UNIVERSITY OF SAN CARLOS
SCHOOL OF LAW & GOVERNANCE
SEC. 14. FORM OF ARTICLES OF INCORPORATION .... 27
Business Organization 2
Revised Corporation Code
Reviewer
SEC. 16. GROUNDS FOR DISAPPROVAL OF AOI OR
AMENDMENTS .................................................................. 29
Atty. Eugenio Espedido
SEC. 18. REGISTRATION, INCORPORATION AND
COMMENCEMENT OF CORPORATION EXISTENCE ..... 30
EH403 SY 2019-2020
CORPO COMMITTEE:
Gaviola, Keeshia Earl T.
Li, Jinnelyn O.
Tagaloguin, Elmar M.
Torres, Chezka Bianca P.
SEC. 19. DE FACTO CORPORATION .............................. 31
SOURCES
Discussion of Atty. Espedido & Atty. Gaviola (2018-2019) |
Herbosa | Prior Year Notes: Gaviola, Tanya & Beer Notes | UP
Law Notes 2019 | San Beda MemAid 2019
SEC. 15. AMENDMENT OF THE ARTICLES..................... 28
SEC. 17. CORPORATION NAME ...................................... 29
SEC. 20. CORPORATION BY ESTOPPEL ........................ 31
SEC. 21. EFFECT OF NON-USE OF CORPORATE
CHARTER AND CONTINUOUS INOPERATION ............... 34
TITLE III. BOARD OF DIRECTORS/TRUSTEES AND
OFFICERS ............................................................................. 34
SEC. 22. QUALIFICATIONS OF THE BOD/BOT ............... 35
SEC. 23. ELECTION OF DIRECTORS OR TRUSTEES .... 37
SEC. 24. CORPORATE OFFICERS .................................. 39
Disclaimer: This material is not for sale. The authors do not
guarantee the absolute correctness, completeness or accuracy
of this reviewer. This is intended to be used as a supplement to
your personal readings. Please be vigilant in cross-referring with
your own notes. We have arranged Atty. E.’s discussion to align
with the codal provisions, and thus this reviewer does not
completely follow the flow of his class discussions.


Kindly note that the portions of these reviewers marked with
double asterisks (**) were not discussed by Atty. E., but for
purposes of the mock bar and/or better understanding, the
authors thought to include such notes in this material.
Tip: To easily reach a specific section or title in this
document, simply press CTRL + <click the section you want
to go to>.
SEC. 25. REPORTORIAL REQUIREMENTS ..................... 41
SEC.
26.
DISQUALIFICATION
OF
DIRECTORS,
TRUSTEES, OR OFFICERS .............................................. 42
SEC. 27. REMOVAL OF DIRECTORS/TRUSTEES ........... 42
SEC. 28. VACANCIES in the board.................................... 42
SEC. 29 COMPENSATION OF DIRECTORS OR TRUSTEES
........................................................................................... 44
SEC. 30. LIABILITY OF DIRECTORS, TRUSTEES OR
OFFICERS ......................................................................... 44
SEC. 31. DEALINGS OF DIRECTORS, TRUSTEES OR
OFFICERS ......................................................................... 45
SEC. 32 INTERLOCKING DIRECTORS ............................ 46
TABLE OF CONTENTS
SEC. 33. DISLOYALTY OF A DIRECTOR ......................... 47
TITLE I. GENERAL PROVISIONS, DEFINITIONS AND
CLASSIFICATIONS .................................................................2
SEC. 34. EXECUTIVE COMMITTEE ................................. 48
TITLE IV. POWERS OF THE CORPORATION ..................... 48
SEC. 1. TITLE OF THE CODE .............................................2
SEC. 35. CORPORATE POWERS AND CAPACITY ......... 48
SEC. 2. CORPORATION DEFINED .....................................4
SEC. 3. CLASSES OF CORPORATIONS .......................... 11
SEC. 36. POWER TO EXTEND OR SHORTEN
CORPORATE TERM .......................................................... 50
SEC. 4. CORPORATIONS CREATED BY SPECIAL LAWS
OR CHARTERS .................................................................. 14
SEC. 37 POWER TO INCREASE OR DECREASE CAPITAL
STOCK ............................................................................... 50
SEC. 5. CORPORATORS AND INCORPORATORS,
STOCKHOLDERS AND MEMBERS................................... 14
SEC. 38. POWER TO DENY PRE-EMPTIVE RIGHT ........ 51
SEC. 6. CLASSIFICATION OF SHARES ........................... 15
SEC. 40. POWER TO ACQUIRE OWN SHARES .............. 52
SEC. 7. FOUNDERS’ SHARES .......................................... 16
SEC. 8. REDEEMABLE SHARES ...................................... 16
SEC. 41. POWER TO INVEST CORPORATE FUNDS IN
OTHER CORPORATIONS/BUSINESSES ......................... 53
SEC. 9. TREASURY SHARES ........................................... 16
SEC. 42. POWER TO DECLARE DIVIDENDS .................. 54
TITLE II. INCORPORATION AND ORGANIZATION OF
PRIVATE CORPORATIONS .................................................. 22
SEC. 43. POWER TO ENTER INTO MANAGEMENT
CONTRACT........................................................................ 59
SEC. 10. NUMBER AND QUALIFICATIONS OF
INCORPORATORS ............................................................ 22
SEC. 44. ULTRA VIRES ACTS .......................................... 59
TITLE V. BYLAWS ................................................................ 60
SEC. 11. CORPORATE TERM ........................................... 23
SEC. 45. ADOPTION OF BY LAWS ................................... 60
SEC. 12. CAPITAL STOCKS .............................................. 23
SEC. 46. CONTENTS OF BYLAWS ................................... 61
SEC. 13. CONTENTS OF THE ARTICLES OF
INCORPORATION.............................................................. 23
SEC. 47. AMENDMENT TO BYLAWS ............................... 61
SEC. 39. SALE OR OTHER DISPOSITION OF ASSETS .. 52
TITLE VI. MEETINGS ............................................................ 62
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SEC. 48. KINDS OF MEETINGS ........................................ 62
SEC. 49. REGULAR & SPECIAL MEETINGS OF
STOCKHOLDERS OR MEMBERS ..................................... 62
SEC. 50. PLACE & TIME OF MEETINGS OF
STOCKHOLDERS OR MEMBERS ..................................... 65
R.A. No. 11232
An Act Providing for the Revised Corporation Code of the
Philippines
TITLE I. GENERAL PROVISIONS, DEFINITIONS AND
CLASSIFICATIONS
SEC. 51. QUORUM IN MEETINGS .................................... 65
SEC. 52. REGULAR & SPECIAL MEETINGS OF
DIRECTORS/TRUSTEES; QUORUM ................................ 65
SEC. 53. WHO SHALL PRESIDE AT MEETINGS ............. 66
SEC. 1. TITLE OF THE CODE
Section 1. Title of the Code. This Code shall be known as the
“Revised Corporation Code of the Philippines”.
SEC. 54. RIGHT TO VOTE OF SECURED CREDITORS &
ADMINISTRATORS ............................................................ 66
INTRODUCTION
SEC. 55. VOTING IN CASE OF JOINT OWNERSHIP OF
STOCK ............................................................................... 66
The Revised Corporation Code of the Philippines (RCC) was
signed into law by Pres. Rodrigo Duterte on 20 February 2019,
and became effective on 23 February 2019, following its
publication in 2 newspapers of general circulation.
SEC. 56. VOTING RIGHT FOR TREASURY SHARES ...... 67
SEC. 57. MANNER OF VOTING; PROXIES ...................... 67
SEC. 58. VOTING TRUSTS ............................................... 68
TITLE VII. STOCKS AND STOCKHOLDERS ....................... 70
SEC. 59. SUBSCRIPTION CONTRACT ............................. 70
SEC. 60. PRE-INCORPORATION SUBSCRIPTION .......... 70
SEC. 61. CONSIDERATION FOR STOCKS ...................... 71
SEC. 62. CERTIFICATION OF STOCK & TRANSFER OF
SHARES ............................................................................. 72
SEC. 63. ISSUANCE OF STOCK CERTIFICATES ............ 73
SEC. 64. LIABILITY OF DIRECTORS FOR WATERED
STOCKS ............................................................................. 75
SEC. 65. INTEREST ON UNPAID SUBSCRIPTIONS ........ 77
SEC. 66. PAYMENT OF BALANCE OF SUBSCRIPTION .. 77
SEC. 67. DELINQUENCY SALE ........................................ 78
SEC. 68. WHEN SALE MAY BE QUESTIONED ................ 79
SEC. 69. COURT ACTION TO RECOVER UNPAID
SUBSCRIPTION ................................................................. 79
SEC. 70. EFFECT OF DELINQUENCY .............................. 79
SEC. 71. RIGHTS OF UNPAID SHARES, NONDELINQUENT
............................................................................................ 79
SEC. 72. LOST OR DESTROYED CERTIFICATES ........... 80
TITLE VIII. CORPORATE BOOKS AND RECORDS ............ 82
SEC. 73. BOOKS TO BE KEPT; STOCK TRANSFER AGENT
............................................................................................ 82
SEC. 74. RIGHT TO FINANCIAL STATEMENTS ............... 86
APPENDIX ............................................................................. 87
P.D. 902-A .......................................................................... 87
NATIONALIZED ACTIVITIES (SEC. 8, RA 7042) ............... 87
SEC. 3, R.A. 8179 (AMENDING SEC. 8, RA. 7042) ........... 88
In its repealing clause, the Revised Corporation Code
expressly repealed the 1980 Corporation Code, which had no
amendments for almost 39 years.
Notes:
From 149 sections, the RCC now has 188 sections.
Being a special law, it is a combination of substantive
and procedural law.
The most important innovation is the introduction of the
OPC, or one-person corporation. This is a very new
concept. We have abandoned the old concept of at
least 5 incorporators being required to make a
corporation.
o There is a new concept because many
investors refrain from investing much into
businesses, because when they invest into
sole proprietorships, their liability is unlimited.
o However, forming a corporation under the old
law
required
5
incorporators,
and
businessmen may not be comfortable with
doing business with five other persons. So
what they did before was they incorporated a
corporation together with family members.
Sometimes, they did it with their drivers,
gardeners and laundrywomen, etc. The SEC
realized that we are just fooling ourselves,
that incorporators can sometimes be had in
circumvention of the law. That is why they
now allow the OPC.
However, note that 80-90% of the Code remains the
same with the Old Code.
TYPES OF BUSINESS ORGANIZATIONS
(1) Sole Proprietorships
A form of business organization with only one proprietary
owner. It is when a person personally or a single individual
conducts business under his own name or under a business
name.
(2) Partnerships
By a contract of partnership, two or more persons bind
themselves to contribute money, property or industry to a
common fund, with the intention of dividing the profits
among themselves. Two or more persons may also form a
partnership for the exercise of a profession.
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(3) Corporation
An artificial being created by operation of law, having the
right of succession and the powers, attributes and
properties expressly authorized by law or incident to its
existence.
SOLE
PROPRIETOR
-SHIP
Starts upon
selling
Commence
-ment
Sole
proprietor
PART
-NERSHIP
CORPO
-RATION
Created by
mere
agreement of
the parties
Created by
operation of
law
At least 2
persons
New Law:
One Person
Corporation
is allowed
No. of
Incorporators
Old Law: At
least 5
incorporators
No juridical
personality
Commence
-ment of
Juridical
Personality
Liable up to
the extent of
personal
properties
Execution
of the
contract
From the
date of
issuance of
the
Certificate of
Incorporation by the
SEC
Liable
personally
and subsidiarily for
partnershi
p debts to
3rd
persons
Stockholder
s are liable
only to the
extent of
their
investments
as
represented
by the
shares
subscribed
by them
Liability
Managed by
the sole
proprietor
Management
Absence
of any
agreement,
every
partner is
an agent
of the
partnership
Important:
Veil of
Corporate
Fiction
applies
only to a
Corporation
Power to do
business is
vested in the
Board of
Directors
(BOT) or
Board of
Trustees
Transferrable
through asset
sale
Transferability of
Interest
Needs
consent of
all partners
(based on
delectus
personae)
No right of succession
Right of
Succession
Does not
need prior
consent of
the stockholders
There is
right of
succession
What is the basic distinction between the three?
A: The veil of corporation fiction only exists in a corporation, and
not in a sole proprietorship or a partnership.
Atty. Espedido.: A Corporation, such as a One Person
Corporation (OPC) enjoys the veil of corporate fiction and a
limited liability whereas a Sole Proprietorship’s liability may not
be limited at all.
One of the requirements of an OPC to exist is to declare how
much capital he intends so that his liability will be based on that
capital. He must prove that he has separated that capital from
his personal funds. The amount declared as capital for the
Corporation has been separated from the personal funds.
Unless he can do that, he might be liable as a Sole Proprietor.
ADVANTAGES OF A CORPORATION
(1) More capitalization
(2) Limited liability – veil of corporate fiction applies
(3) Right of succession – upon the death of a stockholder,
the heir becomes the new stockholder which provides
stability for the business to continue
(4) Transferability of interest – does not require the
consent of other stockholders
(5) Easier management – management is centralized in
the Board of Directors
DISADVANTAGES OF A CORPORATION
(1) Higher Income Tax Liability (May be taxed twice)
Corporate Income Tax and Income Tax
Stockholders
to
Illustration. When the corporation acquires income, it
will be subject to corporate income tax. When it is
distributed to the shareholder as cash dividends, it will
also be an income of the shareholder and such are
taxable income of the shareholder.
(2) Less Participation in the Management. Participation of
stockholders in a corporation is indirect.
Indirect – means the management of the corporation is
entrusted to the Board of Directors. The only
participation of stockholders in the management is in
the election of the Board of Directors.
(3) No delectus personae – investing with people you do
not know; there is no personal touch; no delectus
personae
(4) Dissolution – dissolution is granted by the State, unlike
in a Partnership which can be dissolved anytime.
Dissolution of a Corporation requires consent of the
State because it is imbued with public interest.
Page 3 of 88 | EH403 2019-2020 Corporation Law
(5) Greater degree of government control and supervision
(6) Difficulty in meeting requirements – high cost of
formation and operations
TYPES OF CORPORATIONS
1.
Public corporations
Created to govern a portion of the State. Its purpose is
for the general good and welfare (Sec. 3, Act 1456).
2.
Private corporations
Created for some private purpose, benefit, aim or end.
It may either be stock nor non-stock, governmentowned or controlled, or quasi-public.
3.
Publicly-listed corporations
Private corporations whose stocks are listed in the PSE
(Philippine Stock Exchange).
SEC. 2. CORPORATION DEFINED
Section 2. Corporation Defined. A corporation is an artificial
being created by operation of law, having the right of
succession, and the powers, attributes, and properties expressly
authorized by law or incidental to its existence.
This course is actually called Business Organizations II.
But what will we be studying in this course?
A: We will be studying about private corporations, as
distinguished from public corporations.
Examples:
(1) San Miguel Corporation
(2) Philippine Long Distance Telephone Company
(3) SM Prime Holdings, Inc.
Private corporations are different from public corporations in that
the latter are created and governed by special charters.
What is a public corporation?
A: It is one created by the State either by general or special act
for purposes of administration of local government or rendering
services in the public interest.
PRIVATE CORPORATION VS. PUBLIC CORPORATION
PRIVATE CORPORATION
Formed for a private
purpose, benefit or end.
PUBLIC CORPORATION
Formed or organized to
govern a portion of the
State.
Examples:
1. Municipalities
2. Provinces
3. Autonomous Regions
such as the ARMM and
the CAR
What about Region 7?
A: It is not a public corporation because its purpose is for
geographical determination and there is no election of Regional
Representatives. Its only purpose is for the clustering of the
provinces forming part of that region.
How about ARMM and CAR?
A: These are autonomous regions that have their own
governors and boards. These are public corporations.
How do we define private corporations?
A: They are corporations that are established for a private
purpose or benefit.
What do you think about PAGCOR?
A: It is an artificial being.
Does it have the right of succession?
A: It has.
The Philippine Airlines before was a private corporation.
And it was government-owned. Now, it has been privatized.
Meaning, the shares of stock of the government were sold
to private persons. PAGCOR is a private corporation.
4.
Quasi-public corporations
Private corporations performing public functions.
(Example: VECO)
5.
Government-Owned and Controlled Corporations
Private corporations created by the Congress through
a special charter and the majority of its shareholdings
are owned by the government.
A GOCC has a personality of its own, separate and
distinct from that of the government.
Examples:
(1) Development Bank of the Philippines
(2) Philippine Ports Authority
(3) Philippine
Amusement
and
Gaming
Corporation
(4) Land Bank of the Philippines
(5) Manila International Airport Authority
**NOTES:
1. The test to determine whether a GOCC or private
corporation: if a corporation is created by its own
charter for the exercise of a public function, then
GOCC; if by incorporation under the general
corporation law, then private corporation (Baluyot vs.
Holganza, 2000)
What about the Department of Education?
A: It is not a public corporation. It is an instrumentality of the
government under the Executive Branch.
What is a government instrumentality?
A: It is not a private or a public corporation, but an
instrumentality of the government performing functions of a
particular branch of the government.
If the employees of a GOCC are illegally dismissed, where
do they go?
A: It depends on what is written on their special charter. They
are not covered under the Revised Corporation Code, and they
are also not covered in the Labor Code. Moreover, many of them
are covered by the Civil Service Rules even if they are private
corporations.
Therefore, we have demonstrated the fact that private
corporations may be?
A: They can be private or government-controlled.
Page 4 of 88 | EH403 2019-2020 Corporation Law
CONSEQUENCES OF BEING A CORPORATION
What are the consequences of a corporation existing as an
artificial being?
A:
(1) It has a separate and distinct personality from its
members or shareholders, thus incurs separate liability
(2) It enjoys rights separate from the stockholders
(3) Properties of the corporation are separate from the
properties of the stockholders.
XPNs:
(1) When the crime is punishable by a special law;
Atty. Espedido: The special law must specify that it
imposes penalties on the officers of the corporation. To
be able to punish the officers, the law should
specifically provide that in case the corporation
becomes liable, the officers shall be directly punishable
for the commission of the act or violation, and that they
will suffer the penalty of imprisonment. Otherwise, they
cannot be held liable.
RIGHTS OF A CORPORATION
What rights does a corporation have?
A:
(1) Constitutional rights
(2) Civil rights
(3) Economic rights
(2) When the penalty imposed is a fine;
A corporation can be made criminally liable by being
made to pay a fine. Fines are not civil obligations, but
are penalties.
(3) When the corporation violates the Anti-Money
Laundering Act (AMLA)
Note: A corporation does not have political rights.
Civil and Economic Rights:
(1) Right to sue or be sued
(2) Right to own and dispose of properties
(3) Right to enter into contracts
(4) Right to non-impairment of contracts
Constitutional Rights:
(1) Right to due process and equal protection of the law
Section I, Article III of the Constitution
“No person shall be deprived of life, liberty or property
without due process of law, nor shall any person be
denied the equal protection of the law.”
(2) Right against unreasonable searches and seizure
(3) Right against non-impairment of contracts
(4) Right against self-incrimination
Note: An artificial being has a separate set of rights from
that of natural persons. Artificial persons enjoy certain rights
that persons also enjoy, but not all rights.
What rights can a corporation not exercise?
A:
(1) Political rights – for example, the right to vote and be
voted for
(2) Right to life – granted only personality in accordance to
law
(3) Right to liberty – a corporation is not a corporal being
(it has no physical existence) which can be detained
unlike a natural person. A corporation cannot move,
and therefore it is impractical to send the corporation
to jail.
CRIMINAL LIABILITY OF A CORPORATION
GEN: A corporation cannot be held criminally liable under the
Revised Penal Code.
Rationale: Crimes under the RPC have the element of intent
which corporations are not capable of, as it has no mind of its
own. As a creature of the law, its intention cannot be determined.
It can also not be sent to jail because it has no corporal or
physical existence.
Penalties in the AMLA include:
a. Suspension
b. Revocation of license
c. Fine
PRINCIPLE OF LIBERALITY OF CONTRACTS
Rule: Anyone can stipulate any provision in a contract as long
as such provision is not contrary to law, morals, public policy,
and public order. This right is enjoyed by both natural and
juridical persons.
Note: A corporation also enjoys the right to liberality of
contracts. However, there is an additional condition: a
corporation is not only bound by the limitations imposed under
the principle of liberality of contracts, but is also bound by the
provisions in the Articles of Incorporation.
Thus, a corporation’s existence must be within the
boundaries of the Revised Corporation Code and its
Articles of Incorporation.
Atty. Espedido: In other words, you cannot just say that you can
enter into any contract under the principle of liberality of
contracts but the contract must also be confined within the
privilege granted by the State.
Important: Although you can enter into any contract, your
authority or power to enter into a contract must be confined
within the authority granted to you by the State.
LIABILITY OF CORPORATIONS IN CASE OF DEBT
Consequence of having a separate juridical personality: The
debts of the corporation cannot be demanded by the creditors
against the stockholders.
Stockholders cannot be held personally liable because their
liability is limited to the extent of their investments. It is unlike a
Partnership where the partners can be held personally liable.
Reason: In a corporation, there is a veil of corporate fiction. The
main difference between the two is that, while both partnership
and corporation are juridical persons, the veil of corporate entity
applies only to corporations.
Page 5 of 88 | EH403 2019-2020 Corporation Law
Illustration.
A corporation incurred debts and its assets are not
sufficient to pay its debts. Can the creditors demand
payment from its stockholders?
A: Generally, no. If the assets are not enough, it will be
considered as losses on the part of the creditor.
Atty. Espedido: In case the corporation incurs debts and their
assets are no longer sufficient, the creditors may organize
themselves and discuss the matter with the corporation. To aid
the creditors for whatever is due to them, they could agree to
pursue rehabilitation.
In a rehabilitation, the assets of the corporation will be gathered.
It will not be enough so the court will apply a receiver who will
determine how the creditors will be paid.
The receiver’s job is to settles as much as possible – keep the
business of the Corporation going, such as appoint some
managers, so that the business will continue, earn income, and
such profits will be now distributed to the creditors. However,
this may not be a one-time payment. They will now program the
payment. In this manner, the creditors will be protected.
VEIL OF CORPORATE FICTION
A corporation has a separate and distinct personality from its
shareholders, officers, and directors. Once said corporate fiction
is created, the veil hides the stockholders such that when a
corporation incurs liability, the stockholders are shielded from
liability. In so far as the law is concerned, we are only dealing
with the corporation.
Otherwise, without the veil, would you still like to be a
stockholder?
Atty. Espedido: There is no point. In other words, that veil is the
protection of the stockholders.
Can the veil of corporate fiction be enjoyed by a
partnership?
A: No. While a corporation and a partnership are both juridical
persons, the veil of corporate fiction only applies to corporations.
PIERCING THE VEIL OF CORPORATE FICTION
When can there be piercing of the veil of corporate fiction?
A: When the corporate veil: (Memory Aid: PDFJ)
1. Defeats public convenience;
2. Is used to perpetuate fraud;
3. Is used to defend a crime;
4. Is used to justify a wrong.
Illustration.
Corporation A defrauds its creditors by transferring its
assets to Corporation B
Corporation A has five (5) stockholders. Corporation A incurred
debts and has already received a demand letter. Corporation A
is now anticipating that the creditor might proceed against their
assets.
Corporation A now created Corporation B and made it appear
that the assets of Corporation A were already sold to
Corporation B.
When the sheriff came to attach the property of Corporation A,
the sheriff was shown a document that the assets are sold to
Corporation B.
Do you think that the sheriff can go after Corporation B?
A: Normally, the sheriff might be hesitant. The sheriff will not
want to violate the rights of Corporation B.
Atty. Espedido: But lawyers have a way of pursuing Corporation
B. They can proceed to Corporation B by proving that the assets
were actually owned by Corporation A through establishing that
the stockholders of Corporation A are the same stockholders of
Corporation B.
Show that the assets were only transferred to defraud the
creditors. So this is an instance when the corporate veil may be
lifted.
RELATIONSHIPS OF A CORPORATION
When we organize or form a corporation, we will establish
various relationships. Relationships are necessary.
Relationships formed by a corporation
(1) Relationship between Corporation and the
Shareholders
Which is why it is necessary to execute the Articles of
Incorporation. It manages the relationship between the
corporation and the shareholders.
(2) Relationship among Shareholders themselves
The articles and the law provide the regulation and
monitors this relationship
(3) Relationship between the Corporation and the
State
A corporation is created by the State. It is the state that
granted the privilege; thus, it can also be withdrawn by
the state. Therefore, you must be compliant with the
provisions of the law. Any violation will cause the
suspension or eventual revocation.
(4) Relationship between the Corporation and the
Public
The public here includes the clients.
In forming a corporation, your objective is to gather friends and
people in order to get funds or ask for investments.
Atty. Espedido: In forming a corporation, the main purpose is
fundraising. Because when you do not have money or
investments, it will be difficult to run a business.
The easiest option is to borrow. But if you do not have financial
assets, do you think the bank will lend to you? What will the bank
require? Financial statements. The FS however will show that
you have zero assets. No bank will lend to you. Because if the
manager lends to you without collateral, he will lose his job. If
you do not pay your debt, you might even be sent to jail because
you defrauded the bank.
On the other hand, if you form a corporation, even if you do not
earn profits, can the investors demand payment from you? Are
you obliged to return their money?
A: No. By contributing money, they have exposed themselves
to risk. In business, you do not guarantee profits.
On the other hand, if you borrowed money from the bank and
you cannot return it, there will be interest to be paid,
compounded interest, and the bank may foreclose your
property.
Page 6 of 88 | EH403 2019-2020 Corporation Law
DIFFERENCE BETWEEN A LENDER & AN INVESTOR
LENDER
No risk presumed
INVESTOR
Takes the risk because
there is no guarantee of
success
or
profits
in
business.
Note: When you invest, you share opportunities. You share risks
as well.
What is the difference between an investor and a lender?
A: The investor takes a risk.
RELATIONSHIP BETWEEN THE CORPORATION AND
STATE
A corporation is a creation of the law. In other words, it is a
privilege granted by the State. The term extended or granted by
the state is subject to the condition that the corporation will
comply with the reportorial requirements and behave within the
bounds of the law. Otherwise, the State may revoke or cancel
the license. It may also suspend and/or charge a fine.
PARTNERSHIP VS CORPORATION
Manner of
Creation
PARTNERSHIP
Created by mere
agreement of the
parties
CORPORATION
Created by law or
by operation of law
No. of
Incorporators
At least 2
persons
One Person
Corporation
Old law: at least 5
incorporators
Commencement
of Juridical
Personality
Moment of
execution of the
contract
From the date of
the issuance of the
Certificate of
Incorporation by
the SEC
The primary purpose of the corporation is to maintain,
operate, run and manage a funeral parlor. May the
corporation maintain, operate and manage a hospital
instead?
A: It cannot, because their agreement is to engage in a funeral
business.
Powers
May exercise
power authorized
by the partners
Exercise power
only expressly
granted by law or
implied from those
granted or incident
to its existence
What can the stockholder do?
A: Even if the Board of Directors (BOD) want to have a hospital,
they cannot immediately do so if the Articles of Incorporation is
not amended. The stockholders must ratify it, and there should
be an amendment of the Articles of Incorporation
Management
Absence of any
agreement, every
partner is an
agent of the
partnership
Power to do
business is vested
in the Board of
Directors or Board
of Trustees
Effect of
Mismanagement
Partner can sue a
co-partner
Suit against the
member of the
BOD or BOT must
be in the name of
the corporation
Rights of
Succession
No right of
succession
Has right of
succession
Extent of
Liability to 3rd
Persons
Liable personally
and subsidiarily
for partnership
debts to 3rd
persons
Stockholders are
liable only to the
extent of their
investments as
represented by the
shares subscribed
by them
Transferability
of Interest
Needs consent of
all partners
(based on
delectus
personarum)
Without prior
consent of other
stockholders
Term of
Existence
Any period of
time
Perpetual
Atty. Espedido: Nobody can guarantee success. But more or
less, if there is hard work and perseverance, success follows.
RELATIONSHIP BETWEEN A CORPORATION & THE
SHAREHOLDERS
The relationship between the corporation and the stockholders
is well established in the Articles of Incorporation (AOI). The AOI
is considered as the contract or agreement of the Corporation
and the Stockholders. Since this is their agreement, the AOI
binds their relationship and regulates their relationship.
Illustration.
A funeral parlor is turned into a hospital
The moment the corporation intends to pursue another
business, the stockholder may ask for an amendment of the
Articles of Incorporation to reflect such changes. Otherwise, the
contract will be violated.
Note: Amending the Articles of Incorporation is basically
amending the contract between the shareholders and the
corporation.
RELATIONSHIP AMONG SHAREHOLDERS THEMSELVES
This is still an agreement among themselves. This can be found
in their by-laws.
Content of the By-Laws of the Corporation
(1) How many boards and officers will be elected
(2) Term of office
(3) Functions and Powers
(4) Manner of election
(5) When will the stockholders and/or board meet
(6) Definition of various types of shares
(7) Etc.
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Old law: 50 years
and extendible for
another 50 years
cash dividends, it will also be an income of the
shareholder and such are taxable income of the
shareholder.
(2) Less participation in the management of the business
Shareholders only have an indirect participation in
the management of the corporation
o “Indirect” – means that the management of
the corporation is entrusted to the Board of
Directors. The only participation of the
stockholders in the management is the
election of the Board of Directors.
Firm Name
For limited
partnership,
requires LTD in
its name
May adopt any
name as long as it
is not the same or
similar to other
registered firm
name
Dissolution
May be dissolved
anytime by the
will of any or all
partners
Dissolved only with
consent of the
State
Civil Code
Governed by a
general law which
is the Revised
Corporation Code
or a special charter
Governing Laws
Why is management in a corporation better?
A:
1. There are fewer members, and as a result, it is easier
to convene and communicate, while in a partnership,
“everyone talks”.
2. Management is vested on persons with expertise.
Basic Distinction
The veil of corporate fiction only applies to corporations, and is
not to sole proprietorships or partnerships.
Atty. Espedido: A corporation, such as a One Person
Corporation (OPC) enjoys the veil of corporate fiction and a
limited liability, whereas a sole proprietorship’s liability may not
be limited at all.
One of the requirements for an OPC to exist is to declare how
much capital he intends so that his liability will be based on that
capital. He must prove that he has separated that capital from
his personal funds, that the amount declared as capital for the
corporation has been separated from the personal funds. Unless
he can do that, he will be liable as a sole proprietor.
ADVANTAGES OF A CORPORATION
(1) More capitalization
(2) Limited liability (the veil of corporate fiction applies to
corporations)
(3) Right of succession (upon the death of a stockholder,
the heir becomes the new stockholder which provides
stability for the business to continue)
(4) Transferability of interest – does not require the
consent of the other stockholders
(5) Easier management – management is centralized in
the Board of Directors
(3) No delectus personae
A shareholder will be investing in the business with
people he doesn’t know; there is no personal
touch; there is delectus personae.
(4) Dissolution
Dissolution is granted by the State, unlike in a
partnership which can be dissolved anytime. The
dissolution of a corporation requires the consent of
the State because it is embued with public interest.
(5) Greater degree of government control and supervision
(6) Difficulty of organization
Organizing a corporation requires a high cost of
formation and operations
Summary of Differences between a Partnership and
Corporation (Note: Only these were highlighted during
recitation)
Manner of
Creation
PARTNERSHIP
Created by mere
agreement of the
parties
CORPORATION
Created by law or
by operation of law
Commencement
of Juridical
Personality
Moment
of
execution of the
contract
From the date of
the issuance of the
Certificate
of
Incorporation
by
the SEC
Management
Absence of any
agreement, every
partner
is
an
agent
of
the
partnership
Power
to
do
business is vested
in the Board of
Directors or Board
of Trustees
Rights of
Succession
No
right
succession
Has
right
succession
Extent of
Liability to 3rd
Persons
Liable personally
and subsidiarily
for
partnership
debts
to
3rd
persons
Stockholders are
liable only to the
extent
of
their
investments
as
represented by the
shares subscribed
by them
Transferability
of Interest
Needs consent of
all
partners
(based
on
delectus
personarum)
Without
prior
consent of other
stockholders
DISADVANTAGES OF A CORPORATION
(1) Higher income tax liability
The profits of the corporation is taxed twice:
corporate income tax and income tax on the
stockholders for the dividends
Illustration. When the corporation acquires
income, it will be subjected to corporate income
tax. When it is distributed to the shareholder as
of
of
Page 8 of 88 | EH403 2019-2020 Corporation Law
Atty. Espedido: The life of the corporation begins in the issuance
of the Certificate of Incorporation issued by the SEC.
CONTENTS OF THE
ARTICLES OF INCORPORATION
(1) Name of the Corporation
(2) Purpose
(a) Primary Purpose – main business
Example: Operate and establish the best funeral
parlor of all time and name it “Libing Things”
(b) Secondary purpose – may refer to incidental or
related products or activities
(3) Nature of the business
(4) Term – perpetual term; you could exist for as long as
you wish. If you want to stop, just dissolve it along the
way
(5) Address – Purpose: In order that the SEC will know
where to send notices or serve you summons
(6) Names of the Stockholders
(7) Names of the Incorporators
Note: Incorporators may now be juridical persons so
long as they present appropriate authority. (Old law:
only natural persons)
(8) Capital Structure of the Corporation
CAPITAL STRUCTURE
Three levels of capital structure:
(1) Authorized Capital Stock (ACS) – the maximum amount
that a corporation intends to invest on a business
(2) Subscribed Capital Stock (SCS) – the number of shares
a stockholder intends to invest in the corporation which he
commits himself to pay – it is the committed investment
of the stockholder
(3) Paid-Up Capital – stock actually paid for by the
stockholders; it is the initial amount that the stockholders
are obliged to pay. This is the initial amount that shall be
used in starting the corporation.
If you are a new corporation, how much should be
subscribed?
A: The Revised Corporation Code does not require a
minimum subscribed capital stock.
Reason: To attract the formation of more business
organizations.
XPN: However, the the 25% subscribed capital stock is
compulsory when there is an increase in the capital stock.
Thus, it requires that at least 25% must be subscribed, and
25% must be paid-up.
A/N: Under the Old Corporation Code, newly formed
corporations were required to have 25% of their ACS
subscribed, of this subscribed capital stock, 25% must be
paid-up (paid-up capital stock). However, this requirement
has now been removed under the Revised Corporation
Code.
Note: You do not have to pay the subscription immediately.
The balance or may be due or payable later.
When will the balance be due?
A: It depends on the Board. The Board may indicate the date
when the balance will be due or will simply announce or make a
call on the balance.
How is it paid?
A: The paid-up capital may either be done in cash or property
equivalent to the amount you intend to pay.
If payment is through property, how will the equivalent of
the property be determined?
A:
(1) The value will be determined through an appraisal.
(a) The SEC will send an appraiser OR
(b) You will be required to submit an appraisal report of
your property done by a duly accredited appraiser,
together with the Articles of Incorporation, to the SEC.
(2) The SEC personnel will verify WON the paid-up capital has
been deposited to the bank in addition to the certified bank
deposit, which shall accompany the Articles of
Incorporation.
(3) The treasurer’s affidavit will indicate that at least 25% of the
subscribed capital has been paid, OR under the present
code, there will be now a verification. (Does not necessarily
by the treasurer but some other officers of the corporation,
indicating among others that at least 25% of the
subscriptions have been paid and that it was made with
cash or properties.
APPLICATION WITH THE SEC
Atty. Espedido: More or less these are the contents of an Article
of Incorporation. You may submit this to the SEC.
(1) Verification – The SEC will go over your Article of
Incorporation and verify the name. Before you submit your
Articles of Incorporation, you have to confirm or verify the
name that you intend to use.
Otherwise if the SEC discovers that somebody is already
using the same name, SEC might deny or return to you
your papers and come up with another name.
To save time, they require you to give 3 alternative names.
SEC is free to choose from those 3 alternative names.
(2) Issuance of the Certificate of Incorporation – If all the
requisites are in order, the SEC will issue the Certificate of
Incorporation.
That is the official document that will give the birth of your
corporation. Once you receive this, all the stockholders will
be convened and we will have the first stockholders
meeting.
STEPS AFTER THE BIRTH OF THE CORPORATION
(1) Organization meeting of the stockholders
The main agenda is the election of the Board.
(2) Meeting of the Board of Directors, Election of Officers
Once the Board of Directors are elected, they could adjourn
the stockholders meeting and the directors themselves will
now hold its first Board Meeting.
Page 9 of 88 | EH403 2019-2020 Corporation Law
In that meeting, they will elect the officers based on the
ballots (President, Chairman, Vice President, Secretary,
Treasurer). If they may want to, they will select the COO
(child of the owner).
RIGHT OF SUCCESSION
If a stockholder or a member dies, withdraws, is insolvent, or
suffers incapacity, the corporation will still continue and not be
dissolved.
When all the stockholders die, the heirs will become
stockholders. The rights, as well as the interests of the deceased
stockholders will now be transferred to the heirs at the moment
of death because succession starts at the moment of the death
of the deceased person.
POWERS, ATTRIBUTES, PROPERTIES
These rights may be determined in the Articles of Incorporation,
the Corporation Code, and the By-Laws. These are the sources
of rights and obligations of the stockholders.
Illustration 1.
Transportation Company + Big building for Garage
If you are a transportation company, you are managing,
operating, and maintaining a fleet of buses. What do you
think your powers could be?
A: Demand fare. You have the power to pursue and engage in
the business of transportation
Your neighbors are complaining because your business is
transportation, but you also own a big building. Do you
think you can maintain a big building as a garage?
A: Yes, it is allowed. Maintaining a big building is incidental to
the business.
Illustration 2.
Cement Factory + Electricity
You are operating a cement factory. It requires a big volume
of power, so much that the services of VECO may not be
enough, prompting you now to maintain your own power
plant.
You now have your own power plant within the cement
factory. You have officers and employees residing within
your cement factory. Because you have extra power for
your cement factory, you started selling this extra power to
your EEs inside the compound.
If you are VECO, do you have a reason to complain?
A: The best approach would be to ask the EEs who they would
want to provide electricity for them. They will definitely side with
the cement factory because the rates are subsidized.
The corporation may argue that it is not doing business per se
but only providing assistance to their EEs – extending facilities
to their EEs.
Illustration 3.
USC + Dance lessons after class
After class hours, the entire school will be vacated. The
best way to succeed is to maximize the use of assets. Thus,
the priests hired dancing instructors and offered dancing
lessons to interested matrons and engaged the services of
macho dancing instructors. At least they can earn some
more for two (2) hours.
Can they engage in maintaining and operating a dancing
school?
A: No, because this is not incidental. Offering academic courses
is the principal purpose of USC. Thus, the dancing school is
beyond its purpose.
Illustration 4.
Mining Company + Postal Service
There was a mining company in the mountain and to travel
from the mining site from the big city was very difficult. So
the EEs communicated with their families through mail (no
cellphones at this time). The mails were carried by the
company facilities and delivered to the city. The EEs
requested that their mails could be coursed through the
company parcels.
The company agreed for it is for the benefit of the EEs
provided that the EEs will make payment – a subsidized
mailing payment.
LBC complained because the mining company is now
engaged in delivering parcels and mails. There is now a
competition between the company engaged in mining and
the company carrying parcels.
What do you think?
A: SC said that it is still incidental because at that time,
transportation was very difficult, no more cellphones or any
other mode of communication.
Illustration 5.
Railroad Company + Buying Tracts of Land
A railroad company was buying tracts of land where they
could install their railings.
Somebody complained that they cannot expropriate since
the company’s power is merely to engage in railroad
business. They argued that the company cannot compel
owners to sell their land to the company because only the
government has the power to do so.
SC Ruling: The buying of the lands is for the furtherance of the
business of the railroad. It is incidental to being a railroad
company.
Atty. Espedido: These are some of the several illustrations of
primary powers and incidental powers.
Important: So long as you can justify that the act is incidental to
the main purpose, you are allowed to execute such power.
Page 10 of 88 | EH403 2019-2020 Corporation Law
EFFECT OF INCOMPLETE
INCORPORATION PAPERS
Rule: Failure to acquire or comply with the requirements for an
issuance of a Certificate of Incorporation does not justify
making it into a partnership.
Atty: Espedido: If the papers are not in order, the SEC will not
issue a Certificate of Incorporation. The incorporators will have
to make the necessary corrections.
If the incorporators will not comply, the SEC will have to deny
the issuance of a Certificate of Incorporation.
The incorporators cannot engage in business as a corporation.
They also cannot argue that they are now a partnership because
the intention is not to pursue a partnership but to organize a
corporation.
(I)
As to its nationality**
1. Philippine national
2. Foreign corporation
(A) AS TO PURPOSE
(1) Public Corporation
created to govern a portion of a State
(2) Private Corporation – created for private ends
(a) Publicly listed – private corporations that are publicly
listed in the Philippine Stock Exchange which means
their shares can be bought and sold on the PSE
Examples: San Miguel Corporation,
Ayala Land Corporation
(b) Quasi-Public Corporations – private corporations
performing public functions
Example: VECO providing electricity
SEC. 3. CLASSES OF CORPORATIONS
Section 3. Classes of Corporations. Corporations formed or
organized under this Code may be stock or nonstock
corporations. Stock corporations are those which have capital
stock divided into shares and are authorized to distribute to the
holders of such shares, dividends, or allotments of the surplus
profits on the basis of the shares held. All other corporations are
nonstock corporations.
VARIOUS TYPES OF CORPORATIONS (Outline)
(A) As to purpose
1. Public Corporation
2. Private Corporation
(a) Publicly Listed
(b) Quasi-Public
(c) Government Owned and Controlled
Corporation (GOCC)
(B) Under the Revised Corporation Code
1. Stock Corporation
2. Non-Stock Corporation
(C) As to number of corporators
1. Corporation Sole
2. One Person Corporation
3. Corporation Aggregate
(D) Whether it is Open or Close
1. Open Corporation
2. Close Corporation
(E) As to Legal or Corporate Existence
1. De jure corporation
2. De facto corporation
(F) Whether it is for a religions purpose or not
1. Ecclesiastical Corporation
2. Lay Corporation
(G) As to Formation
1. Domestic Corporation
2. Foreign Corporation
(H) As to their relation to another corporation
1. Holding or Parent Corporation
2. Subsidiary Corporation
3. Affiliated Corporation
(c) Government Owned and Controlled Corporations
(GOCC) – created by Congress through a special
charter for which the government is the majority
stockholder
Examples:
PAGCOR,
Landbank
of
the
Philippines, SSS, GSIS
(B) UNDER THE REVISED CORPORATION CODE
(1) Stock Corporation
Those which have capital stock divided into shares and
are authorized to distribute to the holders of such
shares, dividends, or allotments of the surplus profits
on the basis of the shares held.
It has capital stocks divided into shares and distributed
to the holders.
A stock corporation is also considered as a
corporation for profit.
Purpose of dividing shares: Determine the share in
the profits.
(2) Non-Stock Corporation
All other corporations; they do not issue shares and
do not distribute profits to its members.
However, they still own profits for expenditures and to
improve their facilities. They cannot distribute the
profits to its members. They have to plough this back
to the corporation for the benefit of the members in
terms of improvement of facilities.
(C) AS TO NUMBER OF CORPORATORS
(1) Corporation Sole – one member or corporator; for purely
religious purposes
(2) One Person Corporation – one member or corporator
also but not limited to purely religious purposes
(3) Corporation Aggregate – consisting of more than one
corporator or member
Basis why the State is liberal in the establishment of
religious corporations as a corporation sole: Constitutional
right to Freedom of Religion and Separation of Powers
between the Church and the State.
Atty. Espedido: Any attempt of preventing anyone from
exercising his religion, from establishing his own church, can be
Page 11 of 88 | EH403 2019-2020 Corporation Law
considered as a violation to his freedom of religion. Thus, the
State would just want to know where you are located and the
funds that the church has earned.
