporation. The rights of creditors or liens
upon the property of any of such constituent corporations shall not be impaired
by such merger or consolidation.
Stock - Asset Swap vs. Merger
Stock -Asset Swap Vs Merger
Stock asset swap
Metaphor: common law marriage/
Living together
Effect: If you are living together you
can do everything that a married
couple can only that there is no
commitment
No dissolution of either corporation
Generally, in a stock-asset swap,
there is no assumption of liability.
However, one can choose which
asset or liability to assume while in
merger, there is assumption of all the
assets and liabilities.
Merger/ consolidation
Metaphor: marriage
Closure of business is not equivalent to cessation of the existence of
the corporation. In other words, I can sell my business without
dissolving my corporation. In this situation, the employees can still
pursue against the selling corporation because it still exists and still
has assets. Although they want to engage in another business, they
also have to take care of their employees who are entitled to
separation pay.
Follow-up situation: Merger
What if this was a merger and not a stock - asset swap, what
happens to the employees?
Atleast one corporation is
dissolved
All assets, liabilities and
collectibles will be assumed
by
the
surviving/
new
corporation
Illustration:
If Corp. A wants to enter into a stock-asset swap with Corp. B who has
a parcel of land in the mountains and another parcel of land in the city
but with squatters, then Corp. A can choose which among the parcels
of land to assume.
Atty. E: There are advantages and disadvantages. So it is highly
situational and one should be careful to find out what is best for the
corporation.
Caveat: To illustrate the difference of the effects of a merger versus
stock asset swap, sir asked the situation below…
Situation: Stock- Asset Swap
Selling corporation sold all its assets to the paying corporation
who paid with its stocks. The selling corporation becomes a
stockholder of the selling corporation. There is a problem.
Before sale, the selling corporation had 100 employees, upon
sale of all assets, what will now happen? There is a dilemma
of the employees, what will you advice them?
ANS: The employees will be entitled to separation pay from their
employer, the selling corporation, unless the closure was due to
serious business losses/ reversals. It is the selling corporation, the
employers of these employees, that is obliged to take care of them.
Employers obliged to pay separation pay for termination
based on authorized causes
This is because in labor law, the employee can ask for separation pay
if the termination was based on authorized causes.
Caveat: in answering this, the possible arguments of both the
employers and employees are as follows:
Argument of employers: redundancy in positions.
If they automatically become employees, it will result in redundancy.
1. Janitors – 5 janitors from surviving corporation and another 5
from the previous corporation, 10 janitors. We only need 5.
2. Managers – We have 10 managers, another 10 coming in, we
now have 20 managers.
3. Presidents - 1 president, another president from the other
corporation, we now have 2 presidents.
TN: This is Unfair for the surviving corporation.
The surviving corporation has its own policies on recruitment and the
kind of people it will invite to join its organization. It does not know
who these employees are since it did not process their application nor
screen their papers. It does not know its biography. It might not be
fair to the surviving corporation.
Important: Remedy of employer - termination
In redundancy, the employees can be validly terminated because it is
an authorized cause. The terminated employees have the right to ask
for separation pay from the surviving corporation
Argument of employees: Man power forms part of assets
assumed
In merger, the surviving corporation assumes the assets and liabilities
of the other constituent corporation. Employees are part of the merger
because they are part of the assets.
3 M’s considered as assets:
a. Machinery
b. Money
c. Man power
What will the corporation use in paying these employees? Do
they have cash? Stocks?
Since there was an exchange of stocks and assets, the employees can
go after the properties aside from the one exchanged by the selling
corporation. If there are assets, why not proceed against them.
Decision of SC regarding manpower forming part of assets
However, in one case, the Supreme Court declared that People are not
assets, thus, not part of the merger. Unfortunately, the SC did not
agree with the employees position that people are part of assets. SC
insisted that people are not machineries nor assets. Therefore, they
cannot be part of merger. The surviving corporation cannot be
compelled to assume any liability insofar as the employees are
concerned.1
Amount of Separation pay
GR: 1 month or ½ month per year of service
(15 days per year of service).
XPT: If closure is due to serious business reversals.
Important:
The effect of this is that surviving corporation cannot be made liable
for the termination of the employees of the dissolved constituent
corporation.
Important: Here the closure was not because of serious business
reversals since the selling corporation still has assets in the form of
stocks.
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Sir himself cannot sleep on such decision. How can the SC be wrong? But that
is the way it is.
1
Employees are not automatically assumed by the surviving corporation.
There is no automatic assumption as to the liabilities in favor to the
employees of the constituent corporation by the surviving corporation.
Lesson of the story
When two or more corporations would like to enter into a merger or
consolidation, the constituent corporations should express in their
agreement matters relating to the employees. They should not merely
rely on the word “automatic assumption”. To protect your employees
you must state “take care of my employees” in the agreement.
summary: what happens to employees during corp combination?
1. in a stock - asset swap, the employees will be terminated, and
will be entitled to separation pay from the SELLING Corporation
because the selling corp still has assets (which includes the newly
acquired stocks). they may go after this.
2. In a merger, there will be redundancy, therefore the SURVIVING
corp may terminate them, but is liable for separation pay. The SC,
however, said that manpower is not an asset because people are not
assets, therefore they don’t form part of the assets acquired by the
surviving corp, hence, the surviving corp will not be liable to the
terminated employees.
Title X – Appraisal Right
Sec. 81. Instances of Appraisal Right
Instances when the appraisal right may be exercised
1. In case any amendment to the articles of incorporation has the
effect of changing or restricting the rights of any stockholder or
class of shares, or of authorizing preferences in any respect
superior to those of outstanding shares of any class, or of
extending or shortening the term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or
other disposition of all or substantially all of the corporate
property and assets as provided in the Code; and
3. In case of merger or consolidation.
Caveat: other instances mentioned by de leon, not in codals. Don’t
mention these in class
4.
5.
In case the corporation decides to invest its funds in another
corporation or business for any purpose other than its primary
purpose.
Any stockholder of a close corporation, for any reason, compel
said corporation to purchase his shares at their fair value, which
shall not be less than their par or issued value, when the
corporation has sufficient assets in its books to cover its debts
and liabilities exclusive of capital stock.
Reason why this Right of Appraisal is given to the stockholder
There is fundamental change of agreement already.
Atty E: Despite the fact that the Stockholder must remain with the
corporation through thick and thin, whether profitable or losing, better
or for worse, the authority to leave from the corporation is given by
law. Although the SH cannot just leave the corporation as he wishes,
there are instances when a SH should be given the privilege to leave
the corporation. This is so when certain situations arise.
Exclusivity Of The List
The law lists specific instances when appraisal right could be exercised.
Other than those in the list, the stockholder cannot.
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Reason: It would violate the trust fund doctrine because generally,
the corporation cannot reacquire the shares of the stockholders.
Conversely, the stockholder cannot just return his shares of stocks and
compel the corporation to pay back.
Atty. E: In short, once you are part of the corporation, you must stay for
better or for worse. If you are a stockholder, you cannot just remain when
things are going well, and when things go sour, you can pull out anytime.
That is not the case. Once you are part of the corporation, you have to stay,
unless the instances when appraisal right can be exercised are present. This
is by way of exception.
Important:
You cannot demand for the return of capital because you are an
investor. Because as an investor, you take a risk when you invest,
there’s no guarantee of profit - as compared to a creditor or a lender
where there is an assurance that you will collect no matter what
happens to the business of the borrower. When you invest you should
take the risk.
Lesson of the story: When you invest, be very careful. The offer may
be very attractive but also very dangerous.
TN: Always remember the rule on risk and return. Lower returns are
usually associated with lower risk investments. Higher potential returns
are associated with investments of higher risk. Hence, there is no such
thing as an investment, wherein there is low risk with high returns.
Always be careful.
Summary:
GR: Stockholder cannot demand for the return of his investment. Also,
a shareholder cannot re-acquire their shares, both because of the
Trust Fund Doctrine
XPT: Instances when appraisal right can be exercised
Relevant Provision:
Section 81. Instances of appraisal right. - Any stockholder of a corporation
shall have the right to dissent and demand payment of the fair value of his
shares in the following instances:
1. In case any amendment to the articles of incorporation has the effect of
changing or restricting the rights of any stockholder or class of shares, or of
authorizing preferences in any respect superior to those of outstanding shares of
any class, or of extending or shortening the term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other
disposition of all or substantially all of the corporate property and assets as
provided in the Code; and
3. In case of merger or consolidation.
Sec 82. Requirements before exercise of Right
Conditions before one could exercise the right:
1. The stockholder must be present at the meeting.
2. The stockholder must express his dissent or have voted against
the proposed corporate action
3. The stockholder must make a Written Demand on the corporation
within 30 days after the vote was taken
4. Within 10 days after demanding payment for his shares,
stockholder must present his stock certificate for the purpose of
notation with the corporation
5. The price to be paid is the fair value of the shares on the date
before the vote was taken
6. The fair value shall be agreed upon but in case there is no
agreement within 60 days from the date the vote was taken, the
fair value shall be determined by an appraisal committee
Appraisal Committee
Consists of 3 disinterested persons: one of whom shall be named by
the stockholder another by the corporation and the third, by the two
who were chosen.
Recall: Unrestricted Retained Earnings are surplus profit of the
corporation which funds are not allocated by any plans - funds that are
free. The right is difficult to exercise because the corporation can
always say that they have reserved these funds somewhere.
When paid
Within 30 days after the award of the appraisal committee with there
was no agreement
Other option of the dissenting SH to leave the corporation
Sell all his existing stocks to other interested person
Important:
Payment of the shares must be made only out of the unrestricted
retained earnings of the corporation. Otherwise, if there is no URE, he
cannot be paid. If the corporation pays him, it violates the Trust Fund
Doctrine.
Atty E: It will now be considered a return of the capital. It prejudices
the interest of the creditors, and therefore jeopardizes the interest of
the creditors and violates the Trust Fund doctrine.
Relevant Provision:
Section 82. How right is exercised. - The appraisal right may be exercised
by any stockholder who shall have voted against the proposed corporate action,
by making a written demand on the corporation within thirty (30) days after the
date on which the vote was taken for payment of the fair value of his shares:
Provided, That failure to make the demand within such period shall be deemed a
waiver of the appraisal right. If the proposed corporate action is implemented or
affected, the corporation shall pay to such stockholder, upon surrender of the
certificate or certificates of stock representing his shares, the fair value thereof
as of the day prior to the date on which the vote was taken, excluding any
appreciation or depreciation in anticipation of such corporate action.
If within a period of sixty (60) days from the date the corporate action was
approved by the stockholders, the withdrawing stockholder and the corporation
cannot agree on the fair value of the shares, it shall be determined and
appraised by three (3) disinterested persons, one of whom shall be named by
the stockholder, another by the corporation, and the third by the two thus
chosen. The findings of the majority of the appraisers shall be final, and their
award shall be paid by the corporation within thirty (30) days after such award is
made: Provided, That no payment shall be made to any dissenting stockholder
unless the corporation has unrestricted retained earnings in its books to cover
such payment: and Provided, further, That upon payment by the corporation of
the agreed or awarded price, the stockholder shall forthwith transfer his shares
to the corporation.
Sec 83. Effects of Exercise of Right
Effects of Exercise of Right
1. All rights accruing to such shares shall be suspended
which includes:
a. Right to vote
b. Right to be voted upon
c. Right to be represented
d. Right to receive dividends
2.
He shall be entitled to receive payment of the fair value of
his share as agreed upon between him and the corporation or as
determined by the appraisers chosen by them.
Worse effects of the exercise of the right
The stockholder is in a bad situation because his rights have been
suspended. Worse, he does not have the right to demand cash, and he
cannot compel payment because he has to wait URE exists.
22 | U N I V E R S I T Y
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Can you compel the corporation to pay the value of your
shares when exercising your appraisal right?
No, there is nothing provided in the code. This is unlike demand for
dividends which you can do when the URE exceeds 100% of the Paidup Capital
You are in a bad situation, because you no longer have the
right to vote, dividends, but worse?
You cannot withdraw the exercise of the appraisal right anymore, but
at the same time you cannot compel to be paid. You’re stuck with your
rights being suspended and not being able to get the fair value of your
shares.
SUMMARY: What makes this appraisal right bad?
1. No rights during exercise of the right (no right to vote, voted
upon, represent, dividends)
2. Can not demand payment unless there are URE
3. Can not be withdrawn except for causes under sec 84
Relevant Provision:
Section 83. Effect of demand and termination of right. - From the time of
demand for payment of the fair value of a stockholder's shares until either the
abandonment of the corporate action involved or the purchase of the said shares
by the corporation, all rights accruing to such shares, including voting and
dividend rights, shall be suspended in accordance with the provisions of this
Code, except the right of such stockholder to receive payment of the fair value
thereof: Provided, That if the dissenting stockholder is not paid the value of his
shares within 30 days after the award, his voting and dividend rights shall
immediately be restored.
Sec 84. When Appraisal Right Ceases
GR: You cannot withdraw the exercise of the appraisal right
XPT:
1.
Such stockholder withdraws his demand for payment and the
corporation consents thereto
2.
The proposed corporate action is abandoned or rescinded by
the corporation.
3.
The proposed corporate action is disapproved by the SEC where
its approval is necessary.
4.
The SEC determines that such stockholder is not entitled to
appraisal right.
Important: In those instances, the right to demand payment ceases,
and the Corporation restores all the rights of the Stockholder.
Relevant Provision:
Section 84. When right to payment ceases. - No demand for payment
under this Title may be withdrawn unless the corporation consents thereto. If,
however, such demand for payment is withdrawn with the consent of the
corporation, or if the proposed corporate action is abandoned or rescinded by
the corporation or disapproved by the Securities and Exchange Commission
where such approval is necessary, or if the Securities and Exchange Commission
determines that such stockholder is not entitled to the appraisal right, then the
right of said stockholder to be paid the fair value of his shares shall cease, his
status as a stockholder shall thereupon be restored, and all dividend distributions
which would have accrued on his shares shall be paid to him.
