BUSINESS LAWS AND

REGULATIONS – CORPORATIONS
Third Trimester, Schoolyear 2022 – 2023

June 26, 2024

Atty. Manuel R. del Rosario

MEETINGS

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 KINDS OF MEETINGS

Meetings of the directors, trustees, stockholders or members may be regular or

special.

During regular stockholders’ or regular members’ meetings, the Board should endeavor
to present:

1. Minutes of the most recent, regular meeting;

2. For stock corporations, material information on the current stockholders and their voting
rights;
3. A detailed, descriptive, balanced and comprehensive assessment of the corporation’s
performance and information on any material change in the corporation’s business, strategy
and other affairs, if any;
4. A financial report for the preceding year;
5. An explanation of the dividend policy and the fact of payment or non-payment thereof;
6. Director or trustee profiles, including their qualifications;
7. Attendance report of directors or trustees;
8. Appraisal and performance reports for the board;
9. Compensation report for directors or trustees;
10. Disclosure on self-dealings of directors and related party transactions;
11. Profiles of directors nominated or seeking election or reelection;
12. Election of the Board
13. Other matters

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 KINDS OF MEETINGS

Special meetings are called when the need arises or as provided in the bylaws
or as proposed by a stockholder or member. AGENDA DEPENDS ON SPECIFIC
NEED OR REASON

Notice of any meeting, whether regular or special, may be waived expressly

or impliedly by a stockholder or member.

Attendance at a meeting constitutes 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.

General or blanket waivers of notice, even if included in the Articles or Bylaws,

is not allowed. NOTIFY ALL STOCKHOLDERS OR MEMBERS

In order to determine who can attend, the stock and transfer books are
closed at least 20 days before regular meetings and at least 7 days for special
meetings unless the bylaws provide otherwise.

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 NOTICE OF MEETINGS

Notice of meetings should indicate the (1) date, (2) time, (3) place
and (4) purpose of the meeting. In addition, the following should
be attached:

1. The agenda for the meeting;

2. A proxy form that shall be submitted to the corporate secretary
within a reasonable time prior to the meeting;
3. The requirement and procedures to be followed if a stockholder or
member opts to attend, participate and vote by remote
communication or in absentia;
4. If the meeting is called for the election of directors or trustees,
the requirements and procedure for electing stockholders or
members to the position. It is also good to attach a brief
background of the nominees for election.

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 QUORUM IN MEETINGS

A valid stockholders or members meeting requires a quorum. A

quorum is defined as the minimum number of members of a group
that must be present at a meeting to make the proceedings of that
meeting legal and valid.

Unless otherwise provided, a quorum shall consist of the stockholders

representing a majority (more than 50%) of the outstanding capital
stock or a majority of the members, in case of a nonstock corporation.

NOTE: For stock corporations, one person represents his percentage

share in the outstanding capital stock. For nonstock corporations, one
member is one vote, regardless of their contribution.

The Chairman of the Board or in his absence the President shall

preside at all stockholders’ or members’ meetings, unless the bylaws
provide otherwise.
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STOCKHOLDERS / MEMBERS MEETING

Regular Special
Held annually on the date fixed in the
Held at any time deemed necessary or
TIME bylaws or any date after April 15 of
as provided in the bylaws
every year

In the principal office of the In the principal office of the

corporation, or if not practical, in the corporation, or if not practical, in the
PLACE
city or municipality where the principal city or municipality where the principal
office is located office is located

Stockholders representing a majority Stockholders representing a majority

of the outstanding capital stock or a of the outstanding capital stock or a
QUORUM majority of the members in case of majority of the members in case of
non-stock corporations unless bylaws non-stock corporations unless bylaws
or the Code provides otherwise or the Code provides otherwise

Notice of at least 21 days prior to the

meeting unless a different period is
Written notice at least 1 week unless
required by the bylaws or regulations;
NOTICE bylaws provide otherwise
and notice is in writing or sent through
electronic mail or such other manner
as the SEC allows

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DIRECTORS / TRUSTEES MEETING

Regular Special
Held monthly unless bylaws provide Held at anytime upon call by the President or
TIME
otherwise as provided by the bylaws

Anywhere in or outside the Philippines, Anywhere in or outside the Philippines,

PLACE
unless bylaws provide otherwise unless bylaws provide otherwise

A majority of the number of directors or A majority of the number of directors or

trustees a fixed in the Articles shall trustees a fixed in the Articles shall
QUORUM constitute a quorum for the transaction of constitute a quorum for the transaction of
corporate business unless the Articles or corporate business unless the Articles or
the bylaws provide for a greater majority the bylaws provide for a greater majority

At least 2 days prior to the scheduled At least 2 days prior to the scheduled
NOTICE
meeting, unless bylaws provide otherwise meeting, unless bylaws provide otherwise

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 VOTING BY PROXY or
REPRESENTATIVE
Stockholders or members may vote in person or by proxy in all meetings.
Voting by proxy may also be done through remote communications or in
absentia when allowed by the bylaws. Voting by remote communications must
be received before the tally of votes is finished by the corporation.

