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Corporation Code
Corporation Code
Corporation Code
Corporation Code Maria Zarah Villanueva - Castro CORPORATION CODE (BP BLG 68) *Corporation Code is the general law on Private Corporation regarding to its creation, formation and powers. INTRODUCTION: A. Historical Background Effectivity: May 1, 1980 Article XII Section 16 of the 1987 Constitution: The Congress shall not, except by general law, provide for the formation, organization, or regulation of private corporations. Government-owned or controlled corporations may be created or established by special charters in the interest of the common good and subject to the test of economic viability. *Congress has limited powers in the formation, creation and regulation of a private corporation. Purposes: 1. Uniformity 2. To avoid corruption General Rule: Congress is prohibited to enact a law directly forming a private corporation. Exception: GOCC may be created by special charter. *GOCC is a private corporation with regard to function and in the meantime a public corporation with regard to ownership. Twin Conditions must be present in forming a GOCC: 1. Interest in the common good 2. Subject to the test of economic viability - Means can survive alone in the market; can generate income which they can use for their operating expenses CONCEPT AND CORPORATION: ATTRIBUTES OF A
A. Statutory definition of a Corporation Section 2 of the Corporation Code: A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence. B. Attributes of a Corporation Artificial Being It exist by fiction of law only, hence it is subject to limitations that are inherent because of its nature A corporation is a juridical person which exists by process of legal fiction Doctrine of Corporate Entity/Doctrine of Separate Personality - A corporation is a legal or juridical person with a personality separate and apart from its individual stockholders or members and from any other legal entities to which it may be connected Consequences/Implications of Separate Personality: 1. It is entitled to own properties in its own name and its properties are not the properties of its stockholders, directors and officers. Cases: MagsaysayLabrador v CA; Sulo ng Bayan v Araneta *The interest of the stockholders over the properties of the corporation is merely inchoate.
C. Classification of Private Corporations: 1. As to existence of Stocks: Stock Corporation Corporations 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. (Sec. 3) Non-stock Corporation A corporation where no part of its income is distributable as dividends to its members, trustees, or officers, subject to the provisions of this Code on dissolution. (Sec. 87) Q: Is it correct to say that a Non-stock corporation cannot generate income on their own? A: NO 2. As to function/organizers:
Reason: To make the corporation more stable Creature of enumerated powers, attributes and properties Doctrine of Limited Capacity No corporation under the Corporation Code, shall possess or exercise any corporate powers, except those conferred by law, its Articles of Incorporation, those implied from express powers and those as are necessary or incidental to the exercise of the
Can be compared to a voidable contract, i.e., valid until annulled. *Can be challenged by the State later on. Cases: Hall v Piccio; Seventh Adventist v Northeastern Mindanao Mission *The filing of the Articles of Incorporation and the issuance of the certificate of registration are the essential requisites for the existence of a de facto corporation. Requisites: 1. The existence of a valid law under which it may be incorporated; 2. An attempt in good faith to incorporate; 3. Use of corporate powers; 4. Filing of the Articles of Incorporation; 5. Subsequent compliance with the requirement of law. *In both corporations, there must be a certificate of registration issued. Doctrine of 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 an result thereof: Provided, however, that when any such ostensible corporation is sued on any transaction entered into by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack or corporate personality. (Sec. 21) - Group of persons which holds itself out as a corporation and enters into a contract with a third person on the strength of such appearance cannot be 5
B. Contents and Form of the Articles of Incorporation (Secs. 14 and 15) Contents of Incorporation: 1. Corporate Name; 2. Purpose Clause; 3. Principal office; 4. Term of existence; 5. Incorporators; 6. Directors or trustees; 7. Capitalization; 8. Shares of stock; 9. Treasurers Affidavit. Articles of
Corporate Name Purpose: Identification *Corporation can not adopt any name or group of words at its pleasure because of statutory limitation, viz., Sec. 18 of the Corporation Code which provides that: No corporate name may be allowed by the SEC if the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to 6
*The exclusivity requirement was not satisfied by Lyceum of the Philippines. *In case of change of name, the corporation is not dissolve nor create a new corporation; it also does not extinguish the corporate liability. *Change of name can be done by amending the Articles of Incorporation. Procedure: 1. Obtain approval of majority of the Board and 2/3 stockholders; 2. Submission approval. Purpose Clause *Only one primary purpose. Primary purpose defines the business activities of the corporation. It is the ordinary course of business of the corporation. *Secondary Purpose is for future expansion. There is no limit on the secondary purpose. *In case the primary purpose is not viable then secondary purpose may be used. Principal Office 7 to the SEC for
*Both use the acronym H.S.K. As a rule, generic name or descriptive word may be used as a corporate name. Reason: public domain; can be used by anyone; public use. Exception: Doctrine of Secondary Meaning a word or phrase originally incapable of exclusive appropriation with reference to an article on the market, because geographically or otherwise descriptive, might nevertheless have been used so long and so exclusively by one producer with reference to his
Exception: Doctrine of Relation The filing and recording of a certificate of extension after the term cannot relate back to the date of the passage of the resolution of the stockholders to extend the life of the corporation. However, the doctrine of relations applies if the failure to file the application for existence within the term of the corporation is due to neglect of the officer with whom the certificate is required to be filed or to wrongful refusal on is part to receive it. *The delay in application for justifiable. Keywords: 1. Excusable delay; 2. Beyond the control of the corporation (insuperable intervening causes) Incorporators *Once an incorporator always an incorporator. (Fait accompli an accomplished fact which cannot be altered) *They are the signatories to the Articles of Incorporation. *They are originally forming the corporation Q: What is the reason behind the phrase that an incorporator is not always a corporator? A: To be an incorporator it is not necessary to own a share unlike as a corporator. *Number is limited to 5 to 15. *They must have a contractual capacity. 8 submitting the extension is
Exception: If for compelling reasons, earlier extension will be allowed. *During the three year winding up period, the corporation still has personality but activities are limited to the liquidation of the corporation affairs and not to transact further business. As a rule, after the term has expired, no more extensions be allowed or entertained by the SEC.