Sec 85. Costs of Appraisal Right and transfer
Who bears the cost?
1. By the Corporation
a. Where the price which the corporation offered to pay the
dissenting stockholder is lower than the fair value as
determined by the appraisers named by them
b. Where an action is filed by the dissenting stockholder to
recover such fair value and the refusal of the stockholder to
receive payment is found by the court to be justified
2.
By the Dissenting Stockholder
a. Where the price offered by the corporation is approximately
the same as the fair value ascertained by the appraisers
b. Where the same action is filled by the dissenting
stockholder and his refusal to accept payment is found by
the court to be unjustified.
Effect of transfer
What is the effect of the act of transferring the certificates?
In effect, he abandoned his claim therefore it cancels his right of
appraisal. Thereafter he ceases to be a stockholder and the accrued
dividends and the right to vote will now go to the transferee.
Relevant Provisions:
Section 85. Who bears costs of appraisal. - The costs and expenses of
appraisal shall be borne by the corporation, unless the fair value ascertained by
the appraisers is approximately the same as the price which the corporation may
have offered to pay the stockholder, in which case they shall be borne by the
latter. In the case of an action to recover such fair value, all costs and expenses
shall be assessed against the corporation, unless the refusal of the stockholder to
receive payment was unjustified. (n)
Section 86. Notation on certificates; rights of transferee. - Within ten (10)
days after demanding payment for his shares, a dissenting stockholder shall
submit the certificates of stock representing his shares to the corporation for
notation thereon that such shares are dissenting shares. His failure to do so shall,
at the option of the corporation, terminate his rights under this Title. If shares
represented by the certificates bearing such notation are transferred, and the
certificates consequently cancelled, the rights of the transferor as a dissenting
stockholder under this Title shall cease and the transferee shall have all the
rights of a regular stockholder; and all dividend distributions which would have
accrued on such shares shall be paid to the transferee.
Relevant Provision:
Section 87. Definition. - For the purposes of this Code, a non-stock
corporation is one where no part of its income is distributable as dividends to its
members, trustees, or officers, subject to the provisions of this Code on
dissolution: Provided, That any profit which a non-stock corporation may obtain
as an incident to its operations shall, whenever necessary or proper, be used for
the furtherance of the purpose or purposes for which the corporation was
organized, subject to the provisions of this Title.
The provisions governing stock corporation, when pertinent, shall be applicable
to non-stock corporations, except as may be covered by specific provisions of
this Title. (n)
Sec 88. Purpose of a Non- Stock Corporation
Relevant Provision:
Section 88. Purposes. - Non-stock corporations may be formed or organized
for charitable, religious, educational, professional, cultural, fraternal, literary,
scientific, social, civic service, or similar purposes, like trade, industry,
agricultural and like chambers, or any combination thereof, subject to the special
provisions of this Title governing particular classes of non-stock corporations.
Sec 89 - 91. Members
Qualification of Members
Applicants have to go through the membership screening process
conducted by a membership committee in order to be a member of a
corporation. This is because the non-stock corporation has to ensure
that it will only admit members who are in good behavior.
Process of screening membership
In membership, there is a committee that determines whether or not
one may qualify to be a member. There are 5 members of the
screening committee. Each member has two balls: black ball and white
ball. When the applicant’s name is presented, each will have to go over
the bio-data and they have the option to drop a black ball or a white
ball into a glass. If you do not want the applicant to be a member,
drop the black ball. That’s where the term blackballed was derived
which means the person was denied.
Discipline of Members
The membership committee also has the power to discipline members.
TITLE XI. NON - STOCK CORPORATIONS
TN: In one case, there was a member who was just wearing his
bathing trunks while walking inside the restaurant of the non-stock
corporation. The membership committee can validly discipline him
because there were kids in the event
Sec 87. Definition
Classification of Members
Non - Stock Corporations
One where no part of its income is distributable as dividends to its
members, trustees, or officers and that any profit shall be used for the
furtherance of the purposes for which the corporation was organized.
TN: They are still earning profits. However, these profits are just
ploughed back to the corporation. In fact, these non-stock
corporations are commonly more profitable than stock corporations.
Board of Trustees
Non-stock corporations are governed by the Board of Trustees. Their
number may be more than 15.
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Can members be classified as Voting and Non-voting?
Yes
Voting Rights in Stock and Non-stock Corporations
Stock corporations
Non-stock corporations
Generally,
stockholders
have Generally, members have voting
voting rights
rights but it may be granted,
limited, or totally denied
Important:
Members have voting rights but it may be granted, limited, or totally
denied by the corporation
TN:
a.
b.
c.
in other words, there are members who:
Can vote
Can vote but only in certain instances or issues
Cannot vote at all
Important:
A non-stock corporation has the power to classify its
membership into as many classifications as it wishes so long as
these are uniformly applied.
Example: As a matter of fact, if you are a member of a club, you could
be a proprietary member or a non-proprietary member, which means
that you could just play by claiming your playing rights but you could
not be part of the voting members. And even if you are already a
holder of a membership certificate, it does not mean that you could
automatically enjoy the facilities of the club.
Ownership of a share is not membership
Ownership does not equate to membership
Ownership of share does not mean membership in a non-stock
corporation. That share only represents your ownership of share which
can be transferred. It merely reflects that you own a certain part of
the assets of the corporation indirectly as a member. Therefore, even
if you own one share which could be worth millions, it does not mean
that you could enjoy the facilities of the club.
Can you transfer your membership in a non-stock corporation?
No, membership is personal. You cannot transfer it. Only you can
enjoy the facilities provided by the corporation. However, this is
different from ownership. As an owner, you can transfer your shares
but the transferee does not automatically become member. Even if you
are an owner, it still needs admission to become a member.
A share is worth million. So you can transfer your ownership, however,
once you transfer it, you will lose all your privileges. One qualification
to become a member is to be an owner of one share.
Important: Ownership can be transferred, but membership cannot.
Relevant Provisions:
Section 89. Right to vote. - The right of the members of any class or classes
to vote may be limited, broadened or denied to the extent specified in the
articles of incorporation or the by-laws. Unless so limited, broadened or denied,
each member, regardless of class, shall be entitled to one vote. Unless otherwise
provided in the articles of incorporation or the by-laws, a member may vote by
proxy in accordance with the provisions of this Code. (n)
Voting by mail or other similar means by members of non-stock corporations
may be authorized by the by-laws of non-stock corporations with the approval of,
and under such conditions which may be prescribed by, the Securities and
Exchange Commission.
Section 90. Non-transferability of membership. - Membership in a nonstock corporation and all rights arising therefrom are personal and nontransferable, unless the articles of incorporation or the by-laws otherwise provide.
Section 91. Termination of membership. - Membership shall be terminated
in the manner and for the causes provided in the articles of incorporation or the
by-laws. Termination of membership shall have the effect of extinguishing all
rights of a member in the corporation or in its property, unless otherwise
provided in the articles of incorporation or the by-laws.
Sec 92-93. Election and Term of trustees
Caveat: he asked about election/ board in a non- stock corp compared
to that in a stock corporation
Manner of voting
the members of
24 | U N I V E R S I T Y
STOCK
Cumulative
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NON- STOCK
Straight
BOD/BOT
Number of
directors/ trustees
Term of directors/
trustees
Election of officers
At least 5, not more
than 15
1 year
At least 5, can be
more than 15
3 years (staggered)
Vested in BOD
May
be
Elected
directly by members
unless
otherwise
provided
in
the
articles
of
incorporation or bylaws
Term of Trustees in a Non- Stock Corporation
Illustration (3-year staggered term):
In 2017, during the first election, 15 BOT will be elected. 1/3 or 5 of
the BOT shall have a term of 1 year, another 1/3 shall have a term of
2 years then lastly, the other 1/3 shall have a 3-year term.
In 2018, second election, only 5 BOT will be elected with a 3-year term,
succeeding the first batch of the BOT that has a 1 year term.
In 2019, third election, another 5 BOT shall be elected to succeed the
first batch of BOT that has 2-year term. These new set of BOT shall
have a 3-year term.
Now, there will be an annual election for the 1/3 of the BOT with a 3year term.
Relevant Provisions:
Sec. 92. Election and term of trustees. - Unless otherwise provided in the
articles of incorporation or the by-laws, the board of trustees of non-stock
corporations, which may be more than fifteen (15) in number as may be fixed in
their articles of incorporation or by-laws, shall, as soon as organized, so classify
themselves that the term of office of one-third (1/3) of their number shall expire
every year; and subsequent elections of trustees comprising one-third (1/3) of
the board of trustees shall be held annually and trustees so elected shall have a
term of three (3) years. Trustees thereafter elected to fill vacancies occurring
before the expiration of a particular term shall hold office only for the unexpired
period.
No person shall be elected as trustee unless he is a member of the corporation.
Unless otherwise provided in the articles of incorporation or the by-laws, officers
of a non-stock corporation may be directly elected by the members. (n)
Section 93. Place of meetings. - The by-laws may provide that the members
of a non-stock corporation may hold their regular or special meetings at any
place even outside the place where the principal office of the corporation is
located: Provided, That proper notice is sent to all members indicating the date,
time and place of the meeting: and Provided, further, That the place of meeting
shall be within the Philippines.
Sec. 94-95. Rules of Distribution of Assets
Relevant Provisions:
Section 94. Rules of distribution. - In case dissolution of a non-stock
corporation in accordance with the provisions of this Code, its assets shall be
applied and distributed as follows:
1. All liabilities and obligations of the corporation shall be paid, satisfied and
discharged, or adequate provision shall be made therefore;
2. Assets held by the corporation upon a condition requiring return, transfer
or conveyance, and which condition occurs by reason of the dissolution, shall
be returned, transferred or conveyed in accordance with such requirements;
3. Assets received and held by the corporation subject to limitations
permitting their use only for charitable, religious, benevolent, educational or
similar purposes, but not held upon a condition requiring return, transfer or
conveyance by reason of the dissolution, shall be transferred or conveyed to
one or more corporations, societies or organizations engaged in activities in
the Philippines substantially similar to those of the dissolving corporation
according to a plan of distribution adopted pursuant to this Chapter;
4. Assets other than those mentioned in the preceding paragraphs, if any,
shall be distributed in accordance with the provisions of the articles of
incorporation or the by-laws, to the extent that the articles of incorporation or
the by-laws, determine the distributive rights of members, or any class or
classes of members, or provide for distribution; and
5. In any other case, assets may be distributed to such persons, societies,
organizations or corporations, whether or not organized for profit, as may be
specified in a plan of distribution adopted pursuant to this Chapter. (n)
2.
Limited Liabilities
To secure and protect the personal assets of the family. As
stockholders, their liabilities will be limited to their investment,
Section 95. Plan of distribution of assets. - A plan providing for the
distribution of assets, not inconsistent with the provisions of this Title, may be
adopted by a non-stock corporation in the process of dissolution in the following
manner:
A Metaphor: The Chinese funeral tale
When the head of the family dies, the eldest son carries the picture of
his deceased father and goes straight home without talking to anyone,
then he will place the picture his father in the altar. That means that
the son has succeeded his father’s obligation as head of the family.
The board of trustees shall, by majority vote, adopt a resolution recommending a
plan of distribution and directing the submission thereof to a vote at a regular or
special meeting of members having voting rights. Written notice setting forth the
proposed plan of distribution or a summary thereof and the date, time and place
of such meeting shall be given to each member entitled to vote, within the time
and in the manner provided in this Code for the giving of notice of meetings to
members. Such plan of distribution shall be adopted upon approval of at least
two-thirds (2/3) of the members having voting rights present or represented by
proxy at such meeting.
TITLE XII
CLOSE CORPORATIONS
Sec. 96. Definition and applicability of Title
CLOSE CORPORATION
A close corporation, within the meaning of this Code, is one whose
articles of incorporation provide that:
(1) All the corporation's issued stock of all classes, exclusive of
treasury shares, shall be held of record by not more than a
specified number of persons, not exceeding twenty (20);
(2) All the issued stock of all classes shall be subject to one or more
specified restrictions on transfer permitted by this Title; and
(3) The corporation shall not list in any stock exchange or make any
public offering of any of its stock of any class. Notwithstanding
the foregoing, a corporation shall not be deemed a close
corporation when at least two-thirds (2/3) of its voting stock or
voting rights is owned or controlled by another corporation which
is not a close corporation within the meaning of this Code.
Reasons for Choosing a Closed Corporation
1.
It serves as a Tax Shelter
For purposes of tax avoidance, the corporation may, instead of
distributing profits in the form of cash, issue stock dividends or credit
it as an expense of the corporation.
Crediting as an expense
Any expenses incurred by the members shall be charged to
corporation as long as the Receipts are returned. The receipts
required as when the corporation files its income tax return. These
corporate expenses, which are deductible from the income of
corporation.
the
are
are
the
TN: If these were distributed as cash dividends, these are taxable as
(1) income of the corporation, then to the (2) individual stockholders
after it is being distributed as their individual income. This is not tax
evasion but a form of tax avoidance.
25 | U N I V E R S I T Y
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Illustration:
The corporation got involved in an accident, in this incident, the
claimants will only go after the assets of the corporation, and will
never go after the personal property of the family.
3.
Right of Succession
Just to be sure that no other group will be able to manage the
company.