A proxy must be in writing and signed by the stockholder in any form

authorized by the bylaws. The proxy form does not need to be notarized.

The accomplished proxy form must be filed and received by the corporate
secretary within a reasonable period of time before the scheduled meeting.

The proxy is valid ONLY for the specific meeting for which it is intended unless
specified in the proxy form but in no case shall it be valid for a period longer
than 5 years.

NOTE: Treasury shares have NO voting rights so long as they remain in

the treasury.

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 VOTING TRUST AGREEMENTS
(VTA)

A voting trust agreement (VTA) is a legal document that records the transfer
of shares from a stockholder (trustor) to a third party (trustee). The
agreement gives the trustee temporary control of the voting powers of the
shareholders / trustors. The original certificates of stock issued to the
shareholders by the company are cancelled and new stock certificates are
issued in the name of the third party / trustee. In turn, the trustee shall
deliver to the shareholders / trustors a voting trust certificates (VTC).

Once the voting trust agreement expires, the VTC and the stock certificates
issued in the name of the trustee are cancelled and a third set of stock
certificates are issued in the name of the trustor.

Pansamantalang ililipat ang ownership at stock certificates sa pangalan ng

trustee.

Owner / Stockholder (1) – trustor

Third Party / Transferee (2) - trustee

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 VOTING TRUST AGREEMENTS
(VTA)

EXAMPLE: Pedro owns 50,000 shares, Jose owns 20,000 shares and Beverly
owns 100,000 shares in Maligalig Corporation. They can sign a VTA in favor of
BDO as trustee so that BDO can vote the total of 170,000 shares that they
own. Pedro, Jose and Beverly will surrender their individual stock certificates
to Maligalig and Maligalig will issue a new stock certificate to BDO as trustee
for 170,000 shares. BDO becomes the legal owner of the shares and Pedro,
Jose and Beverly become beneficial owners. BDO will issue a VTC in favor
of Pedro, Jose and Beverly.

Upon the expiration of the VTA, the stock certificate in the name of BDO is
cancelled and individual stock certificates are reissued to Pedro, Jose and
Beverly for their actual shares.

Stock Certificate No. 1: in the names of Pedro, Jose and Beverly (the trustors)
Stock Certificate No. 2: In the name of BDO (the trustee)
Stock Certificate No. 3: in the names of Pedro, Jose and Beverly

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 VOTING TRUST AGREEMENTS
(VTA)

A voting trust agreement (VTA) must be signed, notarized and must specify
the terms and conditions of the agreement. The VTA must be submitted to
the corporation and the SEC.

A VTA is valid up to 5 years only. The exception is when a VTA is submitted as

part of a loan agreement in which case the VTA is canceled upon full payment
of the loan.

No VTA 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
the perpetuation of fraud.

VTA usually done to get a block of votes for major corporate decisions like a
takeover or a merger.

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 VOTING BY PROXY vs.
VOTING TRUST AGREEMENT

PROXY VOTING TRUST AGREEMENT

Not notarized Notarized

Submitted to the Company Submitted to the Company

Not submitted to the SEC Submitted to the SEC

Valid for 1 specific meeting or

Valid for not more than 5 years
not more than 5 years

Transfer of legal ownership to the

No transfer of legal ownership
trustee

New stock certificates issued in the

No change in stock certificates
name of the trustee

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STOCKS AND STOCKHOLDERS

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 SUBSCRIPTION CONTRACT

A subscription agreement is a contract for the acquisition of unissued

stock in an existing corporation or a corporation still to be formed.

Subscribers to the capital stock of a company agree to take and pay

for the unissued shares of the company’s capital stock, even if the
company is yet to be formed or after it is organized.

A purchaser is a person, natural or juridical, who purchases shares of

stock that have been previously issued.

