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CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA CORPORATION LAW as lectured by Atty. Ruben Ladia, with excerpts from his book and lectures CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA DISCLAIMER The following are the materials used for this work: 1. Lectures and syllabus of Atty. Ruben Ladia; and 2. <The Corporation Code of the Philippines (Annotated) with the Securities Regulation Code (R.A. 8799) and Presidential Decree No. 902-A, 3rd Edition= (2015) by Atty. Ruben Ladia; and 3. Atty. Ruben Ladia9s lectures uploaded online by the Arellano Law Foundation Some of the contents of the above have been paraphrased and questions propounded differently in order to tailor the author9s learning method. Answers to some questions are likewise tailored to the personal preference of the author (e.g. answers to exam questions) I do not guaranty the absolute correctness of this work due to human errors and failure to understand the question or concept perfectly. I apologize in advance for any error you may encounter in this work. However, please see to it that the error is an opportunity to learn, as Dean Jose Sundiang puts it <The beauty of an error is to correct it, and not to perpetuate it.= 2|Page CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA TABLE OF CONTENTS CHAPTER I: INTRODUCTION &&&&&&&&&&&&&&&&&&&&. 14 GENERALLY &&&&&&&&&&&&&&&&&&&&&&&&&&&&&. HISTORICAL BACKGROUND &&&&&&&&&&&&&&&&&&&&&. What are the laws which governed corporations? &&&&&&&&&&&&& &&.. What governs business organizations? &&&&&&&&&&&&&&&&& &&.. KINDS OF BUSINESS ORGANIZATION &&&&&&&&&&&&&&&& Sole Proprietorship &&&&&&&&&&&&&&&&&&&&&&&&&.. Advantages &&&&&&&&&&&&&&&&&&&&&&&&&&&&&& Disadvantages &&&&&&&&&&&&&&&&&&&&&&&&&&&&& Sole proprietorship v. Corporation &&&&&&&&&&&&&&&&&&&&&. Partnership &&&&&&&&&&&&&&&&&&&&&&&&&&&&&. Must a partnership be express in order to be considered as such? &&&&&&&&&& What is the basis of the personal relationship in a contract of partnership? &&&&&&. Grounds for dissolution &&&&&&&&&&&&&&&&&&&&&&&&&.. Can a corporation enter into a partnership? &&&&&&&&&&&&&&&&&& Partnership v. Corporation &&&&&&&&&&&&&&&&&&&&&&&&.. Joint Venture &&&&&&&&&&&&&&&&&&&&&&&&&&&&. Example of a joint venture &&&&&&&&&&&&&&&&&&&&&&&& Joint venture v. Partnership &&&&&&&&&&&&&&&&&&&&&&&.. CHAPTER II: DEFINITION AND ATTRIBUTES &&&&&&&&&&&&. 16 DEFINITION &&&&&&&&&&.&&&&&&&&&&&&&&&&&&&16 ATTRIBUTES &&&&&&&&&.&&&&&&&&&&&&&&&&&&&&16 Artificial being &&&&&&&&&&&&&&&&&&&&&&&&&&&& 16 Created by operation of law &&&&&&&&&&&&&&&&&&&&&&.. Right of succession &&&&&&&&&&&&&&&&&&&&&&&&&.. Powers, attributes, and properties expressly authorized by law or incident to its existence &&&&&&&&&&&&&&&&&&&&&&&&. Can corporations be awarded moral damages in cases of libel, slander, or defamation? & ADVANTAGES AND DISADVANTAGES OF THE CORPORATE FORM &&.. Advantages &&&&&&&&&&&&&&&&&&&&&&&&&&&&&.. Example of advantage of feasibility of greater undertaking &&&&&&&&&&&&& Can the incorporators be held liable for damages to creditors of the corporation? &&&& How may the stockholders be made liable in the above problem? &&&&&&&&&&. Disadvantages &&&&&&&&&&&&&&&&&&&&&&&&&&&& GOVERNMENT POWERS IN RELATION TO CORPORATIONS &&&&&. CHAPTER III: CLASSIFICATION OF CORPORATION &&&&&&&&&&.. 22 STOCK CORPORATIONS &&&&&&&&&&&&&&&&&&&&&&&&22 Definition &&&&&&&&&&&&&&&&&&&&&&&&&&&&&&.. Requisites &&&&&&&&&&&&&&&&&&&&&&&&&&&&&&.. Shares v. dividends/ allotments &&&&&&&&&&&&&&&&&&&&&.. NON-STOCK CORPORATIONS &&&&&&&&&&&&&&&&&&&&& 22 Definition &&&&&&&&&&&&&&&&&&&&&&&&&&&&&&& 22 Purpose &&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&. Is it absolute that they cannot engage to profit generating operations? &&&&&&&.. In the instance that there is profit, can they now distribute it? &&&&&&&&&&& What if there is a capital divided into shares but no dividends are distributed? &&&&.. CIR v. Club Filipino, Inc. De Cebu &&&&&&&&&&&&&&&&&&&&.. CORPORATIONS CREATED BY SPECIAL LAW OR CHARTER &&&&&&.. Manner of Creation &&&&&&&&&&&&&&&&&&&&&&&&&&.. Is registration with the SEC necessary in order for them to be considered as a corporation? &&&&&&&&&&&&&&&&&&&&&. 3|Page CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA What governs GOCCs? &&&&&&&&&&&&&&&&&&&&&&&&&. Rule as to suitability &&&&&&&&&&&&&&&&&&&&&&&&&&.. Examples &&&&&&&&&&&&&&&&&&&&&&&&&&&&&.. Governing law as to officers and employees &&&&&&&&&&&&&&&&& Test in determining governing law on employees &&&&&&&&&&&&&&& PNOC-EDC v. NLRC &&&&&&&&&&&&&&&&&&&&&&&&& OTHER CLASSES OF CORPORATIONS &&&&&&&&&&&&&&&&. Public and Private Corporations &&&&&&&&&&&&&&&&&&&& Public corporations &&&&&&&&&&&&&&&&&&&&&&&&&&. Private corporations &&&&&&&&&&&&&&&&&&&&&&&&&&. True test to determine private or public corporation &&&&&&&&&&&&&. Examples of purposes NOT political or governmental in nature &&&&&&&&. National Coal Corporation v. CIR &&&&&&&&&&&&&&&&&&&&.. Ecclesiastical and Lay Corporations &&&&&&&&&&&&&&&&&&& Ecclesiastical or Religious corporations &&&&&&&&&&&&&&&&&& Lay corporation &&&&&&&&&&&&&&&&&&&&&&&&&&&&. Eleemosynary &&&&&&&&&&&&&&&&&&&&&&&&&&&&&.. Civil &&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&& Aggregate and Sole Corporations &&&&&&&&&&&&&&&&&&&.. Aggregate corporations &&&&&&&&&&&&&&&&&&&&&&&&&.. Corporation sole &&&&&&&&&&&&&&&&&&&&&&&&&&&& One Person Corporation (OPC) &&&&&&&&&&&&&&&&&&&&&& Definition &&&&&&&&&&&&&&&&&&&&&&&&&&&&&. Who may organize an OPC? &&&&&&&&&&&&&&&&&&&&&&. Can a juridical person form an OPC? &&&&&&&&&&&&&&&&&&& What cannot be OPCs? &&&&&&&&&&&&&&&&&&&&&&&& Can exercise of profession be an OPC? &&&&&&&&&&&&&&&&&&. Close and Open Corporations &&&&&&&&&&&&&&&&&&&&&. Close corporations &&&&&&&&&&&&&&&&&&&&&&&&&&& Requisites &&&&&&&&&&&&&&&&&&&&&&&&&&&&&& In the AOI of X corporation, 19 stockholders were specified. Y was then invited to be a stockholder. Can Y do so? &&&&&&&&&&&&& Maximum number of stockholders &&&&&&&&&&&&&&&&&&&& Are all shares of stocks required to be held by not more than twenty (20) stockholders? &&&&&&&&&&&&&&&&& Role of shareholders &&&&&&&&&&&&&&&&&&&&&&&&&& Corporation NOT a close corporation holding at least two-thirds (2/3) of close corporation9s voting stock/rights &&&&&&&&&&&&&&&&&.. What corporations may be close corporations? &&&&&&&&&&&&&&&.. Domestic and Foreign Corporations &&&&&&&&&&&&&&&&&&& Definition &&&&&&&&&&&&&&&&&&&&&&&&&&&&&&& Misnomer as to foreign corporation9s definition &&&&&&&&&&&&&&&&& When may a foreign corporation transact business in the Philippines? &&&&&&&&.. Parent or Holding Companies and Subsidiaries and Affiliates &&&&&&&&& Parent or holding company &&&&&&&&&&&&&&&&&&&&&&&& Controlling interest &&&&&&&&&&&&&&&&&&&&&&&&&&& Parent/holding companies v. investment companies &&&&&&&&&&&&&&. Subsidiaries &&&&&&&&&&&&&&&&&&&&&&&&&&&&&& Ayala Corp. owns shares of stock amounting to 56% in BPI, 52% in Globe, and 58% in Ayala Land. What are the relationships of the above corporations? &&&& Consider in the above problem, a cause of action arises against Ayala Land. May the plaintiffs file against Ayala Corp.? &&&&&&&&&&&&&&&&&& Affiliates &&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&.. Coca-Cola bottlers has shares of stock amounting to 48% in A, 32% in B, and 25% in C. What is the relationship of the above corporations? &&&&&&&& Quasi-public Corporations &&&&&&&&&&&&&&&&&&&&&&& Quasi Corporations &&&&&&&&&&&&&&&&&&&&&&&&&& Do they possess all general powers of the corporation? &&&&&&&&&&&&&& De Jure Corporations &&&&&&&&&&&&&&&&&&&&&&&&&. Defective Corporations &&&&&&&&&&&&&&&&&&&&&&&&. De Facto Corporations &&&&&&&&&&&&&&&&&&&&&&&&.. Corporation by estoppel &&&&&&&&&&&&&&&&&&&&&&&&.. What is the liability of those who represented themselves as a corporation?t &&&&. 4|Page CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA CHAPTER IV: FORMATION AND ORGANIZATION OF CORPORATION&&&&&&&&&&&&&&&&&. 29 Stages in the life of a corporation &&&&&&&&&&&&&&&&&&&&&&....29 PROMOTIONAL STAGE &&&&&&&&&&&&&&&&&&&&&&&& 30 Who brings the persons to unite in forming a corporation? &&&&&&&&&&&&& 30 Under whose name does the promoter enter into a contract with? &&&&&&&&&. If the corporation is subsequently organized, who may be liable by virtue of said contracts? &&&&&&&&&&&&&&&&& How then, may corporations make such contracts its own? &&&&&&&&&&&.. In case the corporation indeed made the contract its own by any of the above, is the promoter not liable anymore? &&&&&&&&&&&&&&&&&&&&& Considering the above, what are the options available to the promoter in order to avoid liability? &&&&&&&&&&&&&&&&&&&&&. PROCESS OF INCORPORATION &&&&&&&&&&&&&&&&&&&&. Things considered in drafting AOI &&&&&&&&&&&&&&&&&&&&& Considering the requirements of nationalization, where a public utility corporation requires 60/40 ratio, what would you advise? Can their intent be met? &&&&&&&&&&&&&&&&. Contents of the AOI &&&&&&&&&&&&&&&&&&&&&&&&&&.. Contents in accordance to RCC &&&&&&&&&&&&&&&&&&&&&&. According to the RCC, may an arbitration agreement be provided? &&&&&&&&.. Can the AOI or application for amendments be file via electronic document? &&&&.. Format of AOI &&&&&&&&&&&&&&&&&&&&&&&&&&&&.. THE PREFATORY PARAGRAPH &&&&&&&&&&&&&&&&&&&&.. THE CORPORATE NAME &&&&&&&&&&&&&&&&&&&&&&&. Purpose &&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&. After the corporation is formed, can it use another name other than the name stated in the AOI? &&&&&&&&&&&&&&&&&&& Verification slip &&&&&&&&&&&&&&&&&&&&&&&&&&&& Guidelines &&&&&&&&&&&&&&&&&&&&&&&&&&&&&&. Why cannot a corporation assume a trade name? &&&&&&&&&&&&&&&. Red Line Transportation Co. v. Rural Transit Co. &&&&&&&&&&&&&.. Can the inclusion of two other words sufficient to warrant a difference in corporate names? &&&&&&&&&&&&&&&&&&. Universal Mills Corp. v. Universal Textile Mills, Inc. &&&&&&&&&&&.. Will the addition of geographical locations result to avoiding confusion? &&&&&& Lyceum of the Philippines v. CA &&&&&&&&&&&&&&&&&&&&. Doctrine of Secondary Meaning &&&&&&&&&&&&&&&&&&&&&&. Consider a foreign corporation, who NEVER did business in the Philippines NOR registered a corporate name or its goodwill, will the protection of Sec. 18 apply? &&&&&&&&&&&&&&&&&&&&.. Philips Export B.V., et al., v. CA &&&&&&&&&&&&&&&&&&&.. What if in the above case, Standard instead applied for the name of Standard Philips Sausages, where the latter engages in food production, would the SEC allow its registration? &&&&&&&&&&&&&&&&&&&& What is issued if the name has been changed? &&&&&&&&&&&&&&&&& Will a name change affect the rights and liabilities of the corporation? &&&&&&&& PURPOSE CLAUSE &&&&&&&&&&&&&&&&&&&&&&&&&&.. Three-fold importance of the purpose clause &&&&&&&&&&&&&&&&&. Limitations &&&&&&&&&&&&&&&&&&&&&&&&&&&&&&. What if the corporate name contradicts the above limitations? &&&&&&&&&&.. Is there a limit the number of purposes? &&&&&&&&&&&&&&&&&&& PRINCIPAL OFFICE &&&&&&&&&&&&&&&&&&&&&&&&&& Is the statement of the province sufficient? &&&&&&&&&&&&&&&&&&. Is there a need to state the location of the business operations? &&&&&&&&&& Clavecilla Radio System v. Antillon &&&&&&&&&&&&&&&&&&&& Considering the provision of Sec. 51/50, CC/RCC on meetings allowing to hold meetings in any city within Metro Manila, Cebu, or Davao, may the filing of an action be instituted in any city in Manila? &&&&&&&&&&& What is the basis actions being filed in the place of residence? &&&&&&&&&&... TERM OF EXISTENCE &&&&&&&&&&&&&&&&&&&&&&&& 5|Page CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA Rule as to term of existence &&&&&&&&&&&&&&&&&&&&&&&& THE INCORPORATORS &&&&&&&&&&&&&&&&&&&&&&&&. Who may be incorporators? &&&&&&&&&&&&&&&&&&&&&&&.. Is there a minimum count of incorporators required? &&&&&&&&&&&&&& Can it be 1, 2, 3, or 4 incorporator/s? &&&&&&&&&&&&&&&&&&&& Qualification &&&&&&&&&&&&&&&&&&&&&&&&&&&&&& Citizenship and residency requirement &&&&&&&&&&&&&&&&&&&&. Practice of profession &&&&&&&&&&&&&&&&&&&&&&&&&& One Person Corporation (OPC) &&&&&&&&&&&&&&&&&&&&&& Can OPCs be organized for an exercise of profession? &&&&&&&&&&&&&&.. THE DIRECTORS/TRUSTEES &&&&&&&&&&&&&&&&&&&&&. Rule as to number of directors or trustees &&&&&&&&&&&&&&&&&& Can the number of director/s be 1, 2, 3, 4, or 5? &&&&&&&&&&&&&&&.. Exceptions &&&&&&&&&&&&&&&&&&&&&&&&&&&&&&. Minimum qualification and disqualification &&&&&&&&&&&&&&&&&& Can the corporation add any other qualification or disqualification? &&&&&&&&. Can aliens be directors? &&&&&&&&&&&&&&&&&&&&&&&&& Rule as to corporations engaged in development and utilization of natural resources && What law is violated if more than 40% is owned by foreigners in a corporation engaged in development and utilization of natural resources? &&&&&& Independent directors &&&&&&&&&&&&&&&&&&&&&&&&& When is an independent director mandatory? &&&&&&&&&&&&&&&&&& How are independent directors elected? &&&&&&&&&&&&&&&&&&&& Voting in absentia of independent director &&&&&&&&&&&&&&&&&&& CAPITALIZATION &&&&&&&&&&&&&&&&&&&&&&&&&&. Authorized capital stock (ACS) &&&&&&&&&&&&&&&&&&&&&& Is it required to indicated in the AOI? &&&&&&&&&&&&&&&&&&&.. Minimum required &&&&&&&&&&&&&&&&&&&&&&&&&&... Subscribed capital stock (SCS) &&&&&&&&&&&&&&&&&&&&&&. Is there a required minimum SCS? &&&&&&&&&&&&&&&&&&&&& Paid-up/in capital stock (PCS) &&&&&&&&&&&&&&&&&&&&&&. Is there a required minimum PCS? &&&&&&&&&&&&&&&&&&&&.. Outstanding Capital Stock (OCS) &&&&&&&&&&&&&&&&&&&&&. Are treasury shares included in the OCS? &&&&&&&&&&&&&&&&&&. Considerations for Stocks &&&&&&&&&&&&&&&&&&&&&&&&. Can promissory notes be a consideration for a stock? &&&&&&&&&&&&&.. Can future service be a consideration for a stock?t &&&&&&&&&&&&&&. Must it be payment through only one of the permitted considerations? &&&&&&.. Example &&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&.. SHARES OF STOCK AND THEIR CLASSIFICATION &&&&&&&&&& Shares of stock (SoS) &&&&&&&&&&&&&&&&&&&&&&&&&&&. SoS v. Certificate of Stock (CoS) &&&&&&&&&&&&&&&&&&&&&&& CLASSIFICATION OF SHARES &&&&&&&&&&&&&&&&&&&&.. Purpose of classification &&&&&&&&&&&&&&&&&&&&&&&&.. Rule as to equality of shares &&&&&&&&&&&&&&&&&&&&&&.. Examples of presumption of equality &&&&&&&&&&&&&&&&&&&. X owns 1m par value shares valued at Php100/share, while Y owns 1m no par value shares valued at Php10/share. Who among them has more advantage? &&&&&&&&&&&&&&&&&&& COMMON STOCKS &&&&&&&&&&&&&&&&&&&&&&&&&. Can common shares be denied voting rights? &&&&&&&&&&&&&&&& PREFERRED STOCKS (PS > CS) &&&&&&&&&&&&&&&&&&&.. Requisites of PS &&&&&&&&&&&&&&&&&&&&&&&.. Kinds of preferred shares &&&&&&&&&&&&&&&&&&&&&&. As to dividends &&&&&&&&&&&&&&&&&&&&&& Is the preference absolute as to create the relationship of debtor and creditor between the corporation and the preferred stockholder? &&&. What if in the above situation, indeed, there are profits, would your answer be the same? &&&&&&&&&&&& X, is a preferred stockholder as to Php100,000. Assume that the BoD declared dividends amounting to Php500,000. How much can X receive? &&&&&&&&&.. X, is a preferred stockholder as to Php100,000. Assume that the BoD declared dividends amounting to Php100,000. How much can X receive? &&&&&&&&. In the above problem, how much may 6|Page CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA the other stockholders receive? &&&&&&&&&&&&.. That the other stockholders received nothing from the dividends, what is their recourse? &&&&&&&&&&&&& Reasonable implication in preferred shareholder as to dividends & How then can the preferred shareholder may be distributed with dividends aside from his preference? &&&&&&&&&.. Participating preferred shares &&&&&&&&&&&&.. X, is a participating preferred stockholder as to Php100,000. Assume that the BoD declared dividends amounting to Php500,000. How much can X receive? &&&&&&&&&&&. Cumulative preferred shares &&&&&&&&&&&&&. Do cumulative preferred shareholders lose their right to claim dividends for years that they were not declared or paid? &&&&&&&&&&& How cumulative preferred shares paid &&&&&&. Presumption as to cumulative or non-cumulative in case of no stipulation &&&&&. Non-cumulative preferred shares &&&&&&&&&&&. Advantage of non-cumulative preferred shares &&.. Principal types of non-cumulative preferred shares &. Discretionary dividend &&&&&&&&&&&. Rule as to payment of dividends to non-cumulative preferred shareholders in subsequent years &&&&&&&&.. Mandatory if earned &&&&&&&&&&&&. Earned cumulative or dividend credit type &&. How payment made to earned cumulative or dividend credit shareholders &&&&. Definition as to kinds of preferred shares as to dividends &. Definition as to kinds of non-cumulative preferred shares & Example &&&&&&&&&&&&&&&&&&&&&.. Cumulative v. earned cumulative share &&&&&&&&.. PAR AND NON-PAR VALUE SHARES &&&&&&&&&&&&&&&&&& Par value shares &&&&&&&&&&&&&&&&&&&&&&&&&&.. Primary function &&&&&&&&&&&&&&&&&&&&&&. Is the par value stated in the AoI or the CoS the true value of the shares? && Is the par value stated in the AoI or the CoS the fair market value? &&&&. True/Book value &&&&&&&&&&&&&&&&&&&&&&&.. Can par value shares be issued/sold at less than the par? &&&&&&&&. Watered stocks &&&&&&&&&&&&&&&&&&&&&&&& Liability of shareholders of watered stocks &&&&&&&&&&&&&& No par value shares &&&&&&&&&&&&&&&&&&&&&&&&&&. Where may be fixed &&&&&&&&&&&&&&&&&&&&&&. Does no par value shares represent stated proportionate interest in the capital stock measured by value? &&&&&&&&&&&.. Limitations to issuance of no par value shares &&&&&&&&&&&&. Advantages of no par value shares &&&&&&&&&&&&&&&&.. VOTING AND NON-VOTING SHARES &&&&&&&&&&&&&&&&&.. Voting shares &&&&&&&&&&&&&&&&&&&&&&&&&&&&.. Non-voting shares &&&&&&&&&&&&&&&&&&&&&&&&&&. Which shares can be non-voting shares? &&&&&&&&&&&&&&.. Can all shares be non-voting? &&&&&&&&&&&&&&&&&& Exceptions to non-voting restrictions &&&&&&&&&&&&&&&. XYZ Corporation has an OCS of 1 million shares, where 800k are voting while 200k are non-voting. In case of voting for directors, what is the basis of majority? &&&&&& XYZ Corporation has an OCS of 1 million shares, where 800k are voting while 200k are non-voting. In case of voting for a merger with ZYX corporation, what is the basis of majority? &&&&&&&&&&&&&&&&&&. FOUNDERS? SHARES &&&&&&&&&&&&&&&&&&&&&&&&&. Right to elect and be elected as BoD &&&&&&&&&&&&&&&&&&&&. What happens after the lapse of five (5) years? &&&&&&&&&&&&&&&&.. Rule as to beginning of limited period as to right to elect or be elected &&&&&&& Can the five (5) year period be extended? &&&&&&&&&&&&&&&&&& Instances when the right to elect and be elected cannot be given &&&&&&&&&. REDEEMABLE SHARES (RS) &&&&&&&&&&&&&&&&&&&&&& Kinds of RS &&&&&&&&&&&&&&&&&&&&&&&&&&&&&. <Regardless of the existence of unrestricted earnings= &&&&&&&&&&&&& TREASURY SHARES &&&&&&&&&&&&&&&&&&&&&&&&&.. 7|Page CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA Can treasury shares be reissued? &&&&&&&&&&&&&&&&&&&&&.. Can the treasury share be reissued for less than the issuance price? &&&&&&&&. In the above situation, will the purchaser be liable to the creditors of the corporation for the difference between the purchase price and the par value? &&&&&&&&&&&&&&&&&&&. Effect of treasury shares in the hands of the corporation &&&&&&&&&&&.. Can treasury shares be declared as dividends? &&&&&&&&&&&&&&&.. CIR v. Manning &&&&&&&&&&&&&&&&&&&&&&&&&&&. CAPITAL REQUIREMENT &&&&&&&&&&&&&&&&&&&&.. Rule as to minimum capital required &&&&&&&&&&&&&&&&&&&&&. <&subject to the provisions of the following section= under the Corporation Code &&& Amount of subscribed and paid-up capital &&&&&&&&&&&&&&&&&&&. RESTRICTIONS AND PREFERENCES ON TRANSFER OF SHARES &&.. Importance of restrictions and preferences &&&&&&&&&&&&&&&&&&& Example of importance &&&&&&&&&&&&&&&&&&&&&&&&&&. Rule as to providing restrictions and preferences &&&&&&&&&&&&&&&&. Are they prohibited to provide restrictions and preferences? &&&&&&&&&&&&. Where should restrictions and preferences indicated? &&&&&&&&&&&&&&& What is the effect if it is only indicated in one, but not in both? &&&&&&&&&&& What is the effect if it is indicated in both AoI and CoS? &&&&&&&&&&&&&.. In close corporations, where should the restrictions and preferences appear? &&&&&& What is the effect if the restriction and preference in a close corporation does not appear in any one of the above? &&&&&&&&&&&&&&&&&&&. THE NO TRANSFER CLAUSE &&&&&&&&&&&&&&&&&&&& Rule as to inclusion of no transfer clause &&&&&&&&&&&&&&&&&&&.. THE TREASURER &&&&&&&&&&&&&&&&&&&&&&&&&.. Tenure of interim treasurer &&&&&&&&&&&&&&&&&&&&&&&&.. Duty of interim treasurer &&&&&&&&&&&&&&&&&&&&&&&&&. Authorities of interim treasurer &&&&&&&&&&&&&&&&&&&&&&& THE EXECUTION CLAUSE &&&&&&&&&&&&&&&&&&&&& Purpose &&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&& ACKNOWLEDGMENT &&&&&&&&&&&&&&&&&&&&&&&.. GROUNDS FOR DISAPPROVAL &&&&&&&&&&&&&&&&&&&. Kind of compliance required for approval of AoI &&&&&&&&&&&&&&&&. Effect if substantial compliance is not met &&&&&&&&&&&&&&&&&&& Grounds for disapproval &&&&&&&&&&&&&&&&&&&&&&&&&.. Are the above grounds exclusive? &&&&&&&&&&&&&&&&&&&&&&. Examples of other grounds &&&&&&&&&&&&&&&&&&&&&&&&.. What happens if the SEC found the AoI substantially compliant? &&&&&&&&&.. Effect after issuance of CoI &&&&&&&&&&&&&&&&&&&&&&&&. COMMENCEMENT OF CORPORATE EXISTENCE &&&&&&&&&&&. When will a corporation commence to exist? &&&&&&&&&&&&&&&&.. Cagayan Fishing Development Co. v. Sandiko &&&&&&&&&&&&&&&&. DEFECTIVELY FORMED CORPORATIONS &&&&&&&&&&&&&&& DE FACTO CORPORATIONS &&&&&&&&&&&&&&&&&&&&& Requisites &&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&.. De facto v. de jure corporations &&&&&&&&&&&&&&&&&&&&&&&. Purpose of recognizing existence of de facto corporations &&&&&&&&&&&&& Can a corporation organized by virtue of a statute which was subsequently deemed void and unconstitutional be deemed as within the ambit of an <apparently valid statute=? &&&&&&&&&&& Municipality of Malabang v. Benito, et al. &&&&&&&&&&&&& Pending the approval of the AoI, is quo warranto needed to question the existence of a corporation? &&&&&&&&&&&&&&&&&&& Hall v. Piccio &&&&&&&&&&&&&&&&&&&&&&&&& CORPORATION BY ESTOPPEL &&&&&&&&&&&&&&&&&&&.. Requisites &&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&. Effect of acting as such &&&&&&&&&&&&&&&&&&&&&&&&&& Practical application of the doctrine &&&&&&&&&&&&&&&&&&&&&. General partners &&&&&&&&&&&&&&&&&&&&&&&&&&&&.. By estoppel v. de facto &&&&&&&&&&&&&&&&&&&&&&&&&&. Basis &&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&. Purpose &&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&& Who cannot deny corporate existence? &&&&&&&&&&&&&&&&&&&&.. Is it sufficient that the member or agent of the association is positioned as such in order for the denial be unavailable? &&&&&&&&&&&&&&&&&&&&.. 8|Page CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA Application against third parties &&&&&&&&&&&&&&&&&&&&&&& When doctrine not available &&&&&&&&&&&&&&&&&&&&&&&&. Lozano v. De los Santos &&&&&&&&&&&&&&&&&&&&&&&&& Albert v. University Publishing, Co. &&&&&&&&&&&&&&&&&&&&. Salvatierra v. Garlitos et al. &&&&&&&&&&&&&&&&&&&&&&&&. Chiang Kai Shek School v. CA &&&&&&&&&&&&&&&&&&&&&&& Asia Banking Corp v. Standard Products Co., Inc&&&&&&&&&&&&&&& International Travel and Tours Services, Inc. v. CA &&&&&&&&&&&&&& Georg Grotjahn GMBH & Co. v. Isnani &&&&&&&&&&&&&&&&&&. Summary of rules as to applicability of doctrine of estoppel as to third parties &&&&&. Possible remedies available for 3rd parties who entered into a contract with the ostensible corporation &&&&&&&&&&&&&&&&&&&&. Should all partners be held liable as general partners? &&&&&&&&&&&&&&&. ORGANIZATION AND COMMENCEMENT OF BUSINESS &&&&&&&&.. CORPORATE ORGANIZATION &&&&&&&&&&&&&&&&&&&& What should the corporation do after the issuance of the CoI or certificate of registration? &&&&&&&&&&&&&&&&&&&&.. What if the corporation did not do the above? &&&&&&&&&&&&&&&&&.. Automatic dissolution &&&&&&&&&&&&&&&&&&&&&&&&&&. XYZ corporation was issued its CoI on 27 January 2015. However, it did not formally organized nor commenced its business within five (5) years. When is the CoI deemed revoked? &&&&&&&&. Rule as to automatic dissolution &&&&&&&&&&&&&&&&&&&&&& Delinquent corporation &&&&&&&&&&&&&&&&&&&&&&&&&.. Remedy of delinquent corporation &&&&&&&&&&&&&&&&&&&&& What happens if the delinquent corporation fails to resume operations and/or comply with requirements within two (2) years? &&&&&&&&&&&&& Requirement before suspension or revocation of CoI of corporations under special regulatory jurisdictions &&&&&&&&&&&&&&&&&&&& Summary of dissolutions &&&&&&&&&&&&&&&&&&&&&&&&&.. Formal organization &&&&&&&&&&&&&&&&&&&&&&&&&&&. What kind of compliance should be observed in formally organizing the corporation? && XYZ corporation, has already been issued its CoI. Hence, it already elected the BoD, and the latter elected a treasurer and a clerk. However, a president and secretary has not been elected. May the CoI be dissolved? &&& COMMENCEMENT OF BUSINESS/ TRANSACTION &&&&&&&&&& Example of commencement of business &&&&&&&&&&&&&&&&&&&& When should the corporation commence its business? &&&&&&&&&&&&&&.. Effect of non-commencement &&&&&&&&&&&&&&&&&&&&&&&.. Perez v. Paunlad &&&&&&&&&&&&&&&&&&&&&&&&&&&&. CHAPTER V: THE CORPORATE CHARTER AND ITS AMENDMENTS &&. 35 CORPORATE CHARTER &&&&&&&&&&&&&&&&&&&&&&&& 35 Three-fold contract &&&&&&&&&&&&&&&&&&&&&&&&&&... Charter v. franchise &&&&&&&&&&&&&&&&&&&&&&&&&&.. Kinds of franchise &&&&&&&&&&&&&&&&&&&&&&&&&&& Example of primary and secondary franchises &&&&&&&&&&&&&&&&.. 37 CORPORATE ENTITY THEORY &&&&&&&&&&&&&&&&&&&&. Is the property of the corporation deemed the property of the president? &&&&&& Sulo ng Bayan, Inc. v. Gregorio Araneta, Inc. &&&&&&&&&&&&&&&.. Fermin Caram, Jr. and Rosa De Caram v. CA and Alberto Arellano &&&&&&. Rustan Pulp and Paper Mills, Inc. v. IAC &&&&&&&&&&&&&&&&& Cruz v. Dalisay &&&&&&&&&&&&&&&&&&&&&&&&&&&& Palay, Inc. v. Clave &&&&&&&&&&&&&&&&&&&&&&&&&&. Soriano, et al. v. CA and Cu &&&&&&&&&&&&&&&&&&&&&&.. PIERCING THE VEIL OF CORPORATE FICTION &&&&&&&&&&&&. Applicability of corporate entity theory &&&&&&&&&&&&&&&&&&&.. Subject to equitable limitations &&&&&&&&&&&&&&&&&&&&&&.. Grounds &&&&&&&&&&&&&&&&&&&&&&&&&&&&&&& Effect of any of the above &&&&&&&&&&&&&&&&&&&&&&&& International Academy of Management and Economics v. Litton and Co., Inc. & Kinds of piercing &&&&&&&&&&&&&&&&&&&&&&&&&&&&. Traditional v. Reverse piercing &&&&&&&&&&&&&&&&&&&&&&& 9|Page CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA Outsider v. insider reverse piercing &&&&&&&&&&&&&&&&&&&&&&. What is the kind of piercing employed in IAME v. Litton? &&&&&&&&&&&&& Palacio v. Fely Transportation, Co. &&&&&&&&&&&&&&&&&&&& Marvel Building Corporation, et al. v. David &&&&&&&&&&&&&&&& Yutivo and Sons, Co. v. CTAX &&&&&&&&&&&&&&&&&&&&&& CIR v. Norton and Harrison, Co. &&&&&&&&&&&&&&&&&&&&.. La Campana Coffee Factory, Inc. v. Kaisahan Ng Mga Manggagawa sa La Campana &&&&&&&&&&&&&&&&&&&&&&&&&&&& Emilio Cano Enterprises, Inc. v. Court of Industrial Relations &&&&&&&&. Telephone Engineering, Co. v. Workmen?s Compensation Commission &&&&.. Claparols v. Court of Industrial Relations &&&&&&&&&&&&&&&&& National Federation of Labor Union v. Ople &&&&&&&&&&&&&&&.. A.C. Ransom Labor Union-CCLU v. NLRC &&&&&&&&&&&&&&&& Concept Builders Inc. v. NLRC &&&&&&&&&&&&&&&&&&&&&. Probative factors &&&&&&&&&&&&&&&&&&&&&&&&&&&&& Test to determine the applicability of piercing &&&&&&&&&&&&&&&&&& What is the effect if one of the elements of the test is absent? &&&&&&&&&&.. 10 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia CHAPTER 1: INTRODUCTION GENERALLY Corporations play a large role in economic development of nations, as it provides for a smooth framework of economic transactions and employment opportunities for the masses. PJA 2. Act 1459 or the Corporation Law (1906) 3. BP 68 or the Corporation Code of the Philippines (1 May 1980) Q: What governs business organizations? 1. 2. 3. 4. Constitution; Corporation Code; Civil Code; and Other special laws HISTORICAL BACKGROUND In general, the concept of a corporation started in England and Rome In the Philippines, the concept started as the sociedad anonimas under the Spanish Law, specifically through the Code of Commerce, which is similar to the concept of American corporations akin to English joint stock companies with features resembling the partnership and corporation of today. During the American regime, the Philippine Commission passed the Corporation Law (Act 1459), which aimed to replace the sociedad anonimas, under the following choices: 1. To continue; or 2. Reorganize as corporations In either case, the Corporation Law shall govern. Finally, Batas Pambansa 68 was approved, to be known as the Corporation Code of the Philippines Q: What are the laws which governed corporations? KINDS OF ORGANIZATION 1. 2. 3. 4. BUSINESS Sole proprietorship; Partnership; Joint venture; and Corporation Sole Proprietorship It is a one-man form of business entity, conducted for profit by a lone or single individual who: 1. Owns all assets; 2. Personally owes and answers all liabilities or suffers all losses; and 3. Enjoys all profits to the exclusion of others Advantages 1. Eliminates bureaucratic process (e.g. no need to obtain authority from the board of directors) 2. Can act without delay as proprietor makes his own decision without any need for formal requirements (e.g. no need for board meetings 3. Owning profits, without anyone to share it with Disadvantages 1. Code of Commerce of Spain (1888) 1|Page CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia 1. Unlimited personal liability (e.g. personal properties are not exempt from liability) 2. Limited capital, resources, or credit facility PJA It is based on mutual trust and confidence. Grounds for dissolution SOLE PROPRIETORSHIP Advantages Disadvantages Eliminates bureaucratic Unlimited personal process liability As it is based on mutual confidence and trust, the following are grounds for its dissolution: Can act without delay as proprietor makes his own decision 1. 2. 3. 4. 5. Limited capital, resources, or credit facility Owning profits, without anyone to share it with Sole proprietorship v. Corporation Corporation Liability Sole Proprietorship Unlimited Capital Limited Wide extent of sources Shared by all investors in proportion to the subscription or promised contribution Partnership Art. 1767. (New Civil Code) By the 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 profession. Q: Must a partnership be express in order to be considered as such? No, it may be implied as well Q: What is the basis of the personal relationship in a contract of partnership? Death; Incapacity; Insolvency; Civil interdiction; or Withdrawal of one parties Q: Can a corporation enter into a partnership? As a general rule, no, as the identity of the corporation is lost or merged in entering into a partnership, hence it may happen that the control of the corporation ends up in the hands of persons not authorized by law to manage such corporation. However, as an exception, the Securities and Exchange Commission (SEC), allowed corporations to enter if the following conditions are met: 1. The articles of incorporation (AOI) expressly authorized the corporation to enter into contracts of partnership; 2. The agreement or articles of partnership (AOP) must provide that all the partners will manage the partnership; and 3. The AOP must stipulate that all the partners are and shall be jointly and severally liable for all obligations of the partnership. 2|Page CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Dissolution agreement Partnership v. Corporation Partnership Agreement parties Creation Who organize? may PJA of Corporation By law or operation of law Two (2) or more natural persons. GR: At least five (5) incorporators and Transacting business ANYTHING not contrary to law, morals, good customs, public order, or public policy GR: Any one of the partners, binds the partnership ONLY THOSE expressly authorized by law; or Incidental to its existence GR: Through board of directors ER: Validly delegated ER: Agreement to the contrary Right succession of NONE Necessity of consent in transfer of shares/ rights/ interests Extent liability of CANNOT transfer without the consent of the other partners. CAN transfer without consent of other stockholders As in effect, the transferee becomes a partner if allowed In effect, the transferee is named as a shareholder GR: All partners are liable pro rata with their own property after partnership property has been exhausted Limited only to the extent of subscription or promised contribution ER: partner Existence Limited GR: Fifty years (50) Indefinite period, subject to grounds for dissolution ALLOWED It is akin to a partnership, a one-time grouping of two or more persons created for a particular business transaction. Example of a joint venture The LRT-MRT project Joint venture v. Partnership Continuing relationship Joint venture NONE Partnership GR: HAS ER: Particular or universal Personality NOT distinct from persons composing it HAS personality distinct from partners Object Particular undertaking GR: General business of particular kind HAS such right As it based on mutual confidence and trust NOT ALLOWED, as State9s consent is necessary Joint Venture ER: Corporation sole Powers functions via ER: Single transaction Corporations entering into CAN GR: No ER: If following conditions met: the are AOI allowed corporation; (AOP) provides that all partners shall manage the partnership; and AOP states that all partners shall be jointly and severally liable as to the partnership ER: Extended by amendment 3|Page CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA CHAPTER II: DEFINITION AND ATTRIBUTES DEFINITION Sec.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. accordance to what the State has granted to it. Q: Can corporations be awarded moral damages in cases of libel, slander, or defamation? Yes, a corporation may be awarded moral damages as Art. 2219 of the Civil Code does not qualify the persons who may claim, whether natural or juridical. ATTRIBUTES 1. 2. 3. 4. In the case of Filipinas Broadcasting Network v. Ago Medical and Educational Center and MERALCO v. T.E.A.M. Electronics Corp., the Court held that moral damages may be awarded in case a corporation is humiliated. Artificial being; Created by operation of law; Right of succession; and Powers, attributes, and properties expressly authorized by law or incident/al to its existence Hence, the rulings in the case of Tamayo and LBC, disallowing award of moral damages to corporations, is no longer the prevailing ruling. Artificial being A corporation has a personality distinct and separate from the persons composing it Created by operation of law The State9s consent is needed in order for it to exist, after complying with the requirements imposed Right of succession It continues to exist as such despite the change in the members thereof, be it death, retirement, etc. Powers, attributes, and properties expressly authorized by law or incident to its existence Corporations can only exercise or acquire such of the above in ADVANTAGES DISADVANTAGES CORPORATE FORM OF AND THE Advantages 1. 2. 3. 4. 5. 6. 7. Capacity to act as a single unit Limited shareholder9s liability Continuity of existence Feasibility of greater undertaking Transferability of shares Centralized management Standardization method of organization, management and finance Example of advantage of feasibility of greater undertaking Jollibee, without being incorporated cannot undertake expansion to other places within and outside the Philippines 4|Page CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Q: Henry Sy, Lucio Tan, John Gokongwei, Zobel de Ayala, and Rustan, each contributed and fully paid Php20,000,000 each, amounting to Php100,000,000 in a corporation which they incorporated. The investment was used to lease a land in BGC for the construction of a condo. However, the Big Bang occurred. Can the incorporators be held liable for damages to creditors of the corporation? No, as the corporation will be held liable for such, as the stockholders are only liable to the extent of their subscription. In this case, the incorporators have already fully paid their subscription, hence the creditors have no action as against them. Q: How may the stockholders be made liable in the above problem? If said stockholders guaranteed the obligations Disadvantages 1. Formal proceedings to have a valid and corporate act (e.g. board meetings) 2. Limited jurisdiction, as it can only act within the State granting it authority; 3. Limit of credit available to the corporation, due to limited liability of shareholders; 4. Unity of incompatible and conflicting interests, as the shares of stock are personal properties which may be transferred at will; 5. Minority stockholders has no say in the conduct of corporate affairs; 6. Stockholder9s voting rights may become merely fictitious because of disinterest in management, wide-scale PJA ownership, and inaccessibility of the place of meeting; 7. Double taxation on corporate income; and 8. Being subject to governmental regulations, supervision, and control (e.g. reportorial requirements NOT imposed in other business form) GOVERNMENT POWERS RELATION TO CORPORATIONS IN Sec.184. Effect of amendment or Repeal of This Code, or the Dissolution of a Corporation; No right or remedy in favor of or against any corporation, its stockholders, members, directors, trustees, or officers, nor any liability incurred by any such corporation, stockholders, members, directors, trustees, or officers, shall be removed or impaired either by the subsequent amendment or repeal of this Code or of any part thereof. The above provision provides for the protection accorded to Corporations, in accordance to the Supreme Law of the Land, which includes: a) Due process clause; and b) Equal protection clause 5|Page CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA CHAPTER III: CLASSIFICATION OF CORPORATION From the foregoing, the requisites to be classified as such are as follows: 1. 2. 3. 4. 5. 6. Stock corporations Non-stock corporations Created by special law/charter Public corporations Private corporations Ecclesiastical/religious corporation a. Religious societies b. Corporation sole 7. Lay corporation a. Eleemosynary b. Civil 8. Aggregate corporation 9. Sole corporation 10. One Person Corporation 11. Close corporation 12. Open corporation 13. Domestic corporation 14. Foreign corporation 15. Parent/holding companies 16. Subsidiaries 17. Affiliates 18. Quasi-public 19. Quasi corporation 20. De jure corporations 21. De facto corporations 22. Corporation by estoppel STOCK CORPORATIONS Definition Sec.3. Classes of corporations; Corporations formed or organized under this Code may be stock or non-stock 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 are stock corporations. All other corporations are non-stock corporations. Requisites 1. Capital stock divided into shares; 2. Authority to distribute dividends or allotments as surplus profits to its stockholders on the basis of the shares held by each Shares v. dividends/ allotments Shares, are the divided capital, that is held by shareholders Dividends/allotments are those which are distributed as surplus profits on the basis of the shares held by the holder. NON-STOCK CORPORATIONS Definition Sec.86. Definition; For purposes of this Code and subject to its provisions on dissolution, a non-stock corporation is one where no part of its income is distributable as dividends to its members, trustees, or officers: Provided, that any profit which a non-stock corporation may obtain as an incidental to its operation shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized, subject to the provisions of this Title. The provisions governing stock corporation, when pertinent, shall be applicable to nonstock corporations, except as may be covered by specific provisions of this Title. Hence, no part of their income is distributable as dividends to its members, trustees, or officers 6|Page CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Purpose Purposes other than profit Q: Considering the above, is it absolute that they cannot engage to profit generating operations? No, as they may be allowed if it is incident to its operations Q: That they are allowed to engage in the above, in the instance that there is profit, can they now distribute it? No, the profit can only be used for the furtherance of their purpose or purposes. PJA The Court held that in order for liability to attach, it must be a business as a bar keeper and restaurateur. As a business, the profit must be the purpose or livelihood is the motive. While it is true that the capital is divided, the authority to distribute is nowhere to be found. Hence, absent the second requisite, Club is only a non-stock corporation (Collector of Internal Revenue v. Club Filipino, Inc. De Cebu) CORPORATIONS CREATED SPECIAL LAW OR CHARTER BY Sec.4. Corporations created by Special Q: What if there is a capital divided into shares but no dividends are distributed? Still a non-stock corporation. (See the next case) Q: The Bureau of Internal Revenue (BIR) discovered that Club Filipino, Inc. De Cebu (Club), never paid percentage taxes on their gross receipts acquired in their bar restaurant. In the AOI of Club, it has for its primary purpose of <&developing and cultivating sports for the healthful recreation and entertainment of its stockholders and members.= At one time, Club declared dividends resulting from surplus of profit, but never distributed such. However, the BIR argued that they must pay the percentage tax by engaging in a bar and restaurant. Who is correct? Club is correct. Laws or Charters; Corporations created by special laws or charters shall be governed primarily by the provisions of the special law or charter creating them or applicable to them, supplemented by the provisions of this Code, insofar as they are applicable. They are also known as <government owned or controlled corporations= (GOCCs) Manner of creation They are made through a legislative act Q: Is registration with the SEC necessary in order for them to be considered as a corporation? No, as it owes its existence by virtue of the special law creating them. They are NOT created by compliance with the Corporation Code, Q: What governs GOCCs? 7|Page CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA Danilo is correct. 1. Special law (primary) 2. Corporation Code (supplementary) The Court held that the test is the manner of creation. Rule as to suitability GR: ER: PNOC-EDC being a subsidiary created under the Corporation Law, it owes its existence to the latter. NOT immune Provided by law Examples 1. Philippines National Oil Company (PNOC); 2. National Development Company; 3. Philippine Export and Foreign Loan Guarantee Corporation; 4. Government Services and Insurance System Governing employees law as to officers and Hence, as no special law or charter exists, it is governed by the Labor Code. (Philippine National Oil Company-Energy Development Corporation v. National Labor Relations Commission) OTHER CLASSES CORPORATIONS OF Public and Private Corporations 1. Civil Service Law; if created by special law 2. Labor Code; if organized under the Corporation Code (e.g. subsidiaries) The above classes are now eliminated in order to avoid the confusion due to the presence of majority of shares in a private corporation led to the corporation being classified as public. Test in determining governing law on employees As previously discussed, the test is the manner of creation. Manner of creation Q: PNOC - Energy Development Corporation (PNOC-EDC), a subsidiary of PNOC, hired Danilo Mercado, and subsequently dismissed him. Danilo now filed a case in the NLRC for illegal dismissal, unpaid wages, etc. against PNOC-EDC. PNOC-EDC argues that the case should be dismissed as it is governed by the Civil Service Law. Hence, while the government may own majority of the shares, the fact that a corporation existed by virtue of the Corporation Code makes them a private corporation, and not as a public corporation or GOCC Public corporations Formed or organized, for the government or a portion of the State or any of its political subdivisions for the purpose of general good and welfare, or for the accomplishment of its own public purpose. On the other hand, Danilo argues that he correctly filed the same. Who is correct? 8|Page CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA In sum, public corporations are considered as such if the following purposes are present: a) Political; or b) Governmental Furthermore, mining coal is NOT governmental or political in nature. (National Coal Corporation v. CIR) Ecclesiastical and Lay Corporations Ecclesiastical or Religious corporations Private corporation Those organized for spiritual purposes, or for administering properties held for religious ones Formed for some private purpose, benefit, or aim or end, that will benefit the individuals composing it It has for its purpose to secure public worship or perpetuating the right of a particular religion True test to determine private or public corporation Relation of the body (corporation) to the State A public corporation has AUTHORITY to do a governmental purpose, while a private corporation is NOT. It may be: 1. Religious societies (Sec.116); or 2. Corporation sole (Sec.110) Lay corporation Examples of purposes NOT political or governmental in nature Purposes other than religion, such as secular or business purposes. They may be: a) Banking; b) Refining of oil (PNOC); c) Coal industry (NCC) Q: The National Coal Company (NCC) was created by virtue of Act 257 to develop coal industry in the Philippines. 1. Eleemosynary; or 2. Civil Eleemosynary For charitable and benevolent purposes, such as for maintenance of hospitals and houses for the sick, aged, and poor NCC filed a case for recovery of sum of money against the CIR, claiming exemption as the government owns majority of the stocks. Is NCC correct? Civil No, the mere fact of government owning majority of stocks is not enough to grant exemption. The Court held that NCC is a private corporation, owing its existence to the Corporation Law. For public purposes, but for the benefit, pecuniary or otherwise, of its members Aggregate And Sole Corporations Aggregate corporations 9|Page CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Those composed of a number of individuals vested with corporate powers. Almost all corporations under the Corporation Code are aggregate corporations, composing not less than five (5) but not more than fifteen (15) incorporators. PJA incorporate as One Person Corporations: Provided, further, that a natural person who is licensed to exercise a profession may not organized as a One Person Corporation for the purpose of exercising such profession except as otherwise provided under special laws. The RCC allowed for OPCs, which is another exception to the aggregate corporations, therefore: Note however, under the RCC, the range of incorporators may be from one (1) to fifteen (15). GR: ER: Corporation sole As an exception to the aggregate requirement under the Corporation Code, one person serves as the bodies corporate and politic in order to give them some capacity and advantage not available as a natural person. Chief archbishop Bishop Priest Minister Rabbi Other presiding elder of religious denominations, sects, or churches. 15 Definition OPC is a corporation with a single stockholder. Q: Who may organize an OPC? It may be formed by: 1. 2. 3. 4. 5. 6. Aggregate (2 to incorporators) Corporation sole; and OPCs The following are the only persons allowed by the RCC: a) Natural persons; b) Trust; or c) Estate Q: Can a juridical person form an OPC? No, it must be a natural person, trust, or estate. One Person Corporation (OPC) Q: What cannot be OPCs? Sec.116. One Person Corporation A One Person Corporation is a corporation with a single stockholder: Provided, that only a natural person, trust, or an estate may form a One Person Corporation. Banks and quasi-banks, preneed, trust, insurance, public and publicly-listed companies, and non-chartered governmentowned and controlled corporations may not a) b) c) d) e) f) Banks and quasi-banks; Preneed; Trust; Insurance; Public and publicly listed companies; Non-chartered government owned and controlled corporations g) Natural person licensed to exercise a profession 10 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Q: Can exercise of profession be an OPC? No, exercise of profession is reserved as professional partnerships, and NOT corporations Close and Open Corporations PJA The provisions of this Title shall primarily govern close corporations: Provided, that other Titles in this Code shall apply suppletorily except as otherwise provided under this Title. Share of stock are held by limited number of persons such as: Close corporations a) Family; or b) Other closely knit group Sec.95. Definition and applicability of Title; A close corporation, within the meaning of this Code, is one whose articles of incorporation provides that: a) All the corporation9s issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); Hence, there stockholders is exclusivity of Requisites a) All stocks, except treasury shares, shall be held by specified persons not exceeding twenty (20) persons; b) All issued stuck must be subject to one (1) or more restrictions on transfer; and b) All the issued stock of all classes shall be subject to one (1) or more specified restrictions on transfer permitted by this Title; and c) Shares cannot be listed in any stock exchange or make any public offering c) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class Q: In the AOI of X corporation, 19 stockholders were specified. Y was then invited to be a stockholder. Can Y do so? Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code. Any corporation may be incorporated as a close corporation, except mining or oil companies, stock exchanges, banks, insurance companies, public utilities, educational institutions and corporations declared to be vested with public interest in accordance with the provisions of this Code. No, as there is a need to specify. Maximum number of stockholders It should not exceed twenty (20) Q: Are all shares of stocks required to be held by not more than twenty (20) stockholders? No, as an exception, treasury shares are not included Role of shareholders 11 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Under the Code, each shareholder shall be deemed as a director as well. Hence, each shareholder, as director, are all active in the conduct of corporate affairs. Corporation NOT a close corporation holding at least two-thirds (2/3) of close corporation?s voting stock/rights In such a case, the close corporation cannot be considered as such. It seems that if the corporation holding such amount of voting rights/stocks is not a close corporation as well, due to the fact that the corporation holding majority of the shares is NOT itself close. Being a majority shareholder, the existence of the close corporation cannot be accepted, as the former represents itself otherwise. Q: What corporations may be close corporations? As a general rule, all lines of business may be close corporations. However, as exceptions, the following cannot be deemed as such: a) b) c) d) e) f) Mining or oil companies; Stock exchanges; Banks; Insurance companies; Public utilities; Educational institutions; and g) Those declared vested with public interest Domestic and Foreign Corporations PJA Domestic corporations are those organized or created under or by virtue of the Philippine laws, either by legislative act or under the provision of the General Corporation Law. Sec.140. Definition and Rights of Foreign Corporations For purposes of this Code, a foreign corporation is one formed, organized, or existing under any laws other than those of the Philippines9 and whose laws allow Filipino citizens and corporations to do business in its own country or State. It shall have the right to transact business in the Philippines after obtaining a license for that purpose with this Code and a certificate of authority from the appropriate government agency. Foreign corporations, are those formed, organized, or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporation to do business in its own country or state. Misnomer as to foreign corporation?s definition The second phrase was added to qualify a foreign corporation to secure a license and to do business in the Philippines. (NOTE: The second phrase, as discussed in another subject, refers to the reciprocity rule) Q: When may a foreign corporation transact business in the Philippines? In order to be deemed as a foreign corporation doing or transacting business in the Philippines, the following are required: Definition 12 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia a) License for that purpose; and b) Certificate of authority from appropriate government agency Parent or Holding Companies Subsidiaries And Affiliates and Parent or holding company Those which are confined their activities to owning stock in, and supervising management of other companies. It is when one corporation (parent/holding company): a) Controls another corporation; or b) Controls several other corporations (subsidiaries) Controlling interest It owns more than fifty percent (50%) of the voting stock in the company/ies it hold/s. Hence control refers to the power and authority to elect management PJA as to shares purposes of of stock and control and securities management Subsidiaries Those which the parent owns at least the majority of the shares. Hence it is a corporation under the control of another Q: Ayala Corp. owns shares of stock amounting to 56% in BPI, 52% in Globe, and 58% in Ayala Land. What are the relationships of the above corporations? Ayala Corp is the parent/holding company. BPI, Globe, and Ayala Land, are considered as subsidiaries. Q: Consider in the above problem, a cause of action arises against Ayala Land. May the plaintiffs file against Ayala Corp.? No, a subsidiary has an independent and separate juridical personality. Affiliates Parent/holding companies v. investment companies Also called as <sister companies=, these are subject to common control and operated as part of a system. Parent/holding companies are passive and holds the securites merely for purpose of control and management. Hence, stockholdings of another corporation are not substantial enough to control another. Investment companies are active in the sale or purchase of shares of stock or securities Q: Coca-Cola bottlers has shares of stock amounting to 48% in A, 32% in B, and 25% in C. What is the relationship of the above corporations? Nature Engagement PARENT/ HOLDING Passive Holding for INVESTMENT COMPANIES Active Sale or purchase All corporations are deemed as affiliates. 13 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Quasi-public Corporations Also known as public service corporations, they are private corporations which have accepted the State9s grant of franchise or contract involving performance of public duties Quasi Corporations They are primarily political subdivisions such as townships, counties, school districts, organized by: PJA 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 inquired 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. Those which exists in colourable compliance with an irregularity or defect in organization or omission as to requirements. It CAN ONLY be attacked via qua warranto proceedings a) Statute; or b) Immemorial usage Compliance Q: Do they possess all general powers of the corporation? No, as they are only agencies in the administration of civil government. As such, corporate functions are granted only as to enable them to perform their public duties. De Jure Corporations Those which are organized in strict or substantial compliance with the requirements of incorporation. It CANNOT be attacked by quo warranto proceedings Defective Corporations a) De facto corporations; and b) Corporations by estoppel De Facto Corporations Sec.19. De facto corporations; DE JURE DE FACTO Strict or Colorable substantial Availability of Not available Quo Warranto Proceedings Available Corporation By Estoppel Sec.210. Corporation by estoppel; All persons who assume to act as a corporation knowing it be without authority to do so shall be liable as general partners for al 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 it as a corporation or any tort committed by it as such, it shall not be allowed to use 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. Those so defectively formed which cannot be considered as de jure or de facto corporations. 14 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA They exist only as such to those persons which they cannot deny their existence by virtue agreement, admission, or conduct. Q: What is the liability of those who represented themselves as a corporation? They shall be liable as general partners for all debts, liabilities, and damages. 15 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA CHAPTER IV: FORMATION AND ORGANIZATION OF CORPORATION In the same vein, an agent without a principal is a principal. Stages in the life of a corporation Hence, as an effect, the contracts remain entered into by the promoter, and NOT by the corporation. 1. Creation a. Promotional stage b. Process of incorporation c. Organization and commencement of business 2. Re-organization/Quasi-reorganization 3. Dissolution and winding up Q: How then, may corporations make such contracts its own? A corporation, once granted legal personality, may be bound by the contracts by: PROMOTIONAL STAGE (Panliligaw) It is the act of: 1. Getting a corporation organized; and 2. Procurement of subscription to its capital Q: Who brings the persons to unite in forming a corporation? Promoter 1. Adopting; 2. Ratifying; 3. Accepting benefits knowledge of the terms with Q: In case the corporation indeed made the contract its own by any of the above, is the promoter not liable anymore? No, as a general rule, the promoter is still liable as he was the one who entered into the contract. Q: Under whose name does the promoter enter into a contract with? As an exception, the promoter maybe relieved from liability by: A promoter enters into contracts either: 1. Novation; or 2. Other agreement to release him 1. In his own name/s; or 2. Name of proposed corporation Q: If the corporation is subsequently organized, who may be liable by virtue of said contracts? No, as during the time that the contracts were entered into no corporation existed at the moment. Those which had no legal existence could not have an agent. Q: Considering the above, what are the options available to the proper in order to avoid liability? 1. Continuing offer on behalf of the corporation, as it is NOT a contract unless and until the corporation is formed (offer lang yan); 2. Binding himself at the time of execution of the contract, with a stipulation or understanding that he shall be relieved of responsibility after 16 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA the corporation is formed, accepted and adopts the contract; or Yes, the intent can be met in line with Gamboa v. Teves, to begin, consider the following figure: 3. Binding himself personally and assume the responsibility of looking to the proposed corporation, when formed, for reimbursement Fil. Shares For. Shares It includes the following: 1. Drafting of the AOI; 2. Preparation and submission of documents; 3. Filing with SEC; and 4. Issuance of Certificate of Incorporation (COI) Hence, it may be valid by doing the following: Fil. Shares 500k For. Shares 500k minus 100k Things considered in drafting AOI Q: A and B, Filipino and American, wants to create a public utility corporation. They want to divide the 1 million shares into 50% Filipino owned and 50% Foreign owned, hence 500k shares each. Considering the requirements of nationalization, where a public utility corporation requires 60/40 ratio, what would you advise? Can their intent be met? voting voting In the above figure, it cannot be valid. However, the Court ruled that the nationality rule is concerned with the voting rights, as to the 60% ratio. THE PROCESS OF INCORPORATION 1. Corporate name limitation and restriction; 2. Minimum paid-up requirement 3. Rules and regulations for such undertaking; 4. Q and DQ Stock ownership in nationalized or partly nationalized industries; 5. Additional documentary requirements in some industries; 6. Q and DQ of directors; and 7. Limitation or prohibition on purposes/s 500k 500k Thus: 500k 400k 100k voting voting voting Filipino voting shares Foreign voting shares Foreign nonvoting shares Contents of the AOI Contents Incorporation; Sec.13. of the Article of All corporations organized 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 the Code or by special law: a) The name of the corporation; b) The specific purpose or purposes for which the corporation is being incorporated. Where a corporation shall state which is the primary purpose and which is/are the secondary purpose or purposes: 17 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Provided that a non-stock corporation may not include a purpose which would change or contradict its nature as such; PJA 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. 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 residences of the incorporators; 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 rules and regulations on electronic filing. and 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 residences of the 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, the amount of its authorized capital stock, number of shares into which it is divided, the par value of each, names, nationalities and residence addresses of the original 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; Contents in accordance to RCC a) b) c) d) e) f) g) h) i) It it be a non-stock corporation, the amount of its capital, the names, nationalities and residences of the contributors and the amount contributed by each and; i) Corporation9s name; Purpose/s; Principal office; Term a. Unless elected perpetual existence; Incorporators9 names, nationalities, and residences; Number of: a. Directors (not more than 15); b. Trustees (may be more than 15) Interim directors/trustees names, nationalities and residences; If stock corporation; a. Authorized capital stock; b. Number of shares; c. Par value; d. Original subscriber9s i. names, nationalities, and residences; ii. amount subscribed; iii. paid by each on amount subscribed e. Statement that some or all are without par value, if applicable If non-stock corporations 18 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia a. Capital; b. Contributor9s i. Names, nationalities, and residence addresses; ii. Amount contributed j) Other matters a. Consistent with law b. Deemed necessary and convenient Q: According to the RCC, may an arbitration agreement be provided? PJA 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 shall be 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; Yes Q: Can the AOI or application for amendments be filed via electronic document? Yes Format of AOI Sec.14. Form of Articles of Incorporation; Unless otherwise prescribed by special law, articles of incorporation of all domestic corporations shall comply substantially with the following form: Articles of Incorporation Of ___________________ (Name of Corporation) The undersigned incorporators, all of legal age, have this voluntarily agreed to form a (stock) (non-stock) corporation under the laws of the Republic of the Philippines and certify the following: First: That the name of the said corporation shall be <______, Inc, Corporation or OPC=; Fifth: That names, nationalities and residence addresses of the incorporators are as follows: Names _______ _______ _______ _______ _______ Nationalities __________ __________ __________ __________ __________ Residences _________ _________ _________ _________ _________ Sixth: That the number of directors or trustees of the corporation shall be ___; and the names, nationalities and residences of the first directors or trustees of the corporation are as follows: Names _______ _______ _______ _______ _______ Nationalities __________ __________ __________ __________ __________ Residences _________ _________ _________ _________ _________ Seventh: That the authorized capital stock of the corporation is _____PESOS (P_____) in lawful money of the Philippines divided into ______ shares with the par value of _____ PESOS (P_____) per share. (In case all the shares are without par value): That the capital stock of the corporation is ____ shares without par value. 