Summary:
The objectives of choosing a close corporation:
1. It ensures the right of succession
2. Limited liability as to the stockholders
3. Serves as a Tax shelter – as a form of tax avoidance
4. Fiduciary nature
Relevant Provision:
Section 96. Definition and applicability of Title. - A close corporation, within the
meaning of this Code, is one whose articles of incorporation provide that: (1) All
the corporation’s issued stock of all classes, exclusive of treasury shares, shall be
held of record by not more than a specified number of persons, not exceeding
twenty (20); (2) all the issued stock of all classes shall be subject to one or more
specified restrictions on transfer permitted by this Title; and (3) The corporation
shall not list in any stock exchange or make any public offering of any of its stock
of any class. Notwithstanding the foregoing, a corporation shall not be deemed a
close corporation when at least two-thirds (2/3) of its voting stock or voting
rights is owned or controlled by another corporation which is not a close
corporation within the meaning of this Code. Any corporation may be
incorporated as a close corporation, except mining or oil companies, stock
exchanges, banks, insurance companies, public utilities, educational institutions
and corporations declared to be vested with public interest in accordance with
the provisions of this Code. The provisions of this Title shall primarily govern
close corporations: Provided, That the provisions of other Titles of this Code shall
apply suppletorily except insofar as this Title otherwise provides.
Section 97. Articles of incorporation. – The articles of incorporation of a close
corporation may provide:
1. For a classification of shares or rights and the qualifications for owning or
holding the same and restrictions on their transfers as may be stated therein,
subject to the provisions of the following section;
2. For a classification of directors into one or more classes, each of whom may
be voted for and elected solely by a particular class of stock; and
3. For a greater quorum or voting requirements in meetings of stockholders or
directors than those provided in this Code.
The articles of incorporation of a close corporation may provide that the business
of the corporation shall be managed by the stockholders of the corporation
rather than by a board of directors. So long as this provision continues in effect:
1. No meeting of stockholders need be called to elect directors;
2. Unless the context clearly requires otherwise, the stockholders of the
corporation shall be deemed to be directors for the purpose of applying the
provisions of this Code; and
3. The stockholders of the corporation shall be subject to all liabilities of directors.
The articles of incorporation may likewise provide that all officers or employees
or that specified officers or employees shall be elected or appointed by the
stockholders, instead of by the board of directors.
Management of a Closed Corporation
Management of a Closed Corporation
Management is vested generally in the Board of directors. But they can
be vested directly with the stockholders in the Articles of Incorporation.
There is no need to elect. The stockholders are the directors
themselves. The point system will apply.
Is there a need to elect a Board of Directors in a closed
corporation?
No there is no need. The Board is the stockholders themselves.
Sec 98. Validity of Restrictions on Transfer of Shares
Restrictions
To ensure that the closed corporation remains closed, the corporation
can put restrictions on the transfer of its shares.
In simpler terms, this pertains to the right of first refusal
“No shares of stock covered by the certificates, shall be sold to any
other person other than the existing stockholders, without first offering
this to the existing stockholders”
Important:
Although limitations as to time, place and terms are allowed, the same
shall be reasonable.
Conditions on Selling Shares of Stocks
These conditions must be indicated in the Articles of Incorporation, Bylaws and Certificate of Stocks. The stockholder will be bound and there
is a conclusive presumption that the stockholder is aware of the
conditions.
Illustrations:
Are the following restrictions valid?
1. “No shares of stocks covered by these certificates shall be
sold to any other person other than the existing stockholders”
It is not valid because this is an absolute prohibition. The stockholder
cannot sell the stock to persons other than the existing stockholders.
2. “No shares of stocks covered by these certificates shall be
sold to any other person without first obtaining the consent of
all stockholders”
This is still invalid because the sale is subject to the consent of all
stockholders. The stock may not be sold at all if the required consent
is not secured. The power to sell will depend on the consent of
stockholders. Invalid restriction as the power to sell is now dependent
on the consent of the existing stockholders. That cannot be done as it
would jeopardize the right of the stockholders to dispose their property.
3. “No shares of stock shall be sold without first offering it to
the existing stockholders who shall be given 5 days within
which to decide.”
Invalid. The restriction is contrary to the present policy that is
provided under SEC Opinion which provides that a person shall be
given a month to decide whether or not he or she will buy shares. The
limitation of 5 days as provided in the Certificate of stock is restrictive
that cannot be a valid restriction.
Atty E: If that condition shall be stipulated, the stockholder will be
happy. Although the SEC will say that such is too short, if all the
stockholders will agree that they will be given 5days to sell, it is
deemed as favorable and everybody shall be bound.
4. “No stocks shall be issued unless first offered to all existing
stockholder who are residing in Cebu.”
It is unreasonable because those stockholders who are residing outside
Cebu are absolutely denied of their right to buy the shares of stocks
even at a higher price.
Relevant Provisions:
Section 98. Validity of restrictions on transfer of shares. – Restrictions on
the right to transfer shares must appear in the articles of incorporation and in
the by-laws as well as in the certificate of stock; otherwise, the same shall not be
binding on any purchaser thereof in good faith. Said restrictions shall not be
more onerous than granting the existing stockholders or the corporation the
option to purchase the shares of the transferring stockholder with such
reasonable terms, conditions or period stated therein. 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. 99. Effects of Issuance or Transfer of Stock in Breach
of Qualifying Conditions
If somebody buys despite the knowledge of the condition or
restriction what could happen?
The corporation is not bound to register the sale in the name of the
buyer and as a remedy the buyer can ask for the rescission of the
contract and demand for the return of payment from the stockholder.
Or if he really wants to be a stockholder he could ask that all
stockholders waive the conditions or he could ask for the amendment
of the Articles of Incorporation
Effect of Transfer of a Stock in violation of the Right of First
Refusal in a Close Corporation
GR:
The corporation may refuse to register the transfer of the stock in the
name of the transferee
XPT:
1. When consented to by all the stockholders
2. If the close corporation has amended its articles of incorporation
by majority vote of the board and approved by at least 2/3 of the
stockholders representing the outstanding capital stock
Relevant Provisions:
Section 99. Effects of issuance or transfer of stock in breach of
qualifying conditions. 1. If stock of a close corporation is issued or transferred to any person who is
not entitled under any provision of the articles of incorporation to be a holder of
record of its stock, and if the certificate for such stock conspicuously shows the
qualifications of the persons entitled to be holders of record thereof, such person
is conclusively presumed to have notice of the fact of his ineligibility to be a
stockholder.
2. If the articles of incorporation of a close corporation states the number of
persons, not exceeding twenty (20), who are entitled to be holders of record of
its stock, and if the certificate for such stock conspicuously states such number,
and if the issuance or transfer of stock to any person would cause the stock to
be held by more than such number of persons, the person to whom such stock is
issued or transferred is conclusively presumed to have notice of this fact.
3. If a stock certificate of any close corporation conspicuously shows a restriction
on transfer of stock of the corporation, the transferee of the stock is conclusively
presumed to have notice of the fact that he has acquired stock in violation of the
restriction, if such acquisition violates the restriction.
4. Whenever any person to whom stock of a close corporation has been issued
or transferred has, or is conclusively presumed under this section to have, notice
either (a) that he is a person not eligible to be a holder of stock of the
corporation, or (b) that transfer of stock to him would cause the stock of the
corporation to be held by more than the number of persons permitted by its
articles of incorporation to hold stock of the corporation, or (c) that the transfer
of stock is in violation of a restriction on transfer of stock, the corporation may,
at its option, refuse to register the transfer of stock in the name of the transferee.
5. The provisions of subsection (4) shall not be applicable if the transfer of stock,
though contrary to subsections (1), (2) or (3), has been consented to by all the
26 | U N I V E R S I T Y
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stockholders of the close corporation, or if the close corporation has amended its
articles of incorporation in accordance with this Title.
6. The term “transfer”, as used in this section, is not limited to a transfer for
value.
7. The provisions of this section shall not impair any right which the transferee
may have to rescind the transfer or to recover under any applicable warranty,
express or implied.
Sec 100. Agreements by Stockholders
In every family, there will always be factions. Very rarely is there a
family that is united all the time.
Lesson: the SH can have factions and make agreements among
thesmselves, so long as they continue to comply with the existing by
laws and articles of the corporation
Relevant Provision:
Section 100. Agreements by stockholders. 1. Agreements by and among stockholders executed before the formation and
organization of a close corporation, signed by all stockholders, shall survive the
incorporation of such corporation and shall continue to be valid and binding
between and among such stockholders, if such be their intent, to the extent that
such agreements are not inconsistent with the articles of incorporation,
irrespective of where the provisions of such agreements are contained, except
those required by this Title to be embodied in said articles of incorporation.
2. An agreement between two or more stockholders, if in writing and signed by
the parties thereto, may provide that in exercising any voting rights, the shares
held by them shall be voted as therein provided, or as they may agree, or as
determined in accordance with a procedure agreed upon by them.
3. No provision in any written agreement signed by the stockholders, relating to
any phase of the corporate affairs, shall be invalidated as between the parties on
the ground that its effect is to make them partners among themselves.
4. A written agreement among some or all of the stockholders in a close
corporation shall not be invalidated on the ground that it so relates to the
conduct of the business and affairs of the corporation as to restrict or interfere
with the discretion or powers of the board of directors: Provided, That such
agreement shall impose on the stockholders who are parties thereto the liabilities
for managerial acts imposed by this Code on directors.
5. To the extent that the stockholders are actively engaged in the management
or operation of the business and affairs of a close corporation, the stockholders
shall be held to strict fiduciary duties to each other and among themselves. Said
stockholders shall be personally liable for corporate torts unless the corporation
has obtained reasonably adequate liability insurance.
Sec. 101. When Board Meeting is Unnecessary or
Improperly Held
Board Meetings and Formalities are Not Required in a Close
Corporation
Generally, in a close corporation, resolutions approved without
conducting a board meeting is binding unless a director makes a timely
objection.
Important: In a close corporation, they can dispense with having a
board. In such case, the stockholders become the directors.
When resolutions are approved without a meeting, are the
resolutions binding?
Yes, unless a stockholder makes a timely objection.
Relevant Provision:
Section 101. When board meeting is unnecessary or improperly held. Unless the by-laws provide otherwise, any action by the directors of a close
corporation without a meeting shall nevertheless be deemed valid if:
1. Before or after such action is taken, written consent thereto is signed by all
the directors; or
2. All the stockholders have actual or implied knowledge of the action and make
no prompt objection thereto in writing; or
3. The directors are accustomed to take informal action with the express or
implied acquiescence of all the stockholders; or
4. All the directors have express or implied knowledge of the action in question
and none of them makes prompt objection thereto in writing.
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If a director’s meeting is held without proper call or notice, an action taken
therein within the corporate powers is deemed ratified by a director who failed to
attend, unless he promptly files his written objection with the secretary of the
corporation after having knowledge thereof.
Situation:
If the resolution was passed around and you were made to
sign and you signed. The resolution was carried out. However,
it turned out to be a sale of the apartment which was
occupied by you. The buyer came and informed you of their
transfer to the apartment. Can you object?
Ans: No, because the stockholder already assented. Even if he doesn’t
know that what was authorized to be sold was the apartment occupied
by him, the sale is still binding because the stockholders can decide on
matters involving the corporation’s properties.
Sec. 102. Pre-emptive Right in Close Corporations
Pre-Emptive Right vs. Right of First Refusal
Pre-emptive right
Refers to newly issued stocks
Purpose is to maintain the
proportional
control
of
a
stockholder in the corporation
Right of first refusal
Refers to stocks already held by
the stockholder
Purpose
is
to
keep
the
corporation close
Right of First Refusal vs. Stock Option
Right of first refusal
Applies to close corporation and
applies to treasury shares
Stock Option
It is an opportunity granted to a
person, giving him a period to
decide whether to buy stocks at a
certain price
Caveat: Can’t determine the difference between right of first refusal and stock
option. But that was the answer given by classmate.
Relevant Provision:
Section 102. Pre-emptive right in close corporations. – The pre-emptive
right of stockholders in close corporations shall extend to all stock to be issued,
including reissuance of treasury shares, whether for money, property or personal
services, or in payment of corporate debts, unless the articles of incorporation
provide otherwise.
Sec. 103. Amendment of Articles of Incorporation
Relevant Provisions:
Section 103. Amendment of articles of incorporation. – Any amendment to the
articles of incorporation which seeks to delete or remove any provision required
by this Title to be contained in the articles of incorporation or to reduce a
quorum or voting requirement stated in said articles of incorporation 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, or
of such greater proportion of shares as may be specifically provided in the
articles of incorporation for amending, deleting or removing any of the aforesaid
provisions, at a meeting duly called for the purpose.
Sec. 104 - Deadlocks
Deadlock
It happens when the stockholders are tied in a decision which
paralyzes the business.
Remedy of a stockholder in the event of a deadlock
Ask the SEC to assist the corporation.
Powers of SEC during a deadlock
1. Cancel or alter any provision contained in the articles of
incorporation, by-laws, or any stockholder's agreement;
2. Cancel, alter or enjoin any resolution or act of the corporation or
its board of directors, stockholders, or officers;
3. Direct or prohibit any act of the corporation or its board of
directors, stockholders, officers, or other persons party to the
action;
4. Require 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. Appoint a provisional director;
6. Dissolve the corporation - this is resorted into as a last resort
7. Grant such other relief as the circumstances may warrant.
Relevant Provisions:
Section 104. Deadlocks. – Notwithstanding any contrary provision in the
articles of incorporation or by-laws or agreement of stockholders of a close
corporation, if the directors or stockholders are so divided respecting the
management of the corporation’s business and affairs that the votes required for
any corporate action cannot be obtained, with the consequence that the business
and affairs of the corporation can no longer be conducted to the advantage of
the stockholders generally, the Securities and Exchange Commission, upon
written petition by any stockholder, shall have the power to arbitrate the dispute.
In the exercise of such power, the Commission shall have authority to make such
order as it deems appropriate, including an order: (1) cancelling or altering any
provision contained in the articles of incorporation, by-laws, or any stockholder’s
agreement; (2) cancelling, 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 party 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.
A provisional director shall be an impartial person who is neither a stockholder
nor a creditor of the corporation or of any subsidiary or affiliate of the
corporation, and whose further qualifications, if any, may be determined by the
Commission. A provisional director is not a receiver of the corporation and does
not have the title and powers of a custodian or receiver. A provisional director
shall have all the rights and powers of a duly elected director of the corporation,
including the right to notice of and to vote at meetings of directors, until such
time as he shall be removed by order of the Commission or by all the
stockholders. His compensation shall be determined by agreement between him
and the corporation subject to approval of the Commission, which may fix his
compensation in the absence of agreement or in the event of disagreement
between the provisional director and the corporation.