(F) WHETHER IT IS FOR A RELIGIONS PURPOSE OR NOT
(1) Ecclesiastical Corporation
for religious purposes
Notes:
Corporation sole – one formed for the purpose of
administering and managing, as trustee, the affairs,
property and temporalities of any religions
denomination, sect, or church, by the chief archbishop,
bishop, priest, rabbi, or other presiding elder of such
religious denomination, sect or church.
(D) AS TO WHETHER IT IS OPEN OR CLOSE
(1) Open Corporation
open to any person who may wish to become
shareholders. Most of these are publicly listed.
(2) Close Corporation
limited to selected persons or members of a family.
This qualification is contained in the Articles of
Incorporation (AOI) and the Stock Certificate. The stock
certificate indicates that these holders shall not be allowed
to dispose the shares UNLESS he offers it to the existing
holders first.
IOW, it cannot be an absolute prohibition. Otherwise, it
will violate the right of an owner which includes the right to
own, right to possess, and right to dispose.
Relative Prohibition – you are required to offer this to
existing stockholders. Only when there are no
existing stockholders that would buy that you can
sell it to others.
Atty. Espedido: Disqualifications on the sale of shares of a close
corporation can be found in the articles of incorporation, or in the
certificates of stock.
For example, in the Stock Certificate, you may place a
qualification that “The holder of these shares cannot sell these
shares UNLESS the existing holders exercise their right of first
refusal xxx”
Note:
Close corporation – one whose articles of
incorporation provide that:
1. All issued stock, exclusive of treasury shares, shall
be held by persons not exceeding 20;
2. All issued stock shall be subject to one or more
specified restrictions on transfer; and
3. The corporation shall not list in any stock
exchange or make any public offering of its stock
of any class.
Notwithstanding the foregoing, a corporation shall not
be deemed a close corporation when at least 2/3 of its
voting stock or voting rights is owned or controlled by
another corporation which is not a close corporation.
(E) AS TO LEGAL OR CORPORATE EXISTENCE
(1) De jure corporation
corporation existing in fact or in law
(2) De facto corporation
existing in fact but not in law
(2) Lay Corporation
purpose other than religion
**Other types of religious/charitable corporations:
(3) Corporation Sole
incorporated by one person
a corporation formed for the purpose of administering
and managing, as trustee, the affairs, properties and
temporalities of any religious denomination, sect or
church, by the chief archbishop, bishop, priest, rabbi or
other presiding elder of such religious denomination,
sect or church.
A corporation sole has no nationality but for the
purpose of applying nationalization laws, nationality is
determined not by the nationality of its presiding elder,
but by the nationality of the its members constituting
the sect in the Philippines.
o Thus, the Roman Catholic Church can
acquire lands in the Philippines even if it is
headed by the Pope (Roman Catholic
Apostolic, et. al. vs. Register of Deeds of
Davao City, G.R. No. L-8451)
(4) Corporation Aggregate (Religious Society)
A religious organization incorporated by more than one
person
(5) Eleemosynary Corporation
One organized for a charitable purpose
(G) AS TO FORMATION
(1) Domestic Corporation
a corporation formed, organized or existing under the
laws of the Philippines.
(2) Foreign Corporation
formed under any laws other than those of the
Philippines
(H) AS TO THEIR RELATION TO ANOTHER
CORPORATION
(1) Parent Corporation
corporation which holds ownership of various
corporations, thereby having control over such
corporations. It has the capacity to elect or control other
corporations.
** A holding company is a parent corporation which has
no other business aside from the holding of the shares
of its subsidiaries, which it controls
(2) Subsidiary Corporation
owned and controlled by the holding or parent
corporation. The holding corporation elects the Board
of Directors (BOD) for the subsidiary.
(3) Affiliated Corporation
those related to the parent corporation or subsidiary
corporation
Page 12 of 88 | EH403 2019-2020 Corporation Law
**(I) AS TO NATIONALITY
**NOTES:
What is the difference between an affiliate and a
subsidiary?
A: The difference lies in the level of ownership of the parent
company in a certain corporation.
The terms “affiliate” and “associate” corporation are used
synonymously to describe a company whose parent only
possesses a minority stake in the ownership of the
company.
On the other hand, a subsidiary is a business whose parent
holds a majority stake or is a majority shareholder of 50%
or more of all shares. Some subsidiaries are even wholly
owned, meaning the parent corporation owns 100% of the
subsidiary.
PLACE OF INCORPORATION TEST:
Where the corporation was created:
(1) Domestic Corporation
(2) Foreign Corporation
CITIZENSHIP OF STOCKHOLDERS
(1) Philippine National
100% owned by the Filipino citizens, even if
incorporated abroad.
Sec. 3, Foreign Investment Act of 1991 (R.A.
7042):
Definition:
The term "Philippine national" shall mean a citizen
of the Philippines or a domestic partnership or
association wholly owned by citizens of the
Philippines; or a corporation organized under the
laws of the Philippines of which at least sixty
percent (60%) of the capital stock outstanding and
entitled to vote is owned and held by citizens of the
Philippines; or a trustee of funds for pension or
other employee retirement or separation benefits,
where the trustee is a Philippine national and at
least sixty (60%) of the fund will accrue to the
benefit of the Philippine nationals: Provided, That
where a corporation and its non-Filipino
stockholders own stocks in a Securities and
Exchange
Commission
(SEC)
registered
enterprise, at least sixty percent (60%) of the
capital stocks outstanding and entitled to vote of
both corporations must be owned and held by
citizens of the Philippines and at least sixty
percent (60%) of the members of the Board of
Directors of both corporations must be citizens of
the Philippines, in order that the corporations shall
be considered a Philippine national.
(4) Sister Company
fellow subsidiary with respect to another subsidiary;
both owned by the parent corporation
Although performing other activities, these activities are
very much related or part of the other companies (e.g.
they are part of the supply chain perhaps). Thus, if the
owner of the company creates another corporation related
to the other corporation, then it can be considered sister
companies.
Illustration.
A trucking company is engaged in hauling products. The owner
noted that the products are brought to various warehouses that
are owned by other people. Thus, the owner of the logistics
company decided to construct a warehouse.
The owner of the trucking company also convinced the producer
and the manufacturer that he can assign someone to monitor
the products. Thus, a third business was made – Warehouse
Management. The owner also created another one as a
marketing arm, thus a Sales Force company.
Summary: So the Trucking Company here is the parent
corporation, and it owns the subsidiaries: (1) Warehouse
Company for leasing, a (2) Warehouse Management and a (3)
Sales Force Company. These various businesses, in relation to
each other, are called sister companies and would constitute a
complete chain – they are related to each other.
Another example: Aboitiz Company as the owner of Union Bank,
VECO, real estate, and many other activities. So these are the
subsidiaries of Aboitiz – the more generic term would be
affiliates.
(2)
Foreign-owned corporation
Majority of the stockholdings are owned by
foreigners, even if incorporated in the Philippines.
TESTS TO DETERMINE CITIZENSHIP OF STOCKHOLDERS
(Applies when the corporation is not 100% owned by Filipino citizens)
A.
Control Test
At least 60% of the outstanding capital stock which
are entitled to vote are owned by Filipino citizens
B.
Grandfather Rule
If the percentage of Filipino ownership is less than
60%, then only the number of shares
corresponding to such percentage shall be
counted as Philippine nationality.
Narra Nickel vs. Redmont
The control test is still the prevailing mode of determining
whether or not a corporation is a Filipino corporation, within the
ambit of Sec. 2, Art. II of the 1987 Constitution. When in the mind
of the Court there is doubt, based on the attendant facts and
circumstances of the case or in the 60-40 Filipino equity
ownership, then it may apply the Grandfather Rule.
Page 13 of 88 | EH403 2019-2020 Corporation Law
What do you mean by “doubt”?
A: “Doubt” is any circumstance which renders the beneficial
ownership and control of the corporation outside of Filipino
ownership. It is not when a corporation’s Filipino ownership falls
below 60%.
Where does the 60% requirement apply to, the voting
shares or the outstanding shares?
Atty. Gaviola: The interpretation wherein the SC said that the
restriction must apply to each type of share (Gamboa vs. Teves,
G.R. 176579) is the correct interpretation. This is because when
you say outstanding capital stock entitled to vote, that is very
general.
You cannot say that preferred stocks are not entitled to vote in
the election of directors. Only when they are deemed non-voting
expressly can they be deprived of their right to vote, but only in
the election of directors. For all the other items enumerated in
the RCC, they are required to vote.
A/N: This was lifted from the IBL class of Atty. Gaviola.
**NOTES
NATIONALIZED ACTIVITY
This is determined by looking at the Foreign Investment
Negative List (FINL), which enumerates activities which are
limited to or reserved for Filipinos. It is a list of economic
activities whose foreign ownership is limited to a maximum of
40% of the equity capital. Of the enterprise engaged therein.
If the activity is listed, then that activity can be performed even
by a corporation which is 100% foreign-owned, even if such
corporation was incorporated in the Philippines.
Sec. 8 of RA 7042 (Foreign Investments Act of 1991)
enumerates the activities that are limited to Filipinos.
These activities include, but are not limited to:
1. Natural resources exploration, development and use;
2. Public utility corporations;
3. Land ownership;
4. Educational institutions; and
5. Advertising companies.
Atty. Gaviola: It is an erroneous belief among foreigners and
their attorneys that they need Filipino stockholders in order to
incorporate in the Philippines.
Get rid of the notion that you need to have citizenship in order
to incorporate because to be an incorporator, all that is required
is to be a resident. In fact, only a majority need to be residents.
Take note that a domestic corporation can be foreign-owned.
This happens when a corporation incorporated in the Philippines
is composed of foreigners. In the same way, a foreign
corporation can be considered a Philippine national when 100%
of its capital stock or its stockholders are Filipino citizens.
CORPORATE LAYERING
This is a type of arrangement whereby a corporation has for its
stockholder another corporation. (i.e. Corporation B is the
stockholder of Corporation A).
This is not a circumvention of the law. It is a valid structure
UNLESS it is established that it is used to truly circumvent the
law or the Constitution.
Basis: The Foreign Investment Act, where it only requires that
60% of the investee corporation and investor corporation’s
outstanding capital stock entitled to vote be owned by Filipino
citizens, and that at least 60% of their Board of Directors should
be composed of Filipino citizens.
SEC. 4. CORPORATIONS CREATED BY SPECIAL LAWS
OR CHARTERS
Section 4. Corporations Created by Special Laws or
Charters. – Corporations created by special laws or charters
shall be governed primarily by the provisions of the special law
or charter creating or applicable to them, supplemented by the
provisions of this Code, insofar as they are applicable.
SEC. 5. CORPORATORS AND INCORPORATORS,
STOCKHOLDERS AND MEMBERS
Section 5. Corporators and Incorporators, Stockholders
and Members. – Corporators are those who compose a
corporation, whether as stockholders or shareholders in a stock
corporation or as members in a nonstock corporation.
Incorporators are those stockholders or members mentioned in
the articles of incorporation as originally forming and composing
the corporation and who are signatories thereof.
PARTIES INVOLVED IN THE ORGANIZATION OF A
CORPORATION
Who are the persons involved in the organization of a
corporation?
A: They are:
(1) Incorporators
(4) Promoters
(2) Corporators
(5) Underwriters
(3) Board of Directors/
(6) Founders
Trustees
INCORPORATORS
Incorporators are the organizers of the corporation upon its
inception. They are mentioned in the AOI as originally forming
and composing the corporation, and who are signatories
thereof.
Under the New Code, juridical persons can now be
incorporators.
Under the Old Code, only natural persons can be incorporators.
CORPORATORS
Corporators are those who fund the corporation. These refer to
the stockholders, investors, and incorporators themselves. They
are people who have interest over the corporation.
Stockholders – in a stock corporation
Members – in a non-stock corporation
BOARD OF DIRECTORS OR TRUSTEES
The Board of Directors or Board of Trustees are the group of
people who manage the corporation.
Page 14 of 88 | EH403 2019-2020 Corporation Law
PROMOTERS
Promoters are persons who, acting alone, or with others, take
initiative in founding and organizing the business or enterprise
of the issuer and received consideration thereof (Sec. 3.10, RA
8799, The Securities Regulation Code)
**NOTES:
An underwriter is any party that evaluates and
assumes another party’s risk for a fee. The fee is often
a commission, premium, spread, or interest.
Underwriting services are provided by some large
financial institutions, such as banks, or insurance or
investment houses, whereby they guarantee payment
in case of damage or financial loss and accept the
financial risk for liability arising from such guarantee.
An underwriting arrangement may be created in a
number of situations including insurance, issues of
security in a public offering, and bank lending, among
others.
LIABILITY OF THE PROMOTER
FOUNDERS
GEN: The promoter binds himself personally and assumes the
responsibility of looking to the proposed corporation for
reimbursement.
The founders are those who came about the idea – they are the
think tanks of the corporation.
The promoters promote the corporation itself. They convince the
people to invest. They tell the people that they are organizing
such corporation. However, they are not committed to buy the
shares, and are purely salesmen.
**NOTES:
XPNs:
1.
2.
Express or implied agreement to the contrary
Novation, not merely adoption or ratification, of the
contract
LIABILITY OF THE CORPORATION FOR THE PROMOTER’S
ACTS
GEN: A corporation is not bound by the contract. A corporation,
until organized, has no life and no legal existence. It could not
have had an agent (the promoter) who could legally bind it.
XPNs: A corporation may be bound by the contract if it makes
the contract its own by:
1.
2.
3.
Adoption or ratification of the entire contract after
corporation
Acceptance of the benefits under the contract with
knowledge of the terms thereof
Performance of its obligation under the contract
Note: The contract must of course be one which is within the
powers of the corporation to enter.
UNDERWRITERS
Underwriters are mostly banking companies.
As distinguished from promoters who have no commitment
since they simply promote, underwriters have commitment such
that they guarantee the sale of stocks and if these were not sold,
they will be the ones who will buy the shares. The underwriters
therefore assume liability.
Example: The underwriters commit that 60% of the stocks will
be bought. If they cannot sell such committed shares, they will
guarantee that they will buy such stocks themselves.
What are roadshows?
A: Roadshows are usually done by big corporations. If you want
to promote the formation of a corporation, you may conduct a
roadshow. You go around the country or the world and do a
roadshow.
You tell them about the corporation and the business, and
convince them to join – usually accompanied by the
underwriters who help convince.
As a matter of fact, they are given privilege. They are entitled to
an exclusive right to vote and be voted for, but limited for 5 years
only from date of inception of the Corporation.
What is the purpose of having the exclusive right to vote
and be voted for?
A: To ensure that the corporation will eventually succeed
because they are the ones who envisioned the Corporation.
They have the idea of how the business shall proceed.
Thus, the laws provide that for a period of 5 years or less –
they have the right to vote and be voted upon. NO ONE ELSE
have the right to nominate and elect. This is used to guide the
infant corporation.
The certificate of the founders’ shares defines the privilege that
the holders of this share shall have.
**Notes on Founders’ Shares
Changes in founder’s share expressly provided that the
exclusive right to vote and be voted on founders share in the
election of directors should not violate the Anti-Dummy Law and
the Foreign Investments Act.
Anti-Dummy Law
Persons not allowed to have an interest in nationalized
corporations often just nominate Filipino citizens to be legal
stockholders when in reality, it is the prohibited persons who are
actually controlling the corporation. This is a violation of the AntiDummy Law, and is a criminal offense.
SEC. 6. CLASSIFICATION OF SHARES
Section 6. Classification of Shares. – The classification of
shares, their corresponding privileges, or restrictions, and their
stated par value, if any, must be indicated in the articles of
incorporation. Each share shall be equal in all respects to every
other share, except as otherwise provided in the articles of
incorporation and in the certificate of stock.
The shares in stock corporations may divided into classes or
series of shares, or both. No share may be deprived of voting
rights except those classified and issued as “preferred” or
“redeemable” shares, unless otherwise provided in this Code:
Provided, That there shall always be a class or series of shares
with complete voting rights.
Page 15 of 88 | EH403 2019-2020 Corporation Law
Holders of nonvoting shares shall nevertheless be entitled to
vote on the following matters:
(a) Amendment of the articles of incorporation;
(b) Adoption and amendment of bylaws;
(c) Sale, lease, exchange, mortgage, pledge, or other
disposition of all or substantially all of the corporate
property;
(d) Incurring, creating, or increasing bonded indebtedness;
(e) Increase or decrease of authorized capital stock;
(f) Merger or consolidation of the corporation with another
corporation or other corporations;
(g) Investment of corporate funds in another corporation or
business in accordance with this Code; and
(h) Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the
vote required under this Code to approve a particular corporate
act shall be deemed to refer only to stocks with voting rights.
The shares or series of shares may or may not have a par value:
Provided, That banks, trust, insurance, and preneed companies,
public utilities, building and loan associations, and other
corporations authorized to obtain or access funds from the
public whether publicly listed or not, shall not be permitted to
issue no-par value shares of stock.
Preferred shares of stock issued by a corporation may be given
preference in the distribution of dividends and in the distribution
of corporate assets in case of liquidation, or such other
preferences: Provided, That preferred shares of stock may be
issued only with a stated par value. The board of directors,
where authorized in the articles of incorporation, may fix the
terms and conditions of preferred shares of stock or any series
thereof: Provided, further, That such terms and conditions shall
be effective upon filing of a certificate thereof with the Securities
and Exchange Commission, hereinafter referred to as the
"Commission".
Shares of capital stock issued without par value shall be deemed
fully paid and nonassessable and the holder of such shares shall
not be liable to the corporation or to its creditors in respect
thereto: Provided, That no-par value shares must be issued for
a consideration of at least Five pesos (₱5.00) per share:
Provided, further, That the entire consideration received by the
corporation for its no-par value shares shall be treated as capital
and shall not be available for distribution as dividends.
A corporation may further classify its shares for the purpose of
ensuring compliance with constitutional or legal requirements.
SEC. 7. FOUNDERS’ SHARES
Section 7. Founders’ Shares. – Founders’ shares may be
given certain rights and privileges not enjoyed by the owners of
other stock. Where the exclusive right to vote and be voted for
in the election of directors is granted, it must be for a limited
period not to exceed five (5) years from the date of incorporation:
Provided, That such exclusive right shall not be allowed if its
exercise will violate Commonwealth Act No. 108, otherwise
known as the "Anti-Dummy Law"; Republic Act No. 7042,
otherwise known as the "Foreign Investments Act of 1991"; and
otherwise known as "Foreign Investments Act of 1991"; and
other pertinent laws.
SEC. 8. REDEEMABLE SHARES
Section 8. Redeemable Shares. - Redeemable shares may be
issued by the corporation when expressly provided in the
articles of incorporation. They are shares which may be
purchased by the corporation. They are shares which may be
purchased by the corporation from the holders of such shares
upon the expiration of a fixed period, regardless of the existence
of unrestricted retained earnings in the books of the corporation,
and upon such other terms and conditions stated in the articles
of incorporation and the certificate of stock representing the
shares, subject to rules and regulations issued by the
Commission.
SEC. 9. TREASURY SHARES
Section 9. Treasury Shares. - Treasury shares are shares of
stock which have been issued and fully paid for, but
subsequently reacquired by the issuing corporation through
purchase, redemption, donation, or some other lawful means.
Such shares may again be disposed of for a reasonable price
fixed by the board of directors.
What are “shares”?
A: Shares represent the interest or the investment of a
stockholder in a corporation.
**NOTES:
The terms “share” or “stock” may be used
interchangeably to refer to shares of stock in a
corporation.
A share of stock is a unit of division of the capital stock
of a corporation. The stock represents:
1. The right interest or right of the stockholder in the
management of the corporation through the
exercise of his voting rights;
2. The interest or right of the stockholder in the
earnings of the corporation in the form of the
dividends to be distributed (for a discussion on
dividends, see Sec. 42); and
3. The interest or right of the stockholder in the
residual assets of the corporation upon its
dissolution.
A stockholder may own a share even if he is not holding
a certificate of stock
How do we classify shares?
A: Shares are classified as:
(1) Common shares
(2) Preferred shares
(3) Par value shares
(4) No-par value shares
(5) Founder’s shares
(6) Redeemable shares
(7) Treasury shares
(8) Convertible shares
(9) Voting shares
(10) Non-voting shares
(11) Shares in escrow
DOCTRINE OF EQUALITY OF SHARES
Each share shall be equal in all respects to every other share,
except as otherwise provided in the AOI and stated in the
certificate of stock.
Page 16 of 88 | EH403 2019-2020 Corporation Law
**OTHER IMPORTANT PRINCIPLES TO REMEMBER
(1) Authorized Capital Stock
Refers to the amount of capital stock as specified in the
AOI. Additional shares may not be issued unless the AOI is
amended by the vote of the stockholders. However,
unissued authorized shares may be issued at a later date
without amendment of the AOI or approval of the
shareholders.
(2) Subscribed Capital Stock
It is the amount of capital stock subscribed (purchased),
whether fully paid or not. It connotes an original subscription
contract for the acquisition by a subscriber of unissued
shares in a corporation and would, therefore, preclude the
acquisition of shares by reason of subsequent transfer from
a stockholder or resale of treasury shares.
(3) Outstanding Capital Stock
It is the portion of the capital stock which is issued and held
by persons other than the corporation itself.
(4) Paid-up Capital Stock
The portion of the subscribed/outstanding capital stock that
has been fully paid.
(5) Unissued Capital Stock
That portion of the capital stock that is not issued or
subscribed. It cannot vote, and draws no dividends.
(6) Legal Capital
It is the amount equal to the aggregate part value and/or
issued value of the outstanding capital stock. When par
value shares are issued above par, the share premium or
excess is not considered as a part of the legal capital.
In the case of no-par value shares, the entire consideration
received forms part of the legal capital, and shall not be
available for distribution as dividends.
(7) Shareholder’s Equity (Subscribed Capital)
That portion of the capital of the corporation that is
composed of all the investments that the subscribers put in
(meaning, for stock corporations issuing par value shares
at a price above par, the share premium is included). It is
also known as the subscribed capital of the corporation.
COMMON VS. PREFERRED SHARES
COMMON SHARES
Entitle the holders to a pro rata share in the profits of
the corporation without preference over the other
stockholders.
They are given voting rights
**The most common type of shares, which enjoy no
preference, but the owners thereof are entitled to
management of the corporation (via the exclusive right
to vote), and to equal pro-rata division of profits after
preference. It represents a residual ownership interest
in the corporation.
PREFERRED SHARES
Shares having certain rights and privileges not
available to holders of common shares.
**NOTES:
Stocks which are given preference by the issuing
corporation in:
(1) Distribution of dividends;
(2) Distribution of the assets of the corporation in
case of liquidation; or
(3) Such other preferences as may be stated in
the AOI which do not violate the Code.
Unless the right to vote is clearly withheld, a preferred
stockholder would have such right as it is incident to
stock ownership.
Limitations:
1. Preferred shares can only be issued with par value
2. Preferred shares must be stated in the AOI and in
the COS.
3. The BOD may fix the terms and conditions only
when so authorized by the AOI, and such terms
and conditions shall be effective upon the filing of
a certificate with the SEC.
**PREFERENCE AS TO DIVIDENDS
Participating vs. Non-participating
Those which, after getting their fixed
dividend preference, share with the
Participating
common stocks with the rest of the
dividends.
Those which, after getting their fixed
Nondividend preference, have no more
participating
right to share in the remaining
dividends with the common stocks.
Unless otherwise provided, preferred shares are deemed
non-participating.
Cumulative vs. Non-cumulative
Regardless of lack of profits in any
given year, and lack of declaration of
dividends, the arrears (amount of
dividends undeclared or unpaid) have
Cumulative
to be paid to the preferred stocks in a
subsequent year (once profits are
made), before any dividends can be
paid to the common stocks.
Entitlement to receipt of dividends
Non-cumulative
essentially depends on the declaration
of said dividends.
Unless otherwise stipulated, preferred stocks are deemed
cumulative.
KINDS OF PREFERRED SHARES AS TO DIVIDENDS
(a) Preferred participating shares
(b) Preferred cumulative shares
PREFERRED PARTICIPATING SHARES
Preferred shareholders already earned premium for their
preferred shares and they still participate in the distribution of
the common shares. They take both – they have preference and
they also participate.
Who can issue preferred shares?
A: Every corporation can issue preferred shares.
CUMULATIVE PREFERRED SHARES
Shares which entitle the holder not only to the payment of
current dividends but also to dividends in arrears.
Page 17 of 88 | EH403 2019-2020 Corporation Law
Illustration.
Corporation has cumulative preferred shares.
Year 1 – the corporation has not declared dividends
Year 2 – the corporation decided to declare dividends
In this case, if the stipulated dividend is not paid in Year 1, it
shall be added to the dividend which shall be due in Year 2 and
the accumulated dividends must be paid to the holder of said
preferred share before any dividend may be paid to the holders
of common stock.
Even if the Corporation has profits, is it obliged to give
dividends?
A: No.
If the Corporation does not declare dividends for a long
time, what does the BIR assess?
A: The BIR will assess the corporation for Improperly
Accumulated Earnings Tax (IAET).
PAR VALUE VS. NON-PAR VALUE SHARES
PAR VALUE SHARES
Par value is the minimum issue price of a share of stock which
must be stated in the AOI and in the Certificate of Stock (COS).
If the incorporators agreed to the price, that is the price at which
the shares will be sold to the public.
Who can issue par value shares?
A: Any stock corporation is free to issue par value shares as
indicated in its AOI.
**NOTES:
These are shares with a stated value set out in the AOI.
This remains the same regardless of the profitability of
the corporation (in comparison, the market or fair value
of a share of stock fluctuates depending on the
company’s profitability). This gives rise to financial
stability and is the reason why banks, trust
corporations, insurance companies and building and
loan associations must always be organized with par
value shares.
The entire consideration received by the corporation
shall be treated as capital, and shall not be available
for distribution as dividends.
The AOI must state the fact that the corporation issues
no-par value shares and the number of such shares
No-par shares cannot be issued as preferred stocks
Who cannot issue no-par value shares?
A: Corporations who have access to public funds, such as:
(1) Banks;
(2) Trusts;
(3) Insurance and pre-need companies;
(4) Public utilities;
(5) Building and loan associations; and
(6) Other corporations authorized to obtain funds from the
public (whether publicly-listed or not)
**Note: Building and loan associations are organizations with
the object of accumulating money from their members. The
money is then collected in periodical payments into the treasury
thereof, to be invested, from time to time, in loans to the
members upon real estate for home purposes.
DISTINCTION BETWEEN PAR-VALUE AND NO-PAR VALUE
SHARES
If the assets of the corporation have all been exhausted and
there are still creditors, can the creditors go after the
shareholders?
Non-Par Value
No – the creditors cannot go
after such holders. The nonpar value shares are
deemed fully paid.
Par-Value
Yes – the creditors can go
after the shareholders.
The subscribers are liable
to corporate creditors for
their unpaid subscriptions
Can a corporation lower the par value of shares?
A: No. This is because the value of the par value is stated in the
AOI, and changing it will mislead the public.
NO-PAR VALUE SHARES
The practice of selling shares for a price lower than its par value
is called watering down of stocks, and these shares are known
as “watered stocks”.
These are shares without a stated value.
WATERED STOCKS
You still have to pay for these shares, but its value is not stated
in the AOI and in the COS. There is no fixed value stated in the
Articles of Incorporation but issued for a consideration not less
than five (5) pesos per share.
These are stocks sold or issued at a price less than the stocks’
par value. The value of these shares is diluted, in that the public
is not apprised of the real value of the corporation.
Illustration.
**NOTES:
A no-par share does not purport to represent any
stated proportionate interest in the capital stock
measured by value, but only an aliquot part of the
whole number of such shares of the issuing corporation
(Agbayani)
No-par value shares cannot have an issue price of less
than P5.00 per share
Once issued, they shall be deemed fully paid and nonassessable, and the holders of such shares shall not
be liable to the corporation or to its creditors in respect
thereto.
A corporation has 100Mn authorized capital shares, each with a
par value of P1.00.
Normally, the public would expect that the corporation has
authorized capital in the amount of P100,000,000 (100Mn
shares x P1.00 par value).
Now let’s say that the corporation initially issued 99.5Mn shares
for P1.00, and issued the remaining 500k shares for P0.50 only.
How much is now the authorized capital of the corporation?
A: Still P100,000,000.
Page 18 of 88 | EH403 2019-2020 Corporation Law
But how much capital actually came in?
A: Only P99,750,000.
Computation:
99,500,000 shares X P1.00 =
500,000 shares X P0.50 =
Total
What happens after the five-year limit is over?
Founders shall have equal rights with the holders of common
shares.
+
P99,500,000
250,000
P99,750,000
What is the effect?
A: The corporation is misleading the public. It is not fair to the
public, and does not anymore reflect the actual capital structure
of the corporation
FOUNDER’S SHARES
**These are shares, classified as such in the AOI, which are
given certain rights and privileges not enjoyed by the owners of
other stocks.
Where exclusive right to vote and be voted for in the election of
directors is granted, such right must be for a limited period not
to exceed 5 years subject to the approval of the SEC. The 5year period shall commence from the date of approval by the
SEC.
What is the purpose for granting founders the exclusive
right to vote and be voted for?
A: To ensure that the corporation will eventually succeed
because they are the ones who envisioned the Corporation.
They have the idea of how the business shall proceed.
Thus, the laws provide that for a period of 5 years or less – they
have the right to vote and be voted upon. NO ONE ELSE have
the right to nominate and elect. This is used to guide the infant
corporation.
The certificate of the founders’ shares defines the privilege that
the holders of this share shall have.
What is the rule regarding founders’ rights and privileges?
A: They must be clearly expressed in the corporate charter, to
provide adequate information to third parties dealing with the
corporation.
What are some examples of special rights or privileges that
may be given to founder’s shares that are not given to
common shares?
A: These include:
1) Preference in the payment of dividends and/or
distribution of assets in case of liquidation
2) Right to convert the shares into other shares
3) Right to cumulative dividends
What is the purpose of the founder’s shares?
A: It may be given to encourage organizers and promoters to
make large investments in the proposed corporation.
Exclusive right to vote to be voted for
Note: If the exclusive right to vote and be voted for in the
election of directors is granted, such right must be limited for a
period not exceeding five (5) years.
The limit is non-extendible.
The limitation is designed to prevent possible abuse of the
Board. A lifetime term of the Board absolutely deprives
other stockholders/members of the opportunity to
participate in the management of the corporation.
REDEEMABLE SHARES
These are shares which permit the issuing corporation to
redeem or purchase its shares.
Redeemable shares are redeemable at a fixed date or at
the option of either the issuing corporation or the
stockholder or both at a certain redemption price.
These shares may be issued by the corporation when
expressly provided in the articles of incorporation.
They are shares which may be purchased by the
corporation from the holders of such shares upon the
expiration of a fixed period, regardless of the existence of
unrestricted retained earnings in the books of the
corporation, and upon such other terms and conditions
stated in the articles of incorporation and the certificate of
stock representing the shares, subject to rules and
regulations issued by the Commission.
What is the purpose of redeemable shares?
A: They are issued for the purpose of attracting capital.
**LIMITATIONS:
(1) Redeemable shares may be issued only when
expressly provided for in the AOI.
(2) The terms and conditions affecting said shares must
be stated both in the AOI and in the COS.
(3) Redeemable shares may be deprived of voting rights
in the AOI.
(4) The corporation is required to maintain a sinking fund
to answer for redemption price if the corporation is
required to redeem.
(5) The redeemable shares are deemed retired upon
redemption unless otherwise provided in the AOI.
(6) Unrestricted RE is not necessary before shares can be
redeemed, but there must be sufficient assets to pay
the creditors and to answer for operations (Republic
Planters Banks vs. Agana, G.R. No. 51765, 1997)
(7) Redemption cannot be made if such redemption will
result in insolvency or inability of the corporation to
meet its obligations.
Atty. E.; instead of borrowing from banks, the corporation is
borrowing money from the public.
There are many ways of acquiring funds from the corporation:
1.
Borrow from the banks
2.
Borrow from the public
You have heard that bonds are floated, this is just the
corporation issuing bonds to the public, telling the public that if
you buy these bonds, we will buy this back from you in 5 years
with interest or premium. Or, redeemable shares, this is an
option to raise more money with the public.
We distinguish redeemable shares from the bank, in that banks
are lenders and redeemable shareholders are investors.
Page 19 of 88 | EH403 2019-2020 Corporation Law
What is the difference?
A: Redeemable shareholders assume a risk, particularly that the
corporation will become insolvent before the expiration of the
redemption period.
IOW, as far as the lender is concerned, the moment, the loan
is due, he may collect. If the corporation has no cash, what
will the banks do?
A: (1) Demand payment, or (2) Foreclose on the collateral.
Can the corporations say: please do not get our capital?
A: They cannot.
Bank says not our problem, our problem is to collect, if we
cannot collect, we get properties.
On the other hand, when we talk about redeemable shares?
A: If the corporation is insolvent, the shareholder cannot
demand redemption.
So we can only demand when?
A: When we have profits, then we pay.
Can it be obliged to pay?
A: Yes. That was your promise. To buy back the shares with a
premium of course.
So here’s the investor, here’s the lender. So that if the
investor now demands for the reacquisition of his shares
because the due date has arrived, can the corporation say
that they will use their profits for another purpose?
A: No.
So-called treasury shares, because they are now in the
custody of the treasurer. So what happens to these shares?
A: They become part of the capital.
And therefore, while before they were outstanding, are they
still so?
A: Not anymore. They have been reunited with its parents, it’s
now back home, it’s no longer outstanding.
However, may it still be entitled to dividends?
A: No. Because if they are allowed to be entitled to dividends, it
would create a situation where the corporation would be paying
itself.
However, because these are issued shares, would it have
the right to vote?
A: No, because otherwise, the current board would just use
these to vote for themselves, because the board acts on behalf
of the corporation – manage the properties of the corporation,
since these are properties, they will use these properties to cast
votes in their favor pertaining to these shares. So this will allow
incumbent directors to perpetuate themselves in office.
Party
involved
This is what the law calls what?
A: Unrestricted retained earnings.
Can the corporation even refuse by saying we do not have
unrestricted RE?
A: No.
Atty. Espedido: Restricted or not, if you have surplus, pay. The
corporation has to pay, so long as there is surplus, unrestricted
or not.
When
demandable
BORROWING
FROM A BANK
Dealing
with
lenders/creditors
REDEEMABLE
SHARE
Dealing with investors
Compel payment
upon
maturity
date without any
conditions.
Demand payment on
the
date
of
redemption
In so far as the
creditor
is
concerned, once it
is
due
and
demandable, the
creditor will compel
the corporation to
pay.
NOTE:
Regardless
whether it is restricted
or not, as long as
there is surplus, it is
obliged to pay.
The only situation where the corporation can refuse to pay is
when the corporation is insolvent, otherwise, the corporation will
be touching their capital and will be violating the trust fund
doctrine.
Exception:
Corporation
insolvent
IOW, clearly, what is the difference between the investor
and the lender?
A: The investor takes a risk.
What is that risk?
A: The corporation will not redeem the shares if the corporation
becomes insolvent.
No assumption of
risks;
Assumption
of Risk
However, since he is an investor, does he enjoy anything?
A: Rights to dividends during the period while he is still the
holder (before the redemption period comes), if dividends are
declared.
On the other hand, if there are such dividends declared, can
the lender also collect on such dividends?
A: No, he cannot.
So, once reacquired, what happens?
A: The redeemable shares become treasury shares.
Condition:
The
investor can compel
to redeem only when
there are profits. The
corporation is obliged
to buy back the
shares
with
a
premium.
Distribution
of dividends
Lender can collect
upon arrival of the
due date without
any conditions
Not entitled to
dividends;
only
paid
for
the
balance + interest
is
The investor takes the
risk because the
corporation may or
may not have retained
earnings
During the period
while he is still the
holder (before the
period comes), he is
an investor. Thus,
when dividends are
declared,
he
is
entitled to such.
Page 20 of 88 | EH403 2019-2020 Corporation Law
TREASURY SHARES
What are treasury shares?
A: These are stocks and were fully paid, but were reacquired by
the corporation through:
1) Purchase,
2) Donation,
3) Sale, and
4) Other lawful means.
Reason: It is issued to gain more capital and the
public is aware that these are just redeemable
shares.
(6) It can be resold by the corporation
(7) It is not considered as outstanding shares because it
is back to the corporation – it is in already
**NOTES:
Nature of Treasury Shares
Treasury shares are part of capital. When these shares were
bought or reacquired, surplus money will be used and not capital
money. Otherwise, we will be violating the Trust Fund Doctrine.
Being part of capital, the treasury shares can be sold again. As
to how much, it is the Board that will decide.
Such shares may be disposed of again for a reasonable
price fixed by the BOD.
Treasury shares have no voting right as long as such
shares remain in the Treasury.
Pre-emptive right of stockholders in close corporations shall
extend to reissuance of treasury shares unless otherwise
provided in the AOI.
Special Features of Treasury Shares
(1) Once reacquired, it shall form part of its capital as a
corporate asset.
(2) They can only be reacquired if there are unrestricted
retained earnings.
(3) It is not entitled to dividends because in effect, the
corporation is paying itself, which is absurd. Otherwise,
it will involve double sale for the same shares.
(4) It is not entitled to the right to vote because the
corporation is not a stockholder. If allowed and the
BOD exercises such right as representative of the
corporation, it can be subject to abuses.
If they are were voting shares when issued, now
that they are back, who may vote?
Answer: NO ONE. Treasury shares have no voting
rights.
If the law were to give them voting rights, since these
treasury shares are owned by the corporation, the BOD
necessarily will act on behalf of the corporation. If they
were given voting rights, the BOD will definitely vote for
them all the time.
(5) They can only be reacquired if there are unrestricted
retained earnings.
Unrestricted retained earnings – assets
less liabilities; not allocated for anything;
absolutely
free;
no
restrictions
or
appropriations.
GEN: When it comes to treasury shares, the
corporation is not always free to buy back the
shares. It requires that there should be
unrestricted retained earnings, otherwise, the
corporation will violate the Trust Fund Doctrine
because if they were to buy it back without
unrestricted retained earnings, the creditors
cannot go after the corporation to satisfy unpaid
debts because there is no more capital to speak
of.
Generally, is the corporation authorized to buy back all of
its shares?
A: No.
Why not?
A: It would violate the trust fund doctrine. Such that when you
keep expending funds to buy back all the shares, it would
disadvantage creditors, because it will reach a point where the
capital will used up.
THE TRUST FUND DOCTRINE
The Trust Fund Doctrine means that the capital stock, properties
and other assets of a corporation are regarded as equity in trust
for the payment of corporate creditors.
Stated simply, the trust fund doctrine states that all funds
received by the corporation in payment of the shares of stock
shall be held in trust for the corporate creditors and other
stockholders of the corporation. Under such doctrine, no fund
shall be used to buy back the issued shares of the stock except
only in instances specifically allowed by the Code. (Boman
Environmental Development Corporation vs. CA, G.R. No.
77860, 1988)
By way of exception, however?
A: If it is specifically provided for in the AOI, such as redeemable
shares.
CONVERTIBLE SHARES
A type of preferred stock that the holder can exchange for a
predetermined number of common shares at a specified time.
VOTING VS. NON-VOTING SHARES
GEN: No share may be deprived of voting rights.
XPNs:
1. Preferred non-voting shares;
2. Redeemable shares;
3. Shares as provided by the Code (treasury shares)
There shall always be a class/series of shares which have
complete voting rights.
XPN: Redeemable Shares – which can be issued
regardless of WON there are unrestricted retained
earnings
Page 21 of 88 | EH403 2019-2020 Corporation Law
VOTING SHARES
Shares that are provided with voting rights on any issue on the
corporation. The voter can participate in any meeting and on any
issue that may be raised during the meeting.
Reason: A shareholder is a part-owner of the corporation. Since
the shareholder cannot interfere with the management, he can
only exercise his ownership by voting on certain issues. As partowner, he has the right to protect his ownership. Hence, entitles
him to vote.
NON-VOTING SHARES
SHARES IN ESCROW
Issued or committed to a particular shareholder, but deposited
with a 3rd person or a deposit account pending the fulfilment by
that 3rd person for which it was reserved of the conditions
expressly provided in the certificate of stocks
Share is subject to an agreement; share is deposited with a 3rd
person to be kept by the depositary until the performance of a
certain condition.
TITLE II. INCORPORATION AND ORGANIZATION OF
PRIVATE CORPORATIONS
Shares that are not provided with voting rights but subject to
exceptions.
SEC. 10. NUMBER AND QUALIFICATIONS OF
INCORPORATORS
Exceptions: Holders of non-voting shares shall nevertheless be
entitled to vote on the following matters:
Section 10. Number and Qualifications of Incorporators. –
Any person, partnership, association or corporation, singly or
jointly with others but not more than fifteen (15) in number, may
organize a corporation for any lawful purpose or purposes:
Provided, That natural persons who are licensed to practice a
profession, and partnerships or associations organized for the
purpose of practicing a profession, shall not be allowed to
organize as a corporation unless otherwise provided under
special laws. Incorporators who are natural persons must be of
legal age.
(1)
(2)
(3)
Amendment of the articles of incorporation
Adoption and amendment of the bylaws
Sale, lease, exchange, mortgage, pledge, or other
disposition of all or substantially all of the corporate
property
Note: In determining whether there is a disposition of
all or substantially all of the corporate property, the
guide is when such sale already affects the operations
of the corporation. When the corporation could no
longer carry out its business, then that will be the point
when it will have to be open for voting, including nonvoting shares.
SC ruled that 80% is considered “substantially all”.
(4)
(5)
(6)
(7)
(8)
Incurring, creating, or increasing bonded indebtedness
Increase or decrease of authorized capital stock
Merger or consolidation of the corporation with another
corporation or other corporations
Investment of corporate funds in another corporation or
business in accordance with this Code; and
Dissolution of the corporation
Each incorporator of a stock corporation must own or be a
subscriber to at least one (1) share of the capital stock.
A corporation with a single stockholder is considered a One
Person Corporation as described in Title XIII, Chapter III of this
Code.
Who are incorporators?
A: They are the individuals who form the corporation. They are
typically nominated directors or members, who will initially
manage the corporation.
Under the old law, there was a minimum requirement of 5
incorporators, but under the new law, a single person may form
a corporation.
Reason why a stockholder with non-voting shares is still
entitled to vote on these issues:
Because the fundamental contract of these parties is the Articles
of Incorporation.
However, for purposes of practicality and convenience, there
remains the limit of not more than 15 incorporators in a stock
corporation. However, the number of trustees may be more than
15.
In obligations and contracts, we have learned that if we change
the terms and conditions of the contract, we can novate the
contract. What is necessary in novation is the consent of both
parties. If you need to change anything in the AOI, you need
consent. All parties must be able to participate WON they agree
on the change of the agreement.
Who can be incorporators?
A: Natural and juridical persons.
RIGHT OF APPRAISAL
For those who dissent the proposed agreement, they could
exercise their right of appraisal. Such right can be exercised by
a stockholder who disagrees with the decision of the Board of
Directors to amend the Articles of Incorporation. The dissenting
stockholder can demand the corporation to buy back his shares
at their fair market value.
For natural persons:
1) Must be of legal age
2) Must have capacity to contract
Note: The law does not prescribe a residency requirement.
Unlike the old code, majority of the incorporators need not
be residents of the Philippines.
What is the requirement for incorporators?
A: Whether natural or juridical, they must be subscribers and
have financial interest in the corporation.
Page 22 of 88 | EH403 2019-2020 Corporation Law
SEC. 11. CORPORATE TERM
SEC. 12. CAPITAL STOCKS
Section 11. Corporate Term. – A corporation shall have
perpetual existence unless its articles of incorporation provides
otherwise.
