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CORPORATION LAW

Corporation is one of the types of business organizations. It is also the most important in economic development.

INTRODUCTION

Sole proprietorship

One man form of business entity, personally answers all liabilities, but enjoys all the profits with the exclusion of others

Limited shareholders responsibility

Paid subscription in full, you are no longer liable

Partnership

Based on mutual trust and confidence

Joint venture

one time grouping of persons whether they be natural or juridical

does not entail continuity because after the undertaking is completed it is already the end

particular partnership and joint venture would be similar, but there is already a decision of the Supreme Court declaring them as different when they do not register, it does not exist

Foreign corporations enters into an agreement with a domestic corporation, it must be registered. Generally they do not need to be registered.

Corporations

They may enter into joint venture, but generally they cannot enter into a partnership, but there are exceptions allowed by the SEC: the 3 exceptions must go hand in hand

1. The articles of incorporation expressly authorized the corporation to enter into contracts of partnership;

2. The agreement or articles of partnership must provide that all the partners will manage the partnership; and

3. The articles of partnership must stipulate that all the partners are and shall be jointly and severally liable for all obligations of the partnership.

DEFINITION AND ATTRIBUTES

4 attributes of a corporation

1. Artificial being

2. Created by operation of law

3. Right of succession

4. Powers, attributes and properties expressly authorized by law or incident to its existence.

Doctrine of limited capacity

Only such powers as are expressly granted to it by law and by its articles of incorporation including others which are incidental to such conferred powers, those reasonably necessary to accomplish its purpose and those which may be incidental to its existence

Can do things as the law asks or allows it to do

If it does anything beyond, it shall be considered as ULTRA VIRES

General rule: Moral damages cannot be granted to corporations

Exception: Filipinas Broadcasting Network Inc. vs. Ago Med In cases of slander, libel and other forms of defamation (should not qualify because the code does not qualify whether natural or juridical) Art. 2219 of the civil code:

Art. 2219. Moral damages may be recovered in the following and analogous cases:

(1) A criminal offense resulting in physical injuries;

(2) Quasi-delicts causing physical injuries;

(3) Seduction, abduction, rape, or other lascivious acts;

(4) Adultery or concubinage;

(5) Illegal or arbitrary detention or arrest;

(6) Illegal search;

(7) Libel, slander or any other form of defamation;

(8) Malicious prosecution;

(9) Acts mentioned in Article 309;

(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.The parents of the female seduced, abducted, raped, or abused, referred to in No. 3 of this article, may also recover moral damages.

The spouse, descendants, ascendants, and brothers and sisters may bring the action mentioned in No. 9 of this article, in the order named.

Advantages (SEE LADIA BOOK)

No. 2 may also be a disadvantage

No. 5 may also be a disadvantage

A corporation is a person, therefore protected by the due process clause and equal protection clause of the Constitution

CLASSIFICATION OF CORPORATIONS

Section 3 Stock and non-stock

Importance of knowing, determining what provisions of the code or the law may be applicable

Section 3. Classes of corporations. - Corporations formed or organized under this Code may be stock or non-stock corporations. 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 are stock corporations. All other corporations are non-stock corporations. (3a)

Non-stock- title 10

Stock- section 51

Stockholders must generally cast their votes in the meeting; section 4 governed primarily by the law creating them

Section 4. Corporations created by special laws or charters. - Corporations created by special laws or charters shall be governed primarily by the provisions of the special law or charter creating them or applicable to them, supplemented by the provisions of this Code, insofar as they are applicable. (n)

Section 3

The two requisites must always concur

1. That they have a capital stock divided into shares; and,

2. That they are authorized to distribute dividends or allotments as surplus profits to its stockholders on the basis of the shares held by each of them.

Section 4

Created by a special law, they have their own character

They are not immune from suit unless provided by the law of their creation

Primarily governed by the law creating them

Their subsidiaries are entirely different or independent from that of the other

Close corporation

There is no exemption it is absolute Public corporation

Political or governmental purposes

Those formed or organized for the government or a portion of the State or any of its political subdivision and which have for their purpose the general good and welfare

Private Corporation

Immediate benefit, aim or advantage of private individuals

Those formed for some private purpose, benefit, aim or end

Distinction: public for governmental purpose

Corporation Sole

Exemption to the rule because it is composed only of one person

An incorporator may also be a juridical person Close corporation

There is exclusivity of shares of stock

Section 96-105

Restrictions to transfer shares

Only those indicated can own shares

Article must provide that there will be no public offering

Open corporation

openly admit investors

example: stock exchange

Domestic/ Foreign

Test

Incorporation test

If incorporated under the laws of the Philippines it is a domestic corporation

ME Gray vs. CA

Parent or Holding/ subsidiaries and affiliates

Affiliates- no majority vote

SMC 12%

HERSHEY CBPl 12%

12%

Affiliate is subject to common control by the 12 % owners

De jure

cannot be attached by the state even in a quo warranto proceeding

De facto

exists by virtue of colorable compliance

Attached directly only by the state in a quo warranto proceeding

Corporation by estoppel

So defectively formed, but still considered corporation, but only in relation to those who cannot deny their existence section 20 and 21

FORMATION AND ORGANIZATION

3 stages1. Creation2. Re-organization or quasi-reorganization3. Dissolution/winding-up Purpose clause Defining the scope of authority of the corporate enterprise pr undertaking. Both confirmed and limited 4 limitations of purpose clause

1. Lawful

2. Specific or stated concisely

3. More than one, the primary and secondary must be specified

4. Lawfully combined

Provision that states, cannot be issued less than par, exception is treasury shares because it can be issued less than par

A corporation commences only upon issuance of the certificate, prior thereto it has no being and cannot transact business. Promoters cannot act for a projected corporation

Metro Manila- paid up capital requirement is 10 M Non- stock- mere mention of the operating capital

Mention the authorized capital

Restrictions

Mandatory in close

Not mandatory in ordinary

Non-stock

If value is not more than 100,000

A corporation cannot use any other name unless it has been amended Section 19

If confusingly similar it will not be allowed to be registered

Verification slip from the records officer

Section 19. Commencement of corporate existence. - 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 Securities and Exchange Commission 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. (n)

Words corporation or inc. either in full or abbreviated form must be included

Section 18. Corporate name. - No corporate name may be allowed by the Securities and Exchange Commission if the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws. When a change in the corporate name is approved, the Commission shall issue an amended certificate of incorporation under the amended name. (n)

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.