Section 105. Withdrawal of stockholder or dissolution of corporation. – In
addition and without prejudice to other rights and remedies available to a
stockholder under this Title, any stockholder of a close corporation may, for any
reason, compel the said corporation to purchase his shares at their fair value,
which shall not be less than their par or issued value, when the corporation has
sufficient assets in its books to cover its debts and liabilities exclusive of capital
stock: Provided, That any stockholder of a close corporation may, by written
petition to the Securities and Exchange Commission, compel the dissolution of
such corporation whenever any of 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.
TITLE XIII. SPECIAL CORPORATIONS
Special Corporations
These are entities governed by special laws and by the general
provisions of this Code.
De Leon: Educational corporations are governed primarily by special
laws, and suppletorily, by the general provisions of the Corporation
Code.
2 kinds of Special Corporations
1. Educational Corporation
2. Religious Corporation
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Relevant Provisions:
Section 106. Incorporation. – Educational corporations shall be governed by
special laws and by the general provisions of this Code. (n)
Chapter I - Educational Corporation
Educational Corporation
It is a special corporation because it needs favorable recommendation
from the Ministry of Education (now DepEd).
Why are Educations Corporations considered special
corporations?
They are governed by special laws, that’s what makes it special from
the others. There are existing special laws applicable only to
educational corporations. Generally, they are covered by those special
laws. In case of conflict with the Corporation Code, the provisions of
the special laws that allow their creation prevail.
Are all educational corporations non-stock corporations?
No. It can also be a stock corporation. There are many. They are not
prohibited. Many private schools are educational stock corporations.
TN: USC is an educational, non-stock corporation because it is not
intended for profit, but for educational purposes.
Sec. 107. Pre-requisite to Incorporation
Favorable recommendation from DepEd required
If it ever intends to incorporate, it must follow the general provisions
but it requires the favorable recommendation of the appropriate
government department which is the Department of Education.
TN: Nobody can operate or run an educational institution without a
recommendation from the Department of Education.
Situation:
The University of San Carlos was planning to put up a
different school, a new corporation separate from the
University, because they noticed that after 8:30 pm, all the
assets are idle and not earning anymore. The priests thought
that these assets must be earning 24 hours a day. In running
a business, use of the assets must be maximized. They
recruited dancing instructors who would have to report here
after 8:30 pm and the classrooms will be devoted for dancing
school—USC dancing school. People come to enroll. If the
University tries to organize this, what will be required? Does
the USC need a favorable recommendation from the Dep-Ed?
Ans: No. The USC Dance School need not comply the favorable
recommendation of Dep-Ed. To be considered a special educational
corporation, it should be for educational instruction or formal academic
courses. In this case, a dancing school is not for an academic purpose.
It is purely a school for special skills.
Important: The favorable recommendation from Dep- Ed is only
required for institutions which offer formal academic classes.
Other examples of institutions that don’t need recommendation of
Dep- Ed:
1.
Schools which offer pure Technical or Vocational courses such
as welding, masonry, carpentry, electrical
2.
driving school
Important: There are, however instances when purely technincal
and vocational courses will be mixed with formal academic courses. In
those cases, the recommendation of DepEd is needed.
Relevant Provisions:
Section 107. Pre-requisites to incorporation. – Except upon favorable
recommendation of the Ministry of Education and Culture, the Securities and
Exchange Commission shall not accept or approve the articles of incorporation
and by-laws of any educational institution. (168a)
Sec 108. Management of Educational Corporation
Who manages an educational corporation?
It depends.
A.
If a stock educational corporation, it is the Board of Directors.
B.
If a non-stock educational corporation, it is the Board of
Trustees.
Board of Trustees
They shall constitute not less than five but not more than fifteen in
multiples of five. Unless otherwise provided in the AOI or by-laws, the
terms of office of the trustees shall be staggered with one (1)-year
interval. Trustees subsequently elected shall have a term of five (5)
years. Here, it will ensure continuity.
Chapter II. Religious Corporations
Religious Corporations
Non-stock, non-profit corporation composed entirely of spiritual
persons, which is organized for the furtherance of a religion or for
perpetuating the right of the church or for the administration of church
or religious work or property
Important:
Religious Corporations are non-stock corporations because they are
established for religious purposes and to administer the properties of
the religious corporation. They are not allowed to issue stocks and
dividends because such corporation is not for profit but for furtherance
of religious purposes.
Relevant Provisions:
Section 108. Board of trustees. – Trustees of educational institutions organized
as non-stock corporations shall not be less than five (5) nor more than fifteen
(15): Provided, however, That the number of trustees shall be in multiples of five
(5). Unless otherwise provided in the articles of incorporation on the by-laws, the
board of trustees of incorporated schools, colleges, or other institutions of
learning shall, as soon as organized, so classify themselves that the term of
office of one-fifth (1/5) of their number shall expire every year. Trustees
thereafter elected to fill vacancies, occurring before the expiration of a particular
term, shall hold office only for the unexpired period. Trustees elected thereafter
to fill vacancies caused by expiration of term shall hold office for five (5) years. A
majority of the trustees shall constitute a quorum for the transaction of business.
The powers and authority of trustees shall be defined in the by-laws. For
institutions organized as stock corporations, the number and term of directors
shall be governed by the provisions on stock corporations. (169a
Sec. 109. Classes of Religious Corporations
Classes Of Religious Corporations
1.
Corporation Sole - It is a religious corporation incorporated by
one person and consists of one member or corporator only and
his successors. It is organized for the purpose of administering
and managing, as trustee, the affairs, property and temporalities
of such religious denomination, sect or church.
2.
Religious Society - It is a religious corporation incorporated by
aggregate persons. The law does not require religious societies or
churches to register as a corporation but they may do so in order
to acquire legal personality for the administration of their
temporalities or properties.
Term of Religious Corporations
Indefinite, unless sooner dissolved voluntarily.
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Relevant Provisions:
Section 109. Classes of religious corporations. – Religious corporations may be
incorporated by one or more persons. Such corporations may be classified into
corporations sole and religious societies. Religious corporations shall be governed
by this Chapter and by the general provisions on non-stock corporations insofar
as they may be applicable. (n)
Sec. 110. Corporation Sole
Corporation Sole
It is a religious corporation which is incorporated by one person and
consists of one member or corporator only and his successors.
Who may be an incorporator
The incorporator could either be the priest, minister, rabbi, or
presiding elder.
Requisite for Incorporation
The incorporator must file with the SEC the following:
1.
the verified articles of incorporation,
2.
Authority - either the copy of the commission, certificate of
election or letter of appointment.
Relevant Provision:
Section 110. Corporation sole. – For the purpose of administering and
managing, as trustee, the affairs, property and temporalities of any religious
denomination, sect or church, a corporation sole may be formed by the chief
archbishop, bishop, priest, minister, rabbi or other presiding elder of such
religious denomination, sect or church. (154a)
Section 111. Articles of incorporation. – In order to become a corporation sole,
the chief archbishop, bishop, priest, minister, rabbi or presiding elder of any
religious denomination, sect or church must file with the Securities and Exchange
Commission articles of incorporation setting forth the following:
1.
That he is the chief archbishop, bishop, priest, minister, rabbi or presiding
elder of his religious denomination, sect or church and that he desires to
become a corporation sole;
2.
That the rules, regulations and discipline of his religious denomination, sect
or church are not inconsistent with his becoming a corporation sole and do
not forbid it;
3.
That as such chief archbishop, bishop, priest, minister, rabbi or presiding
elder, he is charged with the administration of the temporalities and the
management of the affairs, estate and properties of his religious
denomination, sect or church within his territorial jurisdiction, describing
such territorial jurisdiction;
4.
The manner in which any vacancy occurring in the office of chief
archbishop, bishop, priest, minister, rabbi of presiding elder is required to
be filled, according to the rules, regulations or discipline of the religious
denomination, sect or church to which he belongs; and
5.
The place where the principal office of the corporation sole is to be
established and located, which place must be within the Philippines.
The articles of incorporation may include any other provision not contrary to law
for the regulation of the affairs of the corporation. (n)
Sec. 112. Submission of the Articles of Incorporation
Requirements to be submitted to SEC for Incorporation
1. Verified Articles of Incorporation
2. The modus operandi of the church
Modus Operandi of the Church
This will show how the church will operate.
You must Indicate how the church will be funded.
Example: Some corporations are incorporated by requesting
contribution from members. “ For Every Religious affair, we will pass
out something, and each one is requested to drop his contribution.”
TN: This is necessary. No church can survive without funds.
You must also explain how the activities are done.
This not compulsory but it will give the state the idea how you run
your church. If you so decide, for the purpose of promotion, you can
volunteer to state your manner of praying—by explaining how the
praying is done.
Relevant Provisions:
Section 112. Submission of the articles of incorporation. – The articles of
incorporation must be verified, before filing, by affidavit or affirmation of the
chief archbishop, bishop, priest, minister, rabbi or presiding elder, as the case
may be, and accompanied by a copy of the commission, certificate of election or
letter of appointment of such chief archbishop, bishop, priest, minister, rabbi or
presiding elder, duly certified to be correct by any notary public. From and after
the filing with the Securities and Exchange Commission of the said articles of
incorporation, verified by affidavit or affirmation, and accompanied by the
documents mentioned in the preceding paragraph, such chief archbishop, bishop,
priest, minister, rabbi or presiding elder shall become a corporation sole and all
temporalities, estate and properties of the religious denomination, sect or church
theretofore administered or managed by him as such chief archbishop, bishop,
priest, minister, rabbi or presiding elder shall be held in trust by him as a
corporation sole, for the use, purpose, behalf and sole benefit of his religious
denomination, sect or church, including hospitals, schools, colleges, orphan
asylums, parsonages and cemeteries thereof. (n)
Purpose of Registration with SEC
Situation:
One religious corporation was applying for incorporation with
SEC. In their religion, when they pray every 4 o’çlock in the
morning. All girls are required to have long hair and as they
move around the streets, they will have to bow so that their
hair will drop. They will have to move their head left and right
as they sing their chant. While doing this, they wear nothing
above, purely bare, but bowing their hair. Will the SEC
approve the application of the cult?
The SEC will not approve the application since the practice of their
religion is against public decency or the right to a decent community.
Important: The freedom of religion is not absolute. There are also
other members of the community who have rights, such as the right
not to be subjected to scandalous circumstances.
Atty E: How about the loudspeakers used for religious activities which
would affect and disturb the community at the early hours of the day?
This practice shall also not be allowed.
TN: True, there may be a freedom of religion but community members
also have the right to a decent community. We cannot be in a
scandalous community. Freedom of religion is not absolute. There are
also restrictions in this freedom. The other members of the community
are also entitled to their own freedom of religion.
What if the Association of all churches and Sect agree to the
practice of the church, would that be allowed?
No, that is not the freedom we are talking about. Although all of the
churches agree, it would still impair the other people in the community
who have other religious beliefs. They may be members of the
community but they are not members of the church; more importantly,
they are entitled to their own peace and order (e.g atheist)
Situation (Follow-up to the religion with naked ladies)
Said provision in the Articles of Incorporation was deleted
before it was submitted to the SEC, while pending approval,
the group started to go around again the way they wanted to
pray. Do you think the police officers will apprehend them?
Yes, due to public disturbance. We have laws of decency, and laws to
protect the children.
Situation (Follow-up)
How about if they would now wear jackets, comb their hairs
properly and walk around early morning, is there anything
wrong? No more. However, the police still apprehended them
and asked for the approved articles of incorporation. Can they
be stopped?
No, because their existence as a religious organization doing spiritual
activities does not need the approval of the SEC.
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Important: When Registration with SEC is required
Registration with the SEC as required under the Corporation Code is
not required in order for the church to engage in spiritual activities.
However, registration is required in order for it to administer the
temporal affairs of the church.
So, what is the point of submitting the Articles of
Incorporation to the SEC when in fact, we could go ahead with
our church activities already?
Approval of the articles of incorporation is not necessary to exercise
their spiritual activities. Such approval is only needed for them to
acquire a juridical personality in order to acquire properties.
2 functions of a religious corporation
1. Spiritual activities
2. Temporal activities
Spiritual Activities
These pertain to functions of a priest which include presiding a mass,
baptism, confession, etc.
Temporal Activities
Temporal activities refer to the administration or management of the
properties of the church. It includes the entering into contracts and
owning of properties in its name.
Examples: making sure that church buildings are functional, or that all
the titles of the properties are in order.
Summary:
GR: Registration as a religious corporation is not required for exercise
of spiritual activities
XPT: Required for the purpose of administering the temporal affairs of
the church
Sec. 113. Acquisition and Alienation of Property
Situation:
An Italian priest came to Cebu to establish a church. He was
carrying with him the authorization from the chief priest in
Italy. What should he do now?
File the articles with SEC, together with the authorization.
Before the SEC approves, can he start baptizing?
Yes. No need for approval from SEC, because the purpose of
registration is for the exercise of temporal activities and not the
spiritual activities.
SEC granted the registration. The Italian priest is now looking
for a parcel of land to build a church. Can he buy a parcel of
land?
Yes. Since the SEC already granted the registration, he can now
purchase the land for the corporation. The corporation sole can
purchase the land because it has no nationality.
Once he acquired, who owns the property?
The Corporation or religious denomination where the priest belongs
If he dies, who will succeed?
It will depend on the religious denomination
Important: The point is, although he is a foreigner, he is not
acquiring such property in his own personal property but in behalf of
the corporation. So far as succession is concerned, the owner of the
property is the religious denomination or the corporation sole and not
the chief of the church. He does not own it in his personal capacity,
the property is owned by the corporation sole.