*There is no citizen requirement but special laws may require otherwise. *Majority must be a resident of the Philippines. Directors and trustees *The Board of Directors is the governing body in a stock corporation while Board of Trustees is the governing body in a nonstock corporation. *They exercise the powers of the corporation. Qualifications: 1. Every director must own at least one (1) share of the capital stock; 2. Majority of the directors or trustees must be residents of the Philippines. *Any director who ceases to be the owner of at least one share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. *Trustees of non-stock corporations must be members thereof. *Initial directors/trustees shall hold office for one year until their successors are elected and qualified. Capitalization Section 14(8) states that: If it be a stock corporation, the amount of its authorized capital stock in lawful money of the Philippines, the number of shares into which it is divided, and in case the share are par value shares, the par value of each, the names, nationalities and residences of the original
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5. Increase or decrease of capital stock; 6. Merger or consolidation of the corporation with another corporation or other corporations; 7. Investment of corporate funds in another corporation or business in accordance with the Corporation Code; 8. Dissolution of the corporation. *The exceptions are exclusive; the list is a closed list Statutory Constraint: Sec. 6 of the Corporation Code *The corporation cannot provide for shares with no voting right General Rule: Only redeemable and preferred shares are deprived of voting right. Exception: Common shares may be denied of its voting right in the following instances: 1. Delinquent in paying the subscription; 2. If there was a founders share where it was given the right to vote exclusively for 5 years (Sec. 7). 5. Common Shares the most common type of shares which enjoy no preference. *The basic class of stock ordinarily and usually issued without extraordinary rights and privileges, and the owners thereof are entitled to a pro rata share in the profits of the corporation and in its assets upon dissolution and, likewise, in the management of its affairs without preference or advantage whatsoever.
2. Preferred shares as to dividends share which gives the holder thereof preference in the distribution of the dividends to the extent agreed upon before any dividends at all are paid to the holders of common shares; 3. Participating preferred shares the holders thereof are still given the right to participate with the common stockholders in dividends beyond their stated preference; 4. Non-participating preferred shares where there is no such participation; 5. Cumulative preferred shares the shareholder is entitled to recover dividends in arrears. While dividend declaration may not be compelled, once it is declared, the shareholder is entitled to the said arrears; 11
*They are not entitled to voting rights. Rationale: to prevent abuse by the management. *These shares may again be disposed of for a reasonable price fixed by the Board of Directors. 9. Founders Shares classified as such in the articles of incorporation may be given certain rights and privileges not enjoyed by the owners of other stocks, provided that where the exclusive right to vote and be voted for in the election of directors is granted, it must be for the limited period not to exceed 5 years subject to the approval of the SEC. The 5 year period shall commence from the date of the approval by the SEC. Treasurers affidavit *The SEC shall not accept the Articles of Incorporation of any stock corporation unless accompanied by a sworn statement of the Treasurer elected by the subscribers showing that at least 25% of the authorized capital stock of the corporation has been subscribed, and at least 25% of the total subscription has been fully paid to him in actual cash and/or in property the fair valuation of which is equal to at least 25% of the said subscription, such paid up capital being not less than P5,000. 12
C. Grounds for rejection of the Articles of Incorporation 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 Treasurers Affidavit concerning the amount of capital stock subscribed and/or paid is false; 4. The percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied with as required by existing laws or the Constitution. Dual Franchise Requirement: No articles of incorporation or amendment to articles of incorporation of banks, banking and quasi-banking institutions, building and loan associations, trust companies and other financial intermediaries,
Sec. 19 of the Corporation Code states that A private corporation formed or organized under this Code commences to have corporate existence and juridical personality and is deemed incorporated from the date the SEC issues a certificate of incorporation under its official seal; and thereupon the incorporators, stockholders/members and their successors shall constitute a body politic and 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. *For purposes of determining whether a corporation enjoys the status of a de facto corporation, it must have been at least issued a certificate of registration.