Section 18

Lyceum of the Philippines case, the additional geographical name does not make it confusingly similar

actual confusion is not necessary- Philips case it is enough that there is probable confusion

2 requisites must be proven

that the complainant corporation acquired a prior right over the use of such corporate name

identical, deceptively or confusingly, patently deceptive

principal office

statement of principal office is required

city and municipality not only province must be specified

principal office NOT operations office

necessary because it will establish the residence of corporations

venue of actions for or against the corporations

venue of meetings

section 51 meetings may only be within the boundaries of the city where the principal office

non-stock may be held anywhere in the Philippines, if provided in its by-laws

where summons may be served registration of chattel mortgage must be registered in the register of deeds where the principal office is located Clavecilla Radio System vs. Antillon

action not upon a written contract

city where the defendant resides

term of existence

corporate term required

determining what point in time the juridical personality will cease to exist

enter into contract only when it has juridical personality

once it ceases to exist, it no longer has personality

exist for another 3 years only for purposes of liquidation Dissolution- it is automatic

When should extension be made?

General rule: Not earlier than 5 years

Exception: unless there are justifiable reasons

May it be extended after expiration?

Alhambra cigar vs. SEC once it ceases to exist it has no vested politic, exist only for a period of 3 years only for liquidation and for that purpose only

Article 5 How many incorporators should there be?

5-15

May a corporation be an incorporator?

General rule: only natural persons

Exception: cooperatives and corporation primarily organized to hold equities in rural banks

How about minors?

NO, because they must be of legal age

May a corporation organized by incorporators consisting solely of foreigners

Yes, there is no nationality requirement only residence, as long as majority are residents of the Phil

Define incorporators

Those person mentioned in the articles as originally forming the corporation and who are signatories of the articles of incorporation.

Must be signatories to be incorporators

Section 5. Corporators and incorporators, stockholders and members. - Corporators are those who compose a corporation, whether as stockholders or as members. Incorporators are those stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof.

Corporators in a stock corporation are called stockholders or shareholders. Corporators in a non-stock corporation are called members. (4a)

Define corporators

All persons who compose the corporation at any given time and need not be among those who execute the articles of incorporation at the start of its formation and organization.

Originally or subsequently

Section 5 provides:

Corporators in a stock corporation are called stockholders or shareholders. Corporators in a non-stock corporation are called members. (4a) May a corporation be a corporator?

YES. There is nothing to prevent a corporation from being a stockholder

Incorporator must subscribe to 1 share

There are those that are exclusively reserved to Filipinos An incorporator maybe a corporator as long as he is a stockholder section 6

Section 6. Classification of shares. - The shares of stock of stock corporations may be divided into classes or series of shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation: Provided, That 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, further, That there shall always be a class or series of shares which have complete voting rights. Any or all of the shares or series of shares may have a par value or have no par value as may be provided for in the articles of incorporation: Provided, however, That banks, trust companies, insurance companies, public utilities, and building and loan associations 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 the assets of the corporation in case of liquidation and in the distribution of dividends, or such other preferences as may be stated in the articles of incorporation which are not violative of the provisions of this Code: 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, That such terms and conditions shall be effective upon the filing of a certificate thereof with the Securities and Exchange Commission.

Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto: Provided; That shares without par value may not be issued for a consideration less than the value of five (P5.00) pesos 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, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal requirements.

Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be equal in all respects to every other share.

Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on the following matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;

3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property;

4. Incurring, creating or increasing bonded indebtedness;

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 this Code; and

8. Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights. (5a)

How many directors should there be?

General rule: Not less than 5 not more than 15

Exceptions:

1. Educational corporations registered as non stock corporation whose number of trustees, though not less than five and not more than [15] should be divisible by five [5], meaning they must have either five, ten, or fifteen trustees and no other;

2. In close corporations where all the stockholders are considered as members of the board of directors thereby effectively allowing twenty members in the board.

3. The by-laws of a corporation may provide for additional qualifications and disqualifications of its members of the board of directors or trustees. However it may not do away with the minimum disqualifications lay down by the Code.

Qualifications of the governing board

Requires mere residency

Section 23. The board of directors or trustees. - 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 (1) year until their successors are elected and qualified. (28a)

Every director must own at least one (1) 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 (1) 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.

May a domestic corporation have a governing board consisting solely of foreigners?

YES, section 23 majority of them must be residents of the Philippines, no nationality requirement

Anti-dummy act

If the business undertaking or activity is only partially nationalized, aliens can be elected as such directors, [unless the law provides otherwise] but their number shall only be in proportion to their equity or participation in the capital stock of the corporation.

Disqualifications

The disqualifications provided for is absolute and may not be done away with. Corporate by-laws may, however, provide for additional qualifications and disqualifications.

Section 27. Disqualification of directors, trustees or officers. - No person convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or a violation of this Code committed within five (5) years prior to the date of his election or appointment, shall qualify as a director, trustee or officer of any corporation. (n)

Section 27 and 23 minimum disqualifications and qualifications

Lee vs. CA

By laws may provide for additional

Govt vs. El hogar Filipino, Gokongwei vs. SMC

Capital structure

Foundation- minimum paid-up capital 3M

Authorized capital 1 M

No. of shares 1M shares

par value 1.00

Amount of shares subscribed

50 K A

50 K B

C 250K

D

E

PAID UP =62,500

Corporation cannot exceed more than 1 M it is the maximum amount it cannot issue more unless amended

Maximum shares it can issue is 1M shares unless amended

How much shares should be subscribed?

Must be at least 25% of the authorized capital stock

Paid- up must be at least 25%-minimum

Section 30

Total subscription compliance with minimum 25% total

Any combination would comply with the minimum required by section 30

Section 30. Compensation of directors. - In the absence of any provision in the by-laws 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 ten (10%) percent of the net income before income tax of the corporation during the preceding year. (n)

Minimum for a domestic corporation?

In no case shall the paid- up capital be less than 5k

Is there a minimum authorized capital imposed by the code?

If there is minimum paid-up logically there should also be a minimum capital =5000

Minimum paid-up capital for a financing company metro manila 10 M if located in MM

Shares of stock

Purpose of classification

To specify and define the rights and privileges of the stockholders;

For regulation and control of the issuance of sale of corporate securities for the protection of purchasers and stockholders.

As a management control device.

To comply with statutory requirements particularly those which provide for certain limitations on foreign ownership and shares like overseas employment agencies requiring to own at least 75% of the shares of stock thereof.

To better insure return on investment which can be affected through the issuance of redeemable shares or preferred shares, i.e., granting the holders thereof, preference as to dividends and/or distribution of assets in case of liquidation; and,

For flexibility in price, particularly, no par shares may be issued or sold from time to time at different price depending on the net worth of the company since they do not purport to represent an actual of fixed value.

Section 6

Each shall be equal in all respects to every other share

Preferred shares

Specific preference

Dividends or during liquidation

No par

Can sell it with the network of the corporation

Distinction between the subscribed and outstanding stocks?