19 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia (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 of the par value ____PESOS (P____) each, and of which _____ shares are without par value. Eight: That the number of shares of the authorized capital stock above stated has been subscribed as follows: Name of subscriber Nationality No. of shares subscribed Amount subscribed Amount paid (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 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 by-laws, 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 case 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 PJA 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 name already registered or reserved for the use of another 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 will reduce the ownership of Filipino citizens to less than the required percentage of the capital stock as provided by existing laws shall be allowed or permitted to be recorded 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 ___th 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) THE PREFATORY PARAGRAPH Sec.14. Form of Articles of Incorporation & Articles of Incorporation Of ___________________ 20 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia (Name of Corporation) The undersigned incorporators, all of legal age, have this voluntarily agreed to form a (stock) (non-stock) corporation under the laws of the Republic of the Philippines and certify the following: It specifies the nature of the corporation, to prevent difficulties of administration and supervision. Thus, the following should be indicated: a) b) c) d) Stock or non-stock; Close or open corporation; Corporation sole; or Religious corporation THE CORPORATE NAME Sec.14. Form of Articles of Incorporation; & First: That the name of the said corporation shall be <______, Inc, Corporation or OPC=; Sec.17. Corporate name; No corporate name shall be allowed by the Commission if it is not distinguishable from that already reserved or registered for the use of another corporation, or if such name is already protected by existing law, rules and regulations. PJA 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 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. Purpose A name is not distinguishable even if it contains one or more of the following: To distinguish it from other firms and entities and it is through which it can: 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 a) Act and perform legal acts; and b) To sue and be sued Q: After the corporation is formed, can it use another name other than the name stated in the AOI? As a general rule, no, as it cannot go beyond what the granting authority has given to it. 21 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia However, as an exception, it may do so if amended in accordance with law, under the following grounds: a) Will result in confusion; b) May open the door to fraud and evasion; and c) Difficulties of administration and supervision PJA 4. 5. Sec.18. Registration, Incorporation and Commencement of Corporate 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 regulations, the name shall be reserved in favor of the incorporation. The incorporators shall then submit their articles of incorporation and bylaws to the Commission. & Verification slip The SEC requires such to be acquired from the Records Division. If said name is available, the SEC may allow reservation for a nominal fee until the filing of the AOI. Guidelines 1. Append the word <corporation= or <incorporated= in full or abbreviated (RCC: added <OPC= as allowable) 2. Adding two (2) other different and distinct words, in case a name is already registered or protected by law 3. If name or surname of a person, there must be a basis: 6. 7. a. Name of incorporator; or b. Name of his child If name of person NOT in accordance with the previous, consent of the latter or heirs (if deceased), must be secured and submitted to SEC a. ER: National heroes If in initials (ABC Corp), the verification slip must contain: a. Meaning indicated; or b. Explanation that it has no meaning Subsidiary of foreign entity must contain <Philippines= or <Phils.= Reserved: a. State, Maharlika, Barangay i. Government exclusive b. Banks, Banking, Bankers, Building and Loan Associations, or other similar words i. Banking laws ii. UNLESS duly licensed by Monetary Board of BSP c. Rural Banks i. Rural Bank Act ii. UNLESS entity is authorized under said Act d. National i. CANNOT be used to those engaged in banking, brokerage, or saving institutions e. United Nations or Bureau i. CANNOT be used for commercial or business purposes f. Finance and Financing i. RA 8556 ii. UNLESS organized as such g. Engineers and Architects i. Only for professional partnership 22 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia ii. UNLESS business of the corporation h. Design or Designers i. If it will result to confusion that it is engaged in technical concern reserved for professional partnerships Q: Why cannot a corporation assume a trade name? As it will result to confusion. (See next case) Q: Rural Transit Co. (Rural) applied for a certificate of public convenience with the Public Service Commission (PSC) to engage in transportation between Tuguegarao and Ilagan. Red Line Transit Co. (Red Line) opposed the application as it is already engaged in said line, being granted with a certificate prior to Rural?s Application. However, PSC issued the certificate in the name of Bachrach Motors Inc., as Rural is only being used as a trade name. Is the certificate valid considering the circumstances? No, in order for the certificate to be valid, the applicant must be a real party in interest. A corporation cannot use a name other than what the law authorized them to use. It can only use another name if it change its name in accordance with law. No law authorizes the corporation to use or assume a trade name. As it is established that <Rural= is not a real party in interest, the application PJA and the subsequent certificate are fictitious. (Red Line Transportation Co. v. Rural Transit Co.) (NOTE: This case was cited in Philippine First Insurance Co. v. Hartigan, where the Court opined that this case involves a use of a name of another corporation which would result into confusion.) Q: Can the inclusion of two other words sufficient to warrant a difference in corporate names? No, as the addition of words may still result to confusion due to their being similar. (See next case) Q: Universal Mills Corp (Mills). was originally registered as Universal Hosiery Mills, Corp. It changed its name to the former due to the expansion of their business to include the manufacture of fabrics of all kinds. On the other hand, Universal Textile Mills (Textile), filed a petition to change the corporate name of Universal Mills, on the ground that it is confusing and deceptively similar, as there is a confusion as to property burned which resulted in confusion among concerned members. As to their registration, Textile was registered on January 1954, while Mills was registered on October 1954. Mills claims that their name did not cause confusion nor deceptively similar. Is Mills correct? No, Mills is incorrect. While it is true that they are NOT identical, confusion is imminent due to the engaging into the business to which Textile was already engaged for almost a decade ago. 23 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia It would seem that Mills wanted to ride the well-earned patronage and good will already established by Textile. Furthermore, Mills could have chosen another name to avoid confusion (Universal Mills Corp. v. Universal Textile Mills, Inc.) PJA Likewise, the invocation of the doctrine of secondary meaning is misplaced as no evidence of exclusivity was posed by Lyceum. In fact, if anyone could assert the doctrine, it is Western Pangasinan Lyceum, as it is in use of such name seventeen (17) years prior to Lyceum9s usage. (Lyceum of the Philippines v. CA) Q: Will the addition of geographical locations result to avoiding confusion? Yes. (See next case) Q: Lyceum of the Philippines (Lyceum), registered on September 1950, petitioned with the SEC to order the deletion of the word <Lyceum= from respondents Western Pangasinan Lyceum, Lyceum of Cabagan, Lyceum of Lallo, Lyceum of of Appari. Hearing officers of SEC ordered Lyceum to have the exclusive use of such word. However, upon appeal to the SEC en banc, the order was reversed on the ground that attachment of geographical names sufficiently distinguished the schools. CA affirmed the same. Is the CA correct? Yes, the attachment of the geographical locations resulting in the distinguishability of Lyceum from the others. The intent of Sec. 18, CC, is: 1. to avoid fraud, 2. evasion of obligations and duties, and 3. reduction of difficulties of administration and supervision over corporations. Doctrine of Secondary Meaning <A word or phrase originally incapable of exclusive appropriation (usually generic) with reference to an article in the market, because of geographically or otherwise descriptive, might nevertheless have been used so long and so exclusively by one producer with reference to his article that, in that trade and to that branch of the purchasing public, the word or phrase has become to mean that the article was his product= In sum, the requisites are: 1. Word or phrase incapable of exclusive appropriation; 2. Producer used it for so long and so exclusively; and 3. The word or phrase has become to mean that the article was his product Q: Consider a foreign corporation, who NEVER did business in the Philippines NOR registered a corporate name or its goodwill, will the protection of Sec. 18 apply? Yes, by virtue of the Paris Convention, which protects such without the obligation to file or register the same 24 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Q: Philips Export B.V. (Philips), is a foreign corporation not doing business in the Philippines, which registered the trademark <Philips= in the Phil. Patent Office. By virtue of which, the authorized users, Philips Electric Lamp Inc., and Philips Industrial Development, Inc. were incorporated on 1956. Standard Philips Corporation (Standard), was registered on 1982. Philips filed a case for infringement against Standard. SEC denied the same, ruling that Sec. 18 applies only when there is identity in the names and that at least two words distinct from Philips name is present. CA affirmed the SEC. Is the CA correct? No, Standard should have been ordered to delete the word Philips.The following requisites are needed in Sec. 18: 1. A prior right to use the name; and 2. Proposed name is either: a. Identical; b. Deceptively or confusingly similar; or c. Patently deceptive, confusing, or contrary to existing law In accordance with the priority of adoption, Philips was in use of such word twenty six (26) years prior. Furthermore, under the purpose of Standard, they are engaged in the production of electrical products, which is the same line of Philips. PJA Likewise, that two words are different cannot be appreciated, as the word <Corporation= does not count due to the fact that it is made to distinguish it from other business entities, but NOT to distinguish it from other corporations. (Philips Export B.V., et al., v. CA) Q: What if in the above case, Standard instead applied for the name of Standard Philips Sausages, where the latter engages in food production, would the SEC allow its registration? Yes, as in this case, the purpose for which it is incorporated is different from the other corporation Q: What is issued if the name has been changed? An amended certificate of incorporation under the amended name. Q: Will a name change affect the rights and liabilities of the corporation? No, it is NOT a new corporation NOR a successor of the original PURPOSE CLAUSE Sec.14. Form of Articles of Incorporation; & 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); It defines the scope of authority or undertaking of the corporation Three-fold importance of the purpose clause 25 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia 1. Stockholder; determine which business lines to invest into; 2. Board of directors and management; within what lines they are authorized to act; and 3. Anyone; determine whether the contract they are entering into is within the general authority of the management. Limitations PJA No, the city or municipality must be stated Q: Is there a need to state the location of the business operations? No, only the principal office Q: New Cagayan Grocery (Grocery) filed a complaint in the CDO court against CRS due to an omission in a transmission resulting to damages. 1. Must be lawful; 2. Specific or stated concisely; 3. Secondary ones must be specified, if more than one purpose; and 4. Must be capable of being lawfully combined CRS has its principal office in Manila, while the said transmission is channelled through the CDO branch. CRS moved that the case be dismissed on the ground of improper venue. Is CRS correct? Q: What if the corporate name contradicts the above limitations? Yes, the principal office serves as the residence of the corporation. The application shall be dismissed by the SEC If filing in the branch offices were allowed, confusion and inconveniences may be resulted. Q: Is there a limit the number of purposes? No PRINCIPAL OFFICE Sec.14. Forms of Articles of Incorporation; Third: That the principal office of the corporation is located in the City/Municipality of ___, Province of ___, Philippines; It establishes the residence of the corporation, to determine the locations of: 1. Chattel mortgage; or 2. Venue for actions Q: Is the statement of the province sufficient? (Clavecilla Antillon) Radio System v. Q: Considering the provision of Sec. 51/50, CC/RCC on meetings allowing to hold meetings in any city within Metro Manila, Cebu, or Davao, may the filing of an action be instituted in any city in Manila? No, the provision is only with respect to meetings, but NOT to the filing of an action in court. Hence, the case must be filed within the jurisdiction of the corporation9s place of residence Q: What is the basis actions being filed in the place of residence? Rules of Court TERM OF EXISTENCE 26 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Sec.14. Form of Articles of Incorporation; & Fourth: That the corporation shall have perpetual existence or a term of ___ years from the date of issuance of the certificate of incorporation; Under the RCC, perpetual existence is deemed the presumption if nothing is stated in the AoI, hence: Perpetual existence Stated in AoI In the CC, the former rule is as follows: GR: ER: Period not exceeding 50 years Extended by amendment not exceeding 50 years THE INCORPORATORS Sec.14. Form of Articles of Incorporation; & Fifth: That names, nationalities and residence addresses of the incorporators are as follows: Names _______ _______ _______ _______ _______ Nationalities __________ __________ __________ __________ __________ Q: Is there a minimum incorporators required? count of No, as long as NOT more than fifteen (15) Q: Can it be 1, 2, 3, or 4 incorporator/s? Yes, under the RCC it may be done. Rule as to term of existence GR: ER: PJA Residences _________ _________ _________ _________ _________ Q: Who may be incorporators? Any person, partnership, association, or corporation Under the CC, only natural persons can However, notice that a one person incorporator shall be deemed as an OPC Qualification a) At least one (1) share of capital stock; and b) Of legal age a. ER: If represented by legal guardian Citizenship and residency requirement Under the RCC, incorporators need not be citizens or residents of the Philippines. However, special laws may provide for such requirement still Practice of profession CANNOT be allowed to organize a corporation They are reserved to organize as a professional partnership One Person Corporation (OPC) Sec.116. One Person Corporation; A One Person Corporation is a corporation with a single stockholder: Provided, that only natural person, trust, or an estate may form a One Person Corporation. 27 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Banks and quasi-banks, preneed, trust, insurance, public and publicly-listed companies, and non-chartered governmentowned and controlled corporations may not incorporate as One Person Corporations: Provided, further, that a natural person who is licensed to exercise a profession may not organize as a One Person Corporation for the purpose of exercising such profession except as otherwise provided under special laws. Corporation with a single stockholder Q: Can OPCs be organized for an exercise of profession? No, as a general rule, a person cannot organize a OPC for the exercise of profession. As an exception, it may be allowed if provided for under special laws. THE DIRECTORS/TRUSTEES Sec.13. Contents of the Articles of Incorporation; & 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); Sec.22. The Board of Directorrs 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. Directors shall be elected for a term of one (1) year from among the holders of stocks registered in the corporation9s books, while trustees shall be elected for a term not exceeding three (3) years from among the members of the corporation. Each director PJA and trustee shall hold office until the successor is elected and qualified. A director who cases 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 corporation vested with public interest shall have independent directors constituting at least twenty percent (20%) of such board: 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 (P50,000,000.00) 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, nonstock savings and loan associations, 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 28 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia in the nature of business operations, and other analogous factors. An independent director is a person who apart from shareholdings and fees received from the corporation, is independent of management and free from any business or other relationship which could, or could reasonably be perceived 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 memberships and other requirements that the Commission will prescribe to strengthen their independence and align with international best practices. Rule as to number of directors or trustees Under the RCC, has been revised as follows: Directors; NOT more than 15 Trustees; MAY BE more than 15 Under the CC, directors and trustees; shall not be less than five (5) nor more than fifteen (15). Q: Can the number of director/s be 1, 2, 3, 4, or 5? Yes, under the RCC it is allowed. PJA Notice that in case there is only 1 member of the board, it is deemed as an OPC Exceptions 1. Educational; not more than 15 and in multiples of 5 (5, 10, 15) 2. Close; all stockholders are deemed directors, hence maximum of 20 Q: Are all corporations required to have a board? No, as close corporations may opt not to have one, as they may be deemed managed by the stockholders, hence: <Sec.96. Articles Incorporation; of The articles of incorporation may provide for: xxx The articles of incorporation of a close corporation may provide that the business of the corporation shall be managed by the corporation rather than by a board of directors. So long as this provision continues in effect, no meeting of stockholders need be called to elect directors: Provided, That the stockholders of the corporation shall be deemed to be directors for the purpose of applying the provisions of this Code unless the context clearly requires otherwise: Provided, further, That the stockholders of the corporation shall be subject to all liabilities of the directors. 29 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia The articles of incorporation may likewise provide that all officers or employees or that specified officers or employees shall be elected or appointed by the stockholders, instead by the board of directors.= Q: In case the close corporation did not opt to make a board, is it correct to say that there are no directors? No, in this case, the stockholders shall be deemed as the directors. Said directors shall be liable as such despite the absence of the board Minimum disqualification qualification and 1. Directors; at least one (1) share of stock 2. Trustee; member of the corporation 3. To both, within five (5) years prior to election: a. Final judgment i. Imprisonment exceeding six (6) years ii. Violation of RCC iii. Violation of Securities Regulation Code; b. Fraudulent acts, administratively liable for such c. Foreign court adjudication or authority similar to the above Q: Can the corporation add any other qualification or disqualification? Yes, through by-laws (e.g. there must be no substantial interest in competitor corporation ) Q: Can aliens be directors? PJA Yes, under the RCC, the residency and citizenship requirement is not required anymore. However, there are corporations which are reserved for Filipino citizens which must observe the nationality rule. Rule as to corporations engaged in development and utilization of natural resources The ratio to be observed should be 60:40. Hence, if there are one million shares, 60% must be owned by Filipinos, equivalent to six (6) seats, while the 40% may be owned by foreigners, equivalent to four (4) seats.) Q: What law is violated if more than 40% is owned by foreigners in a corporation engaged in development and utilization of natural resources? Anti-Dummy Law Independent directors Persons who: a) Is independent from management; and b) Free from any business or other relationship: a. Which could; or b. Could reasonably be perceived to materially interfere with the exercise of independent judgment in carrying out the responsibilities as a director; c) Constituting at least twenty percent (20%) of the board 30 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Q: When is an independent director mandatory? 1. Those covered by Sec. 17.2 of RA 8799 of the Securities Regulation Code (SRC): a. Securities registered with the Commission; b. Corporations listed with an exchange or with assets of at least Fifty million pesos (Php50,000,000); and c. Having two hundred (200) or more holders of shares, each holding at least one hundred (100) shares of a class of its equity shares; 2. The following: a. Banks and quasi-banks; b. Non-stock savings and loan associations; c. Pawnshops; d. Corporations engaged in money service business; e. Preneed; f. Trust and insurance companies; and g. Other financial intermediaries; and 3. Other corporations engaged in businesses vested with public interest similar to the above, as may be determined by the Commission. Q: How elected? are independent directors Authorized capital stock (ACS) Contents of the Articles of Incorporation; Sec.13. & 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 residence addresses of the original 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 Sec.14. Form of Articles of Incorporation; & Seventh: That the authorized capital stock of the corporation is _____PESOS (P_____) in lawful money of the Philippines divided into ______ shares with the par value of _____ PESOS (P_____) 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 of the par value ____PESOS (P____) each, and of which _____ shares are without par value. It refers to: They are elected during the election of directors, voted by shareholders present or those entitled to vote in absentia Voting in absentia of independent director GR: ER: PJA Cannot By-laws provide a) Maximum amount fixed in the articles to be subscribed and painin or secured to be paid by the subscribers; or b) Maximum number of shares that the corporation can issue Q: Is it required to indicated in the AOI? CAPITALIZATION 31 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Yes, as required under Secs. 13 and 14 PJA Under the former Code, 25% of the ACS must be subscribed to. Minimum required Paid-up/in capital stock (PCS) Sec.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. Q: Is there a required minimum PCS? Hence: GR: ER: Not required; Special law provides Subscribed capital stock (SCS) Sec.14. Form of Articles of Incorporation; & Eight: That the number of shares of the authorized capital stock above stated has been subscribed as follows: Name of subscriber It is the actual amount or value which has been actually contributed or paid to the corporation in consideration of the subscriptions made thereon. Nationality No. of shares subscribed Amount subscribed Amount paid It is the total number of shares and its total value for which there are contracts for their acquisition or subscription. It is, hence, the stockholder?s equity account showing part/portion of ACS: a) Paid or promised to be paid; or b) Subscribed by the subscriber/stockholders Q: Is there a required minimum SCS? No, under the RCC, there is no more minimum requirement for the SCS. No, under the RCC, there is no more requirement for the PCS. Under the former Code, 25% of the SCS must have been paid Outstanding Capital Stock (OCS) Sec.173. Outstanding Capital Stock Defined; The term <outstanding capital stock=, as used in this Code, shall mean the total shares of stock issued under binding subscription contracts to subscribers or stockholders, whether fully or partially paid, except treasury shares. Hence these are: a) Shares of stock; b) Issued under binding subscriptions contracts; c) Whether fully paid or partially paid Q: Are treasury shares included in the OCS? No, as it is excluded by law Considerations for Stocks Sec.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: 32 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia 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; d) Previously incurred indebtedness of the corporation; e) Amounts transferred from unrestricted retained earnings to stated capital; f) Outstanding shares exchanged for stocks in the event of reclassification or conversion; g) Shares of stock corporation; and/or in another h) Other generally accepted form of consideration Where the consideration is other than actual cash, or consists of intangible property such as patents of copyrights, the valuation thereof shall initially be determined by the stockholders or the board of directors, subject to approval by 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 upon it by the articles of PJA incorporation or the by-laws, or if not so fixed, by the stockholders representing at least a majority of the outstanding capital stock at a meeting duly called for that purposes. It may be any of the following: a) Cash; b) Property necessary or convenient for its use and lawful purposes; c) Services actually rendered to the corporation; d) Previously incurred indebtedness of the corporation e) Amounts from unrestricted retained earnings to stated capital; and f) Outstanding shares exchanged for stocks in the event of reclassification or conversion g) Shares of stock in another corporation (RCC); and h) Other generally accepted form of consideration (RCC) Q: Can promissory notes consideration for a stock? be a No Q: Can future service be a consideration for a stock? No Q: Must it be payment through only one of the permitted considerations? No, it may be a combination of two or more forms, as long as they are: 1. Capable of valuation; and 2. Fairly valued Q: Consider the following figures: 33 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia ACS: 1m SCS: 500k A B C D E Value: 1/share Subs. 100k 100k 100k 100k 100k 500k Paid up 50k 50k 50k 50k 50k 250k (PCS) Treasury shares What may the corporation do to the delinquent share? 500k No, as it will result in over issuance How then can the corporation issue more stocks? Through the amendment of the AoI What are outstanding capital shares? They are deemed as with voting rights How many are outstanding capital shares? It is 500,000 shares. It may order for the sale thereof If there is no buyer to said shares, what may the corporation do? The corporation then may buy the shares themselves, and now be treated as treasury shares. Considering that it now becomes a treasury share, how much is the OCS, SCS and the ACS? The OCS now becomes 400k, as E9s 100k share is now a treasury share, hence: + - It includes even those which are unpaid. Hence: 250k (PCS) 250k (Unpaid) 500k The treasury shares of 500k are not included in the computation as it is excluded from the OCS Assume that all incorporators, except for E, paid their subscription. What is the remedy of the corporation against E? File an action performance If after the action, E still refused or failed to pay, what happens to the stocks? It becomes delinquent shares Can the corporation issue more than 1m shares? + PJA for specific 250k (PCS) 250k (Unpaid) 500k 100k (E9s share, now treasury) 400k The SCS and the ACS remains the same, as these are matters considered as fait accompli in the AOI SHARES OF STOCK AND THEIR CLASSIFICATION Shares of stock (SoS) Designates the units into which the proprietary interest in a corporation is divided. The sum of all SoS constitutes the corporation9s capital stock. (Sum of SoS = Capital) 34 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia It is likewise the interest or right of the shareholder/stockholder in corporation9s: 1. Management; 2. Surplus profits; 3. Assets remaining after payment of debts in case of dissolution (as liquidation and winding up follows) SoS v. Certificate of Stock (CoS) CoS is a document or instrument evidencing the interest of a stockholder in the corporation. It serves as a documentary evidence of the holder9s ownership of shares and a convenient instrument for the transfer of shares. PJA Sec.6. Classification of shares; The classification of shares, their corresponding rights, 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, except as otherwise provided in the articles of incorporation and in the certificate of stock The shares of stock corporations may be 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 which have complete voting rights. Holders of nonvoting shares shall nevertheless be entitled to vote on the following matters: Classification of shares a) Common; b) Preferred; a. As to dividends; i. Participating; ii. Non-participating iii. Cumulative; iv. Non-cumulative 1. Discretionary dividend; 2. Mandatory if earned; and 3. Earned cumulative or dividend credit b. To voting rights; and c. Upon liquidation c) Par value; d) Non-par value e) Voting; f) Non-voting g) Founder9s h) Redeemable i) Treasury a) Amendment of incorporation; the articles of b) Adoption and amendment of by-laws; c) Sale, lease, exchange, mortgage, pledge, or other disposition of all or substantially all of the corporate property; d) Incurring, creating, or bonded indebtedness; increasing e) Increase or decrease of 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 35 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA 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, however, that banks, trust companies, 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 any 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 the 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 nopar value shares must be issued for a consideration of at least Five persos (P5.00) 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. The provision gives the corporation the authority to classify shares Purpose of classification a) Stockholder9s rights and privileges; b) Protection of purchases and stockholders as to corporate securities9 regulation and control of issuance of sale a. In close corporations as they provide for qualification in owning shares; c) Management control device a. Founder9s shares, voting, and non-voting shares d) Statutory requirements9 compliance a. Limitations in foreign ownership of shares e) Insure return on investment a. Redeemable shares or preferred shares f) Flexibility in price a. No-par value shares Rule as to equality of shares In case there are more than one (1) kind of shares issued, irrespective of classification, they are: GR: ER: Equal in all respects Except as stated in: a) AOI; AND b) CoS Examples of presumption of equality a) b) c) d) Right to vote Common Non-cumulative share Non-participating 36 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Q: X owns 1m par value shares valued at Php100/share, while Y owns 1m no par value shares valued at Php10/share. Who among them has more advantage? None, they are equal in all respects, in the absence of any stipulation b) Preference stated in: a. AOI; and b. CoS Q: If the preference is not stated in AOI but not in the CoS, will the preference apply? No, it must be stated in both the AOI and CoS. COMMON STOCKS One which entitles an owner to: a) An equal pro rata division of profits, if there are any; b) Without any preference or advantage in that respect over any other stockholder or class of stockholders It is however, a limited definition, which refers only to profit or dividends, as it does not consider other privileges which ordinarily attach to such shares, such as: a) Participation affairs; and b) Control PJA in corporate Q: Can common shares be denied voting rights? Hence, as no statement as to preference is made in the CoS, all shares shall be deemed equal in all respects Kinds of preferred shares a) As to dividends; a. Participating; b. Non-participating c. Cumulative; d. Non-cumulative i. Discretionary dividend; ii. Mandatory if earned; and iii. Earned cumulative or dividend credit b) To voting rights; and c) Upon liquidation As to dividends No (Gamboa v. Teves) PREFERRED STOCKS (PS > CS) Gives the holder a preference over the holder of common stocks with respect to: a) Payment of dividends; and/or b) Distribution of capital upon liquidation Requisites of PS Holders shall enjoy the privilege of being paid dividend first before any other stockholders are paid theirs. It is usually on a: a) Fixed percentage; or b) Specified amount Q: Is the preference absolute as to create the relationship of debtor and creditor between the corporation and the preferred stockholder? a) Par value ONLY; and 37 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia No, as the board of directors (BoD) has the discretion to declare dividends. Q: What if in the above situation, indeed, there are profits, would your answer be the same? Yes, as the discretion still remains with the BoD Q: X, is a preferred stockholder as to Php100,000. Assume that the BoD declared dividends amounting to Php500,000. How much can X receive? X can receive only Php100,000. The remaining Php400,000 shall be divided to the other stockholders. PJA Reasonable implication in shareholder as to dividends preferred Hence, the preferred shareholder agrees to his priority in dividends in lieu of future participation with common stockholders. Q: How then can the preferred shareholder may be distributed with dividends aside from his preference? Only if he is a participating preferred stockholder However, this kind of stock is unusual. Participating preferred shares In this situation, it may happen that the other stockholders may receive more than the preferred stockholder. Holders are still given the right to participate with the common stockholders in dividends beyond their stated preference Q: X, is a preferred stockholder as to Php100,000. Assume that the BoD declared dividends amounting to Php100,000. How much can X receive? Q: X, is a participating preferred stockholder as to Php100,000. Assume that the BoD declared dividends amounting to Php500,000. How much can X receive? X can receive Php100,000. As a preferred stockholder, he is entitled to a preference in the distribution of dividends. X can receive Php100,000 plus a share in the Php400,000 Cumulative preferred shares Entitle the owner to payment of: Q: In the above problem, how much may the other stockholders receive? None Q: That the other stockholders received nothing from the dividends, what is their recourse? None a) Current dividends; b) Back dividends not previously paid whether or not dividends were declared or paid in the past years Q: Do cumulative preferred shareholders lose their right to claim dividends for years that they were not declared or paid? No 38 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia How cumulative preferred shares paid Arrears or back dividends must be made in subsequent years to the cumulative preferred shareholders. If any are left, then it is divided to other common shareholders. Presumption as to cumulative or noncumulative in case of no stipulation Stocks shall be presumed as noncumulative. Under Sec. 6, in the absence of statement in the AoI and the CoS, shares shall be deemed equal in all respects. Hence, in order for one be deemed as cumulative, in needs to be expressly stated in the AoI and the CoS Non-cumulative preferred shares Holders are entitled only to current dividends, but not back dividends. As a preferred share, payment to holders of such are made before to the common stockholders. Advantage of non-cumulative preferred shares It avoids undue accumulation of arrears of dividends, particularly for years where profits are not earned. PJA Holder entitled to dividends on a particular year depending on the judgment or discretion of the BoD Rule as to payment of dividends to noncumulative preferred shareholders in subsequent years As a rule, dividends must be paid in the particular year, and NOT in subsequent years. Hence, it is still upon the discretion of the BoD to declare such, upon which, the shareholder shall be entitled As an exception, payment may be made in subsequent years if the failure to declare is tainted with abuse of discretion which results to oppression, fraud, or unfair discrimination. Mandatory if earned Imposes a positive duty on directors to declare dividends every year when profits are earned. It gives the preferred stockholders a right to the annual profit. Their rights will NOT be lost by the failure of the directors to declare dividends each year when earned. On the other hand, it leaves the directors NO discretion to withhold dividends. Earned cumulative or dividend credit type Holder has right to arrears if: Principal types preferred shares of non-cumulative a) Discretionary dividend; b) Mandatory if earned; and c) Earned cumulative or dividend credit a) Profits earned; b) But NOT declared. In effect, their right is merely postponed to a later date Discretionary dividend 39 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA How payment to earned cumulative or dividend credit shareholders dividends every year when profits are earned. It gives the preferred stockholders a right to the annual profit. Their rights will NOT be lost by the failure of the directors to declare dividends each year when earned. Payment to such shareholders are made first before to common shareholders Definition as to kinds of preferred shares as to dividends PREFERRED SHARES AS TO DIVIDENDS Holders shall enjoy the privilege of being paid dividend first before any other stockholders are paid theirs. It is usually on a fixed percentage or specified amount KIND Participating Earned cumulative or Dividend credit On the other hand, it leaves the directors NO discretion to withhold dividends. Holder has right to arrears if profits are earned, but NOT declared. DEFINITION Holders are still given the right to participate with the common stockholders in dividends beyond their stated preference Q: Consider the figure below: Non-participating Holders shall be entitled only to their stated preference and will not participate in the dividends XYZ Corp. 2016 Unrestricted 200k retained earnings Cumulative Entitle the owner to payment of current dividends and back dividends not previously paid whether or not dividends were declared or paid in the past years Non-cumulative Holders are entitled only to current dividends, but not back dividends. Definition as to kinds of non-cumulative preferred shares NON-CUMULATIVE PREFERRED SHARES Holders are entitled only to current dividends, but not back dividends. Discretionary dividend Holder entitled to dividends on a particular year depending on the judgment or discretion of the BoD Mandatory if earned Imposes a positive duty on directors to declare In effect, their right is merely postponed to a later date Stockholder A B C D E 2017 200k 2018 0 Share Cumulative Non-cumulative Discretionary dividend Mandatory if earned Earned cumulative or dividend credit 2019 400k Value 100k 100k 100k 100k 100k Assume that XYZ Corp. declared dividends in 2019, how much would each preferred stockholder receive? A would receive Php400,000, Php100,000 for each year (2016-2019), as he is entitled to his share even if dividends were declared or not. B would receive Php100,000 as he is entitled only to his dividends for the present year (2019). 40 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA PAR AND NON-PAR VALUE SHARES C would receive Php100,000 as the BoD declared dividends only in the present year (2019). D would receive Php300,000, Php100,000 for years 2016, 2017, and 2019. He is NOT entitled in 2018 as there are no earnings for that year E would receive Php300,000 as he is entitled to dividends as long as earned, hence for 2016, 2017, and 2019. His right to receive such were merely postponed. 2016 100k 2017 100k 2018 100k 2019 100k SH C 0 0 0 100k nC 0 0 0 100k DD 100k 100k 0 100k MIE 100k 100k 0 100k EC/ DC Note Receives dividend no matter what Only entitled to present arrear Only entitled to when BoD declares As long as earned, even not declared, entitled annually Nondeclaration of dividends will not affect his entitlement to dividends previously earned Cumulative v. earned cumulative share In cumulative, SH is entitled to dividend whether earned or not. In earned cumulative, SH is entitled only if it is earned Par value shares Those whose value are fixed in the AoI. Primary function The following are the primary functions of par value shares: a) To fix a: a. minimum subscription; or b. original issue price; and b) Indicates the amount which the original subscribers are supposed to contribute to the capital Q: Is the par value stated in the AoI or the CoS the true value of the shares? No, as the share may fluctuate depending on the liability and the net worth of the enterprise. Q: Is the par value stated in the AoI or the CoS the fair market value? No, as it is not the true value True/Book value Net worth of the company divided by number of outstanding shares, hence: Company net worth # of Outstanding Shares Q: Can par value shares be issued/sold at less than the par? No, as it will result to watered stocks Watered stocks Shares issued at less than par 41 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Liability of shareholders of watered stocks SH shall be liable for the difference between what he paid, and the actual par value, hence: - Actual par value Value paid Liability of SH No par value shares Issued price are NOT stated in the CoS. Where may be fixed a) In the AoI; or b) By BoD if authorized by: a. AoI; or b. By-laws c) In the absence of the above, by majority vote of the stockholders Q: Does no par value shares represent stated proportionate interest in the capital stock measured by value? No, only aliquot part of the whole number of such shares of the corporation issuing it Limitations to issuance of no par value shares Sec.6. Classification of Shares; & 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 (P5.00) per share: Provided, further, That the entire consideration received by the corporation for its no-par value shares shall be treated as PJA capital and shall not be available for distribution as dividends. Hence, the limitations are as follows: a) Deemed fully paid and nonassessable; b) Consideration should not be less than five pesos (Php5.00); c) Entire consideration constitutes capital (NOT available for dividend declaration; d) CANNOT be preferred stock; and e) CANNOT be issued by: a. Banks; b. Trust companies; c. Insurance companies; d. Public utilities; and e. Building and loan associations Advantages of no par value shares a) Flexibility in price: a. as it may be issued from time to time at different prices b. it may depend on the viability of corporate undertaking or net worth of the company; b) Evasion of danger of liability upon watered stocks; and c) Disappearance of liability on part of the holder for unpaid subscription: a. As they are deemed fully paid and non-assessable VOTING SHARES AND NON-VOTING Voting shares Gives the holder the right to: a) Vote; and b) Participate in the management through the exercise of the above 42 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia (e.g. election, matters requiring SH approval) PJA (a) (b) Non-voting shares (c) Holder DOES not have the right to have a voice in the election of directors and SOME other matters requiring SH vote. Q: Which shares can be non-voting shares? (d) (e) (f) Sec.6. Classification of Shares; & 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. Only the following shares may be non-voting: a) Preferred; or b) Redeemable (NOTE: The Code may provide for other shares which may be nonvoting, see discussion on Founder9s Shares) (g) (h) Amendment of the articles of incorporation; Adoption and amendment of bylaws; Sale, lease, exchange, mortgage, pledge, or other disposition of all or substantially all of the corporate property; 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; Dissolution of the corporation Hence, the above matters may be voted on despite one is a holder of non-voting share. Q: XYZ Corporation has an OCS of 1 million shares, where 800k are voting while 200k are non-voting. In case of voting for directors, what is the basis of majority? Majority vote shall be based on the 800k, as the 200k non-voting shares cannot vote for directors. Q: Can all shares be non-voting? No, the same provision provides that there should always be a class or series of shares with complete voting rights. Q: XYZ Corporation has an OCS of 1 million shares, where 800k are voting while 200k are non-voting. In case of voting for a merger with ZYX corporation, what is the basis of majority? Exceptions to non-voting restrictions Sec.6. Classification of Shares; & Holders of nonvoting shares shall nevertheless be entitled to vote on the following matters: Majority vote shall be based on the 1 million shares, as it is a matter in which non-voting shares are nevertheless entitled to vote. FOUNDERS? SHARES 43 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Issued to founders of the corporation, which may be given certain rights and privileges not enjoyed by other stockholders. Sec.7. Founder?s Shares; Founders9 shares may be given certain rights and privileges not enjoyed by the owners of other stocks. Where the exclusive right to vote and be voted for in the election of diretors is granted, it must be for a limited eriod 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 <AntiDummy Law=; Republic Act No. 7042, otherwise known as the <Foreign Investments Act of 1991=; and other pertinent laws. Right to elect and be elected as BoD When a right to elect and be elected as a BoD is provided in the founders9 share, it shall be for a limited period of five (5) years. Q: What happens after the lapse of five (5) years? It results to an almost perpetual disqualification of the founder9s shareholder to elect and be elected. Hence, in effect, it becomes a nonvoting share. Therefore, it results to an additional kind of share which may be nonvoting: a) Preferred; b) Redeemable; and c) Other shares if provided for by this Code a. Founder9s shares, after the lapse of five (5) years PJA granting the right to elect and be elected. Rule as to beginning of limited period as to right to elect or be elected Under the RCC, the period of five (5) years shall commence from the date of incorporation. Under the CC, the date shall commence from the SEC9s approval of such. Q: Can the five (5) year period be extended? No, it shall be non-extendible Instances when the right to elect and be elected cannot be given It shall not be allowed if it violates: a) Anti-Dummy Law (CA 108); b) Foreign Investments Act of 1991 (RA 7042); and c) Other pertinent laws REDEEMABLE SHARES (RS) Those issued subject to redemption as may be provided by the terms of the subscription contract. It grants the corporation the right to purchase or reacquire the shares at the option of the: a) Corporation; or b) Holder, based on the face or issued value plus a specified premium. Sec.8. Redeemable Shares; Redeemable shares may be issued by the corporation when expressly provided in the articles of incorporation. They are shares 44 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia 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 said shares, subject to rules and regulations issued by the Commission. Kinds of RS a) b) c) d) 3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code. Hence, redeemable shares may be acquired whether or not there are unrestricted retained earnings. Thus, the rule stands as follows: GR: Optional; Mandatory; Fixed date; or Future date <Regardless of the unrestricted earnings= PJA ER: existence of It operates as an exception under Sec.41, CC or Sec.40, RCC to the rule that it may acquire its own shares if it has unrestricted retained earnings. Sec.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 purchase or acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the following cases: 1. To eliminate fractional shares arising out of stock dividends; 2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and There must be unrestricted retained earnings (Sec.41 CC, Sec.40 RCC) Redeemable shares (Sec.8, CC and RCC) TREASURY SHARES Shares which have been: a) Issued and fully paid for; b) Subsequently reacquired by the issuing corporation, by a. Purchase; b. Redemption; c. Donation; or d. Other lawful means Sec.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. Q: Can treasury shares be reissued? Yes Q: Can the treasury share be reissued for less than the issuance price? Yes 45 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Q: In the above situation, will the purchaser be liable to the creditors of the corporation for the difference between the purchase price and the par value? No, as its full value has been previously paid before Effect of treasury shares in the hands of the corporation It shall have no dividend or voting rights. Voting and dividend rights are granted ONLY TO OCS. Treasury shares ARE NOT PART OF the OCS, as these shares are in the hands of the corporation and not any other person. Q: Can treasury shares be declared as dividends? Yes, they are properties of the corporation Q: Julius Reese (Reese), John Manning, WD McDonald, and E.E. Simmons (respondents), incorporated Manta Trading and Supply Co. (MANTRASCO), whereby Reese owns 24,700 shares, while the respondents own 100 shares or a total of 300 shares. Prior to Reese?s death, the former executed a trust agreement where the law firm of Ross, Carrasco, and Janda are appointed as trustees, with the intent that the management of MANTRASCO and its two subsidiaries will remain with the respondents. However, the transfer was not effected immediately for MANTRASCO?s insufficiency of funds, and was fully paid on 25 November 1963. PJA Prior to this, a special meeting on 2 February 1958, MANTRASCO passed a resolution declaring the 24,700 shares as stock dividends to be distributed to shareholders on 22 December 1958. Sometime in between, on 14 September 1962, BIR conducted an examination on MANTRASCO?s books and found the following: a) As of 31 December 1958, said shares are distributed to respondents, amounting to an acquisition cost of Php7,973,660; b) Respondents failed to declare such as taxable income; and c) From 1956 to 1961, amounts were paid by MATRASCO to Reese?s estate by virtue of the trust agreement. Hence, BIR assessed income deficiency taxes against respondents. CTA, upon appeal, absolved respondents from liability on the ground that their interest remained the same despite the distribution, and only their shares was increased. CIR now appeals to the SC on the ground that said distribution to respondents is in effect a distribution of cash, hence taxable upon respondents. Both are contending that the disputed shares are both treasury shares, CIR holding that due to distribution, it should be taxable, on the other hand, respondents were maintaining that only their numbers of shares were increased, but not their interest. Who is correct? Both are incorrect as to the nature of said shares being treasury shares. The Court enumerated the following characteristics of treasury shares: 46 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia a) Stock issued and fully paid; b) Reacquired by the corporation either by purchase, donation, forfeiture, or other means. c) Can be re-issued or sold again, as long as not retired by the corporation; d) Being in the treasury, they are: a. NOT outstanding shares; b. Does NOT participate in: i. Dividends; and ii. Voting In this case: PJA Q: A and B are siblings, where the former lives in NCR, while the latter in Pampanga. Their father, X, gave A the amount of Php5,000,000 to incorporate a financial lending company in NCR. B, jealous for such, asked X for the same amount to incorporate his own financial lending company. B submitted his AoI, and indicated as the principal office his hometown for convenience purposes. Will his articles be approved? a) The trustees voted thereupon on meetings b) The trustees received dividends; and c) The intention of the trust agreement is to retain said shares in the outstanding shares of Reese9s estate until fully paid. No, the minimum paid-up capital for financial lending company is provided for by special law. Hence, as the declaration of dividends was made on 1958, while full payment was made on 1962, the declaration must be deemed as a nullity, on the ground that dividends can only be declared from unrestricted retained earnings, and NOT from outstanding shares. (CIR v. Manning) Hence, as the principal office stated in B9s AoI is in Pampanga, he needs Php10,000,000. CAPITAL REQUIREMENT Sec.12. Minimum Capital Stock Required Under said law, financial lending companies must have a minimum paid-up capital of Php5,000,000 if in NCR, and Php10,000,000 if outside NCR. <&subject to the provisions of the following section= under the Corporation Code The phrase does not exist anymore as Sec. 13 of the CC has been deleted Amount of subscribed and paid-up capital of Stock Corporations; Stock corporations shall not be required to have a minimum capital stock, except as otherwise specifically provided by special law. Rule as to minimum capital required GR: ER: No minimum capital required Provided for by special law Under the RCC, minimum for such capital has been removed. The provision on requiring the subscription of 25% of authorized capital stock, and the pay up of at least 25% thereof is no longer expressly provided. 47 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Hence, it would seem that the requirement does not exist anymore RESTRICTIONS AND PREFERENCES ON TRANSFER OF SHARES PJA Hence, the restrictions and preferences would not apply to purchasers in good faith. Q: What is the effect if it is indicated in both AoI and CoS? Importance of restrictions and preferences It serves as a protection corporation and stockholders; of a) From other persons; b) By and among themselves Example of importance Q: In close corporations, where should the restrictions and preferences appear? In family owned corporations, where the intent is to run the business between and among themselves, as the entry of a stranger or third person might prejudice the smooth flow of its business operation. Rule as to providing restrictions and preferences GR: ER: NOT required Close corporations CC) Q: Are they prohibited to restrictions and preferences? The purchaser in good faith would be bound by the restrictions and preferences. (Sec.96 In Close Corporations, as an additional requirement, it should appear in the by-laws, hence: a) AoI; b) CoS; and c) By-Laws Q: What is the effect if the restriction and preference in a close corporation does not appear in any one of the above? The purchaser in good faith would not be bound by the restriction and preferences provide THE NO TRANSFER CLAUSE No Q: Where should restrictions preferences indicated? and Sec.14. Forms of Articles of Incorporation; & Eleventh: (Corporations which will engage in any business or activity reserved for Filipino citizens shall provide the following): It should appear in: a) AoI; and b) CoS Q: What is the effect if it is only indicated in one, but not in both? It would NOT bind purchasers in good faith. <No transfer of stock or interest which shall reduce the ownership of Filipino citizens to less than the require percentage of the capital stock as provided by existing laws shall be allowed or permitted to be recorded in the proper books of the corporation and this restriction shall be indicated in all stock certificates issued by the corporation.= 48 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Rule as to inclusion of no transfer clause The Code requires only those corporations which will engage in a business activity reserved, fully or partially, to citizens of the Philippines. PJA Until after the successor is duly elected and qualified in accordance with the by-laws Duty of interim treasurer He shall certify: However, as a matter of policy, the SEC requires all stock corporations to include the same in the AoI. The purpose for this is to enable the State to determine whether such a corporation would contribute to the sound balanced development of the Philippine economy. He is authorized to receive for and in the name and for the benefit of the corporation all: Hence: CC/RCC: SEC: a) Authorized capital stock; b) Number of shares of authorized capital stock; c) Paid-up portion of the subscription Authorities of interim treasurer Corporations which will engage in a business activity reserved, fully or partially, to citizens of the Philippines All stock corporations THE TREASURER Sec.14. Forms of Articles of Incorporation; & 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 by-laws, 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 case and/or property for the benefit and credit of the corporation has been duly received. Tenure of interim treasurer a) Subscription or fees; b) Contributions or donations THE EXECUTION CLAUSE It is where: a) Incorporators sign the document; b) With an indication: a. Where it was signed; and b. When it was executed c) Witnessed by two (2) disinterested persons Purpose It is important as it serves as a contract: a) Between signatories themselves; b) Signatories with the corporation; and c) The corporation with the State ACKNOWLEDGMENT Where signatories acknowledge before a notary public that they have 49 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia executed and signed the same in their own free, voluntary act and deed. GROUNDS FOR DISAPPROVAL PJA recommendation of the appropriate government agency to the effect that such articles or amendment is in accordance with law. Grounds When Articles of Incorporation or Amendment may be Disapproved; Kind of compliance required for approval of AoI 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 a reasonable time from receipt of the disapproval within which to modify the objectionable portions of the articles or amendment. The following are grounds for such disapproval: Only substantial compliance is required Sec.17. 1. The articles of incorporation or any amendment thereto is not substantially in accordance with the form prescribed herein; 2. The purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations; 3. The certification concerning the amount of capital stock subscribed and/or paid is false; and 4. 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, nonstock savings and loan associations (NSSLAs), pawnshop, and other financial intermediaries shall be approved by the Commission unless accompanied by a favourable Effect if substantial compliance is not met First, the Commission shall give the corporation reasonable time to correct or modify objectionable portions of the AoI. However, after failure to comply, the SEC may then disapprove the registration. Grounds for disapproval 1. If not substantially in accordance with the form prescribed; 2. If purpose patently: a. Unconstitutional; b. Illegal; c. Immoral; or d. Contrary to government rules and regulations 3. False certification as to capital stock subscribed; 4. Required percentage of Filipino ownership has not been complied with 5. No favourable recommendation from appropriate government agency in case of specified corporations Q: Are the above grounds exclusive? No Examples of other grounds 50 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia 1. Corporate name is not legally permissible; 2. Minimum capital requirement not sufficient Q: What happens if the SEC found the AoI substantially compliant? The SEC shall issue the certificate of incorporation (CoI) Effect after issuance of CoI The corporation becomes: a) Vested with juridical personality separate and distinct from the stockholders or members; b) With the power to sue and be sued; and c) Perform all legal acts under its own name COMMENCEMENT OF CORPORATE EXISTENCE Sec.18. Registration, Incorporation and Commencement of Corporate 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 regulations, the name shall be reserved in favor of the incorporation. 