A subscriber is different from a purchaser. A subscriber buys unissued

stock while a purchaser buys stocks already issued.

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 HOW CAN ONE
BECOME A STOCKHOLDER?

1. By subscription agreement to buy unissued stock in an existing

corporation or a corporation still to be formed.

2. By buying from a previous stockholder (transfer of shares)

3. By buying a corporation’s treasury shares (shares previously

issued but bought back by the corporation).

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 PRE-INCORPORATION
SUBSCRIPTION
A subscription of shares in a corporation still to be formed shall be irrevocable
for a period of at least 6 months from the date of the subscription.

EXCEPTIONS: (a) all the other subscribers consent to the revocation

(b) the corporation fails to incorporate

No pre-incorporation subscription may be revoked after the Articles of

Incorporation has been submitted to the SEC (Section 60)

Reasons for the 6-month lock in period? (1) To ensure that the new company
has funds at the time the corporation is created and (2) to prevent a
subscriber from speculating on the stocks.

EXAMPLE: On May 15, 2022 Tony subscribed to 5,000 shares in Mabait

Corporation which was in the process of being formed. Tony cannot withdraw
his money from the corporation until November 15, 2022, even if Mabait
Corporation has not yet been issued any Certificate of Registration by the SEC

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 CONSIDERATION FOR STOCKS

Stocks shall not be issued for a consideration less than the par or issued price.
Consideration may be:

1. Actual cash;
2. Property, tangible or intangible, actually received by the corporation and
necessary or convenient for its use and lawful purpose;
3. Labor performed for or actual services rendered;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings
6. Outstanding shares exchanged for stocks in case of reclassification or
conversion;
7. Shares of stock in another corporation;
8. Other generally accepted forms of consideration (Section 61)

NOTE: When consideration is other than cash (numbers 2 to 8 above), the

valuation thereof shall initially be determined by the stockholders or the board
of directors subject to SEC approval. Why? So we know whether the shares
are already fully paid and so we know if the corporation got a fair deal from
the purchaser.
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 CONSIDERATION FOR STOCKS

NOTE: Shares of stock may not be issued in exchange for promissory

notes or promise for future services.

EXAMPLE: Clarice wants to purchase 3,000 shares in Grow and Glow

Pre-School. However, since she had no money, she offered her
services as an accountant and said she will work for 6 months without
pay, as consideration for the 3,000 shares. This is not allowed. There
is no industrial shareholder in a corporation unlike an industrial
partner in a partnership.

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 STOCK CERTIFICATES

A stock certificate is a written instrument signed by the proper

corporate officer stating that the person named therein is the owner
of the designated number of shares of its stock.

Every stock certificate must be signed by the president or vice

president of the corporation, countersigned by the corporate secretary
and affixed with the corporate seal.

Stock certificates will be issued only upon full payment of the

subscription, together with interest and expenses if any is due.

Subscribers to stock shall be liable for interest on all unpaid

subscriptions from the date of the subscription. If no interest rate is
fixed in the subscription contract, the legal rate shall apply. The legal
rate in the Philippines is 6% per annum.

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 RIGHTS OF STOCKHOLDERS

1. The right to attend and vote, whether in person or by proxy, at

stockholders’ meetings
2. The right to elect and remove directors
3. The right to approve certain corporate actions
4. The right to adopt, amend or repeal the bylaws
5. The right to compel the calling of meetings of the stockholders
6. The right to the issuance of a stock certificate
7. The right to received dividends
8. The right to participate in the distribution of assets upon dissolution of
the corporation
9. The right to transfer his shares to another person
10. The right to inspect corporate books and records
11. The right to enter into a voting trust agreement
12. The right to have the corporation voluntarily dissolved

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 LIABILITIES OF
STOCKHOLDERS

1. Liability for unpaid subscription

2. Liability for interest on unpaid subscription
3. Liability for watered or diluted stocks
4. Liability for dividends unlawfully paid

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 TRANSFER OF STOCK
CERTIFICATES
Shares of stock are personal or movable property and may be transferred by
delivery of the certificates indorsed by the owner. Only fully paid shares of
stock may be transferred. There is no such thing as a “non-
transferrable” stock certificate. This is null and void.