Section 137

Section 137. Outstanding capital stock defined. - The term "outstanding capital stock", as used in this Code, means the total shares of stock issued under binding subscription agreements to subscribers or stockholders, whether or not fully or partially paid, except treasury shares. (n)

Voting and dividend rights, it refers to the outstanding capital stocks

Only outstanding stocks are allowed to vote and receive dividends

Actually the same

Treasury shares

are also subscribed shares

while they remain in the treasury, no voting and dividend rights

may be reissued by the corporation

once reissued they become outstanding stocks again

common shares

carry the right to vote

preferred shares

grants the holder preference

preference as to dividends

preference as to distribution of the remaining assets upon dissolution or

both

YOU MUST STATE THE PREFERENCE BECAUSE IF NOT THEY ARE PRESUMED TO BE EQUAL

It may include such other preferences not inconsistent with the Code. This is so because Section 6 of the said law allows a stock corporation to issue preferred shares subject only to the limitations imposed therein which are:

a. They can be issued only with sated par value; and,

b. The preferences must be stated in the articles of incorporation and in the certificate of stock, otherwise, each share shall be, in all respect, equal to every other share.

Participating

Must be stated because the presumption is that it is participating

Cumulative

Irrespective of whether or not they where earned

Preferred

May be denied

Unless denied they are still entitled

What if hindi i-declare kahit na may dividends rights for the previous years? May they be denied dividend rights because they are non holders of non-cumulative? NOTE: YOU CANNOT COMPEL THE CORPORATION TO DECLARE DIVIDENDS UNLESS IT EXCEEDS 100 % PAID UP CAPITAL SEC. 43

Section 43. Power to declare dividends. - The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. (16a)

Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in capital stock, except: (1) when justified by definite corporate expansion projects or programs approved by the board of directors; or (2) when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or (3) when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies. (n)

It depends because there are three types of non-cumulative preferred shares

Discretionary dividend type

Mandatory if earned

Earned cumulative or dividend credit type

Compare cumulative share from non-cumulative, earned cumulative or dividend credit type

Cumulative share whether or not earned

Non-cumulative earned cumulative or dividend credit type- only if earned

Par

stated par value; shall not be issued less than par

No par

without stated par value

once fully paid no longer liable

Corporations cannot use its capitals in declaring dividends; not all can issue no par value section 6

Voting

entitled to vote at any motion brought up in writing

Non-voting

not entitled to vote

What types of shares may be denied of the right to vote?

Preferred and redeemable shares

Is it correct to state that common shares can never be denied the right to vote?

Only preferred and redeemable shares are denied unless provided in this code

PWEDENG MA-DENY YUNG COMMON SHARES, KASI YUNG FOUNDERS SHARES MERON SILANG EXCLUSIVE RIGHTS NA SILA LANG ANG MERON, SO PWEDE SILANG BUMOTO WITH REGARDS TO SOMETHING NA HINDI NA SAKOP NG COMMON SHARE RIGHTS

Example: founders shares- may be given certain rights and privileges

Even common shares may be denied the right to vote of founders shares issued

Section 7. Founders' shares. - 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 a limited period not to exceed five (5) years subject to the approval of the Securities and Exchange Commission. The five-year period shall commence from the date of the aforesaid approval by the Securities and Exchange Commission. (n)

Do you include non-voting shares in passing a valid corporate act?

Even non-voting shares are entitled to vote under section 6

Redeemable shares

Discretionary/optional

Obligatory or mandatory

Generally a corporation can reacquire its own shares if it has unrestricted retained earnings

Exception: redeemable shares may be reacquired irrespective of retained earnings

Treasury shares

They are treasury while in the treasury account of the corporation

May they be reissued by the corporation?

YES

If they are reissued will they be denied the right to vote?

Once reissued they shall become outstanding stocks again and purchasers shall be entitled to all the rights and privileges as the other holders have

Section 57 treasury shares have no voting and dividend rights. Why not?

Section 57. Voting right for treasury shares. - Treasury shares shall have no voting right as long as such shares remain in the Treasury. (n)

Answer: commissioner vs. manning page 62 first par.

Although authorities may differ on the exact legal and accounting status of so-called treasury shares, they are more or less in agreement that treasury shares are stocks issued and fully paid for and reacquired by the corporation either by purchase, donation, forfeiture or other means. Treasury shares are therefore issued shares but being in the treasury they do not have the status of outstanding shares. Consequently, although a treasury share, not having been retired by the corporation re-acquiring it, may be re-issued or sold again, such shares, as long as it is held by the corporation as a treasury share, participates neither in dividends, because dividends cannot be declared by the corporation to itself, nor in meetings of the corporation as voting stock, for otherwise equal distribution of voting powers among stockholders will be effectively lost and the directors will be able to perpetrate their control of the corporation, though it still represents a paid for interest in the property of the corporation. The foregoing essential features of a treasury stocks are lacking in the questioned shares.

In this case, and under the terms of the trust agreement, the shares of stock of Reese participated in dividends which the trustee received and the said shares were voted upon by the trustee in all corporation meetings. They were not, therefore, treasury shares.

When the law speaks of outstanding rights it does not include treasury shares

Treasury shares may be reissued They are actually assets of the corporation

Once re-issued they become outstanding stocks again

The corporation may cancel them; in effect there will be a reduction in the outstanding capital stocks

The code does not require ordinary corporations to provide for restrictions, but it does not likewise prohibit restrictions

Example: right of first refusal

The restriction must be contained in the articles of incorporation

If provided in by-laws but not in the articles of incorporation then it will not be binding

Restrictions and preferences are mandatorily required in close corporations

If it does not provide restrictions it is not a close corporation

Specified persons- close corporations

If not one of those specified you are not included because there is exclusivity in close corporations

Should also be in the by-laws not only in the articles of incorporation

No transfer clause

Execution clause

Acknowledgment

Treasurer affidavit part of the articles of incorporation

Section 23-27 minimum qualifications, but there may be additional Grounds for disapproval

Only substantial and not strict is required

May the SEC refuse or reject registration?

Section 17. Grounds when articles of incorporation or amendment may be rejected or disapproved. - The Securities and Exchange Commission may reject the articles of incorporation or disapprove any amendment thereto if the same is not in compliance with the requirements of this Code: Provided, That the Commission shall give the incorporators a reasonable time within which to correct or modify the objectionable portions of the articles or amendment. The following are grounds for such rejection or disapproval:

1. That the articles of incorporation or any amendment thereto is not substantially in accordance with the form prescribed herein;

2. That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations;

3. That the Treasurer's Affidavit concerning the amount of capital stock subscribed and/or paid is false;

4. That 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.

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, insurance companies, public utilities, educational institutions, and other corporations governed by special laws shall be accepted or 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. (n)

But the grounds in section 17 are not exclusive When will the corporation commence to exist?

Section 19

Section 19. Commencement of corporate existence. - 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 Securities and Exchange Commission 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. (n)

A corporation de jure can come into existence only upon the issuance of the certificate of registration by the SEC? TRUE OR FALSE?

TRUE

EXCEPTION: CORPORATION SOLE

Section 112. Submission of the articles of incorporation. - The articles of incorporation must be verified, before filing, by affidavit or affirmation of the chief archbishop, bishop, priest, minister, rabbi or presiding elder, as the case may be, and accompanied by a copy of the commission, certificate of election or letter of appointment of such chief archbishop, bishop, priest, minister, rabbi or presiding elder, duly certified to be correct by any notary public.