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. PJA 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 and 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. Q: When will a corporation commence to exist? Upon the issuance of the CoI Q: Manuel Tabora (Tabora) sold four (4) parcels of land under a Deed of Sale to Cagayan Fishing Development Co. (Cagayan) on 31 May 1930. During the time of the sale, Cagayan is still in the process of incorporation and was only incorporated five (5) months after the sale, or on 22 October 1930. Subsequently, Cagayan sold the said lands to Teodoro Sandiko (Sandiko) one (1) year later or on 28 October 1931. Is the sale to Sandiko valid? No. A corporation is deemed to exist only after the issuance of the CoI. Before a corporation may validly transact business, it must exist first. That the corporation did not exist at the time of the acquisition of Tabora9s land, the sale is void. Hence, as the corporation are not owners of said lands, the subsequent disposal is likewise void. (Cagayan 51 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Fishing Development Sandiko) DEFECTIVELY CORPORATIONS Co. v. FORMED a) De facto; and b) By estoppel De Facto Corporations a) Defectively created as not to be a de jure corporation but nevertheless exists, for all practical purposes, as a corporate body; b) By virtue of its bona fide attempt to incorporate under existing statutory authority; c) Coupled with the exercise of corporate powers Requisites a) Apparently valid statute; a valid statute under which the corporation could have been created as a de jure corporation; b) Colorable compliance; attempt in good faith to form a corporation; c) Use of corporate powers; as if it were a corporation; and d) Good faith; in claiming to be and doing business as a corporation De facto v. de jure corporations POWERS, ATTRIBUTES, and LIABILITES DIRECT ATTACK BY STATE warranto DIRECT ATTACT PRIVATE PERSONS BY NOT AVAILABLE COLLATERAL ATTACK BY STATE NOT AVAILABLE COLLATERAL ATTACK BY PRIVATE PERSONS One that is: COMPLIANCE PJA DE JURE Strict; or Substantial DE FACTO Colorable SAME NOT AVAILABLE AVAILABLE through quo NOT AVAILABLE Purpose of recognizing existence of de facto corporations It is necessary to promote the: a) Security of business transactions; and b) Eliminate quibbling over irregularities Q: Can a corporation organized by virtue of a statute which was subsequently deemed void and unconstitutional be deemed as within the ambit of an <apparently valid statute=? No (See next case) Q: Amer Macario Balindong, as mayor and in behalf of Malabang, Lanao del Sur (petitioners) filed an action for prohibition to nullify EO 386 and to restrain Mayor Pangandapun Benito and the councilors of Balabagan, Lanao del Sur (respondents) from performing functions of respective offices. Petitioners rely on the ruling in Pelaez v. Auditor General, where the Court ruled that Sec. 68 of the Administrative Code, which gives the President the power to create municipalities is unconstitutional as: 52 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia a) It is an undue delegation of legislative powers; b) It violates the limitation on the President?s power over local government is merely supervisory; and c) It shall be deemed repealed due to the 1935 Constitution, as the Administrative Code was approved on 1917 Respondents on the other hand rely on its being a de facto corporation, being granted existence due to a statute prior to its declaration of being unconstitutional, and that it cannot be collaterally attacked, and Balindong is merely an individual who cannot attack its existence. Who is correct? Petitioners are correct. The ruling in Pelaez correctly declared that EO 386 is unconstitutional, and as a similar ruling in Municipality of San Jose and Siva, Balabagan must be restrained from acting further. An unconstitutional act is not a law, hence confers no rights, no duties, no protection, no office. It is as if the law had never been passed. While it is true that the first consideration is to consider any other statute that may uphold the validity of the corporation, such is wanting in this case as it is only through the Administrative Code that it was created. Furthermore, even considering other aspects such as relationship, the invalidity of Balabagan would not result in the unsettling of many acts it did. (Municipality of Malabang v. Benito, et al.) PJA Q: Pending the approval of the AoI, is quo warranto needed to question the existence of a corporation? No (See next case) Q: Arnold Hall (petitioner), Emma and Fred Brown, Hipolita Chapman, and Ceferino Abella (respondents) acknowledged and signed the AoI, adopted by-laws, and elected officers of Far East Lumber and Commercial Co. (FELC) on 28 May 1947. But they submitted their AoI to the Sec after 7 months, or on December 1947. Pending action on said articles, respondents filed against petitioner for the dissolution of the unregistered partnership with the CFI due to dissension, mismanagement, financial losses and feud among managers, which the CFI granted. Petitioner questioned the CFI decision, on the ground that the entity is a de facto corporation to which only a direct proceeding by the State may prosper. Is petitioner correct? No, FELC cannot be considered as a de facto corporation for two reasons: a) Issuance of CoI calls a corporation into being; and b) The suit is NOT against the corporation, but rather between stockholders. On the first ground, de facto corporations exist by virtue of errors or irregularity, but NOT from total or substantial disregard of the law. On the other hand, the State9s intervention, whether de jure or de facto, is not needed to acquire dissolution of the corporation. 53 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Furthermore, the doctrine of estoppel would not apply as the stockholders are deemed to know regarding the existence of the corporation, and that no third parties are damaged by entering into transactions. (Hall v. PJA b) Persons who assumed obligations with the ostensible corporations i. Cannot resist performance Practical application of the doctrine Piccio) Members avoid liability by invoking lack of personality to be sued Corporation by Estoppel A corporation which is neither de facto nor de jure because of serious defects in its incorporation or organization, which may exist by virtue of an agreement, admission, or conduct of the parties such that they will not be permitted to deny its existence. Sec.20. Corporation by Estoppel; All persons who assume to act as a corporation knowing it to be without 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 it as a corporation or on any tort committed by it as such, it shall not be allowed to use 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 Requisites a) Persons acted as a corporation; b) Knowing it to be without authority Effect of acting as such a) As to persons acting as such; i. Liable as general partners ii. Defense of lack of corporate personality NOT available General partners As general partners, persons are liable up to the extent of their own personal property NOT contributed in the business. Hence, they are not protected by the limited shareholder9s liability By estoppel v. de facto De facto corporations is deemed to have acquired corporate status generally, while by estoppel applies only to particular transactions done in the corporate name. Basis Equity considerations, as it is a mere fiction and exists only for a particular case Purpose It is for convenience, avoidance of injury, and fairness to all parties concerned Q: Who cannot deny corporate existence? 1. Persons who participated; and 2. Third parties who knowingly transacted with the unregistered corporation 54 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Q: Is it sufficient that the member or agent of the association is positioned as such in order for the denial be unavailable? No, the acts relied upon must be equivalent to a representation or admission of corporate existence PJA of jeepney driver?s associations with routes to and from Angeles and Mabalacat. Upon the request of the Sanggunian, they agreed to consolidate their associations as United Mabalacat-Angeles Jeepney Operators and Driver?s Association (UMAJODA). Application against third parties The doctrine would exist ONLY if the 3rd party: a) Tries to escape liability; and b) Has benefitted Hence, only if the 3rd party knowingly transacted with an unregistered corporation may the doctrine apply. Thus, the defense is STILL available in case of fraud, where he does not know that it is unregistered. When doctrine not available 1. Member9s acts does not equate to a representation or admission of corporate existence; 2. 3rd party a. did not treat the association as a corporation; b. does not know that it is a corporation; c. not chargeable with knowledge that it is a corporation; d. there is fraud; e. he is claiming from the contract 3. One who has not dealt with the unregistered association, nor recognized it as a corporation, nor participated in holding it out as such Q: Reynaldo Lozano (Lozano) and Antonio Anda (Anda) are both presidents In line with the agreement, set of officers shall be elected, to which Lozano won. Anda protested, and kept collecting dues from his members. Hence, Lozano filed a case with the trial court to restrain Anda from such acts. However, the trial court found that it is an intra-corporate dispute, which is under the jurisdiction of the SEC. Is the trial court correct? No. At the moment, there is no UMAJODA to speak of, as the certificate of consolidation has not been submitted, hence nothing to approve. As no corporate existence is present, they remain as two different entities. Likewise, the doctrine of estoppel will not apply as there is no third parties involved. It will only apply as a matter of equity to avoid injustice and unfairness. As it is a case where it is only among those who incorporates, knowingly that it has not been registered, there is no corporation by estoppel. (Lozano v. De los Santos) Q: Jose Aruego (Aruego) president of University Publishing Co., Inc. (University) entered into an agreement with Mariano Albert (Albert) whereby the 55 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia former shall have exclusive rights to publish the latter?s book on the Revised Penal Code, in exchange for eight installments amounting to Php30,000. However, Aruego failed to pay, which prompted Albert to pay said amount. The CFI ruled in favor of Aruego, while the SC affirmed the order, and issued a writ of execution against Aruego. As a defense, Aruego claim the real party defendant should be University. Is he correct? No, in line with Hall v. Piccio, nonregistration would mean no corporation exists. Likewise, estoppel cannot apply as the doctrine is not available against his victim. Hence, Aruego cannot claim that it is indeed University that is liable. In reality, Aruego is the one answerable, as he was the one who contracted and reaped the benefits of the transaction. (Albert v. University PJA Refuerzo claims that the liability must be limited to the corporation, which Salvatierra opposed. However, the court granted Refuerzo?s motion. Is the trial court correct? No, Salvatierra is not estopped to deny its existence due to fraud. When asked about its existence, Refuerzo did not give a confirmation. Hence, Refuerzo is liable and NOT the corporation. (Salvatierra v. Garlitos et al.) Q: Faustina Oh (Oh), after 33 years of service to Chiang Kai Shek School (School) in Sorsogon, was surprised that she was not given any assignment for the following sem. Hence, Oh sued School for such dismissal. However, this was amended to implead school officials. CFI dismissed the complaint, CA set aside the decision of CFI holding the school suable while absolving school officials. School petitioned for Review. Will their petition prosper? Publishing, Co.) Q: Manuel T Vda. De Salvatierra (Salvatierra) entered into a contract of lease with Philippine Fibers Process Co. (PFPC) represented by Segundina Refuerzo, as to his parcel of land, for the planting of kenaf, ramie, or other crops. Included in the agreement is the entitlement to income. Due to failure of PFPC to comply with the agreement, an action for accounting, rescission, and damages is instituted in the CFI CFI ruled in favor of Salvatierra as PFPC defaulted. No, their failure to register is due to themselves not passing the required documents within 90 days to incorporate. They cannot now deny its existence to deprive Oh of her claims. (Chiang Kai Shek School v. CA) Q: A promissory note in the amount of Php24,736.47 in favor of Asia Banking Corp (Asia) was issued by Standard Products Co., Inc. (Standard) Due to non payment, Asia instituted an action, which the CFI granted. 56 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Standard appealed, on the ground that Asia failed to prove the corporate existence of both corporations. Will his appeal prosper? No, the issuance of the promissory note amounts to a recognition of corporate existence. (Asia Banking Corp v. Standard Products Co., Inc.) Q: International Express Travel & Tours Services, Inc. (International) and Philippine Football Federation (Federation), through its President Henri Kahn (Kahn), entered into a contract whereby the former served as the travel agent of the latter. By virtue of the contract, International secured tickets for Federation?s trips to SEA Games in Kuala Lumpur, China, and Brisbane, amounting to Php499,654.85. However, Kahn only paid partial payments and subsequently no more payments were made, which led to International?s filing in the RTC for the balance of Php207,524.20 against Kahn and International as the alternative defendant. Kahn answered, maintaining that he should not be held personally liable as he merely acted as an agent of Federation. RTC ruled in favor of International, and held Kahn personally liable. CA, upon appeal, reversed the RTC, hence dismissing the complaint against Kahn, citing both RA 3135 (Revised Charter of the Philippine Amateur Athletic Federation) and PD 604, as the laws which gave rise to Federation?s existence. Is the CA correct? PJA No, juridical capacity requires the State9s consent, and both RA 3135 and PD 604 merely: 1. Recognized the existence of national sports associations; and 2. Provided the manner by which these entities may acquire juridical personality by recognition of the accrediting organization: a. Philippine Amateur Athletic Federation (RA 3135); or b. Department of Youth and Sports Development (PD 604) In this case, Kahn failed to prove any of these recognitions and merely attached the by-laws of the Federation. In order for a national sports association to be given juridical capacity, the State must give its consent, which must be done by compliance with the law, in this case, by RA 3135 or PD 604. (International Travel and Tours Services, Inc. v. CA) Q: Georg Grotjahn GMBH & Co. (Georg) is a multinational company organized and existing under the laws of Germany. By virtue of PD 218, Georg filed an application with the SEC for the establishment of a regional or area headquarters in the Philippines, to which a Certificate of Registration and license was issued. Romana Lanchinebre (Romana), sales representative of Georg, secured loans and cash advances from the latter amounting 57 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia to Php35,000. However, Php12,170.37 was not paid, and no payment was made despite demand by Georg, which led to the filing of a case for collection of sum of money. However, Romana filed a motion to dismiss. Respondent Judge Isnani (Isnani) granted Romana?s motion to dismiss, grounded on the failure of Georg to establish its capacity to sue, nor alleging that it is filing under an isolated transaction, and that it was not licensed to do business but rather only an authority to establish a headquarters herein. Is Isnani correct? No, while it is true that PD 218 precludes Georg to do business in the Philippines, its continuous acting for its primary purpose as headquarters and hiring employees such as Romana, it is deemed as doing business in the Philippines. Furthermore, Romana is estopped from challenging the personality of Georg, as it entered into a contract with the latter and has received benefits. In line with the ruling in Merill Lynch Futures, Inc. v. CA, the doctrine of estoppel applies to foreign corporations doing business although not authorized to do so, as if it is not allowed it would result to injustice on the part of the corporation. (Georg PJA ER: Fraud (Salvatierra v. Garlitos and Albert v. University Publishing Co., Inc.); and 3rd party claiming from the contract (International Express Travel and Tours v. CA and Georg Grotjahn v. Isnani) Possible remedies available for 3rd parties who entered into a contract with the ostensible corporation He may file against: 1. Ostensible corporation, to recover from corporate properties; 2. Associates who held out the association as a corporation; and 3. Both of the above, jointly and severally However, the last two options are available ONLY IF the 3rd party is NOT estopped from denying the existence of the corporation. Hence, if said 3rd party acted in such a conduct recognizing the corporation, the only option available is the first one, hence limited to corporate assets. Q: A, B, and C, represented an association to be a corporation. X, a 3rd party, transacted with them. However, upon breach due to A and B?s fault, X exercised his remedy against the three of them. Grotjahn GMBH & Co. v. Isnani) Summary of rules as to applicability of doctrine of estoppel as to third parties GR: 3rd parties who dealt with corporation and treated it as such CANNOT deny its existence (Asia Banking Corp. v. Standard Products); In reality, the active persons are A and B, and C was merely passive. Should all of them be held liable as general partners? No, it should only be A and B liable up to their own properties. This view is in line with the provision of Sec.21/22 of CC/RCC, stating 58 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA <&knowing it to be without authority to do so=. of incorporation of companies under their special regulatory jurisdiction. Hence, A and B are liable as general partners, while C will only be liable limited to his own contribution. Q: What should the corporation do after the issuance of the CoI or certificate of registration? ORGANIZATION AND COMMENCEMENT OF BUSINESS CORPORATE ORGANIZATION Sec.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) years 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 operation and comply with all requirements that the Commission shall prescribe. Upon compliance by the corporation, the Commission shall issue an order lifting the delinquent status. Failure to comply with the requirement 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 The corporation must: 1. Formally organize; and 2. Commence its business Q: What if the corporation did not do the above? It may lead to automatic dissolution of CoI or be classified as a delinquent corporation. Automatic dissolution If within five (5) years after the issuance of the CoI, the corporation failed to formally organize and commence business. It is deemed revoked, the day after the end of the five (5) year period. Q: XYZ corporation was issued its CoI on 27 January 2015. However, it did not formally organized nor commenced its business within five (5) years. When is the CoI deemed revoked? It shall be deemed revoked on 28 January 2020 Rule as to automatic dissolution GR: ER: Dissolved after five (5) years; Failure due to causes beyond its control Delinquent corporation 59 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia If the corporation commenced its business, but subsequently becomes inoperative for AT LEAST five (5) CONSECUTIVE years, the Commission, after due notice and hearing MAY place the corporation under delinquent status. Hence, it is NOT automatic, but rather requires due process. PJA 2. Commenced but subsequently became inoperative for five (5) years; the corporation is placed under delinquent status, and given two (2) years to resume operations. Only failure to resume operations within the period will dissolution be allowed, the failure to do so deemed as a ground for dissolution. Formal organization The dissolution under this category is NOT automatic, but merely a ground for such. Remedy of delinquent corporation After such placement as delinquent corporation, the order lifting the delinquent status shall be issued if said corporation: 1. Within two (2) years 2. Resume operation; and 3. Comply with the Requirements prescribed by the corporation Q: What happens if the delinquent corporation fails to resume operations and/or comply with requirements within two (2) years? Commission shall revocation of CoI cause the Requirement before suspension or revocation of CoI of corporations under special regulatory jurisdictions The Commission must provide the appropriate agency: 1. Reasonable notice; and 2. Coordinate Summary of dissolutions 1. Failed to commence after CoI issued; automatic dissolution; Process of structuring the corporation to enable it to effectively pursue the purpose for which it was organized. It includes the following: 1. Organizational meeting of stockholders to elect BoD; 2. Adoption of by-laws, if not simultaneously filed with the AoI a. In which case, it must be filed within one (1) month from issuance of CoI 3. Organizational meeting of BoD to: a. Elect corporate officers; b. Adopt corporate seal; c. Accept pre-incorporation subscriptions; d. Establish principal office; and e. Other step necessary to transact business for which corporation is formed Q: What kind of compliance should be observed in formally organizing the corporation? Substantial compliance Q: XYZ corporation, has already been issued its CoI. Hence, it already elected the BoD, and the latter elected a treasurer and a clerk. However, a president and 60 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA secretary has not been elected. May the CoI be dissolved? commenced its business. May the SEC dismiss the CoI? No. Only substantial compliance is required as to formal organizations. No, the petition for annulment is a cause beyond the control of Paunlad. (Perez v. Paunlad) The fact that a president and secretary has yet to be elected does not amount to a ground for dissolution. Due to the acts of XYZ, of electing the BoD, treasurer, and clerk, it is deemed as substantially complied with formal organization. (Perez v. Balmaceda) COMMENCEMENT OF BUSINESS/ TRANSACTION It means that the corporation: 1. Actually functioned; and 2. Engaged in the business for which it was organized. Example of commencement of business Entering into contracts to pursue business Q: When should the commence its business? corporation It should be commenced within five (5) years Effect of non-commencement It shall result to automatic dissolution, UNLESS the cause is beyond its control Q: Paunlad sa Nayon ng Bilogo, Batangas City, Inc. (Paunlad), has already been issued its CoI. However, after securing its water permit, the community sought for the annulment of such permit. Five (5) years has passed, but Paunlad has not 61 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia CHAPTER V: THE CORPORATE CHARTER AND ITS AMENDMENTS CORPORATE CHARTER Signifies an instrument or authority from the sovereign power, bestowing rights or power, and is often used convertibly with the term: 1. Act of incorporation; formed under special act of legislature; or 2. AoI; formed under general law Three-fold contract 1. Between corporation and the State; a. Primary franchise to act as such 2. Between corporation and stockholders or members; a. Respective rights and obligations; and 3. Between and among stockholders or members a. Relationship with one another Charter v. franchise Charter applies to the instrument by which the state vests such right or privilege Franchise is the right or privilege itself to be and act as a corporation or do a certain act. Kinds of franchise 1. Primary; right or privilege of being a corporation which the state confers; and 2. Secondary/special; powers and privileges vested in, and to be exercised by the corporate body as such PJA Example of franchises primary and secondary An employment agency has been issued a CoI by the SEC (Primary). However, in order to legally act as an international or overseas employment agency, it must secure a license or authority from the Philippine Overseas Employment Administration (Secondary). Hence, to be a corporation, the SEC issues the CoI. On the other hand, to operate as an employment agency, the POEA must issue an authority or license. CORPORATE ENTITY THEORY The corporation is possessed with a personality separate and distinct from the individual stockholders or members. It is not affected by the personal rights, obligations, or transactions of the latter. Q: Is the property of the corporation deemed the property of the president? No. (See Cruz v. Dalisay) Q: Sulo ng Bayan, Inc. (Sulo) filed an accion de revindicacion with the CFI Bulacan against Gregorio Araneta, Inc. (GAI) to recover a parcel of for its members, alleging that: 1. The latter cultivated the same since the Spanish regime and continuously possessed such; and 2. GAI forced such members out of said land. Hence, Sulo prays that GAI?s title be declared null and the 62 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia land be named in the names of such members as absolute owners. CFI granted motion to dismiss filed by GAI on the ground that the complaint stated no cause of action, which was granted. The MR was likewise denied. CA now certifies the case for the SC to resolve the issues. Is the CFI?s dismissal correct? Yes, as said land is not Sulo9s property, it has no personality to bring an action. A corporation has no interest in the property of the stockholders, even in the case of a one-man corporation. Even if it is the president, said property is still owned by the latter and not by the corporation. As an exception, a corporation has an interest if it is transferred to the corporation. In this case, there is no showing that the members indeed made a transfer to the corporation. Hence, as there is no legal right to speak of, there cannot be a cause of action. There can be no wrong nor is a breach of duty, when there no right (Sulo ng Bayan, Inc. v. Gregorio Araneta, Inc.) Q: Fermin Caram, Jr, and Rosa De Caram (petitioners) invested in Filipino Orient Airways (FOA). Petitioners were persuaded by the project study presented to them by Barreto and Garcia. However, Alberto Arellano, who worked on the said project study, filed for the payment for his compensation. The court held in his favor and made petitioners, FOA, Barreto and Garcia as jointly and severally liable. PJA To this order, petitioners petitioned to question their solidary liability. Should petitioners be held liable? No. Even if petitioners are the principal stockholders, they cannot be held liable for the transactions of the corporation. FOA, as a bonafide corporation, must be held liable for its obligations. Without any showing that it has no separate juridical personality, petitioner cannot be made liable. If liability is allowed to attach, it would allow for a rule where stockholders, even subsequent ones, may be held liable for transactions entered prior to their being as such. Note however, that Barreto and Garcia did not file their respective petitions, hence the liability remains to attach as to them. (Fermin Caram, Jr. and Rosa De Caram v. CA and Alberto Arellano) Q: Rustan Pulp and Paper Mills, Inc. (Rustan) through its general manager and president Bienvenido Tantoco (Tantoco), entered into a contract with Lluch, where the latter shall supply raw materials to the former. However, few months into the contract, a letter was sent by Rustan?s resident manager Romeo Vergara (Vergara) to Lluch informing that <&we will not be needing further delivery from you=, to which he clarified whether it was a stoppage or termination of contract, which however, was left unanswered. Hence, deliveries continued Due to this, a complaint for breach of contract was filed. CFI dismissed the complaint, but enjoined petitioners to 63 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia respect the contract. On appeal, the IAC modified the judgment and held that Tantoco and Vergara should be jointly and solidary liable. Is the IAC correct? No, the IAC is incorrect. While it is true that the president and manager entered into a contract, they cannot be made liable due to the corporation having its separate and distinct personality. They can only be made liable if there is a stipulation to that effect. (Rustan Pulp and Paper Mills, Inc. v. IAC) Q: By virtue of an NLRC case ordering the reinstatement and full payment of backwages against Qualitrans, a writ of execution was issued. Deputy Sheriff Quiterio Dalisay (Dalisay) executed the same by attaching the cash deposit of its president, Adelio Cruz (Cruz). Cruz questioned the execution as a malfeasance, corrupt practice, and seriously irregular. As a defense, Dalisay claims that he is acting upon a ministerial duty. Is Dalisay correct? No, Dalisay is incorrect, as what is to be executed is what is stated under the dispositive portion, no more, no less. Dalisay <pierced the veil= of corporate fiction, which is a function reserved to the courts. The president is not the owner of corporate properties and vice versa, the mere fact as such cannot make him liable up to his personal properties (Cruz v. Dalisay) Q: Palay, Inc. (Palay), through its president and controlling stockholder Albert Onstott (Albert) executed a PJA Contract to Sell a land in Antipolo, Rizal in favor of Nazario Dumpit (Dumpit). Said contract contains a clause where default in payment results in automatic rescission of the contract without need of demand. Dumpit paid only for two (2) years or until 1967. Six (6) years after, he offered to pay his dues with interests, and sought the assignment of his rights to Lourdes Dizon. However, Palay refused, on the ground that the contract has already been rescinded and resold. Due to this, Dumpit complained with the National Housing Authority (NHA) which ruled in his favor, on the ground that the rescission is void due to absence of demand. Hence, ordered Palay and Onstott to refund the amount paid. Is the NHA correct in ruling Onstott liable? No, the mere fact of presidency and controlling stocks CANNOT by its own make Onstott liable. The general rule stands, that corporations has a separate and distinct personality, and its stockholders can only be made liable in the following circumstances where the veil of corporate fiction: 1. Is used as a shield to further an end subversive of justice; 2. Purposes that count not have been intended by the law that created it; 3. To: a. Defeat public convenience; b. Justify wrong; c. Protect fraud; or d. Defend crime; 64 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia 4. Perpetuate fraud or confuse legitimate issues; 5. Circumvent the law or perpetuate confusion; or 6. As an alter ego, adjunct or business conduit for the sole benefit of the stockholders In this case, the above badges of fraud are wanting. Palay and Onstott merely relied, mistakenly, on the provision of its contract. No proof of intent to defraud Dumpit is present in this case. (Palay, Inc. v. PJA Hence, the general rule should stand, absent any proof of intent to defraud or of using the corporate personality as a shield for a wrongdoing. (Soriano, et al. v. CA and Cu) PIERCING THE VEIL CORPORATE FICTION OF Applicability of corporate entity theory It is limited transactions to legitimate Subject to equitable limitations Clave) Q: Bacarra (I.N.) Facoma, Inc. (Bacarra), a farmer?s cooperative marketing association, entered into a contract through their president, manager, treasurer, and director representative, with Mr. Geruacio Cu (Cu) where the latter shall supply the former with Virginia Tobacco. However, that no payment was made, Cu filed a complaint for collection of sum of money, which was granted by the trial court, ordering said corporate officers jointly and severally liable. They anchored on the ground that the <Association= refers only to the undersigned persons. The CA affirmed the decision in toto, grounded on the fact that the designations were meaningless as to the corporation?s liability, hence personal liability should be ordered. Is the CA correct? Equitable limitations are imposed in order to prevent its being used: 1. As a cloak/cover for fraud or illegality; or 2. To work an injustice Grounds While no hard and fast rule exists, the following may be grounds for such piercing: 1. Purpose of convenience/ to defeat public convenience; 2. Subserve ends of justice; 3. Justify wrong; 4. Protect fraud; 5. Defend crime; or 6. Alter-ego or business conduit for the sole benefit of the stockholders. Effect of any of the above No, said designations were not meaningless, as the parties themselves placed the word <Association=. If indeed they intended to be personally bound, they should have wrote <&the undersigned=. The juridical personality of the corporation shall be deemed as legal fiction Hence, the following are the further effects to the corporation: 65 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia 1. Mere association of persons; or 2. Merged into one corporation, in case of two corporations, where one is deemed merely as an instrumentality or part of the other Q: A writ of execution was issued against Atty. Emmanuel Santos (Santos) after defaulting payments to a lease contract with Litton and Co., Inc. (Litton). Where the real property in the name of International Academy of Management and Economics (IAME) was levied to satisfy the judgment against Santos, hence annotated with <&only up to the extent of the share of Emmanuel Santos.= PJA years from incorporated after IAME was Due to this IAME claims the following: 1. That due process was denied as IAME?s jurisdiction was never acquired; 2. That piercing only applies to stock corporations; 3. That piercing does not apply to natural persons. Is IAME correct? No, IAME is incorrect. IAME filed with the MeTC to lift or remove said annotations alleging its separate personality from Santos. MeTC denied the motion. However, upon MR, the MeTC reversed itself and ordered the cancellation of the annotations and the writ. RTC, upon Litton?s appeal, reversed the MeTC, and reinstated its original Order. CA affirmed the original Order, on the ground that Santos merely utilized IAME for the following reasons: 1. The deed referring to the sale of said land stated that Santos represented IAME as vendee, on 31 August 1979, when the latter has only been incorporated in 1985; 2. That the said property was only transferred to IAME during the appeal to CA on the revival of judgment; and 3. TCT to said land was only issued on 17 November 1993, 14 years after the execution of the deed, and 8 As the denial of due process, while as a general rule, jurisdiction must first be acquired before it be subjected to the trial and the writ of execution, it admits of exceptions, as to when the entity is used to evade a legitimate and binding commitment and perpetuate a fraud or wrongdoings. As to its application to stock corporations, the court and in US courts, in a plethora of cases never placed the issue of whether the corporation is a stock or non-stock corporation. It was held that control of ownership does not pertain to stock ownership. Hence, the concept of equitable ownership was considered, as one who is a nonshareholder defendant having control of the entity. As to its applicability to natural persons, the Court held that the veil may be pierced when the corporation is a mere alter ego of the other, as to reach the corporate assets in order to satisfy the judgment. (International 66 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Academy of Management and Economics v. Litton and Co., Inc.) Kinds of piercing 1. Traditional 2. Reverse a. Outsider Reverse b. Insider Reverse PJA to take advantage of a benefit available to the corporation (e.g. interest in a lawsuit or protection of personal assets BENEFIT AVAILABLE TO THE CORPORATION Traditional v. Reverse piercing CORPORATE INSIDER Traditional piercing happens when a court disregards the existence of the corporate entity so a claimant can reach assets of a corporate insider. X Y Z DEFENDANT Q: What is the kind of piercing applied in IAME v. Litton? Outsider reverse piercing was applied. X Y Z CLAIM CLAIMANT CORPORATE INSIDER Reverse piercing happens when a plaintiff seeks to reach the assets of a corporation to satisfy claims against a corporate insider. CLAIM OR X Y Z C O R P CORPORATE INSIDER CLAIMANT VEIL Outsider v. insider reverse piercing Outsider reverse occurs when a party with a claim against an individual or corporation attempts to be repaid with assets of a corporation owned or substantially controlled by the defendant. (See above) Insider reverse occurs when controlling members will attempt to ignore the corporate fiction in order In this case, the claimant, Litton, has a claim against Santos. However, in order for the judgment to be satisfied, the corporate assets of Litton must be affected, as Litton is the alter ego of Santos, and vise versa. Hence, they are deemed as one and the same person. Q: CFI of QC convicted Alfredo Carillo (Alfredo) guilty for reckless imprudence as he ran over Mario Palacio, son of Gregorio Palacio (Palacio), which required the former to be hospitalized. Hence, Alfredo was sentenced for imprisonment and indemnity. Alfredo drives for Isabelo Calingasan (Calingasan), while the latter is the president and general manager of Fely Transportation Company (FTC). Interestingly, the jeep drove by Alfredo was sold to FTC after the incident. Out of these facts, the civil case for the above incident instituted in CFI Manila against FTC, the latter court ruled that Calingasan is subsidiarily liable as Alfredo is insolvent, and NOT the defendant corporation. 67 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA Hence an appeal was filed by Palacio, stating that FTC should be held subsidiarily liable. Is Palacio correct? were seized and to be publicly sold by the CIR. Thus, led to the filing of an action in the trial court. Yes, Calingasan and FTC are one and the same person, and the latter had been used only as a shield to further an end subversive of justice. Plaintiffs, stockholders of Marvel, allege that the buildings are owned by Marvel and NOT Castro. CIR on the other hand claims that Castro is the sole and true owner of said properties. The following evidence had been observed: 1. The incorporators of FTC include: a. Calingasan; b. His wife; c. His son; and d. His two (2) daughters; 2. No proof as to other properties of FTC other than the jeep In this case, FTC was organized in order for Calingasan to avoid subsidiary liability, as the latter has transferred the jeep to the former in order for the property be placed out of reach of claimants, which led to the Court piercing the veil of FTC. Further, establishing their identity as one, Calingasan can be substituted as the real-party-in interest despite not being the party in the original case, to avoid multiplicity of suits. (Palacio v. Fely Transportation, Co.) F T C CALINGASAN PALACIO Q: By virtue of assessment of war profits taxes assessed against Maria Castro (Castro), three buildings in the name of Marvel Building Corporation (Marvel) The trial court ruled in favor of plaintiffs, due to dual interpretation, no interpretation can be made to deprive one of property without due process of law. Is the trial court correct? No, Castro should be deemed as the true owner, under the following evidence: 1. The incorporators include: a. Two (2) half-brothers; b. Half-sister; and c. Brother-in-law 2. Endorsement in blank of shares to the above; 3. Possession of said shares by Castro 4. That stockholders cannot have such income to enable them to buy said stocks; 5. That subscriptions were not receipted for; 6. Said subscriptions held by Castro 7. Plaintiffs DID NOT took the stand to deny being dummies; 8. Castro advancing big sums of money Out of all the pieces of evidence, the endorsement in blank is the most alarming, as it would seem that the alleged incorporators were merely made as such in order to comply with the minimum requirement, when in fact their shares of stock were not in their name and can be readily be made available once there is a new 68 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA stockholder. (Marvel Building Corporation, et al. v. David) 1. The founders of SM are related to the founders of Yutivo, as the latter9s sons; 2. The subscriptions of SM were advances made by Yutivo (unilateral act); 3. SM under the management and control of Yutivo (management contract); 4. Controlling majority of BoD of both are the same; 5. Principal offices are the same; 6. Correspondence show that SM treats Yutivo as the head office; 7. Remittances directy to Yutivo 8. Hence, finances came from Yutivo M A R V E L CASTRO CIR Q: Yutivo and Sons Co. (Yutivo) bought from General Motors Overseas Corporation (GM) cars and trucks, where the former shall sell it to the public. GM shall pay importation taxes, while Yutivo will not be subject to taxes for its sales. From 1946 and until the time GM withdrew from the Philippines, Yutivo sold such cars and trucks to Southern Motors (SM) for the latter to sell it to the public. Hence, the creation of SM was merely a scheme to avoid taxing the sale to the public, as under this setting, only the sale from Yutivo to SM will be taxed, and NOT the public sale. Rather, the sales to the public should be taxed as original sale by Yutivo and NOT as SM9s taxes. (Yutivo and When GM withdrew from the Philippines, Yutivo was made as the importer by the US Manufacturer, and in its place, was sold to SM, under the same arrangement as to taxes. CIR, claiming that SM was merely organized to defraud the government, assessed deficiency taxes against Yutivo. Is CIR correct? Sons, Co. v. CTAX) S M CORPORATION No, the CIR is incorrect as there is no tax to evade from 1946 up to before 1 July 1947. However, in order to arrive at the true tax liability of Yutivo, the Court observed that SM is a mere subsidiary and branch of the former, hence should be taxable against him. The following evidence must be considered: Y U T I V O CIR Q: Norton and Harrison Co. (Norton) entered into an agreement with Jackbilt, whereby the latter shall deliver concrete blocks to customers upon orders made from Norton, such sale being considered as a sale to Norton. During the agreement, Norton bought all outstanding stock of Jackbilt. Hence, the CIR ordered deficiency sales taxes against Norton due to the transactions made covering the time from said buying of 69 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA Jackbilt?s outstanding stocks. (Thus, the sale made by Norton is deemed as the original sale) as a family corporation involving Tan Tong, with its office in the same place with LCGP. Norton did not comply, and brought to the CTAX which relieved the former from liability. Is CTAX correct? The labor union, Kaisahan ng mga Manggagawa sa La Campana (KKM), consisting of 66 members, demanded higher wages and privileges, directed against La Campana and Starch Factory. No. While it is true mere ownership of stocks does not result to disregarding the separate personalities, this case warrants the allowance thereof as an alter ego, due to the following circumstances: 1. 14,993/15,000 shares were owned by Norton; 2. Norton constituted Jackbilt9s BoD, making them the same for both; 3. Norton financed operations; 4. Employees treated as their own; 5. Compensation to Jackbilt9s BoD shows that the latter is merely a department; 6. Offices are in the same compound While it is true that mere ownership of stocks does not prove control over the other corporation, the pieces of evidence presented amounted to proof that Norton and Jackbilt are one and the same. (CIR v. Norton and Harrison, Co.) J A C K B I L T CORPORATION N O R T O N CIR Q: Tan Tong, was engaged in the business of buying and selling gaugau under the trade name La Campana Gaugau Packing. Subsequently, La Campana Coffee Factory was established As no resolution between them was reached, the same was certified to the CIR. La Campana Gaugau and Coffee Factory, and PLOW as intervenor, moved to dismiss the case on the following grounds: 1. It is against 2 different entitites; 2. Workers of Coffee Factory less than 31; 3. Union revoked, hence no legal capacity; 4. A contract between La Campana and PLOW The above was denied by the CIR. Hence this petition, grounded on the CIR?s lack of jurisdiction as the members are not 30. Is petitioner correct? No, both entities are working under a single management, one business through two different trade names, hence an attempt to subserve the ends of justice, under the following circumstances: 1. La Campana intervened as <La Campana Gaugau and Coffee Factory=; 2. One office; 3. One management; 4. One payroll; and 5. Laborers were interchangeable Among the pieces of evidence, the interchanging of workers is the most 70 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA significant, as this would prove that the employees are available for both, hence operating only as one. 2. Emilio and Rodolfo were indicted as officers, NOT as private persons, hence representing the corporation; Furthermore, that said workers were interchangeable, Coffee and Starch9s workers are represented by one single bargaining unit. (La Campana It must be noted that the case was filed against Emilio, Rodolfo, and Ariston Cano (as field supervisor but the latter was absolved due to insufficiency of evidence) in their capacities as officers of ECE. Coffee Factory, Inc. v. Kaisahan Ng Mga Manggagawa sa La Campana) C O F F E E CORPORATION Hence, considering the above facts, the Court pierced the veil of ECE and held that the order against Emilio an Rodolfo, shall be an order against ECE. (Emilio Cano Enterprises, G A U G A U Inc. v. Court Relations) KKM Q: An ex parte motion to quash the writ of execution was filed by Emilio Cano Enterprises, Inc. (ECE), a closed family corporation, against said writ directed towards their properties. The said writ arose from the order to reinstate and payment of backwages to Honorata Cruz, against Emilio and Rodolfo Cano, president and manager, respectively. ECE contends that the the writ should be against Emilio and Rodolfo as the former was never made a party to the case. Is ECE correct? No, the writ of execution may be effected against ECE, under the following circumstances: 1. Incorporators are from one single family: a. Emilio Cano; b. Wife c. Sons (2) d. Daughter in law of Industrial E C E RODOLFO AND EMILIO COURT OF INDUSTRIAL RELATIONS Q: Telephone Engineering Service Co. (TESCO), has a sister company named Utilities Management Corporation (UMACOR), both under the management of Jose Luis Santiago (Santiago). Pacifico Gatus (Gatus), purchasing agent of UMACOR, was detailed to TESCO. Upon his return to UMACOR, he died of liver cirrhosis. Hence his widow, Leonila, filed a claim for compensation in the Workmen?s Compensation Commission (WCC), claiming that Gatus is an employee of TESCO. WCC required an employer?s report from TESCO. However, the employer?s report submitted indicated UMACOR as Gatus? employer. 71 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Despite the employer?s report, expenses were charged against TESCO?s property and scheduled for public auction, to which it contested as it was not the employer. Is TESCO correct? No. As it may lead to confuse legitimate issues, TESCO and UMACOR are one and the same due to: 1. They are sister companies; 2. One management; and 3. One building In this case, TESCO admitted the above facts, and the Court observed that the denial of the employeremployee relationship at this stage is merely an afterthought, a devise to defeat the law and evade its obligations. (Telephone Engineering, Co. v. Workmen?s Compensation Commission) Q: An unfair labor practice was filed by Allied Workers? Association against Claparols Steel and Nail Plant, for dismissing its employees as the latter ceased its operations. CIR held that Eduardo Claparols (Claparols) is guilty of union busting, and ordered reinstatement and payment of backwages. As a defense, Claparols cited Sta. Cecilia Sawmills, where the Court held that only three (3) months of backwages shall be paid, in cases where there was economic business reverses. Is Claparols correct? No, under circumstances: the following 1. Upon Claparols Steel and Nail Company ceased operations (30 June 1957), the Claparols Steel PJA Corporation was organized (1 July 1957); 2. There was no break in the succession; 3. 90% of share held by Mr. Claparols The Court observed that the Claparols Steel Corporation was designed to evade financial obligations. The Court cited Liddel and Co., Inc. v. CIR, that when a corporation is a dummy, serves no business purpose, and intended only as a blind, the corporate fiction may be ignored. (Claparols v. Court of Industrial Relations) Q: During the conciliation between National Federation of Labor Union (NAFLU) and Lawman Industrial (Lawman) in the Bureau of Labor Relations, the latter ordered a temporary shut down on 15 September 1982, and promised that operations will resume on January 1983. However, as no settlement was reached, NAFLU filed its notice of strike. On the last conference on 6 January 1983, operations still did not resume which led to the complaint for unfair labor practice against Lawman. It was found that the partial shutdown started sometime in August 1982, where at night machines were dismantled and installed on Araneta University Compound, Malabon, Metro Manila, with Lawman changing its name to Libra Garments (Libra), and when its employees found out about this, Libra changed its name to Dolphin Garments. Lawman contends that Libra and Dolphin are separate entities which the Court 72 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia cannot pierce in order to attach liability. Is Lawman correct? No, Lawman is incorrect. The Court held that Libra and Dolphin were mere alter egos of Lawman, which is engaged in the same business. To allow Lawman9s argument would mean to confuse legitimate issues, as it would disallow the reinstatement of its employees, when in fact it is still the same corporation. Lawman9s contention that it ceased operations is hence false, as it is still operating under an alter ego corporation/s, which will bear the liability attached to Lawman being one and the same corporation. (National Federation of Labor Union v. Ople) Q: In 1969 A.C. Ransom Labor Union (Union) filed a complaint for unfair labor practice where the Court of Industrial Relations (CIR) found A.C. Ransom Phil. Corp. (Ransom) was found guilty and ordered reinstatement and payment of backwages for the twenty-two (22) Union members. During the same year, Rosario Industrial Corporation (Rosario) was organized by one family whom are the same persons constituting Ransom. Due to the failure of Ransom to comply, an ex-parte motion for writ of execution and garnishment was filed, to which the Labor Arbiter (LA) granted, and held the officers and agents of Ransom as subsidiarily liable. However, the NLRC reversed the LA?s decision. Is the NLRC correct? PJA No, the NLRC is incorrect. The Court held that where the incorporators and directors belong to a single family, the corporation and its members can be considered as one in order to avoid its being used as an instrument to commit injustice. Furthermore, Rosario and Ransom should be deemed as one and the same corporation, under the following circumstances: 1. Rosario was organized in 1969, the same year when the labor case was filed; 2. Rosario was organized by the same persons, as officers and stockholders, of Ransom; 3. Both were engaged in the same business and produces the same products; 4. Both were closed family corporations, organized by the same family; 5. Rosario occupies the same compound, uses the same equipment and facilities; 6. Both have the sae sales and account departments. Hence, Rosario was organized in order to avoid liabilities of reinstatement and payment of backwages. (A.C. Ransom Labor Union-CCLU v. NLRC) Q: For illegally dismissing its employees while in fact the project was still going on and hired others, Concept Builders Inc. (Concept) was ordered by the Labor Arbiter to reinstate and pay backwages. To satisfy said judgment, the Sheriff went to its principal office in Valenzuela. However, he was surprised that instead, Hydro Pipes Philippines (HPP) was 73 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia located there. However, he was prevented from removing properties therein due to guards with high powered guns preventing him from doing so. Hence said sheriff asked for a break-open order, which was granted. Dennis Cuyegkeng vice-president of HPP, opposed the same, claiming that it is the property of HPP, and that the latter is engaged in the manufacture and sale of steel, which is different from the business of Concept hence that it in the same premises and under the same officers and subscribers cannot be given weight to prove that HPP and Concept are the same. NLRC denied the opposition. Is the denial correct? Yes. The Court highlighted probative factors: 1. Stock ownership of one or common ownership of both corporations; 2. Identity of directors and officers; 3. Manner of keeping corporate books and records; and 4. Methods of conducting the business On the other hand, the following is the test to determine the applicability of piercing: 1. Control, not merely of stocks, but complete domination of: a. Finances b. Policy c. Business practice 2. Control used by defendant to a. Commit fraud or wrong b. Perpetuate violation of legal duty 3. Control must proximately cause the injury or unjust loss. PJA In this case, the following should be noted: 1. 2. 3. 4. 5. 6. Same corporate secretary Same president; Same BoD Same subscribers Same address Information sheet filed on same day by the corporate secretary The Court thus held, organized in order to instrument to evade backwages and that HPP was orchestrate an liability as to reinstatement. (Concept Builders Inc. v. NLRC) Q: What is the effect if one of the elements of the test is absent? The corporate veil CANNOT be pierced in the absence of any one of the elements. Q: On 15 April 1947, M. McConnel, W.P. Cochrane, Ricardo Rodriquez, Benedicto Dario, and Aurea Ordrecio as incorporators organized Park Rite Co., Inc (Park Rite), engaged in the parking business with an ACS of 1500 shares, divided as follows: McConnel Cochrane Rodriguez Dario Ordrecio 500 shares 500 shares 498 shares 1 share 1 share Park Rite leased a land from Rafael Samanillo. on Juan Luna St. as a parking lot for a consideration. On 22 August, the following purchased Park Rite?s shares from the original incorporators: C. Paredes and U. Tolentino 1496 shares 74 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia B. Claudio Q. Paredes S. Tarictican P. Marquez 1 share 1 share 1 share 1 share On October, Padilla, owner of the adjacent lot discovered that his land is being used by Park Rite, despite no contract to that effect, which to his filing of a forcible entry case against the latter. The Municipal Court held Park Rite liable, however the latter had no assets to satisfy the judgment whole. Padilla filed with the CFI to make Park Rite and its stockholders liable to pay the remaining balance. The CFI denied recovery, but the CA reversed the denial, finding Park-Rite as a mere alter ego of the principal stockholders. Is the CA correct? Yes, the Court held that the following pieces of evidence clearly show that the principal stockholders completely dominated and controlled the corporation: 1. The other stockholders merely held qualifying shares; 2. Office of C. Paredes and Park Rite are housed in the same building, in the same floor, of the same room; 3. C. Paredes held the funds in his own name; and 4. Park Rite only had the toll house, wire fence around the lot, and the signs, as visible assets The Court highlighted the fact that due to the funds being held by C. Paredes, the judgment cannot be satisfied by Park Rite. In this case, there is an apparent complete domination by C. Paredes PJA and U. Tolentino which justifies the piercing of the corporate veil. (McConnel v. CA) Q: Tan Boon Bee & Co., Inc., under the name and style of Anchor Supply Co. (Anchor), and Graphic Publishing, Inc. (Graphic), entered into an agreement were the former shall supply paper products to the latter. As Graphic failed to pay its installments, Anchor filed a complaint for sum of money in the CFI, which was granted by the latter. Subsequently, an alias writ of execution was issued by the CFI, where the sheriff levied a printing machine identified as <Original Heidelberg Cylinder Press= found in the premises of Graphic. Philippine American Drug Co. (PADCO), informed the sheriff that the printing machine is its property and not of Graphic as PADCO merely leased it to Graphic, and advised against the sale of such. However, the sheriff proceeded with the auction, and was sold to Anchor, being the highest bidder. This led to PADCO?s filing of a Motion to Nullify Sale on Execution in the CFI, where the latter ruled in the former?s favor. Is the CFI correct? No, the CFI is incorrect, due to the following circumstances: 1. PADCO was never engaged in the printing business; 2. Graphic and PADCO9s BoD and officers are the same; 3. PADCO holds 50% of the share of Graphic9s stock; 4. PADCO claims that it leased the printing machine to Graphic on 75 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia 24 January 1966, when it is also alleged that PADCO acquired title to it on 11 July 1966, is unbelievable. Hence, the Court held that the respondent judge should have pierced the veil of PADCO, as it is one and the same with Graphic. (Tan Boon Bee & Co., Inc. v. Jarencio) Q: Forrest L. Cease (Cease), together with five (5) other American citizens incorporated Tiaong Milling and Plantation Company (Tiaong). As time went by, Cease bought out the other incorporators, and slowly distributed his shares to his children, namely, Benjamin, Florence, Ernest, Cecilia, and Teresita, and to Bonifacia Tirante (Bonifacia) who is also considered as family. After the corporation?s existence lapsed, Cease died, and a disagreement between the children happened, where Benjamin and Florence wants an actual division, while the remaining children and Bonifacio wanted reincorporation. As such, the four reincorporated the company as FL Cease Plantation (FL) Company, and registered it with the SEC. This led to Benjamin and Florence?s filing in the CFI for a settlement of Cease?s estate and a civil case praying that Tiaong and FL be declared as one and the same, and its properties be divided equally among the heirs as said properties belonged to Cease. The court ruled in their favor. Is the CFI correct? Yes, the CFI is correct under the following circumstances: PJA 1. Cease bought out the shares of the original incorporators, and slowly distributed them to his children and Bonifacia, hence at the time of his death, he only had 190/300 shares; 2. That the stocks were owned by family members, it turned into a close family corporation, intended for their exclusive benefit; 3. Tiaong, nor FL, had any bank account, and all properties were indeed in the name and account of Cease; 4. No evidence has been shown on the children purchasing or subscribing to their own stocks; The Court held that Tiaong, and subsequently FL, were mere alter egos of Cease, and that its properties must be held to be Cease9s properties. That it is his property, it must be included in the division of the estate for the heirs (Cease v. CA) Summary of cases when veil may be pierced 1. A corporate insider represented that the company is leasing a property, while the latter was not yet incorporated, when in fact the corporate insider merely made the corporation to evade liability (International Academy of Management and Economics v. Litton and Co., Inc.); 2. A corporation was formed by an employer in order for the latter to evade subsidiary liability (Palacio v. Fely Company); Transportation 3. Where the certificate of stock of the alleged incorporators are made in blank (Marvel Building Corporation, et al. v. David); 76 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia 4. Where the corporation was built to evade taxes via original sale by another corporation (Yutivo & Sons Co. v. CTA and CIR v. Norton and Harrison, Co.) 5. Where the workers of alleged separate entities interchangeable and under single bargaining unit two are one (La Campana Coffee Factory, Inc. v. Kaisahan Ng Mga Manggagawa sa La Campana); 6. Where the corporation is a closed family corporation and the claims were filed against the officers in their said capacities. (Emilio Cano Enterprises, Inc. v. Court of Industrial Relations, A.C. Ransom Labor Union-CCLU v. NLRC, Cease v. CA); 7. Where the corporation denies being an employer in order to evade liability, and places another corporation as its employer, when in fact they admit that they are sister companies under one management and building. (Telephone Engineering, Co. v. Workmen?s Compensation Commission) 8. Where a corporation organized a run-away corporation under a different name when in fact it still uses the same equipment for the same business or is organized by the same persons. (Claparols v. Court of Industrial Relations, National Federation of Labor Union v. Ople, and A.C. Ransom Labor Union-CCLU v. NLRC) 9. When there is no showing that the incorporators or stockholder indeed bought stocks from their own personal fund, but instead, the majority stockholder bought it and merely distributed or gave it to them in order to meet statutory PJA requirements or for the benefit of the family. (Marvel Building Corporation, et al. v. David and Cease v. CA) WHEN PIERCING THE CORPORATE FICTION IS NOT JUSTIFIED When piercing justified The Court have held that the following must be present in order for piercing be justified: 1. The corporation is used or being used to/as: a. Defeat public convenience; b. Justify wrong; c. Protect fraud; d. Defend crime; e. Confuse legitimate issues; f. Circumvent the law; g. Perpetuate deception; or h. An alter-ego, adjunct, or business conduit for the benefit of a stockholder, group of stockholders, or another corporation 2. Control, not merely of stock ownership, financial and operational concerns, but there must be: a. Perpetuation of fraud; or b. At least fraudulent or illegal purpose behind the control; 3. The corporation must be impleaded, otherwise there would be lack of jurisdiction; and 4. There must be claim against the stockholders or officers for corporate debt or obligation. When piercing NOT justified In line with the above, piercing cannot be had if: 77 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia 1. The corporation was not used for the above purposes; 2. The control was not used to perpetuate fraud or there is no fraudulent or illegal purpose behind the control; 3. The corporation was not impleaded; and 4. There is no claim being enforced against the stockholders or officers Quantum of evidence required to prove fraud It must be prove by clear and convincing evidence. Hence it is more than preponderance, but less than proof beyond reasonable doubt. The fraud cannot be presumed and cannot be by mere speculation. Q: The BoD of Akron Customs Brokerage Corp. (Akron) passed a resolution to buy thirteen (13) trucks from E.B. Marcha Transport Co., Inc. (Marcha). The BoD included Akron?s president Feliciano Coprada (Coprada), and Remo Jr. Coprada negotiated with Marcha for the sale of said trucks, terms of which allows for payment of the balance within sixty (60) days, and an extension of thirty (30) days if left unpaid. During the period where no full payment is made, the down payment shall accrue as rentals. A deed of absolute sale was executed, while Coprada executed a promissory note via a loan from the Development Bank of the Philippines (DBP) in favor of Akron. PJA As ninety (90) days had passed and no full payment has been made, Marcha demanded the amount from Coprada who stated that he will pay upon release of the DBP loan. However, in reality no loan was applied for. The BoD issued a resolution allowing the sale of two (2) trucks. As to the rentals, the payment was stopped. Marcha filed a complaint for the return of the thirteen (13) trucks or the recovery of the sum of money with damages in the CFI against Akron and its BoD. As to this complaint, only Remo Jr. answered, but defaulted in pre-trial. Furthermore, Remo sold his shares to Coprada. The CFI ordered Akron and its BoD liable jointly and severally, and the IAC affirmed the CFI. Is the IAC correct? No, the IAC is incorrect as no fraudulent intention is evident from the circumstances: 1. The resolution on the buying of thirteen (13) trucks, while Remo Jr. was one who authorized it, it is Coprada who negotiated with Marcha; 2. The resolution to sell two (2) trucks, is by virtue of a deed of absolute sale, which means that as there is ownership there is a right to dispose; 3. The sale by Remo Jr. of his shares to Coprada is allowed, as the former has no personal obligation to Marcha, and hence has the right to dispose of his shares. At most, solidary liability can attach only to Coprada, due to the following: 78 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia 1. He negotiated with Marcha; 2. He guaranteed payment, but did not do steps to secure the DBP loan; and Furthermore, the Court observed that the promissory note9s inclusion of the word <We= does not represent the stockholders or officers, but rather Akron. It is thus held, that Remo Jr. cannot be held personally liable as Akron has a separate personality. (Remo Jr. v. IAC) Q: Leopoldo Atienza (Atienza) filed a complaint for money claims in the POEA against its foreign employer Arieb Enterprises (Arieb) and recruiter Philsa Construction Trading and Co. (Philsa) in 1985. During the same year, Philsa?s license has expired and was delisted on 1986. In 1986, POEA dismissed the complaint. However upon appeal to the NLRC, the latter reversed the POEA dismissal and held Philsa and Arieb jointly and severally liable. Subsequently, the SC dismissed Philsa?s petition and became final on 1987. As the writ of execution from the POEA directed towards Philsa was left unsatisfied due to the latter being financially incapable and not operational anymore, Atienza moved for an alias writ of execution against the officers of Philsa, which ordered the attachment of the properties of its president and general manager Mr. Francisco del Rosario (Del Rosario), and if insufficient, against the surety bond of Philsa in the POEA. PJA Del Rosario appealed to the NLRC, the latter however dismissed the appeal, and denied the MR as well. Years prior, in 1981, Philsa International Placement and Services Corp. (Philsa International) was organized. It is the above fact that highlighted the decision of the POEA and NLRC to hold Del Rosario liable, claiming that it is a fraudulent act. Is the decision correct? No, the veil of Philsa should not have been pierced, as the following facts do not amount to fraud: 1. Del Rosario cannot be held as the officer responsible for the predicament; 2. Philsa9s allowing their license to expire on 1985, cannot be fraudulent as the decision against them was only on 1987; 3. Philsa International cannot be considered as a run-away corporation, as it was organized on 1981, years prior to the complaint being filed on 1985; and 4. The identity of incorporators alone cannot justify piercing, as there was no fraud done or intended to be done. The Court highlighted the differences of the circumstances in this case against those cases where the Court allowed piercing: 1. In La Campana, the workers were interchangeable as to two companies; 2. In Claparols, the second corporation arose the next day after the corporation ceased operations; and 79 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA 3. In A.C. Ransom, the corporation ceased operations after the CIR9s decision. Yes, Calica is correct in not piercing the veil of Acrylic under the following circumstances: The Court further noted that the complaint was directed against Arieb, and Philsa was only included as the latter guaranteed the former9s liability, as required by the POEA Rules and Regulations (POEA R&R). 