notes in corporation law
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CORPORATION CODE (BP BLG 68)
*Corporation Code is the general law on PrivateCorporation regarding to its creation, formation and
powers.
INTRODUCTION:
A. Historical BackgroundEffectivity:May 1, 1980
Article XII Section 16 of the 1987 Constitution:
The Congress shall not, except by general law,
provide for the formation, organization, or
regulation of private corporations.
Government-owned or controlled corporations
may be created or established by special
charters in the interest of the common good
and subject to the test of economic viability.
*Congress has limited powers in the formation,
creation and regulation of a private
corporation.
Purposes:
1. Uniformity2. To avoid corruptionGeneral Rule:Congress is prohibited to enact a
law directly forming a private corporation.
Exception:GOCC may be created by special
charter.
*GOCC is a private corporation with regard to
function and in the meantime a public
corporation with regard to ownership.
Twin Conditions must be present in forming a
GOCC:
1. Interest in the common good2. Subject to the test of economic viability
- Means can survive alone in the market;can generate income which they can
use for their operating expenses
CONCEPT AND ATTRIBUTES OF A CORPORATION:
A. Statutory definition of a CorporationSection 2 of the Corporation Code: A
corporation is an artificial being created by
operation of law, having the right of succession
and the powers, attributes and properties
expressly authorized by law or incident to its
existence.
B. Attributes of a Corporation Artificial Being
- It exist by fiction of law only, hence it is
subject to limitations that are inherent
because of its nature
- A corporation is a juridical person which
exists by process of legal fiction
Doctrine of Corporate Entity/Doctrine
of Separate Personality- A corporation
is a legal or juridical person with a
personality separate and apart from its
individual stockholders or members and
from any other legal entities to which it
may be connected
Consequences/Implications of
Separate Personality:
1. It is entitled to own properties in itsown name and its properties are
not the properties of its
stockholders, directors and officers.
Cases: Magsaysay-Labrador v CA;
Sulo ng Bayan v Araneta
*The interest of the stockholders
over the properties of the
corporation is merely inchoate.
*Merely inchoate because there are
still condition precedents before
the shareholders get their share,
viz, in Asset, there are dissolution
and satisfaction of claims; in profit-
sharing, there are unrestricted
retained earnings and declarationby the Board of Directors.
2. It can incur obligations and itsobligations are not the obligations
of its stockholders, directors and
officers.
Case: Francisco v CA
3. The rights belonging to thecorporation cannot be invoked by
the stockholders, directors and
officers and vice versa.4. Corporations are entitled to certain
constitutional rights, i.e., right
against unreasonable searches and
seizure, due process clause.
*It is not entitled to certain
constitutional right, i.e., right
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against self-incrimination
particularly production of corporate
documents.
*Right against self-incrimination is
applicable only to natural persons.
General Rule: Constitutional
guarantees are applicable to
corporations.
Exceptions:
1. Right against self-incrimination2. Freedom to travelCase: Bataan Shipyard v PCGG
5. It is liable for tort. It is liable whenthe act was committed by the
officer or agent under express
direction or authority from the
stockholders or members acting as
a body or generally from the
directors as the governing body.
6. Generally, the corporation isconsidered a national of the
country where it was incorporated
(Place of incorporation test)
*Exceptions: 1. In times of war, the
nationality of a corporation is
determined by the nationality of
the controlling stockholders; 2.
Under the Foreign Investment Act
of 1991
7. Corporations are incapable ofintent, hence, they cannot commit
felonies that are punishable under
the RPC. They cannot commit
crimes that are punishable under
special laws because crimes are
personal in nature requiring
personal performance of overt acts.
In addition, the penalty of
imprisonment cannot be imposed.
*Criminal liability falls upon to
responsible officers.
*Responsible officers cannot invokethe doctrine of separate
personality.
*Corporations cannot be
incarcerated.
8. Moral damages cannot be awardedin favor of corporations because
they do not have feelings and
mental state.
*Corporations can claim damages
such as actual, compensatory,
exemplary, loss of earning capacity.
General Rule: Corporation cannot
claim moral damages.
Exception: If the corporation has a
good reputation and such
reputation was destroyed.
Case: Coastal Pacific Trading v
Southern Rolling Mills, Co.
*In Filipinas Broadcasting Network
Inc. v. Ago Medical and Educational
Center, the SC ruled that a
corporation can recover moral
damages under Article 2219(7) if it
was the victim of defamation.
Doctrine of Piercing the Veil of Corporate Entity The
doctrine that a corporation is a legal entity distinct from
the persons composing it. It is a theory introduced for
the purposes of convenience and to serve the ends of
justice. But when the veil of corporate fiction is used as
a shield to perpetuate fraud, to defeat public
convenience, justify wrong, or defend crime, this fiction
shall be disregarded and the individuals composing it
will be treated identically.