Relevant Provisions:
Section 113. Acquisition and alienation of property. – Any corporation sole
may purchase and hold real estate and personal property for its church,
charitable, benevolent or educational purposes, and may receive bequests or
gifts for such purposes. Such corporation may sell or mortgage real property held
by it by obtaining an order for that purpose from the Court of First Instance of
the province where the property is situated upon proof made to the satisfaction
of the court that notice of the application for leave to sell or mortgage has been
given by publication or otherwise in such manner and for such time as said court
may have directed, and that it is to the interest of the corporation that leave to
sell or mortgage should be granted. The application for leave to sell or mortgage
must be made by petition, duly verified, by the chief archbishop, bishop, priest,
minister, rabbi or presiding elder acting as corporation sole, and may be opposed
by any member of the religious denomination, sect or church represented by the
corporation sole: Provided, That in cases where the rules, regulations and
discipline of the religious denomination, sect or church, religious society or order
concerned represented by such corporation sole regulate the method of
acquiring, holding, selling and mortgaging real estate and personal property,
such rules, regulations and discipline shall control, and the intervention of the
courts shall not be necessary. (159a)
Sec. 114. Filling in of Vacancies
Vacancies in a Religious Corporation
When a parish priest is gone, it is the person designated as provided in
its rules who will take over to the position.
Atty. E: That could be the reason why priests are not allowed to
marry. Imagine if the priest is allowed to marry and he has some
family members. The family might claim some of the properties and
would result to conflict.
Relevant Provisions:
Section 114. Filling of vacancies. – The successors in office of any chief
archbishop, bishop, priest, minister, rabbi or presiding elder in a corporation sole
shall become the corporation sole on their accession to office and shall be
permitted to transact business as such on the filing with the Securities and
Exchange Commission of a copy of their commission, certificate of election, or
letters of appointment, duly certified by any notary public.
During any vacancy in the office of chief archbishop, bishop, priest, minister,
rabbi or presiding elder of any religious denomination, sect or church
incorporated as a corporation sole, the person or persons authorized and
empowered by the rules, regulations or discipline of the religious denomination,
sect or church represented by the corporation sole to administer the
temporalities and manage the affairs, estate and properties of the corporation
sole during the vacancy shall exercise all the powers and authority of the
corporation sole during such vacancy. (158a)
Sec. 115. Dissolution of a Corporation Sole
If the corporation wants to dissolve, the corporation sole may be
dissolved by voluntarily filing with the SEC for approval, a verified
declaration of dissolution and upon approval, the corporation shall be
deemed dissolved.
What rules govern distribution of assets upon dissolution?
Upon dissolution, being a Non-stock corporation, the rules on
distribution of assets pertaining to Non-Stock Corporation shall apply.
Relevant Provisions:
Section 115. Dissolution. – A corporation sole may be dissolved and its affairs
settled voluntarily by submitting to the Securities and Exchange Commission a
verified declaration of dissolution. The declaration of dissolution shall set forth:
1.
The name of the corporation;
2.
The reason for dissolution and winding up;
3.
The authorization for the dissolution of the corporation by the particular
religious’ denomination, sect or church;
4.
The names and addresses of the persons who are to supervise the winding
up of the affairs of the corporation.
5.
Upon approval of such declaration of dissolution by the Securities and
Exchange Commission, the corporation shall cease to carry on its
operations except for the purpose of winding up its affairs. (n)
Section 116. Religious societies. – Any religious society or religious order, or
any diocese, synod, or district organization of any religious denomination, sect or
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church, unless forbidden by the constitution, rules, regulations, or discipline of
the religious denomination, sect or church of which it is a part, or by competent
authority, may, upon written consent and/or by an affirmative vote at a meeting
called for the purpose of at least two-thirds (2/3) of its membership, incorporate
for the administration of its temporalities or for the management of its affairs,
properties and estate by filing with the Securities and Exchange Commission,
articles of incorporation verified by the affidavit of the presiding elder, secretary,
or clerk or other member of such religious society or religious order, or diocese,
synod, or district organization of the religious denomination, sect or church,
setting forth the following:
1.
2.
3.
4.
5.
That the religious society or religious order, or diocese, synod, or district
organization is a religious organization of a religious denomination, sect or
church;
That at least two-thirds (2/3) of its membership have given their written
consent or have voted to incorporate, at a duly convened meeting of the
body;
That the incorporation of the religious society or religious order, or diocese,
synod, or district organization desiring to incorporate is not forbidden by
competent authority or by the constitution, rules, regulations or discipline
of the religious denomination, sect, or church of which it forms a part;
That the religious society or religious order, or diocese, synod, or district
organization desires to incorporate for the administration of its affairs,
properties and estate;
The place where the principal office of the corporation is to be established
and located, which place must be within the Philippines; and
a.
The names, nationalities, and residences of the trustees elected by
the religious society or religious order, or the diocese, synod, or
district organization to serve for the first year or such other period
as may be prescribed by the laws of the religious society or religious
order, or of the diocese, synod, or district organization, the board of
trustees to be not less than five (5) nor more than fifteen (15).
TITLE XIV. DISSOLUTION
“Dissolution is the death of the corporation,” how accurate is
this statement?
This is not accurate since it has three years to wind up the affairs of
the Corporation.
Sec. 117-121. Methods of Dissolution
Ways to dissolve a corporation:
1. Voluntary
2. Involuntary
Relevant Provisions:
Section 117. Methods of dissolution. – A corporation formed or organized
under the provisions of this Code may be dissolved voluntarily or involuntarily. (n)
Voluntary Dissolution
Voluntary Dissolution
1. Voluntary Dissolution where no creditors are affected (sec 118)
2. Voluntary Dissolution where creditors are be affected (Sec 119)
3. Dissolution by Shortening of Corporate Term (sec 120)
Sec.118 . Voluntary Dissolution when creditors are NOT
affected
Process
1. Resolution of the Board (majority of the Board)
2. Approved by SH holding 2/3 OCS or 2/3 of the members
3. Signed by Pres. And countersigned by Sec.
4. Submitted to SEC
5. SEC issues Certificate of Dissolution
Relevant Provisions:
Section 118. Voluntary dissolution where no creditors are affected. – If
dissolution of a corporation does not prejudice the rights of any creditor having a
claim against it, the dissolution may be effected by majority vote of the board of
directors or trustees, and by a resolution duly adopted by the affirmative vote of
the stockholders owning at least two-thirds (2/3) of the outstanding capital stock
or of at least two-thirds (2/3) of the members of a meeting to be held upon call
of the directors or trustees after publication of the notice of time, place and
object of the meeting for three (3) consecutive weeks in a newspaper published
in the place where the principal office of said corporation is located; and if no
newspaper is published in such place, then in a newspaper of general circulation
in the Philippines, after sending such notice to each stockholder or member
either by registered mail or by personal delivery at least thirty (30) days prior to
said meeting. A copy of the resolution authorizing the dissolution shall be
certified by a majority of the board of directors or trustees and countersigned by
the secretary of the corporation. The Securities and Exchange Commission shall
thereupon issue the certificate of dissolution. (62a)
Sec. 119. Voluntary Dissolution where creditors are
affected
Process
1. Petition for the dissolution of the Corporation filed with SEC
2. It shall be signed by a majority of its Board of Directors or
Trustees, verified by its President or secretary or one of its
directors or trustees, and shall set forth all claims and demands
against it
3. Resolved by the affirmative vote of 2/3 of the stockholders
representing the outstanding capital stock or members
4. SEC Order fixing the date on or before objections may be filed,
which date shall not be less than 30 days nor more than 60 days
after the entry of the order
5. Before such date a copy of the order shall be published at least
once a week for three consecutive weeks in a newspaper of
general circulation published in the municipality or city where the
principal office of the corporation is situated, or if there be no
such newspaper, then in a newspaper of general circulation in the
Philippines, and a similar copy shall be posted for three
consecutive weeks in three public places in such municipality or
city.
Relevant Provisions:
Section 119. Voluntary dissolution where creditors are affected. –
Where the dissolution of a corporation may prejudice the rights of any creditor,
the petition for dissolution shall be filed with the Securities and Exchange
Commission. The petition shall be signed by a majority of its board of directors
or trustees or other officers having the management of its affairs, verified by its
president or secretary or one of its directors or trustees, and shall set forth all
claims and demands against it, and that its dissolution was resolved upon by the
affirmative vote of the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or by at least two-thirds (2/3) of the members at a
meeting of its stockholders or members called for that purpose.
If the petition is sufficient in form and substance, the Commission shall, by an
order reciting the purpose of the petition, fix a date on or before which
objections thereto may be filed by any person, which date shall not be less than
thirty (30) days nor more than sixty (60) days after the entry of the order.
Before such date, a copy of the order shall be published at least once a week for
three (3) consecutive weeks in a newspaper of general circulation published in
the municipality or city where the principal office of the corporation is situated,
or if there be no such newspaper, then in a newspaper of general circulation in
the Philippines, and a similar copy shall be posted for three (3) consecutive
weeks in three (3) public places in such municipality or city.
Upon five (5) day’s notice, given after the date on which the right to file
objections as fixed in the order has expired, the Commission shall proceed to
hear the petition and try any issue made by the objections filed; and if no such
objection is sufficient, and the material allegations of the petition are true, it shall
render judgment dissolving the corporation and directing such disposition of its
assets as justice requires, and may appoint a receiver to collect such assets and
pay the debts of the corporation. (Rule 104, RCa)
Section 120. Dissolution by shortening corporate term. – A voluntary
dissolution may be effected by amending the articles of incorporation to shorten
the corporate term pursuant to the provisions of this Code. A copy of the
amended articles of incorporation shall be submitted to the Securities and
Exchange Commission in accordance with this Code. Upon approval of the
amended articles of incorporation of the expiration of the shortened term, as the
case may be, the corporation shall be deemed dissolved without any further
proceedings, subject to the provisions of this Code on liquidation. (n)
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Involuntary Dissolution
Involuntary Dissolution
1. Termination/ Expiration of Term
2. By Order of SEC
a. Deadlock in a close corp.
b. Failure of corp. to file reports
c. Corp. became inoperative for a period of 5 years.
3. Failure to Organize the Corporation within 2 years from issuance
of certificate of Incorporation
4. By Legislative Enactment
5. When the court Orders Dissolution
By Legislative Enactment
By Legislative Enactment
When the legislature passes a law saying that a corporation can no
longer exist.
Example: A law passed stating that mining corporations will cease to
exist for environmental purposes. So, the mining corporation has to be
dissolved.
When Court Orders Dissolution
When the court so orders
It could happen when the creditors will file before the SEC wanting
that the corporation be dissolved because it is no longer profitable and
it may be in a position where it can no longer answer for its liabilities
against the creditors.
Involuntary Dissolution by Order of SEC
Involuntary Dissolution By Order Of Sec
SEC may order the dissolution of a corporation on grounds provided by
existing laws, rules and regulations upon filing of a verified petition
and after proper notice and hearing.
Instances when SEC may dissolve the corporation
1. Violations by corporation under the corporation code
2. Deadlocks in a close corporation – and if all of these will fail,
eventually SEC will dissolve the corporation
3. Mismanagement of a close corporation
4. Suspension or revocation of certificate of registration
a. Fraud in procuring its certificate of registration
b. Serious misrepresentation
c. Continuous inoperation for a period of at least 5 years
d. Refusal to comply or defiance of any lawful order of the
Commission
e. Failure to file by-laws within the required period
f.
Failure to file required reports
Relevant Provisions:
Section 121. Involuntary dissolution. – A corporation may be dissolved by
the Securities and Exchange Commission upon filing of a verified complaint and
after proper notice and hearing on the grounds provided by existing laws, rules
and regulations. (n)
De Jure vs. De Facto Corporation
De Jure Dissolution
When there is compliance with
the requirements provided for by
law for dissolution, and the
corporation will continue to exist
only for winding up of the corp.
De Facto Dissolution
The corporation is legally existent
but it can no longer able to
answer for its liabilities and its
function so essentially it is
morally dissolved.
Example: such as insolvency.
Effect when there is De Jure Dissolution of a Corporation
It continues to be a body corporate for 3 years in order to facilitate the
winding up of its affairs. However, it is no longer able to enter into
new businesses or contracts except those contracts which facilitates its
winding up.
Effects of Dissolution
Effects of Dissolution
It ceases its operation. The corporation has three years to wind up
which may include:
1. Filing cases or entertain cases filed against the Corporation
2. Enter into contracts to wind up the affairs of the Corporation.
Effect of Death of All Stockholders and Ownership of
Shares by a Single Stockholder
Death of All Stockholders
It will not result in dissolution of the Corporation because it has the
right of succession. The heirs can succeed.
Should one of the five stockholders buy the shares of the four
others, will they continue to exist?
Yes. The stockholder may give shares to four other persons just to
meet the minimum requirement under the Corporation Code which is
to have at least 5 Directors in the Board, having at least 1 share.
Ownership by a single stockholder
However, if he wants all the shares to himself, will the
Corporation continue to exist?
Although ownership by a single stockholder is not a ground for
dissolution, the SEC may order the dissolution of the Corporation
because it will not be able to meet certain conditions under the
Corporation Code such as:
1. Management - The Corporation Code states that there should be
a Board that will manage. There cannot be a single-man Board.
2. Annual Meeting for the election of the Board.
3. Stockholder’s annual meeting.
4. The General Information Sheet - Corporations must make an
annual report to the SEC indicating the Board and officers elected,
names of the stockholders, and other data that would have to be
submitted every year.
Sec. 122. Corporate Liquidation
Winding Up Includes
1. Payment of liabilities to creditors
2. Claim for amount receivables
3. Distribute the remaining assets to the stockholders
Assets include:
1. Cash,
2. Property,
3. Machineries,
4. Buildings and
5. Account receivables
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What to do with account receivables?
File a collection case
How long is the winding up?
3 years
Atty E’s story: Experience of Sir on a pending case for 25
years; Tug of War between Judiciary and Executive
Department. Do you think you can have a final judgment on
the collection case within three years?