From and after the filing with the Securities and Exchange Commission of the said articles of incorporation, verified by affidavit or affirmation, and accompanied by the documents mentioned in the preceding paragraph, such chief archbishop, bishop, priest, minister, rabbi or presiding elder shall become a corporation sole and all temporalities, estate and properties of the religious denomination, sect or church theretofore administered or managed by him as such chief archbishop, bishop, priest, minister, rabbi or presiding elder shall be held in trust by him as a corporation sole, for the use, purpose, behalf and sole benefit of his religious denomination, sect or church, including hospitals, schools, colleges, orphan asylums, parsonages and cemeteries thereof. (n)

CORPORATION SOLE- upon filing of the verified articles of incorporation, once filed it is vested with a judicial capacity

General rule section 19

Vested with judicial capacity upon issuance of the certificate by the SEC

However it is not accurate according to atty. Ladia because there are those that can issue for example cooperatives- BUREAU OF COOPERATIVES which register, home insurance guaranty corporation- HOME OWNERS Cagayan Fishing vs. Sandika

Corporations are created by law

Commence to exist upon issuance by the CONCERNED government corporation or agency

Prior there to it has no being

The transfer of the property was not valid, it likewise did not have the right to transfer

De jure

Strict or substantial compliance

De facto

4 requisites must go hand in hand take out anyone of them there can be no de facto corporation

1. There is a valid statute under which the corporation could have been created as a de jure corporation.

2. An attempt, in good faith, to form a corporation according to the requirements of law, which goes far enough to amount to a colorable compliance with the law;

3. A user of corporate powers, the transaction of business in some way as if it were a corporation; and,

4. Good faith in claiming to be and doing business as a corporation.

Are the rights and obligations between officers and directors of a de jure and de facto the same?

YES. Governed by the same law, rules and regulations

Only important in determining, is for the purpose of applying the rules with regards to the direct and collateral attack

The existence of a de jure cannot be questioned even by the State, either directly or indirectly

Existence of a de facto can be questioned only by the State directly in a quo warranto proceeding only

Municipality of Malabang vs. Benito

What is the missing link so as to consider it a de facto? A law, because the executive order is unconditional

An unconditional act affords no rights, creates no office

Legal contemplation it was never passed at all

It can therefore be questioned by any person

If the certificate of registration has not been issued, may a corporation de facto exist?

NO!

Number 4 requirement, good faith in claiming to be and doing business as a corporation

Hall vs. Piccio

Missing link is good faith

The certificate was not yet issued by the SEC, the members knew and therefore they were not acting in good faith, therefore anybody can question its existence

Corporation by estoppel

So defectively formed so that they are not to be considered a de jure or de facto

General partners- liable even beyond his promise even his personal properties are prone to attachment

Lozano vs. Delos Santos

Founded on principle of equity

Exercise corporate powers

Enters with business with 3rd parties

When there is no 3rd persons involved and the problem arises between there members, therefore they themselves know that there is no corporation by estoppel

Albert vs. University

1965 case, no section 21 yet

Applied where the rules governing agency

A person purporting in behalf of a non existing corporation

Section 21, you arrive at the same decision

Chiang Kai Siek vs. CA

SC based its decision from the provision of the education act

It cannot immune itself by virtue of its non compliance with the law

Assuming there was no law?

YES, it may still be sued as a school for the past 32 years the school represented itself as possessed of juridical personality

General rule: a 3rd party transacting with a non existent corporation shall be estopped to deny

Asia banking vs. standard products

General rule: absence of fraud a person who has dealt with a non incorporated corporation shall be stopped to deny from actions in which it had benefited

Exemptions: when there is fraud the general rule shall not apply

Salvatierra vs. Garlitos

As a general rule a person who has contracted it a corporation lacking personality

Doctrine is not applicable where fraud takes part in the transaction

Another exemption

International express travel and tours vs. CA

No fraud in this case

How come Kahn was made liable?

Doctrine of incorporation

Applies only if that person is trying to escape from a contract where he is benefited

In this case petitioner is not trying to escape liability, but rather the one claiming from the contract

Would this apply to foreign corporation?

YES, it may apply

Georg Grotjahn vs. Isnami

A foreign corporation cannot gain access to our courts unless they attain a license to engage in business in the Philippines but applying corporation by estoppels, the court allowed

Municipality of Malabang case

No law, hence may be questioned by any person

An unconstitutional act is not a law, t confers no rights, it imposes no duties, it affords no protections, it crates o office, it is in legal contemplation, as inoperative as though it had never been passes

Hall vs. Piccio

No good faith

Corporation by estoppel

Admission, conduct or agreement

Will not apply among members themselves there must be a 3rd party

Cannot escape when benefited

General rule: you deal with a corporation, as to estop it

Exceptions: 1. fraudulently misrepresents the third person may file an action directly to those members, 2. 3rd party will not be estopped if he is not trying to escape liability

2 possible remedies

Chiang kai siek case

Albert case

What would be the effect if the corporation failed to commence transaction?

Automatic

Operated but becomes subsequently inoperative for 5 years only a ground for suspension, proper notice and hearing

Commencement

Example realty company

CORPORATE CHARTER AND ITS AMENDMENTS

What do you understand by the word charter? Is it the same as articles of incorporation?

Corporate charter is broader

Franchise

Primary power granted by the state to be and act as a corporation

Secondary franchise is the right or privilege that the corporation may exercise

You cannot issue investment contracts without a secondary franchise, kailangan primary muna hindi pwede mauna secondary kasi sa section 19 it does not exist until issued with a certificate of registration or incorporation

Corporate entity

Corporation exist separately and independently from the stockholders

Stockholders cannot bring an action, to bring back the properties of a corporation

Corporation has no interest in the individual properties of its members

Sulo ng Bayan vs. Araneta

Corporation cannot bring an action for the recovery of the properties of its members

Caram vs. CA

Stockholders cannot be held liable for the legitimate obligations of the corporation, they exist separately and independently from one another

Cruz vs. Dalisay

Final judgment against a corporation cannot be enforced against stockholders

Rustan Pulp vs. CA

Corporation exist separately and independently Corporation are juridical entities, they exist only in legal contemplation, can act only through its authorized representatives

Soriano vs. CA

They are not personally liable

They where signed for and in behalf of the corporation

Palay inc. vs. Clave

Liabilities incurred by the corporation cannot be enforced against stockholders, etc., even if stockholders, etc. happens to own a substantial interest in the corporation, mere ownership does not disregard the corporate entity theory

Corporate entity for legal or legitimate purposes only

Two or more corporations, one of them will be treated as a mere alter-ego

You cannot pierce the veil of corporate fiction when there are no facts attendant in the case Corporate Entity Theory

The corporation is possessed with a personality separate and distinct from the individual stockholders or members and is not affected by the personal rights, obligations or transactions of the latter

Instrumentality rule

Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the instrumentality may be disregarded

Courts are concerned with reality and not form

Mere ownership of all or substantially all of the shares of stock of a corporation is not, in itself, insufficient ground for disregarding the separate corporate personality. And for the separate personality of the corporation to be disregarded, the wrong doing must be clearly and convincingly established

Fraud must be proven by clear and convincingly evidence amounting to more than preponderance. It cannot be justified by speculation and can never be presumed. And only if it sought to hold the stockholders liable directly for corporate debt

Palacio vs. Fely

Piercing the veil of corporate fiction

Fely trans and the other corporation is one and the same

Marvel bldg. vs. David

There must be facts before the court will be justified in piercing the veil of corporate fiction

Corporation was a mere extension of the personality of the person

Yutivo and sons vs. Court of Tax Appeals

What where the facts or circumstances arrived by the court here?