Section 12. Minimum Capital Stock Not Required of Stock
Corporations. —Stock corporations shall not be required to
have a minimum capital stock, except as otherwise specifically
provided by special law.
Corporations with certificates of incorporation issued prior to the
effectivity of this Code and which continue to exist shall have
perpetual existence, unless the corporation, upon a vote of its
stockholders representing a majority of its articles of
incorporation: Provided, That any change in the corporate right
of dissenting stockholders in accordance with the provisions of
this Code.
A corporate term for a specific period may be extended or
shortened by amending the articles of incorporation: Provided,
That no extension may be made earlier than three (3) years prior
to the original or subsequent expiry date(s) unless there are
justifiable reasons for an earlier extension as may be
determined by the Commission: Provided, further, That such
extension of the corporate term shall take effect only on the day
following the original or subsequent expiry date(s).
A corporation whose term has expired may apply for revival of
its corporate existence, together with all the rights and privileges
under its certificate of incorporation and subject to all of its
duties, debts and liabilities existing prior to its revival. Upon
approval by the Commission, the corporation shall be deemed
revived and a certificate of revival of corporate existence shall
be issued, giving it perpetual existence, unless its application for
revival provides otherwise.
No application for revival of certificate of incorporation of banks,
banking and quasi-banking institutions, preneed, insurance and
trust companies, non-stock savings and loan associations
(NSSLAs), pawnshops, corporations engaged in money service
business, and other financial intermediaries shall be approved
by the Commission unless accompanied by a favorable
recommendation of the appropriate government agency.
GEN: A corporation shall have a perpetual existence.
XPN: When the AOI provides otherwise.
When the Corporation was
Formed
After 3 February 2019
Before 3 February 2019
Effect
The corporation shall have a
perpetual existence, unless
its AOI provides otherwise.
The corporation shall be
deemed to have a perpetual
existence,
unless
the
corporation, upon a vote of
its stockholders representing
a majority of its outstanding
capital stock, notifies the
SEC that they intend to retain
its original term pursuant to
the corporation’s AOI.
REVIVAL OF A CORPORATION
Rule: A corporation whose term has expired may apply for a
revival of its corporate existence to the Commission. Upon the
approval by the Commission, the corporation shall be deemed
revived and a certificate of revival of corporate existence shall
be issued.
Authorized Capital Stock
Refers to the maximum amount of capital which the corporation
will receive when it issues all its shares.
Subscribed Capital Stock
Refers to the committed amount of capital which the corporation
will receive from its existing subscribers
Paid-Up Capital
Refers to the amount of capital which the corporation already
received from its subscribers. This represents the paid portion
of the subscribed capital.
If you are a new corporation, how much should be
subscribed?
A: The Revised Corporation Code does not require a minimum
subscribed capital stock.
Reason: To
organizations.
attract
the
formation
of
more
business
Exception: However, the 25% subscribed capital stock is
compulsory when there is an increase in the capital stock. Thus,
it requires that at least 25% must be subscribed, and 25% must
be paid-up.
SEC. 13. CONTENTS OF THE ARTICLES OF
INCORPORATION
Section 13. Contents of the Articles of Incorporation. - All
corporations shall file with the Commission articles of
incorporation in any of the official languages, duly signed and
acknowledged or authenticated, in such form and manner as
may be allowed by the Commission, containing substantially the
following matters, except as otherwise prescribed by this Code
or by special law:
(a) The name of corporation;
(b) The specific purpose or purposes for which the corporation
is being formed. Where a corporation has more than one stated
purpose, the articles of incorporation shall indicate the primary
purpose and the secondary purpose or purposes: Provided,
That a nonstock corporation may not include a purpose which
would change or contradict its nature as such;
(c) The place where the principal office of the corporation is to
be located, which must be within the Philippines;
(d) The term for which the corporation is to exist, if the
corporation has not elected perpetual existence;
(e) The names, nationalities, and residence addresses of the
incorporators;
(f) The number of directors, which shall not be more than fifteen
(15) or the number of trustees which may be more than fifteen
(15);
(g) The names, nationalities, and residence addresses of
persons who shall act as directors or trustees until the first
Page 23 of 88 | EH403 2019-2020 Corporation Law
regular directors or trustees are duly elected and qualified in
accordance with this Code;
(h) If it be a stock corporation, the amount of its authorized
capital stock, number of shares into which it is divided, the par
value of each, names, nationalities, and subscribers, amount
subscribed and paid by each on the subscription, and a
statement that some or all of the shares are without par value, if
applicable;
i.
j.
If it be a nonstock corporation
1. the amount of its capital
2. the names, nationalities, and
addresses of the contributors, and
3. amount contributed by each
residential
Such other matters consistent with law and which the
incorporators may deem necessary and convenient.
NAME OF THE CORPORATION (See also Sec. 17)
(i) If it be a nonstock corporation, the amount of its capital, the
names, nationalities, and residence addresses of the
contributors, and amount contributed by each; and
(j) Such other matters consistent with law and which the
incorporators may deem necessary and convenient.
An arbitration agreement may be provided in the articles of
incorporation pursuant to Section 181 of this Code.1âwphi1
The Articles of incorporation and applications for amendments
thereto may be filed with the Commission in the form of an
electronic document, in accordance with the Commission's rule
and regulations on electronic filing.
Essential to the existence of the corporation since it is through it
that the corporation can sue and be sued, and perform all legal
acts.
Importance: For identification purposes; the name is important
in order to distinguish it from other organizations.
A corporate name shall be disallowed by the SEC if the
proposed name is either:
1. Identical or deceptively or confusingly similar to that of
any existing corporation or to any other name already
protected by law; or
2. Patently deceptive, confusing, or contrary to existing
laws
CONTENTS OF THE ARTICLES OF INCORPORATION
a.
The name of the corporation;
b.
The specific purpose or purposes for which the corporation
is being formed. Where a corporation has more than one
stated purpose, the articles of incorporation shall indicate
the primary purpose and the secondary purpose or
purposes: Provided, That a nonstock corporation may not
include a purpose which would change or contradict its
nature as such;
c.
The place where the principal office of the corporation is to
be located, which must be within the Philippines;
d.
The term for which the corporation is to exist, if the
corporation has not elected perpetual existence;
e.
The names, nationalities, and residential addresses of the
incorporators;
f.
The number of directors, which shall not be more than
fifteen (15) or the number of trustees which may be more
than fifteen (15);
g.
The names, nationalities, and residential addresses of
persons who shall act as directors or trustees until the first
regular directors or trustees are duly elected and qualified
in accordance with this Code;
h.
If it be a stock corporation:
1. the amount of its authorized capital stock
2. number of shares into which it is divided
3. the par value of each,
4. names, nationalities, and residence addresses of
the original subscribers
5. amount subscribed and paid by each on the
subscription, and
6. a statement that some or all of the shares are
without par value, if applicable;
What are the limitations on the name of the corporation?
A: A corporation cannot use a name:
(1) That is already reserved or registered for the use of
another corporation;
(2) That is protected by law;
(3) That is contrary to law, rules and regulations;
(4) That is identical or confusingly similar with other
corporations’ names.
Illustration 1.
Haplos-Haplos Corporation vs. Hapyod-Hapyod
Corporation
If the business of the corporation was to provide most
effective and comfortable massage in the city, that’s the
principal business, what do you want to call your
corporation? Remember, it has to be descriptive of the
corporation.
A: Haplos-Haplos Corporation.
So that, if one corporation is already registered as HaplosHaplos Corporation, do you think the SEC will allow you
register as Hapyod-Hapyod Corporation?
A: No, because if it confuses the public, then the SEC will now
allow it.
Illustration 2.
Planter’s Peanuts vs. Grower’s Peanuts
What about Planter’s Peanuts and Grower’s Peanuts?
Atty. Espedido: It violates!
Illustration 3.
Efficascent Oil
One corporation came out with “Efficient Oil Corporation”,
do you think somebody will complain?
A: Yes! The Efficascent Oil will complain. Especially if you follow
the color scheme, samot na!
Page 24 of 88 | EH403 2019-2020 Corporation Law
Illustration 4.
United Nations Food Corporation
United Nations Food Corporation, what do you think?
A: No. It would fall under limitation #2.
If you are a fan of food, what will go into your mind if you
see that name?
A: This must be run by the United Nations.
So if the SEC will have to examine that, it might be
disapproved. This is misleading. The public might believe
this is operated, maintained and run by the United Nations.
The best chefs in the world, if you were the SEC, what would
be a good name?
A: International Food Corporation.
Atty. Espedido: In practice, SEC will ask you to submit three
corporation names to save time. So that, if one name is not
allowed or accepted by SEC, then they will just pick from the
remaining names submitted.
**NOTES:
Right to a Corporate Name – A corporation’s right to use
its corporate and trade name is a property right, a right in
rem, which it may assert or protect against the whole world
in the same manner as it may protect its tangible property
against trespass or conversion.
Statutory Limitations on the Form and Use of Corporate
Name:
1) In respect to a corporate name already registered or
otherwise protected by law, the proposed name must
not be:
a. Identical
b. Deceptively or confusingly similar;
2) Patently deceptive, confusing or contrary to law;
3) Must contain either:
a. “Incorporated” or “Inc.”, or
b. “Corporation” or “Corp.”;
4) Must not consist solely of generic, geographical and/or
descriptive terms and names; and
5) Must comply with other policies provided by SEC
Memorandum No. 14, Series of 2000
Doctrine of Secondary Meaning as Applied to Corporation
Names – The doctrine of secondary meaning originated in the
field of trademark law. Its application has, however, been
extended to corporate names since the right to use a corporate
name to the exclusion of others is based upon the same
principle which underlies the right to use a particular trademark
or tradename (Lyceum of the Philippines vs. CA, G.R. No.
101897, 1993)
PURPOSE CLAUSE
(1)
(2)
Primary Franchise – right to exist as a corporation
Secondary Franchise – intended for the carrying out
of a specific business
Atty. Espedido: Once you are issued a certificate of
incorporation, this is called primary franchise – this means you
have the right to exist as a corporation.
If you are dealing or engaged in the jeepney business, you will
also be given another franchise by the LTFRB – a secondary
franchise – which is intended for the carrying out of a specific
business.
The fact that you are given a primary franchise is not a
guarantee that you can immediately pursue any business that
you want, especially if the business that you are trying to pursue
would involve public interest or public utilities.
Purpose?
A: It’s important to state this in the AOI, because it would serve
as the guideline within which the corporation can operate.
Otherwise?
A: It could mislead the public.
So that if you perform something not within the purpose?
A: It would consist an ultra vires act.
Ultra vires acts?
A: These acts will be deemed as void acts, and not binding on
the corporation. It’s beyond your powers as a corporation.
So all these must be indicated in the AOI. Could you change
any one of these?
A: It’s possible.
How?
A: Majority of the BOD + 2/3 of the OCS or the members.
What happens to the 1/3 shares?
A: They may exercise their right of appraisal. (Purchase shares
at fair market value).
Atty. Espedido: As a creation of law, the corporation have to
work within the boundaries of the privilege extended by the
State.
It will serve as a guide in determining WON the corporation is
acting within its authority or powers as indicated in the Articles
of Incorporation.
If it is beyond the powers prescribed by law – it becomes an ultra
vires act which is deemed void, meaning it is not binding.
**NOTES:
A corporation can only have one (1) primary purpose.
However, it can have several secondary purposes.
A corporation has only such powers are as expressly
granted to it by law and by its AOI, those which may be
incidental to such conferred powers, those reasonably
necessary to accomplish its purposes, and those which
may be incident to its existence.
A corporation may not be formed for the purpose of
practicing a profession like law, medicine or
accountancy.
Limitations on the Purpose of a Corporation
(1) A non-stock corporation may not include a purpose
which would change or contradict its nature as such.
(2) The SEC shall reject the AOI or disapprove any
amendment when the stated purpose/s of the
corporation are patently unconstitutional, illegal,
immoral, or contrary to government rules or
regulations.
Stretching the Purpose Clause
It is legal to stretch the meaning of the purpose clause to cover
new and unexpected situations. There is no need to amend the
Page 25 of 88 | EH403 2019-2020 Corporation Law
AOI to accommodate new situations. (SEC Opinion No. 08-24,
October 22, 2008)
allowed since the corporation ceases to exist
already, and there is nothing to extend.
PRINCIPAL OFFICE
INCORPORATORS
Importance: For the SEC to be able to locate and identify where
the corporation is and to know where to serve summons and
notices.
(See Sec. 5 for a discussion on incorporators).
Address? Why, what’s important about it?
A: Because this address is where summons and notices will be
sent by the court/s or SEC or other government agencies.
DIRECTORS/TRUSTEES
(See Sec. 10 for the number & qualifications of incorporators.)
So that you would know where to serve. Alright.
If you are a stockholder, can you be a director?
A: Yes, to be a director, it is a requirement that such is at least
a holder of one (1) share.
So that if the address is “somewhere in the hinterlands of
Mindanao”?
A: This would not be in compliance with the requirement
because it would be impossible to identify the exact location,
because it’s not specific.
Requirements for a President and Vice President
President – must be a director, thus, a holder of 1 share
Vice President – does not require to be a holder of 1
share but once he assumes presidency, he is required
to be a holder of at least 1 share
**NOTES:
**NOTES:
Salient Points:
1. Must be located in the Philippines;
2. Must specify the city or province;
3. The street/number is not necessary;
4. Important in determining venue in an action by or
against the corporation, or on determining the province
where a chattel mortgage of shares should be
registered.
Qualifications for Directorship/Trusteeship Under Other
Sections of the RCC
Principal Office Address
The AOI must state the place where the principal office of the
corporation is to be located, which must be within the
Philippines.
Purposes of Fixing the Principal Office Address
1. To fix the residence of the corporation in a definite
place, instead of allowing it to be ambulatory;
2. For purposes of the stockholders’ or members’
meeting;
3. To determine the place where the books and records
of the corporation are ordinarily kept.
TERM OF EXISTENCE
(See Sec. 11.)
**NOTES:
The corporate term is necessary in determining at
what point in time the corporation will cease to
exist or have lost its juridical personality.
Sec. 139 of the Code provides that a corporation
shall nevertheless be continued as a body
corporate for three (3) years after the effective
date of dissolution, for the purpose of:
1. Prosecuting and defending suits by or
against it;
2. Enabling it to settle and close its affairs;
3. Dispose of and convey its property; and
4. Distribute its assets.
Extension of corporate term prior or earlier than 3
years is allowed only if there is justifiable reason.
On the day of the expiration of the corporate term,
extension is still allowed. However, after the
expiration of its term, extension is no longer
Board of Trustees of
Educational Institutions
(Sec. 106)
Close Corporations
Corporation Sole
(Sec. 108)
One Man Corporation
(Sec. 121)
Trustees of educational
institutions organized as
nonstock corporations shall
not be less than 5 nor more
than 15, provided that the
number of trustees shall be
in multiples of 5.
All stockholders are
considered members of the
board of directors, thus
allowing 20 members in the
board
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
The single stockholder shall
be the sole director and
president of the OPC
The RCC provides for the minimum qualifications and
disqualifications of the directors/trustees which the
corporation may not do away with. However, the by-laws
may
provide
for
additional
qualifications
and
disqualifications.
(See Sec. 46. Contents of Bylaws) – A private corporation
may provide the following in its by-laws:
(f) The directors’ or trustees’ qualifications, duties and
responsibilities
For further discussion:
o See Sec. 22 for Qualifications of Directors
o See Sec. 26 for Disqualifications of Directors
Page 26 of 88 | EH403 2019-2020 Corporation Law
SEC. 14. FORM OF ARTICLES OF INCORPORATION
Eight: That the number of shares of the authorized capital stockstated has been subscribed as follows:
Section 14. Form of Articles of Incorporation. - Unless
otherwise prescribed by special law, the articles of incorporation
of all domestic corporations shall comply substantially with the
following form:
Name of
Subscriber
Nationality
No. of
Shares
Subscribed
Amount
Subscribed
Amount
Paid
Articles of Incorporation
of
_____________________
(Name of Corporation)
The undersigned incorporators, all of legal age, have voluntarily
agreed to form a (stock) (nonstock) corporation under the laws
of the Republic of the Philippines and certify the following:
First: That the name of said corporation
"_________________", Inc. Corporation or OPC";
shall
be
Second: That the purpose or purposes for which such
corporation is incorporated are: (If there is more than one
purpose, indicate primary and secondary purposes);
Third: That the principal office of the corporation is located in the
City/Municipality
of
_______________,
Province
of
______________________, Philippines;
Fourth: That the corporation shall have perpetual existence or a
term of ___________ years from the date of issuance of the
certificate of incorporation;
Fifth: That the names, nationalities, and residence addresses of
the incorporators of the corporation are as follows:
Name
Nationality
Residence
Sixth: That the number of directors or trustees of the corporation
shall be ___________________; and the names, nationalities,
and residence addresses of the first directors or trustees of the
corporation are as follows:
Name
Nationality
Residence
Seventh: That the authorized capital stock of the corporation is
____________________ PESOS (₱______), divided into ____
shares with the par value of ___________________ PESOS
(₱_____________) per share. (In case all the shares are without
par value): That the capital stock of the corporation is
__________________ shares without par value.
(In case some shares have par value and some are without par
value): That the capital stock of said corporation consists of
________________________________ shares, of which
_______________________ shares have a par value of
___________________________PESOS (₱_______) each,
and of which ____________________ shares are without par
value.
(Modify No. 8 if shares are with no-par value. In case the
corporation is nonstock, Nos. 7 and 8 of the above articles may
be modified accordingly, and it is sufficient if the articles may be
modified accordingly, and it is sufficient if the articles state the
amount of capital or money contributed or donated by specified
persons, stating the names, nationalities, and residence
addresses of the contributors or donors and the respective
amount given by each.)
Ninth: That _______________________ has been elected by
the subscribers as Treasurer of the Corporation to act as such
until after the successor is duly elected and qualified in
accordance with the bylaws, that as Treasurer, authority has
been given to receive in the name and for the benefit of the
corporation, all subscriptions, contributions or donations paid or
given by the subscribers or members, who certifies the
information set forth in the seventh and eighth clauses above,
and that the paid-up portion of the subscription in cash and/or
property for the benefit and credit of the corporation has been
duly received.
Tenth: That the incorporators undertake to change the name of
the corporation immediately upon receipt of notice from the
Commission that another corporation, partnership or person has
acquired a prior right to the use of such name, that the name
has been declared not distinguishable from a corporation, or that
it is contrary to law, public morals, good customs or public policy.
Eleventh: (Corporations which will engage in any business or
activity reserved for Filipino citizens shall provide the following):
"No transfer of stock or interest which shall reduce the
ownership of Filipino citizens to less than the required
percentage of capital stock as provided by existing laws shall be
allowed or permitted to be recorder in the proper books of the
corporation, and this restriction shall be indicated in all stock
certificates issued by the corporation."
IN WITNESS WHEREOF, we have hereunto signed these
Articles of Incorporation, this ______ day of _____, 20___ in the
City/Municipality of _________________, Province of
________________, Republic of the Philippines.
(Names and signatures of the incorporators)
____________________________
(Name and signature of Treasurer)
Page 27 of 88 | EH403 2019-2020 Corporation Law
**CERTIFICATE OF INCORPORATION
The SEC has the ministerial duty to approve an application for
registration and issue the Certificate of Incorporation provided
all the requirements of law with respect to the AOI are complied
with.
A corporation commences to have corporate existence and
juridical personality and is deemed incorporated only from the
moment the SEC issues to the incorporators a Certificate of
Incorporation under its official seal.
SEC. 15. AMENDMENT OF THE ARTICLES
Section 15. Amendment of Articles of Incorporation. Unless otherwise prescribed by this Code or by special law, and
for legitimate purposes, any provision or matter stated in the
articles of incorporation may be amended by a majority vote of
the board of directors or trustees and the vote or written assent
of the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, without prejudice to the appraisal right
of dissenting stockholders in accordance with the provisions of
this Code. The articles of incorporation of a nonstock
corporation may be amended by the vote or written assent of
majority of the trustees and at least two-thirds (2/3) of the
members.
The original and amended articles together shall contain all
provisions required by law to be set out in the articles of
incorporation. Amendments to the articles shall be indicated by
underscoring the change or changes made, and a copy thereof
duly certified under oath by the corporate secretary and a
majority of the directors or trustees, with a statement that the
amendments have been duly approved by the required vote of
the stockholders or members, shall be submitted to the
Commission.
The amendments shall take effect upon their approval by the
Commission or from the date of filing with the said Commission
if not acted upon within six (6) months from the date of filing for
a cause not attributable to the corporation.
How do we amend the Articles of Incorporation?
A: Initiated by the Board itself.
What are the requirements for amending the AOI?
A:
(1) By a majority vote of the Board of Directors or Board of
Trustees
(2) Vote or the written assent of the stockholders of at least
2/3 representing the outstanding capital stocks
What is the option of the 1/3 of the OCS or members that
dissented?
A: Dissenting stockholders may exercise their APPRAISAL
RIGHT.
APPRAISAL RIGHT
Right of the dissenting stockholder to leave the
corporation by determining the value of his shares, and
demand the corporation to buy back his shares at their
fair market value (FMV)
Another instance where the corporation can buy back
the shares
Note: But unlike redeemable shares, in this case, the
dissenting stockholder can be paid only if there are
unrestricted retained earnings.
What are unrestricted retained earnings?
A: The surplus profits of the corporation which are not allocated
for anything.
IMPROPERLY ACCUMULATED EARNINGS
The corporation to avoid double taxation may not declare
dividends.
Illustration.
Travelling to Europe as an incentive instead of declaring
dividends
Instead of declaring dividends, they will not declare dividends
and tell all the stockholders “we will go to Europe as your
incentive, and undergo training and observe the latest trends.
You can bring your family.”
Everybody travelled to Europe. They were given pocket
money and per diem. Did they distribute dividends?
A: No dividends distributed, yet the stockholder enjoyed the part
from the corporation.
Will they be taxed?
A: If the government is aware that this is being done, the
government can charge them for IAET (Improperly Accumulated
Earnings Tax).
They must declare the dividends, otherwise, they will be
penalized by the BIR.
What do they do now?
A: They can present expansion plans. This is a restriction of
their earnings. IOW, they can say that they do not have
unrestricted earnings because these are earmarked already for
future expansions.
Another Exception: Loan condition – borrowing huge amounts
of money from the bank. When you loan from the bank, the bank
imposes a lot of conditions. Usually, one of the conditions
imposed is that the corporation cannot declare dividends without
the consent of the bank. The bank wants to be sure that it can
collect its credit.
WHEN AMENDMENT TAKES EFFECT
What happens after the amendment?
A: It requires the approval by the SEC to take effect.
When will it take effect?
A:
(1) From date of approval by the SEC
(2) From of filing when there is inaction by the SEC
within 6 months from filing
**NOTES
Limitations
1. Requirements imposed by the Code or by special laws
2. Must be for a legitimate purpose
3. Must be approved by the directors/trustees, and the
stockholders/members through the vote requirement
4. Appraisal right
5. Both the original and the amended articles together
must contain all the provisions required by law to be set
out in the articles
6. Will take effect only:
Page 28 of 88 | EH403 2019-2020 Corporation Law
a.
b.
Upon their approval by the SEC by the
issuance of a certificate of amended articles;
or
From the date of filing with the SEC, if the
SEC did not act upon it within 6 months from
the date of filing for a cause not attributable to
the corporation.
Procedure
1. The original and amended articles together shall
contain all provisions required by law to be set out in
the AOI
2. The articles, as amended, shall be indicated by
underscoring the change/s made
3. A copy shall be submitted to the SEC:
a. Duly certified under oath by the corporate
secretary and a majority of the directors or
trustees
b. Stating the fact that the amendment/s have
been duly approved by the required vote of
the stockholders or members
4.
Percentage of Filipino ownership of capital stock under
existing laws or the Constitution is not complied with.
**INDUSTRIES REQUIRING PRIOR AUTHORITY BEFORE
INCORPORATION (REGULATED CORPORATIONS)
1.
2.
3.
4.
5.
6.
Banks
Banking and quasi-banking institutions
Pre-need, insurance and trust companies
Non-stock savings and loan associations (NSSLAs)
Pawnshops
Other financial intermediaries
Note: These industries cannot incorporate or apply for
amendment without the prior authority of the government
agencies governing or controlling them. (Ex. Certificate to
Incorporate from the BSP before incorporating a bank)
The Certificate of Incorporation is to be attached to the Articles
of Incorporation.
**NOTES
SEC. 16. GROUNDS FOR DISAPPROVAL OF AOI OR
AMENDMENTS
Section 16. Grounds When Articles of Incorporation or
Amendment May be Disapproved. The Commission may
disapprove the articles of incorporation or any amendment
thereto if the same is not compliant with the requirements of this
Code: Provided, That the Commission shall give the
incorporators, directors, trustees, or officers as reasonable time
from receipt of the disapproval within which to modify the
objectionable portions of the articles or amendment. The
following are ground for such disapproval:
(a) The articles of incorporation or any amendment thereto is not
substantially in accordance with the form prescribed herein;
(b) The purpose or purposes of the corporation are patently
unconstitutional, illegal, immoral or contrary to government rules
and regulations;
Only substantial and not strict compliance is required.
The above grounds are not exclusive. Example of another
ground is the capital requirement.
If there is no valid ground for disapproval, the SEC is dutybound to approve the same, it being the SEC’s ministerial
duty given the right to association.
**DUE PROCESS IN THE REJECTION OF THE AOI
Before rejecting the AOI, the SEC should give the incorporators
reasonable time within which to correct or modify the
objectionable portions of the articles or amendments.
Any decision of the Commission rejecting the AOI or
disapproving any amendment thereto is appealable by Petition
for Review to the CA in accordance with the pertinent provisions
of the Rules of Court.
SEC. 17. CORPORATION NAME
(c) The certification concerning the amount of capital stock
subscribed and/or paid is false; and
(d) The required percentage of Filipino ownership of the capital
stock under existing laws or the Constitution has not been
complied with.
No articles of incorporation or amendment to articles of
incorporation of banks, banking and quasi-banking institutions,
preneed, insurance and trust companies, NSSLAs, pawnshops
and other financial intermediaries shall be approved by the
Commission
unless
accompanied
by
a
favorable
recommendation of the appropriate government agency to the
effect that such articles or amendment is in accordance with law.
**GROUNDS TO DISAPPROVE INITIAL APPLICATION FOR
INCORPORATION AND AMENDMENT OF ARTICLES
1.
2.
3.
Articles or amendment is not substantially in accordance
with the form prescribed by law;
The purpose/s of the corporation is patently
unconstitutional, illegal, immoral, or contrary to government
rules and regulations.
Certification concerning the amount of capital stock
subscribed and/or paid is false.
Section 17. Corporation Name. - No corporate name shall be
allowed by the Commission if it is not distinguishable from that
already reserved or registered for the use if another corporation,
or if such name is already protected by law, rules and
regulations.
A name is not distinguishable even if it contains one or more of
the following:
(a) The word "corporation", "company", incorporated", "limited",
"limited liability", or an abbreviation of one of such words; and
(b) Punctuations, articles, conjunctions, contractions,
prepositions, abbreviations, different tenses, spacing, or number
of the same word or phrase.
The Commission upon determination that the corporate name
is: (1) not distinguishable from a name already reserved or
registered for the use of another corporation; (2) already
protected by law; or (3) contrary to law, rules and regulations,
may summarily order the corporation to immediately cease and
desist from using such name and require the corporation to
register a new one. The Commission shall also cause the
removal of all visible signages, marks, advertisements, labels
prints and other effects bearing such corporate name. Upon the
Page 29 of 88 | EH403 2019-2020 Corporation Law
approval of the new corporate name, the Commission shall
issue a certificate of incorporation under the amended name.
If the corporation fails to comply with the Commission's order,
the Commission may hold the corporation and its responsible
directors or officers in contempt and/or hold them
administratively, civilly and/or criminally liable under this Code
and other applicable laws and/or revoke the registration of the
corporation.
**REQUIREMENTS FOR A VALID CORPORATE NAME
(1) Distinguishable from a name already reserved or registered
for the use of another corporation.
T/N: A name is not distinguishable even if it contains one or
more of the following:
(a) The
word
“corporation”,
“company”,
“incorporated”, “limited”, “limited liability”, or an
abbreviation of one of such words; and
(b) Punctations, articles, conjunctions, contractions,
prepositions, abbreviations, different tenses,
spacing, or number of the same word or phrase.
(2) One that is not yet protected by law;
(3) Not contrary to law, rules, and regulations.
Atty. Gavi: Upon determination by the Commission that the
corporate name violates either of the three requirements, it may
summarily order the corporation to immediately cease and
desist from using such name, and to register a new one. It shall
also cause the removal of visible signages, marks, ads, etc.
bearing such corporate name.
Upon approval of the new corporate name, the Commission
shall issue a certificate of incorporation under the amended
name.
**EFFECT OF FAILURE TO COMPLY WITH SEC ORDER (in
the last paragraph)
The corporation and its responsible directors or officers may be
held:
1. In contempt, and/or
2. Be administratively, civilly and/or criminally liable
under the Code and other applicable laws, and/or
3. May result in the revocation of the corporation’s
registration
Atty. Gaviola: Late December 2017, SEC came out with a new
regulation concerning corporate names. Under the Intellectual
Property Code, the moment you create a trade name and start
using a trade name, it is already protected even if it is not yet
registered under the Intellectual Property Code. But under this
new regulation, if the corporation is doing business under a trade
name different from its corporate name, the trade name should
be included in its AOI. In that regard, the protection granted by
Sec. 17 of the RCC is extended to that trade name.
What is the effect if the trade name is not included in the
AOI?
A: SEC Rules provide that such trade name can be used by
some other corporations subject to the consent of the owner of
the trade name.
Illustration:
Trade Name: Penshoppe
Corporate Name: Golden ABC
**GROUNDS TO QUESTION CORPORATE NAME
(1) Complainant corporation has acquired prior right over the
use of such corporate name; and
(2) Proposed name is either:
a. Identical;’ or
b. Deceptively or confusingly similar to that of any
existing corporation or to any other name already
protected by law; or
c. Patently deceptive, confusing or contrary to
existing laws.
**TEST IN DETERMINING IDENTITY/SIMILARITY
If it has the tendency to mislead a person using ordinary care
and discrimination.
What if the corporation desires to incorporate a subsidiary?
Atty. Gaviola: Usually you will have the same name. The SEC
allows it, provided that the corporation which had a priority right
will send you a letter of consent. In this case, you cannot reserve
your name online. You will have to write a letter to the SEC main
office in Manila to basically grant permission for the subsidiary
to use the name of the parent. So, just because it’s similar, it’s
automatically not allowed. So, if the corporation with the prior
right consents, then, it will be allowed. But it has to be proven
that there is a parent-subsidiary/affiliate.
See also discussion of Corporate Name under Sec. 13.
SEC. 18. REGISTRATION, INCORPORATION AND
COMMENCEMENT OF CORPORATION EXISTENCE
Section
18.
Registration,
Incorporation
and
Commencement of Corporation Existence. - A person or
group of persons desiring to incorporate shall submit the
intended corporate name to the Commission for verification. If
the Commission finds that the name is distinguishable from a
name already reserved or registered for the use of another
corporation, not protected by law and is not contrary to law, rules
and regulation, the name shall be reserved in favor of the
incorporators. The incorporators shall then submit their articles
of incorporation and bylaws to the Commission.
If the Commission finds that the submitted documents and
information are fully compliant with the requirements of this
Code, other relevant laws, rules and regulations, the
Commission shall issue the certificate of incorporation.
A private corporation organized under this Code commences its
corporate existence and juridical personality from the date the
Commission issues the certificate of incorporation under its
official seal thereupon the incorporators, stockholders/members
and their successors shall constitute a body corporate under the
name stated in the articles of incorporation for the period of time
mentioned therein, unless said period is extended or the
corporation is sooner dissolved in accordance with law.
After the requirements are complied with, the SEC shall now
issue the Certificate of Incorporation.
Note: The trade name and corporate name need not be the
same.
Page 30 of 88 | EH403 2019-2020 Corporation Law
What would the issuance of the Certificate of Incorporation
mean?
A: It is considered the birth of the corporation and the
corporation commences its juridical personality.
Importance: The COI is the best evidence of the corporation’s
existence.
We can now classify ourselves as what kind of corporation?
A: It will now become a de jure corporation – which is a
corporation in fact and in law.
SEC. 19. DE FACTO CORPORATION
Section 19. De Facto Corporations. - The due incorporation of
any corporation claiming in good faith to be a corporation under
this Code, and its right to exercise corporate powers, shall not
be required into collaterally in any private suit to which such
corporation may be a party. Such inquiry may be made by the
Solicitor General in a quo warranto proceeding.
What is a de jure corporation?
A: it is one created with substantial conformity to the mandatory
statutory requirements in the Corporation Code of the
Philippines.
What is a de facto corporation?
A: An association of persons existing under a valid law under
which it may be incorporated after having attempted in good faith
to incorporate, and assuming corporate powers (Seventh Day
Adventist Conference Church of Southern Phils. Vs.
Northeastern Mindanao Mission of Seventh Day Adventists,
Inc., GR. No. 150416, 1950)
What are the requisites to be considered a de facto
corporation?
A:
(1) There is a valid law that deems to establish a
corporation;
(2) Substantial compliance with the requirements or a
colorable attempt to organize a corporation under such
law;
(3) Good faith on the part of the corporation in exercising
corporate powers.
Illustration.
Group exercised good faith in substantially complying
with the requirements – De Facto Corporation
A group of five (5), after signing their Articles of Incorporation
and having it notarized, told someone else to file it at the SEC
and did not bother to follow up. It did not even tell anyone to
check on the papers. Nevertheless, it went to say that it is now
a corporation since they have executed the articles. They
assumed credit with a supplied, and the supplier failed to deliver,
despite the transaction.
with the requirements to organize a corporation as provided by
law.
If someone really wants to question the existence of this
corporation, it should only be the Solicitor General representing
the government, who is supposed to extend the privilege. Only
the Solicitor General can question the existence of the
corporation through a quo warranto.
Rule: The State must bring a direct proceeding to question the
validity of its corporate existence through the Solicitor General
by filing a quo warranto proceeding. Its existence as a
corporation cannot be collaterally attacked either by the State or
by private individuals.
SEC. 20. CORPORATION BY ESTOPPEL
Section 20. Corporation by Estoppel. - All persons who
assume to act as a corporation knowing it to be without the
authority to do so shall be liable as general partners for all debts,
liabilities and damages incurred or arising as a result thereof:
Provided, however, That when any such ostensible corporation
is sued on any transaction entered by its as a corporation or on
any tort committed by it as such, it shall not be allowed to use
on any its lack of corporate personality as a defense. Anyone
who assumes an obligation to an ostensible corporation as such
cannot resist performance thereof on the ground that there was
in fact no corporation.
What is a corporation by estoppel?
A: A group of persons who assume to act as a corporation
knowing it to be without authority to do so, who shall be liable as
general partners for debts, liabilities and damages incurred or
arising as a result thereof.
**NOTES:
A group of persons which holds itself out as a corporation and
enters into a contract with a third person on the strength of such
appearance cannot be permitted to deny its existence in an
action under said contract.
“One who assumes an obligation to an ostensible corporation as
such, cannot resist performance thereof on the ground thereof
that there was in fact no corporation.”
These are corporations who have exercised rights as a
corporation and has undertaken obligations as a corporation,
even without validly incorporating. In which case, the persons
who made up the corporation are estopped from claiming that
they are not. But they cannot, because there is no real
corporation, they will not be liable as a corporation. They will be
liable as partners. They will be solidarily liable in their personal
capacity.
Lack of corporate personality is not a defense that it can avail.
Requirements of a Corporation by Estoppel:
They secured everything and applied with all the requirements.
They were able to receive the certificate of incorporation. They
entered into the same transaction above. The supplier argued
that the corporation cannot sue them because the suppliers
went to SEC and discovered that the AOI did not contain any
information on its capitalization (which is a fatal defect).
Can the suppliers file a motion to dismiss?
A: No. In this case, the corporation is considered a de facto
corporation because of its good faith in substantially complying
(1) Representation by a group to the public;
(2) Knowing that they do not have the authority to act as a
corporation; and
(3) Third parties contracting with them are induced to
believe that they have the authority to act as a
corporation.
**NOTE:
Estoppel is a defense available only to third persons against the
ostensible corporation. When there is no third person involved,
Page 31 of 88 | EH403 2019-2020 Corporation Law
and the conflict arises only among those assuming the form of a
corporation, who therefore know that it has not been registered,
there is no corporation by estoppel. (Lozano vs. De Los Santos,
G.R. No. 125221, 1997)
Illustration.
Group merely executed the articles and later transacted
with a supplier – Corporation by Estoppel
A group of five (5), after signing their Articles of Incorporation
and having it notarized, told someone else to file it at the SEC
and did not bother to follow up. It did not even tell anyone to
check on the papers. Nevertheless, it went to say that it is now
a corporation since they have executed the articles. They
assumed credit with a supplied, and the supplier failed to deliver,
despite the transaction.
Can they sue the supplier?
A: Yes, they can sue the supplier as a CORPORATION BY
ESTOPPEL, but not as a corporation de facto. ICAB, there is no
substantial attempt at organizing a corporation – merely
executing the articles is not an attempt.
CORPORATION DE FACTO VS.
CORPORATION BY ESTOPPEL
Corporation de
Facto
A corporation that
exists in fact, but not
in law.
Definition
1. There is a valid
law that deems
to establish a
corporation;
2.
Requisites
3.
Substantial
compliance
with
the
requirements or
a bona fide
attempt
to
organize
a
corporation
under such law;
and
Good faith on
the part of the
corporation in
exercising
corporate
powers.
Corporation by
Estoppel
A group of persons
who assume to act
as a corporation
knowing it to be
without authority to
do so, who shall be
liable as general
partners for debts,
liabilities
and
damages incurred or
arising as a result
thereof.
1. Representation
by a group to the
public;
2. Knowing
that
they do not have
the authority to
act
as
a
corporation; and
3. Third
parties
contracting with
them
are
induced
to
believe that they
have
the
authority to act
as a corporation.
Illustration 1.
No papers were submitted to SEC
There were 5 individuals who did not submit anything to SEC
and entered into a transaction with someone else.
Can they be considered as a corporation?
A: No. There is no corporation at all.
Illustration 2.
Five people misrepresented themselves as a corporation
and borrowed money from a bank
If the five of them went to the bank and told the bank that we
they are a corporation – they called themselves the “Omnibus
Corporation”. The bank lent them money. However, they failed
to pay the bank and sued them as the Omnibus Corporation.
The lawyer of the Omnibus Corporation filed a motion to dismiss
arguing that it has no juridical personality.
Can the bank sue them as a corporation?
A: Yes, they are deemed a corporation by estoppel.
What happens to the Motion to Dismiss?
A: It shall not be granted on the ground that they are considered
as a corporation by estoppel
Who will pay the amount?
A: They will be treated as general partners – they will be
solidarily liable.
So what is the point of complying with all of these
requirement when they will be only treated on as a
corporation?
A: The law treats them as a corporation by reasons of equity. It
is not for purposes of giving them the privilege under the
Revised Corporation Code but only for establishing their liability.
IOW if they are not treated as corporation, the loan will not be
paid.
Illustration 3.
The Corporation by Estoppel lends money to someone;
debtor fails to pay
Let’s reverse the situation. Somebody borrowed from the five
people because they misrepresented themselves as a
corporation. The debtors did not pay. So the Omnibus
Corporation are now demanding payment from the debtor. The
debtor filed a motion to dismiss arguing that they
misrepresented themselves as a corporation.
Will the motion to dismiss be entertained?
A: No. The debtor likewise cannot free itself from his liability of
the unpaid debts by invoking that he transacted with a
corporation by estoppel.
Atty. Espedido: Bottom line: Once you have enjoyed certain
advantages, you cannot now question the existence of that
corporation by estoppel. You cannot now say “I will not pay you
because you are not a corporation”.
This is taken in a sense that a 3rd party cannot take advantage
of the fact that the lender is not a corporation. In the same
manner that the corporation by estoppel itself cannot pursue any
transaction because it does not have any juridical personality.
Page 32 of 88 | EH403 2019-2020 Corporation Law
But if that relationship ripens into a transaction, by rule of equity,
that relationship may be recognized and the parties may be
afforded a protection of the law.
IOW, a corporation by estoppel is established only between the
parties. It does not have a juridical personality. The relationship
only exists between the parties. We are not saying that they
gained juridical personality. Only that the law gives protection.
RULE ON EQUITY requires that the rights of the parties
must be protected.
Illustration 4.
No substantial compliance of the requirements
There is another group that has signed and executed their AOI
and notarized it. After being authorized, they now entered into a
transaction.
Can they be considered as a corporation?
A: We have to qualify. If it is shown that they have substantially
complied with the requirements in good faith, they will be
considered as a de facto corporation.
However, in the facts at hand, it was not mentioned that they
substantially complied with the requirements. They did not even
file the requirements. There act only ended upon the
notarization. ICAB, there was no honest intention.
Illustration 5.
Substantial compliance of the requirements and good faith
of the corporation are both present
transaction and only insofar as the parties are
concerned.
(2) Outside of that, it does not enjoy any privilege of a
corporation at all.
QUESTIONING THE VALIDITY OF CORPORATE
EXISTENCE
Rule: Assuming that a de facto corporation actually exists, its
existence as a corporation cannot be collaterally attacked either
by the State or by private individuals.
The State must bring a direct proceeding to question the validity
of its corporate existence through the Solicitor General by filing
a quo warranto proceeding.
Why the State?
A: A corporation is a creation by law. It is a privilege granted by
the State so that it is only the State that can take it away. It is
the state that issues the Certificate of Incorporation. If it does not
issue, only the State can say that you do not exist as a
corporation. For all intents and purposes, the de facto
corporation is considered as existing insofar as the public is
concerned, except the State.
**NOTES
GOOD FAITH
The group failed to indicate the capital of the corporation.
However, for reasons we do not know, the examiners of the SEC
issued them an Articles of Incorporation.
The issuance of the COI is essential to the claim of good
faith. An association of persons to claiming to exercise the
powers of a corporation knowing that no COI had yet been
issued to them cannot claim to be exercising such powers
in good faith. (Hall vs. Piccio, G.R. No. L-2598, 1950)
Believing now that they received the juridical personality, is
it now a corporation?
A: It could now be considered as a de facto corporation because
there was substantial compliance and good faith on the part of
the corporation.
If after incorporation, the incorporators discovered that they
have not complied substantially with the law and still
continued transacting business as a corporation, without
doing anything to correct the defect, the privilege of a de
facto existence can no longer be invoked in good faith.
HOWEVER, if they were subsequently notified of the defects of
the requirements they have submitted and they still failed to
comply with the requirements. They will not be considered as a
corporation de facto because it lacks the element of good faith
PURPOSES OF THE DE FACTO DOCTRINE
1.
2.
BUT PRIOR to that notification from the SEC, believing that it
fulfilled the requirements and it proceeded into entering the
transactions – they are considered a corporation de facto.
What do you think is the justification of the law for treating
them as a corporation de facto?
A: For stability of business transactions – this is to promote
security of business transaction and to eliminate quibbling over
irregularities. It is also for the protection of the 3rd persons and
consideration of equity.
REASONS FOR TREATING A CORPORATION BY
ESTOPPEL AS A CORPORATION
(1) Principle of Equity
(2) Unjust Enrichment – “No one shall unjustly enrich himself
at the expense of another.”
LIMITATIONS
(1) The law only recognizes the transaction and the
rights of the parties in relation to that particular
3.
4.
To promote the security of business transactions and
to eliminate quibbling over irregularities.
A third person dealing with a corporation will rarely be
prejudiced if the company is recognized as a
corporation in spite of minor defects in formation.
Seldom would it be just to allow a wrongdoer to quibble
over such objections to escape liability or wrongdoing.