1. Employees of Acrylic were chosen by their own criteria and standards; 2. While members of Union performed services for Acrylic, it is merely auxiliary; 3. That both corporations are situated in the same compound is not sufficient to justify piercing. Going further, the said POEA R&R also requires payment of any kind of liability to come from the bond given by the Bonding Company, in this case, from Philsa. Hence, the order should have been against the bond and not from Del Rosario. (Del Rosario v. NLRC) Q: Indophil Textile Mills, Inc. (Indophil) and its union Indophile Textile Mill Workers Union-PTGWO (Union) executed a collective bargaining agreement (CBA) effective 1 April 1987 to 31 March 1990. Furthermore, the Court reiterated their ruling in Umali v. CA, where piercing is justified only if there is a claim against the stockholders or officers of the other corporation, which is wanting in this case as no claim is being imposed against Acrylic9s members. Thus, the creation of Acrylic is not a device to evade the application of the Union9s CBA. (Indophil Textile Mill Workers Union v. Calica) On 3 November 1987, Indophil Acryclic Manufacturing Corp. (Acrylic) was organized, and its own union executed a CBA with the former on July 1989. Acrylic was situated in the same compound with Indophil. In 1990, Union claimed that the workers of Acrylic should be deemed as the former?s members and hence their CBA should extend to the latter, alleging that, pursuant to their CBA with Indophil, Acrylic should be deemed as an <expansion= or <extension= of the facilities of Indophil. The Voluntary Arbitrator (VA), Calica, declared that the CBA does not extend to Acrylic?s union. Is Calica correct? Q: Considering that workers were situated within the same compound of the two corporations in Indophil Textile Mill Workers Union v. Calica, why is the ruling different from La Campana Coffee Factory, Inc. v. Kaisahan Ng Mga Manggagawa sa La Campana when workers in the latter are also in the same compound? In the Indophil case, workers were merely providing auxiliary services. Furthermore, Acrylic9s employees are chosen via Acrylic9s own criteria and standards. On the other hand, in the La Campana case, workers were interchangeable. 80 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Q: Philippine National Bank International Finance Ltd. (PNB-IFL), a wholly owned subsidiary of Philippine National Bank (PNB), organized and doing business in Hongkong, extended a letter of credit to Ritratto Group, Inc., Ritratto, Int?l Inc., and Dadason General Merchandise (Respondents), all of which are organized and doing business in the Philippines. The letter of credit was secured by a real estate mortgage (REM) over four (4) parcels of land in Makati. As there was failure to pay the obligation, PNB-IFL, through a special power of attorney (SPA), authorized PNB, as its attorney-in-fact, to foreclose all the REM. Respondents filed a complaint for injunction with prayer for the issuance of a writ of preliminary injunction and/or temporary restraining order against PNB in the RTC, praying, among other things, that PNB recomputed and reschedule the interest to be paid under the agreement. The RTC granted the prayer, relying on their previous Order dated October 1994 where a suit against PNB is a suit against PNB-IFL. Subsequently PNB?s petition for certiorari and prohibition was dismissed by the CA. Is the dismissal correct? No, the CA should not have dismissed the petition under the following circumstances: 1. Both parties did not contend that PNB merely acts as an agent of PNB-IFL; 2. That, as a mere agent, PNB is not authorized to recomputed or reschedule interest, as it is not a party to the contract; PJA 3. Mere stock ownership cannot justify piercing the veil as there was no fraud nor intent to do such, nor PNB-IFL proven as a mere adjunct or alter-ego. Furthermore, the Court held that, the suit against the agent PNB, cannot mean a suit against the principal PNBIFL. Hence, Respondents should have filed against PNB-IFL, as the real party in interest in order for final determination be had. (Philippine National Bank v. Ritratto Group, Inc. Et al.) Q: EIB Securities Inc. (E-Securities), is a wholly owned and controlled subsidiary of Export and Industry Bank, Inc. (EIB), having 499,995 out of 500,000 shares. Pacific Rehouse Corporation, Pacific Concorde Corporation, Mizpah Holdings, Inc., Forum Holdings Corporation, and East Asia Oil Company, Inc. (Petitioners) filed a complaint in the RTC against ESecurities for the unauthorized sale of the latter?s 32,180,000 DMCI shares. The RTC ruled in favor of Petitioners, and subsequently a writ of execution was issued. However, as the writ was left unsatisfied, Petitioners sought for an alias writ of execution against EIB, alleging that EIB and E-Securities are one and the same person and the latter is merely an alter-ego. EIB opposed the issuance of the alias writ, via a special appearance claiming lack of jurisdiction over its person as it was never impleaded in the main case. The RTC granted the alias writ. In granting the alias writ, the court cited the cases of Sps. Violago v. BA Finance Corp., 81 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia et al. and Arcilla v. CA, where, according to the court, judgment was rendered despite the corporation not being impleaded in the main case. Subsequently, EIB filed a petition for certiorari with prayer for the issuance of a TRO in the CA, which the CA granted and hence reversed the RTC ruling. Is the CA correct in ruling so? Yes, the CA correctly ruled in favor of EIB, as the following circumstances does not justify piercing: 1. Mere ownership of stocks, which is 499,995 out of 500,000 is not sufficient to justify piercing; 2. In order for the ownership justify piercing, the control must be proven, as well as fraud and any injury resulted; 3. The above were not proven during trial, but merely included in the application for an alias writ of execution. The Court held that the RTC misinterpreted the rulings in Violago and Arcilla, as in said cases liability attached to the person impleaded, while the corporations were left untouched despite the latter being ruled as alter-egos. It is to be noted, that EIB was not impleaded in the main case and yet it was made liable. Going further, the Court held in Kukan International Corporation v. Reyes, that piercing the veil of corporate fiction cannot be used as an alternative mode of acquisition of jurisdiction over the person. And finally, piercing the veil of corporate fiction is a question of fact, hence determined during trial. If in the first place no jurisdiction was PJA acquired over the party, then no piercing can be had during trial. As there was no trial regarding the facts surrounding the relationship of EIB and E-Securities, facts presented during the motion for an alias writ of execution shall be deemed as not properly pleaded, and hence no piercing be had. (Pacific Rehouse Corporation v. CA and Export and Industry Bank) Q: When can piercing be done? During trial Q: Can the courts pierce the veil of another corporation despite it being not impleaded? No, as piercing the veil does not amount to a mode of acquisition of jurisdiction Violago and Arcilla case In the Violago case, Sps. Violago filed a 3rd party complaint against Avelino Violago (Avelino) the president of Violago Motor Sales Corporation (VMSC). The judgment was rendered against Avelino. In the Arcilla case, Arcilla obtained a loan in the name of Csar Marine Resources, Inc (CMRI), from Emilio Rodulfo (Rodulfo). Rodulfo filed a case against Arcilla for non-payment. The judgment was rendered against Arcilla. In both cases, both Avelino and Arcilla were found guilty, despite raising the defense of corporate liability. However, the corporation9s properties were never touched by the judgment. 82 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA Hence, the above cases are different with Pacific Rehouse as liability was found against E-Securities, as the one impleaded, but not EIB, which was never impleaded. Therefore, the above rulings have been misinterpreted by the RTC TD to reinstate the employees. Is the NLRC correct? Q: Twenty-two (22) employees of Tanduay Distillery, Inc. (TDI), were given notices of their termination due to retrenchment. The Court observed that Twin Ace assumed the business name TD in order to capitalize on the goodwill of the products previously produced by TDI. Two (2) days prior to the effectivity of the termination, the employees filed with the labor arbiter (LA) an application for a termporary restraining order (TRO) against TDI. However, as the TRO only has a twenty (20) day lifetime, and due to negotiations for the sale of assets of TDI to First Pacific Metro Corporation (FPMC), the retrenchment pushed through. However, FPMC requested to be dropped as a party to the case as it did not proceed with the sale. On the other hand, Twin Ace Holdings, Inc. (Twin Ace), bought the assets of TDI, and assumed the business name Tanduay Distillers (TD). Finally, the LA promulgated her decision ordering TDI to reinstate the employees or in case there is a change in management, to pay employees their separation benefits. TDI appealed the decision to the NLRC, where the latter affirmed the LA. Subsequently, the employees filed a motion for execution. To this, TD, through their representatives James Yu (Yu) and Wilson Young (Young) opposed the motion. However, NLRC promulgated its decision directing No, the NLRC is incorrect in holding TD, Yu, and Young liable in its decision regarding the motion for execution. However, assuming such business name should not be considered as an acquisition of TDI itself, as the nature of the sale between TDI and Twin Ace is merely the sale of its assets, and no stock has been sold. Thus, as it is merely the sale of assets, TDI and Twin Ace or TD, are separate entities, which entities cannot be pierced in the absence of any of the elements allowing for such. (Yu v. NLRC) (NOTE: The NLRC9s first decision did not in any way order TD to reinstate employees. It is only after the motion for execution where TD was ordered to do so. The Court held that a writ of execution cannot go beyond the final judgment, which in this case referred only TDI) AMENDMENT OF THE CORPORATE CHARTER Sec.35. Corporate Powers and Capacity; Every corporation incorporated under this Code has the power and capacity: xxx (d) To amend its articles of incorporation in accordance with the provisions of this Code; 83 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Amendment of the AoI is one of the express powers granted to the corporation. Ordinary Amendments Steps for an effective amendment of Articles of 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. STOCK BoD NON-STOCK BoT Stockholders representing at least 2/3 of the OCS 2/3 of the members Resolution by at least a majority Vote or written assent Amendment of AoI Sec.15. Amendment Incorporation; PJA Both the original and amended AOI shall contain provisions required by law. The amended provisions shall underscore the change/s made Submission and filing of the amendme nts with the SEC A copy thereof, certified under oath that the amendments had been approved by the required vote of SH or members, as certified by the following: 1. 2. Corporate secretary; and Majority of the directors A copy thereof, certified under oath that the amendments had been approved by the required vote of SH or members, as certified by the following: 1. 2. Corporate secretary; and Majority of the trustees Favorable recommendation of the appropriate government agency concerned in case of supervised corporations (e.g. banking, insurance, etc.) Required votes The following votes are needed: 1. Resolution passed by the majority of BoD or BoT; and 2. Ratification by the stockholders or members representing 2/3 of the OCS or of the members, respectively Q: ABC Corporation is a stock corporation having 1,000,000 OCS, where 200,000 are non-voting shares. In case of an amendment to the AoI, what would be the basis of the 2/3 of votes, 1,000,000 shares or 800,000 shares representing only voting shares? 84 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia The basis of the 2/3 vote should be the 1,000,000 shares, which includes the non-voting shares as it is one of the instances where non-voting shareholders are nevertheless entitled to vote. Sec.6. Classification of Shares; xxx Holders of nonvoting shares shall nevertheless be entitled to vote on the following matters: (a) Amendment incorporation of the articles of Additional requirements Under the provision, the following are required and submitted to the SEC: 1. That both original and amended AoI contains provisions required by law a. Furthermore, the change/s made shall be underscored in the amended AoI; 2. A copy, certified under oath: a. That the amendment/s has been approved with the required votes; and b. Certified by the: i. Corporate secretary; and ii. Majority of BoD/BoT 3. Favorable recommendation from the appropriate government agency, in case of supervised corporations. Requirement as recommendation of government agency to the favourable appropriate PJA Grounds When Articles of Incorporation or Amendment may be Disapproved; Sec.16. 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 a reasonable time from receipt of the disapproval within which to modify the objectionable portions of the articles or amendment. The following are grounds for such disapproval: xxx No articles of incorporation or amendment to articles of incorporation of banks, banking and quasi-banking institutions, preneed, insurance and trust companies, nonstock savings and loan associations (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. Hence, the following supervised corporations require such favourable recommendation: 1. Banks; 2. Banking and quasi-banking institutions; 3. Preneed; 4. Insurance and trust companies; 5. Nonstock savings and loan associations (NSSLAs); 6. Pawnshops; and 7. Other financial intermediaries When amendment approved The amendment shall be deemed approved: 85 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia 1. Upon approval of the SEC; or 2. Approval due to inaction; a. From the date of filing, if not acted upon by the SEC within six (6) months from such date, for a cause not attributed to the corporation. PJA i. Increase; or ii. Decrease; b. Dissolution by shortening of corporate term Rule as to approval due to inaction GR: Deemed approved from the date of filing if not acted upon within six (6) months from such date; ER: In case of the following Exceptions to approval due to inaction Sec.37. Power to Increase or Decrease Capital Stock; Incur, Create or Increase Bonded Indebtedness; xxx 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. Dissolution Corporate Term; Sec.136. by Shortening xxx Upon the expiration of the shortened term, as stated in the approved amended articles of incorporation, the corporation shall be deemed dissolved without any further proceedings, subject to the provisions of this Code on liquidation. Hence, the following are the exceptions to approval due to inaction and would require the SEC9s approval: 1. If the cause of inaction is attributable to the corporation; 2. Amendment as to : a. Capital stock 1. If the inaction is a cause attributable to the corporation; 2. Amendment as to: a. Increase or decrease of capital stock; b. Dissolution by shortening of corporate term (NOTE: However, it can also be opined that the amendments under item 2 are not exceptions per se, as they require different requirements, they must be considered as special amendments) Special Amendments The following powers are deemed special amendments: 1. Corporate term: a. Extend; or b. Shorten 2. Capital stock: a. Increase; or b. Decrease 3. Bonded indebtedness: a. Incur; b. Create; or c. Increase Ordinary v. special amendments 86 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA In ordinary amendments, the vote or written assent of the stockholders or members will suffice. to each stockholder or member, at his place of residence as shown in the books of the corporation, which shall contain the following: On the other hand, special amendments cannot be done merely be vote or written assent, as the following must be done: 1. Ratification via a meeting of the stockholders or members representing at least two-thirds (2/3) of the OCS or of the members; and 2. Other formal requirements 1. The proposed action; 2. The time of the meeting; and 3. The place of the meeting Power to extend or shorten corporate term It should be casted in a meeting called for that purpose. Sec.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. Unlike in ordinary amendments, special amendments require a meeting for that purpose in order for it to be valid. Resolution by a majority vote Ratification Hence, it cannot be done by mere written assent. Notice meeting Furthermore, mere inaction by the SEC would not equate to approval in case of special amendments. Required votes The following votes are needed: 3. Resolution passed by the majority of BoD or BoT; and 4. Ratification by the stockholders or members representing 2/3 of the OCS or of the members, respectively Q: Where should the 2/3 vote be casted? Notice of meeting A notice of the meeting for the purpose of the special shall be given of EXTENSION SHORTENING BoD or BoT In a meeting by the stockholders or members representing at least two-thirds (2/3) of the OCS or of the members Of the: 1. Proposed action; 2. Time of meeting; and 3. Place of meeting Addressed to: 1. Each stockholder or member; 2. At his place of residence as 87 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Service notice of shown in the books of the corporation It may be served as follows: GR: Deposited to the addressee in the post office with postage prepaid; Or Personally ER: Sent electronically, under the following circumstances: 1. When can amendment be done Exercise of appraisal right by dissenting stockholder Done in accordance with the rules and regulations of SEC; and 2. By-laws must provide or with consent of the stock holder GR: Not earlier During lifetime than three (3) years ER: Justifiable reasons Dissenting Provision DOES stockholder may NOT provide PJA only be allowed if the by-laws provide despite the stockholder9s consent.) Q: Is the appraisal right of the dissenting stockholder available in both extension and shortening of corporate term? No, the provision only allows the exercise of the appraisal right in case of extension the corporate term. When can amendment of corporate term be done In case of extension of corporate term, it cannot be done earlier than three (3) years prior to the original or subsequent expiry date. However, the period may be extended earlier than the three (3) years if there are justifiable reasons, hence: GR: Not earlier than three (3) years prior to the original or subsequent expiry date ER: Justifiable reasons Modes of service of the notice of meeting The provision provides the following modes of service allowed: 1. Deposited to the addressee: a. In the post office; and b. With postage prepaid; 2. Personally; or 3. Electronically, if: a. Done in accordance with the rules and regulations of SEC; and b. Authorized if: i. By-laws provide; or ii. Stockholder consented (NOTE: While both Secs. 36 and 37 allow electronically sending the notice, 37 is stricter in the sense that it can In case of shortening of corporate term, it must be done during the lifetime of the corporation, for obvious reasons. Q: Alhambra Cigar & Cigarette Mfg. Co., Inc (ACCMC) was incorporated on 15 January 1912, with its charter expiring on 15 January 1962. On 15 July 1963, the BoD and its stockholders garnered the required vote to extend its corporate term. The SEC, however, refused to approve the extension on the ground that a corporation cannot extend its life after the lapse of its original term. Is the SEC correct? 88 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Yes, the SEC is correct. The privilege of extension of a corporate term is a purely statutory, and must comply with conditions precedent. It must be done during the lifetime of the corporation, specifically not earlier than five (5) years prior to its expiry. After the lapse of its term, it is only allowed to exist only for the sole purpose of closing up its business. (Alhambra Cigar & Cigarette Mfg. Co., Inc. v. SEC) (NOTE: At this time, the requirement is not earlier than five (5) years, compared to the RCC which requires not earlier than three (3) years) Q: Assume that the case is filed during our era, what is the remedy of ACCMC under the RCC? ACCMC may file for a revival of its corporate existence Sec.11. Corporate Term; xxx A corporation whose term has expired may apply for a 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. PJA Power to increase or decrease capital stock and to incur, create, or increase bonded indebtedness Sec.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 stockholders9 meeting duly called for the purpose. Written notice of the time and place of the stockholders9 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. A certificate must be signed by a majority of the directors of the corporation and countersigned by the chairperson and secretary of the stockholders9 meeting, setting forth: a) That the requirements of this section have been complied with; 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 89 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia 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 filed 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 PJA 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. Modes of service of the notice of meeting The provision provides the following modes of service allowed: 1. Deposited to the addressee: a. In the post office; and b. With postage prepaid; 2. Personally; or 3. Electronically, if: a. SEC9s rules recognizes it as a valid mode of service; and b. By-laws provide (NOTE: Compared to Sec. 36, the mere consent of the stockholder would not suffice) Signatories to the certificate The certificate must be signed by: 1. Majority of the directors; and 2. Countersigned by stockholder9s meeting9s: a. Chairperson; and b. Secretary 90 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Note however, that this is not required in case of non-stock corporations incurring, creating, or increasing bonded indebtedness. PJA approval is needed in case of increase or decrease of capital stock) Q: Is the six (6) month period to file an application absolute? Q: Where should the copies of the certificate be kept and/or filed? Under the provision, the certificate must be: 1. Kept in the office of the corporation; and 2. Filed with the SEC a. Attached to the original AoI No, as an exception, it may be extended in case of justifiable reasons, hence: GR: ER: Within six (6) months; Justifiable reasons Effectivity The increase or decrease shall be effective: Note however, that this is not required in case of non-stock corporations incurring, creating, or increasing bonded indebtedness. 1. After approval by the SEC; and 2. Upon issuance of Certificate of Filing Prior approval Note however, that this is not required in case of non-stock corporations incurring, creating, or increasing bonded indebtedness. Application with the SEC must be made within six (6) months from the approval of the BoD and stockholders. In addition, approval from the Philippine Competition Commission (PCC) is likewise required where appropriate. Hence, the following prior approvals are necessary: 1. SEC; and 2. PCC, where appropriate (NOTE: Again, mere inaction by the SEC would not suffice) Increase or decrease of capital stock Resolution by a majority vote Ratification Notice meeting of Note however, that this is not required in case of non-stock corporations incurring, creating, or increasing bonded indebtedness. (NOTE: As previously discussed, this is an exception to the approval due to inaction by the SEC, as the latter9s Service notice of INCREASE DECREASE BoD or BoT In a meeting by the stockholders or members representing at least two-thirds (2/3) of the OCS or of the members Of the: 1. Proposed action; 2. Time of meeting; and 3. Place of meeting Addressed to: 1. Each stockholder or member; 2. At his place of residence as shown in the books of the corporation It may be served as follows: GR: Deposited to the addressee in the 91 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA post office with postage prepaid; The amount paid by each on the Or subscription Personally ER: 1. 2. Certificate signed by Contents of certificate 1. 2. in cash or property; OR The amount of capital stock or number of shares of no-par stock allotted to each Sent electronically, under the following circumstances: By-laws provide; and/or SEC9s rules recognizes as a valid mode of service Majority of the directors Countersigned by stockholder9s meeting9s: That the requirements of Sec. 37 have been complied with Chairperson; and Secretary That the requirements of Sec. 37 have been complied with The amount of increase of the capital stock The amount of decrease of the capital stock The: Any bonded indebtedness to be incurred, created or increased Amount of capital stock; OR number of shares of no-par stock thereof actually subscribed The names, stockholder if such increase is for the purpose of making effective stock dividend therefor authorized Any bonded indebtedness to be incurred, created or increased The amount of stock represented at the meeting; The amount of stock represented at the meeting; AND The vote authorizing the decrease of the capital stock AND nationalities , and addresses of the persons subscribing The amount of capital stock; OR number of no-par stock subscribed by each; and Prior approval SEC of Prior approval of Philippine Competition Commission Where copies of certificate kept When effective Additional The vote authorizing the increase of the capital stock Application must be made within six (6) months from approval of BoD and stockholders. As an exception, the period may be extended for justifiable reasons Where appropriate 1. 2. Office of the corporation; and Filed with SEC, attached to original AoI After approval by the SEC; and Upon issuance of Certificate of Filing Sworn statement by That the decrease 92 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia requirements treasurer lawfully holding office at the time of the filing of the certificate, that: 1. shall NOT prejudice the rights of corporate creditors At least twentyfive percent (25%) of the increase in capital stock has been subscribed ; and 2. at least twentyfive percent (25%) of the amount subscribed has been paid in cash or property, the valuation of which is equal to twentyfive percent (25%) Certificate in case of increase in capital stock The said certificate shall contain the following: 1. That the requirements of Sec. 37 has been complied with; 2. The amount of increase of the capital stock; 3. The following: a. The amount of capital stock; OR Number of shares of nopar stock thereof actually subscribed, b. Persons subscribing: PJA i. Their names, nationalities, and addresses; ii. The amount of capital stock; OR Number of no-par stock subscribed by each; and iii. 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; c. Any bonded indebtedness to be incurred, created, or increased; d. The amount of stock represented at the meeting; and e. The vote authorizing the capital stock Additional requirement In case of increase in capital stock, a sworn statement by the treasurer lawfully holding office at the time of the filing of the application is required, which must state the following: 1. At least twenty-five percent (25%) of the increase in capital stock has been subscribed; and 93 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia 2. At least twenty-five percent (25%) of the amount subscribed has been paid: a. In cash, to the corporation; or b. Property, the valuation of which is equal to twentyfive percent (25%), has been transferred to the corporation PJA 2. 3. Service notice of Time of meeting; and Place of meeting Addressed to: 1. Each stockholder or member; 2. At his place of residence as shown in the books of the corporation It may be served as follows: GR: Certificate in case of decrease in capital stock Or Personally ER: The said certificate shall contain the following: 1. That the requirements of Sec. 37 has been complied with; 2. The amount of decrease of the capital stock; 3. Any bonded indebtedness to be incurred, created, or increased; 4. The amount of stock represented at the meeting; and 5. The vote authorizing the capital stock 1. 2. Certificate signed by 1. 2. Contents of certificate increase STOCK Resolution by a majority vote Ratification Notice meeting of BoD In a meeting by the stockholders representing at least two-thirds (2/3) of the OCS Of the: 1. Proposed action; By-laws provide; and/or SEC9s rules recognizes as a valid mode of service Majority of the NONE directors required Countersigned by stockholder9s meeting9s: That the requirements of Sec. 37 have been complied with The amount of stock represented at the meeting; bonded AND NONSTOCK BoT The vote authorizing the incurring, creating or increasing of any bonded indebtedness Application must be made within six (6) months from approval of BoD and stockholders. Two-thirds (2/3) vote of members in a meeting called for that purpose NONE required Any bonded indebtedness to be incurred, created or increased In case of decrease in capital stock, the decrease shall NOT prejudice the rights of corporate creditors or Sent electronically, under the following circumstances: Chairperson; and Secretary Additional requirement Incur, create, indebtedness Deposited to the addressee in the post office with postage prepaid; Prior approval SEC of NONE required As an exception, the period may be extended for justifiable reasons Prior approval of Philippine Where appropriate NONE required 94 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Competition Commission Where copies of certificate kept When effective Bonds issued by the corporation 1. Office of the NOT corporation; and applicable 2. Filed with SEC, attached to original AoI After approval by the SEC; NOT and applicable Upon issuance of Certificate of Filing Shall be registered with the SEC, which shall have the authority to determine the sufficiency of the terms thereof Registration of bonds issued The corporation shall register with the SEC the bonds issued, the latter having the authority to determine the terms9 sufficiency. Certificate in case of incurring, creating, or increase of bonded indebtedness of stock corporations The certificate shall indicate: 1. That the requirements of Sec. 37 have been complied with; 2. Any bonded indebtedness to be incurred, created or increased; 3. The amount of stock represented at the meeting; and 4. The vote authorizing the incurring, creating or increasing of any bonded indebtedness PJA However, bonds issued by the nonstock corporation are nevertheless required to be registered with the SEC PROVISIONS AMENDMENT SUBJECT TO The following matters may be subject to amendment: 1. Corporate name; 2. Purpose clause: a. Changing; b. Altering; or c. Including other purpose/s 3. Principal office; 4. Number of directors; 5. Shares of stocks: a. Classifications; b. Restrictions; and c. Preferences 6. Authorized capital stock; a. Increase; or b. Decrease 7. Corporation term; a. Extend; or b. Shorten The first five items are subject to procedures via ordinary amendment, while the last two items are subject to special amendments. Change in corporate name Incurring, creating, or increase of bonded indebtedness of non-stock corporations Corporations, as a juridical person, are allowed to change its corporate name. In case of non-stock corporations, only the required votes and the duly constituted meeting for that purpose are necessary. The Court opined that as natural persons are allowed to do so, juridical persons may do so, and compared to the former, the latter has nothing sacrosanct about its name. Hence, the other requirements necessary in stock corporations such as the certificate and prior approvals are not required. Q: Would the change of corporate name change the identity of the corporation? 95 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia No, it is in no sense a new corporation, nor a successor of the original corporation. Q: Would the change of corporate name affect the rights, privileges, and obligations of the corporation? No, the rights, privileges, and obligations previously acquired or incurred shall remain. Q: Yek Tong Lin Fire and Marine Insurance Co.m Ltd. (Yek Tong), agreed to be the co-maker in a promissory note in the amount of Php5,000 with Maria Carmen Hartigan (Hartigan) in favor of China Banking Corp. (CBC). In line with this, an indemnity agreement in favor of Yek Tong was made by Hartigan, to indemnify the former in case of losses or expenses by virtue of said promissory note. Meanwhile, Yek Tong changed its name to Philippine First Incsurance Co., Inc. (PFIC). Hartigan failed to pay the amount, and PFIC was made liable by the CBC. As such, PFIC is now claiming against Hartigan by virtue of the indemnity agreement. As a defense, Hartigan claims that PFIC is not privy to the contract, as the former intended the agreement to be with Yek Tong. CFI of Manila dismissed PFIC?s action citing Red Line Transport v. Rural Transit Co. Is the CFI correct? No, the CFI is incorrect. A corporation is allowed to change its corporate name under the Corporation Code, as the legislature PJA provided any restricting such. express provision The Court further observed that the CFI9s reliance on Red Line Transport v. Rural Transit Co. is misplaced, as in that case. The Court ruled that what is prevented is the use of another name of a corporation which would result in confusion. It is obvious that the facts of the Red Line case is different from the case at hand, as the latter changed its name in accordance with law, and did not use any other name as to make confusion. (Philippine First Insurance Co. v. Hartigan) Provisions NOT subject to amendment Matters which are fait accompli (accomplished fact), are beyond the powers of the corporation to change, alter, or modify. This includes: 1. Names of: a. Incorporators; b. Incorporating directors/trustees; c. Treasurer first elected 2. Shares: a. Number; b. Originally subscribed; c. Paid; 3. Execution of AoI: a. Date; b. Place; c. Signatiories; d. Acknowledgment Q: At the time Bareta Inc. was incorporated, one of its incorporators is Maria Mabaho. Now, Maria Mabaho got married with Michael Mabango. Now known as Maria 96 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA Mabango, can the AoI be amended in order for her married name be included? No, as this is a matter not subject to amendment, being fait accompli. (Atty. Ladia: Mabaho pa din sya) Q: San Miguel Corporation (SMC), was incorporated in 1890, and one of its incorporators is Andres Soriano. Considering that more than a century has passed, will Andres Soriano?s still exist in the present AoI? Yes, as this is a matter fait accompli 97 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia CHAPTER VI: BOARD OF DIRECTORS/TRUSTEES AND OFFICERS POWERS OF THE BOARD Sec.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. Directors shall be elected for a term of one (1) year from among the holders of stocks registered in the corporation9s books, while trustees shall be elected for a term not exceeding three (3) years from among the members of the corporation. Each director and trustee shall hold office until the successor is elected and qualified. A director who cases 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 corporation vested with public interest shall have independent directors constituting at least twenty percent (20%) of such board: 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 (P50,000,000.00) 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, nonstock savings and loan associations, PJA 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 the corporation, is independent of management and free from any business or other relationship which could, or could reasonably be perceived 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 memberships and other requirements that the Commission will prescribe to strengthen their independence and align with international best practices. 98 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Hence, the powers directors/trustees include: of a) Authority to exercise corporate powers; b) Conduct all business; and c) Control and hold all properties of the corporation Q: Considering the above, is it correct to state that the Board has supreme authority over all matters? No Authority of the Board v. Stockholders The board is the supreme authority in matters of management of the regular and ordinary business affairs of the corporation. On the other hand, stockholders have authority over fundamental changes in the corporate charter. Equitable principle While stockholders may have ALL the profits, they nevertheless shall TURN OVER the management of the enterprise to the Board of Directors. Independent director Person who: a) Is independent from management; and b) Free from any business or other relationship: a. Which could; or b. Could reasonably be perceived to materially interfere with the exercise of independent judgment in carrying out the PJA responsibilities as a director; c) Constituting at least twenty percent (20%) of the board Q: When is an independent director mandatory? 1. Those covered by Sec. 17.2 of RA 8799 of the Securities Regulation Code (SRC): a. Securities registered with the Commission; b. Corporations listed with an exchange or with assets of at least Fifty million pesos (Php50,000,000); and c. Having two hundred (200) or more holders of shares, each holding at least one hundred (100) shares of a class of its equity shares; 2. The following: a. Banks and quasi-banks; b. Non-stock savings and loan associations; c. Pawnshops; d. Corporations engaged in money service business; e. Preneed; f. Trust and insurance companies; and g. Other financial intermediaries; and 3. Other corporations engaged in businesses vested with public interest similar to the above, as may be determined by the Commission. Q: How elected? are independent directors They are elected during the election of directors, voted by shareholders present or those entitled to vote in absentia 99 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia CLASSIFICATIONS OF POWERS OF CORPORATE AGENTS/OFFICERS Q: Is the exercise of corporate powers and functions limited to the BoD? No, as it may be delegated to: 1. Individual director; 2. Other officers; or 3. Agents However, they cannot do so delegate if the law so provides. Hence, the rule as to delegation stands as follows: GR: ER: May be delegated; Law provides that it cannot be delegated Basis for whether or not the acts of any of the above be binding to the corporation It depends on: 1. Nature of the agency created; 2. Powers conferred upon such person, by: a. Statute; b. Corporate charter; c. By-laws; d. Corporate action by the board or stockholder; or e. Necessary or incidental to one9s office General rule as to acts made by corporate officers The general rule is it is bound by the acts of such officers, if it within any of the classification of powers of corporate agents: 1. Expressly conferred or granted by: a. AoI; b. By-laws; or c. Official act of BoD PJA 2. Incidental, or acts: a. As naturally and ordinarily done b. Which are reasonable and necessary c. To carry out the corporate purpose or purposes 3. Inherent, or acts: a. That go with the office; 4. Apparent, or acts: a. NOT actually granted b. But principal KNOWINGLY allows or permits it to be done; and 5. Powers arising out of: a. Customs; b. Usage; or c. Emergency Q: J.F. Ramirez (Ramirez), based in Paris engaged in the marketing of films, offered the supply of films from Milano and Éclair Films, through his son Jose who is based in the Philippines, to RJ Fernandez (Fernandez) a director and treasurer of The Orientalist Co. (Orientalist). As the offer would only last until the end of the month, Fernandez called an informal conference two (2) days prior to the expiry of the offer. In the said conference, four out of five directors were present, and concurred to the offer of Ramirez, and subsequently sent letters of acceptance to the offer, with Fernandez? signature appeared When the films arrived, drafts were made by B. Hernandez (Hernandez) president of Orientalist, as the latter had insufficient funds. However, the drafts were dishonoured which led Ramirez to file a case against them. 100 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia The trial court ruled in favor of Ramirez, holding Orientalist as principally liable while Fernandez subsidiarily liable as a guarantor. Both are claiming that the other is solely liable on the contract. Orientalist claims that they never ratified the contract as the letters lacks the necessary signature of their president in accordance with their rules, and that the stockholders never issued a resolution ratifying the same. Fernandez claims that only the Orientalist should be held liable, is he correct? Yes, the Orientalist should be held solely liable. PJA Q: La Previsora Filipina (LPF) is a mutual building and loan association where plaintiffs Alberto Baretto, Jose de Amusategui, and Jose Barreto (Plaintiffs) are directors. Plaintiffs filed a case to recover 1% of the 1929 properties to certain directors after termination by virtue of a by-law amendment by the stockholders. However, the trial court upheld the validity of the by-law amendment. Is the trial court correct? No, the trial court is incorrect. Contracts between a corporation and third persons must be made by or under the authority of its BoD and NOT by its stockholders. The Court observed that a formal vote is not always necessary to incur liability, as, like individuals, it may be done through other means. In this case, that no action from the BoD has been taken, the stockholders action is merely advisory. As such, the Board ratified the said contract by adopting a resolution necessary for the utilization of the films. Furthermore, the Court observed that giving compensation to future directors for past services rendered by them is an obligation unknown to law. (Barreto v. La Previsora Filipina) In line with doctrine of apparent authority, as there is a resolution ratifying the contract, the Orientalist is estopped from denying the authority of Fernandez. (Ramirez v. Orientalist Co.) (NOTE: As to the stockholder9s resolution, the Court stated that such is merely advisory, as the powers are vested to the BoD. On the other hand, as to the lack of the president9s signature, the Court held that it is a mere formality, not necessary for the binding effect of the contract) QUALIFICATIONS DISQUALIFICATIONS AND Sec.22. The Board of Directors or Trustees of a Corporation; Qualification and Term; & 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. Hence, as a minimum requirement: 101 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia 1. Directors; must own at least one (1) share of stock; and 2. Trustees; must be a member Q: What happens if the director sold or transferred all his shares? He ceases to be a director He ceases to be a trustee of Q: Can a corporation dispense with the requirements under Secs. 24 and 26? No, these are minimum requirements and hence automatically required in qualifications of directors Minimum disqualification Q: What happens if the trustee ceases to be a member? Sec.26. Disqualification Trustees or Officers; PJA Directors, 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 the Philippine Competition Commission may impose in its promotion of good corporate governance or as a sanction in its administrative proceedings. qualification and 1. Directors; at least one (1) share of stock 2. Trustee; member of the corporation 3. Disqualifications as to both: within five (5) years prior to election or appointment a. Final judgment i. Imprisonment exceeding six (6) years ii. Violation of RCC iii. Violation of Securities Regulation Code b. Fraudulent acts, administratively liable for such c. Foreign court adjudication similar to the above Q: Is it correct to say that the corporation cannot add to what is required in the RCC? No, a corporation requirements. may add The requirements under Sec. 24 and 26 are merely minimum requirements which must be present no matter what. Hence, there can be requirements, as examples: other 1. El Hogar requires certain number of shares, hence not merely 1 share; 2. San Miguel Corp., a director must have at least 10% of the OCS, and 102 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia must NOT own shares in other competitor corporations. Q: San Miguel Corporation required its directors to not have any share in other competitor corporations. It is now being contested as an unlawful provision. Decide? PJA which has a penalty of arresto menor (1 day to 30 days). Should X be disqualified? Yes, the disqualified director should be Under the SEC9s Notice, directors and officers of financing companies must submit an NBI Clearance. The provision is valid. Directors should be acting in the interest of the corporation. Hence, requirements to protect such interest may be placed by the corporation. (Gokongwei v. SEC) Residency requirement There is NO residency requirement as to the majority of the board under the RCC Under the CC, majority of the board must be residents of the Philippines. However, as an exception, certain corporations observes the residency requirement Hence, under the present rule on the observance of the residency requirement of the board: GR: ER: Not required When the law so provides (e.g. partly nationalized) Q: Can the board of directors or trustees be made wholly with non-residents? Yes Q: XYZ is a financing company in the Philippines, one of its directors, X, has been convicted of slight physical injuries, If it appears from the said clearance that there is a record of a crime convicted against said director, he shall be disqualified. Hence, notwithstanding the penalty of slight physical injuries which is less than the disqualification under the RCC, or exceeds six (6) years, a director is disqualified nevertheless as there are additional requirements in other corporations. Q: International Corporate Bank file a case for collection of sum of money against Sacoba Manufacturing Corp. (Sacoba), the latter in turn filed a third party complaint against ALFA Integrated Textile Mills (ALFA), serving the summons to Ramon Lee and Antonio Lacdao (Petitioners), both directors and as president and vice president, respectively, of ALFA. Petitioners informed the trial court that ALFA is now being managed by the Development Bank of the Philippines (DBP), which information caused the issuance of an alias writ of summons against DBP. The transfer of management resulted from a voting trust agreement (VTA) between Petitioners and DBP, the latter being the trustee. Hence, petitioners claim that as they ceased to be officers due of ALFA due to the VTA, the service is invalid 103 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Sacoba contests the issuance of the alias writ of summons, claiming that the service to the Petitioners is a valid service. Is Sacoba correct? No, Sacoba is incorrect. A director is required to own at least one (1) share in order to be deemed as such. Under the old and new Corporation Code, a VTA has the effect of stripping the original owner of legal ownership, and is left with equitable or beneficial ownership. Under the new Code, what is required in order to be a director is legal ownership. In this case, the VTA resulted in the legal ownership being owned by DBP, and hence Petitioners ceased to be officers of ALFA due to the stripping of legal ownership of stocks they own, hence the service to them is not a service to ALFA. (Lee v. CA) (NOTE: Under the old Corporation Code, the provision on qualifications of directors include the words <&in his own right=. Due to this, mere beneficial or equitable ownership would suffice as qualification to be a director. However, the phrase has been deleted, which results in the requirement of legal ownership to be a director.) PJA What is left to the previous stockholder is mere equitable or beneficial ownership. Q: What kind of ownership is required to be a director? It should be legal ownership Q: X is a stockholder with 100,000 shares. As his son, Y, is still a minor, he assigned his shares to Z to hold such shares in trust, and such transaction is recorded in the books of the corporation. What is the status of X and Z?s ownership over such shares? X, as trustor, is left with beneficial ownership over said shares. On the other hand, Z, as trustee, is the legal owner. Q: In the above question, can Z be elected as a director? Yes, as he has legal ownership of said shares Q: In the above question, can X be elected as a director? No, as he has merely beneficial ownership Q: What if the transfer was not recorded in the corporation?s books, can Z be nominated as a director? No, as the basis for nominating a stockholder is the presence of the name in the books Q: What is the effect of a VTA? It strips the stockholder of legal ownership, and transfers it to the transferee/trustee. Q: What if the transfer was not recorded in the corporation?s books, can X be nominated as a director? 104 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA Yes, as in the eyes of the corporation, he remain to be a stockholder with legal ownership of his shares, and hence can be elected. successor has been elected. (Detective and Protective Bureau v. Cloribel) Term Q: Years have passed and Y became emancipated, and eventually X?s shares were transferred to him by Z, and such was recorded in the books of the corporation. Who is the legal owner of said stocks? It is Y, as he already became the owner of said shares by virtue of the transfer and the recording in the books. Q: Detective and Protective Bureau (DPB), filed a case for accounting with preliminary injunction and receivership against then managing director Fausto Alberto (Alberto). The case arose from Alberto?s illegally seizing assets of DPB including its books, records, vouchers, and receipts, and allowed no one to view said assets. Due to this, the stockholders in a meeting removed Alberto as such, and elected Jose de la Rosa (Jose) in his stead. However, Alberto refused to vacate on the ground that Jose does not appear to own any shares of stock. Is Alberto correct? Yes, Alberto is correct. A director needs to have one share of stock in order to be such. Furthermore, a director will serve a term of one (1) year and until their successors are elected and qualified. In this case, as Jose has no share in DPB, he is not qualified, and as such Alberto remains a director, in a holdover capacity, until a qualified In case of stock corporations, directors shall be elected for a term of one (1) year. For non-stock corporations, trustees shall be elected for a term of three (3) years For close corporations, directors shall serve for a period of five (5) years, hence: Stock: Non-stock: Close: 1 year 3 years 5 years Term v. tenure Term is the time during which the officer may claim to hold office as a matter of right, and fixes the interval after which the several incumbent shall succeed as one another. Tenure, on the other hand, represents the term/period during which the incumbent actually holds office. It may be for a shorter (e.g. resignation) or longer (e.g. no qualified successor) duration. Q: Is the >term? affected by the hold-over capacity? No, the term remains the same as fixed by the statute Q: X, a stockholder of ABC Corp., has been elected as director of the latter. However, X decided to resign due to health reasons. How long is his term and tenure? 105 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia His term remains at one (1) year, as it is fixed by the statute. On the other hand, his tenure is only six (6) months, representing the period he actually held office. PJA In stock corporations, every stockholder 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. ELECTION AND VOTING The said stockholder may: Election of Directors or Trustees Sec.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 the qualifications 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 a 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 of in absentia, shall be deemed present for purposes of quorum The election must be by ballot if requested by any voting stockholder or member. 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 the 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 by-laws, members of non-stock corporations may cast as many votes as there are trustees to be elected but 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 a majority of the outstanding capital stock or majority of the members entitled to vote were 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 106 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA proceed in accordance to Section 25 of this Code Requisite if present through remote communication or in absentia The directors or trustees elected shall perform their duties as prescribed by law, rules of good corporate governance, and bylaws of the corporation. Any of the following must be present: 1. Authorized in the bylaws; OR 2. Authorized by majority of BoD Q: Can a stockholder or member nominate any director or trustee? Yes, they may do so. However, as an exception, it is still available despite no authority in the bylaws or by the BoD in cases of corporations vested with public interest, hence: However, as an exception, they cannot nominate any director or trustee in case the exclusive right to vote or be voted for is given to holders of Founder9s Shares, hence: GR: ER: Can nominate anyone; Founder9s shares given the exclusive right to vote and be voted for Required quorum for election of directors a) Stock; majority of the OCS b) Non-stock; majority of members entitled to vote When stockholder/member present GR: Must be authorized in the bylaws or by the BoD ER: Corporations vested with public interest Q: What if the required quorum was not reached? The meeting called for that purpose may be adjourned Method Voting should be by ballot IF requested by the stockholders, hence: deemed GR: ER: Viva voce Ballot It may be by any of the following: Q: When may votes be casted? 1. In person; 2. Through a representative; and 3. Through remote communication or in absentia Requisite if representative present through a He must be authorized to act by written proxy As a rule, it may be casted: GR: ER: At the time fixed in the bylaws At the time of election, if the bylaw are silent Q: What is the basis of the number of votes of shareholders? Each shareholder shall have the right to vote: 107 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia a) The number of shares of stock b) Standing in their own names; c) In the stock books of the corporation; d) At the time fixed in the by-laws or of the election Cast of votes In stock corporations: 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 the shares owned; or c) Distribute them on the same principle among as many candidates as may be seen fit. In non-stock corporations: GR: No more than 1 vote for 1 trustee; ER: Cumulative, if provided in its AoI or by-laws Cumulative voting It is the right of a stockholder to give a candidate as many votes as the number of directors to be elected multiplied by the number of his shares (n of D to be elected x shares) In stock corporations, it is a matter of right In non-stock corporations, it can only be allowed if it is provided in the AoI or by-laws. PJA Q: Can a stock corporation deny the exercise of cumulative voting? No. It is a right granted by law to stockholders to allow the minority to have a rightful representation Q: X owns 1000 shares in ABC corporation, how may he cast his votes if there are five (5) directors to be elected among A,B,C,D,E, and F? X may opt to do any of the following: a) Vote the 1000 shares to: a. One person; or b. Two or more persons CANDIDATE A A,B,C,D, and E A,B,C, and D VOTES 1,000 200 each 250 each b) Cumulate said shares, the 1000 shares multiplied by 5 directors, giving him 5000 votes, and may cast said vote to: a. One person; or b. Distribute to two or more persons, as he may see fit CANDIDATE A A,B,C,D, and E A,B,C, and D VOTES 5,000 1,000 each 1,250 each Q: ABC corporation has an OCS of 1,000,000, where 200,000 are non-voting shares. What is the majority vote in this case? The majority vote shall be 400,001. In this case, non-voting shares are not entitled to voting directors. 108 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Hence, the 200,000 non-voting shares shall be deducted from the 1,000,000, leaving 800,000 shares who are entitled to vote From this 800,000 shares, the majority shall be 400,001 PJA The winners shall be D,E,F,G, and I, being the five (5) directors who received the highest votes. D,E,F,G, and I, casted their votes to themselves, which is 100,000, 100,000, 100,000, 50,000, and 10,000, respectively. Q: Consider the following figure: STOCKHOLDER A B C D E F G H I VOTING SHARES OWNED 200,000 200,000 200,000 100,000 100,000 100,000 50,000 40,000 10,000 1,000,000 OCS If A and B were absent at the time of election of directors, is there a quorum? Yes, as there is still 600,000 out of the 1,000,000 OCS. A and B merely represented 400,000 of the OCS, which does not in any way deprive the present stockholders the quorum. In this case, majority of the stockholders, which is 600,000, has been attained. It has been decided that there are five (5) directors to be elected. A and B were absent, C on the other hand did not nominate himself, and H opted not to vote. D,E,F,G, and I nominated themselves. Who are the winners of the election? As no votes were casted for A,B,C, and H, they cannot be said to have been elected for they were not among those who received the highest votes. If B cumulates his votes for the election of a five (5) man board, how many votes does he have? 1,000,000 votes (200,000 x 5) A,B,C,D, and E are siblings and are holding 800,000 shares as the majority stockholders. On the other hand, F,G,H, and I are not related to the above, and are holding 200,000 shares as minority stockholders. In case the majority stockholders cumulated their votes for a five (5) man board, will the minority be denied of representation? No, as cumulative is designed to provide the minority stockholders representation no matter what. While it is true that the majority stockholders will have 4,000,000 votes, and the minority will have 1,000,000 votes, the latter will nevertheless have someone to be elected as a director considering that their votes given to a candidate/s will belong to those having the highest number of votes. 