Cases: Times Transportation Co. v Santos Sotelo;
Concept Builders v NLRC
*The doctrine of piercing the veil of corporate entity is
the exception to the doctrine of corporate entity.
*The users of this doctrine are: 1. Stockholder; 2. Group
of stockholders; 3. Another corporation.
Effects: 1. Stockholders, officers and corporation are in
effect jointly liable; 2. In case of two corporations, they
will be treated as one wherein they will be both
solidarily liable. (Instrumentality rule)
*There is no effect on the existence of each corporation
as long as their separate entity is used for legitimate
purposes.
Instrumentality Rule When one corporation is soorganized 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 to the
instrumentality may be disregarded.
*The user is another corporation.
Keyword: CONTROL
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Requisites: 1. Control, not mere majority or
complete stock control, but complete dominion, not
only of finances but of policy and business 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 in
contravention of plaintiffs legal rights; 3. The
aforesaid control and breach of duty must
proximately cause the injury or unjust loss
complained of.
Three cases of piercing the veil:
1. Fraud Cases when a corporation is used as a
cloak to cover fraud, or to do wrong;
2. Alter Ego Cases when the corporate entity is
merely a farce since the corporation is an alter ego,
business conduit or instrumentality of a person or
another corporation;
3. Equity cases when piercing the corporate
fiction is necessary to achieve justice or equity.
Probative Factors of Identity:
1. Identical shareholders;
2. Same set of officers, directors, or trustees;
3. Use of same premises, properties, tools and
equipments;
4. Engage practically in the same business; 5. The
same manner of keeping books and records.
*The probative factors of identity are not conclusive
but may be considered as strong evidence.
Creature of LawArticle XII Section 16 of the 1987
Constitution: The Congress shall not,
except by general law, provide for the
formation, organization, or regulation of
private corporations. Government-owned
or controlled corporations may be created
or established by special charters in the
interest of the common good and subject to
the test of economic viability.
Concession Theory It is a principle in the
creation of corporations, under which acorporation is an artificial creature without
any existence until it has received the
imprimatur of the State acting according to
law, through the SEC. The life of the
corporation is a concession made by the
State.
Right of Succession- Capacity to have continuity of existence
despite the changes on the persons
who compose it. Thus, the personality
continues despite the change of
stockholders, members, board
members or officers; death or disability.
- Also known as Principle of Perpetual
Succession
Reason: To make the corporation more
stable
Creature of enumerated powers, attributesand properties
Doctrine of Limited Capacity No
corporation under the Corporation Code,
shall possess or exercise any corporate
powers, except those conferred by law, its
Articles of Incorporation, those implied
from express powers and those as are
necessary or incidental to the exercise of
the powers so conferred. The corporationscapacity is limited to such express, implied
and incidental powers.
*Corporation may be restrained from
engaging a particular transaction because it
is beyond their powers.
*General Capacity a corporation can
perform any act for as long as it is lawful,
moral and not contrary to public policy or
order.
Ultra Vires Doctrine Even if the act islawful, moral and not contrary to public
order or policy but such act is not within the
express, implied and incidental powers of
the corporation such act shall be void for
being ultra vires.
*These doctrines are based on Section 2
and Section 45 of the Corporation Code.
C. Classification of Private Corporations:1. As to existence of Stocks:Stock Corporation Corporations which have
capital stock divided into shares and are
authorized to distribute to the holders of such
shares dividends or allotments of the surplus
profits on the basis of the shares held. (Sec. 3)
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Non-stock Corporation A corporation where
no part of its income is distributable as
dividends to its members, trustees, or officers,
subject to the provisions of this Code on
dissolution. (Sec. 87)
Q: Is it correct to say that a Non-stock
corporation cannot generate income on their
own?
A: NO
2. As to function/organizers:Public Corporation for public purpose and
organized by the State.
Private Corporation for profit making
functions and organized by private persons
alone or with the State
3. As to laws of Incorporation (Place ofIncorporation) :
Domestic Corporation corporation formed,
organized or existing under the Philippine Laws.
Foreign Corporation corporation formed,
organized or existing under any laws other than
those of the Philippines and whose laws allow
Filipino citizens and corporations to do business
in its own country or state. (Sec. 123)
*License is necessary for; 1. Regulation
purposes and 2. Access to local courts.
4. As to legal status:
De Jure Corporation corporation created in
strict or substantial compliance with the
mandatory requirements for incorporation and
the right of which to exist as a corporation
cannot be successfully attacked or questioned
by any party even in a direct proceeding for that
purpose by the state.