It would be unjust to allow a claimant against a
supposed company to assert the individual liability of
innocent passive investors on the ground of flaws in the
formal steps of incorporation, when they have
attempted in good faith to comply with the statutory
requirements and the objecting party is not prejudiced.
(Villanueva, Corporate Law)
WHEN DE FACTO DOCTRINE DOES NOT APPLY
1.
2.
A corporation whose purpose is prohibited by law or is
contrary to public policy;
A corporation created for the practice of learned
profession in the absence of a law expressly permitting
the organization of such corporations. (Note: The
business organization for the practice of profession
shall be by particular partnership.)
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INSTANCES WHEN THERE IS A DE FACTO CORPORATION
1.
2.
3.
4.
5.
6.
7.
8.
9.
Failure to give the notice required by the statue for the
meeting for its organization;
Failure to fix and limit the amount of capital stock of the
company at the first meeting;
Failure to issue stocks;
Informalities in the proceedings of corporate meetings;
Lack of Certificate of Organization filed or executed;
Lack of elected BOD;
Irregularities with respect to the number, term, place of
residence, and of meeting of the Board of Directors;
Some of the persons elected as directors are
disqualified; and
In general, when there is a defect in the organization of
the corporation and not on its creation (Chung Ka Bio
vs. IAC, G.R. No. 71837, 1988)
CONSEQUENCE OF DE FACTO STATUS
For all intents and purposes, a de facto corporation has all the
same rights, powers, obligations, and liabilities as a de jure
corporation. The only difference is that the due incorporation of
a de facto corporation may be directly inquired into by the
Solicitor General in a quo warranto proceeding.
Conversely, in contrast to a de facto corporation, a de jure
corporation can successfully resist a suit brought by the State
challenging its existence.
SEC. 21. EFFECT OF NON-USE OF CORPORATE
CHARTER AND CONTINUOUS INOPERATION
Section 21. Effects of Non-Use of Corporate Charter and
Continuous Inoperation. - If a corporation does not formally
organize and commence its business within five (5) year from
the date of its incorporation, its certificate of incorporation shall
be deemed revoked as of the day following the end of the five
(5)-year period.
However, if a corporation has commenced its business but
subsequently becomes inoperative for a period of at least five
(5) consecutive years, the Commission may, after due notice
and hearing, place the corporation under delinquent status.
A delinquent corporation shall have a period of two (2) years to
resume operations and comply with all requirements that the
Commission shall prescribed. Upon the compliance by the
corporation, the Commission shall issue an order lifting the
delinquent status. Failure to comply with the requirements and
resume operations within the period given by the Commission
shall cause the revocation of the corporation's certificate of
incorporation.
The Commission shall give reasonable notice to, and coordinate
with the appropriate regulatory agency prior to the suspension
or revocation of the certificate of incorporation of companies
under their special regulatory jurisdiction.
After the Issuance of the Certificate of Incorporation
(1) The stockholders will convene to elect the Board of
Directors.
(2) Once the BOD is elected, they will convene to have set
of officers.
EFFECT OF FAILURE TO ORGANIZE AND COMMENCE
Rule: When the corporation does not formally organize and
commence its business within five (5) years FROM the date of
its incorporation – the Certificate of Incorporation (COI) will be
deemed revoked or cancelled on the day following the end of
the five-year period
EFFECT OF FAILURE TO OPERATE
Rule: If the corporation becomes subsequently inoperative for at
least five (5) consecutive years – AFTER due notice and
hearing, the Commission will place the Corporation under
delinquent status
NOTE: There is no automatic revocation. The SEC will place the
corporation under a delinquent status and the delinquent
corporation shall be given a period of two (2) years to resume
the operations and comply with the prescribed requirements of
the Commission.
Once complied – the delinquent status is lifted and the
corporation will have de jure status
Failure to comply – cause the revocation of the Corporation’s
Certificate of Incorporation
GROUNDS FOR SUSPENSION
(a) The articles of incorporation or any amendment thereto is
not substantially in accordance with the form prescribed
herein;
(b) The purpose or purposes of the corporation are patently
unconstitutional, illegal, immoral or contrary to government
rules and regulations;
(c) The certification concerning the amount of capital stock
subscribed and/or paid is false; and
(D) The required percentage of Filipino ownership of the capital
stock under existing laws or the Constitution has not been
complied with.
(E)
TITLE III. BOARD OF DIRECTORS/TRUSTEES AND
OFFICERS
The law makes a distinction between ownership and
management. The board (management) controls, operates
and exercises the powers of the corporation, while the
owners periodically elect, or when demanded by the
circumstances replace the board.
The Corporation Code follows the stakeholder-centered
rather than the shareholder-centered model. Under this
model, owners are only one of the many corporate
stockholders, who have diverse and varied interests. The
corporation, through its board, must take into account and
rank such interests in its actions.
Who are the corporation’s stakeholders?
A: They include but are not limited to:
(1)
Creditors
(2)
Employees
(3)
Customers
(4)
Suppliers
(5)
Government
(6)
Community where the corporation operates
Whom do we elect?
A: President, Secretary, Treasurer, all officers listed in the bylaws of the corporation.
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Note: Stakeholders are different from shareholders.
Shareholders are those individuals or entities who own the
corporation by holding the corporation’s share of stocks. On the
other hand, stakeholders are those who have an interest in the
operations of the corporation, an interest which is not
necessarily pecuniary or financial. While a shareholder is always
a stakeholder, a stakeholder is not always a shareholder.
from among the members of the corporation. Each director and
trustee shall hold office until the successor is elected and
qualified. A director who ceases to own at least one (1) share of
stock or a trustee who ceases to be a member of the corporation
shall cease to be such.
The board of the following corporations vested with public
interest shall have independent directors constituting at least
twenty percent (20%) of such board:
**DOCTRINE OF CENTRALIZED MANAGEMENT
All business of the corporation shall be conducted and all its
properties shall be controlled and held by the Board of Directors
or Trustees. A corporation can act only through its directors and
officers. Acts of management pertain to the board and those of
ownership to the stockholders. (PSE vs. Litonjua, G.R. No.
204014, 2016)
While stockholders and members are entitled to receive profits,
the management and the direction of the corporation are lodged
with their representatives and agents – the board of
directors/trustees. Acts of management pertain to the board;
and those of ownership to the stockholders/members. (Tan vs.
Sycip, G.R. No. 153468, 2006)
The concentration in the board of the powers of control of
corporate business and of appointment of corporate officers and
managers is necessary for efficiency in any large organization.
Stockholders are too numerous, too scattered, and unfamiliar
with the business of a corporation to conduct its business
directly. And so the plan of corporate organization is for the
stockholders to choose the directors who shall control and
supervise the conduct of corporate business. (Filipinas Port vs.
Go, G.R. No. 161886, 2007)
The power to purchase real property is vested in the Board of
Directors or Trustees. While a corporation may appoint agents
to negotiate for the purchase of real property needed by the
corporation, the final say will have to be with the Board, whose
approval will finalize the transaction. A corporation can only
exercise its powers and transact its business through its Board
of Directors, and through its officers and agents when
authorized by a board resolution or by its by-laws. (Sps. Firme
vs. Ukal Enterprises and Development Corp., G.R. No. 146608,
2003)
WHEN DOCTRINE OF CENTRALIZED MANAGEMENT NOT
APPLICABLE
1.
2.
3.
In the case of an Executive Committee duly authorized in
the by-laws;
Where a corporate officer acts within the scope of his
authority under the by-laws or board resolution;
In case of close corporations, the stockholders may
directly manage the business of the corporation instead, if
the AOI so provides.
(a) Corporations covered by Section 17.2 of Republic Act No.
8799, otherwise known as "The Securities Regulation Code",
namely those whose securities are registered with the
Commission, corporations listed with an exchange or with
assets of at least Fifty million pesos (50,000,000.00) and having
two hundred (200) or more holders of shares, each holding at
least one hundred (100) shares of a class of its equity shares;
(b) Banks and quasi-banks, NSSLAs, pawnshops, corporations
engaged in money service business, preneed, trust and
insurance companies and other financial intermediaries; and
(c) Other corporations engaged in businesses vested with public
interest similar to the above, as may be determined by the
Commission, after taking into account relevant factors which are
germane to the objective and purpose of requiring the election
of an independent director, such as the extent of minority
ownership, type of financial products or securities issued or
offered to investors, public interest involved in the nature of
business operations, and other analogous factors.
An independent director is a person who apart from
shareholdings and fees received from any business or other
relationship which could, or could reasonable be received to
materially interfere with the exercise of independent judgment in
carrying out the responsibilities as a director.
Independent directors must be elected by the shareholders
present or entitled to vote in absentia during the election of
directors. Independent directors shall be subject to rules and
regulations governing their qualifications, disqualifications,
voting requirements, duration of term and term limit, maximum
number of board membership and other requirements that the
Commission will prescribed to strengthen their independence
and align with international best practices.
**QUALIFICATIONS FOR A DIRECTOR
(1) Must own at least 1 share of stock.
By ownership, what is required is legal ownership
which is determined through the stocks and
transfer book reflecting one’s name as the owner
or holder thereof. Beneficial ownership is not
necessary.
(2) Must not possess any of the disqualifications (See Sec.
26.).
SEC. 22. QUALIFICATIONS OF THE BOD/BOT
Section 22. The Board of Directors or Trustees of a
Corporation; Qualification and Term. - Unless otherwise
provided in this Code, the board of directors or trustees shall
exercise the corporate powers, conduct all business, and control
all properties of the corporation.
Note: Majority of the directors must be residents of the
Philippines. Majority, not all. There is no citizenship requirement,
except for nationalized industries. Even foreigners can be voted
as directors.
Directors shall be elected for a term of one (1) year from among
the holders of stocks registered in the corporation's book while
trustees shall be elected for a term not exceeding three (3) years
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INDEPENDENT DIRECTOR
Who are independent directors?
A: They are persons believed to be of independent mind. No
relationship at all with the corporation except for some token
shareholdings.
The wisdom of their decision, whether bad or good, cannot be
reversed by the stockholders. Otherwise, it is useless to put
them there only to be reversed by the stockholders. However, it
does not mean that they can decide on certain business
judgments by disregarding all existing limitations.
**NOTES:
Instances when an Independent Director is required:
(1) Corporations vested with public interest such as
financial institutions or corporations that have access
to public funds, borrow from the public, or corporations
that issue or float bonds – they solicit capital from the
public
(2) Corporations covered under the Securities Regulation
Code, namely:
(b) Securities registered with the Commission
(c) Corporations listed with an exchange
(d) Corporations with assets of at least 50M
pesos, and having 200 or more holders of
shares, each holding at least 100 shares of a
class of its equity shares
GEN: Directors cannot be held liable for mistakes or errors in
the exercise of their business judgment as long as they acted in
good faith, with due care and prudence. Contracts entered into
by the BOD are binding upon the corporation and courts will not
interfere.
XPNs:
(1) If the contracts are so unconscionable and
oppressive as to amount to a wanton destruction
of the rights of the minority. (Ingersoll vs. Malabon
Sugar, G.R. No. L-27770, 1927)
(2) If they violate their duties under Sec. 30 (director
willfully and knowingly assents to patently unlawful
acts of the corporation, or are guilty of gross
negligence or bad faith); and
(3) If they violate Sec. 33 (disloyalty of a director who
acquires for himself a business opportunity that
should have belonged to the corporation, unless
his act is ratified by a 2/3 vote of the stockholders).
(3) Banks,
quasi-banks,
NSSLAs,
pawnshops,
corporations engaged in money service business,
preneed, trust and insurance companies, and other
financial intermediaries
Note: Independent Directors shall make up at least 20% of the
board such that when there are 10 members of the BOD, it
requires at least two independent directors.
CONSEQUENCES OF THE BUSINESS JUDGMENT RULE
1.
COMPLIANCE OFFICER
Rule: Other than the President, Treasurer, and Secretary, a
compliance officer is also appointed in corporations vested with
public interest.
2.
The resolution, contracts and transactions of the board
cannot be overturned or set aside by the stockholders or
members, and not even the courts under the principle that
the business of the corporation has been left to the hands
of the Board.
Directors and duly authorized officers cannot be held
personally liable for acts or contracts done with the exercise
of their business judgment.
ELECTION CONTESTS
XPNs:
-
Must follow the prescribed procedure in the by-laws,
including the period of instituting the same.
The matter should be referred to arbitration, if provided for
in the by-laws or the charter.
In the absence of such procedure and/or period in the bylaws, the election contest must be filed within 15 days from
the date of election.
POWERS OF THE BOARD
3-Fold Powers or Authority of the Board
(1)
Corporate powers
(2)
Conduct all business
(3)
Control or administer all properties of the corporation
Nature of the Powers of the Board: Generally, the powers of
the BOD cannot be delegated.
Exception: Ministerial functions
PRINCIPLE OF BUSINESS JUDGMENT RULE
Under this principle, the stockholders cannot review the
decisions of the Board. If they do not want the decision of the
Board, they cannot go to court and change the decision.
a.
b.
c.
When the Code expressly provides otherwise;
When the directors or officers acted with fraud,
gross negligence or bad faith;
When the directors or officers act against the
corporation in conflict of interest situations.
REMEDIES IN CASE OF MISMANAGEMENT
a.
b.
c.
d.
e.
Removal of directors pursuant to Sec. 27.
Derivative suit or complaint filed with the RTC.
Receivership.
Injunction if the act has not yet been done.
Dissolution if abuse amounts to a ground for quo
warranto but the SolGen refuses to act.
Note: Dean Villanueva opined that a derivative suit may be an
exception to such Rule: this occurs when it is apparent that the
Board is not in a position to validly exercise its business
judgment for the protection of the corporation, e.g.:
a. When the Board itself has committed an act
causing damage to the corporation, or
b. When the Board is placed in a conflict of interests
scenario whereby it is unlikely that it would use
such business discretion to file such suit for the
best interest of the corporation.
Atty: Espedido: The BOD can tell the stockholders that they
have no authority to question or change their decision.
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LIMITATIONS OF THE POWERS OF THE BOARD
It is subject to limitations imposed by:
(1)
Constitution
(2)
Laws
(3)
By-laws
(4)
Articles of Incorporation
NATURE OF THE BOARD OF DIRECTOR’S POWER
Their power is original – it comes from the law or the State. It is
the law which defines the Board’s powers. So long as the power
is exercised within the law, nobody can question this.
However, if the Board’s decision is illegal, the Business
Judgment Rule does not mean that they could do anything even
if it is illegal. Business judgment rule is confined to the decision
of the board purely on business, and within the boundaries of
the law, within the boundaries of the AOI.
SEC. 23. ELECTION OF DIRECTORS OR TRUSTEES
Section 23. Election of Directors or Trustees. - Except when
the exclusive right is reserved for holders of founders' shares
under Section 7 of this Code, each stockholder or member shall
have the right to nominate any director or trustee who possesses
all of the qualifications and none of the disqualifications and
none of the disqualifications set forth in this Code.
At all elections of directors or trustees, there must be present,
either in person or through a representative authorized to act by
written proxy, the owners of majority of the outstanding capital
stock, or if there be no capital stock, a majority of the members
entitled to vote. When so authorized in the bylaws or by a
majority of the board of directors, the stockholders or members
may also vote through remote communication or in absentia:
Provided, That the right to vote through such modes may be
exercised in corporations vested with public interest,
notwithstanding the absence of a provision in the bylaws of such
corporations.
A stockholder or member who participates through remote
communication or in absentia, shall be deemed present for
purposes of quorum.
The election must be by ballot if requested by any voting
stockholder or member.
In stock corporations, stockholders entitled to vote shall have
the right to vote the number of shares of stock standing in their
own names in the stock books of the corporation at the time fixed
in the bylaws or where the bylaws are silent at the time of the
election. The said stockholder may: (a) vote such number of
shares for as many persons as there are directors to be elected;
(b) cumulate said shares and give one (1) candidate as many
votes as the number of directors to be elected multiplied by the
number of shares owned; or (c) distribute them on the same
principle among as many candidates as may be seen fit:
Provided, That the total number of votes cast shall not exceed
the number of shares owned by the stockholders as shown in
the books of the corporation multiplied by the whole number of
directors to be elected: Provided, however, That no delinquent
stock shall be voted. Unless otherwise provided in the articles of
incorporation or in the bylaws, members of nonstock
corporations may cast as many votes as there are trustees to be
elected by may not cast more than one (1) vote for one (1)
candidate. Nominees for directors or trustees receiving the
highest number of votes shall be declared elected.
If no election is held, or the owners of majority of the outstanding
capital stock or majority of the members entitled to vote are not
present in person, by proxy, or through remote communication
or not voting in absentia at the meeting, such meeting may be
adjourned and the corporation shall proceed in accordance with
Section 25 of this Code.
The directors or trustees elected shall perform their duties as
prescribed by law, rules of good corporate governance, and
bylaws of the corporation.
HOW ELECTIONS ARE CONDUCTED
Normally, how do we replace officers?
A: Through an election.
Who calls the meeting?
A:
(1) It is called by the secretary
a. On the order of the President
b. By a written demand of the stockholders
representing at least a majority of the
outstanding capital stock, or a majority of
the members entitled to vote
(2) Called by any stockholder or member of the
corporation signing the demand by directly
addressing the stockholders or members – if there
is no secretary, or the secretary despite demand,
refuses or fails to call the meeting
**When are the elections held?
A: Elections must be held once every year. The Code does not
provide when the first election of directors or trustees shall be
held. It authorizes the corporation to provide in the by-laws the
time for the holding of the annual election of directors or
trustees.
Who can elect?
A: Majority of the stockholders
Rule: At all elections of directors or trustees, there must be
present, either in person or through a representative authorized
to act by written proxy, the owners of majority of the outstanding
capital stock, or if there be no capital stock, a majority of the
members entitled to vote. When so authorized in the bylaws or
by a majority of the board of directors, the stockholders or
members may also vote through remote communication or in
absentia. [Section 23, paragraph 2]
Shareholders or members must be present either:
(a) In person;
(b) Through a representative authorized to act by written
proxy;
(c) Remote communication or
(d) In absentia
What happens if only a few stockholders appear and there
is no quorum?
A: A meeting cannot be validly held because as we said a
quorum refers to the number of people required to validly hold a
meeting. To constitute a valid meeting, the majority of the
stockholders must be present.
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What happens if the stockholders present for the holding of
such election are/is less than the majority? What happens?
A: In this case, plurality vote sets in, which means that the
nominee receiving the highest number of votes shall be declared
elected, even if the majority requirement was not reached.
Atty. Espedido: Generally, a meeting cannot be validly held.
However, under the circumstances in our illustration, the law
provides that “notwithstanding any provision of the articles of
incorporation or bylaws to the contrary, the shares of stock or
membership represented at such meeting and entitled to vote
shall constitute a quorum for purposes of conducting an election
under this section. [Section 25 paragraph 4]
How do we proceed with the elections?
A:
(1) Presiding officer will call for nominations.
Everyone who has at least 1 share of stock is
entitled to be nominated.
(2) Presiding officer will determine if the nominees
have all of the qualifications and none of the
disqualifications
(3) Other nominees will be tabulated
QUORUM
Rule: In the meeting of the stockholders, at least majority of the
owners of the outstanding capital stock should be present.
Otherwise, we do not have a quorum.
What is a quorum?
A: It is the number of stockholders or members sufficient to
conduct a valid meeting.
In a meeting of the board of directors, the majority usually
constitutes a quorum, but the by-laws can provide for another.
Kinds of Quorum
(1) Simple majority
The traditional kind. 50% + 1
(2) Qualified majority
The number stated in the by-laws. It can be more
than a simple majority, but it can never be lower
than the simple majority
Any number higher than 50% + 1 as provided for
in the articles of incorporation (e.g. 2/3 or 3/4)
Note: Corporations can determine by themselves what
would constitute a quorum. There can be instances
when the quorum set by the corporation is less than the
majority. Do not confuse quorum for majority.
**NOTES:
1. In absence of the required majority, there will be failure
of election.
2. The law follows plurality voting, wherein the nominee
with the highest number of votes shall be elects as a
director.
3. The election is generally done through straight voting
4. Cumulative voting is generally not permitted in a nonstock corporation, where each member may not cast
more than 1 vote for 1 candidate.
PROXY
A proxy is a written document which contains the authority given
to someone to represent the stockholder and cast his vote
during the meeting.
IOW, these documents are what we might consider as
Management Control Devices which are tools that the
management uses to control the decisions.
Atty. Espedido: If you are part of management, and you want to
secure the issues you want to be approved in a meeting or the
persons you want to be elected in the election, you try to gather
as many proxies as you can, and cast the vote in behalf of the
stockholders. You will cast the vote yourself because you are
the duly authorized representative.
If you notice you have some PLDT subscriptions, you are a
stockholder of PLDT. And from time to time, you will receive
notices from the PLDT. If management or the board would want
to approve something during the meeting, they would advise you
to send proxies as well.
**NOTES:
Proxies shall be in writing, signed by the stockholder or
member and filed before the scheduled meeting with
the corporate secretary. Unless otherwise provided by
the proxy, it shall be valid only for the meeting for which
it was intended. No proxy shall be valid and effective
for a period longer than 5 years at any one time. (See
Sec. 57.)
VOTING TRUST AGREEMENT (See Sec. 58.)
A Voting Trust Agreement is a document similar to a proxy but
longer in application or existence. It contemplates a situation
wherein the group of stockholders agree among themselves that
in cases of issues to be presented for approval, they will bot as
one (block vote), and cast the vote as one.
How many directors do we elect?
A: It depends on the by-laws of the corporation.
**NOTES
Election of Directors
(1) Done at any meeting called for the election of BOD and
voted for by the stockholders. At all elections, owners
of the majority of the outstanding capital stocks must
be presented either:
a. In person;
b. Through a representative authorized to act by
written proxy (in absentia), e.g. proxy or trust;
c. If allowed by the by-laws or majority of the
BOD, through remote communication (e.g.
telephone conference or video conference)
Note: Such modes of attending the meeting and voting
may be utilized by corporations vested with public
interest although not provided in their by-laws.
(2) The election must be by ballot if requested by any
voting stockholder. Hence, voting by viva voces or roll
call (raising hands) is valid except when there is a
request that it be by ballot.
(3) Stockholders shall have the right to vote the number of
shares of stock standing in their own names (1 share =
1 vote) as long as the total number of votes cast shall
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not exceed the number of shares owned by the
stockholders as shown in the books of the corporation
multiplied by the whole number of directors to be
elected.
In this case, A B C D E will win in the elections, but
not F. This scenario illustrates the cumulative
voting.
What is the purpose of cumulative voting?
A: The intention of such mode of voting is to
protect the interest of the minority shareholder and
ensure that the minority has representation in the
Board of Directors.
Formula:
No. of votes = No. of shares x No. of vacant seats
Methods of voting:
a.
Straight voting
Vote such number of shares for as many persons
as there are directors to be elected.
Example. A owns 100 shares. If there are 5
directors to be elected, A is entitled to 500 votes
multiplying 100 by 5. He may give to the 5
candidates 100 votes each.
b.
Cumulative voting (for 1 candidate)
Cumulate said shares and give 1 candidate as
many votes as the number of directors to be
elected multiplied by the number of shares owned.
The privilege of cumulative voting is permitted for
the purpose of giving minority stockholders
representation in the BOD. Stockholders shall
have the right to vote the number of shares of
stock standing in their own names.
A director elected because of the vote of the
minority stockholders who untied in cumulative
voting cannot be removed without cause.
Illustration.
There are 6 nominees for the 5 slots as a director,
nominees A B C D E have 20 shares each.
However, B C D E agreed to gang up against A,
so the four (4) of them agreed to give F one share
each so that F will now be qualified to be
nominated since he will be holding four shares.
How much shares do they have now?
A:
A
20 shares
B
19 shares
C
19 shares
D
19 shares
E
19 shares
F
4 shares
Do you think they can ease out A?
A: No, they cannot ease A out because in this
case, A can cumulate all his shares to vote for
himself. Thus:
Shares
A
B
C
D
E
F
20
19
19
19
19
4
Votes
(Shares X No. of
Directors)
100 (20 x 5)
95 (19 x 5)
95 (19 x 5)
95 (19 x 5)
95 (19 x 5)
20 (4 x 5)
c.
Cumulative voting by distribution
Distribute them on the same principle as many
candidates as may be seen fit.
Note: Comparison with non-stock corporations:
Members may cast as many votes as there are
trustees to be elected, but may not cast more than
1 vote for 1 candidate, unless otherwise provided
in the AOI or in the by-laws. They cannot
cumulate.
Illustration.
B, C, D, E and F agreed among themselves that
they will be the directors with the exclusion of A.
Each will have 50 votes. In order for them to be
elected, they should use cumulative voting. They
cannot prevent A from being elected, if they don’t
want him to be a member of the board. Their plan
however will not work because the law says,
“protect the minority”. That’s the intention of the
law in cumulative voting.
(4) No delinquent stock shall be voted.
Delinquent stocks – declared by the Board as
delinquent because of their subscribers’ failure to pay
the balance after the same was due or after the Board
called for payment
(5) Nominees for directors or trustees receiving the
highest number of votes shall be declared elected.
(6) If no election is held, or the owners of the majority of
the OCS or majority of the members entitled to vote are
not present in person, by proxy or through remote
communication or not voting in absentia at the meeting,
such meeting may be adjourned, and the corporation
shall follow the procedures laid out in Sec. 25.
SEC. 24. CORPORATE OFFICERS
Section 24. Corporate Officers. - Immediately after their
election, the directors of a corporation must formally organize an
elect: (a) a president, who must be a director; (b) a treasurer,
who must be a resident of the Philippines; and (d) such other
officers as may be provided in the bylaws. If the corporation is
vested with public interest, the board shall also elect compliance
officer. The same person may hold two (2) or more positions
concurrently, except that no one shall act as president and
secretary or as president and treasurer at the same time, unless
otherwise allowed in this Code.
The officers shall manage the corporation and perform such
duties as may be provided in the bylaws and/or as resolved by
the board of directors.
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REQUIREMENTS TO BECOME PRESIDENT
President – must be a director, who is a holder of at least 1
share
Vice President – not required to be a holder of at least 1 share,
but by the time he succeeds as President, the VP is required to
have at least one share by then
**BASIC CORPORATE OFFICERS
(1) The president (must be a director)
(2) The treasurer (must be a resident of the Philippines)
(3) The corporate secretary (must be a citizen and resident of
the Philippines)
(4) In the case of public interest company, the compliance
officer
(5) Other officers as provided for in the by-laws
**RULE ON DUAL POSITIONS
GEN: Any director may hold 2 or more positions concurrently.
XPN:
(1) President & secretary
(3) President & treasurer
XPN2: (1) Unless otherwise allowed by the RCC
(2) In an OPC, the president can be a treasurer
Rationale: To ensure faithful performance to their functions.
CHAIRMAN
Not a statutory corporate officer
When his appointment is provided for in the by-laws, he
generally sets the meeting and its agenda, and is the default
officer to preside the same
He may be an independent director, provided he must not
hold an executive position and should not be involved in the
corporation’s day-to-day operations
He may be a non-Philippine national, even in corporations
requiring Filipino ownership, provided he limits his role to
that of a presiding officer during meetings
PRESIDENT
The president must be a director
Primary officer tasked to implement the decision of the
board
Regarded as the principal agent of the corporation
He shall manage the corporation and perform such duties
as may be provided in the by-laws and/or resolved by the
board of directors
He is primarily authorized to initiate meetings, and in the
absence of a Chairman, to preside them
He is the main signatory of the stock certificates, and in
exceptional cases, the financial statements
VICE PRESIDENT
The law does not require the board to elect a vice president
He/She ensures succession to the presidency
It is not provided by law that a vice-president should own at
least one share of stock. However, for him to succeed the
president, he must own 1 share of stock at the time of
ascending into the office of the president.
TREASURER
The treasurer must be a resident of the Philippines. The law
considers his immediate availability being the primary
custodian of the corporate funds, which is needed in the
running of corporate affairs and implementation of the
board decision.
Has control over the funds and/or other assets of the
corporation
Has authority to receive in the name and for the benefit of
the corporation, all subscriptions, contributions or donations
paid or given by the subscribers or members
Certifies the information set forth in 7th and 8th clauses of
the AOI, and that the paid-up portion of the subscription for
the benefit or credit of the corporation has been received
He is one of the main signatories of financial statements
CORPORATE SECRETARY
Tasked to maintain corporate records, including the stock
and transfer book
Upon order of the President, he sends notices and takes
minutes of meetings
Logically, he is the corporate officer with whom a dissenting
director must register his objection to a particular corporate
resolution, such as the issuance of a watered stock
Primary officer tasked to make reports to the SEC
Primary officer tasked to attest to corporate resolutions
He should thus ensure that none of the information or
statements in a report or certification required by the code
is: (1) incomplete, (2) inaccurate, (3) false or (4) misleading.
Otherwise, he may be liable for willfully certifying a report
Together with the President, he is authorized to use stock
certificates
Restrictions:
a. Should be a different person from the compliance
officer
b. Should not be a member of the BOD
COMPLIANCE OFFICER
Required only in corporations that are vested with public interest
Ensures that the members of the board and corporate
officers comply with law, the corporate charter and by-laws
Should not be a member of the board
OTHER CORPORATE OFFICERS
By-laws may sanction the appointment of other corporate
officers, who have special roles in running the affairs of the
corporation
Normally, they assist the president in managing the
corporation
They are agents of the corporation relative to their authority
stipulated in the by-laws
What is the significance of distinguishing between a
corporate and non-corporate officer?
A: Only corporate officers may bind the corporation, provided he
acts within the scope of his authority. He may be terminated at
will, whereas a non-corporate officer may only be terminated for
just or authorized causes.
Further, dispute over the separation from office of a corporate
officer is considered an intra-corporate dispute, which falls
under the jurisdiction of the regular courts.
Page 40 of 88 | EH403 2019-2020 Corporation Law
**TERM OF CORPORATE OFFICERS
(1) BOD – 1 year
(2) Officers – generally coterminous with the Board,
but the by-laws may provide that they have a
longer term.
Note: Unlike regular employees or subordinate officers who
enjoy security of tenure, purely corporate officers and/or
executive directors enjoy protection from their respective
contracts with the corporation
**VACANCIES IN THE POSITION OF THE OFFICERS
They are filled a vote of majority of the board of directors, and
the elected replacement officer has a term of only the unexpired
portion of his predecessor.
SEC. 25. REPORTORIAL REQUIREMENTS
Section 25. Report of Election of Directors, Trustees and
Officers, Non-holding of Election and Cessation from
Office. - Within thirty (30) days after the election of the directors,
trustees and officers of the corporation, the secretary, or any
other officer of the corporation, the secretary, or any other officer
of the corporation, shall submit to the Commission, the names,
nationalities, shareholdings, and residence addresses of the
directors, trustees and officers elected.
The non-holding of elections and the reasons therefor shall be
reported to the Commission within thirty (30) days from the date
of the scheduled election. The report shall specify a new date
for the election, which shall not be later than sixty (60) days from
the scheduled date.
If no new date has been designated, or if the rescheduled
election is likewise not held, the Commission may, upon the
application of a stockholder, member, director or trustee, and
after verification of the unjustifiable non-holding of the election,
summarily order that an election be held. The Commission shall
have the power to issue such orders as may be appropriate,
including other directing the issuance of a notice stating the time
and place of the election, designated presiding officer, and the
record date or dates for the determination of stockholders or
members entitled to vote.
Notwithstanding any provision of the articles of incorporation or
by laws to the contrary, the shares of stock or membership
represented at such meeting and entitled to vote shall constitute
a quorum for purposes of conducting an election under this
section.
Should a director, trustee or officer die, resign or in any manner
case to hold office, the secretary or the director, trustee or officer
of the corporation, shall, within seven (7) days form knowledge
thereof, report in writing such fact to the Commission.
(A) AFTER ELECTION
▪
After the election of the Members of the Board, the
corporate secretary shall submit a report to the SEC for the
results of the election within 30 days after the election of
directors, trustees, and officers of the corporation.
▪
The report shall specify the new date for the election, which
shall not be later than 60 days from the scheduled date.
(C) NO QUORUM ON SECOND DATE
▪
The Commission shall have the power to issue a summary
order that an election be held. The SEC shall have to power
such orders as may be appropriate, including orders
directing the issuance of a notice stating the time and place
of the election, designated presiding officer, and the record
date or dates for the determination of stockholders or
members entitled to vote.
Reason for SEC calling the election:
Atty. Espedido: There are new relationships created. While in
the Old Code, the objective of the SEC was more focused on
stockholders. In the New Code, it does not only focus on
stockholders but to stakeholders as well.
The stakeholders include creditors, customers, clients,
employees. These are now relationships that the corporation will
have to establish. It is no longer focused within the corporation.
The law now seems to protect all the stakeholders. They are
involved insofar as the existence of the corporation is
concerned, and the manner in which the corporation is being
managed and operated.
If there seems to be a problem, the SEC seems to assume.
Who calls the meeting?
A: The President orders the Secretary to send notices to the
stockholder.
However, if one of the agenda is the removal of the
president, is the corporation and stakeholders helpless?
A: No, not anymore. Under the Old Code, there was what is
called HOLDOVER CAPACITY. The old provision says, “until
the successor is elected and assumed office.”
In the New Code, however, it cannot be done. Now, how could
they be elected if there is no election? So now, the law now has
a compulsory intervention by the SEC.
HOLDOVER CAPACITY
Illustration 1.
In a situation where there is no President, the Vice President
succeeds. However, if the VP cannot succeed, a special
election will be called.
Illustration 2.
President refuses to call a meeting for his removal
A meeting is scheduled for the removal of the President.
However, the president himself will not call the meeting.
In such a case, the usual provision in any organization in case
an election of new officers cannot be held is that the old set of
officers will continue – there will be a hold-over. The hold-over
capacity is the abuse that the law wants to resolve.
In order to resolve such scenario, the New Code now provides
that the SEC will summarily order an election to be held.
(B) IF NO ELECTION
▪
The secretary shall still submit a report and reasons therefor
to the SEC within 30 days from the date of the scheduled
election.
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SEC. 26. DISQUALIFICATION OF DIRECTORS, TRUSTEES,
OR OFFICERS
Section 26. Disqualification of Directors, Trustees or
Officers. - A person shall be disqualified from being a director,
trustee or officer of any corporation if, within five (5) years prior
to the election or appointment as such, the person was:
(a) Convicted by final judgment:
(1) Of an offense punishable by imprisonment for a period
exceeding six (6) years;
(2) For violating this Code; and
(3) For violating Republic Act No. 8799, otherwise known as
"The Securities Regulation Code";
(b) Found administratively liable for any offense involving
fraudulent acts; and
(c) By a foreign court or equivalent foreign regulatory
authority for acts, violations or misconduct similar to those
enumerated in paragraphs (a) and (b) above.
The foregoing is without prejudice to qualifications or other
disqualifications, which the Commission, the primary regulatory
agency, or Philippine Competition Commission may impose in
its promotion of good corporate governance or as a sanction in
its administrative proceedings.
GROUNDS FOR DISQUALIFICATION
If within five (5) years PRIOR to the election or appointment as
such, the person was:
(3) Convicted by final judgment:
a. Of an offense punishable by imprisonment for a
period exceeding six (6) years;
b. For violating this Code; and
c. For violating Republic Act No. 8799, otherwise
known as "The Securities Regulation Code";
(4) Found administratively liable for any offense involving
fraudulent acts; and
(5) By a foreign court or equivalent foreign regulatory
authority for acts, violations or misconduct similar to
those enumerated in paragraphs (a) and (b) above.
Atty. Espedido: The SRC simply controls, manages, and
monitors the activities of the stock market. The stock market is
a market where only shares of stocks are being sold. If you want
to share your shares of stock, all you have to do is register with
the stock market. Before you could register, you would have to
undergo the process of registering as an IPO. Once you comply
with all the requisites, then you could already sell your shares to
the public.
SEC. 27. REMOVAL OF DIRECTORS/TRUSTEES
Section 27. Removal of Director or Trustees. - Any director
or trustee of a corporation may be removed from office by vote
of the stockholders holding or representing at least two-thirds
(2/3) of the outstanding capital stock, or in a nonstock
corporation, by a vote of at least two-thirds (2/3) of the member
entitled to vote: Provided, That such removal shall take place
either at a regular meeting of the corporation or at a special
meeting called for the purpose, and in either case, after previous
notice to stockholders or members of the corporation of the
intention to propose such removal at the meeting. A special
meeting of the stockholders or members for the purpose of
removing any director or trustee must be called by the secretary
on order of the president, or upon written demand of
stockholders representing or holding at least a majority of the
outstanding capital stock, or a majority of the members entitled
to vote. If there is no secretary, or the secretary, despite
demand, fails or refuses to call the special meeting or to give
notice thereof, the stockholder or member of the corporation
signing the demand may call the special meeting or to give
notice thereof, the stockholder or member of the corporation
signing the demand may call for the meeting by directly
addressing the stockholders or members. Notice of the time and
place of such meeting, as well as of the intention to propose
such removal, must be given by publication or by written notice
prescribed in this Code. Removal may be with or without cause:
Provided, That removal without cause may not be used to
deprive minority stockholders or members of the right
representation to which they may be entitled under Section 23
of this Code.
The Commission shall, motu propio or upon verified complaint,
and after due notice and hearing, order the removal of a director
or trustee elected despite the disqualification, or whose
disqualification arose or is discovered subsequent to an
election. The removal of a disqualified director shall be without
prejudice to other sanctions that the Commission may impose
on the board of directors or trustees who, with knowledge of the
disqualification, failed to remove such director or trustee.
SEC. 28. VACANCIES IN THE BOARD
Section 28. Vacancies in the Office of Director or Trustee;
Emergency Board. - Any vacancy occurring in the board of
directors or trustees other that by removal or expiration of term
may be filled by the vote of at least a majority of the remaining
directors or trustees, if still constituting a quorum; otherwise,
said vacancies must be filled by the stockholders or members in
a regular or special meeting called for that purpose.
When the vacancy is due to term expiration, the election shall
be held no later than the day of such expiration at a meeting
called for that purpose. When the vacancy arises as a result of
removal by the stockholders or members, the election may be
held on the same day of the meeting authorizing the removal
and this fact must be so stated in the agenda and notice of said
meeting. In all other cases, the election must be held no later
than forty-five (45) days from the time the vacancy arose. A
director or trustee elected to fill vacancy shall be referred to as
replacement director or trustee elected to fill a vacancy shall be
referred to as replacement director or trustee and shall serve
only for the unexpired term of the predecessor in office.
However, when the vacancy prevents the remaining directors
from constituting a quorum and emergency action is required to
prevent grave, substantial, and irreparable loss or damage to
the corporation, the vacancy may be temporarily filled from
among the officers of the corporation by unanimous vote of the
remaining directors or trustees. The action by the designated
director or trustee shall be limited to the emergency action
necessary, and the term shall cease within a reasonable time
form the termination of the emergency or upon election of the
replacement director or trustee, whichever comes earlier. The
corporation must notify the Commission within three (3) days
from the creation of the emergency board, stating therein the
reason for its creation.
Any directorship or trusteeship to be filled by a reason of an
increase in the number of directors or trustees shall be filled only
Page 42 of 88 | EH403 2019-2020 Corporation Law
by an election at a regular or at a special meeting of
stockholders or members duly called for the purpose, or in the
same meeting authorizing the increase of directors or trustees if
so stated in the notice of the meeting.
In all elections to fill vacancies under this section, the procedure
set forth in Section 23 and 25 of this Code shall apply.
Cause of Vacancies: DARI-DREI
(1)
Death
(2)
Abandonment
(3)
Resignation
(4)
Incapacity
(5)
Disqualification
(6)
Removal
(7)
Expiration of Term
(8)
Increase in the number of Directors/Trustees
RULES IN FILLING UP VACANCIES
(A) For Removal
Filled up by the stockholders or members in a regular or
special meeting called for that purpose
When – same day of the meeting authorizing the removal
(B) For Expiration of Term
Filled up by the stockholders or members in a regular or
special meeting called for that purpose
When – not later than the day of such expiration at a
meeting called for that purpose either through a special or
regular meeting
(C) For Increase in the Number of Directors or Trustees
Filled up by the stockholders or members in a
(a) regular or special meeting called for that purpose or in
the same meeting
(b) When – in the same meeting authorizing the increase
of directors or trustees if so stated in the notice of the
meeting
(D) For other causes (DARID; death, abandonment,
resignation, incapacity, disqualification)
Filled up by at least the majority of the remaining
directors or trustees if still constituting a quorum –
existing board will fill the vacancy
When – not later than 45 days from the time the
vacancy arose
➢
Term expiration
Removal
stockholders
members
by
or
Increase in
number
directors
trustees
the
of
or
All other reasons
Meeting should be called no later
than the day of expiration at a
meeting called for that purpose
➢ Meeting may be held on the same
day as the meeting authorizing the
removal, provided it must be stated
in the agenda and notice of the
meeting
(1) At a regular or at a special meeting
of stockholders/members duly
called for such purpose, or
(2) in the same meeting authorizing
the increase of directors or
trustees if so stated in the notice of
the meeting.
➢ Meeting must be held no later than
45 days from the time the vacancy
arose
EMERGENCY BOARD
Rule: When the vacancy prevents the remaining directors from
constituting a quorum and emergency action is required to
prevent grave, substantial, and irreparable loss or damage to
the corporation, the vacancy may be temporarily filled from
among the officers of the corporation by unanimous vote of the
remaining directors or trustees.
Illustration.
If there were 5 members of the board and we have removed
3, how do we fill this up?
A: Since there are only 2 members of the board left, the vacancy
may be temporarily filled from among the officers of the
corporation by unanimous vote of the remaining directors or
trustees.
The emergency board can now proceed to act on the
emergency. The action by the designated director or trustee
shall be limited to the emergency action necessary.
So if the emergency is to borrow 10M, the Emergency Board
has the power and authority to borrow 10M. After such, the term
shall cease within a reasonable time from the termination of the
emergency or upon election of the replacement director or
trustee, whichever comes earlier.
We still have a vacancy again. What do we do now?
A: We now go to the regular route – calling for a regular
stockholder’s meeting.
**REMOVAL
WHO MAY REMOVE
(1) Stock corporation
Vote of the stockholders holding or representing at
least 2/3 of the outstanding capital stock
(2) Non-stock corporation
Vote of at least 2/3 of the members entitled to vote
HOW REMOVAL IS DONE
By the stockholders through a regular or special meeting.
If in a special meeting, the special meeting shall be called
for the purpose of removing the director.
o It must be called by the secretary on order of the
president, or upon written demand of the
stockholders representing or holding at least a
majority of the outstanding capital stock, or a
majority of the members entitled to vote.
If there is no secretary, or if the secretary, despite demand,
fails or refuses to call the special meeting or to give notice
thereof, the stockholder or member of the corporation
signing the demand may call for the meeting by directly
addressing the stockholders or members.
Notice of the time and place of such meeting, as well as the
information to propose such removal, must be given by
publication or by written notice prescribed in this Code by
SEC
Upon verified complaint, and after due notice and hearing,
order the removal of a director or trustee elected despite the
disqualification, or whose disqualification arose or is
discovered subsequent to an election.
Page 43 of 88 | EH403 2019-2020 Corporation Law
Atty. Gaviola: If there is an emergency situation, in order to
prevent grave, substantial or irreparable loss or damage to the
corporation, the vacancy must be temporarily filled from the
officers of the corporation. Temporary only. After the
emergency, the Stockholders would have to fill in the vacancy,
because the Board does not form a quorum anymore.
Note that in emergency situations, the Board, even if they do not
constitute a quorum, may temporarily fill-in the vacancy from the
officers of the corporation.