No. Reality check, it cannot be done within three years. It would be
extremely lucky to have such case decided within three years.
If it cannot collect within 3 years, what happens to the
winding up?
The corporation ceases to exist after 3 years, but the case continues if
the court will appoint a receiver for the purpose of winding up of the
corporation.
Important:
The 3 year-period does not affect the authority of the receiver.
Liquidation by a Receiver; Role of the Receiver
He/ she represents the creditors, stockholders of the corporation and
the court.
Important:
The receiver makes a report to the court regardless of when that
report is forthcoming. It is based on that report that the court will
decide.
May a Corporation in the case of a manufacturer of cement
upon dissolution continue to manufacture cement?
It depends. If the manufacture is only done to complete the existing
orders made by demanding customers, they are not prohibited from
completing such transactions. However, if such manufacture of cement
is for new orders, the corporation cannot be allowed.
Relevant Provisions:
Section 122. Corporate liquidation. – Every corporation whose charter
expires by its own limitation or is annulled by forfeiture or otherwise, or whose
corporate existence for other purposes is terminated in any other manner, shall
nevertheless be continued 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 suits by or against it and enabling it to settle and close its affairs, to
dispose of and convey its property and to distribute its assets, but not for the
purpose of continuing the business for which it was established.
At any time during said three (3) years, the corporation is authorized and
empowered to convey all of its property to trustees for the benefit of
stockholders, members, creditors, and other persons in interest. From and after
any such conveyance by the corporation of its property in trust for the benefit of
its stockholders, members, creditors and others in interest, all interest which the
corporation had in the property terminates, the legal interest vests in the
trustees, and the beneficial interest in the stockholders, members, creditors or
other persons in interest.
Upon the winding up of the corporate affairs, any asset distributable to any
creditor or stockholder or member who is unknown or cannot be found shall be
escheated to the city or municipality where such assets are located.
Except by decrease of capital stock and as otherwise allowed by this Code, no
corporation shall distribute any of its assets or property except upon lawful
dissolution and after payment of all its debts and liabilities. (77a, 89a, 16a)
TITLE XV . FOREIGN CORPORATIONS
Sec. 123. Definition and Rights of a Foreign Corp
Foreign Corporations
These are corporations organized or existing under any laws other
than those of the Philippines AND whose laws allow Filipino citizens
and corporations to do business in its own country or State.
Example: Filipinos organized a corporation in New York
How do we determine the Nationality of the corporation?
What test do we use?
Incorporation Test – We determine the nationality of the corporation
based on where it is incorporated
Caveat: Accordingg to Spectra (last year’s WWW), the answer is this (2
tests)
1. Incorporation test - used to determing if corp is domestic/ foreign
2. Control Test - used to dertermine the nationality of the corporation
Situation:
5 group of Russians were on a beach in Boracay. An Italian
girl befriended the Russians. Then a Chinese woman joined
the group. Later on a Japanese woman. Then a Vietnamese,
the sexiest of them all, joined. Then a Filipina joined the group.
Everyone showed to each other their respective assets and
they decided to incorporate. Do we have a domestic or a
foreign corporation?
A domestic corporation, because they are organized under Philippine
laws
Situation (follow up)
Can it engage in the retail business or rice and corn?
It depends. The retail of rice and corn is a nationalized corporation so
Filipinos must have control. If the Filipina has ownership and control
over the corporation, then they can go into retail business.
Author’s Note:
(Based on RA 3018, retail of rice and corn are held exclusively for Filipinos, meaning
100% owned. There are exceptions, but the foreign corporation will still be dissolved
and liquidated later on. So the answer to the above would be different due to statistical
improbability. When reciting, please say “retail business” because there are certain
classes of corporations that may use a 60-40% ownership rule for retail RA 8754. Also,
sir rephrased the question mid-way to “retail business only)
Important: We’re talking of ownership. It does not say 60% must be
Filipinos. It says 60% must be owned by Filipino. So, if De Vera
happens to own 60% of the shares, and the 40% were distributed to
the 9 other foreigners, this business shall be allowed.
Important: On the other hand, you learned in Constitutional Law,
that there are corporations w/c require 100% ownership. Like mass
media. Otherwise, if you allow 60-40% there, 40% of the program will
be Chinese.
Relevant Provisions:
Section 123. Definition and rights of foreign corporations. – For the
purposes of this Code, a foreign corporation is one formed, organized or existing
under any laws other than those of the Philippines and whose laws allow Filipino
citizens and corporations to do business in its own country or state. It shall have
the right to transact business in the Philippines after it shall have obtained a
license to transact business in this country in accordance with this Code and a
certificate of authority from the appropriate government agency.
Why Foreign Corporations are Regulated
Why is it that the Philippine Government is interested in
regulating foreign corporations?
1. So our local courts could assume jurisdiction
2. To prevent manipulative practices w/c are against fair competition.
Their activities will not cause harm to the Philippines.
3. To protect the interest of other parties when the foreign
corporations engage in business in the Philippines.
4. Subject them to existing rules and regulations of the State.
Sec. 124. Application for a License
What is necessary for a foreign corporation to be able to
engage in business in the Philippines?
It needs a license to operate.
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Requisites to be Granted a License
1. Certified copy of AOI
2. Certification under oath of an official from the state or from the
forum/jurisdiction under which the corporation was incorporated
to assure that t the corporation is in good standing.
3. Certification under oath from its official or any authorized person
to determine that the corporation is solvent and has sound
financial capacity
TN: sir named #3 as the more important one
4. Bond
Purpose of the Bond
To protect other parties when they engage in business here, they need
to file a bond or any form of security to answer for any indebtedness
to the government of the Philippines.
The securities or bonds may be in the form of:
1. Shares of stock
2. Cash
3. Any other form of security.
TN: Once these are all accomplished, license will be issued.
Terms of License
Valid until it is revoked.
Relevant Provisions:
Section 124. Application to existing foreign corporations. – Every foreign
corporation which on the date of the effectivity of this Code is authorized to do
business in the Philippines under a license therefore issued to it, shall continue to
have such authority under the terms and condition of its license, subject to the
provisions of this Code and other special laws. (n)
Section 125. Application for a license. – A foreign corporation applying for a
license to transact business in the Philippines shall submit to the Securities and
Exchange Commission a copy of its articles of incorporation and by-laws, certified
in accordance with law, and their translation to an official language of the
Philippines, if necessary. The application shall be under oath and, unless already
stated in its articles of incorporation, shall specifically set forth the following:
1. The date and term of incorporation;
2. The address, including the street number, of the principal office of the
corporation in the country or state of incorporation;
3. The name and address of its resident agent authorized to accept summons
and process in all legal proceedings and, pending the establishment of a local
office, all notices affecting the corporation;
4. The place in the Philippines where the corporation intends to operate;
5. The specific purpose or purposes which the corporation intends to pursue in
the transaction of its business in the Philippines: Provided, That said purpose or
purposes are those specifically stated in the certificate of authority issued by the
appropriate government agency;
6. The names and addresses of the present directors and officers of the
corporation;
7. A statement of its authorized capital stock and the aggregate number of
shares which the corporation has authority to issue, itemized by classes, par
value of shares, shares without par value, and series, if any;
8. A statement of its outstanding capital stock and the aggregate number of
shares which the corporation has issued, itemized by classes, par value of shares,
shares without par value, and series, if any;
9. A statement of the amount actually paid in; and
10. Such additional information as may be necessary or appropriate in order to
enable the Securities and Exchange Commission to determine whether such
corporation is entitled to a license to transact business in the Philippines, and to
determine and assess the fees payable.
Attached to the application for license shall be a duly executed certificate under
oath by the authorized official or officials of the jurisdiction of its incorporation,
attesting to the fact that the laws of the country or state of the applicant allow
Filipino citizens and corporations to do business therein, and that the applicant is
an existing corporation in good standing. If such certificate is in a foreign
language, a translation thereof in English under oath of the translator shall be
attached thereto.
The application for a license to transact business in the Philippines shall likewise
be accompanied by a statement under oath of the president or any other person
authorized by the corporation, showing to the satisfaction of the Securities and
Exchange Commission and other governmental agency in the proper cases that
the applicant is solvent and in sound financial condition, and setting forth the
assets and liabilities of the corporation as of the date not exceeding one (1) year
immediately prior to the filing of the application.
Foreign banking, financial and insurance corporations shall, in addition to the
above requirements, comply with the provisions of existing laws applicable to
them. In the case of all other foreign corporations, no application for license to
transact business in the Philippines shall be accepted by the Securities and
Exchange Commission without previous authority from the appropriate
government agency, whenever required by law. (68a)
Section 126. Issuance of a license. – If the Securities and Exchange
Commission is satisfied that the applicant has complied with all the requirements
of this Code and other special laws, rules and regulations, the Commission shall
issue a license to the applicant to transact business in the Philippines for the
purpose or purposes specified in such license. Upon issuance of the license, such
foreign corporation may commence to transact business in the Philippines and
continue to do so for as long as it retains its authority to act as a corporation
under the laws of the country or state of its incorporation, unless such license is
sooner surrendered, revoked, suspended or annulled in accordance with this
Code or other special laws.
Within sixty (60) days after the issuance of the license to transact business in the
Philippines, the license, except foreign banking or insurance corporation, shall
deposit with the Securities and Exchange Commission for the benefit of present
and future creditors of the licensee in the Philippines, securities satisfactory to
the Securities and Exchange Commission, consisting of bonds or other evidence
of indebtedness of the Government of the Philippines, its political subdivisions
and instrumentalities, or of government-owned or controlled corporations and
entities, shares of stock in “registered enterprises” as this term is defined in
Republic Act No. 5186, shares of stock in domestic corporations registered in the
stock exchange, or shares of stock in domestic insurance companies and banks,
or any combination of these kinds of securities, with an actual market value of at
least one hundred thousand (P100,000.) pesos; Provided, however, That within
six (6) months after each fiscal year of the licensee, the Securities and Exchange
Commission shall require the licensee to deposit additional securities equivalent
in actual market value to two (2%) percent of the amount by which the
licensee’s gross income for that fiscal year exceeds five million (P5,000,000.00)
pesos. The Securities and Exchange Commission shall also require deposit of
additional securities if the actual market value of the securities on deposit has
decreased by at least ten (10%) percent of their actual market value at the time
they were deposited. The Securities and Exchange Commission may at its
discretion release part of the additional securities deposited with it if the gross
income of the licensee has decreased, or if the actual market value of the total
securities on deposit has increased, by more than ten (10%) percent of the
actual market value of the securities at the time they were deposited. The
Securities and Exchange Commission may, from time to time, allow the licensee
to substitute other securities for those already on deposit as long as the licensee
is solvent. Such licensee shall be entitled to collect the interest or dividends on
the securities deposited. In the event the licensee ceases to do business in the
Philippines, the securities deposited as aforesaid shall be returned, upon the
licensee’s application therefor and upon proof to the satisfaction of the Securities
and Exchange Commission that the licensee has no liability to Philippine
residents, including the Government of the Republic of the Philippines. (n)
Sec. 128 . Resident Agent
Requirements for becoming a resident agent
1.
2.
Sound financial capacity and
Good moral standing.
Obligations of a resident agent
1. Represent the corporation
2. Receive the summons for the corporation
To whom will summons be served in case the resident agent is
kidnapped?
The summons shall be served to the SEC.
If the notice or summons is from the SEC?
If a corporation applies for a license, she signs something, to the effect
that if ever something happens or for any other reason the resident is
not in a position to receive, the SEC or any other officer may receive in
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behalf and that would be considered an appropriate service of
summons.
Relevant Provisions:
Section 127. Who may be a resident agent. – A resident agent may be
either an individual residing in the Philippines or a domestic corporation lawfully
transacting business in the Philippines: Provided, That in the case of an individual,
he must be of good moral character and of sound financial standing. (n)
Section 128. Resident agent; service of process. – The Securities and
Exchange Commission shall require as a condition precedent to the issuance of
the license to transact business in the Philippines by any foreign corporation that
such corporation file with the Securities and Exchange Commission a written
power of attorney designating some person who must be a resident of the
Philippines, on whom any summons and other legal processes may be served in
all actions or other legal proceedings against such corporation, and consenting
that service upon such resident agent shall be admitted and held as valid as if
served upon the duly authorized officers of the foreign corporation at its home
office. Any such foreign corporation shall likewise execute and file with the
Securities and Exchange Commission an agreement or stipulation, executed by
the proper authorities of said corporation, in form and substance as follows:
“The (name of foreign corporation) does hereby stipulate and agree, in
consideration of its being granted by the Securities and Exchange Commission a
license to transact business in the Philippines, that if at any time said corporation
shall cease to transact business in the Philippines, or shall be without any
resident agent in the Philippines on whom any summons or other legal processes
may be served, then in any action or proceeding arising out of any business or
transaction which occurred in the Philippines, service of any summons or other
legal process may be made upon the Securities and Exchange Commission and
that such service shall have the same force and effect as if made upon the dulyauthorized officers of the corporation at its home office.”
Whenever such service of summons or other process shall be made upon the
Securities and Exchange Commission, the Commission shall, within ten (10) days
thereafter, transmit by mail a copy of such summons or other legal process to
the corporation at its home or principal office. The sending of such copy by the
Commission shall be necessary part of and shall complete such service. All
expenses incurred by the Commission for such service shall be paid in advance
by the party at whose instance the service is made.