E. Amendment Incorporation
of
the
Articles
of
Sec. 16 of the Corporation Code states that: 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 2/3 of the outstanding capital stock, 13
MANAGEMENT
OF
F. Effects of Charter
Non-Use
of
Corporate
Sec. 22 of the Corporation Code states that: If a corporation does not formally organize and commence the transaction of its business or the construction of its work within 2 years from the date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved. However, if the corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least 5 years, the same shall be a ground for the suspension or revocation of its corporate franchise or certificate of incorporation. This provision shall not apply if the failure to organize, commence the transaction of its businesses or the construction of its works, or to continuously operate is due to causes beyond the control of the corporation as may be determined by the SEC. *The period must be counted from the issuance of the Certificate of Incorporation.
B. Board of Directors/Trustees General Powers of the Board Sec. 23 of the Corporation Code states that: Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one year until their successors are elected and qualified. Powers of Directors: the Board of
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*Board of Directors/Trustees is the statutory representative of the corporation. General Rule: All corporate powers emanate from the Board of Directors/Trustees. Exception: Unless otherwise provided in this Code. (Limiting Clause) The limiting clause means that there are certain corporate matters that cannot be done by the Board by reason that such matters fall upon the shareholders; or corporate matters that cannot be resolved by the Board alone, i.e., it must be done with the approval of the shareholders. Business Judgment Rule Business Judgment Rule questions of policy or management are left solely to the honest decision of officers and directors of a corporation and the courts are without authority to substitute their judgment for the judgment of the board of directors; the board is the business manager of the corporation and so long as it acts in good faith its orders are not reviewable by the courts or the SEC. - A resolution or transaction pursued within the corporate powers and business operations of the corporation, and passed in good faith by the board of directors/trustee, is valid and binding, and generally the courts have no authority to review the same and substitute their own judgment, even when the exercise of such power may cause losses to
Sec. 23 of the Corporation Code states that: Every director must have at least one share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be members thereof. A majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines. *In order to be eligible as director, what is material is the legal title to and not beneficial title or ownership of the stocks appearing on the books of the corporation. *The directors/trustees natural persons. must be
*They must also be of legal age. *He must possess other qualifications as may be prescribed in the by-laws of the corporation. *Under Sec. 27 of the Corporation Code: No person convicted by final judgment of an offense punishable by imprisonment for a period exceeding 6 years, or a violation of 15
*It is not required that the candidate received the majority vote, what the law provides is only plurality of votes. 16
Sec. 25 of the Corporation Code states that: Unless the articles of incorporation or the bylaws provide for a greater majority, a majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the 17
Exception: Vacancy occurring in the board of directors or trustees other than by removal by the stockholders or members or by expiration of term may be filled by the vote of at least a majority of the remaining directors or trustees if still constituting a quorum. Compensation of Board Members Sec. 30 of the Corporation Code provides that: In the absence of any provision in the bylaws fixing their compensation, the directors shall not receive any compensation, as such directors, except for reasonable per diems: Provided, however, that any such compensation other than per diems may be granted to directors by the vote of the stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholders meeting. In no case shall the total yearly compensation of directors, as such directors, exceed 10% of the net income before income tax of the corporation during the preceding year. General Rule: Directors are not entitled to receive compensation Exceptions: 19
C. Corporate Officers Concept of Corporate Officers *Corporate powers reside on the Board of Directors; decision/policymaking resides on them. Implementation of rules/policy lies on the corporate officers Categories: 1. Statutory Corporate Officers President (must be a stockholder); Secretary (must be a resident and citizen of the Philippines); Treasurer (must be a resident and citizen of the Philippines). 2. As provided by the ByLaws must be clearly stated in the By-Laws that such office is a corporate office. 3. Those designated by the Board of Directors provided the Board of Directors is
D. Liability of Directors, Trustees and Officers Instances when Officers/Directors Solidarily Liable Corporate are held
Sec. 31 of the Corporation Code provides that: Directors or trustees who wilfully and knowingly 20
3. Acquire any personal or pecuniary interest in conflict of their duty (Sec.31). 4. Consent to the issuance of watered stocks or having
4. In case of an officer, the contract has been previously authorized by the board of directors. Reason: As presence in the board meeting might affect the status of the contract.