Rationale: The reason why the law allows the directors to fill-in
the vacancies is for convenience because it’s very hard to call a
stockholder’s meeting, especially if you have a lot of
stockholders. It will be difficult to get quorum, and it’s also the
directors who manage the corporation. So, if the BOD cannot
act because they’re missing a member, then that is not good for
the corporation.
So, the law allows the directors to fill in a vacancy. But only in
certain instances. However, if the stockholders really insist on
holding a meeting to fill a vacancy, then that is their prerogative.
Because the power of the Board to fill in a vacancy is merely a
delegated power coming from the stockholders. It’s inherent in
the stockholders to fill in or elect members of the Board. (Valle
Verde Country Club, Inc. vs. Africa, G.R. No. 151969, 4
September 2009)
EXPIRATION
How should this be filled up?
A: Filled up by the majority of the stockholders representing 2/3
of the outstanding capital stock in a regular or special meeting
called for that purpose
When shall it be filled up?
A: Not later than the day of such expiration at a meeting called
for that purpose.
(3) Voted upon by the stockholders representing the
majority of the outstanding capital stocks
XPN to XPN: A vote of at least of the majority of the outstanding
capital stock or majority of the members entitled to vote grants
the directors compensation in a meeting specifically called for
that purpose.
If they are given compensation, is there a limit?
A: Yes. They should not receive more than 10% of the net
income before tax of the preceding year.
Why are they not paid?
A: Being shareholders, they also receive a share in the
dividends.
Herbosa: Appointment to the board is a consequence of
corporate ownership. An owner or member is ordinarily
expected to assume the post of director or trustee, and manage
the corporation for his ultimate benefit. Thus, the law does not
generally authorize the payment of compensation to a
shareholder/member as a director or trustee.
Illustration.
Director A owns 75% of the shares. It is not mentioned in the
bylaws that the directors shall receive compensation. Thus, the
other directors move that they be given compensation per
month. All of the stockholders (including A) agreed that they
shall be compensated for 30K per month.
Is it valid?
A: It is an invalid approval because the director cannot vote on
the same meeting. As provided by law, the directors cannot
participate in the determination of their own per diems or
compensation.
Absurdity of the provision (as observed by Atty. Espedido):
SEC. 29 COMPENSATION OF DIRECTORS OR TRUSTEES
Section 29. Compensation of Directors or Trustees. - In the
absence of any provision in the bylaws fixing their
compensation, the directors or trustees shall not receive any
compensation in their capacity as such, except for reasonable
per diems: Provided, however, That the stockholders
representing at least a majority of the outstanding capital stock
or majority of the members may grant directors or trustees with
compensation and approve the amount thereof at a regular or
special meeting.
In no case shall the total yearly compensation of directors
exceed ten percent (10%) of the net income before income tax
of the corporation during the preceding year.
Directors or trustees shall not participate in the determination of
their own per diems or compensation.
Corporations vested with public interest shall submit to their
shareholders and the Commission, an annual report of the total
compensation of each of their directors or trustees.
GEN: The directors or trustees shall not receive any
compensation in their capacity as such.
XPN:
(1) Reasonable per diems
(2) As stipulated in their
compensation
by-laws
fixing
their
(a) If the remaining directors vote (excluding Director A
who owns 75%) – the remaining directors cannot approve
because the law requires a vote of at least a majority of the
outstanding capital stock
(b) If Director A participates – it cannot be approved because
the law also prohibits his participation
Atty. Espedido: This provision is probably intended for publicly
listed corporations where rarely someone owns a share that is
50% or more. That might be the intention there.
SEC. 30. LIABILITY OF DIRECTORS, TRUSTEES OR
OFFICERS
Section 30. Liability of Directors, Trustees or Officers. Directors or trustees who willfully and knowingly vote for or
assent to patently unlawful acts of the corporation or who are
guilty of gross negligence or bad faith in directing the affairs of
the corporation or acquire any personal or pecuniary interest in
conflict with their duty as such directors or trustees shall be liable
jointly and severally for all damages resulting therefrom suffered
by the corporation, its stockholders or members and other
persons.
A director, trustee or officer shall not attempt to acquire, or any
interest adverse to the corporation in respect of any matter
which has been reposed in them in confidence, and upon which,
equity imposes a disability upon themselves to deal in their own
Page 44 of 88 | EH403 2019-2020 Corporation Law
behalf; otherwise, the said director, trustee or officer shall be
liable as a trustee for the corporation and must account for the
profits which otherwise would have accrued to the corporation.
LIABILITY OF DIRECTORS
The directors/trustees are liable to the corporation for the
commission of the following:
(1) Knowingly and willfully vote or assent to patently unlawful
acts
(2) Guilty of gross negligence or bad faith
(3) Acquire any personal or pecuniary interest in conflict of duty
in conducting the affairs of the corporation
What is important is that after weighing the pros and cons, the
benefit of the corporation outweighs the negative, as a BOD, opt
for what is more beneficial to the corporation, in this case the
patently unlawful act. In short, the Business Judgment Rule
prevails.
Business Judgment Rule vs. Gross Negligence
SUMMARY: Based on the BJR, the acts of the BOD bind the
corporation. As such, it cannot be questioned or reviewed by the
stockholders or the courts.
Insofar as the BOD exercises their powers under the BJR, the
contract is valid but due to gross negligence they can be held
liable.
NATURE OF LIABILITY
As such, directors or trustees shall be liable solidarily for all
damages suffered by the corporation, the stockholders, or
members and other persons.
In the case of acquiring conflict of interest – the director, trustee
or officer shall be liable as a trustee for the corporation and must
account for the profits which otherwise would have accrued to
the corporation.
Illustration 1.
Corporation’s property was sold for 5Mn while an adjacent
property was sold for 15Mn
Following the BJR, when the Board enters into transactions with
the third parties, the sale is perfectly valid. However, because of
their negligence, then the BOD can be held liable for damages
the corporation suffered.
Personal and Pecuniary Interest
SUMMARY: A certain type of trust is expected of a director of a
corporation similar to that of the degree of trust among partners
in a partnership. A director needs to fully disclose whatever
benefits he may have received by virtue of his position as a
director in the corporation and he will have to remit such benefits
to the corporation.
The Board in a meeting decided to sell one of the corporation’s
properties for 5M. All of the Board except one approved the sale.
While there is no fiduciary trust among stockholders, there lies
a certain degree of trust to be had among the board and the
corporation.
The following day, a property owned by somebody else which is
adjacent to the property recently sold by the Corporation was
able to sell it for 15M.
SEC. 31. DEALINGS OF DIRECTORS, TRUSTEES OR
OFFICERS
The director who did not approve the earlier sale now
questioned the sale approved by the Board. The Board argued
that the said sale was fair and reasonable.
That director was mad because he was the lone dissenter and
now he wants to vindicate himself.
What could happen? If you were the one who approved,
how would you answer the dissenting stockholder?
A: Generally, the stockholders cannot question the decision of
the board because of the principle of the Best Judgment Rule.
In this case, the Board may invoke the Best Judgment Rule and
argue that said sale was fair and reasonable. Provided that there
is no defect in the contract of sale, it is perfectly valid.
Section 31. Dealings of Directors, Trustees or Officers with
the Corporation. - A contract of the corporation with one (1) or
more of its directors, trustees, officers or their spouses and
relatives within the fourth civil degree of consanguinity or affinity
is voidable, at the option of such corporation, unless all the
following conditions are present:
(a) The presence of such director or trustee in the board meeting
in which the contract was approved was not necessary to
constitute a quorum for such meeting;
(b) The vote of such director or trustee was not necessary for
the approval of the contract;
(c) The contract is fair and reasonable under the circumstances;
HOWEVER, in situations wherein the corporation suffers great
loss due to their gross negligence, we can say that although the
sale is valid, the BOD may still be held liable provided that they
were grossly negligent.
In our illustration, what is their liability?
A: They are solidarily liable for all damages suffered by the
corporation and must account for the 10M difference of the price
– they have to pay for whatever losses the Corporation may
have realized because of the transaction.
Business Judgment Rule vs. Patently Unlawful Acts
SUMMARY: Directors who assented to the patently unlawful act
cannot be liable if such act is drawn from a justifiable reason
such as the business judgment rule.
(d) In case of corporations vested with public interest, material
contracts are approved by at least a majority of the independent
directors voting to approved the material contract; and
(e) In case of an officer, the contract has been previously
authorized by the board of directors.
Where any of the first three (3) conditions set forth in the
preceding paragraph is absent, in the case of a contract with a
director or trustee, such contract may be ratified by the vote of
the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or of at least two-thirds (2/3) of the
members in a meeting called for the purpose: Provided, That full
disclosure of the adverse interest of the directors or trustees
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involved is made at such meeting and the contract is fair and
reasonable under the circumstances.
Summary: In the case of self-dealing directors, it is not
considered wrong in itself. However, if any of the conditions
under the law is lacking, the contract entered into can be voided
at the option of the corporation.
GEN: A contract of the Corporation with 1 or more of its
directors, trustees, officers, or their spouses and relatives within
the 4th civil degree of consanguinity or affinity is VOIDABLE, at
the option of the corporation
XPN: The contract is held valid provided that the following
conditions are present:
(1) Presence of the director or trustee in the BOD
meeting in which contract is approved was not
necessary to constitute a quorum for such
meeting;
(2) Vote of such director or trustee was not necessary
for the approval of the contract
(3) The contract is fair and reasonable under the
circumstances
(4) In case of corporations vested with public interest,
material contracts are approved by at least twothirds (2/3) of the entire membership of the board,
with at least a majority of the independent
directors voting to approve the material contract;
and
(5) In case of an officer, the contract has been
previously authorized by the board of directors.
Note: Only conditions 1-3 were mentioned during the recits
RATIFICATION BY A VOTE OF 2/3
Although the contract is VOIDABLE, the contract may be ratified
by the vote of the stockholders representing at least 2/3 of the
outstanding capital stock. Provided, that full disclosure of the
director or trustee’s adverse interest is made at such meeting
and the contract is fair and reasonable.
In the absence of the conditions, what could happen to the
contract of lechon. Do you think you can be paid?
A: Yes, provided that it is ratified by a vote of 2/3 of stockholders
representing the outstanding capital stock (OCS)
Illustration 2.
Quorum attained even without the presence of the SelfDealing Director
Let us assume that all of the 5 Directors are present to approve
the contract.
Do you think there is a problem?
A: There is no problem. Even if the self-dealing director is
present, his presence will not be necessary to constitute a
quorum.
Illustration 3.
Quorum cannot be attained without the presence of the
Self-Dealing Director
Only 3 of the Directors appeared, including the self-dealing
director. Do we have a problem?
A: Yes. Because without the presence of the self-dealing
director, there would be no quorum and the votes to be cast in
approving the contract cannot take place. In this case, the vote
of the self-dealing director is necessary to approve the contract.
The contract may be voided at the option of the corporation.
HOWEVER, although it is voidable, it can be ratified by a vote
of 2/3 of the stockholders representing the outstanding capital
stock.
If you were the holder of 75% of the shares, do we have a
problem?
A: No problem, provided that it is fair and reasonable.
Nevertheless if it is not fair and reasonable, how can it be
cured?
A: It can be cured through ratification by a vote of 2/3 of the
stockholders representing the outstanding capital stock.
SEC. 32 INTERLOCKING DIRECTORS
Illustration 1.
Self-Dealing Director owns a business of selling lechon
and contracts with the corporation
You are Director of a corporation and the corporation planned to
hold a big party. At the same time, you have your own business
of selling lechon.
Can you deal with your corporation?
A: Yes.
Is there a problem?
A: There is no problem for as long as the conditions for a
contract with a self-dealing director are complied with, namely:
(1) That the presence of the director is not necessary to
constitute a quorum for such meeting,
(2) The vote of the director is not necessary to approve the
contract
(3) Contract is fair and reasonable
Otherwise, absence of any of the conditions, the contract may
be deemed VOIDABLE, at the option of the corporation.
Section 32. Contracts Between Corporations with
Interlocking Directors. - Except in cases of fraud, and provided
the contract is fair and reasonable under the circumstances a
contract between two (2) or more corporations having
interlocking directors shall not be invalidated on that ground
alone: Provided, That if the interest of the interlocking director in
one (1) corporation is substantial and the interest in the other
corporation or corporations is merely nominal, the contract shall
be subject to the provisions of the preceding section insofar as
the latter corporation or corporations are concerned.
Stockholding exceeding twenty percent (20%) of the
outstanding capital stock shall be considered substantial for
purposes of interlocking directors.
INTERLOCKING DIRECTOR
Interlocking director refers to a director of two corporations
having a transaction with each other
GEN: A contract between two (2) or more corporations having
interlocking directors shall not be invalidated on that ground
alone.
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XPN:
(1) Cases of fraud; and
(2) Contract is not fair and reasonable
Note: In the case of an interlocking director who has a
substantial interest in one corporation and a nominal interest in
another corporation, the provisions of the Self-Dealing Directors
shall apply. The following requisites must be present, namely:
(1) Presence of the director is not necessary to constitute
a quorum
(2) Vote is not necessary to approve the contract
(3) Contract is fair and reasonable
Illustration 3
The Interlocking Director argues that the remedy is
discriminatory on his part
The director argues that this is discriminatory on his part and he
will be deprived of his right to exercise his right to vote and be
voted upon.
How do you think would the SC will resolve that?
A: SC will rule in favor of the stakeholders because it will be a
disaster if we allow this type of directorship to continue.
Atty. Espedido: IOW, the interlocking directorship is perfectly
valid UNLESS it involves a substantial interest in one
corporation and a nominal interest in the other, in which case,
the requirements under the Self-Dealing Director should be
complied with in order for it to be considered valid. Otherwise,
the status of the contract is deemed VOIDABLE.
Atty. Espedido: To allow him – there will be a conflict of interest.
If we were to tolerate these things, the other corporation will be
destroyed. And if the other corporation is destroyed, it will be the
bigger corporation that will alone survive. So there is no more
competition and so it gets all the market. That will be a disaster!
So the Court shall allow the amendment of the By-Laws for the
protection and preservation of the other corporation.
Competition must be promoted.
Note: Stockholdings exceeding twenty percent (20%) of the
outstanding capital stock shall be considered substantial for
purposes of interlocking directors.
SEC. 33. DISLOYALTY OF A DIRECTOR
Is there something wrong of being an interlocking director?
A: Generally, nothing is wrong.
DISADVANTAGE OF HAVING AN INTERLOCKING
DIRECTOR
Atty. Espedido: However, even if it is valid, the law recognizes
the disadvantages of an interlocking directorship – it is prone to
DANGER.
Illustration 1.
Getting the list of the Top 20 Customers
In a case where the director owns 90% of a beer company and
10% in another company – there is NOTHING WRONG but the
law recognizes some evils.
For example, while in the meeting, the Director starts
questioning why the sales were going down. He asked the Sales
Manager about it and asked for the list of the Top 20 Customers
of the Corporation. He took photos of the list and later went to
these big customers and convinced them to buy instead in the
other corporation. THUS, although it may be said that there is
nothing wrong, there is DANGER. This is the evil contemplated
by the law.
Section 33. Disloyalty of a Director. - Where a director, by
virtue of such office, acquires a business opportunity which
should belong to the corporation, thereby obtaining profits to the
prejudice of such corporation, the director must account for and
refund to the latter all such profits, unless the act has been
ratified by a vote of the stockholders owning or representing at
least two-thirds (2/3) of the outstanding capital stock. This
provision shall be applicable, notwithstanding the fact that the
director risked one's own funds in the venture.
DISLOYAL DIRECTOR
GEN: A director, by virtue of such office, ACQUIRES A
BUSINESS OPPORTUNITY belonging to the corporation, (that
should have benefitted the corporation itself), thereby obtaining
profits to the prejudice of the corporation, must ACCOUNT FOR
AND REFUND the corporation for ALL PROFITS.
XPN: Ratification by the stockholders owning at least 2/3 of the
outstanding capital stock .
DISTINCTION
Illustration 2.
Merger of two Corporations – No more competition
Currently, the biggest telephone companies right now are PLDT
and Globe. If one is a Director in both corporations, he could just
propose that the companies should merge and become one.
Thus, only one corporation will remain which could result in a
monopoly and there will be no more competition in the business.
They could either eliminate the competition or come out with a
disastrous competition.
In that illustration, how do you think will they prevent?
A: A remedy is to amend the bylaws and have a stipulation that
if there is a director with substantial interest in a company similar
to their business, he should be disqualified. IOW, that person
who owns the 90% will be disqualified.
Grounds
Liability
Liabilities
(1) Willfully
and
knowingly assent
or vote to patently
unlawful acts
(2) Gross negligence
or bad faith in
directing
the
affairs of the
corporation; or
(3) Acquiring
any
personal
or
pecuniary interest
in conflict with
their duty as a
director or trustee
Liable as a trustee and
must account for the
profits
which
otherwise would have
accrued
to
the
corporation
Disloyalty
By virtue of his office,
ACQUISITION OF A
BUSINESS
OPPORTUNITY
belonging to the
corporation
and
OBTAINING
PROFITS to the
prejudice of the
corporation
ACCOUNT for and
REFUND to the
corporation
ALL
PROFITS
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Damages
Solidarily liable
Liable
for
ALL
damages
resulting
therefrom
prerogatives in managing the corporation’s business
affairs.
ACTUAL DAMAGES
suffered (unrealized
profit)
TITLE IV. POWERS OF THE CORPORATION
SEC. 35. CORPORATE POWERS AND CAPACITY
SEC. 34. EXECUTIVE COMMITTEE
Section 34. Executive Management, and Other Special
Committees. - If the bylaws so provide, the board may create
an executive committee composed of at least three (3) directors.
Said committee may act, by majority of vote of all its members,
on such specific matters within the competence of the board, as
may be delegated to it in the bylaws or by majority vote of the
board, except with respect to the: (a) approval of any action for
which shareholders' approval is also required; (b) filing of
vacancies in the board; (c) amendment or repeal of bylaws or
the adoption of new bylaws; (d) amendment or term is not
amendable or repealable; and (e) distribution of cash dividends
to the shareholders.
The board of directors may create special committees of
temporary or permanent nature and determine the members'
term, composition, compensation, powers, and responsibilities.
EXECUTIVE COMMITTEE
A smaller committee given delegated powers by the board. It is
composed of not less than three (3) members, who are to be
appointed by the board.
T/N: The board can delegate, except matters which are
discretionary. However, the intention of creating the committee
is for purposes of expediency so that the board doesn’t have to
meet at all times to ake a decision, because it can be difficult to
convent the board sometimes.
Matters which cannot be delegated to the Executive
Committee (SVB – EC)
(1) Approval of any action for which shareholders’
approval is also required;
(2) Filling of vacancies within the board;
(3) Amendment or repeal of bylaws, or adoption of new
bylaws;
(4) The amendment or repeal of any resolution of the
board which by its express terms is not so amendable
or repealable;
(5) A distribution of cash dividends to the shareholders.
**NOTES
Executive Committee
Committee which exercises powers within the
competence of the Board that requires authority under
the by-laws. The Board cannot just create their own
executive committee if such committee will be
exercising the powers of the Board.
Special Committee
Can be created by the Board even without the authority
under the by-laws.
Any
other
committee
exercising
a
mere
recommendatory power whose actions require
ratification and confirmation by the board. It cannot
approve resolutions on its own. The reason here is that
the Board is the corporation’s governing body, clearly
upholding the power to exercise the corporation’s
Section 35. Corporate Powers and Capacity. - Every
corporation incorporated under this Code has the power and
capacity:
(a) To sue and be sued in its corporate name;
(b) To have perpetual existence unless the certificate of
incorporation provides otherwise;
(c) To adopt and use a corporate seal;
(d) To amend its articles of incorporation in accordance with the
provisions of this Code;
(e) To adopt bylaws, not contrary to law, morals or public policy,
and to amend or repeal the same in accordance with this Code;
(f) In case of stock corporations, to issue or sell stocks to
subscribers and to sell treasury stocks in accordance with the
provisions of this Code; and to admit members to the corporation
if it be a nonstock corporation;
(g) To purchase, receive, take or grant, hold, convey, sell, lease,
pledge, mortgage, and otherwise deal with such real and
personal property, including securities and bonds of other
corporations, as the transaction of the lawful business of the
corporation may reasonably and necessarily require, subject to
the limitations prescribed by law and the constitution;
(h) To enter into a partnership, joint venture, merger,
consolidation, or any other commercial agreement with natural
and juridical persons;
(i) To make reasonable donations, including those for the public
welfare or for hospital, charitable, cultural, scientific, civic, or
similar purposes: Provided, That no foreign corporation shall
give donations in aid of any political party or candidate or for
purpose s of partisan political activity;
(j) To establish pension, retirement, and other plans for the
benefit of its directors, trustees, officers, and employees; and
(k) To exercise such other powers as may be essential or
necessary to carry out its purpose or purposes as stated in the
articles of incorporation.
SPECIFIC POWERS OF A CORPORATION
(1) To sue and be sued in its corporate name
(2) To have perpetual existence unless the certificate of
incorporation provides otherwise
(3) Adopt and use a corporeal seal
(4) Amend its Articles of Incorporation
(5) Adopt, amend, or repeal bylaws
(6) Stock corporations – issue or sell stocks to subscribers
and sell treasury stocks
a. Nonstock corporation – admit members to the
corporation
(7) Deal with real and personal property, including
securities and bonds of other corporations
Page 48 of 88 | EH403 2019-2020 Corporation Law
(8) Enter into commercial agreeements with natural and
juridical persons
(9) Make reasonable donations
(10) Establish pension, retirement, and other plans for the
benefit of its directors, trustees, officers, and
employees
(11) Other powers essential or necessary to carry out its
purpose
Illustration.
Stockholders winning the lotto and engaging in the buy
and sell of second-hand cars
There are 5 stockholders of XYZ Corporation. After receiving
their dividend, they decided to use their dividend and use it to
buy lotto – thereafter, they won.
When they won the lotto, they put up a business of their own.
They will deal in the buying and selling of second hand cars. In
one instance, the second hand car that they sold did not function
well. The buyer sued XYZ Corporation.
What would happen? Will the case prosper?
A: No, XYZ Corporation has a separate personality of its own,
so it cannot be sued by the acts of the stockholders doing
personal acts.
Although they are stockholders, the money they used were not
the funds of the corporation. Moreover, the business that the
stockholders were engaged in was not the business of the
corporation.
**NOTES
KINDS OF POWERS OF THE CORPORATION
(1) Express powers
Those expressly stipulated in the AOI and in the
by-laws
**This refers to the power expressly conferred
upon the corporation by law. These powers can be
ascertained from the special law creating the
corporation, or from the general incorporation law
under which it was created, the general laws of the
land applicable to the corporation (i.e. the Revised
Corporation Code), and its AOI.
Atty. Gaviola: Ordinarily, the express powers are provided
in the primary purpose clause of the AOI. In the primary
purpose clause of the AOI, the powers contained in Sec. 35
are not actually enumerated there. If you think about it, the
powers under Sec. 35 are incidental powers – they exist by
virtue of the juridical personality of the corporation.
To be strict about it, express powers will only exist if they
are expressly provided in the primary purpose in the AOI.
(2) Implied powers
Powers that are necessary to carry out the
express powers
**Those powers which are reasonably necessary
to exercise the express powers and to
accomplish/carry out the purposes for which the
corporation was formed.
Atty. Gaviola: The implied power of the corporation is one
which is related or exist by virtue of the express power of
the corporation, even if they are not expressly provided.
They need not be expressly laid out in the AOI, but exist by
virtue of the express powers.
Examples:
a. Acts in the usual course of business
b. Acts to protect debts owing to a corporation
c. Embarking on a different business
d. Acts in part or wholly to protect or aid employees
e. Acts to increase business
(3) Incidental/Inherent powers
Powers that are necessary to the existence and
operation of the corporation;
**Powers which a corporation can exercise by the mere
fact of it being a corporation; or
This refers to powers which are necessary to the
corporate existence and are, therefore, impliedly
granted. Being powers inherent in the corporation as a
legal entity, these powers exist independently of the
express powers.
Atty. Gaviola: These are the powers which are there by
virtue of your being a corporation, so your ability to sue and
be sued, to buy and sell properties, everything that is
enumerated under Sec. 35 basically. Regardless of the
[primary] purpose [of the corporation], incidental powers
exist.
There was a problem before on the secondary purpose
[clause of the AOI] because people just enumerated the
secondary purpose[s], and among the secondary [purposes
they listed was subparagraph (g), which is] to sell or lease
property. A few years back, BIR came up with a rule which
they strictly enforced, which is that if a property was
classified as an ordinary asset, then VAT and income tax
will be imposed on it, but if it was classified as capital asset,
then it will be meted with capital gains tax.
Ordinarily, you can say that a certain item or property is an
ordinary asset of the corporation if it is related to the
corporation’s primary purpose. Thus, real estate is
considered an ordinary asset if the corporation owning it is
engaged in the real estate business. [On the other hand], if
the corporation is engaged in retail, then a parcel of land it
owns will be considered a capital asset unless it is used for
business.
The problem with the BIR is that, if they see “to purchase,
receive, take or grant real and personal property” [under a
corporation’s secondary purposes, then they will consider
the corporation to be a real estate company].
Thus, there is a disconnect between the SEC and BIR.
Corporations who copied the incidental powers in their
secondary purposes clause [will be assessed with VAT plus
the 30% income tax as against the 6% capital gains tax
whenever it sells land, even though it is actually not a real
estate company].
POWER TO SUE AND BE SUED IN ITS CORPORATE NAME
As a juridical entity, the corporation can directly pursue all
actions to enforce its rights. It does not have to go through its
stockholders in order to bring a suit. At the same time, a
corporation can directly be held liable for its obligations. The
creditor does not have to go through the stockholders.
Page 49 of 88 | EH403 2019-2020 Corporation Law
SEC. 36. POWER TO EXTEND OR SHORTEN CORPORATE
TERM
Section 36. Power to Extend or Shorten Corporate Term. —
A private corporation may extend or shorten its term as stated
in the articles of incorporation when approved by a majority vote
of the board of directors or trustees, and ratified at a meeting by
the stockholders or members representing at least two-thirds
(2/3) of the outstanding capital stock or of its members. Written
notice of the proposed action and the time and place of the
meeting shall be sent to stockholders or members at their
respective place of residence as shown in the books of the
corporation, and must be deposited to the addressee in the post
office with postage prepaid, served personally, or when allowed
in the bylaws or done with the consent of the stockholder, sent
electronically in accordance with the rules and regulations of the
Commission on the use of electronic data messages. In case of
extension of corporate term, a dissenting stockholder may
exercise the right of appraisal under the conditions provided in
this Code.
POWER TO EXTEND OR SHORTEN CORPORATE LIFE
How do we extend or shorten the corporate life?
A: The law now presupposes that their term will be perpetual.
However, there is still use of this provision because the
corporation has the option to avail of corporate existence or not.
It may choose to shorten the term.
Rules:
1. If issued prior to the effectivity of the New Code –
deemed perpetual UNLESS elects to retain original
corporate term
2. If issued under the New Code – perpetual existence
UNLESS otherwise specified in the Articles of
Incorporation
RIGHT TO SUCCESSION
Do we still have the right to succession? Is there a need to
have right of succession?
A: Yes. Because there is a difference between succession and
perpetual existence.
SEC. 37 POWER TO INCREASE OR DECREASE CAPITAL
STOCK
Section 37. Power to Increase or Decrease Capital Stock;
Incur, Create or Increase Bonded Indebtedness. — No
corporation shall increase or decrease its capital stock or incur,
create or increase any bonded indebtedness unless approved
by a majority vote of the board of directors and by two-thirds
(2/3) of the outstanding capital stock at a stockholders' meeting
duly called for the purpose. Written notice of the time and place
of the stockholders' meeting and the purpose for said meeting
must be sent to the stockholders at their places of residence as
shown in the books of the corporation and served on the
stockholders personally, or through electronic means
recognized in the corporation's bylaws and/or the Commission's
rules as a valid mode for service of notices.
(b) The amount of the increase or decrease of the capital stock;
(c) In case of an increase of the capital stock, the amount of
capital stock or number of shares of no-par stock thereof actually
subscribed, the names, nationalities and addresses of the
persons subscribing, the amount of capital stock or number of
no-par stock subscribed by each, and the amount paid by each
on the subscription in cash or property, or the amount of capital
stock or number of shares of no-par stock allotted to each
stockholder if such increase is for the purpose of making
effective stock dividend therefor authorized;
(d) Any bonded indebtedness to be incurred, created or
increased;
(e) The amount of stock represented at the meeting; and
(f) The vote authorizing the increase or decrease of the capital
stock, or the incurring, creating or increasing of any bonded
indebtedness.
Any increase or decrease in the capital stock or the incurring,
creating or increasing of any bonded indebtedness shall require
prior approval of the Commission, and where appropriate, of the
Philippine Competition Commission. The application with the
Commission shall be made within six (6) months from the date
of approval of the board of directors and stockholders, which
period may be extended for justifiable reasons.
Copies of the certificate shall be kept on file in the office of the
corporation and led with the Commission and attached to the
original articles of incorporation. After approval by the
Commission and the issuance by the Commission of its
certificate of filing, the capital stock shall be deemed increased
or decreased and the incurring, creating or increasing of any
bonded indebtedness authorized, as the certificate of filing may
declare: Provided, That the Commission shall not accept for
filing any certificate of increase of capital stock unless
accompanied by a sworn statement of the treasurer of the
corporation lawfully holding office at the time of the filing of the
certificate, showing that at least twenty-five percent (25%) of the
increase in capital stock has been subscribed and that at least
twenty-five percent (25%) of the amount subscribed has been
paid in actual cash to the corporation or that property, the
valuation of which is equal to twenty-five percent (25%) of the
subscription, has been transferred to the corporation: Provided,
further, That no decrease in capital stock shall be approved by
the Commission if its effect shall prejudice the rights of corporate
creditors.
Nonstock corporations may incur, create or increase bonded
indebtedness when approved by a majority of the board of
trustees and of at least two-thirds (2/3) of the members in a
meeting duly called for the purpose.
Bonds issued by a corporation shall be registered with the
Commission, which shall have the authority to determine the
sufficiency of the terms thereof.
REQUISITES FOR AN INCREASE OR DECREASE OF
CAPITAL STOCK:
A certificate must be signed by a majority of the directors of the
corporation and countersigned by the chairperson and secretary
of the stockholders' meeting, setting forth:
1.
2.
(a) That the requirements of this section have been complied
with;
3.
4.
Done in a stockholder’s meeting duly called for the purpose
There must be a written notice of the proposed increase or
diminution of the capital stock
Majority vote of the board of directors.
2/3 vote of the stockholders representing the outstanding
capital stock
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5.
6.
7.
8.
A certificate signed by a majority of the directors and
countersigned by the chairman and the secretary of the
stockholders’ meeting
Accompanied by the sworn statement of the treasurer
showing that at least 25% of such increased capital stock
has been subscribed and that at least 25% of the amount
subscribed has been paid
Submitted to and approved by the SEC.
Approval by the Philippine Competition Commission
XPN: Stockholders are denied their pre-emptive right in the
following instances:
(1)
When it is expressly prohibited under the Articles
of Incorporation
(2)
Shares issued in compliance with the laws
requiring stock offerings or minimum ownership by
the public
a. When the corporation decides to go
public, the SEC requires the corporation
to earmark some shares for the
employees (salary deduction, easy
instalment payment)
b. Under existing laws – earmark existing
shares to the public
LIMITATION IN THE DECREASE OF CAPITAL STOCK
Up to what extent do you think can you increase or
decrease capital stock?
A:
(a) For the increase – no problem, as long as they follow
the subscribed capital stock, and the paid-up capital
stock
(b) For the decrease – to the extent that it will not prejudice
creditors
What could be the problem if we decrease the capital stock?
A: Subscribed capital stock is already part of capital. Thus, if we
decrease the capital, we are trying to return some part of the
capital – thus in effect, violating the Trust Fund Doctrine. It will
prejudice the rights of the corporate creditors.
**NOTES
INCREASE IN BONDED INDEBTEDNESS
Bonded indebtedness is an indebtedness that is evidenced by
a bond. It is a debt instrument that is long-term in nature which
is issued by a corporation.
It is different from a promissory note. A promissory note is more
of a short or medium-term, and it is normally issued to a
particular person (payee) which is not the case in a bond.
Atty. Espedido: At least 20% must be
sold to the public
(3)
Shares to be issued in exchange of properties to
retire existing debts
Illustration 1.
Corporation sells the unsubscribed 20M shares to a
stranger
Corporation has 100M ACS and 100M shares. There are 5
stockholders.
One of them, Mr. A, takes 60% or 60 million. The other four
subscribed 5M each. There is a total of 80M subscribed capital
stocks with a remaining 20 million unsubscribed.
The board then decided to sell the remaining 20 million because
somebody else was interested to buy. The board said, “Let’s sell
it to Mr. Stranger.”
A who subscribed for 60M opposed and argued that he has a
pre-emptive right over the 20M.
SEC. 38. POWER TO DENY PRE-EMPTIVE RIGHT
Section 38. Power to Deny Preemptive Right. - All
stockholders of a stock corporation shall enjoy preemptive right
to subscribe to all issues or disposition of shares of any class, in
proportion to their respective shareholdings, unless such right is
denied by the articles of incorporation or an amendment thereto:
Provided, That such preemptive right shall not extend to shares
issued in compliance with laws requiring stock offerings or
minimum stock ownership by the public; or to shares issued in
good faith with the approval of the stockholders representing
two-thirds (2/3) of the outstanding capital stock in exchange for
property needed for corporate purposes or in payment of
previously contracted debt.
The board countered that A was already given hischance to
subscribe, yet he did not. Thus, they are selling it to others.
Is stockholder A entitled to use his preemptive right?
A: Yes. The purpose of this right is for the stockholder to
maintain its power or influence. Moreover, the language of the
law is not limited to issuances, it includes disposition as well.
Illustration 2.
Corporation decided to increase its authorized capital
stock
POWER TO DENY PRE-EMTPIVE RIGHT
If you were Mr. A who owned 60 million, and the corporation
decided to increase its authorized stock for another 100 million
because many are interested.
GEN: Pre-emptive right is a preferential right granted to the
existing stockholders to subscribe to the newly issued stocks
before it is being offered to the public.
How much will you be able to subscribe for the second 100
million?
A: Another 60 million.
Reason: In order for the existing stockholders to
protect their interest in the corporation and the shares
that they hold representing their ownership.
It is to allow the stockholders to retain the extent of their
power.
Can the corporation say, “Somebody is already going to
subscribed 80 million shares. You can subscribe 20
million.” Is this allowed?
A: No, because this will reduce Mr. A’s influence or dilute his
share – instead of 60% influence, he will only have 40%
influence.
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Can the subscriber say, “I will subscribe shares (pay the
delinquent shares), but I will pay them when I have my share
of the profit.”?
A: It depends. We have to distinguish if the cash dividends are
already due and demandable or not.
such property and assets shall be appropriated for the conduct
of its remaining business.
If the cash dividends are due and demandable, then
compensation is allowed. But if the dividends are not due and
demandable, compensation is not allowed.
XPN: If the disposition of all or substantially all assets of the
corporation, the following requisites must be present:
(1) Vote of the majority of the board
(2) Authorized by the stockholders representing 2/3 of the
outstanding capital stock
 XPN to the ratification of the stockholders:
a. Necessary in the usual and regular
course of business of the corporation; or
b. Proceeds of the sale or other disposition
of property and assets shall be
appropriated for the conduct of its
remaining business.
SEC. 39. SALE OR OTHER DISPOSITION OF ASSETS
Section 39. Sale or Other Disposition of Assets. - Subject to
the provisions of Republic Act No. 10667, otherwise known as
the "Philippine Competition Act", and other related laws a
corporation may, by a majority vote of its board of directors or
trustees, sell, lease, exchange, mortgage, pledge, or otherwise
dispose of its property and assets, upon such terms and
conditions and for such consideration, which may be money,
stock, bonds, or other instruments for the payment of money or
other property or consideration, as its board of directors or
trustees may deem expedient.
A sale of all or substantially all of the corporation's properties
and assets, including its goodwill, must be authorized by the
vote of stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, or at least two-thirds (2/3) of the
members, meeting duly called for the purpose.
In nonstock 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.
The determination of whether or not the sale involves all or
substantially all of the corporation's properties and assets must
be computed based on its net asset value, as shown in its latest
financial statemments. 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 of
which it was incorporated.
Written notice of the proposed action and of the time and place
for the meeting shall be addressed to stockholders or members
at their places of residence as shown in the books of the
corporation and deposited to the addressee in the post office
with postage prepaid, served personally, or when allowed by the
bylaws or done with the consent of the stockholder, sent
electronically: Provided, That any dissenting stockholder may
exercise the right of appraisal under the conditions provided in
this Code.
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 the
corporation or if the proceeds of the sale or other disposition of
GEN: A corporation can dispose its assets by a majority vote of
its board of directors or trustees.
TEST FOR DETERMINING WON 2/3 VOTES IS REQUIRED:
If it will render the corporation incapable of continuing its
business – based on jurisprudence, this refers to disposition of
at least 80% of its assets.
Illustration.
Transportation company sells 20 buses out of 100 buses
A transportation company operating 100 passenger buses
decides to sell only 20 buses.
What vote is required?
A: It only needs to be approved by a majority vote of the Board
of Directors. Selling 20 out of 100 buses cannot be considered
substantial to make the company incapable of continuing the
business or incapable of performing its stated purpose.
If it sells 80 buses out of 100?
A: It needs the approval of the stockholders representing 2/3 of
the outstanding capital stock as it can already be considered as
all or substantially all of the corporate property and assets.
Illustrations on the exceptions to ratification:
Exception 1 – necessary in the usual course of business
of the corporation
The corporation is selling subdivision lots.
Do you think every time they sell 80% of the subdivision lots
available for sale, they have to secure the ratification of the
shareholders?
A: No, because this is in the usual course of business of the
corporation.
Exception 2 – if the proceeds of the sale would be plowed
back to the business of the corporation
There is no need of approval. Whatever proceeds, the
corporation can use it back.
SEC. 40. POWER TO ACQUIRE OWN SHARES
Section 40. Power to Acquire Own Shares. - Provided, That
the corporation has unrestricted retained earnings in its books
to cover the shares to be purchased or acquired, a stock
corporation shall have the power to purchased or acquired, a
stock corporation shall have the power to purchase or acquire
its own shares for a legitimate corporate purpose or purposes,
including the following cases:
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(a) To eliminate fractional shares arising out of stock dividends;
(b) 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
(c) To pay dissenting or withdrawing stockholders entitled to
payment for their shares under the provisions of this Code.
GEN: A corporation is not allowed to acquire its shares.
Reason: Because it is in effect liquidating, to the
damage and prejudice of its creditors. If the corporation
buy out the shares of the stockholders, we are trying to
liquidate which is a violation of the Trust Fund Doctrine.
Sooner or later, there will be no more stockholders
since the corporation is buying out the shares. If all the
stockholders get back all their investment – there will
no longer be any investments for the corporation to
continue to operate.
XPN:
(1) Prevent fractional shares arising from stock dividends
 In distributing stock dividends based on the
amount, there will be an instance where 1/2 or 1/4
share is given. Instead of giving fractional shares,
the corporation will just buy it back.
(2) Satisfy delinquent shares
(3) Pay dissenting stockholders – in the exercise of their
appraisal right, which means that when the stockholder
does not agree with the decision of the board, it may
exercise such right and the corporation shall be
compelled to buy-back the shares
Condition for the exceptions to apply: There must be
unrestricted retained earnings.
Why would these exceptions not violate the trust fund
doctrine?
A: Because it can only be exercised when it has unrestricted
retained earnings which simply means that such retained
earnings are not earmarked for any purpose – SURPLUS OF
PROFITS.
HOWEVER, if there are no surplus profits or URE – this will
already affect the creditors. The Trust Fund Doctrine will be
violated.
ADVANTAGES AND DISADVANTAGES
If the corporation reacquires the shares and you are one of
the remaining stockholders whose shares were not
reacquired, will you be happy?
A: It depends.
Advantageous
If the company is expected to earn profits, then they would have
bigger dividends because of the fewer stockholders who will be
dividing the profits.
Disadvantageous
If the company expecting losses, then only a few stockholders
will be sharing the losses, which is prejudicial on their part.
SEC. 41. POWER TO INVEST CORPORATE FUNDS IN
OTHER CORPORATIONS/BUSINESSES
Section 41. 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, 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 outstanding capital stock, or by at least two-thirds (2/3) of
the members in the case of nonstock corporations at a meeting
duly called for the purpose. Notice of the proposed investment
and the time place of residence as shown in the books of the
corporation and deposited to the addressee in the post office
with the postage prepaid. Served personally, or sent
electronically in accordance with the rules and regulations of the
Commission on the use of electronic data message, when
allowed by the bylaws or done with the consent of the
stockholders: 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.
Requisites:
(1) Vote of the majority of the Board of Directors
(2) Vote of the stockholders representing 2/3 of the
outstanding capital stock
Illustration.
Airline Corporation buys 60% of a Shipping Company
A corporation is engaged in an airline business – operating
aircrafts. Since it has a lot of aircrafts, they noticed that their idle
funds in the bank are not earning much.
The corporation decided to buy 60% of a shipping company.
If the corporation buys 60% of the shipping company, what
would be required?
A: A vote of the majority of the Board of Directors and a vote of
the stockholders representing 2/3 of the outstanding capital
stock
Can the corporation say that there is no need of the
ratification since the shipping company is still a
transportation company?
A: No. It is already a deviation of its principal purpose.
What if we have 10 stockholders. How many stockholders
will have to approve the decision of the board?
A: It depends on the stockholders representing 2/3 of the
outstanding capital stock. It may even be just one stockholder
because the Code talks about 2/3 of the outstanding shares. It
is not on the number of directors but on the number of shares.
Atty. Espedido: Our TEST is the PRINCIPAL PURPOSE. A
company may invest so long as it is within the bounds of the
primary purpose. Otherwise, it requires a vote of the MAJORITY
OF THE BOARD AND 2/3 vote of the stockholders representing
the OUTSTANDING CAPITAL STOCK.
Also, if shares were bought back using other shares, then the
shares used as payment could have been used as stock
dividends.
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Note: Other than the primary purpose, THERE IS NO NEED
FOR RATIFICATION IF THE NEW BUSINESS WILL BE:
(1) Necessary accomplish its primary purpose
(2) It falls under the express, implied, inherent, and
apparent powers of the corporation
(3) There is a logical relationship to the primary business
or if it is in furtherance of the business
Atty. Espedido: This is the test in determining WON it
is express, implied, inherent, or an incidental power.
Otherwise, without the ratification of the stockholders,
it becomes an ultra vires act which is an unenforceable
act.
SEC. 42. POWER TO DECLARE DIVIDENDS
Section 42. 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,
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 be first be applied to the
unpaid balance on the subscription plus costs and expenses,
while stock holders until their unpaid subscription is fully paid:
Provided, further, That no stock dividend shall be issued without
the approval of stockholders representing at least two-thirds
(2/3)of the outstanding capital stock at a regular or special
meeting duly called for the purpose.
Stock corporations are prohibited from restraining surplus profits
in excess of one hundred percent (100%} of their paid-in capital
stock, except: (a) when justified by the definite corporate
expansion projects or programs approved by the board of
directors; or (b) when the corporation is prohibited under any
loan agreement with financial institutions or creditors, whether
local or foreign, from declaring dividends without their consent,
and such consent has not yet been secured; or (c) 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.
DIVIDENDS
What are dividends?
A: These are part of the PROFITS distributed as shares to the
stockholders. If there are no profits, there are no dividends.
GEN: The Board has the sole authority to declared dividends.
The declaration of dividends is the sole prerogative of the board.
XPN: The Board may be compelled to issue dividends when the
retained earnings of the corporation EXCEED 100% of their
paid-in capital stock.