Subscribed capital where all advanced by Yutivo, the board where the same as Yutivo

Commissioner of Internal Revenue vs. Norton and Harrison

Court applied the general rule

Mere substantial ownership does not mean that it has a same corporate entity

La Campana Coffee Factory, Inc. vs. KKM

Two corporations managed by the same family, workers were made interchangeably

Emilio Cano vs. CIR

Sued in there official capacity

Reverse of Soriano vs. CA (signed in their official capacity)

Tesco vs. WCC

The two corporations where located in the same office

Claparols vs. CIR

Same as NAFLU and A.C. Ransom

Concept builders vs. NLRC

Instrumentality rule. What is the instrumentality rule? where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the instrumentality may be disregarded.

Has no separate mind of its own. What is the degree of control?

1. Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own.

2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty or dishonest and unjust act in contravention of plaintiffs legal rights; and,

3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.

The absence of one of the elements prevents piercing the corporate veil. In applying the instrumentality or alter ego doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendants relationship to that operation.

There must facts and circumstances before warrant piercing the veil of corporate fiction

The control necessary does not mean stock ownership MCConnel vs. CA

were located in the same floor while the mere ownership of all or nearly all of the capital stock of a corporation does not necessary mean that it is a mere business conduit of the stockholder, that conclusion is amply justified where it is shown, as in the case before us, that the operations of the corporation were so merged with the stockholders as to be practically indistinguishable from them. To hold the latter liable for the corporations obligations is not to ignore the corporations separate entity, but merely to apple the established principle that such entity cannot be invoked or used for purposes that could not have been intended by the law that created that separate personality.

Tan boon bee vs. Jarencio

Why would a drug company need a printing machine

The property must be in pursuance of a company business Cease vs. CA

Alter-ego or the extension of the person of forest ware does the court pierced the veil of corporate fiction

As to not deprive the holders of their successional rights

Mere ownership of all or substantially all is not a justification of piercing the veil of corporate fiction

Fraud must be proven by clear and convincing evidence cannot presume or speculate, there must be facts and circumstances

Fraud must be clear and convincing evidence more than preponderance

Remo Jr. vs. IAC

The resolution was not entered to defraud anyone

Del Rosario vs. National Labor Commission

The wrongdoing must be clearly established

There must be facts to support

Payment of claims cannot thus be presumed

Indophil Textile Mill vs. CALICA

How do you distinguish this ruling to La Campana, having the same issues:

La campana, one payroll, employees were made interchangeable. Acrylic had its own standards

PNB vs. Ritratto Group

Control test

Not mere majority but rather complete

Twin ace was only a subsequent interested party

Assets and machineries

Amendment of the articles of incorporation

Express power granted to a corporation

Section 16

Appraisal right

Section 81 to object on certain acts and transactions

Section 81. Instances of appraisal right. - Any stockholder of a corporation shall have the right to dissent and demand payment of the fair value of his shares in the following instances:

1. In case any amendment to the articles of incorporation has the effect of changing or restricting the rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class, or of extending or shortening the term of corporate existence;

2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets as provided in the Code; and

3. In case of merger or consolidation. (n)

Right granted only in specified instances

Are non-voting shares included in amending the articles of incorporation

1 100/s

XYZ-----ABC

2 100/s

To

10100/s

=1M/S

what would be the 2/3?

Section 6 last paragraph

Voting shares are excluded except the foregoing instances

1

1

2

2

3

3

4

4

5

5

6

6

1 & 2=absent

1&2=absent but gave their written assent

3 & 4= objected

3&4=objected

5 & 6= approved the amendment

5&6=approved

Would there be a valid amendment

Special amendments 37 & 38 shortening that would result to dissolution require prior approval by the SEC

Section 37. 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 representing at least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members in case of non-stock corporations. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That in case of extension of corporate term, any dissenting stockholder may exercise his appraisal right under the conditions provided in this code. (n)

Section 38. 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, at a stockholder's meeting duly called for the purpose, two-thirds (2/3) of the outstanding capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Written notice of the proposed increase or diminution of the capital stock or of the incurring, creating, or increasing of any bonded indebtedness and of the time and place of the stockholder's meeting at which the proposed increase or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be considered, must be addressed to each stockholder at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally.

A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by the chairman and the secretary of the stockholders' meeting, setting forth:

(1) That the requirements of this section have been complied with;

(2) The amount of the increase or diminution of the capital stock;

(3) If 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 residences 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 his subscription in cash or property, or the amount of capital stock or number of shares of no-par stock allotted to each stock-holder if such increase is for the purpose of making effective stock dividend therefor authorized;

(4) Any bonded indebtedness to be incurred, created or increased;

(5) The actual indebtedness of the corporation on the day of the meeting;

(6) The amount of stock represented at the meeting; and

(7) The vote authorizing the increase or diminution 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 Securities and Exchange Commission.

One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed with the Securities and Exchange Commission and attached to the original articles of incorporation. From and after approval by the Securities and Exchange Commission and the issuance by the Commission of its certificate of filing, the capital stock shall stand increased or decreased and the incurring, creating or increasing of any bonded indebtedness authorized, as the certificate of filing may declare: Provided, That the Securities and Exchange Commission shall not accept for filing any certificate of increase of capital stock unless accompanied by the 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 (25%) percent of such increased capital stock has been subscribed and that at least twenty-five (25%) percent of the amount subscribed has been paid either in actual cash to the corporation or that there has been transferred to the corporation property the valuation of which is equal to twenty-five (25%) percent of the subscription: Provided, further, That no decrease of the capital stock shall be approved by the Commission if its effect shall prejudice the rights of corporate creditors.

Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the approval by a majority vote 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 Securities and Exchange Commission, which shall have the authority to determine the sufficiency of the terms thereof. (17a)

The vote must be cast at the meeting called for that purpose

Written assent would not suffice

When do amendments become valid and effective?

Only upon the approval of the SEC TRUE OR FALSE?