General Rule: The contract is voidable. Exception: If the requisites provided in Sec. 32 are present. Exception to the Exception: If requirement number 1 or 2 is absent, in the case of a contract with a director or trustee, such contract may be considered valid by the ratification of at least 2/3 of the outstanding capital stock or 2/3 of the members. Requisites: 1. The presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting; 2. The vote of such director or trustee was not necessary for the approval of the contract;
Sec. 33 of the Corporation Code provides that: Except in cases of fraud, and provided the contract is fair and reasonable under the circumstances, a contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone: Provided, That if the interest of the interlocking director in one corporation is substantial and his interest in the other corporation or corporations is merely nominal, he shall be subject to the provisions of the preceding section insofar as the latter corporation or corporations are concerned. Stockholdings exceeding 20% of the outstanding capital stock shall 22
A: General Rule: Contracts between two or more corporations having interlocking directors are valid. Exceptions: 1. Contracts are void if contracts are fraudulent or if contracts are unfair and unreasonable. If the By-Laws prohibits interlocking director. Case: SEC Gokongwei, Jr. v
2.
*The interest is nominal if his interest is 20% or less of the outstanding capital stock. The interest is substantial if his interest is more than 20% of the outstanding capital stock. *If the interlocking director has a substantial interest in one corporation and has a nominal interest in the other corporation, the director must comply with the requisites provided in Sec. 32 on self-dealing directors.
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B. Classes of Corporate Powers 1. Express 2. Implied 3. Incidental Express those expressly authorized by the Corporation Code and other laws, and its Articles of Incorporation or Charter. Implied those that can be inferred from or necessary for the exercise of the express powers. Incidental those that are incidental to the existence of the corporation.
Doctrine of Necessary Implication those which can be reasonably inferred from the express powers given since they are necessary for the corporation to perform a particular act are deemed part of such powers. C. Statutory Powers of a Corporation and the Limitations on their Exercise Sec. 36 of the Corporation Code states that: Every corporation incorporated under this Code has the power and capacity: 1. To sue and be sued in its corporate name; 2. Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of incorporation; 3. To
Sec. 16 of the Corporation Code states that: Unless otherwise prescribed by this Code or by special law, and for legitimate purposes, any provision or matter stated in the articles of 25
A: Requires longer time of payment; special burden on the corporation; involves the important assets of the corporation. Denial of Pre-emptive Right Sec. 39 of the Corporation Code states that: All stockholders of a stock corporation shall enjoy pre-emptive 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 to be issued in compliance with laws requiring stock offerings
A: 1. Sell; 2. Lease; 3. Exchange; 4. Mortgage; 5. Pledge. Requirements: 1. Majority vote of the Board. 2. Vote of the Stockholders representing 2/3 of the OCS. 3. The sale does not bring about the illegal combinations and monopolies. *No need for the approval of the SEC. Tests: 1. Quantitative Test no statutory test; pertains to the disposition of all assets 2. Qualitative Test there is a statutory test; pertains to the disposition of substantially all of its assets. *The provision is so strict because the law wants the corporation will reach its expiration term. Q: With the sale of all the assets of the corporation, will the same result to its dissolution? A: NO. Possession or continued possession of corporate properties is not a condition for the existence of a corporation. Corporation still exists despite the disposition of all its properties and assets. 28
Requisites for declaration of cash/property dividends: 1. Board approval 2. Unrestricted Retained Earnings Requisites for declaration of stock dividends: 1. Unrestricted Retained Earnings; 2. Board approval; 3. Ratification by the stockholders. Q: Why stockholders ratification is necessary in the declaration of stock dividends? A: Because the earnings are capitalized. It is considered to be a corporate assets. Q: May the board be compelled to declare dividends? A: General Rule: NO. Exception: Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-in capital stock. Exceptions to the Exception: 1. Corporate expansion 2. Pursuant to loan agreement 3. Special circumstances/contingent liabilities Q: Are the stock dividends considered as watered stocks because the stockholder concerned does not pay anything therefor? A: NO. The unrestricted retained earnings are considered to be a consideration thus dividends received through stocks are not watered stocks. *The source of payment is the unrestricted retained earnings.
to
Articles
of
Distinction between By-Laws and Articles of Incorporation: By-Laws is a condition subsequent. Articles of Incorporation is a condition precedent. Essential for corporate existence.
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D. Contents of By-Laws; Requisites of a Valid By-Law Provision Sec. 47 of the Corporation Code states that: Subject to the provisions of the Constitution, this Code, other special laws, and the articles of incorporation, a private corporation may provide in its By-Laws for: 1. The time, place and manner of calling and conducting regular or special meetings of the directors or trustees; 2. The time and manner of calling and conducting regular or special meetings of the stockholders or members; 3. The required quorum in meetings of stockholders or members and the manner of voting therein; 4. The form for proxies of stockholders and members and the manner of voting them; 5. The qualifications, duties and compensation of directors or trustees, officers and employees; 6. The time for holding the annual election of directors or trustees and the mode or manner of giving notice thereof; 7. The manner of election or appointment and the term of office of all officers other than directors or trustees; 8. The penalties for violation of the By-Laws; 9. In the case of stock corporations, the manner of issuing stock certificates; and 10. Such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs.