Note: If they still do not declared dividends, they will be charged
with Improperly Accumulated Earnings Tax (IAET) – in which
case the corporation is prone to penalties under the NIRC for
undue accumulation.
XPN to XPN: A corporation may not be compelled to declare
dividends even if the profits exceed 100% of the paid-in capital
in the following instances:
(1) When justified by definite corporate expansion projects
or programs approved by the board of directors
(2) When the corporation is prohibited under any loan
agreement with financial institutions or creditors,
whether local or foreign, from declaring dividends
without their consent, and such consent has not yet
been secured
(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.
How are dividends payable?
A: It depends. There are several ways that dividends can be
paid: whether in cash, property, stock or a combination of any of
the three.
Can the stockholders demand for the declaration of
dividends?
A: No. The decision to declare dividends lies with 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, using its discretion, may not
declare dividends but rather use it for business expansion
projects.
Exception: 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 such case, the
shareholders may demand for the declaration of dividends.
Illustration. You are a shareholder, and in April of a taxable
year, you heard that the BOD intends to declare dividends.
Per your computation, your tax for the year would be high,
not yet including the taxes you will incur upon receiving the
dividends. Would you be happy that the BOD will declare
dividends?
A: No. You would tell the BOD not to declare dividends because
of the additional taxes you will incur from it.
Can you however compel the corporation to declare
dividends if the retained earnings has not reached more
than 100% of the paid-in capital?
A: No.
CORPORATE PRACTICE OF ACCUMULATING EARNINGS
When the corporation acquires income, it will be subject to the
corporate income tax. Then, when it distributes cash dividends
to the shareholders, such dividends will become the income of
said shareholders, and thus will be subject to individual income
tax. In effect, there is double taxation. This makes the BOD
hesitant to declare dividends, and so even though the
corporation has cash, it will find ways to make it appear that the
“dividends” of the corporation were “expenses” to avoid paying
taxes on them.
Illustration. The shareholders will attend a seminar abroad to
observe the latest trends of the business, and all expenses will
be paid by the corporation.
The amount to be spent is equal to what should have been the
dividends to the shareholders, but instead of declaring said
amount as dividends, the amount will now be made to appear
as an expense of the company to finance the shareholders’
seminar abroad. It will not be considered as income on the part
of the shareholder, and thus will not be subjected to income tax.
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IMPROPERLY ACCUMULATED EARNINGS TAX
However, the BIR discovered this scheme. They came up with
an amendment to the NIRC to impose improperly
accumulated earnings tax (IAET) as a penalty for erring
corporations.
Atty. Espedido: As much as possible, corporations do not
declare cash dividends because it is taxable twice: (1) when
declared as income by the corporation and (2) when declared
income by the stockholders upon distribution.
(B) STOCK DIVIDENDS
GEN: The corporation will be liable for IAET when its
undistributed profits exceed 100% of the paid-up capital.
Rule: It shall be withheld from the delinquent stockholders
UNTIL their unpaid subscription is fully paid.
XPN: When accumulated earnings are allowed, such as when:
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/her
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 reserves for possible
contingencies (e.g. typhoons).
Offsetting in cash dividends does not apply in stock dividends.
You cannot issue any stock dividends UNTIL the unpaid stock
are fully paid.
When will dividends be taxed on the side of the
shareholder?
A: It depends on the type of dividend that will be received:
1.
2.
Cash dividend → the stockholder is liable for tax since
it is income already.
Stock dividend → it is not yet taxable, even though
they already have value. It is not considered income
because there is no transfer of cash.
Important: Until the shareholder is able to encash stock
dividends, the shareholder is not considered to have earned
an income. Stock dividends are not subject to income tax
because it is not yet cash. This is so because the value of
the shares of stock may fluctuate depending on the market
value, book value or par value of said share. Because their
value fluctuates, they are not taxable because still being
unrealized gain, the shareholder would not know their
actual value.
Recall:
3.
Book value → Net assets ÷ no. of outstanding shares
Market value → The value that buyers in the market
are willing to buy and the value that shareholders are
willing to sell. It generally increases if the business of
the corporation is doing well, and decreases if the
business is doing bad. It may be higher or lower than
the par value.
Par value → A pre-determined value
(1)
(2)
(3)
(4)
TYPES OF DIVIDENDS
Cash dividends
Property dividends
Stock dividends
Combination of the different kinds of dividends
1.
2.
Note: Issuing stock dividends requires a majority vote of the
BOD and a ratification of 2/3 vote of the stockholders
representing the outstanding capital stock
Illustration. If your subscription has not yet been paid and
declared due by the Board, can you say “just charge my
unpaid subscription to future dividends”? Can a
shareholder refuse to pay by saying that?
A: No, because there is no assurance whether indeed dividends
will be declared in the future, or how soon. If the subscription
becomes due, it has to be paid. Otherwise, the subscriber will
be declared as a delinquent shareholder.
However, if dividends were declared, and the shareholder
still has unpaid subscriptions?
A: The dividend will first have to be applied to the unpaid
subscription.
EFFECT OF DELINQUENCY ON
THE RIGHT TO DIVIDENDS
What are delinquent stocks?
A: These are unpaid subscriptions that have become due and
demandable, and yet no payment is made.
When do unpaid subscriptions become due and
demandable?
A:
1. Upon the arrival of the specified date or period for
payment; or
2. Upon the call of board (considered as a demand to
pay).
RULES ON DELINQUENT STOCKS
When cash dividends are declared, and there is still an
unpaid subscription, will the shareholder still receive his or
her dividends? If yes, how?
A: Cash dividends due on delinquent stock shall first be applied
to the unpaid balance of the subscription. If there is an excess
amount, then it will go to the shareholder.
Atty. Espedido: 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.
(A) CASH DIVIDENDS
Rule: If there are delinquent shares, the cash dividends shall be
applied to the unpaid subscription which is due and demandable
of the shareholder – OFFSET.
Note: Issuing cash dividends requires a vote of majority of the
Board of Directors without need of ratification from the
stockholders
Here, there is a debtor-creditor relationship between the
corporation and the stockholder.
On one hand, the corporation is a creditor with regards to the
unpaid subscription, but a debtor with regards to the declared
cash dividends.
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On the other hand, the stockholder is a creditor with regards to
the declared cash dividends, but a debtor with regards to the
unpaid subscription.
When stock dividends are declared and there is still an
unpaid subscription, would the shareholder still receive
dividends? If yes, how?
A: Stock dividends will be withheld from the delinquent
shareholder until his unpaid subscription is fully paid.
Atty. Espedido: We are assuming that the unpaid subscriptions
are now delinquent because they are due and demandable for
payment.
If it is not yet due, no offsetting/withholding will apply. Even if
there are unpaid subscriptions, and there are cash dividends
declared and to be distributed, if these unpaid subscriptions are
not yet due and demandable, no offsetting or withholding will
occur. The corporation cannot compel the shareholder to first
pay the unpaid subscriptions. There can be offsetting only when
both debts are due and demandable.
CONVERSION OF EARNINGS INTO CAPITAL THROUGH
DECLARATION OF STOCK DIVIDENDS
Important: The law permits the corporation to convert its
earnings into capital, through the declaration of stock dividends.
In this manner, the board may use such earnings for the general
or specific corporate purpose. It becomes part of the corporate
trust fund and may no longer be used for dividend distribution.
This is an effective way to retain earnings without having to
explain to SEC/BIR.
Illustration. If the original authorized capital stock (ACS) of the
corporation is 1Mn, and is fully subscribed, and they increased
it by another 1Mn, the SCS should be 250k of the increased
ACS, and the paid-up capital should be 62.5k (remember,
increase in paid-up capital has a 25%-25% requirement: 25% of
the increase must be subscribed, and 25% of such subscription
must be paid up).
However, there are Unrestrained Retained Earnings of the
corporation which the corporation 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 for their new subscriptions. However, once
declared as dividends, the corporation cannot be sure whether
or not the SH will really invest in the new stocks, since the
shareholders cannot be compelled to invest back.
KTG (medyo libog, so here is an attempt to clarify the
illustration): If a corporation increases its ACS, it is required to
fulfill two requirements:
1. 25% must be subscribed; and
2. Of the subscriptions, 25% must be paid up.
In this case, the corporation needs to put up 25% x 25% x P1Mn
(which is equals to 62.5k). The corporation has such money in
the form of its unrestricted retained earnings (URE). However,
the corporation wants to declare the URE as dividends.
So the corporation now has a problem: should it use the amount
of URE as the paid-up capital, or should it declare the same as
dividends?
INCREASING THE AUTHORIZED CAPITAL STOCK
If there are no more stocks, can we still distribute stock
dividends?
A: Yes. We can increase the authorized capital stock which is
done by amending the Articles of Incorporation. This is done
through the following processes:
1. A stockholder’s meeting duly called for the purpose
2. A written notice of the proposed increase or diminution
of the capital stock
3. Majority vote of the Board of Directors
4. A vote of 2/3 of the stockholders representing the
outstanding capital stock
5. A certificate signed by a majority of the directors and
countersigned by the chairman and the secretary of the
stockholder’s meeting
6. Accompanied by the sworn statement of the treasurer
showing that at least 25% of such increased capital
stock has been subscribed and that at least 25% of the
amount subscribed has been paid
7. Submitted to and approved by the SEC
8. Approval by the Philippine Competition Commission
Note: In this case, we are now increasing the capital stock and
the it is the corporation who will pay because instead of paying
cash, the shareholders will no longer need to pay since the
corporation will use the profits that they already have.
If the corporation declares it as cash dividends, it gives the
existing stockholders enough money to possibly purchase or
pay-up the new ACS (remember, existing stockholders have a
pre-emptive right to shares). However, the corporation is not
assured if the existing shareholders will really buy the new ACS,
since they cannot be compelled to invest in the corporation.
To make sure that the money will remain with the
corporation, what kind of dividends should the corporation
declare instead?
A: The corporation should declare stock dividends by
transferring the URE to capital asset.
In effect, the capital stock is increased
corresponding increase in the corporate assets.
without any
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.
NON-TAXABILITY OF STOCK DIVIDENDS
**Tanya Notes
Atty. Espedido: If the authorized capital stock of the corporation
has all been subscribed, and additional capital is needed, the
corporation has the option to increase the authorized capital
stock.
Stock dividends are NOT TAXABLE because these are not
realized income but are considered investments.
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STOCK SPLITS
REVERSE STOCK SPLIT
Stock Split
This is an increase in the number of shares, but no increase in
the capital value of such shares.
Illustration. 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?
A: 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.
**Illustration.
ABC Corporation currently has 300,000 outstanding shares of
stock with a par value of P1. It issues a 2-for-1 stock split as
dividends.
Decreases the number of shares held by each stockholder.
However, it will still retain the same capital value.
**Illustration:
ABC Corporation currently has 300,000 outstanding shares of
stock with a par value of P1. It issues a 1-for-5 stock split as
dividends.
Before reverse stock split:
No. of Shares
A
100,000
B
100,000
C
50,000
D
25,000
E
12,500
F
12,500
After reverse stock split:
The effect will be as follows:
Before stock split:
A
B
C
D
E
F
No. of Shares
Capital
100,000
100,000
50,000
25,000
12,500
12,500
P200,000
P200,000
P100,000
P50,000
P25,000
P25,000
Value per
Share
P2.00
P2.00
P2.00
P2.00
P2.00
P2.00
In a 2-for-1 stock split, each stockholder will receive an
additional share of stock for each share he/she holds.
No. of Shares
Capital
200,000
200,000
100,000
50,000
25,000
25,000
P200,000
P200,000
P100,000
P50,000
P25,000
P25,000
Value per
Share
P1.00
P1.00
P1.00
P1.00
P1.00
P1.00
A/N:
(3) A stock split is a corporate action in which a company
divides its existing shares into multiple shares to boost
the liquidity of the shares.
(4) The primary motive is to make shares seem more
affordable to small investors even though the
underlying value of the company has not changed.
(5) The most common split ratios are 2-for-1 or 3-for-1,
which means that the stockholder will have two or three
shares, respectively, for every share held earlier.
(6) Reverse stock splits are the opposite transaction,
where a company divides, instead of multiplies, the
number of shares that stockholders own, raising the
market price accordingly.
P200,000
P200,000
P100,000
P50,000
P25,000
P25,000
No. of Shares
Capital
20,000
20,000
10,000
5,000
2,500
2,500
P200,000
P200,000
P100,000
P50,000
P25,000
P25,000
Value per
Share
P2.00
P2.00
P2.00
P2.00
P2.00
P2.00
Value per
Share
P10.00
P10.00
P10.00
P10.00
P10.00
P10.00
A/N:
1.
A reverse stock split reduces the number of shares
held by each shareholder but with proportionally more
valuable shares.
A reverse stock split does not directly impact a
company's value.
A reverse stock split, however, often signals a
company in distress since it raises the value of
otherwise low-priced shares.
The desire to increase share prices to remain relevant
and to avoid being delisted are the most common
reasons for corporations to pursue this strategy.
2.
After stock split:
A
B
C
D
E
F
A
B
C
D
E
F
Capital
3.
4.
CONFLICTING VIEWS ON ISSUANCE OF CASH
DIVIDENDS WHEN THERE ARE NO PROFITS
(UNLAWFUL DECLARATION OF DIVIDENDS)
If it was discovered later that there were no profits at all but
the Board has already declared and distributed cash
dividends and somebody complained, should we now
require the stockholders to return?
A: There are conflicting views among authorities:
(1)
If solvent corporation:
View 1 – No need to return since creditors are still
protected. They will not be prejudiced since the
corporation still has capital
View 2 – Must still be returned as it violates the
Trust Fund Doctrine
(2)
If insolvent corporation – it needs to be returned
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Atty. E’s opinion: If the corporation is still solvent, the Trust Fund
Doctrine is not violated since capital remains intact. Thus, there
is no need to return.
**NOTES
RETAINED EARNINGS
Accumulated profits of a corporation in its previous operations.
It includes all income accumulated throughout the years during
which the corporation was operating.
DECLARING DIVIDENDS FROM THE CAPITAL: PAID-UP
CAPITAL
GEN: Dividends cannot be distributed out of the capital. It
violates the trust fund doctrine. Under such doctrine, the
corporation cannot return capital to the stockholders unless all
the creditors have been paid first.
XPN (exclusive exceptions):
1.
If the dividend is a liquidating dividend – dividends
that are distributed during the liquidation of a
corporation.
Here, the trust fund doctrine no longer applies because
the corporation is already being liquidated. This means
that before the corporation can even distribute the
liquidating dividends, it has to pay its creditors. The
remainder is what will be distributed as liquidating
dividends.
2.
When the corporation is a wasting asset corporation.
So, if the corporation has been experiencing losses, there will
be no retained earnings. Rather, there will be deficits. Retained
earnings can only exist if the corporation has been operating at
a profit.
TYPES OF RETAINED EARNINGS
(1) Restricted Retained Earnings
In general, retained earnings are restricted if they
are not available for dividend declaration
(2) Unrestricted Retained Earnings
If available for dividend declaration.
RESTRICTING RETAINED EARNINGS
1.
Appropriated by the Board of Directors for corporate
expansion projects or programs.
Example: If the Board of Directors say that out of the
P50Mn retained earnings, they are going to allocate
P15Mn for a future expansion, then that P15Mn will be
considered restricted retained earnings. Therefore, out
of the P50Mn, P15Mn cannot be declared as
dividends.
2.
Covered by a restriction for dividend declaration under
a loan agreement.
Wasting Asset Corporation
A type of corporation which has a limited life because
its assets are consumed during its operations and
cannot be replenished.
Example:
Mining – If a corporation is created to mine only a
certain area, then once the minerals in that area
has been fully depleted, the corporation’s purpose
ceases to exist. So slowly, as the area’s minerals
are consumed, the assets of the corporation are
also slowly being depleted.
In that sense, the corporation is allowed to return
capital to its stockholder because the idea is that
the corporation will exist only for a limited period –
the period that its assets still exists. Once the
assets are depleted, then the corporation can
return its capital to its stockholders.
RELEVANT DATES IN DIVIDEND DECLARATION
Contractual Covenants
If, for example, there is a loan agreement, and the
creditor expressly provides that the corporation cannot
declare dividends out of a certain amount of its retained
earnings. That portion that is restricted under the
covenant becomes restricted retained earnings.
3.
Required to be retained under special circumstances
obtaining in the corporation, such as when there is a
need for special reserves for probably contingencies.
Example: When a corporation acquires treasury
shares, it is required to restrict a portion of its retained
earnings in the same amount as the treasury shares
that they acquired. That portion becomes restricted
retained earnings, and cannot be available for dividend
declaration.
If the corporation has been experiencing losses, such
that it has zero or negative retained earnings, then it
cannot declare dividends at all. So there has to be
unrestricted retained earnings for a corporation to
declare dividends.
(1) Declaration Date
Before the declaration date, the dividends are not a
liability of the corporation. In fact, the corporation is not
obliged to declare dividends even if it has unrestricted
retained earnings. The BOD cannot be compelled to
declare dividends. Dividends only become a liability of
the corporation once they are declared. The moment of
declaration is the time the corporation recognizes such
liability.
(2) Record Date
This refers to the date when the corporation
determines who among its stockholders are entitled to
receive dividends. The stockholders on record in the
stock and transfer book as of the record date are the
stockholders who will receive dividends.
Before the record date, the stocks are considered sold
dividends on. This means that before the record date,
stocks are sold with the right to receive dividends on it.
In effect, it means that there is actually a premium on
the price of those shares because they carry the right
to receive dividends.
When stocks are sold after the record date, the stocks
are commonly referred to as being sold dividends off,
because even if they are sold or transferred, the one
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who will be receiving dividends on them is the person
who was the owner of such as of the record date.
Illustration.
Declaration Date
Record Date
March 10
March 30
A is the holder of the share on declaration date. On March
15, A sells the shares to B. Those shares are considered
sold dividends on.
If B sells the shares to C on March 25, those shares are still
considered sold dividends on.
On March 30, or the record date, if C is still the owner of
those stocks, then C is the one entitled to receive dividends
on the shares.
If on April 5, C sells the shares to D, then it is still C who is
entitled to receive dividends on them. On this date, the
shares are considered sold dividends off.
(3) Payment Date
Date when the dividends are actually paid by the
corporation. When a corporation declares dividends, it
will normally say when the record and the payment
dates are.
If the corporation’s resolution for the declaration of
dividends is silent as to the record date, then the record
date is considered the same as the declaration date.
SEC. 43. POWER TO ENTER INTO MANAGEMENT
CONTRACT
Section 43. Power to Enter into Management Contract. - No
corporation shall conclude a management contract with another
corporation unless such contract is approved by the board of
directors and by the 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 nonstock corporation, or both the
managing and the managed corporation, at a meeting duly
called for the purpose: Provided, That (a) 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 (b) where a majority if
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 twothirds (2/3) of the members in the case of a nonstock
corporation.
These shall apply to any contract whereby a corporation
undertakes to manage or operate all or substantially all of the
called services 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 entered into
such periods as may be provided by the pertinent laws or
regulations.
MANAGEMENT CONTRACT
An agreement under which a corporation delegates the
management of its affairs to another corporation for a certain
period. Two corporations are involved: (1) the managing
corporation and the (2) managed corporation
GEN: Management contract is entered into by a MAJORITY
vote of the Board of Directors and stockholders of both the
managing and managed corporation
XPN: Approved by the stockholders of the managed corporation
owning at least 2/3 of the outstanding capital stock or of
members in two instances:
(1) The stockholder representing the same interest of both
managing and managed corporation owns or control
MORE THAN 1/3 of the outstanding capital stock
entitled to vote of the managing corporation; and
(2) Majority of the members of the BOD of the managing
corporation also constitutes majority of the members of
the BOD of the managed corporation .
STATUS OF THE BOD OF
THE MANAGED CORPORATION
What could this mean, what happens to the Board of the
managed corporation, do they still function as a board?
A: Yes, this is not an abandonment. The BOD of the managed
corporation still retains the control of how the corporation should
exist.
The only thing is that, on the operational side of the managed
corporation is now given to the managing corporation. There are
companies whose business is just to manage certain portions or
operations of other corporations. The board of the managed
corporation still functions as to the remaining operations.
Examples: ship management corporation, audit managers
SEC. 44. ULTRA VIRES ACTS
Section 44. Ultra Vires Acts of the Corporations. - No
corporation shall possess or exercise corporate powers other
than those conferred by this Code or by its articles of
incorporation and except as necessary or incidental to the
exercise of the powers conferred.
What is the effect of an ultra vires act?
A: An ultra vires act is an unenforceable act. Since it is not
enforceable, the contract is not binding to the corporation.
The State looks ultra vires acts with disfavor. It will create more
problems than solutions. If we strictly enforce the concept of
ultra vires act, the entire business community will be affected.
Atty. Espedido: Imagine the inconvenience and discomfort of
trying to review AOI of every stockholder for every transaction
that we do. Trying to analyze: “Is this inherent, apparent,
necessary?” If we do this, we would lose a lot of time before we
could enter into business transactions.
So, the authorities came out with solutions on how this could be
resolved.
No management contracts shall be entered into for period longer
that five (5) years for any one term.
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RESOLVING ULTRA VIRES ACTS
Notwithstanding the provisions of the preceding paragraph,
bylaws maybe adopted and filed prior to incorporation; in such
case, such bylaws shall be approved and signed by all
incorporators and submitted to the Commission, together with
the articles of incorporation.
How do we resolve ultra vires acts?
GEN: It is not binding.
XPN:
INSTANCE
i. Contract is completely
performed or fulfilled by
both parties (parties are
estopped)
ii. Only one party has been
benefited (one of the
parties already executed
the contract; partial
fulfillment)
iii. Contract is not yet acted
upon
SOLUTION
Leave them as they are – we
do not have to dig up what
happened
Return what
received
has
been
Do not perform or proceed
TRUE OR FALSE
1.
All illegal acts are ultra vires acts – TRUE
2.
All ultra vires acts are illegal acts – FALSE, because
they may also be unauthorized acts.
In all cases, bylaws shall be effective only upon the issuance by
the Commission of a certification that the bylaws are in
accordance with this Code.
The Commission shall not accept for filing the bylaws or any
amendment thereto of any bank, banking institution, building
and loan association, trust company, insurance company, public
utility, educational institution, or any other 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.
What are bylaws?
A: They are the internal rules and regulations of a corporation.
When should a corporation file its bylaws?
A:
1. Within one (1) month after the receipt of the official
notice of the issuance of its certificate of incorporation
from the SEC, or
2. They may be adopted and filed prior to incorporation,
together with the AOI.
RATIFICATION OF ULTRA VIRES ACTS
Note: You can already submit your by-laws even if you have
not yet been given the authority to exist.
RULES:
(A) Illegal ultra vires acts – cannot be ratified
(B) Unauthorized ultra vires act – can be cured through a
ratification by a vote of 2/3 of the stockholders
representing the outstanding capital stock so long as it
DOES NOT AFFECT THIRD PARTIES.
**NOTES
Ultra Vires Act
One not within the express, implied and incidental powers of the
corporation, conferred by the RCC or the AOI.
What are the requisites for the adoption of by-laws?
1. Vote of the stockholders representing at least a
majority of the OCS in case of stock corporations or
members in case of non-stock corporations;
2. Approved and signed by all incorporators; and
3. Submitted to the SEC.
What is the binding effect of bylaws to the public?
GEN: It does not bind the public.
XPN: A third person may be bound by the bylaws where has
knowledge about it, either actual or constructive.
**NOTES
Consequence of an Ultra Vires Act
Merely voidable, which may be enforced by performance,
ratification, or estoppel. (De Leon)
TIME AND PROCEDURE FOR THE ADOPTION OF BYLAWS
1)
Note: According to Atty. E, an ultra vires act is unenforceable
rather than voidable.
PRE-INCORPORATION
Submitted or filed before the SEC together with the AOI.
(This is the one now required in practice; you cannot
incorporate without it.)
TITLE V. BYLAWS
Requirements:
1. Approved and signed by all incorporators; and
2. Submitted to the SEC together with the AOI.
SEC. 45. ADOPTION OF BY LAWS
Section 45. Adoption of Bylaws. - For the adoption of bylaws
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 on nonstock
corporations, shall be necessary. The bylaws 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 by a majority of the directors or trustees
and countersigned by the secretary of the corporation, shall be
filed with the Commission and attached to the original articles of
incorporation.
Additional requirements for banks and other special
corporations:
Accompanied by a certificate of the appropriate
government agency to the effect that such bylaws or
amendments are in accordance with law.
2)
POST-INCORPORATION
Basically, everything that you need to do post-incorporation
in order to commence the transacting of business.
Page 60 of 88 | EH403 2019-2020 Corporation Law
Requirements:
1. Affirmative vote and signature of stockholders
representing the majority of the OCS or members
in case of nonstock corporation;
2. Duly certified by the majority of the BOD/BOT; and
3. Filed with SEC, to be attached to the original AOI.
CONSEQUENCES OF FAILURE TO ADOPT BYLAWS
Note: This may not be applicable to the Revised Corporation
Code. But this was not discussed by Atty. [Gaviola] after the
revision.
Non-filing of the bylaws on time will not result in the automatic
dissolution of the corporation. Such consequence is not
provided under the Corporation Code.
However, pursuant to Sec. 6 (i) (5) of P.D. No. 902-A (see Sec.
19), the failure to file the bylaws within one (1) month from the
date of incorporation with the SEC shall render the corporation
liable to the revocation of its registration, to wit:
Section 6. In order to effectively exercise such
jurisdiction, the Commission shall possess
the following powers:
(c) The required quorum in meetings of stockholders or
members and the manner of voting therein;
(d) The modes by which a stockholder, member, director, or
trustee may attend meetings and cast their votes;
(e) The form for proxies of stockholders and members and the
manner of voting them;
(f) The directors’ or trustees’ qualifications, duties and
responsibilities, the guidelines for setting the compensation
of directors or trustees and officers, and the maximum
number of other board representations that an independent
director or trustee may have which shall, in no case, be
more than the number prescribed by the Commission;
(g) The time for holding the annual election of directors or
trustees and the mode or manner of giving notice thereof;
(h) The manner of election or appointment and the term of
office of all officers other than directors or trustees;
(i) The penalties for violation of the bylaws;
(j) In the case of stock corporations, the manner of issuing
stock certificates; and
(k) Such other matters as may be necessary for the proper
or convenient transaction of its corporate affairs for the
promotion of good governance and anti-graft and corruption
measures.
An arbitration agreement may be provided in the bylaws
pursuant to Sec. 181 of this Code.
xxx
SEC. 47. AMENDMENT TO BYLAWS
i) To suspend, or revoke, after proper notice
and hearing, the franchise or certificate of
registration of corporations, partnerships or
associations, upon any of the grounds
provided by law, including the following:
xxx
5. Failure to file by-laws within the required
period;
There must, first of all, be a hearing to determine the existence
of the ground, and assuming such finding, the penalty is not
necessarily dissolution, but may only be revocation.
Under the rules and regulations of the Commission, the failure
may merely by the imposition of a fine.
PERSONS BOUND & NOT BOUND BY THE BYLAWS
1.
Persons bound by the bylaws:
a. Corporation
b. Directors or trustees
c. Stockholders
2.
Persons not bound by the bylaws:
a. Any person who has no actual knowledge of
the bylaws of the corporation;
b. Employees of the corporation
Section 47. Amendment to Bylaws. – A majority of the board
of directors or trustees, and the owners of at least a majority of
the outstanding capital stock, or at least a majority of the
members of a nonstock corporation, at a regular or special
meeting duly called for the purpose, may amend or repeal the
bylaws or adopt new bylaws. The owners of two-thirds (2/3) of
the outstanding capital stock or two-thirds (2/3) of the members
in a nonstock corporation may delegate to the board of directors
or trustees the power to amend or repeal the bylaws or adopt
new bylaws: Provided, That any power delegated to the board
of directors or trustees to amend or repeal the bylaws or adopt
new bylaws shall be considered as revoked whenever
stockholders owning or representing a majority of the
outstanding capital stock or majority of the members shall so
vote at a regular or special meeting.
Whenever the bylaws are amended or new bylaws are adopted,
the corporation shall file with the Commission such amended or
new bylaws and, if applicable, the stockholders’ or members’
resolution authorizing the delegation of the power to amend
and/or adopt new bylaws, duly certified under oath by the
corporate secretary and a majority of the directors or trustees.
The amended or new bylaws shall only be effective upon the
issuance by the Commission of a certification that the same is
in accordance with this Code and other relevant laws.
PROCESS OF ADOPTION, AMENDMENT OR
REPEALING OF BYLAWS
SEC. 46. CONTENTS OF BYLAWS
Section 46. Contents of Bylaws. – A private corporation may
provide the following in its bylaws:
(a) The time, place and manner of calling and conducting
regular or special meetings of the directors or trustees;
(b) The time and manner of calling and conducting regular or
special meetings and mode of notifying the stockholders
or members thereof;
1.
2.
3.
Required votes are met:
a. Approved by a majority of the BOD/BOT; and
b. Approved by a majority of the OCS in case of
stock corporations, or a majority of the
members in the case of nonstock
corporations.
File with SEC for approval.
SEC issues Certificate of Approval.
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T/N: Once approved (as evidenced by the certification
from SEC), the amended by-laws become the new bylaws of the corporation.
A/N: The power to adopt, amend or repeal bylaws can be
delegated by 2/3 of the OCS or members to the BOD or BOT.
However, this delegated power is immediately revoked
whenever majority of the OCS or members vote at a special or
regular meeting for the adoption, amendment or repealing of
bylaws.
What must be done if new bylaws are amended or adopted?
1. File with SEC the new bylaws or amended bylaws;
2. If applicable, the stockholders’ resolution authorizing
the delegation of the power to amend and/or adopt new
bylaws, which must be duly certified under oath by the
corporate secretary + majority of the BOD/BOT.
TITLE VI. MEETINGS
SEC. 48. KINDS OF MEETINGS
Section 48. Kinds of Meetings. – Meetings of directors,
trustees, stockholders, or members may be regular or special.
How many types of meetings do we have?
A: There are 4 kinds of meetings, namely:
1. Meetings of Directors
2. Meetings of Trustees
3. Meetings of Stockholders
4. Meetings of Members
Which may either be:
1. Regular, or
2. Special
Illustration.
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?
A: No, 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. Espedido: 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.
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.
Because imagine if Gokongwei in one meeting of San Miguel
says “I understand that the sales of our corporation are going
down, maybe there is problem with the formula, it no longer
tastes 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.
SEC. 49. REGULAR & SPECIAL MEETINGS OF
STOCKHOLDERS OR MEMBERS
Section 49. Regular and Special Meetings of Stockholders
or Members. – Regular meetings of stockholders or members
shall be held annually on a date fixed in the bylaws, or if not so
fixed, on any date after April 15 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 twenty-one (21) days prior to the meeting,
unless a different period is required in the bylaws, law, or
regulation: Provided, further, That written notice of regular
meetings may be sent to all stockholders or members of record
through electronic mail or such other manner as the Commission
shall allow under its guidelines.
At each regular meeting of stockholders or members, the board
of directors or trustees shall endeavor to present to stockholders
or members the following:
a)
The minutes of the most recent regular meeting which shall
include, among others:
(1) A description of the voting and vote tabulation
procedures used in the previous meeting;
(2) A description of the opportunity given to
stockholders or members to ask questions and a record of the
questions asked and answers given;
(3) The matters discussed and resolutions reached;
(4) A record of the voting results for each agenda item;
(5) A list of the directors or trustees, officers and
stockholders or members who attended the meeting; and
(6) Such other items that the Commission may require
in the interest of good corporate governance and the protection
of minority stockholders.
b)
A members’ list for nonstock corporations and, for stock
corporations, material information on the current
stockholders, and their voting rights;
c)
A detailed, descriptive, balanced and comprehensible
assessment of the corporation’s performance, which shall
include information on any material change in the
corporation’s business, strategy, and other affairs;
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d)
A financial report for the preceding year, which shall include
financial statements duly signed and certified in accordance
with this Code and the rules the Commission may prescribe,
a statement on the adequacy of the corporation’s internal
controls or risk management systems, and a statement of
all external audit and non-audit fees;
e)
An explanation of the dividend policy and the fact of
payment of dividends or the reasons for nonpayment
thereof;
f)
Director or trustee profiles which shall include, among
others, their qualifications and relevant experience, length
of service in the corporation, trainings and continuing
education attended, and their board representations in
other corporations;
g)
A director or trustee attendance report, indicating the
attendance of each director or trustee at each of the
meetings of the board and its committees and in regular or
special stockholder meetings;
h)
Appraisals and performance reports for the board and the
criteria and procedure for assessment;
Unless the bylaws provide for a longer period, the stock and
transfer book or membership book shall be closed at least
twenty (20) days for regular meetings and seven (7) days for
special meetings before the scheduled date of the meeting.
In case of postponement of stockholders’ or members’ regular
meetings, written notice thereof and the reason therefor shall be
sent to all stockholders or members of record at least two (2)
weeks prior to the date of the meeting, unless a different period
is required under the bylaws, law or regulation.
The right to vote of stockholders or members may be exercised
in person, through a proxy, or when so authorized in the bylaws,
through remote communication or in absentia. The Commission
shall issue the rules and regulations governing participation and
voting through remote communication or in absentia, taking into
account the company’s scale, number of shareholders or
members, structure, and other factors consistent with the
protection and promotion of shareholders’ or member’s
meetings.
WHEN MEETINGS ARE CONDUCTED
i)
A director or trustee compensation report prepared in
accordance with this Code and the rules the Commission
may prescribe;
j)
Director disclosures on self-dealings and related party
transactions; and/or
k)
The profiles of directors nominated or seeking election or
reelection.
A director, trustee, stockholder, or member may propose any
other matter for inclusion in the agenda at any regular meeting
of stockholders or members.
Special meetings of stockholders or members shall be held at
any time deemed necessary or as provided in the bylaws:
Provided, however, That at least one (1) week written notice
shall be sent to all stockholders or members, unless a different
period is provided in the bylaws, law or regulation.
A stockholder or member may propose the holding of a special
meeting and items to be included in the agenda.
Notice of any meeting may be waived, expressly or impliedly, by
any stockholder or member: Provided, That general waivers of
notice in the articles of incorporation or the bylaws shall not be
allowed: Provided, further, That attendance at a meeting shall
constitute a waiver of notice of such meeting, except when the
person attends a meeting for the express purpose of objecting
to the transaction of any business because the meeting is not
lawfully called or convened.
Whenever for any cause, there is no person authorized or the
person authorized unjustly refuses to call a meeting, the
Commission, upon petition of a stockholder or member on a
showing of good cause therefor, may issue an order directing
the petitioning stockholder or member to call a meeting of the
corporation by giving proper notice required by this Code or the
bylaws. The petitioning stockholder or member shall preside
thereat until at least a majority of the stockholders or members
present have chosen from among themselves, a presiding
officer.
REGULAR MEETING
(1) Held annually on a date
fixed in the bylaws; or
(2) On any date after April
15 of every year, as
determined
by
the
BOD/BOT.
SPECIAL MEETING
At any time deemed
necessary by the BOD/BOT
or as provided for in the
bylaws.
Why are regular meetings held only after April 15?
A: For purposes of filing income tax return. By that time, the
financial statements are already done. All the data, information,
figures are already available.
NOTICE OF MEETING
WHEN GIVEN
REGULAR MEETING
Sent to all stockholders of
record at least 21 days prior
to the meeting unless a
different period is required in
the bylaws, law or regulation.
SPECIAL MEETING
At least one week prior to the
meeting, a written notice
shall be sent to all
stockholders,
unless
a
different period is provided
for in the bylaws, law or
regulation.
CONTENTS OF A NOTICE OF MEETING
In order to be a proper notice of meeting, the following must be
contained:
1.
2.
3.
4.
5.
6.
Shall state the time and place of the meeting;
The agenda for the meeting;
A proxy form which shall be submitted to the corporate
secretary within a reasonable time prior to the meeting;
When attendance, participation, and voting are allowed
by remote communication or in absentia, the
requirements and procedures to be followed when a
stockholder or member elects either option; and
When the meeting is for the election of directors or
trustees, the requirements and procedure for
nomination and election.
The minutes of the most recent regular meeting which
shall include, among others:
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(a) A description of the voting and vote tabulation
procedures used in the previous meeting;
(b) A description of the opportunity given to
stockholders or members to ask questions
and a record of the questions asked and
answers given;
(c) The matters discussed and resolutions
reached;
(d) A record of the voting results for each agenda
item;
(e) A list of the directors or trustees, officers and
stockholders or members who attended the
meeting; and
(f) Such other items that the Commission may
require in the interest of good corporate
governance and the protection of minority
stockholders;
Appeals1, the Court ruled that it is the Corporate Secretary who
is responsible to serve as custodian of all the records of the
corporation, to keep the stock and transfer books, and the only
person authorized to make the entries therein.
Illustration. An individual purchased shares of stock on
March 10 and there is a meeting on March 15. Could he
already vote?
A: No, he is still not qualified to vote because there is a
requirement under the law that for regular meetings, the transfer
of book shall be closed for at least 20 days PRIOR to the
scheduled meeting.
On the other hand, for special meetings, the transfer books shall
be closed for at least 7 days PRIOR to the scheduled date of
meeting. The notice shall include this information on the closing
of the transfer book.
Reason for including the minutes of the previous meeting:
The minutes of the previous meeting must be attached and must
be accompanied by the notices because these will require the
approval.
POSTPONEMENT OF REGULAR MEETINGS
GEN: Written notice and reason thereof shall be sent to ALL
stockholders at least 2 weeks prior to the date of meeting.
Atty. Espedido: If there is any dissenting stockholder who
objects, then it could be discussed again in the new meeting.
XPN: A different period is required under the bylaws, law, or
regulation.
This is important because should there be conflict in the future,
they could always refer back to the minutes. These will be in the
custody of the secretary. The secretary among others shall take
hold of the AOI, bylaws, all resolutions approved, minutes of the
meeting approved.
UNJUST REFUSAL TO CALL A MEETING
HOWEVER, when there is unjust refusal to call a meeting, a
stockholder can petition the Commission to order the conduct of
a meeting.
HOW NOTICE OF MEETINGS ARE SENT
•
Notice of meetings shall be sent through the means of
communication provided in the bylaws. It can be through:
(1)
Electronic Mail
(2)
Other means allowed by the Commission
•
Atty. Espedido: Because of the E-Commerce Act, the electronic
records can now be presented in court.
The petitioning stockholder shall preside thereat UNTIL
at least a majority of the stockholders or members
present have chosen from among themselves, a
presiding officer.
In case where the Commission will order the conduct
of the meeting, ANY NUMBER OF THE
STOCKHOLDERS PRESENT shall already be
considered as a quorum. Such that, when out of the
100 stockholders, 5 only came, it shall be constitute a
quorum.
CLOSING OF STOCK OR TRANSFER BOOK
**NOTES
Important: Unless the bylaws provide for a longer period, the
stock and transfer book or membership book shall be closed at
least twenty (20) days for regular meetings and seven (7)
days for special meetings BEFORE the scheduled date of the
meeting.
REGULAR MEETING
Closed at least 20 days
before the schedule date of
the meeting.
SPECIAL MEETING
Closed at least 7 days before
the schedule date of the
meeting.
**Stock and transfer book
A stock and transfer book (STB) contains the records of all
stocks in the names of the stockholders alphabetically arranged;
the installment paid and unpaid on all stock for which
subscription has been made, and the date of payment of any
installment; a statement of every alienation, sale or transfer of
stock made, the date thereof, and by and to whom made; and
such other entries as the by-laws may prescribe.
The STB shall be kept in the principal office of the corporation
or in the office of its stock transfer agent and shall be open for
inspection by any director or stockholder of the corporation at
reasonable hours on business days. In Torres Jr. vs. Court of
IMPROPERLY CALLED MEETINGS
Improperly called meetings can be considered valid, provided:
3. All the stockholders attend or are duly represented
during the meetings;
4. Not one of those stockholders attended just for the
purpose of objecting to the calling or holding of such
meeting.
T/N: Even if the meeting is improperly held or improperly called,
all transactions or resolutions approved during the said meeting
can still be considered valid provided that ALL the stockholders
attend or are duly represented in that meeting.
The new amendment added a new caveat: “Provided, that not
anyone of those stockholders attended just for the purpose of
objecting to the calling or holding of the meeting.”
So even if the stockholders are duly represented or are present,
but one of them was there just to object the calling or holding of
such meeting, then you cannot apply the exception that the
meeting is valid even if it’s improperly called or held.
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SEC. 50. PLACE & TIME OF MEETINGS OF
STOCKHOLDERS OR MEMBERS
Illustration
Quorum in a non-stock corporation
Section 50. Place and Time of Meetings of Stockholders or
Members. – Stockholders’ or members’ meetings, whether
regular or special, shall be held in the principal office of the
corporation as set forth in the articles of incorporation, or, if not
practicable, in the city or municipality where the principal office
of the corporation is located: Provided, That any city or
municipality in Metro Manila, Metro Cebu, Metro Davao, and
other Metropolitan areas shall, for purposes of this section, be
considered a city or municipality.
10 members in a non-stock corporation in order to hold a
meeting. Before the meeting, 3 already died. What will be
our quorum?
A: The quorum is 4 because the remaining members are only 7.
In a non-stock corporation, the dead members cannot be
represented.
Notice of meetings shall be sent through the means of
communication provided in the bylaws, which notice shall state
the time, place and purpose of the meetings.
SEC. 52. REGULAR & SPECIAL MEETINGS OF
DIRECTORS/TRUSTEES; QUORUM
Each notice of meeting shall further be accompanied by the
following:
(a) The agenda for the meeting;
(b) A proxy form which shall be submitted to the corporate
secretary within a reasonable time prior to the meeting;
(c) When attendance, participation, and voting are allowed by
remote communication or in absentia, the requirements and
procedures to be followed when a stockholder or member elects
either option; and
(d) When the meeting is for the election of directors or trustees,
the requirements and procedure for nomination and election.
All proceedings and any business transacted at a meeting of the
stockholders or members, if within the powers or authority of the
corporation, shall be valid even if the meeting is improperly held
or called: Provided, That all the stockholders or members of the
corporation are present or duly represented at the meeting and
not one of them expressly states at the beginning of the meeting
that the purpose of their attendance is to object to the
transaction of any business because the meeting is not lawfully
called or convened.
SEC. 51. QUORUM IN MEETINGS
Section 51. Quorum in Meetings. – Unless otherwise provided
in this Code or in the bylaws, 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.
Quorum is the number of shareholders needed in order to validly
conduct a meeting.
2 KINDS OF QUORUM
(1) Simple quorum – 50% + 1
(2) Qualified Quorum – any number greater than the
simple quorum
Note: In so far as non-stock corporation is concerned, quorum
is based on the majority of the living members.
Section 52. Regular and Special Meetings of Directors or
Trustees; Quorum. – Unless the articles of incorporation or the
bylaws provides for a greater majority, a majority of the directors
or trustees as stated in the articles of incorporation shall
constitute a quorum to transact corporate business, and every
decision reached by at least a majority of the directors or
trustees constituting a quorum, except for the election of officers
which shall require the vote of a majority of all the members of
the board, shall be valid as a corporate act.
Regular meetings of the board of directors or trustees of every
corporation shall be held monthly, unless the bylaws 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 bylaws.
Meetings of directors or trustees of corporations may be held
anywhere in or outside of the Philippines, unless the bylaws
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 two (2) days prior to the scheduled
meeting, unless a longer time is provided in the bylaws. A
director or trustee may waive this requirement, either expressly
or impliedly.
Directors or trustees who cannot physically attend or vote at
board meetings can participate and vote through remote
communication such as videoconferencing, teleconferencing, or
other alternative modes of communication that allow them
reasonable opportunities to participate. Directors or trustees
cannot attend or vote by proxy at board meetings.
A director or trustee who has a potential interest in any related
party transaction must recuse from voting on the approval of the
related party transaction without prejudice to compliance with
the requirements of Section 31 of this Code.