109 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia For example, if the 4,000,000 was used to vote themselves, the 1,000,000 shares will still defeat them, hence: CANDIDATE A B C D E F, G, H, or I VOTES 800,000 800,000 800,000 800,000 800,000 1,000,000 Even if the majority distributes it unevenly, the minority will still have representation: CANDIDATE A B C D E F, G, H, or I VOTES 1,000,000 1,000,000 666,666 666,666 666,666 1,000,000 Notice that in either case, the minority9s 1,000,000 shares will guaranty representation as their candidate shall receive among the highest votes. Election of Corporate Officers Sec.24. Corporate Officers; Immediately after their election, the directors of a corporation must formally organize and elect: a) a president, who must be a director; b) a treasurer, who must be a resident; c) a secretary, who must be a citizen and resident of the Philippines; and d) such other officers as may be provided in the bylaws. PJA If the corporation is vested with public interest, the board shall also elect a 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. Corporate officers The following are to be elected: a) b) c) d) President Treasurer Secretary; Other officers as provided in the bylaws; and e) Compliance officer Q: Who elects corporate officers? As a general rule, they are elected by the BoD. As exceptions, in close corporations where the AoI may provide that corporate officers are voted by the stockholders, and in case of non-stock corporations where members directly elect corporate officers in the absence of a provision providing otherwise. Hence: GR: ER: BoD; Stockholders in a close corporation if provided in the bylaws; and Members in a nonstock corporation if 110 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia there is no provision providing otherwise (NOTE: Notice that in case of a close corporation, there must be a provision in the AoI to that effect in order for the exception to apply. Hence, the general rule that the BoD shall elect its corporate officers stands if there is no provision to that effect.) Q: When must the BoD elect its corporate officers? After the BoD election, they must formally organize and elect its corporate officers Requirements PJA As a general rule, a person may hold two (2) or more positions concurrently. As an exception, a president CANNOT serve as a secretary or treasurer at the same time. As an exception to the exception, the president may serve as the secretary or treasurer at the same time if the RCC allows the same. Hence: GR: A person may hold 2 or more positions ER: The president cannot be the treasurer or secretary at the same time A president must be a director. Consistent with the definition of director, he does not necessarily need to be a resident or citizen of the Philippines. EER: The president may be allowed to be the treasurer or secretary at the same time if the RCC allows A treasurer on the other hand must be a resident of the Philippines. Hence, even if he is not a Filipino citizen, he may serve as a treasurer. He need not be a director of a corporation Q: Can the president be the chairman of the board? A secretary needs to be a resident and citizen, hence living in and a citizen of the Philippines. He need not be a director. In practice, corporations usually do this set-up where the chairman of the BoD is also the corporate president. OFFICER President Treasurer Secretary Director Resident Citizen MUST MUST MUST MUST Yes, he may serve as such as a person may hold two or more positions at the same time. Q: When is a compliance officer is required? In case of corporations vested with public interest. Rule as to concurrence 111 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA VALIDITY AND BINDING EFFECT OF ACTIONS OF CORPORATE OFFICERS At least a majority of the directors or trustees present at the meeting at which there is a quorum, hence: Sec.52. Regular and Special Meetings of Directors or Trustees; Quorum ; a) There must be a majority vote among the directors or trustees; b) The majority vote will come from those present; c) There must be a meeting; and d) Those who are present must constitute a 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. xxx The above portion of the provision was previously included in the last paragraph of Sec.23 of the CC. Now it is inserted in the first paragraph of the above section. Quorum required to transact corporate business GR: ER: Majority of the directors or trustees; Greater majority, if the AoI or bylaws provides Q: Can a corporation provide for a quorum less than the majority, say representing at least 1/3 of the directors or trustees? No, the provision only allows a corporation to require a greater majority, but NOT less than the majority. Vote required for a valid corporate act Q: Can all matters be decided by the majority of those constituting a quorum? No, as an exception, election of corporate officers requires the majority of all members of the board, hence: GR: ER: Majority of the quorum Majority of all board members, in cases of election of corporate officers Q: XYZ corporation has ten (10) directors. In the absence of any provision requiring a greater majority for a quorum, what is the required quorum? The quorum shall be at least six (6) members. The required quorum shall be the majority of the directors or trustees, which in this case is six (6) out of the ten (10) members Q: If XYZ corporation is to vote on a corporate act, how many votes are required to make it valid if there are 6 directors or trustees present? The required vote shall be four (4) 112 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Q: If the quorum is 6, but there are 7,8,9, or 10 who are present, what is the required vote? It shall be the majority of the directors or trustees constituting a quorum. Hence, 4 for 7, 5 for 8, 5 for 9, and 6 for 10. Q: After the election of XYZ?s directors, they went on to elect their corporate officers. At the election, 6 were present and the 4 votes were reached in order to elect its officers. Are the votes sufficient to elect its corporate officers? No, as in cases of election of corporate officers, the majority vote of ALL directors or trustees is required. It is hence an exception to the general rule that a majority vote of those who were present in a meeting where there is a quorum is sufficient. Effect if the quorum was not met, or there is no meeting for such corporate act, or the required vote was not reached Hence the act would NOT bind the corporation. However, as an exception, it will be binding to the corporation if subsequently it was ratified, expressly or impliedly. (NOTE: As an example, go back to the case of Ramirez v. Orientalist Co. where the corporation deny the validity of the transaction with Ramirez, but did acts which are consistent with the use with the subject of the transaction.) PJA As another exception, acts of individual directors, while generally will not bind the corporation, it may bind the corporation if: a) There is delegation of authority; b) If expressly conferred; or c) Where the officer or agent is clothed with actual or apparent authority Hence, the rule is as follows: GR: ER: Will NOT bind the corporation Will bind the corporation: a) If subsequently ratified; or b) Acts of Individual director if: a. There is delegation of authority; b. Expressly conferred; c. Clothed with actual or apparent authority Q: Yao Ka Sin Trading (YKS) accepted the offer of Constancio Maglana (Maglana), president and chairman of Prime White Cement Corporation (PWCC), as to the latter?s supplying of cement to the former. However, twenty-three (23) days after the signing of said offer, the BoD of PWCC disapproved and rejected the contract entered into by YKS and Maglana, and sent a letter to YKS that in case YKS continued on withdrawing cement from them, the check amounting to Php243,000 shall be deposited by PWCC. YKS never replied, and nevertheless accepted the 113 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA 10,000 bags together with the official receipt for the deposited check. YKS argues that PWCC is bound by the transaction entered into by Maglana, the latter being its officer, and anchored on the following grounds: a) That Maglana was delegated with authority due to a by-law provision allowing his power to enter into contracts; b) That Maglana?s power to sign contracts is expressly conferred in order to expedite the execution of contracts; or c) In case the above are unavailing, that Maglana is clothed with actual or apparent authority Is YKS correct? No, YKS is incorrect, hence PWCC is not bound by the transaction entered into by the former with Maglana. As to Maglana9s being delegated with authority, it was held that it is only the BoD as the one with the authority to enter into contracts. As to his power to sign, it presupposes a prior act of the corporation through the BoD. Hence, the signature would only apply if there is a prior act. There is therefore, only a limited delegated authority And finally, as to his actual or apparent authority, there was no evidence presented as to his previous transactions allowing for such (Yao Ka Sin Trading v. CA) 114 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA POWER TO DENY PRE-EMPTIVE RIGHT Q: What if his preemptive right was not granted? Sec.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 a previously contracted debt. It thereby results to dilution of his shares, as he will only own 5% or specifically 100k shares out of the 2m shares It is a right granted by law to ALL corporations Preemptive right SH allowed to subscribe to all issues or dispositions of shares of any class, in proportion to their respective shareholdings Purpose It is to preserve proprietary interest in stock corporations Q: A has 10% or 100k shares out of the 1 million OCS of X Corporation. X issued additional 1 million shares. What is the right A? A may subscribe to 10% of 1m shares to retain his right In such a case, he will own a total of 200k shares thereby retaining his 10% proprietary interest Q: Can preemptive right be denied? Yes, by the AOI or an amendment thereto as corporations are granted with the powers to deny such. Q: Is exercise of the denial restricted via the AOI or any amendment of the AOI only? No, as despite the absence of a provision in the AOI or in its amendment, pre-emptive right is denied in the following instances: 1. Shares issued in compliance with laws requiring a. Stock offerings; or b. Minimum stock ownership by the public; or 2. Shares issued a. In good faith; b. Approved by 2/3 of OCS c. In exchange for property: i. Needed for corporate purpose; or ii. In payment of previously contracted debt (NOTE: The above stated circumstances does not apply to a close corporation, thereby only denial through AoI is available) Summary of cases where pre-emptive right is denied 1. AoI or amendment thereto; 115 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia 2. Shares issued in compliance with laws requiring a. Stock offerings; or b. Minimum stock ownership by the public; or 3. Shares issued a. In good faith; b. Approved by 2/3 of OCS c. In exchange for property: i. Needed for corporate purpose; or ii. In payment of previously contracted debt Q: X corporation, engaged in telecommunications, has 1b shares, 400m of which is owned by the public. In case it issued another 1b shares, may the 400m of the shares be subscribed by the existing stockholders to retain their interest? No, in telecommunications corporations, 40% must be owned by the public. Thus, 40% or 400m shares of the additional 1b shares must be offered to the general public. Existing stockholders cannot exercise their pre-emptive right over the 400m shares to retain his interest as it must be offered to the general public. Q: X Corporation, engaged in manufacturing, wants to establish facilities for furtherance of their corporation purpose. Y offered property to corporation in exchange of shares, which was approved by 2/3 of the OCS. May SH exercise his pre-emptive right considering that there are newly issued shares? No, as the newly issued shares are for acquisition of property for corporate PJA purposes, which was further approved by 2/3 of the OCS. Thus, all the requisites were met in order to deny pre-emptive right. Q: Can the pre-emptive right of the SH be waived? Yes, as it is merely a right Common practice additional shares upon issuance of Advise SH that they can subscribe such additional shares, and the period when they can do so. After such period, it shall be deemed that the SH waived his pre-emptive right Q: What types of shares are covered by the pre-emptive right? All types of shares are covered by the pre-emptive right. During the deliberation of the Corporation Code, it has been stated that it now covers all types of shares The previous ruling in Mendoza v. SEC that only newly issued shares, and NOT previously unsubscribed shares, are covered by the pre-emptive right. In ruling so, the 1st offer is deemed offer of all of the shares, thus the unsubscribed shares is deemed as waiver Under the present rule, Sec. 38, now categorically states that ALL ISSUES OR DISPOSITIONS OF ANY CLASS, even treasures, when they are reissued, or founder9s shares, when 116 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia the period has passed, SH are entitled to subscribe thereto Close corporation Preemptive Corporations; Sec.101. Right in Close The preemptive right of stockholders in close corporations shall extend to all stock to be issued, including reissuance of treasury shares, whether for money, property or personal services, or in payment of corporate debts, unless the articles of incorporation provide otherwise. In the case of a close corporation, the sole denial would be through the AoI This is so, because close corporation cannot make public offerings. Likewise, payment of corporate debts cannot deny pre-emptive rights in a close corporation. As such, the rule as to a SHs exercise of pre-emptive right is as follows: GR: ER: Absolute; Denied through AoI POWER OF SALE OR DISPOSITION OF ALL OR SUBSTANTIALLY ALL CORPORATE PRORTIES Sec.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, stocks, PJA 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 corporation9s properties and assets, including its goodwill, must be authorized by the vote of the stockholders representing at least twothirds (2/3) of the outstanding capital stock, or at least two-thirds (2/3) of the members, in a stockholders9 or members9 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 statements. A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated. 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. 117 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia 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 such property and assets shall be appropriated for the conduct of its remaining business. General rule A corporation may sell, lease, exchange, mortgage, pledge or dispose its corporate property or assets through a majority vote of the BoD or BoT Exception to the general rule PJA the majority vote of the BoT shall suffice Summary GR: 51% of BoD/T (NOT all or substantially all) ER: 51% of BoD/T + 2/3 of OCS/M (All or substantially all) EER: 51% of BoT (All or substantially all, where M have no voting rights) Substantially all A corporation will be rendered as such if the corporation will be rendered incapable of continuing the business for which it was organized or accomplishing its purpose Q: X Corporation is engaged in realty business, specifically the buy and sell of real property. Their sole property is in BGC, and they have decided to sell such property, is the 2/3 vote of the OCS required? No, the majority vote of BoD shall be sufficient In case of a disposition of all or substantially all corporation9s assets and properties, the following are required: In this case, the property at hand is not necessary to the business of X, as to render it incapable of continuing its business. 1. Majority vote of the BoD or BoT; and, 2. At least 2/3 vote of the OCS or members in a meeting duly called for that purpose must be had: In fact, such sale is in line with their purpose, which is the buying and selling real property Exception to the exception In case of a non-stock corporation, where members have no voting rights, Q: Y Corporation is engaged in manufacturing. Its sole property is a compound with warehouse, plant, and housing its corporate offices. Y decided tp sell the property, is the 2/3 vote needed? 118 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA Yes, as the sale of such property would render Y incapable of continuing its business. No, as the sale was done against the purpose for its donation, without having the consent of the donor. The property in question holds the plant where its products are being made. Furthermore, the majority vote of the BoD is without effect, considering that they are not the legitimate board. Its sale would mean that no goods can then be made. Even assuming that they are the legitimate board, the 2/3 vote of the M is still required, as the purpose for which it was organized was not in line with the sale of the said properties. Q: What if Y corporation used the proceeds are to be used to create a modern facility, would the 2/3 vote be required? No, as the proceeds of the sale are to be used for the conduct of its remaining business (Islamic Directorate of the Phil. v. CA) Q: In case of a sale of all or substantially all to another corporation, would the purchaser be liable for debts and liabilities of selling corporation? Summary of when 2/3 vote not required In the following cases, the 2/3 vote is not required: 1. When the sale is not all or substantially all of corporate properties or assets; 2. Sale of all or substantially all: a. Non-stock corporations where members have no voting rights; b. Sale is necessary in the usual and regular course of business; and c. Proceeds appropriated for conduct of remaining business Q: After contesting the election of its directors, which was declared null and void, the said directors issued a resolution for the sale of a lot donated by the Libyan government, for the purpose of putting up a learning institution in Manila. Will the board resolution suffice to make the sale valid? As a general rule, no, in line with the corporate entity theory where the corporation shall have its own separate entity from other corporations, as highlighted by the following cases: 1. Yu v. NLRC; 2. Edward Nell & Co. v. Pacific Farms (Nell Doctrine); and 3. Y1 Leisure v. CA However, as an exception, still under the Nell Doctrine, liability will attach to the seller in the following cases: 1. Purchaser expressly or impliedly agreed to assume; 2. Transaction amounts to merger or consolidation; 3. Purchaser mere continuation of seller; 4. Fraudulent sale, as only to escape liability POWER TO ACQUIRE OWN SHARES 119 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Sec.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 purchase or acquire its own shares for a legitimate corporate purpose or purposes, including the following cases: 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. Minimum requirement In order for a stock corporation may purchase or acquire its own shares, the following must be present: a) Must have URE (surplus profits); and b) Must be for legitimate purpose/s Elimination of fractional shares Fractional shares resulting from stock dividends is NO LONGER ALLOWED, thus it must be removed by the corporation by acquiring such fraction Q: X corporation declared stock dividends where 1 stock dividend shall be given to 3 shares each. PJA A is the owner of 10 shares. Thus, he is entitled to 3.33. How many stock dividends will he get? Only 3 shares, as fractional shares are not allowed anymore. Q: What will happen to the .33? It will be paid in cash or property, Hence, it effectively dilutes number of shares to the extent of .333 Collect or Compromise an Indebtedness to the Corporation In these cases, specifically through a delinquency sale, the corporation is allowed to acquire the shares subject of delinquency Q: X corporation has its SHs A, B, C, D, and E with 100k shares each. E paid only 50k out of the 100k, thereby leaving an unpaid portion of 50k. What is the corporation?s remedy? The corporation will call for payment, at a specific date Q: After calling for payment, at the end of the month, E failed to pay. What is the next remedy? The whole share (100k) shall be declared as delinquent shares. After such declaration, the corporation may now move to sell such shares at a public auction. Q: During the auction, there were no bidders. Is the corporation left without any remedy? 120 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA No, as in this case, it may now but its own shares, provided that the minimum requirement was met. b. Withdrawal of stockholder or dissolution of corporation (Sec.104) Q: As no bidders came, the corporation sought to bid. However, it has no profits as there are numerous losses. Can it still reacquire such shares? Q: X Corp made 1m this year Its debts amount to 500k thus paid from the 1m. The remaining 500k was resolved by the BoD to be a reserve for possible contingencies. How much is the URE? No, as there is no URE. Effect after corporation delinquent shares acquired Such delinquent shares shall now be treasury shares Options of corporation after delinquent shares became treasury shares In this case, the corporation may opt to do any of the following: a) Reissue for reasonable price; or b) Cancel such shares (take them out of issue) Effect of reissuance It regains its status as part of the OCS To pay dissenting stockholders or withdrawing In these cases, a SH shall be entitled to the payment of the fair value of his shares Exceptions to requirement of URE While the general rule is that there must be a URE, the shares maybe reacquired despite absence of URE: a) Redeemable shares b) Appraisal right; c) Close corporations: a. Deadlocks (Sec.103); and None. The entire 1m shall be deemed as restricted, considering that half was used to pay the debts while the other half was reserved. Redeemable shares &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& Deadlocks In this case, the close corporation may compel the SH to sell his share REGARDLESS of URE Withdrawal of stockholder or dissolution of corporation &any stockholder of a close corporation may, for any reason, compel the corporation to purchase shares held at fair value, which shall not be less than the par or issued value, when the corporation has sufficient assets in its books to cover its debts and liabilities exclusive of capital stock& Its requisites are as follows: a) Compel close corporation to purchase his shares, for any reason; and b) Sufficient assets in books: 121 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia a. To cover debts and liabilities; and b. Exclusive of capital stock Q: C Corporation is a close corporation with 1m OCS. This year, it made 1m in profits. The board resolved that 500k would be for payment of debts, while the other 500k is reserved for contingency purposes. A, is an SH holding 200k shares at Php1/share. A demands to be paid fair value of shares 200k, can C pay A? Yes, the reserve to be used as payment to A. In this case, C has sufficient assets aside from the capital stock to pay its debts. Thus, the 500k reserve will be used to pay C9s 200k shares. Q: What if C is a stock corporation, can it pay A? No, as the whole 1m will be considered restricted POWER TO INVEST CORPORATE FUND Sec.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 members in the case of non-stock corporations, at a meeting duly called for the purpose. Notice of the proposed investment PJA and the time and place of the meeting shall be addressed to each stockholder or member at the place 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 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. General rule In case that the investment is for the primary purpose, the majority vote of the BoD/T shall suffice Exception In case the investment is other than the primary purpose, the following must be present: a) Majority vote of BoD/T; b) Ratified by at least 2/3 of the OCS/M Q: A realty corporation invested in general construction. is the approval of the SH needed? Yes, as it is other than primary purpose De La Rama v. Ma Ao sugar central: 122 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA Q: Sugar Central Corporation subscribed to stocks Phil. Fibers, which produces sugar bags, authorized by a majority vote of the directors. The SHs oppose the same, stating that their 2/3 concurrence must be had before they can invest. Is the SH correct? Q: Assume that the Court ruled that the 2/3 vote of the OCS is required, as counsel for SMC what would be your defense? No,SH approval not required, acquisition in Phil. Fibers, is necessary to carry out purpose of Sugar Central as Phil. Fibers produce sugar bags. In fact, SMC usually poses the 2nd agenda of the annual meeting as <Approval or Confirmation of Previous Acts=, which usually reaches a unanimous vote. (De la Rama v. Ma-ao Sugar Central) Rationale for sufficiency of BoD majority Logical relation between act done and primary purpose, SH approval not needed, as it is deemed as the power of BoD alone in the exercise of their management discretion (Montelibano v. Murcia) Q: San Miguel Corporation (SMC), engaged in the brewery business purchased a brewery in Hong Kong, authorized by the majority vote of the BoD. SH Gokongwei questioned the validity of the investment as it did not sought the ratification by 2/3 of the OCS, is he correct? No, the 2/3 vote is not required in this case. The purchase of the brewery in Hong Kong is in line with the SMC9s primary purpose, as a brewery business. Thus, the BoD9s majority vote is sufficient as it is deemed as an exercise of its powers. (Gokongwei v. SEC) I would argue that it has been ratified subsequently. The SC in the same case held that such practice is a sound corporate practice and/or policy. POWER TO DECLARE DIVIDENDS Sec.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 first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholders until their unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders representing at least twothirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. Stock corporations are prohibited from retaining surplus profits in excess of one hundred percent (100%) of their paid-in capital stock, except: a) when justified by definite corporate expansion projects or programs approved by the board of directors; or 123 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA 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 Required votes 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. Rationale for requiring 2/3 OCS in case of stock dividends Q: Are all corporations capable to declare dividends? No, as a non-stock cannot declare, as no part of its income shall be distributed to its members. Dividends These are corporate profits that are set aside and declared by BoD either on demand or at a fixed date Types: 1. Cash; a. In lawful money 2. Property; a. Instead of cash, where there is surplus (e.g. shares in other corp, bonds, notes) 3. Stock; a. Additional shares of stock 4. Or any combination thereof Who declares type? BoD Where declared from? URE 1. Cash/property: a. Majority vote of BoD; 2. Stock: a. Majority vote of BoD; and b. 2/3 of OCS Stock dividends are otherwise called capitalization of URE. It is in the nature of forced subscription to the capital stock of the Corporation. Thus, it requires SH approval for validity. (PLDT v. NTC) Q: X corporation has an ACS of 10m. A, B, C, D, and E subscribed to 1m each (OCS). However, subscribers only paid 50% of their subscription. What is the total asset of the corporation? 5m, as unpaid subscription considered as collectibles due to the corporation. Q: Assume that X made 5m as URE, and has no debts. BoD decides to declare whole 5m as dividends, can they do so? Yes, even any part thereof, as cash, property, or stock dividends Q: How much is each SH?s share would be? Proportionate share (pro rata) to their interest in the corporation, to the extent of their subscriptions Q: Assume that the total asset of the corporation is 10m, consisting of 5m subscribed shares and 5m URE If the 124 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia corporation declared dividends of 5m, will it result decrease in total assets? It depends on the type of dividend: 1. Cash/property: a. Decreases assets i. 1m for each SH for their 1m shares (25%) b. Stock: i. Does not decrease assets 1. Stocks will be deemed as capitalization Q: X corporation has 1m shares at Php1/share in SMC. Subsequently, X acquired 500k more shares, thus amounting to 1.5m shares in SMC. PJA No, as there is only 10m ACS. Declaration of 6m URE as stock dividends, being capitalization, will result to the ACS becoming 11m. As the AoI stated only a 10m of shares, it cannot be allowed to go beyond such ACS. Thus, the requirements before a stock dividend may validly be declared is as follows: 1. Votes: a. Majority of BoD; and b. 2/3 vote of OCS 2. Free portion of the ACS that will accommodate the stock dividends declared BoD declares 500k SMC shares as dividends to the SHs of X. The SHs oppose as their approval was not acquired arguing that it is a stock dividend. Are the SHs correct? Q: What happens then to the 1m excess URE? No, as it is a property dividend. Shares of stock of another corporation are within the ambit of a property dividend. Q: If despite the knowledge of such, X still pursued the 1m be declared as stocks, what is the effect? It will be declared as cash or property dividends In this case, there is a surplus in property in the form of SMC shares It is a violation of contract with the state, as it is only limited to the issuance of ACS (NOTE: Chairs, notebooks, tablets, bond papers NOT property, as this does not make surplusage) Q: What would be the proper remedy if it intends to push through with the 6m stock dividends? Q: X Corp. has 10m ACS. It made 6m URE, may Corp declare 6m as cash or property dividends to SH? Increase capital stock of corporation through amendment of the AoI Yes, as there is a URE. Q: What if in the above example, X? BoD, with the approval of 2/3 of the OCS, declare the entire 6m as stock dividends? Q: E only paid 50% of his subscribed share, hence a total of only 4.5m PUC. If the corporation declared 5m URE as cash dividends, how much will E be 125 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia entitled thereto, dividends? 1m or 500k cash E shall be entitled to the entire 1m cash dividends, as Sec. 71 provides: <Sec.71. Rights of Unpaid Shares, Non 3 delinquent; Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a stockholder.= The only instance where he shall be deprived of the entire 1m cash dividends is if he is to be declared as a delinquent stockholder Q: What if E is declared as a delinquent stockholder, what will happen to the Php1m cash dividends? Any cash will be FIRST applied to delinquency cost, expenses. Thus, the 500k will be used to pay his unpaid shares. PJA Yes, as the corporation cannot accumulate URE of more than 100% of the PUC That it only has a PUC of 4.5m, it cannot go beyond 9m considering that an amount greater than that is considered more than 100% of the PUC. It this instance the corporation cannot be allowed to retain such URE, and it thus may be compelled to declare dividends Q: Still on the same facts, except the corporation only made 5m as URE, can SH compel BOD to declare dividends? As a general rule, no, as it is not more than 100% However, as an exception, the BoD may be compelled if the shareholder holds a mandatory if earned type. In such a case the unpaid portion now fully paid, hence ceases to be delinquent shares In the second instance, the shareholder will be entitled to dividends despite the non-declaration of such by the BoD, as long as the corporation earned such URE. If any remains, it will be paid to him in cash. Thus the 500k will be given to him as cash Q: Assuming that the corporation has more than 100% of URE, is the right to compel dividends absolute? Q: What if stock dividends, would E be entitled to it? No, as it may be properly denied in the following cases: Not immediately, as it is withheld from him until payment of delinquency 1. Definite corporate expansion projects or programs approved by the BoD; 2. Corporation is prohibited under any loan agreement: a. With financial institutions or creditors, i. whether local or foreign, Q: Assume that the corporation made 10m URE, and has a PUC of 4.5m, may the BoD be compelled to declare dividends? 126 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia b. from declaring dividends without their consent; c. and such consent has not yet been secured; 3. Retention is necessary under special circumstances such as reserve for possible contingency Q: Can a non-SH be entitled to dividends declared by a corporation? PJA 2020 as recorded in the books of the corporation. Q: In this situation is A left with no recourse? No, as A can go against Z for recovery of dividends from the Corporation. Q: Is the above remedy always available? No, dividends are fruits of investment, no investment, no fruits. Whoever owns the tree, also owns the fruit, in whatever form it may be (cash, property, stock) (Neilson & Co. v. Mining) Lepanto Consolidated Q: X Corporation declared cash dividends of 5m URE on 2 May 2020 to be paid on 30 May 2020. A is a SH holding 1m shares. On 10 May 2020, A transferred his shares Z, for Php1.8m On 20 May 2020, asked for cancellation of A?s certificate, and on the same day X Corp cancelled A?s stock certificate, thus issued a new certificate in favor of Z. Come 30 May 2020, X Corp pays Z cash dividends as stockholder on record on payment date. As between A and Z, who has a better right to the dividends? A, as whoever own the shares on the day of declaration, presumably is the owner of dividends. Corp is correct however in giving to Z as he owns the stock as of 30 May No, as it may be stipulated that Z will be entitled to such. Considering the amount paid by Z, it may be possible that A granted such stipulation as he earned 800k from his 1m shares that he bought for 1m. Rule as to revocability of declaration of dividends As a general rule, the declaration of dividends cannot be revoked, as it is to be treated as debt of the corporation owing to its SHs However, as an exception, such declaration can be revoked in the following instances: 1. Declaration has not yet been announced; 2. Declaration has not yet been communicated to SH; or 3. Stock dividend, as it is not revocable prior to actual issuance Rationale dividends for revocability of stock For reasons of policy as to prevent misleading investors in the stability of transactions of such corporations Liability of BoD in case dividends are illegally paid or declared 127 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia As a general rule, the BoD is not personally liable for declaring dividends in violation of law However, as an exception, the BoD shall be personally liable if they acted wilfully, or with negligence or bad faith This is in line with the principle that courts will not interfere with the business judgment of the directors UNLESS it is attended by negligence or bad faith. Q: If the BoD relied merely on the representation of a dishonest employee or the legal advise of a negligent practitioner, can they be held liable? PJA acquire 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 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.= Q: Assume that the SH received dividends in good faith and due diligence, may creditors pursue such dividends of the SH for their own payment? No, as a majority view, an innocent SH should not liable to return dividends received by him, No, as it is not tainted with malice. It is in line with Sec.30: <Sec.30. Directors, Officers; Liability Trustees of or 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. As an exception, he may be compelled to do so if the corporation already insolvent. It is unfair and unreasonable burden to repay creditors when he received them in good faith and in the regular course of business. POWER TO ENTER MANAGEMENT CONTRACTS INTO Sec.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 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, of both the managing and the managed corporation, at a A Director, Trustee or Officer shall not attempt to acquire, or 128 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia 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 of the members of the board of directors of the managing corporation also constitute a majority of the members of the board of directors of the managed corporation, then the management contract must be approved by the stockholders of the managed corporation owning at least two-thirds (2/3) of the total outstanding capital stock entitled to vote, or by at least two-thirds (2/3) of the members in the case of a nonstock corporation. These shall apply to any contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation, whether such contracts are called service contracts, operating agreements or otherwise: Provided, however, That such service contracts or operating agreements which relate to the exploration, development, exploitation or utilization of natural resources may be entered into for such periods as may be provided by pertinent laws or regulations. No management contract shall be entered into for a period longer than five (5) years for any one (1) term. Under the old notion, management contracts should be prohibited However, such notion no longer holds through PJA Management contract It refers to any contract where a corporation undertakes to manage or operate all or substantially all of the business of the corporation Thus, if it is NOT all or substantially all, it shall not be deemed as a management contract Required votes General Rule SH represents same interest of both corporation owns/ controls more than 1/3 of the OCS of the managing corporation MANAGED MANAGING CORP CORP BoD/T SH/M BoD/T SH/M Majority Majority 2/3 Majority Majority of BoD of managing corporation also constitutes majority of BoD of managed corporation Existence of contract GR: No more than 5 years per 1 term ER: Exploration, development, exploitation, or utilization of natural resources 129 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia ULTRA VIRES Sec.44. Ultra Vires Acts of 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. These are those that cannot be undertaken or performed Q: Does the law expressly enumerated such prohibited acts? No Basis It is prohibited as it is not within the express, inherent, or implied powers In line with the doctrine of limited capacity in corporate form or business only those conferred by law, in the AOI, and incidental to existence may be done by the corporation Q: What if the act went beyond the authority of the law? It is deemed as ultra vires Effect if act is ultra vires In this case, a collateral attack is allowed against corporation, as the 3rd party can interpose defense of ultra vires. PJA It cannot be ratified, as those contrary to law cannot be validated, It shall be deemed void ab initio Rationale for ratificability of ultra vires acts not illegal perse Ultra vires acts beyond corporate powers can be validated, as it merely went beyond its powers It can be likened to a contract of agency, where the agent went beyond his authority is merely voidable Consequences; The SEC may order the ultimate dissolution of the corporation However, courts are reluctant in deciding dissolution, merely enjoins furtherance of ultra vires act. Remedies of SH SH may institute a derivative suit to enjoin act However, if already performed, the SH may file a Derivative suit for damages against BoD Effect on contracts PARTY 1 PARTY 2 Fully executed Executory As to the contracts, they are generally voidable, subject to ratification or validation, express or implied and even by estoppel Q: What is the effect if the ultra vires act is illegal per se? Fully executed Executory EFFECT Courts will not interfere Neither may maintain an action for enforcement Beneficiary estopped to raise ultra vires, due to unjust enrichment 130 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Q: X corporation is engaged in <&to acquire by purchase, subscription, or otherwise, and to invest in, hold, sell, or otherwise dispose of stocks, bonds, mortgages, and other securities&= Prior to the death of its president, a resolution was passed to give the proceeds of insurance policy of its president to his minor children, thus in a form of a donation. Upon death, said minor children wants to enforce the resolution. However, X corporation stated that it cannot be enforced, as the resolution is ultra vires. Is X correct? PJA However, the SC ruled otherwise. Q: X corporation is a non-stock and civic corporation engaged in the redemption of war notes of its members. Upon a finding by the SEC that it offered its services to the public for a valuable consideration, specifically in the registering and acceptance of the war notes for deposit and collecting fees from such, a cease and desist order was issued against them. X claims that it is within their authority and made in good faith. Is X correct? No, X is incorrect. No, as a non-stock corporation cannot engage in collection of fees for services rendered In answering the question of whether or not an act is ultra vires, the Courts look into the AoI of the corporation, and if the act is within the AoI, not ultra vires. Thus the SC held that the act is ultra vires, as a non-stock corporation cannot distribute surplus profits. In resolving this case, it has been observed that to dispose is broad enough to include any manner of disposition and thus, donation is within its scope. Q: In case of a check signed by an officer of a corporation, who is liable in case the signing is unauthorized? Even assuming arguendo ultra vires, act validated BoD resolution, SH ratification (Privano v. Dela Rama Steamship Co.) (Japanese War Notes Claimants Association, Inc. v. SEC) It is the officer who signed the check which shall be personally liable As a rule, if there is no authority, no liability may attach to the corporation. (Crisologo-Jose v. CA) Q: May a trust company be a guarantor? Yes, as it is deemed an implied power to guaranty transactions, in order to appeal more to the purchasers (Carlos v. Mindoro Sugar Co.) In the above case, Phil. Trust Co. stopped payment by virtue of its being a guarantor, claiming that it is ultra vires. Q: What is the effect if the contract executed by the corporation is not on its face beyond its corporate powers? It shall be presumed valid as corporations are presumed to contract within its powers. 131 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Ultra vires doctrine should not be allowed to prevail over a valid exercise of authority. Furthermore, the purpose clause can reasonably be stretched. Q: PLDT, a telecommunication company, can it validly engage as a service provider of social media? Yes, in reality Q: Can it engage in selling of gadgets? No Q: That it cannot engage in such, is it without recourse to engage in such? No, as it may amend its AoI (It won9t do it anyway, considering its sister company, Smart, is engaged in such) Q: What if it is not authorized, despite non-amendment of the AoI, they still engaged in such, what is the effect? Ultra vires PJA trustees and countersigned by the secretary of the corporation, shall be filed with the Commission and attached to the original articles of incorporation. Notwithstanding the provisions of the preceding paragraph, bylaws may be adopted and filed prior to incorporation; in such case, such bylaws shall be approved and signed by all the incorporators and submitted to the Commission, together with the articles of incorporation. 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 other special corporations governed by special laws, unless accompanied by a certificate of the appropriate government agency to the effect that such bylaws or amendments are in accordance with law. These are rules and ordinances adopted by corporations for its own government, or basically, internal rules CHAPTER VIII: BY-LAWS Functions Sec.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 of 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 Its function is as follows, with regard to the corporation itself, to SH/M and BoD/Corporate Officers, with relation thereto and among themselves: 1. Regulate; 2. Govern; and 3. Control Importance of By-Laws (BL) 132 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia BL is part of organization, and as such in case of failure to do so, it may be subject to automatic revocation of its CoR, the day following the 5 year period of being inoperative since the day of incorporation PJA Where kept Principal office Subject to inspection during office hours When made and required votes Content of valid BL Incorporators Prior to incorporati on After incorporati on SH/M Certifie d by BoD NONE Majorit y Majority Counter signed by Corporat e Secretary Yes Signed by ALL NONE NONE NONE As can be seen, the requirement of adopting BL prior to incorporation is much easier than after incorporation. Q: X, a national corporation, has 50000 members, how many signatures must be had in order to adopt its BL? 25,001 Q: What happens if a BL was not adopted within 5 years from date of incorporation? CoR revoked the day following the end of 5 year period Q: When will it be valid and effective? Only upon approval of SEC thru a certification that it is not contrary to law Additional requirement in case of a corporation supervised by a government agency Favourable recommendation by the appropriate agency thru a certification that it is not contrary to law Sec.46. Contents of By 3laws; 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; 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 directors9 or trustees9 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, 133 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA be more than the number prescribed by the Commission; when it involves criminal offenses and interests of third parties. x x x g) The time for holding the annual election of directors or trustees and the mode or manner of giving notice thereof; Thus, it is available if the dispute is between the corporation and the SH/M, which arise from the following: h) The manner of election or appointment and the term of office of all officers other than directors or trustees; a) Implementation of AoI or BL; or b) Intracorporate relations 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 Section 181 of this Code. Arbitration agreement It may be provided in the BL: Sec.181. Arbitration for Corporations; An arbitration agreement may be provided in the articles of incorporation or bylaws of a corporation. When such an agreement is in place, disputes between the corporation, its stockholders or members, which arise from the implementation of the articles of incorporation or bylaws, or from intracorporate relations, shall be referred to arbitration. A dispute shall be non-arbitrable However, as an exception, it will not be available if: a) Criminal offenses; or b) Those involving interests of 3rd parties Elements a) It should not be inconsistent with existing laws nor contrary to public order, public policy or, morals (Fleisher v. Botica Nolasco and Government v. El Hogar) b) Not inclined with AoI, as the BL is merely subordinate (Loyola Grand Villas Homeowners Association v. CA) c) General and uniform in effect, NOT discriminatory, affecting all those who are alike d) Must not impair obligations (Gokongwei v. SEC) e) Reasonable (Gokongwei v. SEC) Presumption as to SH/M?s knowledge of the BL SH/M conclusively presumed to know provisions of by-laws A BL is binding upon all SH or M Ignorance is not a defense 134 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Q: Are 3rd persons, conclusively presumed to know the BL? GR: ER: No Actual or constructive notice of BL provision (Fleisher v. Botica Nolaso) Q: A is an SH of 5 shares of X Corporation. A sold to B his shares. X offers to buy such shares from B, claiming that it has a preferential right by virtue of a BL provision. However, B refused to sell the same. As such, B sought registration of the shares in X corporation. However, the Secretary refused registration. Is the Secretary justified in doing so? No, as the BL provision is without any force and effect as contrary to law. Assuming it is valid, by law does not bind the appellee, as no notice has been received regarding the BL provision, and as it is acquired for value and good faith. (Fleisher v. Botica Nolaso) Q: BL of SMC was amended, disqualifying John Gokongwei from being elected as BoD During the70s, when Gokongwei acquired SMC shares, he owns so much shares that casting it upon himself guarantees a position Gokongwei questioned by-law provision, to the extent that it is not a valid BL provision, is he correct? No, as the BL provision valid. PJA holds controlling interest in a competitor corporation is valid, as to prevent director from promoting individual interest, to the prejudice of the other. Specifically, Gokongwei has family corporations directly competing against SMC (poultry, coffee, etc). (Gokongwei v SEC) Q: What kind of question is reasonableness of a BL provision is? the Reasonableness of by-law provision is a purely question of law. However, it is subject to limitation of mere matter of judgment, reasonable minds may differ, and the courts cannot be warranted to substitute its judgment AMENDMENT OF BY-LAWS Sec.47. Amendment to By-laws; 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 non-stock 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 non-stock 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 An amendment which renders a director ineligible if he is a director or 135 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia 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. PJA Types a) SH/M meetings a. Regular b. Special b) Directors/Trustees meetings a. Regular b. Special 5 essential requisites for both meetings a) b) c) d) e) Held on proper day Prior notice Held in proper place; Called by proper party; Voting and quorum requirements Q: If cannot be held due to valid reasons? May be postponed to a reasonable future date Modes It may be by any of the two means: Stockholders/Members meetings a) Majority vote: a. BoD; and b. SH; or b) BoD alone, when delegated 2/3 of SH (OCS)/M by Revocability of 2nd mode The power delegated may be revoked by the majority vote of the SH/M When valid Only upon approval of SEC Compared with amendment of AOI, the amendment may be valid due to inaction of the SEC Sec.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. MEETINGS Sec.48. Kinds of Meetings; Meetings of directors, trustees, stockholders, or members may be regular or special. At each regular meeting of stockholders or members, the board of directors or trustees shall endeavor to present to stockholders or members the following: 136 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia 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 members9 list for non-stock 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 corporation9s performance, which shall include information on any material change in the corporation9s business, strategy, and other affairs; PJA 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 corporation9s 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; 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. 137 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia 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. 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 PJA special meetings before the scheduled date of the meeting. In case of postponement of stockholders9 or members9 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 i n a b s e n t i a . The Commission shall issue the rules and regulations governing participation and voting through remote communication or in absentia, taking into account the company9s scale, number of shareholders or members, structure, and other factors consistent with the protection and promotion of shareholders9 or members9 meetings. Regular v. special SH?s meeting Regular meetings are held, annually, either: a) As stated in by laws; or b) Any date after 15 April, as determined by BoD On the other hand, special meetings are held a) At any time necessary; or b) As may be provided for in by-laws Prior notice Written notice shall be sent to all SH/M at least: a) 21 days prior (regular); or b) 1 week (special); or 138 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia c) As otherwise provided in by law Q: Can waiver be dispensed with? Yes, by waiver, expressly or impliedly; As an example, the SH not notified but attended Exception to waiver due to attendance If his attendance is for the purpose of objection, it is not deemed a waiver Q: An action to annul the election of the BoD of SMB was made, and to compel the BoD to hold another on the ground that the 5 days notice as required in the BL was not complied with, as it was posted only 2 days prior, will the action prosper? Yes, the BL controls, thus the election is null and void due to lack of notice requirement. (Board of Directors v. Tan) Held at proper venue a) Stock corporations: a. Principal office; or b. If not practicable any place in the city or municipality where the principal office is located b) Non-stock a. Can meet beyond territorial boundaries PJA Hence, its availability is as follows: GR: No ER: If the BL provides EER: Corporations vested with public interest, to the effect that the absence of BL provision does not negate exercise of electronic voting Q: If electronic voting is allowed by the BL or due to the corporation being vested with public interest, what is the effect? The SH/M shall be deemed present at the meeting Q: SMC has its principal office in Mandaluyong City. From 1981, it holds its meetings at PICC. Is their venue valid, considering that PICC is in Pasay while their principal office is at Mandaluyong City? Yes, as PICC in Pasay shall be considered part and parcel of Metro Manila FOR PURPOSES OF MEETINGS. Metropolitan cities shall be deemed as one city or municipality for purposes of meetings. (e.g. Metro Manila, Metro Cebu, Metro Davao) Called by proper person Q: Can SH/M vote electronically as to validly cast their votes By-laws may provide who is the proper person (Pres, Sec, whatever) Yes, the RCC allows the SH/M voting electronically if by-laws allows, UNLESS it is a corporation vested with public interest even w/out by law. If no person authorized or person authorized unjustly refuses: Regular and <Sec.49. Special Meetings of Stockholders or Members; 139 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia xxx 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.= PJA Regular and <Sec.49. Special Meetings of Stockholders or Members; xxx 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.= Thus, the rule is as follows: GR: At least 20 days (regular); or 7 days (special) before the scheduled meeting ER: BL provides for longer period Thus, the rule is as follows: GR: ER: BL provide Petitioning SH/M, in case the BL does not provide or the person authorized refuses to call the meeting, and a petition was made by a SH/M to the SEC to which an order to call the meeting shall be directed Q: How does the corporation determine who are the SH/M who will be entitled to vote? The corporation checks into their stock and transfer/member9s book Q: Will such books be open up until the day of the meeting? Quorum and voting Sec.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 non-stock corporations. Thus, the quorum, as a general rule is as follows: 1) Stock corporation; Majority of OCS 2) Non-stock corporation; Majority of members However, as an exception, when a greater quorum is required by the AoI, BL, or laws, it should comply with it. No, the RCC provides: 140 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA Q: X Corporation has 1m shares (OCS), owned by A, B, C, D, and E, having 200k shares each. Furthermore, the BL provides that the call shall be made by the President, but instead was called by the Treasurer. X? BoD passed a resolution to amend AoI and BL, and to enter into a management contract. Considering that it was improperly held or called, what is the effect? what happens to resolution? At the day of the meeting, only A, B, and C, are present, representing 600k of the OCS thus more than majority are present, can all acts be validly voted on? As a general rule, it shall have no valid force and effect As to the amendment of the BL and entering the management contract, there is a quorum considering that only a majority of the OCS is required to pass the corporate act. However, as to the amendment of the AoI, it cannot be passed as what is required is at least 2/3 of the OCS. Q: Assume that A?s 200k shares are nonvoting, and all A, B, C, D, and E are present, what would be the basis of the vote required? It would be the entire 1m OCS in case of the amendment of the AoI and BL, as these are matters which the nonvoting shareholders may vote on. However, as to the entering into a management contract, the basis would only be the 800k as non-voting shares cannot vote thereon. Q: The BL of X Corporation states that their annual meeting must be held on every 1st Monday of May, by-laws, however it was conducted on the 1st Sunday of April Likewise, it was not conducted in their principal place of business in Manila, but rather held in Baguio City However, as an exception, Sec. 50 provides that: <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.= Thus in order for the exception to apply, the following must concur: 1) If the proceeding or business is within the corporation9s powers or authority; 2) All SH or M are present or duly represented; and 3) No one of the SH/M expressly stated prior to the meeting that the purpose of their attendance is to object 141 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Directors?/Trustees? meetings Sec.52. Regular and Special Meetings of PJA related party transaction without prejudice to compliance with the requirements of Section 31 of this Code. 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 refuse from voting on the approval of the Regular meeting Sec.52. Regular and Special Meetings of Directors or Trustees; Quorum; xxx Regular meetings of the board of directors or trustees of every corporation shall be held monthly, unless the bylaws provide otherwise. xxx Thus, it must be held: GR: ER: Monthly; or As provided in BL Special meeting Sec.52. Regular and Special Meetings of Directors or Trustees; Quorum; xxx 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. xxx Thus, it may be held:: GR: ER: Anytime, upon call of the President; or As provided in BL Place Sec.52. Regular and Special Meetings of Directors or Trustees; Quorum; xxx Meetings of directors or trustees of corporations may be held anywhere in or outside of the Philippines, unless the bylaws provide otherwise. xxx Thus, it is held at: 142 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia GR: Anywhere a. within the Philippines; or b. outside the Philippines; or ER: As provided for in the BL Notice requirement Notice of the date, time, and place shall be sent to every D/T, on: GR: ER: At least 2 days before scheduled meeting; or BL provides LONGER time Q: Is the notice requirement absolute? No, as the D/T may waive it expressly or impliedly PJA On the other hand, the voting required for a valid corporate act shall be: GR: Majority vote of those constituting a quorum ER: Greater majority, when the AoI or BL provides; and Majority of all directors, in case of election of corporate officers Q: Assume that there is a 5-man member board, may 2 votes pass a corporate act? Yes, as if there are 3 directors present there is a quorum, hence 2 votes shall constitute a majority Quorum and voting requirement Q: Is this above example absolute? Sec.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. xxx The quorum shall be the: GR: Majority of their number as stated in the AOI. ER: Greater majority as required in AoI or BL; No, the provision is specific, the AOI or BL may provide for greater majority; and in case of election of corporate officers as majority of entire directors must be reached to elect them. Q: Should BoD be physically present? No, may be by telecommunication or video conference, or remote communication, Sec. 52 provides: <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 143 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia trustees cannot attend or vote by proxy at board meetings.= (NOTE: Compare with availability of such in SH9s meetings, as it must be provided in the BL, or despite no provision in BL, it is a corporation vested with public interest In case of directors9 meetings, it is available despite no provision to that effect) Q: Can directors vote by proxy? No, in case of directors9 meetings, proxy is not available, to wit: <&Directors or trustees cannot attend or vote by proxy at board meetings.= Q: A stockholders? meeting was called to elect BoD as their term will expire in 2 weeks. PJA a) Restricted by law, AoI, or BL; b) Non-voting shares; a. Preferred; b. Redeemable; c. Common, in case of issuance of Founder9s shares (Issuance NOT by virtue of the AoI or BL) c) Treasury shares in treasury a. Those NOT reissued, as if reissued becomes part of OCS and regains former status d) Delinquent shares e) Sec. 62, unregistered transferees of shares a. As those only in books may participate Q: A used his X Corporation shares as security for a loan, who can vote on the shares? A, a BoD, cannot attend, and thus sent his brother, is the proxy valid? As a general rule, it is the shareholder, A, has authority to vote, as the legal owner has the right to vote. Yes, as it is a stockholder9s meeting, as it is the SH who will elect BoD. However, as an exception, the lender may vote if: The director is only prohibited to send a proxy in case of directors9 meetings. a) Expressly authorized in writing; AND b) Recorded in the books of the corporation In case of a stockholders9 meeting, A is acting as a SH, thus he may exercise his right to vote. As the right to vote is an inherent and incidental right to stock ownership, a property right in fact, he may vote the way he pleases to. following It may be the executor, administrator, receiver, and other legal representative DULY appointed by the court Q: What if there is no one appointed? Q: Is the above rule absolute? No as the considered: Q: Who may vote in case of shares of deceased or incapacitated persons? must be No one can vote on the shares 144 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Shares held in common PJA Thus, it will be presumed that they have equal rights, Sec.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 coowners, authorizing one (1) or some of them or any other person to vote such share or shares: x x x Thus, in order for a vote be had on the commonly held shares, there must be: GR: Consent owners by ALL ER: Written proxy signed by all co-owners authorizing 1 or more person to vote Shares held in an and/or capacity &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. Thus, they may vote via: a) Any one of the them (joint owners;) or b) Their proxy Q: A, and/or B, and/or C, own 1m SMC shares of stock. All of them attends the SH regular meeting for election of BoD. However, they cannot agree as to whom to elect, how can they vote? The provisions of co-ownership under the Civil Code shall apply. Therefore, it will be necessary to divide the 1m shares into three. Q: In dividing the 1m shares into three, it will result to 333,333.33 shares each for A, B, and C. How many votes can they cast. A, B, and C, can vote only 333,333 shares each. That there are fractional shares (.333), the .333 shall be treated as spoiled, Q: What if the 1m shares are to be cumulated for a 15-man board election? A, B, and C shall have 5m votes each 1m x 15 number of directors will result in 15m votes, thus 5m each. VOTING BY PROXY AND OTHER MEANS SH and M can vote in ALL meetings through any of the following means: a) b) c) d) In person; By proxy; Remote communication; or In absentia Authority required in case of remote communication or in absentia It can only be availed of if any of the following authority is present: a) BL; or b) Majority of BoD However, take note that it is available in case of corporations vested with public interest despite no authority to that effect. 145 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Proxy Sec.