FALSE because it can be valid upon the date of filing if not acted upon within 6 months without fault attributable to the corporation

Why is it retroactive?

What provision may be amended, altered or repealed

Can you change name, address for example she married or changed address?

NO. you cannot change that

Fait accompli, are beyond the powers or authority of the corporation to change, alter or modify. These would include the following:

Names of the incorporators and

The incorporating directors or trustees,

The name of the treasurer originally or first elected by the subscribers or members to act as such until his successor has been duly elected and qualified,

The number of shares and amount originally subscribed and paid out of the original authorized capital stock of the corporation,

The date and place of execution of the articles of incorporation,

The signatories and acknowledgment thereof.

All other provisions or matters stated or contained in the articles are subject to amendment.

Founders or signatories hindi pwede palitan

Names, nationalities- you cannot

Capital- right granted by law to all corporation

Paid up capital- NO

Restriction and transfer of shares in ordinary stock corporations

You can, but close corporation cannot

Section 96, otherwise it will not be a close corporation

Section 96. Definition and applicability of Title. - A close corporation, within the meaning of this Code, is one whose articles of incorporation provide that: (1) All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); (2) all the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code.

Any corporation may be incorporated as a close corporation, except mining or oil companies, stock exchanges, banks, insurance companies, public utilities, educational institutions and corporations declared to be vested with public interest in accordance with the provisions of this Code.

The provisions of this Title shall primarily govern close corporations: Provided, That the provisions of other Titles of this Code shall apply suppletorily except insofar as this Title otherwise provides.

Transfer clause, executor clause, acknowledgment, treasury affidavit-NO

Philippine First Insurance case

Mere change in the name of a corporation or by merely complying with the law is general amendment

It does not change its personality. It is the same person in a different name. the charter is the same

Amendment of a corporate term

Extending the same can never be made 7 years prior? TRUE or FALSE

FALSE. It can be if there are justifiable reasons for earlier extension as may be determined by the SEC

Can you extend the corporate term if it has already expired?

Once the term expires without an amendment having happen it ceases to exist as a body politic. It is dissolved automatically on the day it expires.

Alhambra cigar and PNB case

Instances when the SEC allowed extension whose term has already expired

All of them involved are institutions of learning, it was the case in order to avoid confusion that would arise later on.

BOARD OF DIRECTORS/TRUSTEES

Section 23

Section 23. The board of directors or trustees. - 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 (1) year until their successors are elected and qualified. (28a)

Every director must own at least one (1) 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 (1) 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.

Controlled by the board of directors

Authority are however restricted to the day to day

Stockholders may have all the profit but will turn over the management to the governing board

But unless the law provides the power may be delegated

General rule

Corporations must sit and act as a body Will be bound by corporate officers if they acted within the 5 classification page 150

Ramirez vs. Orientalist co.

What was the position of Fernandez in this case? TREASURER

Why did the court rule that actions of Fernandez bound the corporation when he is not even a board of director?

if a man is found acting for a corporation with the external indicia of authority, any person not having notice of want of authority, may usually rely upon those appearances; and if it be found that the directors had permitted the agent to exercise that authority and thereby held him out as a person competent to bind the corporation, or had acquiesced in a contract and retained the benefit supposed to have been conferred by it, the corporation will be bound, notwithstanding the actual authority may never have been granted.

Contracts must be made by the director and not the stockholders

Actions of the stockholders in such matters is only advisory and not in any way binding in the corporation

Barreto vs. La previsora Filipina

Everything emanates from the board of directors

Stockholders action is merely advisory except their approval or vote is necessary to prove a valid corporate act

Qualifications:

No citizenship requirement, at least majority must be residents

Can have a governing board consisting solely of foreigners

But we have to take into consideration partly nationalized industries and other laws which prohibits or limits foreign ownership

Anti-dummy act

Utilization development of natural resources 60% must be owned by Filipino citizens, therefore they only own 40%---10 members they can only have 4 seats, but not entirely correct because the law may provide otherwise; educational institutions restricted to Filipinos, but there are exceptions when created by religious and charitable institutions.

By-laws may provide additional qualifications and disqualifications

To qualify as a director he must own at least 1 share

Should the stockholder be the equitable or beneficial owner in order to qualify as a director?

NO, it is not necessary, as long as you are listed in the books as owner of one share

Lee vs. CA

As long as you are listed in the books as owner of one share

Under the old law he must be the beneficial owner and legal owner thereof but in the new law it is not required as long as it stands in his name he is qualifies

1 A-100t/SB (own in the trust of X) is B qualified to be a director?

2

3-10

2 transferring there voting rights in favor of VT

Other rights will accrue in favor of them, but not the voting rights

voting rights must be recorder in the books of the corporation that it is transferred

PNB-IFL- wholly owned subsidiary of PNB

PNB will assign to PNB-IFL nominal shares and PNB-IFL now will be able to be nominated

Gen. Rule:

Term of one year who will serve as such until there successors are elected and qualified

Exception:

Non-stock corporation can serve for a term of 3 years

Educational non-stock- term of the governing board can be 5 years

May this term exceed one year?

Yes, they may serve in a hold over capacity until their successors have been duly elected and qualified

Detective and protective bureau vs. Cloribel

In the by-laws, managing director must be elected from among themselves

Must be duly elected and qualified

How are the directors elected?

1-100T/S

2-100T/S

3-100T/S

to 10=1M/S

Do you include the vote of 1 & 2 to have a quorum to have a valid meeting?

NO, quorum requirements is 401,000

Quorum requirement is 501k

Holders of non-voting shares are only entitled to vote in last par. Of section 6

1-200k

2-200k

3-200k

4-100k

5-100k

6-100k

7-50k

8-40k

9-5k

10-5k

=1MS

1&2 is absent, 3&4 ayaw tumakbo and hindi nagvote 6-10, tumakbo and ninominate nila yung sarili nila and cast all their shares on themselves

Who wins? Or who gets elected?

No vote requirement, the one who gets the most number of votes gets elected, section24.

What is cumulative voting?

Process of multiplying the number of shares to the number of director to be elected

Matter of right granted to stockholders in a stock corporation

1 to 5 has 200k/s and members of the same family- majority 800k they have 4M votes they are guaranteed 4 seats

6 to 10 are not related- 1 seat 1M votes

Cumulative to allow the minority to have a rightful representation in the board

Is it allowed in a non-stock corporation?

Not generally available

Section 89 unless the articles or by-laws allow cumulative voting

Section 89. Right to vote. - The right of the members of any class or classes to vote may be limited, broadened or denied to the extent specified in the articles of incorporation or the by-laws. Unless so limited, broadened or denied, each member, regardless of class, shall be entitled to one vote.

Unless otherwise provided in the articles of incorporation or the by-laws, a member may vote by proxy in accordance with the provisions of this Code. (n)

Voting by mail or other similar means by members of non-stock corporations may be authorized by the by-laws of non-stock corporations with the approval of, and under such conditions which may be prescribed by, the Securities and Exchange Commission.