When
Notice of
Meeting
Regular Meeting
Held monthly unless
the bylaws provide
otherwise.
Special Meeting
Held anytime upon:
(a) The call of the
president; or
(b) As provided for in
the bylaws.
GEN: 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 two (2) days prior to the scheduled
meeting
XPN: A longer time is provided in the bylaws.
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How
conducted
May be done electronically or other means as
allowed by the Commission.
T/N: Teleconferencing is now very common
and is now the standard way.
Reasons why SEC allows teleconferencing:
1. In order to take advantage of the advances of
technology;
2. To save time of the busy members of the board. As
long as the minutes will reflect the true and accurate
information, the BOD or BOT don’t have to conduct a
physical meeting.
NO REPRESENTATION ALLOWED
IN A BOARD MEETING
Directors or trustees cannot attend or vote by proxy at board
meetings. This is because a director’s presence is personal due
to his qualification and expertise.
RIGHT TO VOTE OF SECURED CREDITORS
GEN: In case a stockholder grants security interest in his or her
shares in stock corporations, the stockholder-grantor shall have
the right to attend and vote at meetings of stockholders.
XPN: UNLESS the secured creditor is expressly given by the
stockholder-grantor such right in writing which is recorded in
the appropriate corporate books.
Atty. Espedido: It is still the pledgor who has the right to
participate. Even if the pledgee has the possession of the
certificate, there is no ownership that is being transferred,
UNLESS the pledgor grants the pledgee the right to vote.
In which case, the pledgee may demand from the pledgor the
right to vote to be contained in a PROXY.
(1) Demand right to vote
(2) Demand for a proxy
WHEN STOCKHOLDER IS DEAD
SEC. 53. WHO SHALL PRESIDE AT MEETINGS
Section 53. Who Shall Preside at Meetings. – The chairman
or, in his absence, the president shall preside at all meetings of
the directors or trustees as well as of the stockholders or
members, unless the bylaws provide otherwise.
SEC. 54. RIGHT TO VOTE OF SECURED CREDITORS &
ADMINISTRATORS
Section 54. Right to Vote of Secured Creditors and
Administrators. – In case a stockholder grants security interest
in his or her shares in stock corporations, the stockholdergrantor shall have the right to attend and vote at meetings of
stockholders, unless the secured creditor is expressly given by
the stockholder-grantor such right in writing which is recorded in
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.
Certificate of Stock
The best evidence of ownership of shares of stocks.
IMPORTANT: Shares are personal properties. Being personal
properties, the certificate of stock can be offered as security for
any liability or loan to guarantee payments of obligations like in
pledge and mortgage.
Who takes possession of the certificate of stock in a pledge
or mortgage?
A:
PLEDGE
MORTGAGE
Pledgee takes possession of The mortgagee does not
the certificate
take possession of the
certificate
There is a transfer of
possession BUT no transfer
of ownership
Note: 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. 55. VOTING IN CASE OF JOINT OWNERSHIP OF
STOCK
Section 55. Voting in Case of Joint Ownership of Stock. –
The consent of all the co-owners shall be necessary in voting
shares of stock owned jointly by two (2) or more persons, unless
there is a written proxy, signed by all the co-owners, authorizing
one (1) 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.
GEN: The consent of all the co-owners shall be necessary in
voting shares of stock owned jointly by two (2) or more persons.
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
XPN: Unless there is a written proxy, signed by all the coowners, authorizing one (1) or some of them or any other person
to vote such share or shares.
SUMMARY:
(A) If there are 2 of them – BOTH of them should consent
to the vote UNLESS one or more of them will authorize
the other to represent them and cast their vote in behalf
of the other.
(B) Owned in an “AND/OR” capacity – EITHER of the
co-owners could vote
Example: A and/or B – either A or B could vote
There is no transfer of
possession and ownership
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Illustration.
Two owners with contradicting vote
There are 2 owners. Both of them were together taking
lunch and there was an issued that required a vote of WON
there must be an increase of capital stock. How will we
qualify the vote?
A: If there are 2 stockholders with contradicting votes – NO
VOTE; ZERO VOTE. The best solution: Both should AGREE.
SEC. 56. VOTING RIGHT FOR TREASURY SHARES
Section 56. Voting Right for Treasury Shares. – Treasury
shares shall have no voting right as long as such shares remain
in the Treasury.
Rule: Treasury shares shall have no voting rights.
PROXIES
An instrument that refers to the authority given by the
stockholder to another to represent the former during meeting
Rule: Proxies shall be in writing, signed, and filed by the
stockholder in any form authorized in the bylaws.
(A/N: See discussion on proxies under Sec. 23.)
VALIDITY AND EFFECTIVITY OF A PROXY
It shall be valid only for the meeting for which it is intended
UNLESS otherwise provided in the proxy form. However, no
proxy shall be valid and effective for a period longer than 5
years.
Reason: If they were given voting powers, the directors would
vote for themselves, thereby perpetuating their position in the
board.
Illustration. If you have a proxy for the year 2020, you cannot
use it for 2021 because it is only intended for that particular
meeting unless it is extended but in no case shall it be longer
than 5 years.
A/N: See Sec. 9.
A PROXY CANNOT BE SUBSTITUTED
SEC. 57. MANNER OF VOTING; PROXIES
Section 57. Manner of Voting; Proxies. – Stockholders and
members may vote in person or by proxy in all meetings of
stockholders or members.
When so authorized in the bylaws or by a majority of the board
of directors, the stockholders or members of corporations may
also vote through remote communication or in absentia:
Provided, That the votes are received before the corporation
finishes the tally of votes.
A stockholder or member who participates through remote
communication or in absentia, shall be deemed present for
purposes of quorum.
The corporation shall establish the appropriate requirements
and procedures for voting through remote communication and
in absentia, taking into account the company’s scale, number of
shareholders or members, structure and other factors consistent
with the basic right of corporate suffrage.
Proxies shall be in writing, signed and filed, by the stockholder
or member, in any form authorized in the bylaws and received
by the corporate secretary within a reasonable time before the
scheduled meeting. Unless otherwise provided in the proxy
form, 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.
MANNER OF VOTING
Rule: Stockholder or members in all meetings of stockholders
or members may vote:
(1) In person
(2) By proxy
(3) Through remote communication or in absentia when
authorized:
(a) in the bylaws or
(b) by a majority vote of the BOD
A proxy cannot be substituted by reason of the trust and
confidence reposed upon the person given the authority to
represent the other. The authority cannot be delegated.
Illustration 1. Jin is given a proxy for a particular meeting.
It was scheduled on the same day that she has a date and
she preferred to go on that date instead.
She cannot delegate her authority to attend said meeting to her
sister. Her sister cannot attend the meeting because a proxy
cannot be substituted or delegated.
Illustration 2. On the other hand, Jin is given a proxy all
compliant with the requirements. However, at the meeting,
she was told that she cannot participate for no reason. Can
it be done?
A: No, it cannot be done because she has a vested right as an
owner.
PROXY GIVEN TO TWO OR MORE PERSONS
(A) IF TWO PROXY HOLDERS
If two persons were given a proxy by the same person, both
of them cannot vote at the same time in the meeting.
Between two proxy holders, who is entitled to vote?
A: RULES:
1. Proxy whose proxy instrument bears the latest
date
2. If same date – Proxy holder whose proxy
instrument bear the later time
3. If same time – proxy holder who presents it first
4. All things being equal (same date, same time, and
present at the same time) – proxy committee
decides
(B) IF THREE PROXY HOLDERS
Where a proxy is given to three persons in one instrument,
the three of them must agree upon the vote and in case of
conflict, the rule of the majority of the three governs. [See
De Leon, Page 512]
Atty. Espedido: The most practical approach is to AGREE
upon the vote and majority shall prevail.
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REVOCATION OF PROXY
Illustration. A proxy was declared and recognized as the
appropriate proxy holder. However, when he went to the
meeting, the stockholder who gave him the proxy was also
there. Who is entitled to vote?
A: 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.
SEC. 58. VOTING TRUSTS
Section 58. 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
Commission; otherwise, the agreement is ineffective and
unenforceable. The certificate or certificates of stock covered by
the voting trust agreement shall be cancelled and new ones shall
be issued in the name of the trustee or trustees, stating that they
are issued pursuant to said agreement. The books of the
corporation shall state that the transfer in the name of the trustee
or trustees is made pursuant to the voting trust agreement.
MANAGEMENT CONTROL DEVICES
Management Control Devices
These are devices that are used to attain the particular result
that the management wants. They will be able to control the
results or predetermine the outcome of their acts. They will
guarantee the accomplishment of the objective of the
management.
Kinds:
1.
2.
3.
4.
Management Contract
Proxy
Voting Trust Agreement
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 upon a trustee
or trustees for the purpose of conferring to the latter the right to
vote and other rights pertaining to the shares for a period not
exceeding five years at any time.
Management may influence a group of stockholders, telling
them that “this is how you should vote”. In order to ensure that
they will abide by the agreement on how to vote, they may
execute a voting agreement. They could designate any or some
to cast their vote in behalf of all the other signatories to that
voting agreement.
If the management could have this, more or less they can
predetermine the outcome of the results/vote. This is a way of
PREDICTING the outcome of the results of any issue that may
require approval during a stockholders meeting.
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.
What happens to these voting rights?
A: The stockholder transfers his voting rights to another
(trustee).
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 trustor 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.
Illustration. 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.
Any other stockholder may transfer the 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 purposes of
circumventing the laws against anti-competitive agreements,
abuse of dominant position, anti-competitive mergers and
acquisitions, violation of nationality and capital requirements, or
for the perpetuation of fraud.
Unless expressly renewed, all rights granted in a voting trust
agreement shall automatically expire at the end of the agreed
period. The voting trust certificates as well as the certificates of
stock in the name of the trustee or trustees shall thereby be
deemed cancelled and new certificates of stock shall be
reissued in the name of the trustors.
The voting trustee or trustees may vote by proxy or in any
manner authorized under the bylaws unless the agreement
provides otherwise.
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?
A: 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?
A: The voting trustee, because the Voting Trust Agreement
operates to revoke the proxy.
RIGHTS OF A TRUSTEE IN A VOTING TRUST AGREEMENT
(1)
(2)
(3)
(4)
The right to vote
The right to be voted upon
The right to be represented
Right of inspection of all corporation books and
records
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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
Illustration 1.
Stockholder attends the meeting – proxy is revoked
You were given the proxy and attended the meeting.
However, in the meeting, you saw the stockholder who you
are representing. When an issue was about to be resolved,
the SH voted. What do you think will happen?
A: The stockholder’s vote prevails because the presence of the
stockholder revokes the proxy.
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).
Illustration 2.
Trustor attends the meeting – trustee’s vote prevails; no
revocation of VTA
VOTING TRUST AGREEMENT VS.
VOTING AGREEMENT
On the other hand, a voting trustee attended the meeting
and the trustor also appeared. Which vote should prevail?
A: The trustee’s vote shall prevail.
Voting Trust Agreement
An agreement in writing
whereby one or more
stockholders of a stock
corporation transfers their
shares to any person/s or to
a corporation having
authority to act as trustee for
the purpose of vesting in
such person/s or corporation
(as trustee/s) voting or other
rights pertaining to the
shares for a certain period
not exceeding the term fixed
by the Code and upon the
terms and conditions stated
in the agreement.
Voting Agreement
A written agreement among
a group of shareholders, not
a joint ownership, wherein
they agree among
themselves on how they will
vote when a certain issue
arises.
Illustration 3.
Trustee delegates authority to a proxy
The trustee authorized somebody else to appear in the meeting
because he had something else to do. He told his son to
represent him (trustee) in the meeting. When the son went there,
the stockholder was also there.
Whose vote will prevail? Can the trustee transfer this right
to someone else? Is this the intention of the law?
A: The proxy’s right will prevail. Section 58, last paragraph
provides: “The voting trustee or trustees may vote by proxy or in
any manner authorized under the bylaws unless the agreement
provides otherwise.”
Atty Espedido: That is a very dangerous provision. It is basic that
delegated power cannot be further delegated. But it is the law.
PROXY vs VOTING TRUST AGREEMENT
Proxy
No legal title to the shares of
the stockholder
Voting Trust Agreement
Acquires legal title to the
shares of the stockholder
The stockholder precisely executed the trust agreement and
even transferred title to the trustee basically because of trust.
The proxy of the trustee might not be trusted by the stockholder.
It will be very dangerous if we allow the proxy to represent.
Revocable at any time
unless coupled with interest
Irrevocable for a definite and
limited period of time
A delegated power cannot be delegated. BUT it is the law. It is
provided by law.
Can only act at the specified
SH’s meeting
Not limited to any particular
meeting
**PROHIBITION AGAINST THE USE OF MANAGEMENT
DEVICES
Votes only in the absence of
the owner of stock
Can vote and exercise all the
rights of the transferring SH
even when the SH is present
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
Shorter duration
Longer duration
Need not be notarized nor a
copy be filed with the SEC
Notarized and filed with SEC
No right of inspection of
corporate books
Has such right
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.
Illustration. 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?
A: 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.
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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.
TITLE VII. STOCKS AND STOCKHOLDERS
SEC. 59. SUBSCRIPTION CONTRACT
Section 59. 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.
Subscription Contract
The agreement entered into when subscribing for shares.
Important: Like any other contract, it must have the elements
of a contract, namely:
1.
2.
3.
Consent – consent of the parties (meeting of the
minds)
Object or subject matter – in the subscription
contract, it pertains to the newly-issued stocks
Consideration – in the subscription contract, it shall
not be less than the par value or issue value of the
shares. It can be paid through the following means:
a. Cash
b. Property
c. Labor or services actually rendered
d. Amount transferred from URE to capital
e. Shares which are reclassified
How can you become a stockholder?
A:
(1) Subscription of an unissued shares of the corporation
(2) Direct purchase of existing shares from another
stockholder
(3) Purchases stock from publicly listed corporations
(4) By exercising stock option
When would you subscribe?
(a) Pre-incorporation subscription – before incorporation
(b) Post-incorporation subscription – after subscription
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.
to stock option because here, person A can already purchase
the stock at P10 instead of P15.
Atty. Espedido: 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
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, so that they can
maintain their “hold” or existing % of holdings in the corporation.
STOCK OPTION
Privilege given by the
corporation
Can be given to 3rd parties
No maximum amount.
Depends on the agreement
between the corporation and
the person given the
options.
PRE-EMPTIVE RIGHT
A right given to stockholders
by law
Only given to existing
stockholders
The stockholder has the right
to buy newly-issued shares
in an amount in proportion to
him
SEC. 60. PRE-INCORPORATION SUBSCRIPTION
Section 60. Pre-incorporation Subscription. – A subscription
of shares in 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 the corporation fails to incorporate within the
same period or within a longer period stipulated in the contract
of subscription. No pre-incorporation subscription may be
revoked after the articles of incorporation is submitted to the
Commission.
PRE-INCORPORATION SUBSCRIPTION
GEN: The individual agrees to subscribe prior to incorporation
and said contract is IRREVOCABLE for at least 6 months
XPN: Revocable in the following instances:
(1) ALL of the other subscribers consent to the
revocation;
(2) The Corporation fails to incorporate within the
same period or
(3) Within a longer period stipulated in the contract of
subscription.
**XPN to XPN: Irrevocable after the AOI have been submitted
to the Commission (post-incorporation subscription).
What is the purpose of the irrevocability?
A: To ensure the creation of the corporation. It gives the
organizers the chance to organize.
Do stock options have value?
A: Yes. They are valuable because they give a person the right
to buy shares of stock at a specific price. (A/N: Remember, stock
prices fluctuate, so you may have an opportunity to buy shares
of stock at a lower price).
Atty. Espedido: If revocation is allowed 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.
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
**RULE ON POST-INCORPORATION SUBSCRIPTION
Under post-incorporation, the law is silent as to the revocability
or irrevocability of the subscription, but actually it is irrevocable.
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The moment a subscriber subscribes after the incorporation of
a company, he becomes a stockholder and cannot anymore
revoke his subscription.
And since he is already a stockholder, he can now enjoy the
rights of a stockholder. The basis for this is Sec. 71 of this Code.
Rights of stockholder:
1. He may check the corporate books;
2. He has the right to vote on shares if he has a
voting share;
3. He has the right to dividends when the corporation
declares said dividends.
Atty. Gaviola: There is a rule in Oblicon that generally, a contract
is revocable when it is not consummated. We apply the same
logic here in the sense that when a subscriber pays for his
subscription pre-incorporation, [the shares are issued] with the
condition that [the proceeds coming from them] will be used for
the formation of the corporation.
The failure of such event to happen would allow the subscriber
to revoke his subscription as provided in Sec. 60, which states
that the corporation has 6 months to comply with said obligation.
However, once the corporation files its AOI, then it is as if the
corporation has already complied with its obligation, thus
making the subscription irrevocable (the contract is already
consummated).
Meanwhile, for post-incorporation subscription, it is akin to a
valid and binding contract that is already perfected
(consummated), hence, it is irrevocable. The subscription now
becomes part of the capital stock of the corporation. Hence, the
corporation cannot allow the subscriptions to be revoked without
prejudicing its interests and that of its stockholders. The
corporation must now comply with its obligations to its
stockholders, like the distribution of dividends and allowing them
to exercise their rights as stockholders.
Where the consideration is other than actual cash, or consists
of intangible property such as patents or copyrights, the
valuation thereof shall initially be determined by the
stockholders or the board of directors, subject to the approval of
the Commission.
Shares of stock shall not be issued in exchange for promissory
notes or future service. The same considerations provided in
this section, insofar as 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 by the articles of incorporation or the bylaws,
or if not so fixed, by the stockholders representing at least a
majority of the outstanding capital stock at a meeting duly called
for the purpose.
How do you pay for subscriptions?
A:
(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;
(6) Outstanding shares exchanged for stocks in the event
of reclassification or conversion;
(7) Shares of stock in another corporation; and/or
(8) Other generally accepted form of consideration
ACTUAL CASH
GEN: Shares of stock shall not be issued in exchanged for
promissory notes.
SEC. 61. CONSIDERATION FOR STOCKS
Section 61. 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:
XPN: Except if the corporation is the one indebted to the person.
If the corporation has debts against the person, then the
corporation may allow this by issuing shares of stocks.
PROPERTY (TANGIBLE/INTANGIBLE)
(a)
Actual cash paid to the corporation;
(b)
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;
(c)
Labor performed for or services actually rendered to
the corporation;
When property is used for the payment of subscription, the
property value must be equal to the amount subscribed.
This is measured through the fair market value of the property.
And to be sure that the property has been evaluated properly, or
assigned with the proper valuation, the SEC will examine the
property.
LABOR OR SERVICES ACTUALLY RENDERED
(d)
Previously incurred indebtedness of the corporation;
(e)
Amounts transferred
earnings to stated capital;
from
unrestricted
retained
(f)
Outstanding shares exchanged for stocks in the event
of reclassification or conversion;
(g)
Shares of stock in another corporation; and/or
(h)
Other generally accepted form of consideration.
Rule: Services here do not refer to future services but pertains
to ACTUAL services rendered.
Illustration. The person planned to join the corporation as a
Vice President. Later on, he was eventually appointed as
VP. Can he be given shares of stocks by telling the
corporation, “I am paying my shares of stock out of my
salary for the first month.” Is that allowed?
A: No, that is not allowed because services here do not refer to
future services.
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Why are future services not allowed?
A: Because of the uncertainty of future services.
AMOUNTS TRANSFERRED FROM THE UNRESTRICTED
RETAINED EARNINGS TO CAPITAL
Illustration. 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?
A: 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.
Atty. Espedido: 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.
WAIVER OF RIGHT TO UNPAID SUBSCRIPTION
Illustration. 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?
A: 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.
Atty. Espedido: 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.
OPTIONS IN APPLICATION OF PAYMENT
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;
Example. Apply the 50,000 to all the 100 subscribed
shares. In effect, there is no single share fully paid
Note: If it is a proportional payment or pro rata – the
stockholder cannot be issued a Stock Certificate.
(2) Full payment for corresponding number of shares –
apply payment to as many shares as may be covered
by that payment.
Example: Apply it to the 50 shares. Therefore the 50
shares are fully paid.
Note: The corporation may issue to the stockholder a
Stock Certificate on the appropriate number of shares
covered.
GOODWILL
Rule: Goodwill may be used to pay subscription because this is
considered property. To determine the value of a good will, it
shall be appraised by the SEC.
**What is goodwill?
A: Goodwill is an intangible asset that is associated with the
purchase of one company by another. Specifically, goodwill is
the portion of the purchase price that is higher than the sum of
the net fair value of all of the assets purchased in the acquisition
and the liabilities assumed in the process. The value of a
company’s brand name, solid customer base, good customer
relations, good employee relations, and proprietary technology
represent some reasons why goodwill exists.
ISSUED PRICE OF NON-PAR VALUE
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.
(A) It may be fixed in the:
1. Articles of Incorporation; or
2. By the BOD pursuant to authority conferred
by the AOI or the bylaws
MANNER OF PAYMENT
(B) If not fixed by the abovementioned – fixed by the
stockholders representing at least a majority of the
OCS at a meeting duly called for the purpose
Are you supposed to pay in full?
A: The stockholder may either pay in full but this is not required.
When is balance payable?
A: The balance shall be paid on:
(a) The date indicated in the subscription
contract; or
(b) When the BOD calls for payment.
**Atty. Gaviola: The call is only required when there is no date
fixed for the payment of the shares. It is the BOD who will make
the call by resolutions of the BOD in a meeting where there is a
quorum, approved by majority of the directors present in the
meeting.
Important: Once the stockholder fully pays, he is given a
Certificate of Stock.
SEC. 62. CERTIFICATION OF STOCK & TRANSFER OF
SHARES
Section 62. Certificate of Stock and Transfer of Shares. –
The capital stock of 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 bylaws. Shares of stock so issued are
personal property and may be transferred by delivery of the
certificate or certificates indorsed by the owner, his attorney- infact, or any other person legally authorized to make the transfer.
No transfer, however, shall be valid, except as between the
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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. The
Commission may require corporations whose securities are
traded in trading markets and which can reasonably
demonstrate their capability to do so to issue their securities or
shares of stocks in uncertificated or scripless form in accordance
with the rules of the Commission.
1 CERTIFICATE OF STOCK CAN BE OFFERED AS
COLLATERAL
Note: Shares of stock so issued are personal property.
Once a certificate of stock is given, the stockholder may offer it
as collateral to the bank or he can exercise his right as an owner
to dispose or sell it.
2 CERTIFICATE OF STOCK IS TRANSFERRABLE
No shares of stock against which the corporation holds any
unpaid claim shall be transferable in the books of the
corporation.
SEC. 63. ISSUANCE OF STOCK CERTIFICATES
Section 63. Issuance of Stock Certificates. – No certificate of
stock shall be issued to a subscriber until the full amount of the
subscription together with interest and expenses (in case of
delinquent shares), if any is due, has been paid.
**Certificate of Stock
(As defined in the case of Anna Teng vs. SEC)
A certificate of stock is a written instrument signed by the proper
officer of a corporation stating or acknowledging that the person
named in the document is the owner of a designated number of
shares of its stocks. It is prima facie evidence that the holder is
a shareholder of a corporation.
A certificate, however, is merely a tangible evidence of
ownership of shares of stock. It is not a stock in the corporation,
and merely expresses the contract between the corporation and
the stockholder.
The shares of stock evidenced by said certificates, meanwhile,
are regarded as property and the owner of such shares may, as
a general rule, dispose of them as he sees fit, unless the
corporation has been dissolved, or unless the right to do is
properly restricted, or the owner’s privilege of disposing of his
shares has been hampered by his own action.
What are requirements for a certificate of stock?
A:
1. It has to be signed by the president or the VP,
countersigned by the corporate secretary or assistant
secretary, and sealed with the corporate seal.
2. It has to state the par value of the share.
3. The name of the shareholder must be indicated.
4. The number of shares must be indicated.
5. The stock number must be indicated.
SIGNATURES REQUIRED IN A CERTIFICATE OF STOCK
(1) Signed by the president or vice-president
(2) Countersigned by the secretary or assistant secretary
NATURE OF CERTIFICATE OF STOCKS
(1) It is a personal property
(2) It is transferrable
(3) It is NOT a negotiable instrument
It is transferred through indorsement + delivery.
3 A CERTIFICATE OF STOCK IS NOT A NEGOTIABLE
INSTRUMENT
Distinction between non-negotiability and transferability:
NOT NEGOTIABLE
It is not negotiable because
it does not contain a
promise or order to pay a
sum certain in money
TRANSFERRABLE
Stock certificate can be
transferred from one
person to another so as to
constitute the transferee
as the lawful owner
thereof.
Note: Here, it is not negotiable because it does not contain a
promise or order to pay a sum certain in money. Although it may
contain an order to deliver a certain number of stocks.
Atty. Espedido: Negotiability presupposes various or many
transfers or subsequent transfers. To constitute the transferee
as the lawful holder of the instrument. There are defenses
available, and he could avail of these defenses. But when we
say transferability, it is more on possession.
REQUISITES OF A NEGOTIABLE INSTRUMENT
Section 1. Form of Negotiable Instruments. – An instrument to
be negotiable must conform to the following requirements:
WUPOD
(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.
MANNER OF TRANSFERRING
NEGOTIABLE
INSTRUMENT
(1) Payable to order
indorsement + delivery
(2) Payable to bearer –
delivery
STOCK CERTIFICATE
indorsement + delivery
Note: A Certificate of Stock may be transferred through
indorsement + delivery.
Atty. Espedido: At the back portion of that certificate is an
indorsement portion – it simply states that this certificate
covering a no. of shares is being transferred to xxx. The date
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and place are indicated, and then sign. So, whoever becomes a
transferee becomes the shareholder.
PROCEDURE
(1)
(2)
(3)
(4)
Indorsement + Delivery
Transferee presents it to the corporation
It is shown to the Secretary
The Secretary records it in the stock and transfer book
of the corporation. On the other page, it will indicate the
name of the transferee.
(5) Once the transferee is recorded, the name of the new
stockholder will now be recorded in the stock and
transfer book
EFFECT
It merely transfers the ownership of the shares to the transferee
or assignee, the latter now being the owner of the shares. There
is already a valid transfer of ownership. However, it does not
make the transferee/assignee a stock holder just yet.
So how can the transferee or assignee become the
stockholder?
A: The registration of the transfer in the stock and transfer book
makes one a stockholder, regardless of the issuance or nonissuance of a new certificate of stock.
SCRIPLESS TRADING
“The Commission may require corporations
whose securities are traded in trading
markets and which can reasonably
demonstrate their capability to do so to issue
their securities or shares of stocks in
uncertificated or scripless form in
accordance with the rules of the
Commission.”
EFFECT IF NOT RECORDED IN THE STOCK AND
TRANSFER BOOK
Rule: No transfer, however, shall be valid, except as between
the parties, until the transfer is recorded in the books of the
corporation
Thus, if it is not recorded in the stock and transfer book, the
transfer will only be binding upon the parties.
Atty. Espedido: You should call the corporate secretary and
warn him not to issue it to anyone.
If it is not in the books, it will not affect third parties. Thus, the
stockholder can sell it again.
Summary of effect if not recorded in the stock and transfer
book:
•
Valid and binding as to the parties (corporation and
subscriber)
•
Not binding to 3rd parties
PURPOSE OF INDORSEMENT
The purpose of indorsement is in order to bind third parties.
Because of this indorsement, any third party can go to the
secretary and have his name registered in the stock and transfer
book.
Atty. Espedido: But this usually doesn’t happen since the holder
thereof will just call the secretary and warn the secretary as to
the fact of the loss of the certificate.
REMEDY FOR REFUSAL TO RECORD TRANSFER OF
STOCK IN YOUR NAME
What if the secretary refuses to record or transfer the stock
in your name?
A: You have the right to go to court and FILE A MANDAMUS
case. You have the right to be recognized – have that right to
register the transfer in your name
Note: The secretary only has a ministerial duty to comply with
the indorsement.
What is a “scrip”?
A: A scrip is a duly signed certificate of stock.
KTG: A scrip is a certificate or receipt that represents
something of value, but has no intrinsic value in itself. What’s
essential is that the issuer and the recipient must agree on the
value that the scrip represents. In other words, it is a substitute
or alternative to legal tender that entitles the bearer to receive
something in return.
Applying this to the provision above, a corporation may be
required to issue its shares in the form of scrips. In this case,
the scrip will represent each share of stock the shareholder
owns. On or before a specific date, the shareholder could
combine the scrips he has, and convert the value they
represent into actual shares.
What happens in scripless trading?
A: There is transfer of ownership of shares without actually
delivering the stock certificates. Instead, the transfer of
ownership is done through book entries.
Atty. Gaviola: This kind of trading is usually done when the
stocks are listed in the stock exchange.
What is the rationale for this provision on scripless trading?
A: For convenience in the buying and selling of securities. If we
strictly follow the traditional way of transferring shares (which
involves delivery of actual certificates), the stock market will not
survive because the transactions will take days to months.
How is scripless trading done?
A: A corporation that intends to trade shares in the stock
exchange must:
1.
Deliver all their securities or their shares to the
Philippine Depository and Trust Corporation (PDTC);
2.
The shares in the books of the PDTC will now be
assigned or given to the brokers who purchased the
shares;
**NOTES
TWO WAYS TO TRANSFER SHARES
1.
2.
Deliver the stock certificate with an intention to transfer
ownership duly indorsed; or
Execute a Deed of Assignment for the shares.
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3.
The corporation’s stock and transfer agent records in
the stocks in the Stock and Transfer Book, and issues
the certificates of stock of the corporation.
T/N: The entity recorded in the Stock and Transfer
Book will be the PDTC, the holder of the shares.
4.
In turn, the PDTC will make entries in their own records
(book entries).
Uplifting of Shares
If the shares are desired to be kept for a long time without
intention to trade them, the shares can be uplifted by:
1.
2.
Requesting the PDTC to take out the shares from their
custody, and record them in the Stock and Transfer
Book under the name of a specific purchaser (who
could be the corporation or an actual shareholder).
The Stock and Transfer Agent will then issue the
certificates of stock to the purchaser.
If later on, the purchaser/shareholder decides to sell the shares,
the stock certificates he or she has must be returned to the Stock
and Transfer Agent, which will take time.
Atty. Gaviola: Note, this is the delay and complication that
scripless trading avoids.
Key Points on Scripless Trading:
1. There is only one owner, the PDTC, who is listed as
the stockholder in the books of the corporation.
2. The PDTC will have its own list of brokers who hold the
shares for their clients.
3. Brokers will have their own list of clients as well.
Who has ownership of the shares of stock in scripless
trading then?
A: The legal owner is the PDTC, but the beneficial owner/s are
the client/s of the brokers.
If that is the case, then who can vote on such shares during
elections?
A: The beneficial owner should ask for a certification from the
broker that he is the owner of the specific number of shares that
he bought. That certification, which is not a stock certificate,
should be brought by the beneficial owner to the election. It is
akin to a proxy allowing the holder to vote on shares.
SEC. 64. LIABILITY OF DIRECTORS FOR WATERED
STOCKS
Section 64. Liability of Directors for Watered Stocks. – A
director or officer of a corporation who: (a) consents to the
issuance of stocks for a consideration less than its par or issued
value; (b) consents to the issuance of stocks for a consideration
other than cash, valued in excess of its fair value; or (c) having
knowledge of the insufficient consideration, does not file a
written objection with the corporate secretary, shall be liable to
the corporation or its creditors, solidarily with the stockholder
concerned for the difference between the value received at the
time of issuance of the stock and the par or issued value of the
same.
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 STOCKS
Stocks which are sold at less than the par value. You pay less
for more stocks. If you were able to subscribe to a water stock,
the value paid will not reflect the actual value of the shares.
How could water stocks exist?
1. When the value of the thing that you used in paying the
stocks is lower than the par value of the share–
discounted stocks
2. Did not pay anything at all – bonus stocks
3. Consideration is valued in excess of its fair value
What is the effect of watered shares?
A: Watered stocks are not merely ultra vires, but they are illegal
per se, and they cannot be ratified by any vote of the
shareholders, or by resolution of the BOD. However, if they are
sold to a third party, then it should be honored by the corporation
as a valued stock if the third parties acquired it in good faith.
** Why would the law allow a stock certificate which has not
been fully paid to be transferred?
A: To maintain economic relations among corporations and the
public. If we do not allow that, every time a person buys shares
of stocks, the buyer will always ask if it was sold with proper
consideration and it will lead to the suffering of the economy.
That is why certificates are made transferrable even if it is not
fully paid.
The transferability of the certificates would not mean anything if
we have to examine them every time we buy a share of stock
because it would cause great inconvenience.
T/N: We could no longer trust in the certificate and therefore it
loses its credibility. And if no one will trust in them, its
transferability is rendered useless.
And so here comes now the transferee, he did not know this
was a watered stock. He went to the corporation and
presented the said stock, duly endorsed. Is the corporation
obliged to recognize that he is now the stockholder of the
certificate?
A: The corporation must honor because there is nothing wrong
with the certificate. The mistake or deficiency was in the
consideration. So, so long as the certificate is legitimate then the
corporation is obliged to honor/acknowledge and effect the
transfer.
PARTIES LIABLE
(1) The directors who consented to the sale of the share
at less than par value
(2) Shareholder who bought the watered stock
Note: Issuance of watered stock is a valid stock. The issuance
is valid BUT the purchase is ILLEGAL.
Illustration. Such that when the investor subscribed, he can say
that you cannot get back his shares. He is correct because the
issuance is valid BUT he can be compelled to pay the difference.
Atty. Espedido: What is not valid is the consideration. The
issuance is valid.
Page 75 of 88 | EH403 2019-2020 Corporation Law
Who was at a loss?
A: The corporation because the capital indicated and
determined through the par value no longer reflect the true
capital based on par value.
Illustration. 100 shares issued at 1 peso par value = Php 100
capital; 1 share was sold at 50% = Php 99.50 capital
If a share for example was sold at a discounted 50%, and 100
shares were all issued at a par value of PHP1/share – the capital
should be Php 100.
But since one share was sold at 50% discount, then the capital
is PHP99.50 when it should have been PHP100 if there was no
watered stock.
Because of that watered stock, our capital is now less than what
it should be.
Who are the parties responsible?
A: The directors who agreed that the sale will be sold at that
discounted price.
How do we compel the directors if they do not pay?
A: We have to go to court.
Who could authorize the filing of the case in a corporation?
A: Normally, it is the directors. But because the directors
themselves is responsible for the watered stock, they will never
authorize the filing of the case. The remedy is to file a derivative
suit.
DERIVATIVE SUIT
What is a derivative suit?
A: A derivative suit is filed by a stockholder in behalf of a
corporation.
Note: The cause of action belongs to the corporation, but the
stockholder files the action on behalf of the corporation. Instead
of the directors filing the suit, it would now be the stockholders.
Is it the same as a representative suit?
A: No.
A derivative suit is not a representative suit because a
representative suit is a class suit – a person files in behalf of a
class who have a common interest or are similarly situated.
On the other hand, a derivative suit is filed on behalf of a
corporation, not on behalf of a person similarly situated to the
corporation. It is the corporation that is injured, not the
stockholder.
This is allowed by law because the person who is required to act
(BOD) refuses to act.
DERIVATIVE SUIT
Filed on behalf of a
corporation
REPRESENTATIVE SUIT
A class suit where a person
files in behalf of a class who
have common interest or are
similarly situated
Note: It cannot compel to return the issued stocks because as
far as the issuance is concerned, it is VALID. However, it is the
deficient consideration that is ILLEGAL.
Important: If they are given the option to return, the stocks
being transferrable, it could have already been transferred to
another person already.
If the issuance will not be considered valid, the transferee might
be holding something which is not valid even if he has already
paid fully. The transferee may even have paid more because at
the time the shares were transferred, the value might have
already increased.
So that, on watered stocks, what is the prayer in the
derivative suit?
A: The difference between the actual price paid and the par
value of the shares against the directors or officers who
consented to/did not object against the issuance of watered
shares.
** Can a creditor file a derivative suit?
A: No, only the stockholders that are stockholders at the time of
the suit can file the derivative suit.
So we are ready for the derivative suit. Here are stockholder
now who’s filing against the directors because the directors
refuse the file necessary case, so in the end what would the
result of the derivative suit?
A: The BOD will liable for the issuance of the watered stock and
the non-issuance of the certificate of stock, in that manner the
directors shall be solidarily liable.
In the prayer of the derivative suit to be filed by the
petitioning stockholders prayed that they be awarded with
damages and they suffered sleepless nights because
watered are issued, why the directors did it to them, do you
think they can recover damages from that?
A: NO. They can’t recover the damages because the purpose of
the derivative it should be in favor of the corporation, and in the
instant case it was not for the benefit of the corporation. Such
that the cause of action should belong to the corporation.
On the other hand, they had not decided to file derivative
suit, but a case on their behalf, an individual case, they
trying to recover the unpaid portion belongs to the
corporation, that should be given to them, then the court
should give to them the unpaid balance, do you think they
can do that?
A: No. The balance there is considered as a legal capital of the
corporation, such that it is the corporation has the right to
recover the balance, moreover if they are allowed to recover the
unpaid balance and be given to them the it would violate the
trust fund doctrine, because these are part of the capital of the
corporation, and if they allowed to recover the balance then that
would tantamount to liquidation because it is part of the capital.
And it is the corporation is supposed to recover it.
REQUISITES FOR A DERIVATIVE SUIT TO PROSPER
1. Injury to the corporation
2. The person suing must be a stockholder at the time of
the injury
3. Suing on behalf of the corporation.
OTHER INSTANCES IN WHICH A DERIVATIVE SUIT MAY
PROSPER
1.
2.
3.
Disloyalty of directors (See Sec. 33)
Self-dealing directors (See Sec. 31)
Interlocking directors (See Sec. 32)
Page 76 of 88 | EH403 2019-2020 Corporation Law
RR’s answers:
1. Directors assent to acts that are patently illegal
2. Grossly negligent
3. Conflict of interest
4. Disloyalty
WATERED STOCKS IS APPLICABLE ONLY TO NEWLY
ISSUED SHARES (VIRGIN SHARES)
Illustration. Treasury shares with a par value of Php10/share
were sold at Php5/share – not a water stock
There are treasury shares. The BOD needed cash, and they
decided to sell these treasury shares. The par value is at
PHP10/share. The board decided to sell it at PHP5/share.
Is this a watered stock?
A: No, because watered stocks only applies to freshly issued
shares.
There were watered stocks issued. Fortunately, the
corporation was about to be disowned. The existing assets
were not enough to pay all the creditors. Would the
creditors, in the presence of watered stocks, would it be
able to pursue some more other than the existing assets?
A: Yes. This is supposed to be part of the asset.
Can the transferee be compelled to pay the unpaid portion?
A: No. The stocks are not anymore “virgin” stocks when the
transferee bought it since it has been previously issued by the
Corporation to the subscriber. Watered stock only applies to
“virgin” shares. If we allow the transferee to pay, it defeats the
transferability.
Atty. Espedido: We will have to keep asking if it is a watered
stock or not. Thus, insofar as issuance is concerned, it is valid.
What is not valid is with regard to the deficient consideration –
wherein you paid less for more.
**NOTES
KINDS OF SUITS
1.
Individual Suit – a suit brought by the shareholder in
his own name against the corporation when a wrong is
directly inflicted against him.
2.
Representative Suit – a suit brought by the
stockholder in behalf of himself and all the other
stockholders similarly situated when a wrong is
committed against a group of stockholders.
3.
Derivative Suit – a suit brought by a stockholder for
wrongful acts committed by directors/trustees of a
corporation, when the shareholder finds that he has no
redress because the directors/trustees are the ones
vested by law to decide whether or not to sue.
DERIVATIVE SUITS
It is a suit by a shareholder to enforce a corporate cause of
action. It is a condition sine qua non that the corporation be
impleaded as a party because not only is the corporation an
indispensable party, but it is also the present rule that it must be
served with process.
The judgment must be made binding upon the corporation in
order that the corporation may get the benefit of the suit against
the same defendants for the same cause of action.
REQUISITES FOR DERIVATIVE ACTIONS
1.
2.
3.
4.
5.
That the person instituting the action be a stockholder
or member at the time the act/s or transaction/s
subject of the action occurred and at the time the action
was filed;
That the stockholder/member exerted all reasonable
efforts, and alleges the same with particularity in the
complaint, to exhaust all remedies available under the
Articles of Incorporation, bylaws, laws or rules
governing the corporation to obtain the relief he desires
That there is no appraisal right available for the act/s
complained of;
That the suit is not a nuisance or harassment suit;
That the suit is brought in the name of the
corporation.
Important:
In derivative suits, the corporation is an unwilling coplaintiff; the suing stockholder/member is only a
nominal party.
The number of shares owned by the suing stockholder
is not material.
The wrong contemplated in a derivative suit is one
which injures the corporation directly. But, the personal
injury suffered by the stockholder cannot disqualify him
from filing said derivative suit.
SEC. 65. INTEREST ON UNPAID SUBSCRIPTIONS
Section 65. Interest on Unpaid Subscriptions. – Subscribers
to stocks shall be liable to the corporation for interest on all
unpaid subscriptions from the date of subscription, if so required
by and at the rate of interest fixed in the subscription contract. If
no rate of interest is fixed in the subscription contract, the
prevailing legal rate shall apply.
SEC. 66. PAYMENT OF BALANCE OF SUBSCRIPTION
Section 66. Payment of Balance of Subscription. – Subject
to the provisions of the subscription contract, the board of
directors may, at any time, declare due and payable to the
corporation unpaid subscriptions and may collect the same or
such percentage thereof, in either case, with accrued interest, if
any, as it may deem necessary.
Payment of unpaid subscription or any percentage thereof,
together with any interest accrued shall be made on the date
specified in the subscription contract 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 interest rate is provided in the subscription
contract. The interest shall be computed from the date specified,
until full payment of the subscription. If no payment is made
within thirty (30) days from the said date, all stocks covered by
the subscription shall thereupon become delinquent and shall
be subject to sale as hereinafter provided, unless the board of
directors orders otherwise.
**NOTES
How does the BOD call for the payment of the balance of
the subscription?
A: A call is made by a resolution of the BOD in a meeting where
there is a quorum, and approved by majority of the directors
present in said meeting.
Page 77 of 88 | EH403 2019-2020 Corporation Law
What is the effect of the failure to pay after a call, or upon
the lapse of the date specified in the subscription contract?
A: The BOD may issue another board resolution declaring said
subscriptions delinquent.
(3) Publication of Notice of Sale
(a) once a week for two (2) consecutive weeks
(b) in a newspaper of general circulation in the
province or city where the principal office of the
corporation is located
SEC. 67. DELINQUENCY SALE
Section 67. 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 the sale, with a copy of the resolution, shall be sent to
every delinquent stockholder either personally, by registered
mail, or through other means provided in the bylaws. The same
shall 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 the former’s 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 a 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 the purchaser’s 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 fully
paid 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.
PROCEDURE FOR DELINQUENCY SALE
(1) Resolution by the BOD for the order of sale of delinquent
stocks, specifying the following:
(a) Amount due on each subscription
(b) Accrued interest
(c) Date, time, and place of sale which shall not be
less than 30 days nor more than 60 days from the
date the stocks become delinquent
(2) Notice of Sale with a copy of the Resolution shall be sent
to every delinquent stockholder either:
(a) Personally
(b) By registered mail, or
(c) Through other means provided in the bylaws
(4) Sale at a public auction to the bidder who shall offer to
pay the full amount of the balance on the subscription
together with accrued interest, costs of advertisements and
expenses of sale for the smallest number of shares or
fraction of a share.
Who is the “highest bidder”?
A: He is the bidder who offers to pay the highest amount for the
least number of shares.