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 company9s 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. Proxy is an authority given by an SH/M to another person for purposes of voting for him in a meeting Requisites PJA A proxy must comply with the following: a) In writing; b) Signed by SH/M; c) Filed with the corporate secretary; a. Complying with form prescribed by BL; b. Within reasonable time prior to the meeting; d) Validity should be for: a. Specific meeting intended; or b. If not for a specific meeting but for a period, the period is only until the max of 5 years only at any one time Kinds of proxies A proxy may be general, a general discretionary power of attorney to vote for directors to vote for directors and ALL ORDINARY MATTERS that may properly come before the meeting. Thus, it is NOT an authority to vote for fundamental changes in the corporate charter or for other unusual transactions, UNLESS so specified. Hence the rule is as follows: GR: Only for ordinary matter, never for fundamental changes and/or unusual transactions ER: May be allowed, if so specified On the other hand, a limited proxy, restricts the authority on specified matters only and may direct the manner in which the vote will be cast. 146 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA Q: Can the availment of proxy be denied in a stock corporation? In addition, they must submit a proxy statement and a proxy form. No, it cannot be denied as it is a matter of right, Effect of failure to observe requirements under SRC Q: Can the availment of proxy be denied in a non-stock corporation? The SEC may impose sanctions Q: Can proxies be revoked? Yes, as it is not matter of right in a non-stock corporation. The last paragraph of Sec. 88 provides: <Unless otherwise provided in the articles of incorporation or the bylaws, a member may vote by proxy, in accordance with the provisions of this Code. x x x= Thus, a provision in the AoI or BL can deny the exercise of proxy. Q: What if no provision as to the denial of proxy in a non-stock corporation is present? Then, proxy may be exercised, as there is no provision to the contrary Proxies in listed companies Rule 20 of Securities and Regulation Code (SRC) provides: <20.11.2.21. In the validation of proxies, a special committee of inspectors shall be designated or appointed by the Board of Directors which shall be empowered to pass on the validity of proxies. [GSIS 3vsRosete (Meralco), April 16, 2009]= Thus, there is a validating committee in case of proxies in listed companies, Yes, it is generally revocable, as such when the SH attended the proxy is deemed revoked Voting trust agreement Sec.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. The trustee or trustees shall execute and deliver to the transferors, voting trust certificates, which shall be transferable in the 147 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia same manner and with the same effect as certificates of stock. The voting trust agreement filed with the corporation shall be subject to examination by any stockholder of the corporation in the same manner as any other corporate book or record: Provided, That both the 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. 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. PJA a. Vote; or b. Other rights pertaining to the shares; 4. For a period not exceeding five (5) years at any time Rule as to period of VTAs As a general rule, a VTA cannot exceed five (5) years. However, as an exception, it may exceed five (5) years if the VTA is a condition to a loan agreement. Q: A, B, and C, executed a VTA in favor of Z, as a condition for a loan acquired by the former. According to the terms of the VTA, it shall exist for ten (10) years. C, as he claims that his concurrence was not acquired as to the VTA, contests the said VTA, on the ground that a VTA cannot exceed five (5) years. Is D correct? No, as a VTA can exist beyond five (5) years if it is a condition to a loan agreement Q: Still on the same facts, A, B, and C was able to fully pay their loan on the sixth (6th) year. However, Z continued to vote upon said shares on the ground that the VTA exists for ten (10) years. May Z rightfully continue voting on said shares by virtue of the VTA? No, as a VTA executed by virtue of a loan agreement automatically ceases to exist upon full payment of the loan Title of voting trustee Hence, there is a voting agreement (VTA) when: 1. One or more SH/s; 2. Confer upon a trustee/s; 3. The right to: trust He is only a sham owner, with a colarable or fictitious title to vote for stocks that he does not actually own Rights of trustor and trustee 148 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA A VTA creates a dichotomy between the equitable ownership and the legal title thereto. In turn, Z should execute a Voting Trust Certificate in favor of A, B, and C. Stockholders (trustor) remain beneficial owners of the said shares, however, the legal ownership transferred to voting trustee. Q: May A B C transfer beneficial ownership in favor of other persons considering that there is no longer a stock certificate? In simpler terms, real ownership is separated from voting rights. (See Lee v. CA at page __) Yes, by virtue of endorsing the VTC, as if the VTC is a stock certificate in itself Revocability As a general irrevocable. Q: Can a corporation enforce a VTA executed by its stockholder to a trustee? rule, VTAs are No, as the corporation is not privy to the transaction. (National Investment and Corp. v. Aquino) However, as an exception, VTAs are revocable if it is attended by fraud Q: A, B, C, executed a VTA in favor of Z. D, co-owner of A, B, and C?s shares questioned the VTA on the ground that it was not notarized. Is XYZ correct? Development Proxy v. VTA Legal title to shares Proxy Remains with the SH/s VTA Transferred to trustee, as trustor ceases to be SH of record Nature of person?s voting Merely agent As the owner Trustor/owner of shares capability to be a director Can be a director, as legal title stays with him CANNOT be a director, as legal title is no longer with him Purpose To secure voting and quorum requirements, or to represent an absent SH For the trustee to acquire voting control Revocability Revocable Irrevocable Yes, as it is required that the VTA be: 1. In writing; 2. Notarized; 3. Specifies the terms and conditions; and 4. Filed with the SEC Q: Assume that all the requirements of a VTA have been complied with, A, B, and C, delivered the stock certificates to Z, what should Z do? Z should go to XYZ and asks for the cancellation of the stock certificate, and further request that a stock certificate be issued under his name pursuant to the VTA and that such be recorded in the books. UNLESS coupled interest Capacity to act at meetings as an with Generally only for a particular UNLESS attended fraud by Can do so in any meeting 149 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia meeting during duration of VTA Capacity to vote by proxy CANNOT, only in person May do so Existence beyond 5 years CANNOT exceed five (5) years at any one time Can be had, as a condition to a loan agreement GR: No ER: If required by BL MUST be done in order to be valid Notarization and SEC filing requirements PJA STOCK AND STOCKHOLDERS Three ways to be SH The following are the means to be considered as an SH: 1. Contract of subscription; 2. Acquisition or transfer from existing SH, even through the stock exchange; and 3. Purchase or acquisition of treasury shares reissued by corporation Voting Pool Agreement Subscription Q: Consider the following figures: A B C D E F G H I Sec.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. Shares held 200k 200k 200k 100k 100k 100k 50k 25k 25k A,B,C,D, and E are the shareholders being relatives. majority F,G,H, and I, entered into a voting pool agreement, to the effect that for this year, their votes shall be cast in favor of F, and the following year, to another shareholder, and so on and so forth. Is the agreement valid? Yes, as it is a voting pool agreement Q: What rule governs a voting pool agreement? It is governed by the law on obligations and contracts. It is to take or pay for shares of stock of unissued shares from a corporation or one yet to exist. Q: XYZ Corporation has 1m ACS, consisting of 500k subscribed and 500k unissued shares. Z wants 100k shares, 50% of which to be paid at the end of the year. In their contract, there is a stipulation that Z shall not be considered as an SH until full payment. Is Z liable to pay his unpaid shares considering that their contract does not consider him an SH? Yes, as it is a subscription contract, it is a debt owing to the corporation. 150 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA In line with Sec. 71 all rights and obligations of an SH shall apply even though there are unpaid shares. A contract of subscription is not within the ambit of a contract of sale9s definition. Q: What if instead of a <subscription contract=, it is designated as a <contract of sale=, can Z still be compelled to pay his unpaid shares? Thus an oral contract is valid and enforceable under Statute of Frauds Yes, as the provision said <any contract=. Thus, despite the designation stating otherwise, it will be deemed as a contract of subscription (NOTE: Prior to the previous Corporation Code, it will be considered a contract of sale, which, as there is no consideration, it will be considered as a mere scrap of paper. As it stands now, <&basta unissued, contract of subscription=) Q: A, is a subscriber of 100k shares of X Corporation, and paid 50% thereof. X called payment but A failed to do so. As such, X bought said shares through a delinquency sale, and became treasury shares. X reissued said shares, and Z acquired such. Is Z liable to pay the unpaid portion? (Salvatiera v. Garlitos) Q: Can a conditional? subscription contract be Yes, as long as there is no prohibition stated in the AoI or BL, and the condition is not beyond powers of corporation, or violative of law and public policy. Thus, a stipulation to the effect that a subscriber shall not be deemed an SH until full payment is contrary to law, considering that Sec. 71 states otherwise. Q: A subscription form was left with blanks, like the down payment that was not disclosed, instead was written a counter-proposal: <Babayaran ko pagkatapos ko makapagpahuli ng isda= Subscriber died. Is there a valid contract of subscription? No, there is no advance payment. No, as it is deemed issued stocks, NOT unissued stocks to which a subscription contract exists and the subscriber thereof may be made liable to pay The counter proposal being facultative in nature is void from the beginning. (Trillana v. Quezon College, Inc.) Pre-incorporation subscription Q: Is a subscription contract required to be in writing just like a contract of sale? No, it is not required to be in writing. Sec.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 151 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA 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. Corporation failed materialize within months longer stipulated subscription contract No pre-incorporation subscription may be revoked after the articles of incorporation is submitted to the Commission. It is a contract entered with a corporation yet to be born Revocability subscription of pre-incorporation As a general rule, it must be irrevocable for AT LEAST 6 months from subscription. As an exception, it may be revoked within the irrevocable period under any of the following circumstances: 1. ALL subscribers consent to revocation; or 2. Corporation failed to materialize within: a. Period of six (6) months; or b. Longer period as stipulated in the subscription contract However, as an exception to the exception, it is irrevocable after submission of the AoI to the SEC despite the above circumstances, hence: GR: ER: Irrevocable for at least 6 months Revocable if: ALL subscribers consent; or to 6 or as in EER: Irrevocable once the AoI is submitted to the SEC Q: Can the irrevocability be longer than six (6) months? Yes, as the provisions states that it must be revocable for <&at least= six (6) months. Therefore the minimum would be six (6) months, and can be longer than six (6) months. Q: V subscribed with a still yet to be born ABC corporation on 31 January 2020, the contract of which states that it shall be irrevocable for eight (8) months. On 31 April 2020, ABC sought W, X, Y, and Z?s, likewise subscribers, consent to revoke V?s subscription contract, to which they concurred. V?s defense is that on 31 March 2020, ABC submitted its AoI to the SEC. On the other hand, ABS claims that the revocation is valid as all of its subscribers consented to it. Who is correct? V is correct, as the subscription contract is irrevocable once the AoI is submitted to the SEC Consideration for shares 152 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Sec.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: 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; d) Previously incurred indebtedness of the corporation; e) Amounts transferred from unrestricted retained earnings to stated capital; f) Outstanding shares exchanged for stocks in the event of reclassification or conversion; g) Shares of stock corporation; and/or in another h) Other generally accepted form of consideration. 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. PJA 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. Hence, consideration may be any of the following: 1. Actual cash paid; 2. Property: a. Actually received by the corporation; b. Which is necessary or convenient for its purpose; and c. At fair valuation equal to the par or issued value of the stock issued; 3. Labor or service rendered; 4. Previously incurred indebtedness; 5. Amounts transferred from URE to stated capital a. Stock dividends, as they are deemed as capitalization of URE; 6. Outstanding shares exchanged in case of reclassification or conversion: a. Founders shares, after 5 years may be converted to common shares, and thus amount of founders shares used to newly issued common shares; 7. Shares of stock in another corporations; 8. Other generally accepted form of consideration Q: How much should the consideration be for shares? It must not be less than: 153 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA 1. Par value (for par value shares); or 2. Issued price (for no-par value shares) No, rather a valid subscription is already tantamount to stocks being <issued=. Q: How is issued price of no-par value shares determined? Q: A subscriber stipulated that he shall not pay any subscription except those applied by virtue of declaration of dividends. Is the stipulation valid? It is determined as follows: 1. As fixed in the AoI; 2. Determined by the BoD if authorized by the AoI or BL; or 3. Majority of OCS at a metting called for that purpose, absent any of the above Q: What is the effect if it is issued lower? Watered stocks Requirement if consideration is other than actual cash No, as it is discriminatory against other SHs for being unlawful. It is likewise illegal and void, for being in fraud of creditors, in violation of the trust fund doctrine. Therefore, it is not a proper defense defense in case for a call for payment for the unpaid subscription. (The National Exchange Co., Inc. v. I.B. Dexter) Q: When is a stock certificate issued? Valuation shall bet determined by the SH or BoD, subject to approval of SEC Q: Can promissory notes be a valid consideration? No, it cannot be used and are expressly prohibited as realization not certain Q: Can future services be a valid consideration? No, likewise, its realization not certain (e.g. Corp hires a corporate secretary and was given 500k shares for his future services. After 1 month, said corporate secretary, hence the realization cannot be made certain) Q: Is issuance of a stock certificate necessary in order for the stock be deemed as <issued=? It is issued only upon full payment of one9s subscription Requisites of valid stock certificate A stock certificate shall be deemed as valid if all the following requisites are present: 1. Signed by the corporate president; 2. Countersigned by corporate secretary; 3. Sealed by corporate seal; 4. Have been fully paid; 5. Delivered to SH; and 6. In case of a transfer, the original stock certificate must be surrendered to the corporate secretary Q: Is it required that a person already holds a stock certificate in order to be deemed as an SH? 154 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia No, as Section 71 states: <Rights of Unpaid Shares, Nondelinquent; Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a stockholder.= What can be deduced from this provision is that despite the failure to pay the subscription in full, the holder shall nevertheless be deemed as an SH. That a stock certificate can only be issued upon full payment, it can thus be concluded that it is not necessary to be deemed as an SH. Operative certificate act of transferring stock Operative act refers to: PJA Q: X entered into an agreement with Y whereby the latter shall transfer 90% of his shares in ABC Corporation to the former in exchange for Php8.6m. Y endorsed the stock certificate in blank, and retained possession all the while. X, in violation of the agreement, transferred to Z, for purposes of control. Y, aggrieved, sought for the return of the possession of his shares. Who is the rightful owner of the shares? Y still owns the said shares. In order for a transfer to be valid, it must be endorsed AND delivered to the transferee. Absent any one of such operative acts, there is no valid transfer. That Y retained possession of the stock certificate, means that the transfer has never been validly effected. 1. Endorsement by: a. Owner; or b. attorney in fact; AND 2. Delivery to transferee Thus, X9s subsequent transfer to Z could never be valid, as X never acquired title to Y9s shares. (Embassy Q: How is endorsement effected? Farms, Inc. v. CA) At the back of the stock certificate is an endorsement form, indicating: <I, ____ owner of stock certificate number _____ with the amount of ___, hereby transfer the same to ____... Q: What if instead, the stock certificates were delivered to the transferee, but not endorsed, is there a valid transfer? No, as one of the aspects of the operative act is absent (Razon v. IAC) (sgd) A= Q: Are stock instruments? certificates negotiable Effect of operative act No, they are only quasi-negotiable It shall be deemed as a valid transfer insofar as the contracting parties are concerned 155 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia While it is true that a stock certificate is transferred by endorsement and delivery, it is only non-negotiable. It is non-negotiable as the holder takes it without prejudice to all the rights and defences which true or lawful owner may have, EXCEPT estoppel may apply. (NOTE: Compared to a negotiable instrument, the holder takes it WITH prejudice. The holder likewise becomes a <holder in due course= See the case of Bachrach Motor Co., Inc. v. Mariano Lacson Ledesma, et al.) Q: X allegedly bought 500k shares in ABC Corporation, from transferees Y and Z. Both of the latter are already dead. On the other hand, Solicitor General D allegedly holds such shares in trust for E, who acquired them from the original owner F. E claims that the stock certificates were stolen during the war. Who has a valid title to the shares? Is it X, the innocent purchaser for value? Or E, who is allegedly the transferee from the original owner F? E is the owner of the shares. Considering that an innocent purchaser for value holds said shares WITHOUT prejudice to the rights and defences of the legal owner, he acquires no valid title to it. Thus, that the transfer to X is fraudulent, he acquired no title from the beginning. (De Los Santos v. McGrath) Applicability of estoppel PJA To reiterate, a bonafide purchaser under forged or unauthorized transfer, does NOT acquire title against the true or lawful owner, EXCEPT estoppel. Hence, if one is apparently vested with authority, he cannot deny his authority with respect to a 3rd party (transferee, bonafide purchaser) Q: A, a SH of WXY Corporation, kept his stock certificate in a safe. Eventually, a person Z stole A?s stock certificate. Z forged A?s signature in said certificate, endorsed and delivered to B, a purchaser in good faith. Will the person acquiring the stock certificates in good faith acquire title against the true and lawful owner A? No, it is not endorsed and delivered by A, the true and legal owner thereof. (NOTE: Take any one of the operative acts required away, there is no valid transfer) Q: A asked his brother B, as the former will go abroad, <Itago mo muna stock certificate ko ha?=. Subsequently, B endorsed and delivered to C, a purchaser in good faith. Is it a valid transfer? Yes, as it is valid between A and B. B being the owner, now can transfer A is now in estoppel, as B is now clothed with authority to dispose of the same Giving B9s apparent authority, there is a valid endorsement and delivery to C, there is hence a valid transfer. 156 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Street certificate It is an endorsement in blank, and anyone who holds said certificate is presumably the legal owner of shares Q: A street certificate is in the hands of X, however, Y, who transferred the street certificate to C, is still the registered stockholder in the books. Is the transfer to X valid? Yes, the transfer is valid insofar as the contracting parties are concerned Registration in the books of the corporation will not affect its validity Q: Still on the same facts, is the transfer binding on the corporation and 3rd persons? No, it is not valid insofar as the corporation and 3rd persons are concerned In order to be valid against the corporation and 3rd persons, registration in the books is NECESSARY. Q: X mortgaged to Y his shares in ABC Corporation, as the former borrowed Php30,000 from the latter. As the obligation matured, X failed to pay and hence Y moved to foreclose said shares. Y is the highest bidder and acquired the shares. Is there a necessity to record the mortgage in the books of ABC in order for the transfer be held as valid? No, as insofar as the contracting parties are concerned, the transfer is valid. PJA However in order for the transfer be binding upon ABC and 3rd persons, it must be registered in their books. (Monserrat v. Ceron, et al.) Q: Assume that the transfer of shares of stock by A to B was never registered in the books of the corporation, and B transferred it to C, C to D, D to E, E to F, F to G, G to H, and H to I, all of which were likewise never registered, whose transfer is valid insofar as the corporation is concerned? None of the transfers are to be valid insofar as the corporation is concerned. In order for the transfer be binding against the corporation and 3rd persons, it must be registered in the books of the corporation. (Uson v. Diosomito, et al.) Requisites of registration for a mortgage over stocks In order for a mortgage be being to the whole world, the mortgage must be registered in the Registry of Deeds of the following places: 1. Residence of the shareholder; and 2. Residence of the corporation (Chua Guan v. Magsasaka, Inc.) Samahang Purpose of registration of transfers in books of corporation In order to enable the corporation to: 1. Know the transfer, so as the corporation would not be required to go beyond its books; 157 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia 2. Enable transferee to exercise SH9s rights, as if he is not listed, he cannot exercise such rights; and 3. Afford corporation the opportunity to object or refuse registration in cases allowed by law: a. Such as the last paragraph of Sec. 62 which states <No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation.= 4. Protection against fictitious and fraudulent transfers: a. So as to enable creditors to look into the books in cases of non-payment or watered stocks. (China Banking PJA corporation (Sec. 62, 3rd paragraph); 2. Shares with unpaid claim is not subject to transfer in the books (Sec. 62, last paragraph); 3. Restrictions in close corporations (Sec. 95); and 4. Special laws: a. General banking act: i. transfer making the holder acquire more than 20% of OCS, requires approval of the Central Bank; b. Sale to aliens, in violation of nationalization laws Q: XYZ Corporation, is a corporation vested with public interest, follows the 60:40 ratio required under our nationalization laws. Corporation v. CA) Q: Can the right to transfer be regulated or restricted? A, a Filipino stockholder, transfers 1% of his share to B, a foreigner. What would be the effect with respect to the validity of the transfer and its registration in the books? Yes, as a general rule, it may be regulated or restricted, by law, agreement of the parties, or the AoI, However, as an exception, unreasonable restrictions cannot be had. The transfer is valid insofar as A and B is concerned, but not a valid transfer insofar as XYZ and 3rd parties are concerned. or However, registration in XYZ9s books cannot be had as it would violate our nationalization laws. It is necessary to afford protection from illegal or fraudulent transfers. In effect, B could never be an SH given the above circumstances. Restrictions under the Corporation Code and other laws Q: X offered to sell his shares in ABC Corporation. His stock certificate has a <non-transferable clause=. Purpose for allowing regulations restrictions in transfer of stocks The following are restrictions provided under the Corporation Code: 1. Valid only between parties until registration in the books of the Y, president of ABC, offered to buy said shares at Php85 per share. However, Z, an outsider, offered to buy said shares at Php100 per share, which 158 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia obviously was accepted by X, given the bigger profit. Z wanted to register the transfer, but was refused on the ground that the stock certificate indicates a <non-transferrable clause=. Is ABC justified in refusing registration? No, ABC is not justified in doing so. Any restriction to dispose must be construed strictly, in that any restraint of transfer must be seen as a restraint of trade. Personal property can be disposed, given that ownership carries with it the power to do so. Thus, the transfer between X and Z is valid, and must be registered. Furthermore, the restriction <nontransferable clause= is null and void. (Padgett v. Babcock) Q: X and Y, major SHs of ABC Corporation, agreed not to sell their shares for a period of two (2) years. Is their agreement valid? PJA attorney-in-fact, or any other person legally authorized to make the transfer.= Thus, the provision allowing delivery and endorsement as a mode of transfer is merely permissive, and recognizes other forms of transfer. (e.g. formal contract of sale set in notarial document equates to delivery, thus notarized deed may be a mode) Q: X executed an SPA in favor of his wife Y to dispose his 473 shares in ABC Corporation. At this time, no stock certificate was issued concerning the 473 shares. Y, assigned the said shares to Z, by virtue of a deed of assignment. As such, Z went to ABC Corporation, and demanded the registration of his shares. However, ABC refused, on the ground that the transfer is invalid, considering that no stock certificate is issued, no endorsement can be had. Is ABC correct? No, ABC is incorrect. Yes, it is a valid agreement. It does not concern a restriction as to transfer but rather of an agreement between parties to not sell their shares. There is a valid transfer by the notarized deeds of assignment considering that there is no stock certificate issued. (Rural Bank of (Lambert v. Fox) Salinas v. CA) Q: Given the operative acts of transfer, is it the only mode to transfer shares? No, as the 2nd paragraph of Sec. 62 provides: <Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner, his Q: What is the nature of the duty of the corporation in registration of transfers? It is merely ministerial Q: What is the remedy in case the corporation refuses registration? Mandamus, if the refusal is without any valid cause 159 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Examples of valid cause of refusal It may be by any of the following: 1. Due to unpaid claims; 2. Restriction on closed corporations of Sec. 95; or 3. In violation of nationalization laws Q: X entered into a pledge with Y, wherein the former made his shares in ABC Corporation the subject of the pledge in favor of the latter. However, X, as the pledgor, failed to do the principal obligation. PJA An election for directors occurred thereafter and concluded in which X was absent. X questioned the validity of the meeting as he is the majority stockholder and his absence would mean that the quorum could not be arrived and hence the subsequent election is not a valid corporate act. Y, on the other hand claims that X is not entitled to any form of notice, as the latter already transferred his shares to the latter, by a notarized deed. Who is correct? X is correct. In turn, Y, as the pledgee, sought registration of X?s shares subject to the pledge. However, ABC Corporation refused registration. X filed a mandamus. Will his mandamus prevail? No, mandamus cannot prevail. Mandamus can only be issued, if the petitioner has legal right to the thing demanded. The pledge itself, and the subsequent failure by X to comply with the principal obligation did not vest ownership unto him. Ownership can only be transferred to him by a public or private auction, which in this case, is wanting. (Tay v. In cases where a stock certificate was already issued, a notarized deed MUST BE DELIVERED to the transferee. The purpose for requiring delivery of the stock certificate in cases of transfers by a notarized deed where a stock certificate has already been issued is to avoid a double sale. Thus, in such cases where a stock certificate is already issued, transfer by a notarized deed MUST BE coupled with DELIVERY in order to have effect. (Rural Bank of Lipa v. CA) (NOTE: Endorsement and delivery (operative act) always required if certificate of stock has been already issued) CA) Q: X, owner of 10,057 shares in ABC Corporation, evidence by stock certificate #12345, transferred his shares to Y by a notarized deed, but held on to the stock certificate. Q: X, is an incorporator, president, and director of ABC Corporation. At the time he is a director, there were only 3 directors. As such, X assigned to Y and Z, a certain number of shares each, as to enable them 160 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA to complete the 5-man board. The transfer was recorded in the books of the corporation, which was held by X as its president. ER: Thus, from then on, Y and Z functioned as directors. EER: On their 5th year, X was dislodged as the president of ABC Corporation by virtue of a Board Resolution. Further, his stock certificates covering the shares assigned to Y and Z were cancelled. By notarized deed prior to issuance of stock certificate (Rural Bank Salinas v. CA) of By notarized deed AND delivery of stock certificate, if stock certificate already issued (Rural Bank of Lipa v. CA) EEER: Estoppel (Tan v. SEC) X opposed the same, as he claims that his stock certificate cannot be cancelled as he never endorsed the same to Y and Z. In effect, he contests the powers of Y and Z as a director, hence seeking to nullify his subsequent dislodgement as well. Is X correct? No, X is incorrect. That X only questioned the transfer after five (5) years, the Court held that X estopped from raising such defense. Furthermore, X as an officer and custodian of the books, no delivery and endorsement is necessary. X acquiesced to every exercise of rights and prerogatives by Y and Z for five (5) years. He cannot now be permitted to question the validity of the transfer. (Tan v. SEC) Summary of modes to transfer shares Considering the above doctrines, the following are the modes to transfer shares: GR: Stock certificate must be endorsed AND delivered (Sec. 62) Q: Considering that shares may be transferred by a notarized deed, can a beneficial owner in a VTA transfer his shares in the same manner? No, the beneficial owner must endorse and deliver the Voting Trust Certificate, just like any other stock certificate Q: Is there a timeframe for registration? None, kung ayaw mo pa maging SH, sino makakapilit sayo? Q: X transferred his shares in ABC Corporation to Y. Y sought registration of his shares after eleven (11) years. ABC Corporation refused to register his name in the books, on the ground that it has already prescribed in accordance with the five (5) year limit under the Statute of Limitations. Is ABC correct? No, ABC is incorrect, there is no fixed period to register, and ownership accrues upon transfer. 161 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Even assuming that there is a limit, the Statute of Limitations under the Civil Code cannot apply. Even assuming it can apply, it still must be registered, as the period shall be reckoned from the date of demand. (Won v. Wack Wack Golf and Country Club, Inc.) (NOTE: Hence, the Marcoses having in their possession shares of stock, they are not barred to register such ;) Forged v. unauthorized issuance of stock certificates Forged stock certificates PJA to transfer it to purchaser for value C, will C acquire title? No, as stock certificates are nonnegotiable instrument, it would still be subject to defences of A. Q: What are A?s possible defences in the above situation? It may include the following: 1. Hindi ko yan dineliver, it was stolen from me; 2. Hindi ko yan pinirmahan Q: What if C transfer the shares to D, will the latter acquire title? It is when a stock certificate held by the real owner is transferred to another by forging his signature in the endorsement portion Q: Is the above rule on transfers absolute? Original owner cannot be deprived of ownership by the forger No, as the transferee may indeed acquire title in cases of estoppel. (e.g. rather than being stolen, pinasa sa kapatid, tinransfer nang kapatid) Effect Q: What is the remedy of the real owner? The real owner may file an action for conversion or issuance of new stock certificates and subsequently have them listed in the books of the corporation No, as still D will be subject to the defences of A. Q: What would be different if what was transferred to C was a negotiable instrument? If negotiable, C becomes holder in due course Unauthorized issuance of stock certificate Q: What is the remedy of the purchaser? With respect to his alleged title, he has none, as it took title upon the forger and thus never acquired any title. It is when the Corporation cancels a stock certificate and issued a stock certificate, unknowing of the fact that it is from a fraudulent transfer. However, he may however have an action against the forger Q: C went to the ABC Corporation with the forged SC1. Q: A owns stock certificate #1. It was stolen by B, and forged the signature of A, Corporation cancelled SC1, and issued SC11 in favor of C. 162 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia C endorsed and delivered SC11 to D, is D with a valid title? Yes, as this is a case of unauthorized issuance of stock certificate. D, as a bonafide purchaser acquires title thereto, as he takes title from the representation of Corporation. He relied on the genuineness of SC11, not on the forged SC1. Q: Considering that D (bonafide purchase) acquires title thereto, is A (real owner) deprived of title? No, as it is non-negotiable, A9s defences are still available. Remedies available The following are the available to each party: remedies 1. Corporation can: a. Repudiate the unauthorized issued stock certificate; b. Compel its surrender; and c. File action for damages against the forger 2. Real owner: a. Can compel corporation to issue stock certificate to his name due to doctrine of nonnegotiability; 3. Bonafide purchaser: a. Can compel registration, as he took faith in the corporation9s representation as to the genuineness of the stock certificate Q: What will happen if both the real owner and the bonafide purchaser are recognized as owners of the shares? PJA It will result in over issuance . (e.g. 100m shares all subscribed and paid up. To recognize both A and D results in over issuance as there will be 100m each, amounting to 200m.) Q: Who will the corporation recognize as the true SH and owner? Only the original and true stockholder shall be recognized. Therefore, the bonafide purchaser9s title cannot prevail over the original owner. Q: A owns 100k shares of stock in XYZ Corporation, evidenced by a stock certificate #1 (SC1). B stole said shares, and forged A?s signature to endorse it to C, a bonafide purchaser. C went to ABC to request for a stock certificate, to which the latter issued, thus cancelling SC1 and issued stock certificate #2 (SC2). C endorsed SC2 to D, a bonafide purchaser as well. What are the remedies of A, C, D, and XYZ assuming all of them acted in good faith? Of course, A can raise his defences as the owner, as it is non-negotiable. In turn, his title would prevail over the other holders. D, on the other hand, has the right to recover from ABC the amount he acquired the stocks, as he relied on representation. ABC, can then file a 3rd party claim against C, as C represented that its title is good but is in fact unauthorized 163 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Finally, C may file a 4th party claim against B, the source of all evil. Sec.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. Thus, no issuance of the stock certificate can be had until fully paid What can be deducted from this is that the obligation to pay the stocks is indivisible Q: A subscribed to 1m shares. He had already paid 500k shares. Can a stock certificate be issued? No, as there is still no full payment Q: Can a stock certificate be issued covering the already paid shares of 500k? No, as the obligation is indivisible Illustrating indivisibility The payment shall be applied to all of the shares. Thus, each of the shares has been paid by only 50% thereof. Assuming each share is Php1.00 each, each share have been paid by Php0.50: PRICE Php1.00 Php1.00 Php1.00 PAID Php0.50 Php0.50 Php0.50 Watered stocks Sec.64. Liability of Directors for Watered Stocks; A director or officer of a corporation who: Issuance of Stock Certificate Share 1 Share 2 Share 3 PJA BALANCE Php0.50 Php0.50 Php0.50 So on and so forth Thus, it necessarily follows, given that no share of stock has been fully paid, no stock certificate may be issued. 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. These are shares issued as fully paid when in fact the full amount has not been paid, otherwise known as fictitiously paid-up shares to the extent that they have not been paid or will not be paid for. Thus watered stocks is a violation of Section 61 as shares shall not be issued less than its par or issued price Q: Assume that par value shares are issued at Php1/share, can it be issued at a price less than that? No, it cannot be issued for less as it will result in watered stocks Q: Assume issued price of no-par value shares is at Php10/share, can it be issued lower than that? 164 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia No, as likewise it will result in watered stocks Q: What if in the above situations the shares were issued at a higher price, is it valid? Yes, as what is prohibited is the issuance at lower than the par value or issued price. In this situation, it will still result in full payment of the shares, which is in contrast with watered stocks, as it would not amount to full payment. Manner of issuance Watered stocks may be issued in any of the following manner: 1. Monetary consideration less than the par value or issued price; 2. Property valuated in excess of FMV; 3. Gratuitously; or 4. In the guise of stock dividends when there are no URE (surplus profits) Rationale Watered stocks are prohibited The rationale for prohibiting such is because: 1. The corporation will be deprived of capital, which in turn hurting its business, capability, and responsibility; 2. Existing SHs are prejudiced by the reduction of proportionate interest in the corporation, as holders of watered stocks have acquired such interest at a lower price; PJA 3. Creditors are deprived of corporate assets, thus violation the trust fund doctrine. Q: If issued, what are the extent of liabilities of BoD and corporate officers? Solidarily liable with the SH holding such watered stocks Q: ABC Corporation issued 1m par shares at Php1.00/share. X acquired shares at Php0.50/share. Upon finding that these are watered stocks, who may be held liable? X, and the BoD and corporate officers of ABC shall be solidarily liable. Q: ABC Corporation issued 1m no-par shares at Php10.00/share. X acquired shares at Php5.00/share. Upon finding that these are watered stocks, who may be held liable? Only the BoD and corporate officers of ABC shall be held liable. No-par shares are deemed fully paid and non-assessable upon issuance. Thus, the shareholder of no-par value shares cannot be held liable for watered stocks Q: Will all directors and officers be liable in case of watered stocks? No, only those CONSENTING or those having KNOWLEDGE thereof but did not interpose a written OBJECTION shall be held liable. Thus, a director or officer will not have any liability in the following cases: 165 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia 1. If he DID NOT CONSENT to the issuance of watered stocks; 2. If he has NO KNOWLEDGE; 3. If with knowledge of the intent to issue watered stocks, he INTERPOSED A WRITTEN OBJECTION (NOTE: Thus even passive ones may be held liable if he failed to object or acquiesced thereto) Effect of issuance of watered stock PJA officers, and subscriber if par value shares 5. As to subsequent transferees of watered stocks; a. His rights are the same as transferor b. Liability: i. In good faith: 1. NOT liable at all ii. In bad faith: 1. Solidarily liable (ER: No-par) The following are the effects: 1. Corporation: a. May be dissolved by proper forum i. However, this is an extreme remedy; or b. Court will enjoin the corporation from doing the questioned act 2. Subscriber of watered stocks: a. If par value shares: i. May be compelled to pay or assume to pay, as to validate his shares; b. If no-par value shares: i. Cannot be compelled to pay, as shares are deemed fully paid and non-assessable 3. As to consenting SH: a. Estopped from raising any objections, thus cannot compel payment from BoD, corporate officers, and subscriber if par value shares 4. As to dissenting SH: a. May compel full payment against BoD, corporate 6. As to creditors a. Can enforce difference payment of Theories on liability due to watered stocks The following theories argue the basis for attaching liability in case of watered stocks: 1. Trust fund doctrine; a. As held in the case of Wood v. Domer (1824), the capital stock, including unpaid subscription, are held as a trust fund for payment of debts; b. Thus, creditors has right to look up such fund, and has the right to file actions to protect their interest 2. Fraud/misrepresentation theory a. Liability is based upon false representation that the true or par issued price has been paid or promised to be paid Q: ABC Corporation offered par value shares at Php1.00 per share, the fair market value of which is at Php10.00/share. 166 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA X subscribed to 1m shares valued at Php8.00/share. Considering that the shares were issued at less than the fair market value, are these watered stocks? No, as the basis for determining watered stocks is the par value or issued price. 1. As stipulated in the stock certificate or by-laws; or 2. Prevailing legal interest rate, if none is stated Enforcement subscriptions Payment Subscription; Sec.66. That it has been issued lower than the FMV does not matter, as it is not less than the par value. In fact, it places the corporation at a better standing, as it sold the shares at a higher price, resulting in a higher capital. Interest on Unpaid Subscriptions Sec.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. Rule as to subscriptions interest on unpaid As a general rule, subscribers to shares are not liable to pay interest on their unpaid subscriptions However, as an exception, interests may attach to the unpaid subscription if provided for in the contract of subscription or by-laws Q: Assuming that an interest is applicable, what is the basis for the rate to be applied? The following shall be the basis for the interest: and payment of Balance of of 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. Sec.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 167 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA sixty (60) days from the date the stocks become delinquent. disposed of by said corporation in accordance with the provisions of this Code. 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. Sec.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. 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 former9s 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 purchaser9s 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 Sec.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. Q: When should unpaid subscriptions be paid? As a rule, payment shall depend on the following: 1. In accordance with the provisions of the subscription contract; or 2. At any time upon call of BoD, if no stipulation in the subscription contract Possible remedies to enforce payment The corporation has the following options to enforce payment: 1. Board action (Secs. 66 and 67); or 2. Collection case (Sec. 69) 168 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA Q: If there is date stipulated in the subscription contract, is demand necessary? X did not pay, and the shares became delinquent. What should be the the course of action of ABC? No, as it is the subscriber9s duty to pay on the stipulated date The BoD of ABC shall issue a resolution for the sale of shares, which said resolution shall be issued in not less than thirty (30) days, and not more than sixty (60) days from the date of delinquency Q: What is the effect if subscriber failed to pay on stipulated date? It will result in delinquency Q: If there is no fixed period in the subscription contract, is a call for payment necessary? Yes, as a demand is necessary before it becomes due or payable (No demand, no delay) Q: What is the effect the if call for payment was not heeded? Likewise, the following shall be sent to the delinquent SH/s: 1. Notice of the sale; and 2. Copy of the BoD resolution Furthermore, the above must be published at least once a week, for two (2) consecutive weeks. Q: What if after demand, there is no payment until the date of sale? It will result in delinquency Public auction shall proceed. Options after delinquency The corporation may opt to do any of the following: 1. Delinquency sale; or 2. Collection case in court Q: X subscribed to 1 million shares of ABC Corporation and left 500k shares unpaid. How many shares are delinquent? It is the whole 1 million shares, as it is indivisible Q: Still on the same facts, this year 2020, ABC is liable to pay Php5m, hence the BoD decided to call for payment of unpaid shares. Q: Who shall be considered the <winning bidder= in the public auction? It is the bidder who offers to pay the full amount plus cost/expenses, if any, for the lowest number of shares. What follows is the registration in the name of winning bidder, and the issuance of the stock certificate in his favor. Q: What if there are remaining shares? It shall be credited to the delinquent stockholder. Likewise, a stock certificate shall be credited in his favor. 169 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Q: At the day of the public auction, the starting bid is as follows: 500k + 2k costs/expenses P, Q, and R, attended the auction, and bids offered as follows: P Q R 3 3 3 990k 980k 975k Is P, the highest bidder, the winner? No, rather, the bidder who offered the smallest, R, shall be the winning bidder Q: Given that R is the winner as to the 500k shares, what is the effect to R?s and X?s shares and status as a shareholder? R is now an SH in ABC in the amount of 500k, X is the SH as to his 500k shares, and now deemed as fully paid up and not delinquent anymore Q: Assume that no bidders appeared, can ABC Corporation bid? Yes, as the last paragraph of Sec. 67 provides: <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 PJA as fully paid in the books of the corporation. x x x= Q: What is the limitation as to the corporation?s capability to bid? Sec. 40 states that: <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 purchase or acquire its own shares for a legitimate corporate purpose or purposes. x x x= Thus, while a corporation may bid for delinquent shares in a public auction, said corporation must have URE or surplus profits. Q: Can an insolvent corporation bid? No, as an insolvent corporation obviously has no URE or surplus profits Q: Is a corporation left with no remedy considering that there are no bidders, nor can it bid as it is insolvent? No, as it may still avail the remedy under Sec. 69, specifically a collection case in court. Q: Assume that X?s share was sold at a delinquency sale. However, the publication requirement of once a week for two (2) consecutive weeks was not complied with, as it was published for one (1) week only. 170 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia May the sale be assailed on ground of irregularity or lack of notice? Yes, as long as the two (2) conditions under Sec. 68 concur: 1. The delinquent SH pays/tenders payment to the party holding stocks (winning bidder) for the sum it was sold; AND 2. Such action filed within 6 months from sale Q: What if the two (2) conditions under Sec. 68 was not complied with?; The lips of the delinquent SH shall be forever sealed Q: X subscribed to 200k shares in ABC Corporation, and paid 200k out of the 660k shares. On 2020, ABC acquired Php1m profits, but however, opted to not declare dividends. ABC called for payment of unpaid subscription, however, X refused to pay. Thus ABC declared X as a delinquent shareholder. What follows is the public auction of X?s shares. X refused on the ground that the by-laws of ABC provides that the unpaid share shall be paid from 70% of the profits obtained by ABC. Hence, X claims that he cannot be declared delinquent as payment can be had from the profits of ABC. Is X correct? PJA That they opted not to, it necessarily follows that ABC has the option to do any of the two (2) remedies. (De Silva v. Aboitiz & Company, Inc.) Q: X acquired 15k shares in ABC Corporation, and paid 37.5k shares thereof. X was elected as the President and General Manager of ABC sometime in 1985. In 1986, he resigned, and demanded for unpaid wages and bonuses as then President and General Manager ABC claims that the unpaid wages and bonuses were applied to the unpaid balance of the shares as a set off. Is ABC justified in doing so? No, the set off is premature. As no demand or call for payment was made the set off has no leg to stand on. Without any demand, the unpaid balance cannot be deemed as due and demandable. (Apodaca v. NLRC) Q: Can creditors enforce the remedies against unpaid subscriptions? Yes, as it is in line with the trust fund doctrine (Lumanlan v. Cura) Q: Creditors sought the recovery of unpaid subscriptions of numerous subscribers of ABC Corporation. No, X is incorrect. The BoD has the option to declare dividends in the first place. The subscribers contend that they merely invested by virtue of the promise of the President of the Philippines that the government shall be investing in ABC. However, the promise never happened. 171 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia As such, by virtue of goodwill, ABC released said subscribers from their unpaid subscriptions. Is ABC correct in doing so? No, ABC has no power to release subscribers from obligation without any valuable consideration for such release. If released, it will result of reduction in capital stock, and reduction of capital stock can only be done in the manner prescribed by law (Sec. 37) Likewise it would not have been allowed by SEC, as it prejudices the right of creditors, in violation of the trust fund doctrine. (PNB v. Bitulok Sawmill, Inc., et al.) (NOTE: Never believe the promises of the government) Q: ABC Corporation owes XYZ Corporation the amount of Php179,000.00 May the SHs having unpaid shares be held liable for the debt owed by ABC? Yes, as SHs are personally liable to the extent of their unpaid subscriptions. (Edward A. Keller &Co., Ltd. v. COB Group Marketing, Inc.) Q: In 1924, X subscribed to shares in ABC Corporation, paying 50% thereof. In 1931, Y has been appointed as the receiver for ABC Corporation, and demanded payment of X?s unpaid subscription. As no payment was made, an action for recovery was instituted in 1935 against X. As a defense, X claims that the action to recover the unpaid claims has already PJA prescribed, considering that ten (10) years have elapsed since his subscription in 1924 and that the action was only filed in 1935. Is X Correct? No, the action has not prescribed. The prescription period shall be determined from the time of demand (1931), not from his subscription (1924). Thus, that the demand was made on 1931, and the action was instituted on 1935, prescription has yet to set in. (Garcia v. Suarez) Effect of delinquency Sec.70. Effect of Delinquency; No delinquent stock shall be voted for, be entitled to vote, or be represented at any stockholder9s 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. SH holding delinquent shares do not have the right to vote or to be voted for. As an exception, the SH nevertheless has the right to receive dividends Q: Considering that a delinquent SH has the right to receive dividends, will he receive cash dividends outright? No, Section 42 provides: <&Provided, That any cash dividends due on delinquent 172 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, x x x= Thus, cash dividends will first be applied to amount of unpaid subscriptions including cost expenses interest. If after applying as such, there are still some cash dividends left, it is only then that it is paid to him. Q: How about stock dividends, will it automatically be given to the delinquent shareholder? No, as likewise, Section 42 provides: <&while stock dividends shall be withheld from the delinquent stockholders until their unpaid subscription is fully paid: x x x= Thus stock dividends shall be withheld from him until full payment. Q: X is a director of ABC Corporation. He holds 1m shares, out of which he had paid only 50% thereof. After ABC demanded payment, and subsequently refused, they declared X as a delinquent SH. Is X disqualified to be a director considering that the shares he holds are delinquent? No, he does not lose his right as a director unless shares are sold in delinquency sale. However, considering that what will be subjected to a delinquency sale is only 50% of his subscription, he will PJA still hold shares in his name and thus still qualified as a director. Rights of unpaid shares which are nondelinquent Sec.71. Rights of Unpaid Shares, Non 3 delinquent; Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a stockholder. Thus, subscribers holding unpaid shares which have NOT been declared as delinquent shall have ALL the rights of a SH However, as an exception, he shall not be entitled to issuance of stock certificates. Be it noted, that a stock certificate is not one of the requirements to be deemed as a SH. Lost or destroyed stock certificates Sec.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 person9s 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 173 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia information and evidence as may be deemed necessary; 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 PJA 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. Rationale for allowing issuance of new certificates if lost, stolen, or destroyed To avoid certificates. duplication of stock By having no duplicates, fictitious and fraudulent transfers can be avoided. Likewise, it is a protection from damages that may be incurred by transferees Requirements for issuance of new stock certificate in case of lost, stolen, or destroyed stock certificates The following are the requisites: 1. SH must execute a triplicate affidavit and file with the corporation, indicating: a. Circumstances on how the stock certificate was lost, stolen, or destroyed; b. Number of shares covered by the stock certificate; c. Serial number of the certificate; d. Name of the corporation which issued the same; and e. Other information and evidence as may be deemed necessary, 174 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia 2. After verifying the affidavit and other information, the corporation shall cause a publication of a notice in a newspaper of general circulation in the place where it has its principal office, at least once for three (3) consecutive weeks, which shall indicate: a. Name of the corporation; b. Name of the registered owner; c. Serial number of stock certificate; d. Number of shares represented by the stock certificate; and e. A statement that the right to contest shall be barred if no such contest was made within one (1) year from the last publication 3. If no contest was made within one (1) year, a new stock certificate shall be issued Q: Is the issuance after one (1) year absolute? No, as it may be issued earlier than said period when SH concerned files a bond satisfactory to the BoD, which shall be effective for one (1) year, Q: What would happen if a contest was made? The issuance shall be suspended until the court determines who the rightful owner is. Q: Pending ths issuance of CS, may the owner of the lost or destroyed certificate, may he transfer by notarized deed without delivery? No, as held in the case of Rural Bank of Lipa v. CA, a notarized deed not sufficient in itself as there is already a stock certificate issued PJA Q: May corporate officers be held liable for unauthorized issuance of replacement certificate? As a general rule, actions against corporate officers cannot prevail However, as an exception, they may be held liable in cases of fraud, bad faith, or negligence Corporate Books and Records Sec.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, intragroup 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; 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 175 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia 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 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. PJA 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. 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=. 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 corporation9s 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. If the corporation denies or does not act on a demand for inspection and/or reproduction, the aggrieved party may report such denial or inaction to the Commission. Within five (5) 176 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia 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. 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 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. Sec.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 PJA 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 are 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. Every corporation must keep certain books and records Q: Can the SH and/or directors inspect the books of the corporation? Yes, it is their right Q: Can outsiders inspect the books of the corporation? As a general rule, books of the corporation cannot be inspected by outsiders However, as an exception, outsiders may be allowed, if the corporation consented thereto. Rationale for allowing inspection by SH and/or directors As they have a beneficial interest through ownership of shares. 177 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Likewise, it is necessary for selfprotection and preservation. Q: Can the requesting/inspecting party copy the contents of the books? Yes, at the expense requesting/inspecting party of Q: What is the remedy if the corporation refused to allow inspection or copying? Mandamus will lie to compel the corporation to allow such. In addition, damages under Section 161 shall apply: <Violation of Duty to Maintain Records, to Allow their Inspection or Reproduct ion; Penalties; The unjustified failure or refusal by the corporation, or by those responsible for keeping and maintaining 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). x x x= PJA Thus, damages can amount from Php10,000 to Php200,000, or from Php200,000 to Php400,000 if injurious to the public. In addition, it may be reported to the SEC, which within five (5) days from such report, shall conduct a summary investigation. It shall then order directing the inspection or reproduction. To wit: <If the corporation denies or does not act on a demand for inspection and/or reproduction, the aggrieved party may report such denial or inaction 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. x x x= Q: What if the SH abused such right (e.g. reproduced for publication)? The SH may be sanctioned from Php5,000 to Php2,000,000. To wit: <Sec.158. Administrative Sanctions; If, after due notice and hearing, the Commission finds that any provision of this Code, rules or regulations, or any of the Commission9s orders has been violated, the Commission may impose any or all of the following sanctions, taking into consideration the extent of participation, nature, effects, frequency and seriousness of the violation: 178 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia (a) Imposition of a fine ranging from Five thousand pesos (P5,000.00) to Two million pesos (P2,000,000.00), and not more than One thousand pesos (P1,000.00) for each day of continuing violation but in no case to exceed Two million pesos (P2,000,000.00); x x x= Q: Is inspection and reproduction an absolute right? No, directors and officers may advance any of the following defences: a) Improper use of information secured through previous examination; b) Not acting in good faith and for legitimate purpose; or c) Requesting party is a competitor, director, officer, controlling stockholder or otherwise represents the interests of a competitor Corporations are required to submit to the SEC: a) Financial statement received by BIR within 120 days from end of fiscal year, to be submitted within ten (10) days from receipt of SEC9s written request; and b) General Information Sheet (GIS) to be submitted within thirty 30 days from date of meeting as indicated in the by-laws or actual meeting thereof to As to directors and trustees, their right to inspect is ABSOLUTE AND UNQUALIFIED. This is because, directors or supervisors, directs and manages the business, and it is necessary to be equipped with all data and information of the company to manage and direct diligently (Vegaruth v. Isabela Sugar and Gokongwei v. SEC) Nature of right to inspect by SH It is personal Q: Considering that SH?s right to inspect is personal, can it be exercised through another? Yes it may be exercised by agent or duly authorized representative. He can do so with or without the SH concerned <What a man can do, can do in person, or through another.