E. Amendment to By-Laws Sec. 48 of the Corporation Code provides that: The board of directors or trustees, by a majority vote thereof, and the owners of at least a majority of the outstanding capital stock, or at least a majority of the members of a non-stock corporation, at a regular or special meeting duly called for the purpose, may amend or repeal any ByLaws or adopt new By-Laws. The owners of 2/3 of the outstanding capital stock or 2/3 of the members in a non-stock corporation may delegate to the board of directors or trustees the power to amend or repeal any ByLaws or adopt new By-Laws: Provided, That any power delegated to the board of directors or trustees to amend or repeal any By-Laws or adopt new By-Laws shall be considered as revoked whenever stockholders owning or representing a majority of the outstanding capital stock or a majority of the members in non-stock corporations, shall so vote at a regular or special meeting. Whenever any amendment or new By-Laws are adopted, such amendment or new ByLaws shall be attached to the original By-Laws in the office of the corporation, and a copy thereof, duly certified under oath by the corporate 34
F. By-Laws in relation to Third Parties *In China Banking Corporation v CA, the SC held that in the absence of evidence that China Bank is aware of the provisions of the By-Laws, China Bank is not bound to observe the provisions of the By-Laws. Hence, China Bank must be allowed to register the shares in its name. General Rule: Third parties are not affected by the By-Laws. Exception: If the third party has actual knowledge of the provisions of the By-Laws. CORPORATE MEETINGS: A. Kinds of Corporate Meetings Sec. 49 of the Corporation Code provides that: Meetings of directors, trustees, stockholders, or members may be regular or special. Kinds: a. Stockholders/Members: 1. Regular meeting 2. Special meeting b. Directors/Trustees: 1. Regular meeting 2. Special meeting Sec. 50 of the Corporation Code provides that: Regular meetings of stockholders or members shall be held annually on a date fixed in the by-
Q: Are they included for quorum and voting purposes? A: NO. Q: Even if there are proxies? A: YES. Q: Shares not yet fully paid but not yet delinquent, are they entitled to vote? A: YES. *Delinquent stock is not entitled to vote and his presence would not be taken for purposes of quorum. *The only right remain is the right to receive dividends subject to the provision of Section 43. 2. Escrow Shares *Escrow shares are not entitled to vote before the fulfillment of the condition imposed thereon. 3. Unpaid Shares Sec. 72 of the Corporation Code provides that: Holders of subscribed shares not fully paid which are not delinquent shall 37
General Rule: The holder of unpaid shares can exercise the right to vote. Exception: If it is provided in the subscription contract that such right cannot be exercised until the subscription is fully paid. 4. Sequestered Shares Q: What is the reason sequestration process? for
A: For investigative purposes; To avoid wastage dissipation of assets. Q: Is PCGG authorized to vote for the sequestered shares? A: General Rule: No. PCGG cannot vote for the sequestered shares because being a conservator/administrator, it should only perform acts of administration and not acts of ownership. Exception: If there is a strong evidence that indeed the shares have been purchased through public funds. Requisites: 1. Strong evidence or prima facie evidence that the shares are ill-gotten. 2. There is an imminent danger that the shares will be dissipated. Case: Transmiddle East v CA Q: During the pendency of sequestration process, are the sequestered shares included for quorum purposes?
Sec. 55 of the Corporation Code provides that: In case of pledged or mortgaged shares in stock corporations, the pledgor or mortgagor shall have the right to attend and vote at meetings of stockholders, unless the pledgee or mortgagee is expressly given by the pledgor or mortgagor such right in writing which is recorded on the appropriate corporate books. Executors, administrators, receivers, and other legal representatives duly appointed by the court may attend and vote in behalf of the stockholders or members without need of any written proxy. Q: Can the pledgee/mortgagee exercise the right to vote? A: General Rule: No. right to vote remains to owner thus, it is pledgor/mortgagor that exercise it. The the the can
Exception: If there is an agreement that the pledgee/mortgagee can exercise the right to vote. Case: Calapatia 38
Derivative Suit is a suit brought by any stockholder, usually a minority shareholder, to redress a wrong committed against the corporation whenever the responsible officers refuse to take any action thereon or are the very person to be sued. 40
2. Purchase or acquisition of shares from existing stockholders. 3. Purchase of treasury shares from the corporation. *All of them involve shareholdings. *Subscription is unique because it involves unissued shares. B. Concept of Subscription Contract Subscription Contract is, under Sec. 60 of the Corporation Code , 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.
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D. Consideration Shares
for
the
Issuance
of
Sec. 61 of the Corporation Code provides that: A subscription for shares of stock of a corporation still to be formed shall be irrevocable for a period of at least 6 months from the date of subscription, unless all of the other subscribers consent to the revocation, or unless the incorporation of said corporation fails to materialize within said period or within a longer period as may be stipulated in the contract of subscription: Provided, That no pre-incorporation subscription may be revoked after the submission of the articles of incorporation to the SEC. *Contracts subscribers. between the
b. May be regarded as continuing offer on the part of the subscriber concerned which the corporation may accept upon acquisition of juridical personality. Reason: The corporation is not yet in existence. 2. Post incorporation subscription one entered into after the incorporation for the acquisition of unissued stock. *Contracts between the subscribers and the corporation.