Illustration:
Bidder 1
Bidder 2
Their Offer
10k shares for P100k
5k shares for P75k
Value per Share
P10/share
P15/share
Who is the highest bidder in this case?
A: Bidder 2 is the best bidder. This is because the 2nd bidder
bought the least number 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.
DATE OF SALE AT PUBLIC AUCTION
The sale must be held not less than 30 days nor more than 60
days FROM the date the stocks become delinquent.
EFFECT OF PAYMENT BY THE SUBSCRIBER BEFORE THE
PERIOD OF SALE (before 30 days)
When the delinquent stockholder pays to the corporation on or
before the date specified for the sale of the delinquent stock the
balance due on the stockholder’s subscription, the stocks shall
be RETAINED by the stockholder. In which case, he may be
issued the certificate of stock in his favor.
**NOTES
Illustration 1
Delinquent Stock
Total subscription
Total paid subs.
Total unpaid subs.
-
20,000 shares valued at P1Mn
10,000 shares valued at P500k
10,000 shares valued at P500k
In this case, the entire subscription of 20,000 shares is
considered delinquent stock. This is because of the Principle of
Indivisibility of Subscription. Thus, a delinquent stock shall
refer not only to the unpaid subscription, but includes the paid
subscription.
The winning bidder will be determined by who is willing to pay
the for the most for the least/smallest number of stocks.
Page 78 of 88 | EH403 2019-2020 Corporation Law
Illustration 2
Delinquent Stock
Bidder
Bidder A
Bidder B
Bidder C
-
Bid
2,000 shares valued at P10k
1,500 shares valued at P10k
1,000 shares valued at P10k
SEC. 69. COURT ACTION TO RECOVER UNPAID
SUBSCRIPTION
Value/Sh
P5.00/share
P6.67/share
P10.00/share
In this case, Bidder C should be declared the highest bidder
because he is the bidder who is willing to pay the highest amount
for the smallest number of shares or fraction of the share. This
means that the highest bidder must be the bidder who is willing
to pay the highest amount per share.
Upon payment of the highest bidder, the stock purchased shall
be transferred to such purchaser in the Stock and Transfer Book
of the corporation, and certificate/s for such stock shall be issued
in the purchaser’s 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.
Illustration 3
Excess Shares & No Bidder
Section 69. Court Action to Recover Unpaid Subscription. –
Nothing in this Code shall prevent the corporation from
collecting through court action, the amount due on any unpaid
subscription, with accrued interest, costs and expenses.
SEC. 70. EFFECT OF DELINQUENCY
Section 70. Effect of Delinquency. – No delinquent stock shall
be voted for, be entitled to vote, or be represented 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
payment is made by the holder of such delinquent stock for the
amount due on the subscription with accrued interest, and the
costs and expenses of advertisement, if any.
SEC. 71. RIGHTS OF UNPAID SHARES, NONDELINQUENT
Section 71. Rights of Unpaid Shares, Nondelinquent. –
Holders of subscribed shares not fully paid which are not
delinquent shall have all the rights of a stockholder.
Excess shares
EFFECTS OF DELINQUENCY
Based on the illustration above, 1,000 shares out of the 10,000
shares shall be given to Bidder C. The remaining 9,000 shares
shall be given to the delinquent shareholder.
No bidder
If there is no bidder, the corporation is authorized to purchase
the shares and the same shall form part of the treasury shares.
Effect
If the bidder is the corporation, there will be no shares given to
the delinquent shareholder. Applying the illustration above, all
10,000 shares will pertain to the shareholder. They will form part
of the treasury shares.
The corporation may go after the delinquent shareholder in
accordance with Sec. 69 of this Code.
Note (Atty. Espedido): The Board may decline any bidder.
SEC. 68. WHEN SALE MAY BE QUESTIONED
Section 68. 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. No such action shall be maintained
unless a complaint is filed within six (6) months from the date of
sale.
QUESTIONING OF AUCTION SALE
If there is irregularity in the conduct of the sale, the same may
be questioned.
When can you question the conduct of the auction sale?
A: Within 6 months from the date of sale.
As to the stockholder, he will no longer enjoy the following rights:
(1) Right to vote
(2) Right to be voted for;
(3) Right of representation at any stockholder's meeting;
(4) Not entitled to any of the rights of a stockholder
 EXCEPT the right to dividends in accordance
with the provisions of this Code
(5) Stocks will be considered delinquent and shall be
subject to delinquency sale
UPON
DECLARATION
OF
DELINQUENCY,
A
STOCKHOLDER CANNOT RETURN SHARES ALREADY
BOUGHT
Note: After being declared delinquent, the stockholder cannot
return the shares already bought.
Reason: He cannot return the shares already bought because
as between the corporation and the subscriber, there is a debtorcreditor relationship. Thus, the stockholder is obliged to pay the
balance. He cannot just simply return the shares he bought.
SUBSCRIBER CANNOT USE FUTURE DIVIDENDS AS
PAYMENT FOR THE BALANCE
Illustration.
This coming December, the stockholder is sure that there will be
cash dividends. So, the stockholder says: “By the time the cash
dividends are issued on December, these dividends will be used
to pay the unpaid subscribed shares.”
He further says, “I am already sure that the corporation will issue
the dividends since the profits have increased beyond 100% of
the paid-in capital and it is still March. Thus, by December, I am
sure that the corporation is required to declare dividends.”
Is that allowed?
A: No, it is not allowed.
Page 79 of 88 | EH403 2019-2020 Corporation Law
Three Justifications [Summary of Answers]
Note: This is based on the answers during the recitation
(1) Declaration of dividends when profits exceed the 100%
paid-in capital is subject to exceptions
(2) Corporation may still incur losses in the future – no
assurance that dividends will be declared
(3) Corporation NEVER PROMISES that a stockholder will
be given dividends and only the Board can determine
as to what type of dividend will be issued (not always
cash dividends)
Elaboration:
Since it is still not certain that there will be cash dividends that
will be declared since it is subject to exceptions, namely:
(1) Expansion projects
(2) Loan agreement that contains a condition that the
corporation cannot declare dividends UNLESS there is
consent by the creditor
(3) Emergency purposes
Assuming that none of the 3 exceptions are present, the future
cash dividends (dividends on December) still cannot be used as
payment for the shares because the corporation may still incur
losses in the future. There is still no assurance that dividends
will be declared.
Moreover, assuming that it does not fall under the exceptions
and sure that there are no losses to be incurred, it is still not
allowed because when you subscribe, you become a debtor to
the corporation because you paid partially. However, for the
balance, you are a debtor to the corporation because you
undertook to pay when it is due and demandable.
On the other hand, the Corporation never promises that a
stockholder will be given dividends. What was agreed upon is
that the subscriber will invest, and in the meantime, he shall wait
WON the Board will distribute dividends.
Even if the corporation has already reached the 100% of its paidin capital, assuming it is not falling under the exception and sure
that no loss shall be incurred, the subscriber is not sure if he will
be given cash since the Corporation can either declare cash,
stock, or property dividends. Not even the Internal Revenue
Code can dictate declaration of cash dividends. Only the Board
can determine this.
The Internal Revenue Code may only dictate to declare
dividends but not as to what kind of dividends to be issued
since this is the SOLE prerogative of the Board.
**NOTES
SEC. 72. LOST OR DESTROYED CERTIFICATES
Section 72. Lost or Destroyed Certificates. – The following
procedure shall be followed by a corporation in issuing new
certificates of stock in lieu of those which have been lost, stolen
or destroyed:
(a) The registered owner of a certificate of stock in a
corporation or such person’s legal representative shall file
with the corporation an affidavit in triplicate setting forth, if
possible, the circumstances as to how the certificate was
lost, stolen or destroyed, the number of shares represented
by such certificate, the serial number of the certificate and
the name of the corporation which issued the same. The
owner of such certificate of stock shall also submit such
other information and evidence as may be deemed
necessary; and
(b) After verifying the affidavit and other information and
evidence with the books of the corporation, the corporation
shall publish a notice in a newspaper of general circulation
in the place where the corporation has its principal office,
once a week for three (3) consecutive weeks at the expense
of the registered owner of the certificate of stock which has
been lost, stolen or destroyed. The notice shall state the
name of the corporation, the name of the registered owner,
the serial number of the certificate, the number of shares
represented by such certificate, and shall state that after the
expiration of one (1) year from the date of the last
publication, if no contest has been presented to the
corporation regarding the certificate of stock, the right to
make such contest shall be barred and the corporation shall
cancel the lost, destroyed or stolen certificate of stock in its
books. In lieu thereof, the corporation shall issue a new
certificate of stock, unless the registered owner files a bond
or other security as may be required, effective for a period
of one (1) year, for such amount and in such form and with
such sureties as may be satisfactory to the board of
directors, in which case a new certificate may be issued
even before the expiration of the one (1) year period
provided herein. If a contest has been presented to the
corporation or if an action is pending in court regarding the
ownership of the certificate of stock which has been lost,
stolen or destroyed, the issuance of the new certificate of
stock in lieu thereof shall be suspended until the court
renders a final decision regarding the ownership of the
certificate of stock which has been lost, stolen or destroyed.
Except in case of fraud, bad faith, or negligence on the part of
the corporation and its officers, no action may be brought
against any corporation which shall have issued certificate of
stock in lieu of those lost, stolen or destroyed pursuant to the
procedure above-described.
EFFECTS OF DELINQUENCY
The stockholder will remain a stockholder, but the exercise of
the any of the stockholder’s rights is suspended except the right
to dividends.
The distribution of shares in the dividends by a delinquent
stockholder will be applied in the following manner:
1.
2.
If cash or property dividend – the corporation will
offset the payment of the unpaid subscription from the
stockholder’s share in the dividend.
If stock dividend – the stockholder’s share in the
dividends is withheld by the corporation until the
subscription is fully paid.
LOST CERTIFICATE
Being transferrable, is there any danger or risk of loss?
A: Yes. Since it is transferrable, the finder might just try to copy
the signature and might be able to transfer it to someone. The
transferee, once he goes to the Corporate Secretary might
recognize that it was a fraudulent signature and may decline –
IOW, the buyer is prejudiced.
Remedy: File an Affidavit of Loss to the corporation
Page 80 of 88 | EH403 2019-2020 Corporation Law
Illustration
Stockholder mistakenly used the Certificate of Stock after
a “toilet situation” :)
The stockholder rushed to the nearest toilet. However, after that,
he was looking for a tissue paper but there was none. So he
pulled out a white paper from his wallet and used it to clean
himself.
When he went home, he discovered that he wrongfully used the
Certificate of Stock and hurriedly went back to the toilet.
However, it was already closed. When he went back the next
morning, the trashcan was already empty. The stockholder
exerted many efforts to find the janitor, only to discover that the
janitor has already resigned.
He engaged the services of the NBI to locate the janitor but his
address was unknown. He made efforts to retrieve it but became
futile.
Thus, he executed an Affidavit of loss detailing the
circumstances as to how the certificate was lost. It was signed
and notarized.
**Illustration
Taxi
So if you happen to find a certificate of stocks in a taxi worth
10 million pesos, what will you do? Can you sell it?
A: Yes Sir I can sell it because certificate of stocks is
transferrable.
So you find a buyer and tell him “you see the par value of
this, this worth 10 million pesos and I will sell it to you for
only 2 million pesos” will you buy it? Of course it’s way
more than profitable, someone will take them.
It’s important for the corporation not to just issue new COS
because they want to be sure. For all you know you have
endorsed it to someone else and that someone will come in
the corporation and claim also. So what does the law
require?
A; The following procedure shall be followed for the issuance by
a corporation of new certificates of stock in lieu of those which
have been lost, stolen or destroyed:
(1) Affidavit. The registered owner of a certificate of stock
in a corporation or his legal representative shall file with
the corporation an affidavit in triplicate setting forth, if
possible, the circumstances as to:
a. how the certificate was lost, stolen or
destroyed.
b. the number of shares represented by such
certificate,
c. the serial number of the certificate and
d. the name of the corporation which issued the
same.
He shall also submit such other information and
evidence which he may deem necessary;
(2) Publication by the corporation. Corporation shall
publish a notice in a newspaper of general circulation
published in the place where the corporation has its
principal office, once a week for three (3) consecutive
weeks at the expense of the registered owner of the
certificate of stock which has been lost, stolen or
destroyed.
The notice shall state:
a. the name of said corporation,
b. the name of the registered owner and
c. the serial number of said certificate, and the
d. number of shares represented by such certificate,
T/N: If no contest, general rule is after the expiration of one (1)
year from the date of the last publication, the right to make such
contest shall be barred and said corporation shall cancel in its
books the certificate of stock which has been lost, stolen or
destroyed and issue in lieu thereof new certificate of stock.
The exception is: Unless the registered owner files a bond or
other security in lieu thereof as may be required, effective for a
period of one (1) year, for such amount and in such form and
with such sureties as may be satisfactory to the board of
directors, in which case a new certificate may be issued even
before the expiration of the one (1) year period provided herein.
If a contest has been presented to said corporation or if an
action is pending in court regarding the ownership of said
certificate of stock which has been lost, stolen or destroyed, the
issuance of the new certificate of stock in lieu thereof shall be
suspended until the final decision by the court regarding the
ownership of said certificate of stock which has been lost, stolen
or destroyed.
Summary:
General Rule: No action may be brought against any corporation
which shall have issued certificate of stock in lieu of those lost,
stolen or destroyed pursuant to the procedure above-described.
Except In case of fraud, bad faith, or negligence on the part of
the corporation and its officers.
Alright, if we do not want to wait for 1 year just put up a bond,
and that bond will answer to any other party who present himself
as the owner who brought the certificate with him and prove that
it was not lost and in fact it was legally transferred to him. That’s
how important it is because it is transferrable. You should
execute an affidavit of loss stating the circumstances of loss “ I
Mr J.R.C., and the true and lawful owner stocks certificate
number 0-10-0-10, while one evening I was in karaoke I drink
too much and I left my stocks certificates beside a lady” you
should recite the circumstances leading to the loss.
PROCEDURE IN ISSUING NEW CERTIFICATES
OF STOCK IN LIEU OF THOSE STOLEN, LOST OR
DESTROYED
(1) Filing of an Affidavit of Loss to the corporation
CONTENTS:
1. Circumstances as to how the certificate was lost,
stolen, or destroyed
2. Number of shares represented by such certificate
3. Serial number of the certificate
4. Name of the corporation which issued the same
5. Other information and evidence as may be
deemed necessary
(2) Submission of a Verified Affidavit and other
information and evidence with the books of the
corporation
(3) Publication of a Notice by the corporation in a
newspaper of general circulation in the place where the
corporation has its principal office, once a week for 3
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consecutive weeks at the expense of the registered
owner of the certificate of stock which has been lost,
stolen, or destroyed
CONTENTS:
1. Name of the corporation
2. Name of the registered owner
3. Serial number of the certificate
4. Number of shares represented by such certificate
5. State that AFTER the expiration of 1 year from the
date of the last publication, if no contest has been
presented to the corporation regarding the
certificate of stock, the right to make such contest
shall be barred and the corporation shall:
(a) Cancel the lost, destroyed or stolen COS in its
books.
(b) In lieu thereof, the corporation shall issue a
new certificate of stock
T/N:
If the transaction is not recorded, then the transaction
is binding merely between the parties to the deed, and
not against the corporation and third persons.
The mere execution of the deed of assignment does
not make one a stockholder. Rather, it is the recording
in the Stock and Transfer Book that does.
ASSIGNMENT OF SUBSCRIPTION RIGHTS
WHEN A NEW CERTIFICATE OF STOCK IS ISSUED
(A) AFTER expiration of 1 year from the date of the last
publication – if no contest has been presented to the
corporation regarding the certificate of stock
(B) BEFORE the 1-year period provided – if the
registered owner files a bond or other security as may
be required, effective for a period of 1 year, for such
amount and in such form and with such sureties as may
be satisfactory to the BOD
**NOTES
ISSUANCE OF NEW STOCK CERTIFICATE
GEN: There is a 1-year waiting period before the issuance of
a new certificate of stock. This would give the
transferee/assignee the chance to object to the declaration of
lost or destroyed certificates.
1.
Although generally, the law says you cannot transfer
shares where there is an unpaid subscription, in
practice you can transfer shares by deed of
assignment of subscription rights. What happens is
that you assign your rights to the subscription. You
don’t assign the shares because you are not allowed.
2.
The Principle of Indivisibility still exists when you
assign your rights to subscription. Meaning, you assign
the subscription as a whole.
TITLE VIII. CORPORATE BOOKS AND RECORDS
SEC. 73. BOOKS TO BE KEPT; STOCK TRANSFER AGENT
Section 73. Books to be Kept; Stock Transfer Agent. – Every
corporation shall keep and carefully preserve at its principal
office all information relating to the corporation including, but not
limited to:
(a) The articles of incorporation and bylaws of the corporation
and all their amendments;
(b) The current ownership structure and voting rights of the
corporation, including lists of stockholders or members,
group structures, intra-group relations, ownership data, and
beneficial ownership;
(c) The names and addresses of all the members of the board
of directors or trustees and the executive officers;
If they do not object, the certificate will be issued after 1 year.
(d) A record of all business transactions;
XPN: If the owner gives a bond or security which will be valid for
1 year. That will now allow the issuance of the new certificate/s
of stock even before the lapse of 1 year.
Should a legitimate claimant turn out to have been
jeopardized by the affidavit of loss, what should the
claimant do?
A: The claimant will have the rights over the bond posted.
DEED OF ASSIGNMENT OF SHARES (TRANSFER W/O
STOCK CERTIFICATE)
If there is a certificate of stock, transfer will be done by delivery
and endorsement, and then you record in the stock and transfer
book.
If there is no certificate of stock, transfer can be still done by
deed of assignment of shares.
How is it done?
A: It is basically just like a deed of sale.
1. Execute the deed of assignment.
2. Have it recorded in the Stock and Transfer Book.
(e) A record of the resolutions of the board of directors or
trustees and of the stockholders or members;
(f)
Copies of the latest reportorial requirements submitted to
the Commission; and
(g) The minutes of all meetings of stockholders or members, or
of the board of directors or trustees. Such minutes shall set
forth in detail, among others: the time and place of the
meeting held, how it was authorized, the notice given, the
agenda therefor, whether the meeting was regular or
special, its object if special, those present and absent, and
every act done or ordered done at the meeting. Upon the
demand of a director, trustee, stockholder or member, the
time when any director, trustee, stockholder or member
entered or left the meeting must be noted in the minutes;
and on a similar demand, the yeas and nays must be taken
on any motion or proposition, and a record thereof carefully
made. The protest of a director, trustee, stockholder or
member on any action or proposed action must be recorded
in full upon their demand.
Corporate records, regardless of the form in which they are
stored, shall be open to inspection by any director, trustee,
stockholder or member of the corporation in person or by a
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representative at reasonable hours on business days, and a
demand in writing may be made by such director, trustee or
stockholder at their expense, for copies of such records or
excerpts from said records. The inspecting or reproducing party
shall remain bound by confidentiality rules under prevailing laws,
such as the rules on trade secrets or processes under Republic
Act No. 8293, otherwise known as the “Intellectual Property
Code of the Philippines”, as amended, Republic Act No. 10173,
otherwise known as the “Data Privacy Act of 2012”, Republic Act
No. 8799, otherwise known as “The Securities Regulation
Code”, and the Rules of Court.
fixed by the Commission, which shall be renewable annually:
Provided, That a stock corporation is not precluded from
performing or making transfers of its own stocks, in which case
all the rules and regulations imposed on stock transfer agents,
except the payment of a license fee herein provided, shall be
applicable: Provided, further, That the Commission may require
stock corporations which transfer and/or trade stocks in
secondary markets to have an independent transfer agent.
A requesting party who is not a stockholder or member of record,
or is a competitor, director, officer, controlling stockholder or
otherwise represents the interests of a competitor shall have no
right to inspect or demand reproduction of corporate records.
It is the best evidence used in cases where conflicts need to be
resolved in a corporation. It is a proof of the corporation’s
transactions. Also, it is considered as a prima facie official
evidence of the corporation.
Any stockholder who shall abuse the rights granted under this
section shall be penalized under Section 158 of this Code,
without prejudice to the provisions of Republic Act No. 8293,
otherwise known as the “Intellectual Property Code of the
Philippines”, as amended, and Republic Act No. 10173,
otherwise known as the “Data Privacy Act of 2012”.
BOOKS TO BE KEPT
What are these books and records?
A: Every corporation shall keep and carefully preserve at its
principal office all information relating to the corporation
including, but not limited to:
Any officer or agent of the corporation who shall refuse to allow
the inspection and/or reproduction of records in accordance with
the provisions of this Code shall be liable to such director,
trustee, stockholder or member for damages, and in addition,
shall be guilty of an offense which shall be punishable under
Section 161 of this Code: Provided, That if such refusal is made
pursuant to a resolution or order of the board of directors or
trustees, the liability under this section for such action shall be
imposed upon the directors or trustees who voted for such
refusal: Provided, further, That it shall be a defense to any action
under this section that the person demanding to examine and
copy excerpts from the corporation’s records and minutes has
improperly used any information secured through any prior
examination of the records or minutes of such corporation or of
any other corporation, or was not acting in good faith or for a
legitimate purpose in making the demand to examine or
reproduce corporate records, or is a competitor, director, officer,
controlling stockholder or otherwise represents the interests of
a competitor.
(a) The articles of incorporation and bylaws of the
corporation and all their amendments;
(b) The current ownership structure and voting rights of the
corporation, including:
i. lists of stockholders or members
ii. group structures
iii. intra-group relations
iv. ownership data, and
v. beneficial ownership;
(c) The names and addresses of all the members of the
board of directors or trustees and the executive
officers;
(d) A record of all business transactions;
(e) A record of the resolutions of the board of directors or
trustees and of the stockholders or members;
(f) Copies of the latest reportorial requirements submitted
to the Commission; and
(g) The minutes of all meetings of stockholders or
members, or of the board of directors or trustees.
If the corporation denies or does not act on a demand for
inspection and/or reproduction, the aggrieved party may report
such to the Commission. Within five (5) days from receipt of
such report, the Commission shall conduct a summary
investigation and issue an order directing the inspection or
reproduction of the requested records.
Contents of the Minutes of the Meeting
Such minutes shall set forth in detail, among others:
1. time and place of the meeting held
2. how it was authorized
3. the notice given
4. the agenda therefor, whether the meeting was
regular or special, its object if special
5. those present and absent, and every act done or
ordered done at the meeting
Stock corporations must also keep a stock and transfer book,
which shall contain a record of all stocks in the names of the
stockholders alphabetically arranged; the installments paid and
unpaid on all stocks for which subscription has been made, and
the date of payment of any installment; a statement of every
alienation, sale or transfer of stock made, the date thereof, by
and to whom made; and such other entries as the bylaws may
prescribe. The stock and transfer book shall be kept in the
principal office of the corporation or in the office of its stock
transfer agent and shall be open for inspection by any director
or stockholder of the corporation at reasonable hours on
business days.
A stock transfer agent or one engaged principally in the business
of registering transfers of stocks in behalf of a stock corporation
shall be allowed to operate in the Philippines upon securing a
license from the Commission and the payment of a fee to be
REASON FOR THE CORPORATION TO KEEP THE BOOKS
AND RECORDS
Atty. Espedido: You also have the record of the STOCK
CERTIFICATES. SEC will mark it as received.
You will also show your stock certificates – there is a book where
there is a perforated portion. Once you issue this certificate,
secretary removes this perforated portion, but there’s a
remaining portion.
Summary
What are the books to be kept?
1. Articles of Incorporation
2. By-laws
3. Stock and transfer books
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4.
5.
6.
7.
Stock certificates
Minutes of the stockholders meeting
Minutes of the board meeting
Records of all business transactions of the corporation
(journals, ledgers, financial statements)
STOCK TRANSFER AGENT
Atty. Espedido: If there are hundreds and thousands of
shareholders, you will need a STOCK TRANSFER AGENT to
record all the transactions and transfers of the corporation.
•
Stock transfer agents are duly licenses and are
supposed to register with the SEC.
•
The stock transfer agent does nothing except record all
transactions and transfers. Most of these stock transfer
agents are banks.
Note: A stock transfer agent or one engaged principally in the
business of registering transfers of stocks in behalf of a stock
corporation shall be allowed to operate in the Philippines upon
securing a license from the Commission and the payment of a
fee to be fixed by the Commission, which shall be renewable
annually.
REQUISITES TO BE ALLOWED TO OPERATE AS A STOCK
TRANSFER AGENT
(1) Secures a license from the Commission (which is
renewable annually)
(2) Payment of a fee to be fixed by the Commission
Atty. Espedido: It is good now because we now have computers.
Before, it is done manually.
Other than these books, we have the:
(1) The minutes of the stockholders’ meeting and
(2) The minutes of the board’s meeting
CONFIDENTIAL MATTERS ARE NOT INCLUDED IN THE
MINUTES
There are reports in the meeting that are confidential that you
do not have to include in the minutes. There are confidential
matters that you need not have to record – but you must make
a reference: meaning, you report it to the account (which is not
part of the minutes).
RIGHT TO INSPECT BOOKS AND RECORDS
What are your rights as a stockholder?
A: A stockholder has the right to inspect such books and records
at reasonable hours on business days.
Can you also just request to have a copy?
A: Yes, but the stockholder shoulders the expenses.
Important: The right as provided in the Code refers only to the
right to inspect but not the right to copy. If you want to have a
copy, you have to pay for the copy.
Otherwise, can you ask to just bring it to your house?
A: No. This cannot be done and is also dangerous because
there may be delicate matters contained in the books or records.
Take note: The right to inspect does not include the right to take
it out even for a few hours.
Atty. Espedido: 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.
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
**NOTES
CORPORATE BOOKS
1. Records of all business transactions (i.e. accounting
books, ledgers, journals)
2. Minutes Book for Stockholders – minutes of meetings
of stockholders
3. Minutes Books for Directors or Trustees – minutes of
meetings of the BOD or BOT
4. Stock and Transfer Book
CORPORATE RECORDS
1. Charter documents:
a. AOI
b. Bylaws
c. Amendments, if any
2. Reports filed with the SEC:
a. General Information Sheets (GIS), and
b. All other reports required under the Securities
Regulation Code (SRC)
MINUTES BOOK, CONTENTS:
1. Date and time of meeting
2. Place of holding meeting
3. How the meeting was authorized
4. The fact that notice was given
5. Whether the meeting was regular or special
6. If the meeting was special, the object of the meeting
7. Those present or absent in the meeting
8. Every act done or ordered at the meeting
9. Upon demand of a director, trustee, stockholder or
member:
a. The time when any director/trustee or
stockholder/member entered or left the
meeting must be noted in the minutes;
b. A carefully-made record of the yeas and nays
must be taken on any motion or proposition;
c. The protest on any action or proposed action.
STOCK AND TRANSFER BOOK, CONTENTS:
1. All stocks in the name of the stockholders,
alphabetically arranged;
2. Installments paid and unpaid on all stocks for which
subscription has been made, and the date of any
installment;
3. Statement of every alienation, sale or transfer of stock
made, the date thereof, by and to whom made; and
4. Such other entries as the bylaws may prescribe.
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Note:
The Stock and Transfer Book shall be kept in the
principal office of the corporation, or in the office of its
stock and transfer agent.
Only the Corporate Secretary is duly authorized to
make entries in the Stock and Transfer Book. Entries
made by the President or the Chairman are invalid.
The Stock and Transfer Book serves as the best
evidence of the transactions that are entered or stated
therein. However, the entries are only considered as
prima facie evidence, and may be subject to proof to
the contrary.
corporate records, to comply with Sections 45, 73, 92,
128, 177 and other pertinent rules and provisions of
this Code on inspection and reproduction of records
shall be punished with a fine ranging from Ten
thousand pesos (P10,000.00) to Two hundred
thousand pesos (P200,000.00), at the discretion of the
court, taking into consideration the seriousness of the
violation and its implications. When the violation of this
provision is injurious or detrimental to the public, the
penalty is a fine ranging from Twenty thousand pesos
(P20,000.00) to Four hundred thousand pesos
(P400,000.00).
INSPECTION OF CORPORATE RECORDS
The corporate records are open to inspection by any director,
trustee, shareholder, or member of the corporation in person or
by representative at reasonable hours on business days, and a
demand in writing may be made by such director, trustee,
shareholder or member at their expense, for copies of such
records or excerpts from said records.
There are matters that are not covered by the right to inspect
however. For instance, a corporation engaged in the
manufacturing of goods can keep the formula of its goods
secret.
Reasonable Hours on Business Days
(Throwback to Nego)
When is a day considered a business day considering that
we have call centers now?
Atty. Amago: Follow government service hours. M-F, 8AM5PM.
REQUISITES FOR THE EXERCISE OF THE RIGHT TO
INSPECT
1.
2.
3.
It must be exercised at reasonable hours on business
days.
The stockholder must not have improperly used any
information he secured through any previous
examination.
The demand is made in good faith or for a legitimate
purpose.
The penalties imposed under this section shall be
without prejudice to the Commission’s exercise of its
contempt powers under Section 157 hereof.
REMEDIES OF A STOCKHOLDER REFUSED INSPECTION
If the corporation or its officers refuse to allow a
stockholder to inspect, is the filing of a case the only option
of a stockholder?
A: No. An aggrieved party may report such denial or inaction to
the Commission.
Sec. 73 of the RCC after all provides:
“If the corporation denies or does not act on a demand
for inspection and/or reproduction, the aggrieved party
may report such to the Commission. Within five (5)
days from receipt of such report, the Commission shall
conduct a summary investigation and issue an order
directing the inspection or reproduction of the
requested records.”
Within 5 days from the receipt of such report, the SEC shall
conduct a summary investigation, and issue an order directing
the inspection/reproduction of the requested records.
VALID DEFENSES FOR REFUSAL
1.
2.
WHO CANNOT INSPECT
A requesting party who is not a stockholder or member of record,
or is a competitor, director, officer, controlling stockholder or
otherwise represents the interest of a competitor.
LIABILITY FOR REFUSAL TO ALLOW INSPECTION OR
PRODUCTION OF RECORDS
Who can be liable?
A:
1. Any officer or agent of the corporation who shall refuse
to allow the inspection or production of records shall be
liable;
2. Any director who allows or approves the refusal shall
also be guilty of an offense punishable under Sec. 161
of the Revised Corporation Code.
SEC. 161. Violation of Duty to Maintain Records, to
Allow their Inspection or Reproduction; Penalties.
– The unjustified failure or refusal by the corporation,
or by those responsible for keeping and maintaining
3.
The person demanding to examine and copy excerpts
from the corporation’s records and minutes has
improperly used any information secured through any
prior examination of the records or minutes of such
corporation or any other corporation;
The person demanding to examine was not acting in
good faith or for a legitimate purpose in making the
demand;
The person demanding is a competitor, or a director,
officer, controlling stockholder or representative of the
interests of a competitor.
JURISPRUDENTIAL PRINCIPLES
JUSTIFIED PURPOSE/S FOR INSPECTION (Terelay vs. Yulo
citing Ballantine)
1. To ascertain the financial condition of the company or
the propriety of dividends;
2. The value of the shares of stock for sale or investment;
3. Whether there has been mismanagement;
4. In anticipation of shareholders’ meetings to obtain a
mailing list of shareholders to solicit proxies or
influence voting;
5. To obtain information in aid of litigation with the
corporation or its officers as to corporate transactions.
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UNJUSTIFIED PURPOSES
1. Obtaining information as to business secrets or to aid
a competitor;
2. To secure business “prospects” or investment or
advertising lists;
3. To find technical defects in corporate transactions in
order to bring “strike suits” for purposes of blackmail or
transaction.
STOCK & TRANSFER BOOK VS. GENERAL
INFORMATIONS SHEET
The Stock and Transfer Book is still the primary source of
determining whether a person is a stockholder or not. However,
the General Information Sheet can also serve as a secondary
source and other documents can still be shown that a person is
a stockholder of a corporation.
GENERAL INFORMATION SHEET
SEC collects from incorporators, stockholders, directors,
trustees, officers, beneficial owners, external auditor, notary
public, personal information such as but not limited to full name,
signature, nationality, sex, address, accreditation number, roll of
attorney number and taxpayer information number. These are
contained within the General Information Sheet of a corporation.
SEC. 74. RIGHT TO FINANCIAL STATEMENTS
Section 74. Right to Financial Statements. – A corporation
shall furnish a stockholder or member, within ten (10) days from
receipt of their written request, its most recent financial
statement, in the form and substance of the financial reporting
required by the Commission.
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 in accordance with this Code, and the
rules the Commission may prescribe.
However, if the total assets or total liabilities of the corporation
is less than Six hundred thousand pesos (P600,000.00), or such
other amount as may be determined appropriate by the
Department of Finance, the financial statements may be
certified under oath by the treasurer and the president.
Should it be signed by a certified public accountant?
A: It depends, but generally, yes. But the law allows the financial
statement to be certified under oath by the treasurer and the
president if the total assets or total liabilities of the corporation
is:
(a) Less than 600k; or
(b) Any other amount as may be determined appropriate
by the DOF
When will it be required to be signed by a certified public
accountant (CPA)?
A: When the total assets or liabilities of the corporation is 600K
or more.
PRESENTATION OF FINANCIAL REPORT
The BOD/BOT shall present to such stockholders or members a
financial report of the operations of the corporation for the
preceding year, which shall include:
1. Financial statements, duly signed and certified in
accordance with this Code;
2. Rules the Commission may prescribe.
WHEN CERTIFIED UNDER OATH (Treasurer & President
instead of CPA)
If the total assets or liabilities of the corporation are less than
P600,000, or such other amount as determined by the
Department of Finance.
SUBMISSION TO THE COMMISSION
SEC. 177. Reportorial Requirements of Corporations. –
Except as otherwise provided in this Code or in the rules
issued by the Commission, every corporation, domestic or
foreign, doing business in the Philippines shall submit to the
Commission:
(a) Annual financial statements audited by an independent
certified public accountant: Provided, That if the total
assets or total liabilities of the corporation are less than
Six hundred thousand pesos (P600,000.00), the
financial statements shall be certified under oath by the
corporation’s treasurer or chief financial officer; and
(b) A general information sheet.
Corporations vested with public interest must also
submit the following:
(1) A director or trustee compensation report; and
(2) A director or trustee appraisal or performance report
and the standards or criteria used to assess each
director or trustee.
The reportorial requirements shall be submitted annually
and within such period as may be prescribed by the
Commission.
The Commission may place the corporation under
delinquent status in case of failure to submit the reportorial
requirements three (3) times, consecutively or
intermittently, within a period of five (5) years. The
Commission shall give reasonable notice to and coordinate
with the appropriate regulatory agency prior to placing
under delinquent status companies under their special
regulatory jurisdiction.
Any person required to file a report with the Commission
may redact confidential information from such required
report: Provided, That such confidential information shall be
filed in a supplemental report prominently labelled
“confidential”, together with a request for confidential
treatment of the report and the specific grounds for the grant
thereof.
**NOTES
LOSS OF STOCK AND TRANSFER BOOK
WHEN RECENT FINANCIAL STATEMENTS FURNISHED
Within ten (10) days from the receipt of a written request of a
stockholder or member, in the form and substance of the
financial reporting required by the SEC.
Secondary or extrinsic evidence may be introduced to
reconstitute its contents. The new stock and transfer book
should be presented to the SEC for registration, accompanied
Page 86 of 88 | EH403 2019-2020 Corporation Law
by a sworn statement executed by any responsible offer setting
forth the circumstances attending the loss.
STOCK TRANSFER AGENT
such activities with the view to promote, conserve or
rationalize investment;
h)
To pass upon, refuse or deny, after consultation with the
Board of Investments, Department of Industry, National
Economic and Development Authority or any other
appropriate government agency, the application for
registration of any corporation, partnership or association or
any form of organization falling within its jurisdiction, if their
establishment, organization or operation will not be
consistent with the declared national economic policies.
i)
To suspend, or revoke, after proper notice and hearing, the
franchise or certificate of registration of corporations,
partnerships or associations, upon any of the grounds
provided by law, including the following:
Engaged principally in the business of registering transfers of
stock in behalf of a stock corporation shall be allowed to operate
in the Philippines upon securing a license from the Commission
and payment of a fee to be fixed by the Commission, which
should be renewed annually.
TRANSFER BY CORPORATION
A stock corporation is not precluded from performing or making
transfers of its own stocks, in which case all the rules and
regulations imposed on stock transfer agents, except the
payment of a license fee herein provided, shall be applicable.
APPENDIX
1.
2.
Fraud in procuring its certificate of registration;
Serious misrepresentation as to what the corporation
can do or is doing to the great prejudice of or damage
to the general public;
3.
Refusal to comply or defiance of any lawful order of the
Commission restraining commission of acts which
would amount to a grave violation of its franchise;
4.
Continuous in operation for a period of at least five (5)
years;
5.
Failure to file by-laws within the required period;
6.
Failure to file required reports in appropriate forms as
determined by the Commission within the prescribed
period;
P.D. 902-A
PRESIDENTIAL DECREE No. 902-A
March 11, 1976
REORGANIZATION OF THE SECURITIES AND EXCHANGE
COMMISSION WITH ADDITIONAL POWER AND PLACING
THE SAID AGENCY UNDER THE ADMINISTRATIVE
SUPERVISION OF THE OFFICE OF THE PRESIDENT
Section 6. In order to effectively exercise such jurisdiction, the
Commission shall possess the following powers:
a)
b)
To issue preliminary or permanent injunctions, whether
prohibitory or mandatory, in all cases in which it has
jurisdiction, and in which cases the pertinent provisions of
the Rules of Court shall apply;
To punish for contempt of the Commission, both direct and
indirect, in accordance with the pertinent provisions of, and
penalties prescribed by, the Rules of Court;
c)
To compel the officers of any corporation or association
registered by it to call meetings of stockholders or members
thereof under its supervision;
d)
To pass upon the validity of the issuance and use of proxies
and voting trust agreements for absent stockholders or
members;
e)
j)
To issue subpoena duces tecum and summon witnesses to
appear in any proceedings of the Commission and in
appropriate cases order search and seizure or cause the
search and seizure of all documents, papers, files and
records as well as books of accounts of any entity or person
under investigation as may be necessary for the proper
disposition of the cases before it;
f)
To impose fines and/or penalties for violation of this Decree
or any other laws being implemented by the Commission,
the pertinent rules and regulations, its orders, decisions
and/or rulings;
g)
To authorize the establishment and operation of stock
exchanges, commodity exchanges and such other similar
organization and to supervise and regulate the same;
including the authority to determine their number, size and
location, in the light of national or regional requirements for
To exercise such other powers as implied, necessary or
incidental to the carrying out the express powers granted to
the Commission or to achieve the objectives and purposes
of this Decree.
NATIONALIZED ACTIVITIES (SEC. 8, RA 7042)
SEC. 8. List of Investment Areas Reserved to Philippine
Nationals (Foreign Investment Negative List). – The Foreign
Investment Negative List shall have two (2) components lists; A,
and B.
a)
List A shall enumerate the areas of activities reserved
to Philippine nationals by mandate of the Constitution
and specific laws.
b)
List B shall contain the areas of activities and
enterprises regulated pursuant to law:
1)
Which are defense-related activities, requiring prior
clearance and authorization from Department of
National Defense (DND) to engage in such activity,
such as the manufacture, repair, storage and/or
distribution of firearms, ammunition, lethal weapons,
military ordinance, explosives, pyrotechnics and similar
materials; unless such manufacturing or repair activity
is specifically authorized, with a substantial export
component, to a non-Philippine national by the
Secretary of National Defense; or
2)
Which have implications on public health and morals,
such as the manufacture and distribution of dangerous
drugs; all forms of gambling; nightclubs, bars,
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beerhouses, dance halls; sauna
bathhouses and massage clinics.
and
steam
forms of gambling, nightclubs, bars, beer houses, dance halls,
sauna and steam bathhouses and massage clinics.
“Small and medium-sized domestic market enterprises, with
paid-in equity capital less than the equivalent two hundred
thousand US dollars (US$200,000) are reserved to Philippine
nationals, Provided that if: (1) they involve advanced technology
as determined by the Department of Science and Technology or
(2) they employ at least fifty (50) direct employees, then a
minimum paid-in capital of one hundred thousand US dollars
(US$100,000.00) shall be allowed to non-Philippine nationals.
"Small and medium-sized domestic market enterprises with
paid-in equity capital less than the equivalent of Two hundred
thousand US dollars (US$200,000.00), are reserved to
Philippine nationals: provided, that if (1) they involve advanced
technology, or (2) they employ at least fifty (50) direct
employees, then a minimum paid-in capital of One hundred
thousand US dollars (US$100,000.00) shall be allowed to nonPhilippine nationals.
Amendments to List B may be made upon recommendation of
the Secretary of National Defense, or the Secretary of Health, or
the Secretary of Education, Culture and Sports, endorsed by the
NEDA, approved by the President, and promulgated by a
Presidential Proclamation.
"Amendments to List B may be made upon recommendation of
the Secretary of National Defense, or the Secretary of Health, or
the Secretary of Education, Culture and Sports, indorsed by the
NEDA, or upon recommendation motu propio, of NEDA,
approved by the President, and promulgated by a Presidential
Proclamation.
“Transitory Foreign Investment Negative List” established in
Sec. 15 hereof shall be replaced at the end of the transitory
period by the first Regular Negative List to be formulated and
recommended by NEDA, following the process and criteria
provided in Sections 8 of this Act. The first Regular Negative List
shall be published not later than sixty (60) days before the end
of the transitory period provided in said section, and shall
become immediately effective at the end of the transitory period.
Subsequent Foreign Investment Negative Lists shall become
effective fifteen (15) days after publication in a newspaper of
general circulation in the Philippines: Provided, however, That
each Foreign Investment Negative List shall be prospective in
operation and shall in no way affect foreign investment existing
on the date of its publication.
“Amendments to List B after promulgation and publication of the
first Regular Foreign Investment Negative List at the end of the
transitory period shall not be made more often than once every
two (2) years”. (As amended by R.A. 8179)
"The Transitory Foreign Investment Negative List established in
Section 15 hereof shall be replaced at the end of the transitory
period by the first Regular Negative List to be formulated and
recommended by NEDA, following the process and criteria,
provided in Sections 8 and 9 of this Act. The first Regular
Negative Lists shall be published not later than sixty (60) days
before the end of the transitory period provided in said section
and shall become immediately effective at the end of the
transitory period. Subsequent Foreign Investment Negative
Lists shall become effective fifteen (15) days after publication in
a newspaper of general circulation in the Philippines: provided,
however, that each Foreign Investment Negative List shall be
prospective in operation and shall in no way affect foreign
investment existing on the date of its publication.
"Amendments to List B after promulgation and publication of the
first Regular Foreign Investment Negative List at the end of the
transitory period shall not be made more often than once every
two (2) years."
SEC. 3, R.A. 8179 (AMENDING SEC. 8, RA. 7042)
END OF MIDTERM NOTES
Sec. 3. Sec. 8 of the Foreign Investments Act of 1991 is
hereby amended to read as follows:
"Sec. 8. List of Investment Areas Reserved to Philippine
Nationals (Foreign Investment Negative List). – The Foreign
Investment Negative List shall have two (2) component lists: A
and B:
"a) List A shall enumerate the areas of activities reserved to
Philippine nationals by mandate of the Constitution and specific
laws.
"b) List B shall contain the areas of activities and enterprises
regulated pursuant to law:
"1) which are defense-related activities, requiring prior clearance
and authorization from Department of National Defense (DND)
to engage in such activity, such as the manufacture, repair,
storage and/or distribution of firearms, ammunition, lethal
weapons, military ordinances, explosives, pyrotechnics and
similar materials, unless such manufacturing on repair activity is
specifically authorized, with a substantial export component, to
a non-Philippine national by the Secretary of National Defense;
or
"2) which have implications on public health and morals, such
as the manufacture and distribution of dangerous drugs, all
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