= (WG Philpotts v. Phil. Manufacturing Co., et al.) Reportorial requirements Nature of right Directors/Trustees PJA inspect by Rationale for allowing inspection by another In some instances, the SH may not understand the contents of the books. As a specific example, even if the SH is a lawyer, he might not understand the contents of a financial statement, so a CPA may be recruited. Q: When should inspection be exercised? Reasonable hours in any business day 179 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Q: X is a SH of ABC Corporation. One working day, specifically a Monday, at around 1:00pm, X requested to inspect the books of ABC. However, ABC refused, on the ground that the by-laws provides that inspection can only be allowed from the 15th to 25th of March ONLY. Thus, X filed a mandamus. mandamus applicable? Will Yes, mandamus can apply. The by-law provision is without force and effect as it is contrary to law, thus the effect is as if it was not written at all. A corporation may deny inspection if sought on unusual hours or improper conditions. However, it does not have the power to deny such inspection altogether. (Pardo v. The Hercules Lumber Co., Inc.) (NOTE: If the by-law provision would be allowed, it would violate the <doctrine of limited capacity=, as the corporation can only do so much as the law allows it.) Q: X, a director of ABC Corporation, filed a mandamus as there is a failure of ABC to provide a certified true copy (CTC) of the minutes of the SH?s meeting, which was requested a day after said meeting. Is mandamus proper? No, mandamus is not YET available. While it is true that a director has an absolute and unqualified right to inspect the books, the circumstances pertaining to CTCs of minutes must be observed. PJA CTCs of minutes can only be availed of after it is signed by responsible officer. As an illustration, if the 1st meeting happened today, the corporate secretary shall prepare the minutes and it can only be signed during the following meeting, which in SH9s meetings, would be six (6) months from each other. The usual course of the following meeting is as follows: a) The 1st agenda would be the determination of quorum; b) The 2nd agenda would be the reading of minutes and its approval; and c) If approved, then and only then finalized and signed. Thus, as in this case, a CTC would not be available prior thereto, and hence the director9s request is unreasonable. (Vegaruth v. Isabela Sugar) (NOTE: All that may be issued prior to the 2nd meeting is an excerpt; however, it is not the same as the signed minutes and a CTC) Q: How bout in the case of director?s meetings, when would the CTC of the minutes be available? It would be available only upon approval at the following meeting, thus a month after the meeting concerned. Q: May a SH of a holding company inspect the books and records of a subsidiary? Isn?t he considered a SH of the subsidiary? 180 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia It would depend on the nature of the subsidiary. If the subsidiary is a wholly owned subsidiary, then yes, the SH of the holding company may inspect the books of the subsidiary, as it is in accord with equity, good faith, and fair dealing. (Gokongwei v. SEC) However, if it is NOT a wholly owned subsidiary, the SH of the holding company CANNOT inspect the books of the subsidiary, as they are treated as separate entities, and the SH of the holding company, shall not be treated as an SH of the subsidiary. (Rogers v. Corporation) Sherman Oil Q: X is a stockholder of San Miguel Corporation (SMC). Can he inspect the books of San Miguel International (SMI)? Yes, as SMI is a wholly owned subsidiary of SMC, in fact all of the former9s shares are held by the latter. Q: Ayala Corp. is a holding company, with its subsidiaries BPI, Globe, and Ayala Land, having 52%, 58%, and 58% interests, respectively. X, is an SH of Ayala, can he inspect any or all of subsidiaries? No, as these not wholly owned subsidiaries, all these 3 are treated as separate and independent entities. These 3 subsidiaries are even treated as independent listed companies under the Securities and Regulation Code. Gonzales v. PNB PJA Q: Gonzales, an outsider to the Philippine National Bank (PNB), raised questions as to transactions of the latter. Later on, Gonzales acquired one (1) share in PNB, and hence requested to inspect the books and records of PNB. However, PNB refused to do so. Thus, Gonzales filed a mandamus case. Will his mandamus prevail? No, his mandamus shall not prevail. As a condition precedent to inspection, a SH must be in good faith and has a legitimate purpose for the inspection. As in this case, the Court held that acquisition of one (1) share cannot amount to good faith, and that Gonzales9 previous acts when he was still a stranger to the corporation are questionable, as to raise the question of the legitimacy of the purpose of examination. Even assuming that Gonzales is in good faith and has a legitimate purpose, inspection cannot be had as: a) PNB has its own charter; b) Inspection can only be done by the Central Bank itself; c) The result of the investigation can only be divulged to the following: a. President of the Philippines; b. Secretary of Finance; and c. Members of the BoD In case of violation of the above, the person may be subjected to fine and/or imprisonment. (Gonzales v. PNB) 181 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia (NOTE: Under the 1907 Corporation Law, corporations cannot refuse inspection, as there are no available grounds to do so.) Mergers and Consolidation Sec.75. Plan of Merger or Consolidation; Two (2) or more corporations may merge into a single corporation which shall be one of the constituent corporations or may consolidate into a new single corporation which shall be the consolidated corporation. The board of directors or trustees of each corporation, party to the merger or consolidation, shall approve a plan of merger or consolidation setting forth the following: a) The names of the corporations proposing to merge or consolidate, hereinafter referred to as the constituent corporations; b) The terms of the merger consolidation and the mode carrying the same into effect; or of c) A statement of the changes, if any, in the articles of incorporation of the surviving corporation in case of merger; and, in case of consolidation, all the statements required to be set forth in the articles of incorporation for corporations organized under this Code; and d) Such other provisions with respect to the proposed merger or consolidation as are deemed necessary or desirable. PJA submitted for approval by the stockholders or members of each of such corporations at separate corporate meetings duly called for the purpose. Notice of such meetings shall be given to all stockholders or members of the respective corporations in the same manner as giving notice of regular or special meetings under Section 49 of this Code. The notice shall state the purpose of the meeting and include a copy or a summary of the plan of merger or consolidation. The affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock of each corporation in the case of stock corporations or at least two-thirds (2/3) of the members in the case of non-stock corporations shall be necessary for the approval of such plan. Any dissenting stockholder may exercise the right of appraisal in accordance with this Code: Provided, That if after the approval by the stockholders of such plan, the board of directors decides to abandon the plan, the right of appraisal shall be extinguished. Any amendment to the plan of merger or consolidation may be made: Provided, That such amendment is approved by a majority vote of the respective boards of directors or trustees of all the constituent corporations and ratified by the affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of two-thirds (2/3) of the members of each of the constituent corporations. Such plan, together with any amendment, shall be considered as the agreement of merger or consolidation. Articles Consolidation; Sec.77. Sec.76. Approval; Stockholders? or Members? Upon approval by a majority vote of each of the board of directors or trustees of the constituent corporations of the plan of merger or consolidation, the same shall be of Merger or After the approval by the stockholders or members as required by the preceding section, articles of merger or articles of consolidation shall be executed by each of the constituent corporations, to be signed by the president or 182 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia vice president and certified by the secretary or assistant secretary of each corporation setting forth: a) The plan of the merger or the plan of consolidation; b) As to stock corporations, the number of shares outstanding, or in the case of nonstock corporations, the number of members; c) As to each corporation, the number of shares or members voting for or against such plan, respectively; d) The carrying amounts and fair values of the assets and liabilities of the respective companies as of the agreed cut-off date; e) The method to be used in the merger or consolidation of accounts of the companies; f) The provisional or pro-forma values, as merged or consolidated, using the accounting method; and g) Such other information as may be prescribed by the Commission. Effectivity Consolidation; Sec.78. of Merger or The articles of merger or of consolidation, signed and certified as required by this Code, shall be submitted to the Commission for its approval: Provided, That in the case of merger or consolidation of banks or banking institutions, loan associations, trust companies, insurance companies, public utilities, educational institutions, and other special corporations governed by special laws, the favorable recommendation of the appropriate government agency shall first be obtained. If the Commission is satisfied that the merger or consolidation of the PJA corporations concerned is consistent with the provisions of this Code and existing laws, it shall issue a certificate approving the articles and plan of merger or of consolidation, at which time the merger or consolidation shall be effective. If, upon investigation, the Commission has reason to believe that the proposed merger or consolidation is contrary to or inconsistent with the provisions of this Code or existing laws, it shall set a hearing to give the corporations concerned the opportunity to be heard. Written notice of the date, time, and place of hearing shall be given to each constituent corporation at least two (2) weeks before said hearing. The Commission shall thereafter proceed as provided in this Code. Mergers and consolidation are the most common types of corporate reorganization. (NOTE: <Mergers and consolidation= is previously an elective subject. Atty. Ladia refused the offer to teach such subject. In explaining so, he said that he does not know anything about it except those which are stated in the Corporation Code. He mentioned about <horizontal= and <vertical= mergers, and said <What the heck is that?=) Historical background The reasons for availing mergers and consolidation are not always the same, however, the most common reason is due to weak financial conditions. By doing so, it aims to put the business/es in a sound financial standing 183 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia But some corporations merged despite their solvency. (e.g. Equitable and PCI, BPI and FEBTS) PJA rights to one of them which continues in existence, the others being dissolved and merged therewith Illustration In the above cases, merger was resorted to be able to be more competitive against foreign banking during the 1980s. ABC and companies. XYZ are existing Likewise, it may be in the form of purchasing assets. As XYZ is in the verge of insolvency, it transferred all its assets, rights and properties to ABC. Thus, it may be a method of recapitalization ABC issued shares to XYZ, then XYZ is dissolved. As an example, back then, lending institutions only requires a minimum paid-up capital of Php100,000.00. ABC continues to exist, representing the combined business. It was however raised eventually to Php10m within NCR, and Php5m outside NCR. Thus, a moratorium was given to lending institutions to come up with the required paid-up capital within three (3) years, OR to merge/consolidate with other lending companies As many companies were affected some of them merged, but others folded up their business Consolidation It is done by uniting or the amalgamation of two (2) or more corporations to form a new one. It results in a new corporation, and the termination of the old ones. Illustration ABC and DEF are existing corporations, they transferred all their rights, assets, and properties to XYZ, a corporation still to be born XYZ issued shares of stock to ABC and DEF, both of the latter are dissolved thereafter. Merger It is a union effected by absorbing one or more corporation/s by another, which survives, which continues the combined business. Uniting of two or more corporations (pwede 3 or 4, so on and so forth) by the transfer of properties, assets, and Q: Who are the parties in mergers or consolidation? They are called as the constituent corporations Q: What happens to the constituent corporations in a merger? 184 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Not all of the constituent corporations are dissolved, as one of them becomes the surviving corporation which continues the combined business. On the other hand, the other constituent corporations that have been absorbed shall be dissolved. Q: What happens to the constituent corporations in a consolidation? All constituent corporations are dissolved, as a new corporation is formed. Requirements and procedures The following are the requirements: a) The BoD of each constitutent corporations shall approve a plan of merger/consolidation setting forth: a. Names of the constituent corporations; b. Terms and mode of carrying it to effect; c. Statements: i. Merger; changes in the AoI of surviving corporation, if any; or ii. Consolidation; setting forth requirements of AoI in accordance with law; and d. Such other provisions deemed necessary or desirable b) Approval of the plan by constituent corporations: a. Majority of BoD/T; and b. 2/3 of SH/M PJA c) Prior notice of meeting to SH/M in accordance with Section 49, which shall indicate: a. Purpose of the meeting; and b. Copy/summary of the plan d) If approved, Execution of Articles of Merger/Consolidation (AoM/C) by all constituent corporations a. To be signed by: i. President; or ii. Vice President and b. Certified by: i. Secretary; or ii. Assistant secretary; c. Setting forth: i. Plan of merger/ consolidation; ii. Number of outstanding shares/members, as the case may be; iii. Number of shares/member who voted against the plain; iv. Assets9 and liabilities9, as of agreed cut-off date: 1. Carrying amounts; and 2. Fair values; v. Method to be used as to accounts; vi. Provisional or proforma values using the accounting method; and vii. Such other information as may be prescribed by the SEC 185 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Q: After the above has been done, what should the constituent corporations do next? The AoM/C must be filed and submitted to SEC In addition, the following corporations require the appropriate government agency9s favourable recommendation: a) b) c) d) e) f) g) Banks or banking institutions; Loan associations; Trust companies; Insurance companies; Public utilities; Educational institutions; and Other special corporations governed by special laws, In case the SEC finds the requirements as compliant, the issuance of the Certificate of Merger/Consolidation shall follow Q: What if the SEC found that the merger/consolidation is contrary to law? SEC shall set a hearing, and proceed as provided for in the Code Restrictions and limitations Act 3815, or specifically the Revised Penal Code under Art. 186, proscribes illegal combinations, or when the purpose is to lessen competition, or restrain commerce, or tend to create monopoly. In case of violations, a fine and/or imprisonment may be decreed Effects of mergers/consolidations PJA Effects Consolidation; Sec.79. of Merger or The merger or consolidation shall have the following effects: a) The constituent corporations shall become a single corporation which, in case of merger, shall be the surviving corporation designated in the plan of merger; and, in case of consolidation, shall be the consolidated corporation designated in the plan of consolidation; b) The separate existence of the constituent corporations shall cease, except that of the surviving or the consolidated corporation; c) The surviving or the consolidated corporation shall possess all the rights, privileges, immunities, and powers and shall be subject to all the duties and liabilities of a corporation organized under this Code; d) The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and franchises of each constituent corporation; and all real or personal property, all receivables due on whatever account, including subscriptions to shares and other choses in action, and every other interest of, belonging to, or due to each constituent corporation, shall be deemed transferred to and vested in such surviving or consolidated corporation without further act or deed; and e) The surviving or consolidated corporation shall be responsible for all the liabilities and obligations of each constituent corporation as though such surviving or consolidated corporation had itself incurred such 186 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia liabilities or obligations; and any pending claim, action or proceeding brought by or against any constituent corporation may be prosecuted by or against the surviving or consolidated corporation. The rights of creditors or liens upon the property of such constituent corporations shall not be impaired by the merger or consolidation. Thus, there will only be one single corporation after the merger or consolidation: a) The surviving/absorbing corporation, in case of a merger; or b) The consolidated corporation, in case of a consolidation As to the other constituent corporations, their existence shall be terminated. Q: What will the surviving or consolidated corporations possess? They shall possess ALL the rights, privileges, properties, receivables, immunities, powers, franchises, interests, and shall be subjected to all duties and liabilities of a corporation. PJA Q: ABC Corporation and XYZ Corporation merged in 1975, whereby the latter absorbed the former. In 1977, D executed a promissory note (PN) in favor of ABC Corporation, as D has an obligation with the then ABC Corporation. XYZ sought to enforce the PN. Can they do so? Yes, because as of the time of the merger, all references to the absorbed corporation, shall be deemed as a direct reference to the surviving bank. (Associated Bank v. CA) Q: In the original decision of a case raised to the Supreme Court, it was held that the employees of the absorbed corporation are NOT automatically absorbed by surviving corporation, as it refers to chattel (not rights, assets, liabilities). Further, the decision was anchored on the fact that the AoM did not contain any provision to that effect. However, one Justice dissented, to the extent that they must be automatically absorbed. Is the argument correct? Q: Is the transfer of the above automatic? Yes, as they will possess it WITHOUT ANY FURTHER ACT AND DEED. It is automatic upon the issuance of the certificate. Q: Will the rights of the creditors of the terminated corporations be lessened or extinguished? No, any lien on the property of constituents shall not be impaired Yes, as it is more in keeping with the dictates of social justice and state policy of according full protection to labor to deem employment contracts as AUTOMATICALLY ASSUMED by the surviving corporation even in the absence of provision in AoM/C. However, nothing in this resolution shall impair the right of employer to terminate services for lawful purpose or cause, or the right of the employee to resign, retire, or otherwise sever his employment, whether before or after 187 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia the merger. (BPI v. BPI Employees Union) Q: ABC Bank merged with XYZ Bank, whereby the latter absorbed the former. PJA Q: When will the merger or consolidation be deemed as valid? Only upon approval of the SEC APPRAISAL RIGHT During the existence of ABC, D acquired a loan amounting to Php5m. However, only Php2.5m was given by ABC to D. Sec.80. When the Right of Appraisal May As the total of the loan was not acquired, no payment was made by D when they became due. Any stockholder of a corporation shall have the right to dissent and demand payment of the fair value of the shares in the following instances: Thus, XYZ enforced collection against D. Can D be compelled to pay? No, delay cannot be attributed to D, as the total of the cash loan has never been released. In fact, it is XYZ who must pay D for that portion of the loan that was not given. Surviving corporation shall be responsible and liable for liabilities of the absorbed corporation. It is as if the surviving corporation incurred such liabilities. (Ong v. BPI Be Exercised; a) In case an amendment to the articles of incorporation has the effect of changing or restricting the rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class, or of extending or shortening the term of corporate existence; b) In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets as provided in this Code; Family Savings Bank) c) In case of merger or consolidation; and (NOTE: As held in DPB v. Guarina Agricultural a debtor cannot incur delay unless the creditor has fully performed reciprocal obligations) d) In case of investment of corporate funds for any purpose other than the primary purpose of the corporation. Q: Considering that constituent corporation?s existence are terminated, is it correct to say that it amounts to winding-up/liquidation? For the past 26 years, whenever Atty. Ladia asks questions regarding appraisal right, students confused it with pre-emptive right. Thus take note of the difference. No, as in the case of a merger or consolidation, there are no assets to collect, as it is merely transferred to another Appraisal right 188 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia It is a right granted to dissenting SH on certain corporate acts and transactions to demand the fair value of his shares PJA Thus, SH can do so even if the grounds under Section 80 are not present. Q: Can the SH demand the fair value of his shares in all instances in case he dissents? Q: The BoD of ABC Corporation, a stock corporation, passed a resolution amending its AoI, changing its principal office from QC to Manila. No, it is NOT AT ALL TIMES AVAILABLE X, a SH, resides in a house exactly beside the office in QC. Instances allowed Appraisal right is available in the following instances: a) Amendment of AoI changing or restricting rights of any SH; X is amputated in both legs. X objected to the amendment of the principal office, as it will restrict and change his right as SH. He has been diligently attending SHs meetings from the 1st one b) Sale, lease, exchange, transfer, mortgage, pledge and other disposition of all or substantially all of corporate properties; He further alleged, that if its office is moved to Manila, he can no longer attend. c) Merger/Consolidation; and On the other hand ABC claims that it will not change his right as an SH. May X exercise his appraisal right? d) Investment of corporate funds in any business or purpose, other than the primary purpose Q: X is an SH in ABC Corporation, a close corporation. X exercised his appraisal right, as he was heartbroken that his brother Y, a SH as well, married his ex-girlfriend Ivana. ABC refused, on the ground that X?s reason is not among the instances which allows exercise of appraisal right. Is ABC justified in refusing? No, his reason is a flimsy excuse In fact, even without the change in principal office, meetings may be held anywhere in Metro Manila. Q: The BoD of ABC Corporation, a stock corporation, passed a resolution amending its AoI, changing its principal office from QC to Tawi-Tawi. X, a SH, resides in a house exactly beside the office in QC. X is amputated in both legs. No, as in a close corporation, Section 104 provides that appraisal right may be exercised for ANY reason. X objected to the amendment of the principal office, as it will restrict and change his right as SH. 189 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia He has been diligently attending SHs meetings from the 1st one He further alleged, that if its office is moved to Tawi-Tawi, he can no longer attend. He explained that he once had an exgirlfriend in Tawi-Tawi, whose brothers threatened him that if he continues his relationship with their sister, they will cut off his legs. Eventually, they did and which caused his present state. On the other hand ABC claims that it will not change his right as an SH. May X exercise his appraisal right? Yes as the reason is due to fear, appraisal right may be exercised as it has a sound basis How right exercised Sec.81. How Right is Exercised; The dissenting stockholder who votes against a proposed corporate action may exercise the right of appraisal by making a written demand on the corporation for the payment of the fair value of shares held within thirty (30) days from the date on which the vote was taken: Provided, That failure to make the demand within such period shall be deemed a waiver of the appraisal right. If the proposed corporate action is implemented, the corporation shall pay the stockholder, upon surrender of the certificate or certificates of stock representing the stockholder9s shares, the fair value thereof as of the day before the vote was taken, excluding any appreciation or depreciation in anticipation of such corporate action. If, within sixty (60) days from the approval of the corporate action by the stockholders, the withdrawing stockholder and the corporation PJA cannot agree on the fair value of the shares, it shall be determined and appraised by three (3) disinterested persons, one of whom shall be named by the stockholder, another by the corporation, and the third by the two (2) thus chosen. The findings of the majority of the appraisers shall be final, and their award shall be paid by the corporation within thirty (30) days after such award is made. Provided, That no payment shall be made to any dissenting stockholder unless the corporation has unrestricted retained earnings in its books to cover such payment: Provided, further, That upon payment by the corporation of the agreed or awarded price, the stockholder shall forthwith transfer the shares to the corporation. Thus, the SH must: a) Vote against the particular act or transaction; and b) Is outvoted Q: XYZ Corporation is primarily engaged in construction. It has five (5) directors and only stockholders as well, A, B, C, D, and E, having Php5m each. The BoD during a meeting proposed the change of the primary purpose to realty, to which B, C, D, and E, while A dissented. Can A exercise his appraisal right? Assuming he can, what should he do? Yes, he may exercise his appraisal right. In order to do such, he must do the following: a) A must make a written demand of appraisal right, that he be paid fair value of shares within thirty (30) 190 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia days from interposing objection thereto; and b) Must surrender the stock certification for notation of such dissenting and for purpose of payment of shares. Q: Can the corporation pay at all times? No, as it can only pay if there are unrestricted retained earnings. Q: What will happen to the shares after they have been paid by the corporation? It will become treasury shares Q: At what point in time should the fair value of the shares be determined? a) Date of meeting interposed objection; b) Date of written demand; or c) Date of payment of fair value of shares Fair value shall be based on the day prior to the meeting when objection interposed Q: XYZ Corporation is primarily engaged in construction. It has five (5) directors and only stockholders as well, A, B, C, D, and E, having Php5m each. The BoD during a meeting proposed the change of the primary purpose to realty, to which B, C, D, and E, while A dissented. B, C, D, and E, agreed to the amendment as they know properties upon which the Tarlac-Pangasinan-Luzon Expressway (TPLEX) will pass through. On the other hand, A objected as he is the managing director, for he is a civil engineer by profession. PJA Thus on the 30th day of March went to the office and filed the written demand. Subsequently, it was determined that the fair value of shares is Php5m. However, there is no URE, as it used all its cash to acquire said properties, what will happen? If he cannot be paid within 30 days from agreement, his voting and dividend rights will be restored (NOTE: Exercise of appraisal rights results in suspension of said rights until payment of fair value) Q: Still on the same facts, a year later, XYX sold the real properties they acquired to the project manager of the TPLEX Thus, XYZ made Php105m in 1 ½ year. May the XYZ now, after acquiring URE, pay A the FMV of his shares, and later declare 100m as cash dividends to A?s exclusion? Yes, Corp may now pay A the fair value of his shares and declare the Php100m as dividends to A9s exclusion. A9s exclusion is justified as once appraisal right is exercised, it remains forever. While it is true that there are means to withdraw the appraisal right, it is wanting in this case. (NOTE: Even assuming he withdraws his demand for payment, the corporation would never consent&Belat mo kami naghirap) 191 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA Instances when status as stockholder restored and dividends may accrue in favor of dissenting stockholder At the option of the corporation, rights referred under such exercise may be terminated. The following instances restore status as stockholder dividend rights: Q: A exercised his appraisal right, however after six (6) months it is not yet paid. a) Demand for payment withdrawn, with the consent of the corporation; b) Proposed action: a. Abandoned; b. Rescinded; or c. Disapproved by SEC where such approval is necessary; c) SEC determines that SH not entitled to appraisal right; and Q: May a SH with unpaid subscription exercise appraisal right, considering that he must surrender stock certificate for notation that it consists of dissenting shares? Yes, as surrender of stock certificate is at the option of the corporation. Thus, he transferred it to by endorsing and delivering it to F. F goes to the corporation for notation and recording. What is the effect? The corporation will cancel the stock certificate of A and will issue new stock certificate in favor of F. The right of A on the other hand regarding the payment of FMV of his shares thereby ceases In line with this, the transferee, F, shall have all the rights as a regular SH, and all dividends shall accrue in his favor. Disagreement as to fair value of shares With the fact that a stock certificate is yet to be issued, the corporation is deemed knowledgeable about such fact. Q: X is a SH holding Php5m shares, but only paid 50% thereof. If X dissented, how much will be paid to him Only the fair value of amounting to the paid shares. shares Thus, only 50% of his shares shall be the subject of the payment of fair value. Q: What if the effect if SH fails to deliver stock certificate 10 days from demand? If after sixty (60) days from the approval of the corporate action by the SH, the dissenting SH and the corporation cannot agree to the fair value, it shall be determined by three (3) appraisers: a) One named by the dissenting SH; b) One named by the corporation; and c) One named by both appraisers referred above Q: Who pays the cost of appraisal? As a general rule, it shall be borne by the corporation. 192 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia However, as an exception, it shall be borne by the dissenting SH if the fair value determine by the appraiser is approximately the same as the price offered by the corporation. Q: Who pays the costs and expenses in cases of an action to recover the fair value in case of refusal by the SH to receive the same? As a general rule, as to when the dissenting SH is justified in refusing, the corporation shall bear such. However, as an exception, the dissenting SH shall bear such if he is TITLE XI: NON-STOCK CORPORATIONS PJA Yes, they may, but only for the purpose of furtherance of business or purpose. Thus, they cannot distribute it to their members as dividends. (CIR v. Club Filipino, Inc. De Cebu) Q: Will provisions governing stock corporations apply to non-stock corporations? As a general rule, when pertinent, it will apply to non-stock corporations However, as an exception, provisions on stock corporations shall not apply if it is specifically covered by Title XI on non-stock corporations Purpose/s of non-stock corporations Sec.86. Definition; For purposes of this Code and subject to its provisions on dissolution, a non-stock corporation is one where no part of its income is distributable as dividends to its members, trustees, or officers: Provided, That any profit which a non-stock corporation may obtain incidental to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized, subject to the provisions of this Title. Sec.87. Purposes; Nonstock corporations may be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agricultural and like chambers, or any combination thereof, subject to the special provisions of this Title governing particular classes of non-stock corporations. Right to vote The provisions governing stock corporations, when pertinent, shall be applicable to nonstock corporations, except as may be covered by specific provisions of this Title. Non-stock corporation are those corporation where no part of its income is distributed as dividends to their members (Binaliktad lang) Q: Can non-stock corporations make profit? Sec.88. Right to Vote; The right of the members of any class or classes to vote may be limited, broadened, or denied to the extent specified in the articles of incorporation or the bylaws. Unless so limited, broadened, or denied, each member, regardless of class, shall be entitled to one (1) vote. Unless otherwise provided in the articles of incorporation or the bylaws, a member may 193 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia vote by proxy, in accordance with the provisions of this Code. The bylaws may likewise authorize voting through remote communication and/or in absentia Q: How is the right to vote exercised in a nonstock corporation a compared to stock corporations? As a general rule, each member in a nonstock corporation is entitled only to one (1) vote. However, as an exception, it may be limited, broadened, or denied. Thus, the rule as to cumulative voting is as follows: GR: ER: NOT allowed May be allowed if bylaws provide, as the bylaws may broaden, limit, or deny voting rights of members (NOTE: In stock corporations, cumulative voting cannot be denied as it is a matter of right, and the denial of such will result in violation of the Doctrine of Limited Capacity) PJA But, as an exception to the exception, it is nevertheless available despite no provision in the by-laws, if the corporation is one vested with public interest. Thus, the rules is as follows: GR: NOT allowed; ER: Allowed, provide if by-laws EER: Allowed, even in the absence of by-law provision, if the corporation is vested with public interest Q: Can non-stock corporations have shares of stock? Yes, in the form of <club shares= (e.g. Manila Golf Club, Wack Wack Golf Club) Q: Is ownership of shares in non-stock corporation equivalent to being a member? No. One may be a stockholder, but not a member in a non-stock corporation. Rule as to proxy voting GR: ER: Allowed If the bylaws otherwise In the same way, one may be a member, but not a stockholder. provides Types of club shares Rule as to voting through remote communication and/or in absentia The following are the common types of club shares: As a general rule, it is NOT available. 1. Individual; for one (1) person 2. Partnership; for two (2) to four (4) persons; and 3. Corporate; for five (5) or more persons However, as an exception, it is available if the by-laws provide such. 194 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Effects of holding club shares Holders are normally corporations, and are entitled to nominate five (5) persons to be members. BUT THEY ARE NOT BEING NOMINATED AS STOCKHOLDERS. PJA Membership in a nonstock corporation and all rights arising therefrom are personal and nontransferable, unless the articles of incorporation or the bylaws otherwise provide. Thus, it is transferable personal and non- Rule as to transferability (NOTE: Atty. Ladia was then nominated by a client corporation to be a member of the Celebrity Sports Club, BUT NOT AS A SHAREHOLDER) GR: Non transferable ER: Transferable, if the AoI or BL provides Q: Considering that a non-stock corporation does not have the authority to distribute dividends Q: A is a stockholder and a member in XYZ Club, a non-stock corporation. His club shares indicate that it is transferable. Some may have bought shares only for investment He has been an active participant for the past twenty (35) years. As he has aged, he transferred his club shares and delivered his stock certificate to B, his driver. As an example, back then, shares of Wack Wack Golf Club was valued at only Php20,000.00 per share. Now, it is valued at Php30m per share. Php20k mo Php30m na ngayon. B sought registration. May XYZ refuse? Q: How does one then become a member? No, as a transferee, he has the right to compel corporation that the transfer be recorded to his name considering that there is a valid transfer It is determined by the qualifications set by the non-stock corporation concerned. Q: Is B now automatically a member, considering that his transferor A was a member, without need of any application? As an example, Senator Manny Pacquiao is a stockholder of Manila Polo Club, but NOT a member, as he is not qualified, baka kailangan matangkad. No, as it is still subject to admission by the corporation in accordance with the qualifications set in its AoI, bylaws, Rules and Regulations, and its board Nature of membership Sec.89. Non-transferability Thus, application is still needed to be a member of Membership; 195 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Q: A is a stockholder of XYZ Club. Sometime in 1966, he applied to be a member of XYZ. On the application form, it was stated that the <majority vote of members= are required to be a member. The action for the application was deferred up until 1977. It was only on 1978 that it was acted upon, but however, despite reaching a majority vote, it was disapproved, on the ground that a <unanimous decision= was not reached, in accordance with their rules. According to the members, a <unanimous vote of the members= is required even prior to A?s application, specifically twenty (20) years prior to the application. However, the amendment from <majority= to <unanimous= vote was not printed on the application form, for economic reasons Likewise, A?s letter of reconsideration grounded on the fact that the application form required only a <majority vote= was not acted upon. Is XYZ justified in refusing the application? No, while as rule, a nonstock corporation has a right to approve or disapprove proprietary membership, such right should not be exercised arbitrarily. The Court held that the failure to print due to economic reasons is a flimsy excuse, considering that XYZ is a well-funded corporation. (Cebu Country Club, Inc., et al. v. Elizagaque) (NOTE: In deciding the case, the Court applied Sec. 19 of the Civil Code) PJA Board of Trustees Sec.91. Election and Term of Trustees; The number of trustees shall be fixed in the articles of incorporation or bylaws which may or may not be more than fifteen (15). They shall hold office for not more than three (3) years until their successors are elected and qualified. Trustees elected to fill vacancies occurring before the expiration of a particular term shall hold office only for the unexpired period. Except with respect to independent trustees of nonstock corporations vested with public interest, only a member of the corporation shall be elected as trustee. Unless otherwise provided in the articles of incorporation or the bylaws, the members may directly elect officers of a nonstock corporation. Q: Can the board of a nonstock corporation only use <trustees= as its designation? No, as it can use any other appropriate name Thus, there is no provision barring a nonstock corporation to use <directors= as its designation Q: Is it required that a <trustee= be a member as well of the non-stock corporation? As a general rule, a trustee must be a member of the non-stock corporation. However, as an exception, independent trustees of corporations vested with public interest need NOT be a member. Term of office 196 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Trustees shall hold office for NOT MORE THAN three (3) years Rule as to election of corporate officers As a general rule, member may directly elect them However, as an exception, election may be made by other parties if the AoI or bylaws provides Rule as to place of meetings As a general rule, it should be held where the principal office of the corporation is located. However, as an exception, it may be held at any place even outside the corporation9s principal office, if the bylaws provide. Dissolution Sec.93. Rules of Distribution; The assets of a nonstock corporation undergoing the process of dissolution for reasons other than those set forth in Section 139 of this Code shall be applied and distributed as follows: a) All liabilities and obligations of the corporation shall be paid, satisfied and discharged, or adequate provision shall be made therefor; b) Assets held by the corporation upon a condition requiring return, transfer or conveyance, and which condition occurs by reason of the dissolution, shall be returned, transferred or conveyed in accordance with such requirements; c) Assets received and held by the corporation subject to limitations PJA permitting their use only for charitable, religious, benevolent, educational or similar purposes, but not held upon a condition requiring return, transfer or conveyance by reason of the dissolution, shall be transferred or conveyed to one (1) or more corporations, societies or organizations engaged in activities in the Philippines substantially similar to those of the dissolving corporation according to a plan of distribution adopted pursuant to this Chapter; d) Assets other than those mentioned in the preceding paragraphs, if any, shall be distributed in accordance with the provisions of the articles of incorporation or the bylaws, to the extent that the articles of incorporation or the bylaws determine the distributive rights of members, or any class or classes of members, or provide for distribution; and e) In any other case, assets may be distributed to such persons, societies, organizations or corporations, whether or not organized for profit, as may be specified in a plan of distribution adopted pursuant to this Chapter. Sec.94. Plan of Distribution of Assets; A plan providing for the distribution of assets, consistent with the provisions of this Title, may be adopted by a nonstock corporation in the process of dissolution in the following manner: a) The board of trustees shall, by majority vote, adopt aresolution recommending a plan of distribution and directing the submission thereof to a vote at a regular or special meeting of members having voting rights; 197 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia b) Each member entitled to vote shall be given a written notice setting forth the proposed plan of distribution or a summary thereof and the date, time and place of such meeting within the time and in the manner provided in this Code for the giving of notice of meetings; and c) Such plan of distribution shall be adopted upon approval of at least two-thirds (2/3) of the members having voting rights present or represented by proxy at such meeting Dissolution is done as there may be properties held by it, as to determine its destination. Q: Is dissolution in non-stock corporation the same with stock corporations? No, as some properties must be returned or given to other corporations. In contrast, stock corporations are to liquidate in order to pay their debts, liabilities, and ultimately distribute the remaining, if any, to its shareholders. TITLE XII: CLOSE CORPORATIONS The entirety of the provisions under the previous Corporation Code is retained in the Revised Corporation Code Sec.95. Definition and Applicability of Title; A close corporation, within the meaning of this Code, is one whose articles of incorporation provides that: a) all the corporation9s issued stock of all classes, exclusive of treasury shares, shall be held of record by not more PJA than a specified number of persons, not exceeding twenty (20); b) all the issued stock of all classes shall be subject to one (1) or more specified restrictions on transfer permitted by this Title; and c) the corporation shall not list in any stock exchange or make any public offering of its stocks of any class. Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least twothirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code. Any corporation may be incorporated as a close corporation, except mining or oil companies, stock exchanges, banks, insurance companies, public utilities, educational institutions and corporations declared to be vested with public interest in accordance with the provisions of this Code. The provisions of this Title shall primarily govern close corporations: Provided, That other Titles in this Code shall apply suppletorily, except as otherwise provided under this Title. Advantages of close corporations It keeps the business organization exclusively to a certain group of people Further, it limits liability to business traverses to the amount of subscriptions. Q: How many persons can hold shares in a close corporation? 198 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia It should be not more than twenty (20) Q: Do <persons= include anyone under the sun? No as it must be <specified persons= Thus, in order to be qualified to hold stocks in a close corporation, such person must be specified. Three (3) mandatory provisions PJA Thus, SHs are personally liable as they take an active part in management, EXCEPT if there is reasonably adequate liability insurance, as stated under Sec. 99(e) However, there is still a limited liability as to other corporate acts. Ultimate effect; It leads to another type of business organization, a de facto partnership with the corporate shell. The following must appear in the AoI: a) All issued stocks of all classes, exclusive of treasury shares, shall be held by not more than 20 specified persons; b) All of the issued stocks of any classes shall be subjected to one (1) or more specified restrictions; and c) Such shares shall not list in any stock exchange, or make any public offering of any stock of any class. Q: What if any one of them is absent? It shall be deemed as a close corporation, and thus shall not be governed by Title XII Identity of stock ownership and active management Most SHs, if not all, take active participation either as directors, officers, or partners in management. In other corporations, SH has no voice in management, as the BoD has the authority to do such. It has features of both a corporation and the partnership. Articles of Incorporation Sec.96. Articles of Incorporation; The articles of incorporation of a close corporation may provide for: a) A classification of shares or rights, the qualifications for owning or holding the same, and restrictions on their transfers, subject to the provisions of the following section; b) A classification of directors into one (1) or more classes, each of whom may be voted for and elected solely by a particular class of stock; and c) Greater quorum or voting requirements in meetings of stockholders or directors than those provided in this Code. The articles of incorporation of a close corporation may provide that the business of the corporation shall be managed by the stockholders of the corporation rather than by a board of directors. So long as this provision 199 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia continues in effect, no meeting of stockholders need be called to elect directors: Provided, That the stockholders of the corporation shall be deemed to be directors for the purpose of applying the provisions of this Code, unless the context clearly requires otherwise: Provided, further, That the stockholders of the corporation shall be subject to all liabilities of directors. The articles of incorporation may likewise provide that all officers or employees or that specified officers or employees shall be elected or appointed by the stockholders, instead of by the board of directors. Q: Is it required that a close corporation have a BoD? No, as they may do away with a BoD, and vest management in the SHs themselves. In effect, any one of them may bind the corporation Q: What is the relationship of the stockholders? They are deemed as partners between and among themselves Q: Is a corporation, designating itself as a close corporation, having 2/3 of its voting shares held by another corporation still considered as a close corporation? No, it shall not be deemed as a close corporation, and shall be treated as a stock corporation. Q: Is a corporation, designating itself as a close corporation, having 2/3 of its nonvoting shares held by another corporation still considered as a close corporation? PJA Yes, it is still a close corporation as what is held are merely non-voting shares. Q: Is a corporation, designating itself as a close corporation, having 2/3 of its voting shares held by another close corporation still considered as a close corporation? Yes, it is still considered as a close corporation. Purposes which cannot incorporate as a close corporation The following cannot incorporate as close corporations: a) b) c) d) e) f) g) Mining or oil companies; Stock exchanges; Banks; Insurance companies; Public utilities; Educational institutions; and Corporations declared to vested with public interest be Q: Why are banks prohibited to be close corporations? As under the General Banking Law, not more than 20% of voting stocks may be owned or held by relatives within the 3rd degree of consanguinity Q: Who determines if a corporation is vested with public interest? Under Sec. 176, the Congress determines such, based on the recommendation by the National Economic and Development Authority Q: Are the requirements set in Section 96 mandatory? 200 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia No, it is merely permissive, as it uses the word <may= Illustration of providing classification of shares As an example, a close corporation may opt to give a classification as to the shares, such as the following: a) Common A shares: a. Which can only be held by incorporators; and b. Relatives within 3rd degree of consanguinity; b) Common B shares; a. Can only be held by relatives within 3rd degree of consanguinity; c) Common C shares; a. Can only be held by incorporators9 business associates Illustration of restriction on transfers A close corporation MUST provide restrictions on transfers, as without it, it cannot be considered as a close corporation. (No restrictions = not a close corporation) As such, continuing from the above example, they may provide the following restrictions: a) Common A: a. Must be offered to other Common A shareholders before offered to the corporation; b) Common B: a. Must be offered to other Common B shareholders before offered to the corporation; c) Common C: PJA a. Must be offered to other Common C shareholders before offered to the corporation; d) In case existing stockholders refused the offer, only then can it be offered to other persons. (NOTE: <Other persons= must be eligible themselves, otherwise the close corporation may validly refuse registration) Illustration of classification of directors, and who may vote Likewise, a classification as to the number of directors from each class may be had. Still from the same example, they may opt to do: a) Common A: a. Three (3) directors from this class; b. Can only be voted for by A shareholders b) Common B: a. One (1) director from this class; b. Can only be voted for by B shareholders c) Common C: a. One (1) director from this class; b. Can only be voted for by C shareholders Q: Can cumulative voting be exercised? Yes, however it is a limited exercise as it will be restricted to the directors to be elected in their respective classes Thus, if X is a Common A shareholder, having 20 shares, and there are three (3) directors to be elected, he will have 60 votes. (20 shares x 3 directors) 201 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia By having different classes, there will be a guaranteed seat for each. Q: XYZ Corporation is a close corporation. Its AoI states that for purposes of investing in a corporation involving a purpose other than its primary purpose, the required vote shall be ¾ or 75% of the shares representing the OCS. With the intent to do such, XYZ garnered the vote amounting to 2/3 or 66.66%. As such they proceed to do so. However, the SHs of XYZ contests the validity of the corporate act, as the AoI states that ¾ or 75% is required to allow such. On the other hand, XYZ claims that 2/3 or 66.66% of votes is enough, as it is merely the number required under Section 41 of the Revised Corporation Code. Who is correct? The stockholders are correct. A close corporation is permitted to increase the quorum and/or voting requirement. Effect of permitting a greater number of quorum and/or voting It increases the veto power of the minority SH, as it will be harder to validate a corporate act Q: Can they provide for a lower quorum and/or voting requirement? No, the provision only allows for a <greater= quorum and/or voting requirement. Q: Proceeding from the fact that ultimately the SHs may have all the investment, it must transfer the PJA management of the business to the BoD, will it absolutely apply in a close corporation? No, as the AoI may provide that business may be managed by the SHs rather than the BoD Q: What is the effect if the close corporation opts to place the management in the hands of the SHs? The SHs shall still be deemed as directors themselves, which shall be subject to all rights and liabilities of directors Q: Considering that liability of directors shall apply in case management is transferred to SHs, is the extent the same as compared to directors in stock corporations? No, as SHs managing close corporation are personally liable, thus more extensive (EXCEPT, of course, if there is a reasonably adequate insurance) As compared to liabilities of directors in stock corporations, directors may be held liable ONLY IF the transaction is fraudulent, acted in bad, faith, or with gross negligence Q: Considering that in stock corporations the BoD shall elect the corporate officers, will such rule absolutely apply in close corporations? No, as the AoI may likewise provide that they shall be elected by the SHs Limitations on restrictions on transfers Restrictions cannot be more onerous than granting existing SHs and/or corporation itself the preferential right 202 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia to purchase the shares within reasonable period of time, under certain conditions or terms. And thus, upon the expiration of period, the option was not exercised, the SH may now transfer to any other party Remedy in case of breach of restrictions Sec.98. Effects of Issuance or Transfer of Stock in Breach of Qualifying Conditions; a) If a stock of a close corporation is issued or transferred to any person who is not eligible to be a holder thereof under any provision of the articles of incorporation, and if the certificate for such stock conspicuously shows the qualifications of the persons entitled to be holders of record thereof, such person is conclusively presumed to have notice of the fact of the ineligibility to be a stockholder. b) If the articles of incorporation of a close corporation states the number of persons, not exceeding twenty (20), who are entitled to be stockholders of record, and if the certificate for such stock conspicuously states such number, and the issuance or transfer of stock to any person would cause the stock to be held by more than such number of persons, the person to whom such stock is issued or transferred is conclusively presumed to have notice of this fact. c) If a stock certificate of a close corporation conspicuously shows a restriction on transfer of the corporation9s stock and the transferee acquires the stock in violation of such restriction, the transferee is conclusively presumed to have notice of the fact that the stock was acquired in violation of the restriction. PJA d) Whenever a person to whom stock of a close corporation has been issued or transferred has or is conclusively presumed under this section to have notice of: (1) the person9s ineligibility to be a stockholder of the corporation; or (2) that the transfer of stock would cause the stock of the corporation to be held by more than the number of persons permitted under its articles of incorporation; or (3) that the transfer violates a restriction on transfer of stock, the corporation may, at its option, refuse to register the transfer in the name of the transferee. e) The provisions of subsection (d) shall not be applicable if the transfer of stock, though contrary to subsections (a), (b) or (c), has been consented to by all the stockholders of the close corporation, or if the close corporation has amended its articles of incorporation in accordance with this Title. f) The term <transfer=, as used in this section, is not limited to a transfer for value. g) The provisions of this section shall not impair any right which the transferee may have to either rescind the transfer or recover the stock under any express or implied warranty. Q: X holds 20 Common A shares in ABC Corporation, a close corporation. ABC has a total of 20 SHs X wants to sell his shares, thus, in accordance with the restrictions provided by ABC, he first offered it to the other Common A shareholder, but no one opted, and then offered it to ABC, but is not willing to. 203 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Thus, X transfers it to Y and Z with 10 shares each. Y and Z are neither incorporators nor relatives. Will Y and Z have the same right to compel registration? No, the close corporation can validly refuse its registration, because it violates the conditions provided in the AoI, bylaws, and stock certificate. Presumption as to transferee?s knowledge of ineligibility As a general rule, the transferee is conclusively presumed to know ineligibility However, as an exception, the presumption shall not apply if ALL the SHs CONSENTS THERETO Q: Assuming that ALL the SHs consented to the supposedly disqualified transferees? eligibility, what should the corporation do? Subsequently there must amendment of the AoI be an Q: Assuming that it was allowed, and the AoI has been amended, what then would be the effect? ABC Corporation shall now cease to be a close corporation, considering that it will now have 21 SHs. It shall now be deemed as a stock corporation. Q: Assuming that the corporation did not consent thereto, what is the remedy of the transferee? He may file an action for rescission, which will result to mutual restitution PJA Q: Considering that restrictions may likewise allowed in stock corporations, is the rule on where should it appear to be valid the same with close corporations? No, as in stock corporations, it shall be sufficient that it appears in the following: a) AoI; and b) Stock certificate While in close corporations, it should appear in: a) AoI; b) Stock certificate; AND c) Bylaws Agreements Sec.99. Agreements by Stockholders; a) Agreements duly signed and executed by and among all stockholders before the formation and organization of a close corporation shall survive the incorporation and shall continue to be valid and binding between such stockholders, if such be their intent, to the extent that such agreements are consistent with the articles of incorporation, irrespective of where the provisions of such agreements are contained, except those required by this Title to be embodied in said articles of incorporation. b) A written agreement signed by two (2) or more stockholders may provide that in exercising any voting right, the shares held by them shall be voted as provided or as agreed, or in accordance with a procedure agreed upon by them. c) No provision in a written agreement signed by the stockholders, relating to 204 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia any phase of corporate affairs, shall be invalidated between the parties on the ground that its effect is to make them partners among themselves. d) A written agreement among some or all of the stockholders in a close corporation shall not be invalidated on the ground that it relates to the conduct of the business and affairs of the corporation as to restrict or interfere with the discretion or powers of the board of directors: Provided, That such agreement shall impose on the stockholders who are parties thereto the liabilities for managerial acts imposed on directors by this Code. e) Stockholders actively engaged in the management or operation of the business and affairs of a close corporation shall be held to strict fiduciary duties to each other and among themselves. The stockholders shall be personally liable for corporate torts unless the corporation has obtained reasonably adequate liability insurance. Meetings SEC. 100. When a Board Meeting is Unnecessary or Improperly Held; Unless the bylaws provide otherwise, any action taken by the directors of a close corporation without a meeting called properly and with due notice shall nevertheless be deemed valid if: a) Before or after such action is taken, a written consent thereto is signed by all the directors; or b) All the stockholders have actual or implied knowledge of the action and PJA make no prompt objection in writing; or c) The directors are accustomed to take informal action with the express or implied acquiescence of all the stockholders; or d) All the directors have express or implied knowledge of the action in question and none of them makes a prompt objection in writing. An action within the corporate powers taken at a meeting held without proper call or notice is deemed ratified by a director who failed to attend, unless after having knowledge thereof, the director promptly files his written objection with the secretary of the corporation. Q: Considering that stock corporations must call the meeting properly and give due note in order for the corporate act be valid, is the rule absolutely applicable in close corporations? No, as directors may validly act without a meeting or the there is a failure to meet the conditions necessary for a meeting, under the following circumstances: a) Written consent signed by ALL directors, before or after the meeting; b) ALL SHs: a. Have knowledge: i. Actual; or ii. Implied; AND b. Made no written objection; c) BoD are: 205 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA a. Accustomed to take informal action; AND WITH b. ALL SHs acquiescence: i. Express; or ii. Implied d) ALL directors: a. Have knowledge: i. Express; or ii. Implied; AND b. Made no written objection Effect; no denial, right of pre-emption in CC would be absolute (NOTE: In stock corporations, directors must sit and act as a body at a duly constituted meeting, with proper notice given to stockholders, in order for the corporate act be valid.) In addition to all other rights, any SH of CC may for any reason compel corp to buy his shares which would not be less than par or issued value, PROVIDED CC has sufficient assets exclusive of capital stock (104) Effect to absent director in case of a act within the corporate powers taken at a meeting without proper call or notice v. SC, SH cannot get back his investment except appraisal right or sale of shares As a general rule, it is deemed that the absent director ratified the corporate act Appraisal right can only be exercised in specific instances However, as an exception, it will not be deemed ratified if the absent director submitted a written objection to the corporate secretary after having knowledge thereof. Pre-emptive right (38) Exceptions in 38 CC; DOES NOT APPLY Nothing in provisions of Title XII bars foreign corp from denying pre-emptive right GR: SC will apply to CC 101; even for money, property, or payment of debts, may exercise his pre-emptive rights Shares issued in compliance&not apply (95(3)) there9s no such thing as public issuance in CC 104 does not require URE, only sufficient assets to cover debts and liabilities. Cannot use capital stock to pay shares of withdrawing SH e.g. Assume CC has capital stock of 10m (cannot be used to pay withdrawing SH shares in SC , except redeemable shares or deadlock or if SH compels CC payment of fair value of shares ) 1m profits 500k liabilities 500k reserve (for rise of gasoline) Effect to 1m, restrited AoI may deny preemptive right SC; cannot acquire shares whether appraisal or whatever If no denial; instances in 38 does not apply CC; can still pay FMV because it can use the reserve (Not capital) 206 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Amendment of AoI 102; special provision 96; to provide for greater quorum and requirements in both SH or D meeting Balance of control oftentimes precarious due to provision results in deadlock (103) e.g. ¾ required, tall order, deadlock remedy? 