Sec. 62 of the Corporation Code provides that: Stocks shall not be issued for a consideration less than the par or issued price thereof. Consideration for the issuance of stock may be any or a combination of any two or more of the following: 1. Actual cash paid to the corporation; 2. Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued; 3. Labor performed for or services actually rendered to the corporation; 4. Previously incurred indebtedness of the corporation; 5. Amounts transferred from unrestricted retained earnings to stated capital; and 6. Outstanding shares exchanged for stocks in the event of reclassification of conversion. Where the consideration is other than actual cash, or consists of intangible property such as patents of copyrights, the valuation thereof shall initially be determined by the incorporators or the board of directors, subject to the approval by the SEC. Shares of stock shall not be issued in exchange for promissory notes or future service. The same considerations provided for in this section, insofar as they may be applicable, may be used for the issuance of bonds by the corporation. The issued price of no-par value shares may be fixed in the articles of incorporation or by the board of directors pursuant to authority conferred upon it by the articles of incorporation or the by-laws, or in the absence thereof, by the stockholders representing at least a majority of the 42
E. Payment of Subscription Q When payment of the subscription is made? A: Look into the subscription agreement. If subscription agreement is silent as to when the amount of subscription to be paid, the board of directors may call on all the unpaid subscribers to pay the remaining balance of their subscription. Remedies to enforce payment of subscription 1. By Extra-judicial sale at public auction. 2. By judicial action. 3. Collection from cash dividends and withholding of stock dividends. When shares delinquent are considered
F. Certificate of Stock Certificate of Stock is a written evidence of the shares of stock but it is not the share itself. 43
Sec. 67 of the Corporation Code provides that: Subject to the provisions of the contract of
A: It is an evidence of ownership of stocks. Q: Who issue stock certificate? A: Stock certificates must be signed by the president or vice-president, countersigned by the secretary or assistant secretary. Q: When certificate of stock may be issued? A: Sec. 64 of the Corporation Code states that: No certificate of stock shall be issued to a subscriber until the full amount of his subscription together with interest and expenses (in case of delinquent shares), if any is due, has been paid. Doctrine of Indivisibility Subscription Contract of
Q: can the stock certificate be treated as negotiable instrument under NIL? A: No. The requisites are not complied with. There is no engagement to pay in sum certain in money. *Negotiable instrument represents credit. Creditor-debtor relationship arises. Q: Are certificates negotiable? of stock
Doctrine of Indivisibility of Subscription Contract: Failure to pay any of the installments due would necessarily affect all the other installments because the subscription is to be treated as one, whole, entire, indivisible contract. Upon default of payment on any of the installment results to entire subscription due and demandable. *The Certificate of Stock cannot be divided into portions. *No certificate of stock shall be issued until the full payment of the subscription. *The corporation has an automatic lien over the shares. Q: What will happen payment already made subscriber? to by the the
A: They are negotiable in certain extent. That is why they are quasinegotiable. *The title over the share can be assigned, transferred by indorsement and delivery. *Due course applicable. holding is not
G. Transfer of Shares If represented by a certificate, the following must be strictly complied with: 1. Delivery of the certificate; 2. Indorsement by the owner or his agent; 44
Destroyed
Certificate
of
Sec. 73 of the Corporation Code provides that: The following procedure shall be followed for the issuance by a corporation of new certificates of stock in lieu of those which have been lost, stolen or destroyed: 1. The registered owner of a certificate of stock in a corporation or his legal representative shall file with the corporation an affidavit in triplicate setting forth, if possible, the circumstances as to 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. He shall also submit such other information and evidence which he may deem necessary; 2. After verifying the affidavit and other information and evidence with the books of the corporation, said corporation shall publish a notice in a newspaper of general circulation published in the place where the corporation has its principal office, once a week for 3 consecutive weeks at the expense of the registered owner
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B. Right to Inspect Corporate Books Basis and Extent of the Right of Inspection Q: Is the keeping of these books mandatory? A: YES. Section 144 of the Corporation Code provides penalty for any violation of the provision of the Code. Rationale: Right of inspection would be futile. Right of inspection would not be exercised. Limitations Inspection on the Right of
1. The books and records shall be open to inspection at reasonable hours on business days. 2. The books and records shall not be improperly used any information secured through any prior examination of the books or records. 3. The stockholders demand must be in good faith or for a legitimate purpose. *Inspection can be done personally or through agent. Remedies to Enforce Right of Inspection *In case of refusal to exercise the right of inspection, the stockholder
B. Requisites of and Procedure for Merger and Consolidation 1. Approval by majority vote of the Board of Directors of each corporation. 2. Approval of the stockholders of each corporation representing 2/3 of the outstanding capital stock. 3. Approval of SEC Cases: Associated Polyan v CA Bank v CA; 47