In case of a change of address of the resident agent, it shall be his or its duty to
immediately notify in writing the Securities and Exchange Commission of the new
address. (72a; and n)
Section 129. Law applicable. – Any foreign corporation lawfully doing
business in the Philippines shall be bound by all laws, rules and regulations
applicable to domestic corporations of the same class, except such only as
provide for the creation, formation, organization or dissolution of corporations or
those which fix the relations, liabilities, responsibilities, or duties of stockholders,
members, or officers of corporations to each other or to the corporation. (73a)
Section 130. Amendments to articles of incorporation or by-laws of
foreign corporations. – Whenever the articles of incorporation or by-laws of a
foreign corporation authorized to transact business in the Philippines are
amended, such foreign corporation shall, within sixty (60) days after the
amendment becomes effective, file with the Securities and Exchange Commission,
and in the proper cases with the appropriate government agency, a duly
authenticated copy of the articles of incorporation or by-laws, 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. (n)
Section 131. Amended license. – 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 Securities and
Exchange Commission, favorably endorsed by the appropriate government
agency in the proper cases. (n)
Sec. 132. Merger/Consolidation involving Foreign
Corporation Licensed in the Philippines
Can a foreign corporation enter into a merger?
Yes, so long as it abides with the rules on merger/consolidation.
Important:
A. If merger/consolidation with a DOMESTIC corporation
The requirements for merger/consolidation provided in this code
shall be followed
B. If the foreign corporation is a party to a merger in its
home country/state:
1. If the foreign corporation is the surviving or
consolidated corporation
a. It must submit to the SEC a copy of its Articles of
Merger/Consolidation
b. Duly authenticated by proper official or agency
c. Within 60 days from the effectivity of the
merger/consolidation.
2. If the foreign corporation is the absorbed corporation
in merger or consolidation:
a. It must file a petition for withdrawal of its license.
Author’s Note: Summary
Merger/Consolidation
a DOMESTIC CORP
with
merger/ consolidation in
foreign country, and it is the
surviving/
consolidated
corp
Merger/Consolidation
in
foreign country, and it is the
absorbed corporation
Must abide with the laws of
merger/ consolidation in the
Philippines
a. It must submit to the SEC
a copy of its Articles of
Merger/Consolidation
b. Duly
authenticated
by
proper official or agency
c. Within 60 days from the
effectivity
of
the
merger/consolidation.
File a petition for withdrawal of
its license
Relevant Provisions:
Section 132. Merger or consolidation involving a foreign corporation
licensed in the Philippines. – 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: Provided, That the requirements on merger or
consolidation as provided in this Code are followed.
Whenever a foreign corporation authorized to transact business in the Philippines
shall be a party to a merger or consolidation in its home country or state as
permitted by the law of its incorporation, such foreign corporation shall, within
sixty (60) days after such merger or consolidation becomes effective, file with
the Securities and Exchange Commission, and in proper cases with the
appropriate government agency, a copy of the articles of merger or consolidation
duly authenticated by the proper official or officials of the country or state under
the laws of which merger or consolidation was effected: Provided, however, That
if the absorbed corporation is the foreign corporation doing business in the
Philippines, the latter shall at the same time file a petition for withdrawal of its
license in accordance with this Title. (n)
Sec 133. Effect of Doing Business without a License
Situation 1:
A friend availed the services of an online Foreign Corporation
engaged in face-lifting (cosmetic surgery). So, the friend went
to Korea in order for the operation to performed. However,
the operation was unsuccessful and resulted to her having
bloated lips. Can she sue the Foreign Corporation for damages?
Yes. However, there may be problems with regard to acquiring
jurisdiction over the person of the Foreign Corporation especially if it
does not have a resident agent here in the Philippines.
Atty. E: This problem just illustrates the importance of a resident
agent of the Foreign Corporation here in the Philippines.
Situation 2:
Assume that there was a resident agent (same cosmetic
company earlier) but despite the appointment of the resident
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agent, the foreign corporation never got the license. The
patient did not pay. Can the foreign corporation now file a
case in the Philippines to demand payment?
No. The act of soliciting orders (online solicitation) falls under the
definition of “doing business.” Because it was doing business here in
the Philippines, the foreign corporation needs to secure a license.
Since it did not, it should not be given the privilege to file a case.
Important: A foreign corporation doing business in the Philippines
without a license cannot avail of our judicial processes
Instances when a foreign corporation is considered “doing
business” in the Philippines
1. Soliciting orders, purchases and service contract
2. Opening offices or branches
3. Appointing representatives or distributors domiciled in the
Philippines
4. Participation in the management or control of domestic
corporation
5. Any other acts that imply continuity of commercial dealings or
arrangements
Situation 3:
The foreign corporation may continue to engage in business
even without a license so, it saw another patient. This patient
knew that the foreign corporation has no license. Now, patient
suffered the same fate. Said patient did not pay. When foreign
corporation filed a case for collection, the patient filed Motion
to Dismiss because the corporation has no license. Will the
case be dismissed?
No. The parties are in pari delicto.
Atty E: There was no estoppel because there was no
misrepresentation on the part of the corporation that it had a license.
The patient knew that the corporation had no license.
Instances when a Foreign Corporation may sue in the
Philippines
1. When the foreign corporation has a license
2. When the foreign corporation has no license, they may sue under
the following instances:
a. When FC entered an isolated transaction
b. No transaction at all (e.g. suit for violation of intellectual
property rights in defending the goodwill of the business)
Illustration:
Denim manufacturer in Korea with label, “Tutok Raba”. It
was copied by a corporation in the Philippines. The Korean
Corporation may file a case against the Philippine
Corporation in the Philippines. It may be because both
countries are signatory to existing treaties or agreements
where in that treaty, they allow signatory countries to file
cases here.
c.
d.
When foreign corporation entered into a transaction not
related in its business
When foreign corporation would enforce its right
Illustration:
There is a ship carrying the products of the foreign
corporation and the ship was in the port of Manila but it was
for mere passage. Some of the items were then stolen so
the foreign corporation sued in Phil. court to enforce their
right over their stolen products.
Instances when foreign corporation cannot sue
When foreign corporation is doing business in the Philippines and they
do not have a license.
Instances when foreign corporation can be sued
At any instance.
Important:
However, there might be difficulty in acquiring jurisdiction over the
foreign corporation because of the difficulty in serving summons unless
extraterritorial summons are allowed in a given circumstance.
Foreign Insurance Company
Situation 1 (local shipper sues foreign reinsurer):
Author’s Synopsis: Cargo by a local shipper was insured by local insurance
company for 50M and reinsured by foreign insurance company up to 50% of 50M
(25M). The contract of insurance was between the local shipper and local insurer,
and the contract of reinsurance was between the local insurer and foreign
reinsurer. Cargo perished and local insurance company does not pay the local
shipper the entire 50M. Question: Can the local shipper sue the foreign reinsurer
for the 25M?
There is a Foreign Corporation in England. This foreign
corporation is engaged in insurance business.
A local
insurance company in the Philippines entered into insurance
contract with a shipping vessel for its cargo up to 50M. The
local insurance company would like to distribute its risk by reinsuring the cargoes to the foreign corporation in England up
to 50% (25M). Re-insurance company agrees. In effect, it has
reinsured the entire cargo. While domestic business involves
the domestic insurance company and the cargo owner or the
shipper, the reinsurance contract is between the domestic
insurance company and the foreign insurance company.
Should the cargo get lost and the domestic insurance
company refuses to pay for the entire 50M, can the shipper
sue that foreign company who reinsured the remaining half of
the cargo?
ANS: The shipper can sue. Foreign Corporation can be sued in ALL
instances. Although the agreement was originally between the
Domestic insurer and the local shipper, but because there was an
agreement between the domestic insurer and the foreign insurer with
the consent of the local shipper, then it is binding. There is no problem
with privity of contract.
Atty E’s qualified answer:
1. If the shipper was aware before the incident that half of his
cargo was reinsured, and by virtue of that knowledge, and the
foreign company agreed, there was in effect a contract.
2. If the shipper was not aware, then there was no privity of
contract.
The shipper has no right to go after the foreign corporation.
Under the rules on privity of contract, the local shipper has no
personality to sue that foreign corporation. Thus, the domestic
insurer is liable for the full 50M. The shipper cannot sue the
foreign company because it is not privy.
Situation (follow up):
If the shipper was aware of the contract of reinsurance, and
there was a conformity between the local shipper and the
foreign reinsurance company—local shipper having been
advised by the foreign reinsurance company that it is
reinsuring the cargo up to 25M, can shipper sue the foreign
reinsurer?
ANS: It can sue. Provided however, that both parties were in
agreement, and the local shipper conformed to the agreement prior to
the contingency.
Situation 2 (reverse situation: foreign reinsurer sues local
shipper):
The domestic insurer did not pay the premium due to the
foreign reinsurance company, the reinsurance being known to
the shipper. The foreign reinsurer now sues the shipper for
payment of the premium corresponding to the reinsured
portion, which the domestic insurer did not pay. Can the
Foreign Corporation sue the balance?
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ANS: There was no agreement that the shipper is solidarily liable with
the domestic corporation
How about it being a foreign corporation?
If it has a license, then it can file a suit. If he did not have a license,
he cannot file a suit
Situation 3 (foreign shipper sues foreign insurer):
A foreign company is an exporter of Shell products. Here is the
domestic carrier that ships the products with a foreign vessel
from Cebu, Philippines to Spain. To insure the cargoes,
because this was a foreign vessel, they went to a foreign
insurance company, who insured the cargoes. If something
happens to the cargoes, may the shipper of the cargoes sue
the foreign insurance company?
ANS: Yes a foreign corporation can be sued any time.
Right of Subrogation
Situation (foreign insurer sues manufacturer, pursuant to
right of subrogation):
So that foreign insurance company who has the right of
reimbursement or subrogation came over and sued the
manufacturer of the cargoes, because there were some
defects in the goods it exploded while on board, that’s why
the goods were destroyed. While the insurance company paid
the local shipper, he will now be entitled to subrogation. Can
the foreign insurance company sue the manufacturer?
ANS: General rule is that “No license, they cannot sue”. If a foreign
corporation is doing business in the Philippines and it does not have a
license, they cannot sue. Subrogation from a domestic corporation is
not an exception to secure a license otherwise they would always
argue that they are stepping into the shoes of a domestic corporation.
License is necessary.
Atty E: If we keep on saying, you must secure a license before you
can sue, unless it will result to unjust enrichment, it will be nothing, it
will never comply with the license
Relevant Provisions:
Section 133. Doing business without a license. – No foreign corporation
transacting business in the Philippines without a license, or its successors or
assigns, shall be permitted to maintain or intervene in any action, suit or
proceeding in any court or administrative agency of the Philippines; but such
corporation may be sued or proceeded against before Philippine courts or
administrative tribunals on any valid cause of action recognized under Philippine
laws. (69a)
Section 134. 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 Securities and Exchange
Commission upon any of the following grounds:
1. Failure to file its annual report or pay any fees as required by this Code;
2. Failure to appoint and maintain a resident agent in the Philippines as required
by this Title;
3. Failure, after change of its resident agent or of his address, to submit to the
Securities and Exchange Commission a statement of such change as required by
this Title;
4. Failure to submit to the Securities and Exchange Commission an authenticated
copy of any amendment to its articles of incorporation or by-laws or of any
articles of merger or consolidation within the time prescribed by this Title;
5. A misrepresentation of any material matter in any application, report, affidavit
or other document submitted by such corporation pursuant to this Title;
6. Failure to pay any and all taxes, imposts, assessments or penalties, if any,
lawfully due to the Philippine Government or any of its agencies or political
subdivisions;
7. Transacting business in the Philippines outside of the purpose or purposes for
which such corporation is authorized under its license;
8. Transacting business in the Philippines as agent of or acting for and in behalf
of any foreign corporation or entity not duly licensed to do business in the
Philippines; or
9. Any other ground as would render it unfit to transact business in the
Philippines. (n)
Section 135. Issuance of certificate of revocation. – Upon the revocation
of any such license to transact business in the Philippines, the Securities and
Exchange Commission shall issue a corresponding certificate of revocation,
furnishing a copy thereof to the appropriate government agency in the proper
cases.
The Securities and Exchange Commission shall 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. (n)
Section 136. Withdrawal of foreign corporations. – Subject to existing laws and
regulations, a foreign corporation licensed to transact business in the Philippines
may be allowed to withdraw from the Philippines by filing a petition for
withdrawal of license. No certificate of withdrawal shall be issued by the
Securities and Exchange Commission unless all the following requirements are
met;
1. All claims which have accrued in the Philippines have been paid, compromised
or settled;
2. All taxes, imposts, assessments, and penalties, if any, lawfully due to the
Philippine Government or any of its agencies or political subdivisions have been
paid; and
3. The petition for withdrawal of license has been published once a week for
three (3) consecutive weeks in a newspaper of general circulation in the
Philippines.
Sec. 136. Withdrawal of Foreign Corporations
In case of the withdrawal of license, what is required?
1. All claims which have accrued in the Philippines have been paid,
compromised or settled;
2. All taxes, imposts, assessments, and penalties, if any, lawfully
due to the Philippine Government or any of its agencies or
political subdivisions have been paid; and
3. The petition for withdrawal of license has been published once a
week for three (3) consecutive weeks in a newspaper of general
circulation in the Philippines.
Relevant Provisions:
Section 136. Withdrawal of foreign corporations. – Subject to existing
laws and regulations, a foreign corporation licensed to transact business in the
Philippines may be allowed to withdraw from the Philippines by filing a petition
for withdrawal of license. No certificate of withdrawal shall be issued by the
Securities and Exchange Commission unless all the following requirements are
met;
1. All claims which have accrued in the Philippines have been paid, compromised
or settled;
2. All taxes, imposts, assessments, and penalties, if any, lawfully due to the
Philippine Government or any of its agencies or political subdivisions have been
paid; and
3. The petition for withdrawal of license has been published once a week for
three (3) consecutive weeks in a newspaper of general circulation in the
Philippines.