Other corporate officers other than the governing board section 25

Section 25. Corporate officers, quorum. - Immediately after their election, the directors of a corporation must formally organize by the election of a president, who shall be a director, a treasurer who may or may not be a director, a secretary who shall be a resident and citizen of the Philippines, and such other officers as may be provided for in the by-laws. Any two (2) or more positions may be held concurrently by the same person, except that no one shall act as president and secretary or as president and treasurer at the same time.

The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and the by-laws of the corporation. Unless the articles of incorporation or the by-laws 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 transaction of corporate business, and every decision of at least a majority of the directors or trustees present at a meeting at which there is a quorum shall be valid as a corporate act, except for the election of officers which shall require the vote of a majority of all the members of the board.

Directors or trustees cannot attend or vote by proxy at board meetings. (33a)

Is the president required to be a stockholder. YES

The chairman may be another person

The president may also be another person

Prohibited is president to be secretary or treasurer at the same time

Board of director must sit and act as a body to arrive at a corporate act

What would constitute a quorum if 5 then 3 must be present

May the vote of 2 members past a 5 man governing board pass a valid corporate act?

YES. Voting requirement is majority of directors present at which there where a quorum

1

1 and 2 present=valid voting requirement

2

1 and 2 voted yes

3

3 voted no

4

5

Is it absolute?

NO, except in the election because it requires the majority of all the members of the board

If by-laws or articles provide a higher voting requirement

Artificial beings must act through its members and act as a body to have a valid corporate act

Exception:

Delegation

Expressly conferred

Where the officer or agent is clothed with actual or apparent authority

Otherwise it will not bind the corporation

Yao ka sin trading case already asked in the bar

Only bind the corporation to the extent of authority confined to him or virtue of customs, usage and policy

Must pass first the controller and counsel

What if the notice requirement is not complied with?

Lopez realty vs. Fotencha

Notice requirement must be complied with hence it should have been with force and effect, but according to the SC, it may be ratified expressly if there is a subsequent meeting called for that purpose

Impliedly through acts

Asuncion was aware of the corporations obligation

There was implied ratification or she was estopped

Pua casim vs. Neumark and Co.

Considered 3 circumstanced

Check which was the proceed of the loan which was endorsed and deposit in the corporate account

Neumark as president and also stockholder

Yu chuck vs. Kong Li Po

General manager usually has the power to hire but the SC said the contract must be reasonable

The contract here is so onerous that it would throw the corporation into insolvency

Francisco vs. GSIS

GSIS cannot evade the binding effect of the telegram

Only 15 months later that the corporation said there was a mistake

The silence coupled with the unconditional acceptance of the other subsequent remittances is binding to the corporation

Board of liquidators vs. Kalaw

Settled jurisprudence has it that where similar acts have been approved by the directors as a matter of general practice, custom and policy, the general manager may bind the company without formal authorization of the board of directors. In varying language, existence of such authority is established, by proof of the course of business, the usages and practices of the company and by the knowledge which the board of directors has, or must be presumed to have, of acts and doings of its subordinates in and about the affairs of the corporation. So also, xx authority to act for and bind a corporation may be presumed from acts of recognition in other instances where the power was in fact exercised. xx Thus, when, in the usual course of business of a corporation, an officer has been allowed in his official capacity to manage its affairs, his authority to represent the corporation may be implied from the manner in which he has been permitted by the directors to manage its business.

In the case at bar, the practice of the corporation has been to allow its general manager to negotiate and execute contracts in its copra trading activities for and in NACOCOs behalf without prior board approval. If the by-laws were to be literally followed, the board should give its stamp of prior approval on all corporate contracts. But that Board itself, by its acts and through acquiescence, practically laid aside the by-law requirement of prior approval.

Kalaw signed alone and said contracts were submitted to the board of directors after its consummation and not before

Buenaseda vs. Bowen

Express ratification is made through a formal board action

Implied ratification is through: silence or acquiescence, acceptance benefits and lastly recognition or adoption

An unauthorized act may nevertheless be binding either by express or implied by estoppels

By virtue of silence the board had impliedly accepted the act

By recognition or adoption

By virtue of payment of obligations arising therefore- Lopez realty May directors or trustees be disqualified to act as such?

YES, crime, etc. disqualifications in book

Possess or dispossess any of the qualifications or disqualifications , cease to hold at least one share

May directors be ousted from office?

At least 2/3 of members representing outstanding capital stock. Again notice requirement must be complied with

1-200

1-5 same family

2-200

3-200

4-100

5-100

electing

6-100

6 to 10 not related

7-50

8-40

9-5

10-5

outstanding director

Meetings called by the president or the secretary ordered by the president

It depends if the removal is without cause they cannot do so because removal without cause shall not deprive the minority stockholders or members of the right of representative

If with cause they can even if it will prejudice the rights of the minority, provided of course additional requirements by-laws and articles of incorporation

Who will fill up the vacancy created due to the ouster of a member of the board of directors

Section 29. Vacancies in the office of director or trustee. - Any 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; otherwise, said vacancies must be filled by the stockholders in a regular or special meeting called for that purpose. A director or trustee so elected to fill a vacancy shall be elected only or the unexpired term of his predecessor in office.

Any directorship or trusteeship to be filled by reason of an increase in the number of directors or trustees shall be filled only by an election at a regular or at a special meeting of stockholders or members duly called for the purpose, or in the same meeting authorizing the increase of directors or trustees if so stated in the notice of the meeting. (n)

Other than by removal or expiration of term they do not have the power

When will the vacancies be filled up?

Is notice required, to fill up vacancies due to removal?

What if the vacancy is due to an increase, can it be filled up in the same meeting where in the number is increased?

Election due to removal-in the same meeting notice is not required

Election due to increase in number- it must be so stated in the meeting

Section 30

Section 30. Compensation of directors. - In the absence of any provision in the by-laws 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 ten (10%) percent of the net income before income tax of the corporation during the preceding year. (n)

Generally not entitled to receive compensation because they render it gratuitously

Unless the by-laws allows

Stockholders may also grant pursuant to a majority vote

Must not exceed net income of 10% tax of the preceding year

Acting in special capacity

In, sum directors may receive compensation when

1. there is a provision in the by-laws to that effect

2. When the stockholders, by a majority vote of the outstanding capital stock grant the same; and,

3. If the director renders extra-ordinary or unsual service

Central cooperative exchange vs. Tibe

By-laws may allow, stockholders may also allow such

What do you understand by the phrase as such directors

Western institute vs. Salas

Compensation was granted without by-laws authority

Prohibition is not a sweeping rule Members of the board may receive when they receive in a special capacity

Mere act of the board will suffice

Is the 10% ceiling applicable to other officers?