For a valid transfer of shares:

• Delivery to the corporation of the original certificate issued;

• Certificate must be endorsed by the owner;
• The transfer must be recorded in the stock and transfer books of
the corporation. WHY? So the corporation always knows who its
actual stockholders are and so it can object in case it has a claim
against the shares of stock

If the transfer is not recorded in the stock and transfer books of the
corporation, the buyer only has no rights against the corporation except the
right to have the shares transferred in his name. HINDI PA SIYA
STOCKHOLDER

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 WATERED or DILUTED STOCKS
Watered stock is stock that is issued by a corporation as fully paid up when in
fact it is not, because it has been issued:

a. without any consideration or

b. for less than the par value or
c. for overvalued property, labor or services.

The issuance of watered stock is prohibited to protect persons who may

acquire stock and those who may become creditors. They believe that the
shares are fully paid.

Prohibition refers to the original issue of the stocks. If a stock is subsequently

transferred, for example treasury shares are resold to the public, it is no
longer “issued” and may be sold for less than par or issued value.

EXAMPLE: DEF Corporation reacquired 1,000 shares with a par value of P1

each. These 1,000 shares became treasury shares. After 3 years, DEF sold the
treasury shares for P500 (less than par value). This is legal.

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 LIABILITY OF DIRECTOR
FOR ISSUANCE OF WATERED STOCKS

A director who (a) consents to the issuance of stocks for less than par value
or (b) consents to the issuance of stocks for a consideration other than cash,
valued in excess of fair value or (c) having knowledge of 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 in value received and the par or
issued value of the same.

EXAMPLE: Kyle purchased 500,000 shares of stocks in XYZ Corporation with

an issued value of P10 each. Instead of paying P5M in cash for the shares,
Kyle gave a parcel of land measuring 125 square meters. He told the
corporation that the land was valued at P5M. The corporation took his word
for it and did not investigate. A cursory examination of the property will reveal
it is worth less than P5M. If Director Rene does not object in writing to the
issuance of these watered stocks in favor of Kyle he can be held solidarily
liable with Kyle for the difference in the value of the property and the P5M
price of the 500,000 shares of stock.
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 DELINQUENT STOCKS

At any time, the Board may declare unpaid subscriptions due and payable.
The call for payment may be for the full amount or a percentage of the full
amount. If no payment is received within 30 days from the date specified, the
shares of stock will become DELINQUENT and may be sold. Section 67

The Board may order the sale of delinquent stock and specify the amount due
on each subscription plus interest. The date, time and place of the sale shall
not be less than 30 days nor more than 60 days from the date the stocks
became delinquent.

TWO ACTIONS REQUIRED: (1) stocks are declared delinquent and (2) the
delinquent stocks are sold

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 PROCEDURE FOR THE SALE OF
DELINQUENT STOCKS

1. The Board of Directors passes a resolution declaring payable the whole or

a percentage of unpaid subscriptions stating the deadline for payment.

2. The stockholders are notified of the resolution. If they do not pay within
30 days from the deadline, the stocks will become delinquent.

3. The Board of Directors passes a resolution ordering the sale of the

delinquent stocks stating the amount due, the date and place of sale with
notice to the delinquent stockholders.

4. On the date of the sale, the delinquent stocks shall be sold to the highest
bidder for cash. If there are no bidders who offers to pay the full amount
plus interest, the corporation may bid for the same and the shares become
treasury shares

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 DELINQUENT STOCKS

Delinquent stocks may not vote or be voted upon or represented at

any meeting. The holder of delinquent stocks do not have any rights
of a stockholder EXCEPT the right to receive dividends. (Section 71)

Holders of subscribed shares not yet fully paid, but which are not yet
declared delinquent, shall have all the rights of a stockholder.

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 LOST OR DESTROYED
CERTIFICATES OF STOCKS
The corporation may issue new certificates to replace those that have been
lost, stolen or destroyed. The procedure is as follows:

1. The registered owner shall file a notarized Affidavit of Loss in triplicate.

The affidavit should state (a) the circumstances surrounding the loss,
theft or destruction, (b) the number of shares covered by the certificate
(c) the serial number of the certificate and (d) other information;
2. The corporation shall check the adequacy of the affidavit;
3. The corporation shall cause the publication of a proper notice in a
newspaper of general circulation published in the place where the
principal office of the corporation is located, once a week for 3
consecutive weeks;
4. If no contest or opposition is presented after the lapse of 1 year from
the date of last publication, the corporation shall cancel the old
certificate and issue new ones. The registered owner of the
certificate may request to be issued a new certificate even before
the lapse of 1 year by filing a bond or other surety duly approved
by the Board of Directors.
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