TITLE XVI. MISCELLANEOUS PROVISIONS
Sec. 137. Outstanding Capital Stock Defined
Capital Structure
1. Authorized Capital Stock – maximum amount of the capital or
investment that a corporation can have. This is stated in the
Articles of Incorporation
2. Subscribed Capital Stock – the amount of the promise or
commitment of the each of the stockholders. This is at least 25%
of the Authorized Capital Stock
3. Paid up Capital Stock – the amount that the stockholders actually
paid. This is at least 25% of the Subscribed Capital Stock
Outstanding Capital Stock
It means the total shares of stock issued under binding subscription
agreements to subscribers or stockholders, whether or not fully or
partially paid, except treasury shares. (Sec. 137, Corporation Code)
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Subscribed Capital Stock
At least 25% must be paid up
PERCEIVED CONFLICT:
Issuance of shares vs. Issuance of Certificate of Stock
Outstanding shares are shares fully issued. All subscribed
shares are outstanding shares. Now, there is a rule that says
shares cannot be issued unless fully paid. On one hand,
outstanding shares talk about fully issued shares. On the
other hand, there is also a rule that says shares of stock
cannot be validly issues unless fully paid. Is there a conflict?
Is there a conflict?
Atty E: When you say fully issued in a valid subscription agreement,
why would the law say that at least 25% is paid up? Is there a conflict?
The definition says, fully issued.
ANS: There is no conflict. We have to distinguish issuance of share and
issuance of certificate of stock.
ISSUANCE OF SHARE VS ISSUANCE OF CERTIFICATE
1.
2.
In issuance of share, it can be issued whether fully or partially
paid.
In issuance of certificate, it can be issued upon full payment of
the value of the shares of stock.
Atty E: Therefore, when there is a binding subscription contract, the
shares are already issued and outstanding. But it does not mean that
the Certificate of Stock is also issued since it can only be issued upon
full payment of the value of the shares of stock. Even without the
Certificate of Stock, the stockholder is already the owner. However,
the stockholder has no proof that he is the owner of the shares of
stock without the Certificate of Stock. As a consequence, the
stockholder cannot transfer.
But if you do not have the certificate?
There is no proof that you are the owner of the shares.
So what is the consequence?
You would find it difficult or you cannot transfer the shares because
you do not have proof of ownership. Only in the subscription
agreement. And so, to compel you to pay, the certificate of stock will
only be issued after full payment. Without the certificate, the
stockholder cannot transfer the shares, so that the corporation can
monitor where the shares are.
However, although technically it cannot be transferred, can
you think of another way on which the stocks can be
transferred without a valid certificate?
You can assign or transfer your shares even if it is not paid, on the
condition that the transferee will assume the obligation to pay the
unpaid balance of the subscription. So the corporation can still trace
the share, and the corporation can still demand the unpaid balance.
Relevant Provision:
Section 137. Outstanding capital stock defined. – The term “outstanding
capital stock”, as used in this Code, means the total shares of stock issued under
binding subscription agreements to subscribers or stockholders, whether or not
fully or partially paid, except treasury shares. (n)
Sec. 143. Rule-making power of the SEC
Miscellaneous Provisions Not Discussed
As a government agency, what do you think are the functions
of the SEC?
Administrative and Quasi-Judicial Functions
Section 138. Designation of governing boards. – The provisions of specific
provisions of this Code to the contrary notwithstanding, non-stock or special
corporations may, through their articles of incorporation or their by-laws,
designate their governing boards by any name other than as board of trustees.
Quasi-judicial functions retained by the SEC
Section 139. Incorporation and other fees. – The Securities and Exchange
Commission is hereby authorized to collect and receive fees as authorized by law
or by rules and regulations promulgated by the Commission. (n)
Quasi-judicial functions It resolves conflicts arising from:
1. Intra-corporate relations; or
2. Relationship between or among stockholders of the same
corporation; or
3. The relationships between the stockholders and the corporation.
Important:
Intra-corporate disputes are now under the jurisdiction of the regular
courts. The jurisdiction to resolve intra corporate disputes has already
been transferred to the RTC. Despite that, the SEC still retains quasijudicial functions such as the following:
1.
2.
3.
4.
5.
6.
Impose sanctions for violations of laws and the rules and
regulations pursuant thereto;
Issue cease and desist orders to prevent fraud or injury to the
investing public;
Punish for contempt of the Commission, both direct and indirect;
Issue subpoena duces tecum and summon witnesses to appear in
any proceedings of the Commission;
Suspend or revoke, after proper notice and hearing the franchise
or cert. of registration of corp., partnerships, or assoc. upon any
other grounds provided by law;
Impose penalties for violation of the Corporation Code.
Section 140. Stock ownership in certain corporations. – Pursuant to the
duties specified by Article XIV of the Constitution, the National Economic and
Development Authority shall, from time to time, make a determination of
whether the corporate vehicle has been used by any corporation or by business
or industry to frustrate the provisions thereof or of applicable laws, and shall
submit to the Batasang Pambansa, whenever deemed necessary, a report of its
findings, including recommendations for their prevention or correction. Maximum
limits may be set by the Batasang Pambansa for stockholdings in corporations
declared by it to be vested with a public interest pursuant to the provisions of
this section, belonging to individuals or groups of individuals related to each
other by consanguinity or affinity or by close business interests, or whenever it is
necessary to achieve national objectives, prevent illegal monopolies or
combinations in restraint or trade, or to implement national economic policies
declared in laws, rules and regulations designed to promote the general welfare
and foster economic development.
In recommending to the Batasang Pambansa corporations, businesses or
industries to be declared vested with a public interest and in formulating
proposals for limitations on stock ownership, the National Economic and
Development Authority shall consider the type and nature of the industry, the
size of the enterprise, the economies of scale, the geographic location, the
extent of Filipino ownership, the labor intensity of the activity, the export
potential, as well as other factors which are germane to the realization and
promotion of business and industry.
Important:
So with regard to purely administrative violations, the SEC still has
jurisdiction over it. The SEC also has the power to enforce its decision
by issuing a writ of execution and can even appoint a receiver. If there
are assets involved, the SEC can issue the writs of execution,
attachment, and even appoint receivers.
Section 141. Annual report or corporations. – Every corporation, domestic
or foreign, lawfully doing business in the Philippines shall submit to the Securities
and Exchange Commission an annual report of its operations, together with a
financial statement of its assets and liabilities, certified by any independent
certified public accountant in appropriate cases, covering the preceding fiscal
year and such other requirements as the Securities and Exchange Commission
may require. Such report shall be submitted within such period as may be
prescribed by the Securities and Exchange Commission. (n)
TN: Before, this was covered by a Presidential Decree 902-A which
was issued by Marcos. Everything was given to the SEC. Because such
was under the supervision of the President, under the executive
department, decisions of the SEC will be appealable to the office of the
President so that he has the complete control of the economy and
business of the country.
Section 142. Confidential nature of examination results. – All
interrogatories propounded by the Securities and Exchange Commission and the
answers thereto, as well as the results of any examination made by the
Commission or by any other official authorized by law to make an examination of
the operations, books and records of any corporation, shall be kept strictly
confidential, except insofar as the law may require the same to be made public
or where such interrogatories, answers or results are necessary to be presented
as evidence before any court. (n)
Rule-making Power
Issue additional rules in order to comply with what is provided under
the Corporation Code.
Section 144. Violations of the Code. – Violations of any of the provisions of
this Code or its amendments not otherwise specifically penalized therein shall be
punished by a fine of not less than one thousand (P1,000.00) pesos but not
more than ten thousand (P10,000.00) pesos or by imprisonment for not less than
thirty (30) days but not more than five (5) years, or both, in the discretion of the
court. If the violation is committed by a corporation, the same may, after notice
and hearing, be dissolved in appropriate proceedings before the Securities and
Exchange Commission: Provided, That such dissolution shall not preclude the
institution of appropriate action against the director, trustee or officer of the
corporation responsible for said violation: Provided, further, That nothing in this
section shall be construed to repeal the other causes for dissolution of a
corporation provided in this Code. (190 1/2 a)
Example: Issues rules on how to comply with financial statements to the SEC.
It may provide a requisite on the format and how many copies shall be
submitted. It can also collect and demand fines for non-compliance.
Relevant Provision:
Section 143. Rule-making power of the Securities and Exchange
Commission. – The Securities and Exchange Commission shall have the power
and authority to implement the provisions of this Code, and to promulgate rules
and regulations reasonably necessary to enable it to perform its duties hereunder,
particularly in the prevention of fraud and abuses on the part of the controlling
stockholders, members, directors, trustees or officers. (n)
Sec. 149. Effectivity of Corporation Code
Section 149. Effectivity. – This Code shall take effect immediately
upon its approval. Approved, May 1, 1980
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Section 145. Amendment or repeal. – No right or remedy in favor of or
against any corporation, its stockholders, members, directors, trustees, or
officers, nor any liability incurred by any such corporation, stockholders,
members, directors, trustees, or officers, shall be removed or impaired either by
the subsequent dissolution of said corporation or by any subsequent amendment
or repeal of this Code or of any part thereof. (n)
Section 146. Repealing clause. – Except as expressly provided by this Code,
all laws or parts thereof inconsistent with any provision of this Code shall be
deemed repealed. (n)
Section 147. Separability of provisions. – Should any provision of this Code
or any part thereof be declared invalid or unconstitutional, the other provisions,
so far as they are separable, shall remain in force. (n)
Section 148. Applicability to existing corporations. – All corporations
lawfully existing and doing business in the Philippines on the date of the
effectivity of this Code and heretofore authorized, licensed or registered by the
Securities and Exchange Commission, shall be deemed to have been authorized,
licensed or registered under the provisions of this Code, subject to the terms and
conditions of its license, and shall be governed by the provisions hereof:
Provided, That if any such corporation is affected by the new requirements of
this Code, said corporation shall, unless otherwise herein provided, be given a
period of not more than two (2) years from the effectivity of this Code within
which to comply with the same. (n)
ATTY E’S INPUT ON THE CASES
PEA-PGWTO vs. NLRC
Atty E: Pantranco properties was the biggest railway company in
Luzon. It had financial reversals, it needed fresh capital it has to
borrow money from PNB. Unable to service the loan that it incurred
from PNB, PNB necessarily had to foreclose the properties of
Pantranco. So, it was now in the name of PNB. But at the same time,
PNB is just an expert in banking. It was not ready to operate a big
transportation company such as Pantranco. And so, it looked for
experts and created its own transportation company, PNB Madecor. In
other words, it continued the business of Pantranco but through
another corporation, Madecor, although PNB was the majority
stockholder. So, Madecor continued to operate until somebody was
interested to buy out the shares of PNB. Who bought? Mega Prime
acquired the share of PNB. So, from Pantranco it went to PNB, it went
to Madecor, owned majority of PNBs shareholding, eventually Mega
Prime acquired the shares of PNB.
So, the employees of Pantranco were able to secure a
favorable judgment. To whom did the Labor Arbiter execute
its favorable judgment against? PNB, PNB Madecor and to PNEI.
However, the property was no longer in the name of
Pantranco as it went to Madecor & Megaprime. What did it
(Madecor & MegaPrime) allege when the employees went
against the properties of Madecor and Megaprime?
It cannot be liable for the money claims against PNEI.
The first issue, according to the Laborers was?
Laborers said they were one and the same. The transfer was intended
to defraud them. Thus, we could lift the veil of corporate fiction and
pursue against whoever is the owner of these assets.
SC: The property now belongs to Madecor/MegaPrime. It is no longer
belonging to PNEI and that the PNB Madecor is a separate and distinct
personality from PNEI.
Atty E: The transfer of the assets was of arms length basis. There
was no fraud at all. As a matter of fact, the transfer was by virtue of a
foreclosure. Pantranco did not pay its obligations. So the transfer was
valid and ownership by Madecor cannot be presumed to be the same
ownership as that of Pantranco.
The second issue, according to the Laborers was?
Firstly, the laborers were trying to pursue the assets. They filed a
money claim against the Pantranco assets, and were suing against the
transfer of the assets from Pantranco to PNB, PNB Madecor and Mega
Prime, since the assets were transferred to PNB, Madecor, and
Megaprime from Pantranco
How did they raise and argue the issue that since
Madecor/Megparime is now the owner of properties then now
it will be liable for the liabilities of Pantranco.
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They argued that there was a merger. Because in a merger the
surviving corporation will assume the liabilities/assets of the dissolved
corporation. In a merger there is assumption of liability. And the
ownership is now transferred, then it follows liabilities are transferred.
SC: In this case, there was no merger and that these corporations
were separate and distinct personalities from another, and that one
company cannot be liable for the obligations that is to be fulfilled by
the other company. In other words, there was just a transfer of assets
and not a merger. Because in transfer of assets, what is only acquired
by the acquiring corporation are just those assets and not the liabilities
of the other corporation.
Seaoil vs. Autocorp
What was the issue?
1. W/N a director can be held personally liable for obligations
incurred by the corporations
Atty E: Whether the issuance of a check by an officer, will make that
officer personally liable if there is bad faith. Because we learned that a
director generally cannot be held liable for the obligations of a
corporation. Exception to that is that a director can be held liable for
the obligations of corporation if he knowingly assents to the patently
unlawful acts of the corporation.
SC: Rodriguez did not act in bad faith because the corporation here
entered into the transaction in good faith. Rodriguez, having a
separate personality cannot be held liable.
China Bank vs. Dyne Sem
Author’s note: Sir had no inputs for this case
Parischa vs. Don Luis Rison Realty
Why was Ms. Bautista’s authority questioned?
Her authority was questioned because there was no board resolution
authorizing her to represent the corporation in the case. But however,
she later on was able to present a Secretary’s Certificate to sue in
behalf of the corporation. And assuming arguendo that Ms. Bautista
has the right to represent the corporation, petitioners still argued that
the corporation cannot sue because their certificate of incorporation
was already revoked by the SEC, because it was presented already
when the corporation was already dissolved.
SC: The corporation can sue because the revocation was only had
after the case was filed. The point was, legal capacity of the
corporation to sue existed while the case was being filed against the
petitioner.
Atty E: Subsequent revocation of the certificate of incorporation of a
corporation does not affect its rights. Even if the authority was
presented already after the dissolution, it will still have a valid effect
because it was issued when the meeting was conducted before the
dissolution.