3. Any claim, action or proceeding pending by or against any of the constituent corporations may be prosecuted by or against the surviving or consolidated corporations. 4. The rights of the creditors or lien upon the property of any of each constituent corporation shall not be impaired by such merger or consolidation. 5. Dissolution of other corporation leaving the surviving or consolidated corporation exists. Remedy of the dissenting stockholder: The dissenting stockholder may exercise his appraisal right. RIGHT OF APPRAISAL: A. Concept of Appraisal Right Appraisal Right is the right to withdraw from the corporation and demand payment of the fair value of his shares after dissenting from certain corporate acts involving fundamental changes in corporate structure. *Demanding for the reasonable return of investment. *Stockholders cannot right at his pleasure. Requisites: 1. The Stockholder has dissented 2. Corporate change must have been approved by the SEC. *Any changes that stockholders right. affect the exercise this
C. Effects of Merger or Consolidation 1. All property, real or personal, and all receivables due to, and all other interest of each constituent corporation, shall be deemed transferred to and vested in such surviving or consolidated corporation without further act or deed. 2. The surviving or consolidated corporation shall be responsible for all the liabilities and obligations of
B. Instances of Appraisal Right Sec. 81 of the Corporation Code provides that: Any stockholder of a corporation shall have the right to dissent and demand payment of the fair value of his shares in the following instances: 1. In case any amendment to the articles of incorporation has the effect of changing or restricting the rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class, or of extending or shortening the term of corporate existence; 2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets as provided in the Code; and 3. In case of merger or consolidation.
D. Effects of Exercising Appraisal Right Sec. 83 of the Corporation Code provides that: From the time of demand for payment of the fair value of a stockholders shares until either the abandonment of the corporate action involved or the purchase of the said shares by the corporation, all rights accruing to such shares, including voting and dividend rights, shall be suspended in accordance with the provisions of this Code, except the right of such stockholder to receive payment of the fair value thereof: Provided, That if the dissenting stockholder is not paid the value of his shares within 30 days after the award, his voting and dividend rights shall immediately be restored. Effects: 1. All rights accruing to such shares shall be suspended from the time of demand for payment of the fair value of the shares until either the abandonment of the corporate action. 2. The dissenting stockholder shall be entitled to receive payment of the fair value of his shares as agreed upon between him and the
B. Distinguished from Stock Corporation Non- stock Corporation Public welfare Board of Trustees Generally, the term of office of trustees is 3 years By-laws can provide for a different venue as long as it is within the Philippines Member may be deprived of their right to designate proxies by provisions in the articles of incorporation or by-laws Reason: To promote camaraderie, togetherness, unity and familiarity. Generally, members could directly elect officers. Except unless AOI provides otherwise. C. Membership Corporation in Stock Corporation For profit Board of directors 1 year subject to hold-over principle City or municipality where the principal office is located Proxy is allowed
Non-Stock
Sec. 89 of the Corporation Code provides that: The right of the membership 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
Sec. 96 of the Corporation Code states that: A corporation, within the meaning of this Code, is one whose articles of incorporation provide that: (1) All the corporations 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 20; (2) all the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least 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
Close Corporation Its articles must contain the special matters prescribed by Section 97 aside from the general matters in Section 14. Failure to do so precludes a de jure close 53
Its status as an ordinary stock corporation is not affected by the ownership of its voting stock or voting rights Its articles cannot classify its directors Business of the corporation is managed by the board of directors
The corporate officers and employees are elected by a majority vote of all the members of the board of directors The pre-emptive right is subject to the exceptions found in Section 39 of the Corporation Code The appraisal right may be exercised by a stockholder only in the cases provided in Sections 81 and 42 of the Corporation Code Except as regards redeemable shares, the purchase by the corporation of its own stock must always be made from the unrestricted retained earnings
*In San Juan Structural Steel Fabricators v CA, the SC held that the circumstance that around 99.86% of the total share holding of petitioner belongs to respondent would not justify classification of the corporation as close. B. Permissive Provisions in the Articles of Incorporation Sec. 97 of the Corporation Code provides that: The articles of incorporation of a close corporation may provide: 1. For a classification of shares or rights and the qualifications for owning or holding the same and restrictions on their transfers as may be stated therein, subject to the provisions of the following section; 2. For a classification of directors into one or more classes, each of whom may be voted for and elected solely by a particular class of stock; and 3. For a greater quorum or voting requirements in meetings of stockholders or directors than those provided in this Code. The articles of incorporation of a close corporation may provide that the business of the corporation may provide that the business of the corporation shall be managed by the stockholders of the corporation rather than by a board of directors. So long as this provision continues in effect: 1. No meeting of stockholders need be called to elect directors; 2. Unless the context clearly requires otherwise, the stockholders of the corporation shall be deemed to be 54