NO. the phrase as such director was used twice

The SC ruled that the 10% ceiling will not likewise apply if they acted in a capacity other than as such directors

Government vs. El Hogar

Judicial intervention is not proper

The appropriates remedy is to those who can make or unmake the by-laws

Liability of corporate officers

Obligations incurred by those acting for and in behalf of the corporations are not theres BUT there are exceptions even if they are acting for and in behalf of the corporation

Tramat vs. CA

General rule was applied in the case

Ong acted as officers and acted within the scope of his authority

Court laid down 4 instances when even if acting within the scope of his authority he is held solidarily liable

1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith, or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons;

2. He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto;

3. He agrees to hold himself personally and solidarily liable with the corporation;

4. He is made, by a specific provision of law, to personally answer for his corporate action.

Watered stocks- issued, fully paid up when in fact they have not been fully paid or promised as such

Llamado vs. CA

The corporate entity theory cannot be used as a defense to escape liability in violation of B.P. 22

Where the check is drawn by a corporation the persons who signed the check shall be liable.

Uichico vs. NLRC

Labor case corporate directors and officers are solidarily liable with the corporation for the termination of employment of corporate employee done with malice and bad faith

3 fold duty of directors

obedient

diligent

loyal

Business judgment rule

Questions of policy and management are left solely to the honest decision of the board of directors and the courts are without authority to substitute its judgment as against the former. The directors are the business managers of the corporation and as long as they act in good faith, its actuations are not subject to judicial review. Montelibano vs. Bacolod Murcia Milling

questions of policy and management are left solely to the board of directors

BOD, business manager of the corporation and as long as they act in good faith, its actuations are not subject to judicial review

They are not insurer of the property of the company, they were guarantors that the enterprise undertaken by the corporation shall be successful

Montelibano vs. Bacolod Murcia Milling Co.

Directors are not liable due to imprudence or honest error of judgment

Duty of loyalty of corporate directors

31,32,33,34

31,32,33- specific instances when corporate officers may violate loyalty

32,33 self-dealing and interlocking director

Corporate opportunity doctrine

It places a director of a corporation in the position of a fiduciary and prohibits him form seizing a business opportunity and/or developing it at the expense and with the facilities of the corporation. He cannot appropriate to himself a business opportunity which in fairness should belong to the corporation.

Last paragraph of section 31 and the provision of section 34 make reference to recovery of forbidden profits

Distinction between section 31 and 34 relative to the ratification by the stockholders

The second paragraph of section 31 which makes a director liable to account for profits if he attempts to acquire or acquires any interest adverse to the corporation in respect to any matter reposed in him in confidence as to which equity imposes a disability upon him to deal in his own behalf is not subject to ratification by the stockholders. Whereas, in section 34 if a director acquires for himself a business opportunity which should belong to the corporation, he is bound to account for such profits unless his act is ratified by the stockholders owning ore representing at least 2/3 of the outstanding capital stock.

If reposed in him in confidence, not subject to ratification

If the acquisition is merely that of a business opportunity which has not been reposed in him in confidence, the same may be subject to ratification by the stockholders.

Director x co.

A-REALTY

B

CZ owns property and is going abroad never to Return, he wants to sell for 25M the fair market value is 30M

D

E

E goes to Z and offers to pay the property for 26 M and later he sells it for 30M making 4M profit, one of the stockholders learned and complains that he should submit the profits. E said that he will move for ratification of his actuation. Can it be ratified?

It can be ratified he merely acquired a business owning to the corporation

It would be different if it was entrusted in his confidence

Another scenario:

Had A not attended the meeting he would not have known of the sale it is then a matter reposed in him in confidence

A corporation cannot reaquire its share if it has no restricted unretained earnings

Strong vs. Rapide

What duty did he violate?

He violated his duty of loyalty The law would be impotent if the sale were not invalidated

Self-dealing director and interlocking director

What is a self-dealing director?

Director of a corporation dealing or transacting business with his corporation

Are the contracts and dealing of a self0dealing director valid?

General rule: voidable

May the contracts of a self-dealing director be valid per se.

YES. If all the 4 conditions are present they will be valid per se

1. That 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. That the vote of such director or trustee was not necessary for the approval of the contract;

3. That the contract is fair and reasonable under the circumstances; and

4. That in case of an officer, the contract has been previously authorized by the board of directors.

When do they become voidable?

When any of the two requisites are absent it is voidable, but subject to ratification by 2/3 of the outstanding capital stock or 2/3 of the member

Requisites for ratification (subject to ratification by the stockholders holding or representing at least 2/3 of the outstanding capital stock or 2/3 of the members.)

it must be at a meeting called for the purpose

full disclosure of the adverse interest of the director concerned must be made

the contract is fair and reasonable under the circumstances

Problem if self-dealing director involved owns all or substantially all of the shares of stock of the corporation thereby making it easily possible to have the contract ratified

last sentence of section 32 should be made to apply by determining the reasonableness and fairness of the contract

Section 32. Dealings of directors, trustees or officers with the corporation. - A contract of the corporation with one or more of its directors or trustees or officers is voidable, at the option of such corporation, unless all the following conditions are present:

1. That 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. That the vote of such director or trustee was not necessary for the approval of the contract;

3. That the contract is fair and reasonable under the circumstances; and

4. That in case of an officer, the contract has been previously authorized by the board of directors.

Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a director or trustee, such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full disclosure of the adverse interest of the directors or trustees involved is made at such meeting: Provided, however, That the contract is fair and reasonable under the circumstances. (n)

Prime white cement vs. IAC

a director of a corporation owes a position in trust

in case of conflict between himself and that of the corporation, he cannot sacrifice the interest of the corporation to his own advantage

as a director he should have acted in a manner as not to unduly prejudice the corporation

he cannot be allowed to enrich himself

May corporate directors purchase the corporate property?

Mead vs. Mccullogh

interlocking director- a director of one corporation who deals and transacts business with another corporation who is himself a director

A- director of X company also a director of Y corporation

Both companies enter into a contract and A sits, is the contract valid?

Yes on the ground of fraud or if it is unfair

May be subject to the provision of section 32

Section 32 contract may become voidable, hence it may also be ratified

X Co.

Y Co.

A owe 20%

A owe 20%

Is it generally valid or voidable? VALID

25%

25% VALID

15%

25% VOIDABLE SUBJECT TO section 32

More than 20 substantial

BOD mismanages corporate officers. Who may file a suit?

General rule: BOD which can institute a case because it has all the powers. To allow stockholders to file would violate the doctrine of corporate entity and may result to multiplicity of suits

Stockholders cannot therefore generally file a case EXCEPT of course in a DERIVATIVE SUIT Derivative suit

An action based on injury to the corporation-to enforce a corporate right- wherein the corporation itself is joined as a necessary party, and recovery is in favor of and for the corporation.

Remedy granted by law to stockholders to institute a case to remedy a wrong done directly to the corporation and indirectly to the stockholders, if the board refuses to do so. Otherwise if not they would be left without any recourse

Available suits

individual or personal

Wrong done against his person a