103 PJA Misuse and misapplication corporate funds of Minority SH petitioned Dissolution SC; Dissolution not warranted, there is still legal remedy, to go against corporate officers or directors (30) This is an SC If CC? Granted, any act. CC v. SC (16 differences) Grants proper forum a very wide discretion in the management of CC Prohibits D/SH performing, or cancelling any provision, or bar implementation of any resolution, or even require SH to sell his shares to corporation IRRESPECTIVE of URE, or even dissolve or kill the CC *BJR does not apply is not included in book Rights of transferees also not included (RBS v. CA) CC can deny if breaces conditions and restriction Cases applying and misapplying Title XII San Juan Structural Steel and Design v. CA Also, provisional director that may be appointed may break deadlock by casting deciding vote SC; Husband and wife own 99.8% of OCS does not make it a CC Provisional director; extension of the court, appointed by the court In order to be a CC, all the 3 qualifying provisions must be present Isn9t it that the court cannot interfere (business judgment rule)? BJR may not apply, because court has wide discretion Dissolution of CC; grounds are more extensive than any other stock corporation Any act prejudicial to any SH, wastage, misapplication of funds, or mere dishonesty Petition of any one single SH Manuel Dulay v. CA Counsel for Dulay is Ladia9s classmate, asked him if they can argue that Dulay is a CC, because SH belongs to one single family except corporate secretary good friend of patriarch, Manuel Dulay He asked to bring files He checked, no one single provision required to be indicated is present in AoI, not a CC Republic v. Visayan 207 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Sale of property was made by President, manager, general manager, and treasurer. Executed, Virgilio Dulay was a witness to the deed of sale, and also questioned the validity of the sale. However, no written objection thereto after acquiring knowledge thereof PJA In Dulay; could have cited Concept Builders v. NLRC, Dulay had absolute control of Dulay Enterprises (Piercing of the veil, shares of children arose solely from ascendant) Corps involved are not CC Lopez Realty v. Contentia SC; applied 100, any resolution passed by the board may nonetheless be valid if the absent director does not formally file objection to corp secretary after having knowledge thereof. Court ruled that it was valid. Although not a CC, the SC believed him Naguiat v. NLRC Clarkfield taxi INC, family owned corporations. CFTI was phased out and terminated taxi drivers Complaint filed against Naguiat Enterprises, arguing separate and different from CFTI. SC; Naguiat not the employer, rather CFTI, and Naguiat separate Conceded, both are CC, applied 99(e) SH who take active participation in management of CC are personally liable, thus Sergio can be held liable Ladia; supposed 2 corporations are not CC, organized in 50s, how could they have known the requirements of CC, Corporation Code became law 1 May 1980, and the AoI of both, not having any one provision required is present. However, even if did not misapplied, same decision could have been raised Estoppel An actuation by the corp that was improperly held or conducted may be ratified expressly or impliedly or even by way of estoppel Asuncion not notified of meeting knew of BR, granting gratuity pay to EEs She was in fact the very same person who signed first 2 vouchers, paying gratuity pay arising out of questioned BR She is in estoppel Naguiat v. NLRC Uichico v. NLRC, when corporate directors or corporate officers liable even if acting for and in behalf of corporation In labor cases, the person or officer who terminates EEs done in bad faith is personally or solidarily liable with the corporation SPECIAL CORPORATIONS TITLE XIII There are 2 corporations: types of special Educational Religious 208 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA Sec.105; Educational May a foreigner be a member of the board of educational institution Are governed by special and general provisions of this code Commonwealth Act 2076, known as the Education Act Art XIV of Constitution; educational institutions (other than, established, religious order, mission boards, charitable organizations) owned solely by Fil citizens now Once formed or organized as such, they must incorporate within period of 90 days from recognition as institutions of learning Failure to do so; not immune from being sued as a corporation (Chiang Kai Shek v. CA) Favorable recommendation of agencies concerned must first be secured Exception to the rule that foreigners cannot be members of governing board (RMC) SLU President and chairman of BoD, Belgian Priest Dep Ed Culture and Sports; lower ed Dep of Higher Education; higher LEB; law education SLU organized by Belgian missionary board Grace Christian HS of QC Governing board Organized by charitable organization GR; Is not less than 5, but not more than 15 Earlier, president and chairman, naturalized American citizen 5, 10, 15 British School for Term of office Majority of them are British nationals May exceed 1 year (106) UST/ Beda May serve for a term of 5 years, UNLESS BL requires otherwise However, classify themselves, 1/5 shall expire every year Religious organization, foreigners sitting in board have Religious corporations Kinds Stock educational corporations Provisions corporations (22(2)) of shall Sole (107); and Religious societies stock apply Sole 209 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia 1 individual or person only NOT any person may form or organize, must be Priest; Bishop Archbishop Rabbi Minister; or Have religious denomination sect or churh Formed and organized for administering and managing the affairs, property, and temporalities of a particular religious organization, sect, or church PJA Same powers, rights, authority to own hold or acquire properties, even sell, just like any other corporation? Owning/holding; yes Alienation/disposition of real properties; No, unless proper court authority (ONLY REAL PROPERTIES) e.g. Corp sole has a van using for 10 yrs, head opts to sell the van and the proceeds will be used to pay as dp for the new van, is a court order required? No, as it is not a real property HOWEVER, if its R and R as to mode of disposition of real property is provided, court order is not required When acquires juridical personality From and after filing of verified AoI with the SEC Will the registration of property unto corporation vest upon the owner the ownership? (107) It is an exception to the rule of existence upon issuance of CoR/I from SEC No, they will act as trustee (other corporations with juridical personality without issuance of CoR/I Head merely acts trustee/administrator thereof It devolves upon the church as Roman Apostolic Church v. LRC Created with own charter (Congress); Those issued by HIBC, (Home owner9s association) Bureau of cooperatives as to its cooperatives Corporation by estoppel (unregistered corporation) WoN the RCC has a nationality SC; a corporation sole has 1 person only, and successors who will always be 1 at a time in some particular station, who are incorporated by law in order to give them legal capacities and advantage, particularly that of perpetuity, which natural person cannot Sole person, NOT owner of church properties, but merely a guardian or administrator thereof 210 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia RCC has no nationality, framers of Constitution did not have in mind corporation sole, when they provided that 60% of capital stock must be owned by Filipino Citizens Director of Land v. PJA Person authorized Discipline or Rules of In the meantime? Succerssor to transact must file with SEC Election or appointment assent of religious denomination, sect, or church CA May it be dissolved despite perpetuity? Right of corporation to register land in its own name Under old constitution can only hold or lease Historical right of corporation to register lands Meralco v. Bartolome to Republic v. Villanueva; corporation cannot apply for registration, alienable public land Decided 2 months after Villanueva Villanueva; Teehankee wrote dissenting opinion, citing Public Land Law, alienable public land is converted to private property if the same is held by the possessor or his predecessor in interest, OCENPO for a period of 30 years ipso jure Adopted Teehankee Yes, ONLY through verified declaration of dissolution (NOT judicial act or decree or involuntary dissolution) Doctrine of separation of church and state Exception; police powers, may be by judicial e.g. being used as a front for prostitution or manufacture of drugs, the State may exercise police powers Religious societies, read provisions One person (115-131) Title XIII Ch 3 New provision, primarily governed by title III supplemented by provisions of code OPC, must be appended in the corporation name Republic v. IAC Determination of character of land must be made to determine registrability Lone or single individual or person, only natural, trust, or estate, may form an OPC Public domain; cannot It cannot be formed for any business activity (banks, quasi banks, etc&) Private land; would not apply Practice of profession? No, EXCEPT provided by special laws Vacancy of head (112) prohibition 117; No minimum ACS 211 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Except otherwise provided for by special law PJA one of them or agreed that State shall be the single SH of OPC AoI (40) plus 126; Change of N or AN at anytime If single SH is trust or estate, the name and nationality and residence of trustee, administrator, executor, guardian, conservator, custodian or other person exercising fiduciary duties with proof of such authority Also, the NNR of the nominee or alternate nominee in the extent or coverage of this authority 119; It is not required to adopt and submit BL Since sole SH, then sole Director, and at the same time the President, as the latter must be a director GR: ER; President cannot be corporate sec or treasurer at the same time OPC, may be self appointed treasurer 130; IMPORTANT; liability of single SH SH has burden of affirmatively showing that there is adequate finances (There is no minimum capital) If he can9t prove that property is independent of SH personal property, the SH shall be jointly and severally liable for the debts and liabilities of the OPC Piercing shall apply with equal force and effect to OPC 131; Conversion from ordinary corporation to OPC Secretary? No, as special functions under 123 When single SH acquires all the stocks of an ordinary corporation, he MAY apply for conversion of ordinary to OPC 124; Resignation of a nominee and alternate nominee with written consent OPC converted to ordinary corporation shall succeed the latter To take the place of single SH in case of death or incapacity Legally responsible for ordinary corporation9s outstanding liabilities as of date of conversion With the extent and limitation of their authority to manage the corporate affairs Inclusive of the term of N or AN If temporary; retains capacity until OPC If death or permanent; until heirs of OPC have been determined and designated 132; Conversion of OPC to ordinary stock corporation After due notice to SEC and within 60 days from occurrence of circumstances leading to conversion, the State settled or legal heirs determined, it shall be converted to ordinary stock corporations 212 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia DISSOLUTION, WINDING LIQUIDATION (TITLE XIV) UP, and Dissolution Extinguishment of corporate franchise Termination of corporate existence PJA PNB v. CFI PNB and the Phil Blooming Mills, entered into a contract of lease for 25 years, extendible for another 20 years, at the option of the lessee (PBM) January 1952, term of 25 years, expires on 1977 Ways: Expiration of its corporate term Voluntary surrender of franchise Revocation of franchise (involuntary dissolution) PBM introduced buildings, machineries and other improvements with PBM granted the right to remove them before the termination of the lease. 133; Mentions only 2 methods, voluntary and involuntary This is probably true as expiration may be considered voluntary mode, considering the intention of SH that it shall exist for such period The term of existence of PBM expired, and dissolved, without the improvements having been taken out SC; when period expires, corporation ceases to be a body corporate, for the purpose of continuing the business for which it is organized. In perpetuity Only a general rule, as it is not barred to provide term If they so provide, they seize to exist, and deemed automatically dissolved upon expiration of term, SUBJECT to extension (11 and 37) or amend its AoI to make it perpetual. In these cases, corporation continues to be possessed with juridical personality and may carry out its business upon period granted to it by virtue of extension Extension should however be made prior to the expiration of the original term, otherwise, will be considered ipso facto dissolved There is no need to institute a proceeding for quo warranto to determine date and time of the dissolution, as the period of corporate existence is provided for in the AoI With the period expired without any extension, it is deemed automatically dissolved in sofar as continuation of business is concerned (Parang tao din yan, <Lord 50 years masaya na ko=, 50 years ka na ngayon, punta ka na kay Lord, pwede pa po ba 50 yrs pa. Pa extend ka na (SEC) kasi bukas patay ka na. Eh sabado ngayon, sarado SEC, paano ka ngayon? Patay ka na? Di namaaaan, pwede naman amendment through electronic means) Failure to lessee to remove improvements before lease terminated 213 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia amounts to waiver, it is the contract between the parties, 1678 will not apply where reimbursement is allowed, as there is a contract Sec.11. Corporation whose term expires, may apply for revival Within 3 years from (liquidation period) expiration After 3 years? Corporation cease to exist, for all purposes Voluntary dissolution Modes; No creditors affected (134) Creditors affected (135) Shortening of corporate term (136, equivalent to amendment) No creditors affected Majority vote of BoD Majority of OCS/M Notice 20 days prior to the meeting, Publication, once prior to date of meeting Verified request for dissolution with copy of resolution authorizing the dissolution certified by majority of BoD, countersigned by corporate secretary with proof of publication Supervised corps; fave recommendation Within 15 days and in the absence of withdrawal, certificate of dissolution issued, effects only upon issuance Dagohoy Enterprises Other steps administrative or judicial is required PJA Creditors are affected Petition filed with the SEC Verified by president or secretary or any other director setting forth all claims and demands against it Approval of at least 2/3 of OCS/M at a meeting called for that purpose Reasons for dissolution Form manner and time when notices were given Date place and time of the meeting Verified request for dissolution with copy of resolution authorizing the dissolution certified by majority of BoD, countersigned by corporate secretary With the list of all creditors Publication 1/3 Posting intention to dissolve in 3 public conspicuous place Petition sufficient in form and substance, SEC set date when objections may be filed which shall not be more than 60 days nor less than 30 days after entry of& Publication 1/3 Posting intention to dissolve in 3 public conspicuous place Hearing, judgment directing disposition of assets as justice may require, or may appont a receiver Receiver not mandatory Banking v. Michelin) (China Intent, no occasion for appointment except under special circumstances and upon clear showing Shortening of corporate term 214 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA e.g. 25 years ago registered, 50 years existence. after payment of liabilities shall upon petition of SEC in appropriate court shall be forfeited to national government AoI amended, to shorten, shall exist for a term of 25 years, effectively dissolving the corporation SEC reasonable notice and coordinate prior to involuntary dissolution Upon expiration of shortened term, deemed dissolved, without any further proceeding Refusal to comply to SEC, violation of provisions (158), gross mismanagement in conduct of close corporations, deadlocks dishonesty, any act prejudicial to interest of any SH, violations of special laws ground for involuntary dissolution (Foreign Investment Act, Insurance Code, SRC) Withdrawal of request of petition (137) In writing No later than 15 days from receipt of request for dissolution After? No longer withdrawn Form? Motion Ways Judicial Administrative 138; Involuntary dissolution Extreme remedy Filing of a verified complaint by any interested party Most cases, not given Or motu proprio on grounds provided by law: If natural persons, tantamount to death penalty Non use of charter (21) Continuous inoperation (21) Upon finding in final judgment, incorporation through fraud, Concealing or aiding the omission of securities violation in the sale of shares of stock Smuggling Tax evasion Money laundering Graft and corrupt practices Committed or aided in commission of any of the above If the corporation9s owner absolved on the above grounds (b?e?) its assets Gov9t v. Phil. Sugar Estates Buying and selling of real properties, selling to Manila Railroad (Gov9t) Not authorized AoI (Doctrine of limited capacity) SC; Court9s proceed with extreme caution in case of forfeiture of corporate profits, only allowed in: Express limitation; Plain abuse of&purpose Violation of charter, dissolution will be granted 215 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA In this case, purpose was to enrich itself at the cost of taxpayers properties, may be disposed to whoever they want YET the court did not order absolute, rather conditional dissolution, cease and desist within 6 months, if not, dissolved Rep v. Security Credit Gov9t v. Abrogar Quo warranto; Illegal holding of title of properties in excess of 5 years. After property bought in foreclosure sale Then law, Financial institutions acquire properties used as collateral for a loan, shall be disposed 5 years after they bought it There is a showing interest by Phil. Sugar in estate for speculative purposes at the time action instituted El Hogar Disposed many institution of case Quo Warranto, SC engaging in banking business without Central Bank9s authority Engaged in propaganda resulting in opening of 59,000 SC; dissolution, corporation violated by engaging in banking without securing authority Continuance, substantial injury to the public Deposits must be insured with the PDIC (Savings Bank) Rep v. Visayan Transportation business months after SC; Corporation violated law, equally obvious, conduct is not in contempt of law NOT fault of El Hogar that it could not dispose properties in time, as gov9t attributable for failure to issue title within reasonable period Beyond powers of corporation, but not an abuse of power that constitutes or threatens substantial injury to the government Falsely reconstituted AoI, included new purposes lumber, agriculture, gen merchandise, mining Misappropriated funds Minor SH proceeding instituted dissolution Lower court denied, affirmed by SC SC; Corporate act or omission complained of did not result to substantial injury Dissolution not warranted, merely enjoined Misapplication of funds committed by officers, that they may be held personally liable, voting or assenting& Cancelling shares; patent nullity, cannot be enforced even by directors. They are personal Dissolution awarded only if no adequate remedy is available to SH, 216 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia NOTE; if close corporations, decision of court different, FOR ANY ACT (broader), thus a single SH may suffice Any person in interest can institute dissolution proceeding before proper forum PD 902 SEC and RA 8799 special commercial court involving intracorporate disputes (between or among SH, Directors,..), corporation and State insofar as the right to exist, and all the grounds for dissolution is strong or serious misrepresentation to do what it is doing, to the damage of the investing public PJA Dissolved 25 years, secondary franchise still has a period. However it is terminated as well Contract executed prior to dissolution for purpose of continuing business Even without state, equity, for the benefit of SH and creditors Termination of juridical entity, does not imply extinction of obligations (Gonzales v. Administration) rights and liabilities not extinguished by dissolution (184) No rights or remedies for or against the corporation&shall be affected by the subsequent dissolution Sec.5(m) RA 8799 SEC concurrect jurisdiction and or revoke after proper notice or hearing the franchise or Certificate of Registration upon any ground provided for by law Hall v. Piccio (1950) De jure corporation may be terminated in a private suit, between SH, without intervention of State (intracorporate) e.g. Lease by or to a corporation, terms, terminate ceasure of corporation, survives death of contracting parties, Personal services, deemed terminated, implied condition such contract terminates upon eventuality Body corporate for 3 years for purpose of liquidation and winding up (139) Expiration of 3 year period, ceases to exist for all purposes can no longer sue and be sued Sec. 138 Buenaflor By any interested party even creators can institute against the corporation Dissolution not only terminates private franchise to be a corporation, including exercising other transactions Terminates power to enter into contract e.g. Secondary franchise, recruitment, 50 years Filed application to operate cold storage. Opposed by Camarines Industry, filed similar application Buenaflor, moved to dismiss, 4 years earlier existence CI expired CI registered new AoI, and assigned all its assets and rights to new CI 217 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Certificate of Convenience issued to CI PJA Corporation dissolved, winding up ensues (139) liquidation and Collection of all corporate assets, properties, SC; 1953, dissolved, CSI seized to exist, could not lawfully continue its business. For payment of debts and liabilities Applied 1957, no longer personality to sue or be sued If any remains, distribution of its assets to its SH in accordance to proportionate interest PSC directed to award certificate in favor of Buenaflor (Preferred shares; before any other SH) Cebu Port Labor Union CBLU filed stevedoring for recognition of Motion to dismiss, 1952 CBLU was dissolved, no personality to enter into a contract SC; Stevedoring contract cannot be enforced with CBLU, even within 3 year period as it does not include continuing business Gonzales EO abolished Phil Sugar Comission, and made Phil Sugar Regulatory, the former transferred its assets and property to the latter Gonzales filed a complaint for sum of money SC; Dissolved corporation cannot deny substantive rights, after being taken over by successor (If not consti, 184 will be sufficient to arrive at same conclusion, no rights or remedies for or against the corporation& shall be affected by the subsequent dissolution) Period; 3 years to effect liquidation 3 year period absolute? No Modes: Corporation itself, through BoD; Trustee or assignor appointed by corporation to undertake liquidation; Appointment of receiver or liquidator 1st mode No express provision or authority, or prohibiting BoD from undertaking the liquidation of corporation Power of BoD to manage corporate affairs, includes liquidation. Period; 3 years to finish Claims for or against the corporation NOT filed will become unenforceable, as there is no more corporate entity. Actions pending for or against the corporation after 3 years are ABATED, as after period, corporation ceases to exist for all intents and purposes 2nd mode 218 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia 3 year period will NOT apply, provided the designation is made within that period GR: No time limit; ER: Time limit under Deed of Trust PJA 1927 dissolution granted, with appointment of assignee to liquidate Somera assigned, 1936 file recovery of sum against Valencia. Valencia claims prescription May still sue after period Should the BoD use 1st mode, at any them within period, use 2nd mode SC; Assignee may bring action even beyond the 3 year period. Board of Liquidators v. Kalaw rd 3 mode Appointed by proper forum, via petition or motu proprio upon dissolution 3 year period does not apply, substituted by receiver or liquidator who will sue or be sued even after period. National Abaca v. Court WoN an action commenced within 3 year period may continuo after expiration thereof SC; pending actions by or against the corporation in its corporate name, are abated. Suit against Kalaw, instituted by NaCoCo EO abolished NaCoCo, with a provision that it will continue as a body corporate for another 3 years from effectivity of the order& Appointed BoL to liquidate. Collection case never finished within 3 years. Motion to dismiss SC; No time frame for trustor or assignment to finish case, even beyond period Elago v. CA HOWEVER, the action may be continued by the trustee, to whom the corporate properties are conveyed, even beyond the period. Sec.139(2) effect of conveyance to make trustee the legal owner of properties or rights, subject only to beneficial right of SH and creditors Collection of Sum of Money against Elago Corporation dissolved 1960 shortening corporate torm. by 1964 after dissolution lower court rendered decision in favor of Corporation Somera v. Valencia May Corp prosecute beyond 1922 corporation exist SC; Trustee is understood in general terms, hence even including its 219 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia counsel, who prosecuted and defended, may be considered as its trustee. Tiokabio v. IAC In this case, registered 1905. did not convert, 1955 supposed to be dissolved, WoN Corporation dissolved may during the 3 period transfer its assets to other corporation that would continue business SC; Liquidation, should be the sole activity. It is not however, unlawful to transfer with the consent of 2/3 OCS to transfer all its assets to a new one (Sec.39) Transfer of all or substantially of all& It is not unlawful for the BoD with the consent of 2/3 OCS to transfer its assets within 3 year period Clemente v. CA Sociedad Anonima, corporation PJA precursor of Plaintiff, heirs of some SH, claim ownership of property left behind, more than 40 years after dissolution. SC: Petitioners failed to substantiate claim of ownership. Termination of the right of juridical entity does not by itself cause the extinction or diminution of the rights and liabilities of such entity (Gonzales) Nor those of its owners or creditors If 3 year period without a trustee (Elago), may be permitted to do so to continue as trustee by legal implication Pecuniary interest in the corporate assets not only SH also creditors, may make proper presentation with the SEC, which is primary with matters of this jurisdiction. Engaged in cockfighting No known creditors, directors, SH. Acquired land in the fort. It was allowed. Higher court acknowledged its being defunct (This is an absurd decision, 40 years after, if this is the case then there would be no escheat proceedings. Cited cases are misplaced Right to exist, 50 years, in 1907 corporation law came into being, and from then on no more sociedad anonimas were registered and those existing were granted the right to convert as a corporation be governed by the corporation law or continue to exist as such, be governed by Code of Commerce. Some converted to corporations Gonzales, there is a successor corporation SRA, absorbed assets, no successor here Elano, there was a lawyer who prosecuted, in this case no lawyer What will the SEC do? Can only apply provisions, hence escheat 220 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia It is more appropriate, to direct sitio or municipality concerned to proceed to escheat proceedings) TITLE XV; Foreign Corporations PJA In so far as Philippines is concerned, it is a FC Filipinas v. In times of war, the control test is applied 140; FC One formed, organized, or existing under any laws other than those of the Philippines And whose laws allow Filipino citizens and corporations to do business in its own country or state Not an accurate inclusion of definition Any corporation registered or organized under laws of another State is necessarily a FC To do business herein If business is not allowed in the other state, the Philippines as well will not. Any corporation owing its existence in another state is a foreign corporation Test; 103 incorporation test, place of incorporation, irrespective of nationalities of the SH. e.g. Retail trade has Php2m or more, it can be held by foreigner, FC? No, as registered in the Philippines California registered, all incorporators and SH are Filipino immigrants, status? Nationality determines corporation of the controlling nationality SH of For purposes of national security Control test Shares belonging corporation/partnership to a 60% owned by Filipino Citizens, Philipinne National EXCEPTION Grandfather rule If percentage is less than 60%, only number of shares corresponding to such percentage shall be considered as Philippine Nationals e.g. 100k shares 60% belong to Filipino citizens = owned by Filipinos If less than 60% = example 50%, only the 50% shall be recorded as belonging to Filipinos Narra Nickel Mining v. Redmont NNM , Tesoro Mining, and McArthur Mining, is engaged in mining of coal MMDI, Canadian corporation, investor. SH as to 39.9% in each of the three. SC; 60/40 shall be considered Filipino 221 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia If there is no doubt as to who is beneficial ownership and control of corporation PJA General Corporation Case Service of summons (135) No more need to dissect nationality and ownership FC must agree and stipulate that it if has no RA, service must be made to the SEC (135) If doubt? Grandfather rule shall apply Issue; X, Y, Z, corporations, invested in NNM, TN, and MM, respectively. MMBI holds 39.9% of shares in each of the investors Control test? No, as there is now a doubt. The Court held violation of nationalization laws considering the investments to X Y Z, thus amounting to more than 60% In toto, it has 62%, and thus a FC, and thus cannot engage into mining. Corporations have no legal existence beyond the boundaries of&by which it was created Juridical existence of corporation confined to territories of State of incorporation No legal existence beyond such territory. The State therefore may restrict its right of FC to engage in business within its limits, and to sue in its courts But by virtue of State comity, a corporation created by laws of one State is usually allowed to transact business in other states and to sue in its courts, subject to restrictions and other requirements If no license did business? It cannot sue or intervene in any court or administrative agency But may be sued for valid cause Is it the fact of no license that prohibits? No, the doing of business without a license (Universal Shipping v. IAC) Mentholatum v. Mangaliman Mentholatum, based in Kansan, agent PADCO, is doing business by selling here, as exclusive distributing agent. FC filed against Mangaliman for infringement. Mangaliman produced, same size. Did the FC do business in the Philippines? SC; True test, whether the FC continuing the body of substance of business. Continuity of commercial dealings. Whatever PADCO executed distributor, has the effect Mentholatum doing it itself as of Thus it did so without a license. Mentholatum thus is barred from& (1945) 142,143,144; requirements 222 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia (No longer applicable, due to amendment of trademark law and Paris Convention (1965)) Marshall Wells Object of the law in preventing FC to access courts due to no license is NOT to prevent it from doing single acts or isolated transaction. What is prevented is acquiring domicile without taking steps necessary amenable to suits to local courts. No FC shall be permitted to transact without a license PJA Due to failure to deliver, a 3rd contract was made Court ruled that 3rd contract is continuity of business SC; FC may sue, as it does not amount to commercial dealings. 3rd contract is due to failure not attributable to it. Thus it is not to engage a continuing transaction, but rather to&damages suffered Far East v. Nankai Kogyo 1 contract, doing business SC; Isolated transaction only, the prohibition does not apply. Transacting business is contuity of commercial dealings. Bulakhidas v. Navarro FC not engaged in business in Philippines cannot sue License is not necessary in order for FC may sue in Philippines if it is transacting business for a single Delivery tons of steel scraps Nankai delivered and seller in Manila, As there is an expiration of license, less than the agreed amount was delivered Nankai claims lack of jurisdiction SC; FC barred, as the transaction is not incidental. Continuity of business is evident. Swedish East Asia v. Manila Court Erroneous discharge of cargo bound for Hong Kong, SEA seeking to return such Nankai sent its agent to look into areas, thus looking for base of operations Facilities Management v. Dela Rosa Manila Court did not allow SC; FC performing single act/isolated transaction Anta consolidated v. CA 3 parties RA 5455, enumerates certain acts that would constitute doing or transacting business <Appointing a representative or distributor domiciled in the Philippines, unless& independent status= 223 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Thus mere appointment does not necessarily be doing business. If it transacted business in its own name (representative) PJA Estopped to challenge personality of corporation, after acknowledging the same by entering into a contract Art. 19, NCC Western Equipment Opening of offices Any act that imply continuity of dealings WE FC selling its products in Philippines Defendant seeking registration Communication Material and Design v. CA CMDI and domestic corporation entered into an exclusive representative agreement for the sale of Hi-Tec bags at stipulated commission. Renewed with license agreement. SC; WE does not seeks legal or contractual obligation Sole purpose is to protect its reputation, corp name, or good will, a property right, a right in rem, that it may assert in any courts of the world Trademark acknowledges no territorial boundaries Developed similar products of CMDI (Philips v. CA) M2D filed Whether& is doing business in the Philippines SC: In determining if FC doing business or not, aside from activities, Contractual arrangement entered with other entities The agreement shows that there are provisions which are highly restrictive in nature so as to reduce the other as merely an agent (no competing product clause, bind __ only in a representative capacity) General Garments DC, registers Puritan Puritan corporation filed petition for cancellation of the trademark, alleging prior use WoN a FC who never transacted business in the Philippines may enforce an action SC; Trademark law allowing actions for infringement, whether licensed or not. Puma v. IAC Petitioner is estopped to bar FC access to our courts Puma filed a complaint for infringement for using word Puma Georg v. Isnani Lower court ordered in its favor 224 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia IAC reversed, lack of capacity to sue SC: It has capacity to sue, Paris Convention, Ph signatory in 1965 Lacoste Trademark Lacoste and crocodile 1977 1982, French corporation Lacoste filed cancellation SC; Art. 189, RPC, violated, hence Sec. 21(a) of RA 166 is not applicable. In the 1st place, Lacoste is not doing business in the Philippines. While there is a exclusive distributor, the latter has independent status (Rustan) It markets many other products Lacoste thus not doing business Assuming arguendo, that it is, violation of criminal statute, the principal party is the State. No capacity to sue is too far fetched in criminal cases Paris convention, to avoid multiplicity of suits To allow the local corporation to use, would be nugatory to trademark law. PJA Single transaction/isolated transaction (Marshall Wells, Swedish) Does not seek to enforce any legal or contractual rights arising out of business transaction contracted in the Philippines (Antam, Western Equipment) Protection of corporate name, trademark, trade name, goodwill, or reputation (Western Equipment, General Garments) Violation of RPC (Lacoste) Estopped to challenge personality of FC by merely transacting with it (Communication Materials) Defending a suit filed against it (Tan?) Capacity to sue of FC must also be affirmatively be pleaded in order to gain access courts If not? GR; case may be dismissed ER; Violation of RPC (Lacoste); Unnecessary or ineffectual (Olimpia) Defending a suit against it (Time v. Reyes) Atlantic Mutual Stevedoring Insurance v. Cebu AMI, and Continental Insurance, FC Damages against Cebu (v. Communication materials; representative appointed has no independent status) GLEANED FROM ALL FC can sue in Philippine courts Trial court, as failure to aver capacity Gave opportunity to amend the same, did not do so, hence dismissed SC; Sustained lower court Averment is only FC 225 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia 2 possibilities, doing or not doing 1st duly licensed to maintain suit 2nd no such license is required to maintain suit Olympia (Capacity averment not necessary) Ol Office, Hong Kong corporation, shipped 300 portable typewriters to Olympia Business, Philippines California insured, FC Typewriters were lost in the storm California Insurance paid the value of the goods, and sued Razon WoN California may be able to sue SC; Yes, Olympia Business is local corporation Capacity to sue no longer required Time v. Reyes Manila mayor and Enrile action against Time Magazine, for article corruption in asia Time filed for dismissal, as FC not doing business in the Philippines, cannot be sued, for lack of jurisdiction PJA FC may by writ of prohibition seek relief wrongful assumption of jurisdiction, on the ground of want of jurisdiction will not be bound by the ruling of the court, is it as if a M2Q service of summons 146; Laws governing FC All laws, rules, and regulations, applicable to domestic corporations& Intracorporate governed by law of State of creation MB (?) v. Insular Life Defendant insular life organized under laws of New York, with license to do business in the Philippines Plaintiff has 57 shares, less than 3% of the OCS, sought to inspect and examine books and records which was denied SC; Plaintiff not entitled, New York law requires 3 percent or if it can be shown that inspection is for specific and honest purpose in good faith (If Phil law, allowed, even if 1 share) 147; Amendment of FC licensed File with SEC and appropriate& authenticated copy of amendment Lower court, deferred motion to dismiss until after trial IF Amendment of corporate name or purpose must apply for amended license (?) Time filed certiorari, may Time institute petition? Mere filing of authenticated copy not sufficient under 148 SC; Time is not here maintaining and suing, but merely defending one filed against it Iba na pangalan o purpose, kaya dapat palitan 226 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA 149-153; Merger and Consolidation Fine not exceeding 30k Withdrawal of license Open defiance, daily fine 1k until complied with Petition subject to 3 conditions, all must go hand in hand 158; Administrative sanctions Conditions: Fine 5k to 2m pesos All claims accrued in the Philippines had been paid and settled and/or compromised Not more than continuing violation 1000/day All taxes, interests, assessments, and penalties due to Phil. Government had been paid Permanent cease and desist Publication for 1/3 Dissolution All must go hand in hand Forfeiture of all assets (Title XIV Revocation of license INVESTIGATIONS OFFENSES PENALTIES (154-172) for Suspension or revocation of CoI 159; Unauthorized name of corporate name AND 10k to 200k 160; 154; SEC investigate violation of Code, R R and order 155; Administer oaths, subpoena witnesses and documents 156; Cease and desist, reasonable belief, violate or is about to violate code r r o 10k to 200k at the discretion of the court Permanently dq from being such If injurious to public 20k to 400k Records Order, desist from committing act 10k -200k 20k to 400k Ex parte, enjoin person Max period of 20 days, permanent if due notice and hearing OR administratively (58), transmit evidence to DOJ for investigation criminal prosecution for violation of c rro Contempt order Fails to comply to any lawful order Without powers prejudice to contempt Reports inaccurate false misleading statements 20 to 200, 40 to 40 163; Independent Auditor 80 to 500, 100 to 600 227 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Corporate registration thru fraud 200k to 2m, 400k to 5m PJA 173 definition OCS 174 designation of governing board of nonstock and other corporation Fraudulent conduct (165) 200 to 2m, 400k to 5m Acting as intermediaries (166) Used for fraud in corruption 100k to 5m By any other appropriate name, directors or others 175; Sec to collect and to retain& 176; public interest NEDA recommend legislature limit of stock ownership Failure to install safeguards, prima facie evidence 177 reportorial requirements Engaging in intermediaries 179 powers of SEC 100k to 1m 500k to 1m No court below CA shall issue restraining orders& in any case dispute that interferes the exercise of SEC powers Retaliation from whistleblowers 180 electronic 100k to 1m 181 Arbitration agreement 170; Violation of any other provision of Code 10k to 1m Corporations; be dissolved before the SEC Separate from civil and criminal liability under code and other laws 171; Liability of& Non arbitrable, criminal offense, 3rd parties Enforcement: Number of arbitrators Procedure for appointment Tribunal to rule on question Intra corporate dispute Corporation, upon discretion of court Aiders and abettors Not exceeding imposed on principal offender 173-188 Miscellanous Dismiss case prior to pre trial conference if found to include the same Power to grant interim measures to ensure enforcement Final arbitral, executor after 15 days 228 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA a seat, if reduced to 5, 20% is needed) Stay? Only through bond or issuance of appeate court of injuctive writ PAL Rehab case; Jurisdiction over partylist Transferred to COMELEC Main task; promote capital market, minimize market manipulation in the sale of securities CA 83 Applicability of Code Effect of amendment or repeal of Code (Discussed inrelation to dissolution) Will not affect rights for or against Interport case BW resorts scandal; bringing collapse of SE, being more published one, RA 8799 enacted became effective August 2000 185-188 self explanatory Took away original and exclusive jurisdiction of SEC, under Sec. 5 and some of 5 of PD 902 A transferred to appropriate RTC, designated by the SC SPECIAL LAWS PD 902-A as amended Granted SEC broad and extensive powers and authority Admin, regulatory, adjudicatory (q-jud) investigatory, Only SEC functioning as q jud in the world Gained importance as q jud in controversial cases Chem Phil; where control of corporate affairs between siblings, where one sought military, the other pnp, tanks facing each other Designation, November 2000, they are now known as Special Commercial Courts, 1 per region, or 1 in each city in MM, except Makati, Manla, and QC, they have 2 each Only these courts can hear and decide cases Sec. 5 and 6 is 902 A Sec. 5(a) Devises or schemes amounting to fraud& detrimental to public& Orasa v. CA Kingley v. CA Aleje v. CA BLTB case; death of at least 5 persons, including 2 SG, Ayala corp; decrease of directors to disenfranchise minorities, (10 members of the Board, 10% to be a guaranteed Even if collection of sum of money, must be SCC Aleje v. CA Complainant allege Aleje as officer&fraud in order to divert funds 229 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA and assets to personal use, resulting to financial losses It depends delivery): It is a NSC 1986; Rivera v. Florendo, no, Rivera as transferor refuse to endorse stock certificate to alleged transferee Circumstances constituting fraud, must be stated particularly, to come within ambit of SCC, otherwise, regular courts (Abad v. CFI) (endorsement and No intracorporate, not yet SH, 3rd person Sec.5b; Intra corporate controversies Issue of conflicting opinions Sunset view v. Campos (1981) Philex (1982) Ubion Glass v. CA (1983) Then,Any and all controversies so long as there is intra corporate relationship between parties, SH, M, D, T, some or all of them and corporation, and the corporation and the State, only 1984; single tiered rule qualified (PSBA v. Leano) for intra corporate to exist, req: 1. There must be intra corporate relationship; and 2. Controversy must arise out of that relationship Peneira v. IAC 1990; petitioner was awarded to operate canteen, arose out of violation, not intra Contractual breach, separate and distinct from corporate relationship. Controversy did not arise out of intracorporate relationship, RTC may have jurisdiction Right of a transferee of Shares to compel transfer registration, assuming transferee is nt yet on records, hence 3rd person. Intra? Abejo v. Dela Cruz 1987, yes, CS endorsed and delivered to transferee with knowledge from corporation. Valid transfer having been complied with Thus, if no valid transfer, RTC can have jurisdiction (Rivera) If valid transfer, CS released, registration requirement waived, transferee technically and legally deemed SH, (Abejo) If conflict involves enforcement of Code, jurisdiction is within SCC If requires mere determination of contractual& ordinary trial courts can acquire jurisdiction Sec. 5(c) election appointment and removal of corporate directors& SCC, not NLRC PSBA v. Leano Andaya Luzon Espino Any controversy in election&elected or appointed, SCC Even if officer concerned may not be a SH of corporation 230 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Payment of backwages, other benefits&will not opearate to prevent SCC from exercising its jurisdiction, for so long as officer is elected or appointed by the BoD If main cause of action recovery of unpaid wages? No, does not assert the his right to the office, purely labor dispute. Then NLRC (Midland Construction v. Movilla) Main consideration to determine within SCC or NLRC; whether officer&asserts his right to such office, or questions proprietary of removal/ouster, SCC Receivership and suspension of payments 5(d) PJA RJ Jacinto, mere disagreement among SH, suffice as ground to appoint ManCom, at least if there is no imminent danger Management should not be removed from Board, if Man Com appointed, replace BoD, managerial powers Where dissension cannot successfully carry on corporate function, appointment is imperable Finding of external auditors, not questioned by RJ Jacinto, support the petitioner continuos& FWCC funds transferred to RJ group of companies, there was a drastic reduction of& Now FRIA, 2010 Suspension of lending operations Sec. 6(d) Appointment of management committee receiver board or body READ PROVISION 2 requisites that SCC may appoint a ManCom, board or body Shichim v. CC Ho and Sons (2006) 1. Shown corporate property is danger of being wasted or destroyed&diverted for purpose; and 2. Serious paralysation of operations to detriment of SH parties litigants or general public Absence showing of danger loss wastage and paralysis, mere apprehension of future misconduct&will not authorize appointment of Man Com RJ Jacinto v. First Credit Women9s Limitation of operations to mere collection of receivables, as well as inability of FWCC of pressing obligations, supports conclusion that imminent danger of dissipation, loss, wastage SC; affirmed SEC of appointment of ManCom Appointment warranted. PD 902 A governed by other rules Interrim rules on intra Supplemented by RoC, in sofar as applicable Venue (5 Rule 1) must be instituted before SCC where principal office of corp located or established NOT where the petitioner resies defenaant or Biggest lending then FWCC 231 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia e.g. San Fernando Pampanga, SH residence. Intra corporate controversy against BoD of corporation. Where instituted? PJA Yes, or any as fixed in BL Secretary of finance manager? Yes, or their respective secretaries Cabanatuan, as it is where Region III SCC Service of pleadings (Sec. 6 R. 1) Thus, EB Villarosa applies only if NOT intra corporate disputes Sec. 4 R.1. Fax or email if authroized by the court Decisions or orders of SCC are executory in nature Prohibited pleadings Sec. 8 R.1 UNLESS; restrained by appellate court Motion for postponement Dismiss Recon Extension LAST PART Securities Regulation Code (RA 8799) EXCEPT; compelling reasons Replaced the then Revised Securities Act (BP 178) Service of summons Villa rosa v. Benito Effective 8 August 2000 Only upon officers named in statute If other persons? insufficient Service Sec.5 R.2., deemed adequate if made at any statutory or corporate officers as fixed in BL or RESPECTIVE secretaries Aim, establishing a free securities market that regulates itself, encourage participation of ownership in enterprises, and promote development of capital market, protect investors, minimize fraudulent and other forms of market manipulation in the sale of securities (State Policy, Sec.2) Deviation from as Marry Regulation e.g. SF Pampanga, case filed in Nueva Ecija, summons served upon one of directors, neither president. Treasurer, in house& Then, SEC determines by itself if security is worth investing into Service valid? Now, full disclosure rule, as long as full and complete disclosure relative to the issue at hand, public will determine worth risking into Yes, statutory officer of corporation? If BL provide assistant finance manager elected by the board, served upon him? 232 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Fraudulent and manipulative devices are more clear and spelled out Old; penal, fine no less than 5 to 50k, and/or imprisonment 7 to 21 at the discretion Now, Sec. 73, 50k to 5m Securities (Sec.3) Includes SoS Bonds Notes Evidence of indebtedness & Certificates (club shares) Last enumeration, broad and encompassing, to include any investment similarly situated with the above Securities cannot be sold offered for sale or distributed to public without registration filed and approved by SEC Offered for sale to public, more than 19 persons PJA e.g. Hospitals then, selling shares to more than 19 persons, they sought exemption from registration. Made mention that it will be sold to medical practitioners. (SEC taking second look at this, as it is no longer the case Manny Pangilinan holds shares in medical practitioners, SEC may add or remove any security as exempt security or transaction if enforcement in the public interest and protection of investors) Even if securities involved are registered pursuant to registration statement, cannot be registered by any person Coursed through duly licensed broker, dealer or salesman (Sec.28), all registered under SEC (3. something e.g. You cannot go to Stock Exchange to sell, must be through private sale. 3.3. Broker; person engaged in buying and selling for account of others Violation of Sec. 8 Sec. 73 may be imposed Is registration always necessary? No, if securities covered by Sec. 9 and 10 Exempt securities 3.13 Salesman; natural person employed by issuer, dealer, or broker 2002 bar q: Tender offer Sec.19 Point in time where 60% of bar is commercial Examiner Lopez former SEC chairman 9.2 (READ) Exempt transactions 10.2 (READ Any person, or group of persons who intends to acquire 15%... or of a corporation with assets of 50m pesos and having 200 or more SH with at least 100 shares each& 233 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia How will you know 50m assets or 200 or more SH or at least 200 of them holding 100 shares each so as not to violate tender offer rule (IF violated, must make tender offer)? Check records of SEC Proxy solicitation (Sec.20) PJA Involves agreement for placement of money for profit (Pyrammiding/ Ponzi Scheme v. Multi level marketing under Consumer Protection Act enforced by DTI) Without any goods or services involved, amounts to investment contract. Cannot be issued or offered for sale to the public without registration statement filed and approved by SEC Broker or dealer who holds or acquire proxy for at least 10% shall submit report to SEC the beneficial owners within 10 days of acquisition Contents: Proxy statement, form If goods or services involved, DTI (Avon Natasha 1st quadrant) Violation? Sec. 73 Will increase value of goods Nag market nang good, supervisor, area director each has commission, will definitely increase Sec. 30, independent director rule Copied and made part of RCC Issue came as to ID 8 years ago, this ID rule would be asked in the Bar 22 players employing contract scheme Equitable PCI Elected ID, whose qualification was placed in issue Sec.38, at directors Mid 80s least 2 independent investment Ladia issued CDO against them for selling a security without registration statement filed and approved by SEC e.g. Operator 3 A-BCD ID; person not officer or employee of corporation, parent, subsidiaries or any individual SRC Rule 38, must not own or hold 2% In a 7 level number of persons involve, 1287, x 500 = 1.093k will make ID elected was a director of a subsidiary of E PCI NOT allowed, investment contract, needs filing& 3rd day resigned Investment contract Ogane Group of Companies IOUs to more than 19 persons 234 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia Induced particular person to invest money to them, with a promise rate of return, 10-15% a month e.g. Operator to Maria, 1m, in exchange of IOU, 10-15%/ month Money not invested, how will they pay Maria? They will induce another person, cash used to pay Maria If more than 19 persons, investment contract) PJA Wash sale. A kinuha share sa right pocket, nilipat sa kaliwa, no change in beneficial ownership of shares Matched order 24(a)(ii) Placing an order for the sale or purchase of security with the knowledge that a simultaneous order of substantially the same size, time, and price, will be entered by or for the same or different parties e.g. Alam ni X na may nag place nang sell order, sya din ang bumili, minatch lang nya yung sell order People v. Petralgo Are they illegal? No, per se Foreign exchange trading, which is also an investment contract SC; touchstone of investment, presence of investment in common venture premised on the reasonable expectation of profits to be derived solely from entrepreneurial and managerial efforts of others Such that an investor uninformed,& transaction generally & Fraudulent and other forms of market manipulation Except, if it is misused as a means to create a false or misleading appearance of active trading in the particular security In the above case, 1 buy 1 sell order does not create false or misleading appearance of active trading, except. Painting the tape Buying and selling of security to increase or decrease price of security during normal trading hours Wash sale 24(a)(i) Trading hours: 9am to 12 noon Transaction of security, no change in beneficial ownership thereof e.g. 7 brokers to engage in activity e.g. (1997) X player in SE, holds 100m shares of particular security 9:15, placed an order for sale of 1m shares for 1.10 X calls his broker B1, sell 1m of Z company at 1.10 each. B2, 9:18, to buy 1m shares at 1.10 B3 9:45 To sell 1m shares at 1.30 After a minute, called broker 2, buy 1m shares of Z company for 1.10 each B4 9:47 buy 1m for 1:30 235 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia B5 &. PJA e.g.ACS of corporation used to be 1b shares. Increased to 2b shares. B7 11:30 1.80 Intended to increase, and in fact increased during regular trading hours Marking the close Is placing an order for the purchase of sale or security at or near the close of trading hour At the end of the day, after 19 orders, 11:59, 2.00 per share, nobody can acquire those shares as 12 noon is end of time He did that for 9 months, at the end of the day gone up to 119/ share, thus 119 million pesos (Fraudulent manipulative in nature) But, when it was increased they used underwriters for the sale of some of the increase in capital stock Underwriters undertook to sell securities for and in behalf of the issuer corporation, either on a best effort method, or they themselves buy the shares Assume UW x 3, A B C, 200m each. Thus 600m in the increase of 1b. Result? Squeeze in the flow, as only 400 is available for subscriptions by the general public. What happens? Demand is great, the price is high, as to the 400. Short sale (24.2.) King of Macao Stanley Ho (prior to 1997); lone owner of all casinos in Macao before foreign entities allowed Ho invited to invest in particular company in Philippines. Fear that once China takes them back, will no longer allow gambling. Ho did come to the Philippines, but never made any investment. Return to Macao, shares dropped. Brokerage firm called clients to sell shares now, everybody followed. 45 to 12 to 5 per share Squeezing the float Holding on to security with intent and in view of reselling them later for profit No definition Sale of security that no person shall employ shall employ short sale EXCEPT Sale of security which the vendor does not own hold or possess Can a person who does not own hold possess sell? Yes, just like sale of goods, you don9t own it but when the time comes to comply, you have it. Old law; reverse, short sale is illegal if not in accordance& Hence, not illegal per se, as SEC never had any R and R on short sale Now; no person shall employ short sale EXCEPT in accordance& 236 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA Hence, illegal now. Hence, X earned more. Today Ladia is not aware of any such R and R allowing for such T3/4 Rule Allowed before, but now, no more. Insider trading Sec. 27 T3 used in Phil. Trade today, 3 days later comply with your part of the obligation No person may trade in a particular security while in possession of a material non-public information e.g. nagbenta ka shares mo today (27), 3 days later, deliver SHS. Wala ka today but on the day you have, there is compliance If there is any matter would effect of increasing or decreasing particular security must be disclosed with SEC and PSE Defines insiders (3.8.) Rumors of 9/11 American airlines shares being traded to Germany stock exchange Following day, release was held no more To Ladia9s belief, it may have been banned by the FBI or CIA Bin Laden9s friend, knew fact of use of American airlines to smash building of New York 9/10, X sold 10m shares of AAL, at 1.10/ share, sold it for 1 dollar, sayang din 10 cents to A Bar Q: Manila Gas has shares being traded in the SE, engaged in discovery of national gas, was able to discover one of commercial quantity. BoD did not disclose to SEC and PSE, instead called brokers to buy shares of MG before they undertook to a printer to print the particular matter for its distribution to general public. Before printer did his job, also called his broker, to buy shares of MG for particular issue. Thereafter, disclosed matter to SEC. What violation did the BoD and/or printer commit? Insider trade, any person who acquires information hence even the printer X walang 10m shares nang AAL Civil liabilities in violation of the Code (58-61) 9/11, event 63; amount of damages to be awarded 9/12 drop in shares at 50 cents, due to possible liabilities that may attach to AAL Not exceeding triple of the amount of transaction plus actual damages and 237 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia PJA exemplary if any and atty fees not exceeding 30% of the award Ladia; bat mo papakialaman atty9s fees, eh kung pumayag client ano ngayon Settlement offers (Sec. 55) Party or parties being investigated May propose settlement with SEC Limitation of actions (62) Similar to old law They must be brought within 2 years after discovery of fact And within 5 years after CoA accrues 238 | P a g e CORPORATION LAW 2019-2020, 2nd Sem Atty. Ruben Ladia EXAMINATION QUESTIONS PRELIMINARY EXAMS (RANADA) 1. While the incorporation papers of DEF Incorporated were pending with the SEC for approval, Juan Dela Cruz, the designated Treasurer held real estate worth Php2,500,000.00 which Sandy Gan turned over for shares he purchased in DEF Incorporated. Before the stock certificate could be issued, a certain Layla DeFive claimed that he was the real owner of the property. He filed an action against the corporation for recovery. Will the action prosper? 2. Referring to Question No. 1, the corporation was composed mostly of aliens. Is this valid? 3. A change in the corporate name by virtue of an amendment requires the vote of its shareholders and members of the board of directors. The directors of the corporation considered the approval as notification and, as such, required that they be notified as well. PJA 5. Sixteen (16) persons applied for employment abroad with Tansan Philippines Shipping Inc. where Juan and Matias Dela Cruz were its President and Vice President, respectively. The applicants had to pay Php10,000.00 each for processing. They were given receipts under Tansan?s name. They were instructed to follow up after two (2) weeks. Upon following up, the applicants discovered that Tansan abandoned their office and that Juan and Matias were gone missing. Upon verification with the SEC, the applicants found out that Tansan was not yet incorporated. Can Juan and Matias be liable for illegal recruitment in as much as Tansan was not even registered with the DOLE? 6. Shareholders are not merely investors in a corporation but also have interest in the management thereof. TRUE or FALSE? Are the debtors of a Corporation required to be notified of any amendment? 4. Who has the authority to pierce the veil of corporate fiction and why? 239 | P a g e

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