CORPORATE DISSOLUTION/LIQUIDATION: A. Methods of Voluntary Corporate Dissolution and the Requirements therefor Dissolution refers to the extinguishment of franchise or termination of corporate existence. Modes of Dissolution: 1. Voluntary dissolution 2. Involuntary dissolution Methods of Voluntary Dissolution: 1. Voluntary dissolution where no creditors are affected 2. Voluntary dissolution creditors are affected where
C. Restrictions on Transfer of Shares Sec. 98 of the Corporation Code provides that: Restrictions on the right to transfer shares must appear in the articles of incorporation and in the by-laws as well as in the certificate of stock; otherwise, the same shall not be binding on any purchaser thereof in good faith. Said restrictions shall not be more onerous than granting the existing stockholders or the corporation the option to purchase the shares of the transferring stockholder with such reasonable terms, conditions or period stated therein. If upon the expiration of said period, the existing stockholders or the corporation fails to exercise the option to purchase, the transferring stockholder may sell his shares to any third person. Option Restriction this restriction provides that no disposition of shares will be made unless the shares are offered first to the corporation or the stockholders. *Pre-emptive right is exercisable or available. *This restriction is valid and allowed. Reason: it is the one contemplated by law. *Restriction derogates private rights. Consent Restriction this restriction provides that no disposition of shares
3. Shortening of the corporate term by amending the articles of incorporation *Dissolution takes effect upon the coming of the shortened term. 4. Expiration of corporate term
where
no
Sec. 118 of the Corporation Code provides that: If dissolution of a corporation does not prejudice the rights of any creditor having a claim against it, the dissolution may be effected by majority vote of the board of directors or trustees, and by a resolution duly adopted by the affirmative vote of the stockholders owning at least 2/3 of the outstanding capital stock 55
where
4. The resolution to dissolve must be approved by the majority of the directors/trustees and approved by the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of members; 5. A copy of the resolution shall be certified by the majority of the
Sec. 119 of the Corporation Code provides that: Where the dissolution of a corporation may prejudice the rights of any creditor, the petition for dissolution shall be filed with the Securities and Exchange Commission. The petition shall be signed by a majority of its board of directors or trustees or other officers having the management of its affairs, verified by its president or secretary or one of its directors or trustees, and shall set forth all claims and demands against it, and that its dissolution was resolved upon by the affirmative vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by at least twothirds (2/3) of the members at a meeting of its stockholders or members called for that purpose. If the petition is sufficient in form and substance, the Commission shall, by an order reciting the purpose of the petition, fix a date on or before which objections thereto may be filed by any person, which date shall not be less than thirty (30) days nor more than sixty (60) days after the entry of the order. Before such date, a copy of the order shall be published at least once a week for three (3) consecutive weeks in a newspaper of general circulation published in the municipality or city where the principal office of the corporation is situated, or if there be no such newspaper, then in a newspaper of general circulation in the Philippines, and a similar copy shall be posted for three (3) consecutive weeks in three (3) public places in such municipality 56
B. Concept of Involuntary Dissolution and the Grounds therefor Sec. 121 of the Corporation Code provides that: A corporation may be dissolved by the Securities and Exchange Commission upon filing of a verified complaint and after proper notice and hearing on the grounds provided by existing laws, rules and regulations. *This must be done with substantive and procedural due process. Grounds: 1. Failure to submit by-laws within the prescribed period 2. Fraud in the procurement Certificate of Registration of
3. Misrepresentation as to the activities that the corporation will undertake 4. Treasurers affidavit is false 5. Continued inoperation for 5 years
C. Corporate Liquidation Liquidation is a process by which all the assets of the corporation are converted into liquid assets in order to facilitate the payment of obligations to creditors, and the remaining balance if any is to be distributed to the stockholders. *Liquidation dissolution. takes place after
D. Methods of Liquidation or Winding Up 1. By Board of Directors 2. Through a trustee to whom the properties are conveyed 3. By management committee or rehabilitation receiver Q: Can the 3 year period be extended? A: NO. Reason: Beyond the 3 year period, there is no corporate existence for all purposes subject to doctrine of relation. Remedy: Before the expiration of the 3 year period, appoint a trustee/receiver.
Sec. 122 of the Corporation Code provides that: Every corporation whose charter expires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall nevertheless be continued as a body corporate for three (3) years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it
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B. Tests to Determine Nationality of a Corporation 1. Incorporation Test when the corporation is incorporated, organized under the law of other country. 2. Control Test for purposes of investment; the citizenship of a particular corporation is to be determined by the citizenship of the controlling stockholders.
E. Revocation and Withdrawal of License Grounds for Revocation: 1. Failure to file its annual report or pay any fees as required by the Corporation Code 2. Failure to appoint and maintain a resident agent in the Philippines as required by the Corporation Code 3. Failure, after change of its resident agent or his address, to submit to the SEC a statement of such change as required by the Corporation Code 4. Failure to submit to the SEC an authenticated copy of any amendment to its articles of
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