De Facto Corporation the due incorporation
of any corporation claiming in good faith to be a
corporation under the Corporation Code, and
its right to exercise corporate powers, shall not
be inquired into collaterally in any private suit
to which such corporation may be a party. Such
inquiry may be made by Solicitor General in a
quo warranto proceeding. (Sec. 20)- organized with a colourable compliance
with the requirements of a valid law
and its existence cannot be inquired
collaterally.
- There is an irregularity or defect in the
constitution or organization.
Can be compared to a voidable contract,
i.e., valid until annulled.
*Can be challenged by the State later on.
Cases: Hall v Piccio; Seventh Adventist v
Northeastern Mindanao Mission
*The filing of the Articles of Incorporation
and the issuance of the certificate of
registration are the essential requisites for
the existence of a de facto corporation.
Requisites:
1. The existence of a valid law under which
it may be incorporated;
2. An attempt in good faith to incorporate;
3. Use of corporate powers;
4. Filing of the Articles of Incorporation;
5. Subsequent compliance with the
requirement of law.
*In both corporations, there must be a
certificate of registration issued.
Doctrine of Corporation by Estoppel All persons
who assume to act as a corporation knowing it to be
without authority to do so shall be liable as general
partners for all debts, liabilities and damages
incurred or arising as an result thereof: Provided,
however, that when any such ostensible
corporation is sued on any transaction entered into
by it as a corporation or on any tort committed by it
as such, it shall not be allowed to use as a defense
its lack or corporate personality. (Sec. 21)
- Group of persons which holds itself out
as a corporation and enters into a
contract with a third person on the
strength of such appearance cannot be
permitted to deny its existence in an
action under said contract.
Case: Lim Tong Lim v CA
*Lim is stopped because he benefited from
the transaction.
Remedy: To ran after those persons
responsible for the representations
Essence: They are precluded from denying
their existence by their previous act or
conduct
Holding Corporation it is one which controls another
as a subsidiary by the power to elect management. It is
one that holds stocks in other companies for purposes
of control rather than for mere investment.
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Affiliate one related to another by owning or being
owned by common management or by a long-term
lease of its properties or other control device. It may be
the controlled or controlling corporation, or under
common control.
Subsidiary Corporation one which is so related to
another corporation that the majority of its directors
can be elected either directly or indirectly by such other
corporation. It is always controlled.
Open Corporation one which is open to any person
who may wish to become a stockholder or memberthereto.
Close Corporation those whose shares of stock are
held by limited number of persons like the family or
other closely knit group. (Sec. 96)
FORMATION AND ORGANIZATION OF A PRIVATE
CORPORATION:
A. Submission of Articles of Incorporation;contractual significance*The life of a corporation commences from the
issuance of the Certificate of Registration by the
SEC upon filing of the Articles of Incorporation
and other documents.
Article of Incorporation is the charter of the
corporation, and the contractual relationships
between the State and the corporation, the
stockholder and the State, and between the
corporation and its stockholders.
Contractual Significance:1. The issuance of a certificate of incorporation
signals the birth of the corporations juridical
personality;
2. It is an essential requirement for the
existence of a corporation, even a de facto one.
B. Contents and Form of the Articles ofIncorporation (Secs. 14 and 15)
Contents of Articles of Incorporation:
1. Corporate Name;2. Purpose Clause;
3. Principal office;
4. Term of existence;
5. Incorporators;
6. Directors or trustees;
7. Capitalization;
8. Shares of stock;
9. Treasurers Affidavit.
Corporate NamePurpose:Identification
*Corporation can not adopt any name or
group of words at its pleasure because of
statutory limitation, viz., Sec. 18 of the
Corporation Codewhich provides that: No
corporate name may be allowed by the SEC
if the proposed name is identical or
deceptively or confusingly similar to that of
any existing corporation or to 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.
SEC Guideline x x x b. In order to prevent
confusion and difficulties of administration,
supervision and control, if the proposed
name contains a word already use as a part
of the firm name or style of a registered
entity, the proposed name must contain
two other words different and distinct from
the name of the company already
registered or protected by law. x x x
Case: Ang Mga Kaanib Ni Jesus Cristo
*The phrase Ang Mga Kaanib are words
merely descriptive of membership while the
phrase Sa Bansang Pilipinas are merely
descriptive of the place.
*Both parties are religious institutions
*Both use the acronym H.S.K.
As a rule, generic name or descriptive word
may be used as a corporate name.
Reason: public domain; can be used by
anyone; public use.
Exception:Doctrine of Secondary Meaning
a word or phrase originally incapable ofexclusive appropriation with reference to
an article on the market, because
geographically or otherwise descriptive,
might nevertheless have been used so long
and so exclusively by one producer with
reference to his article that in that trade
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and to that branch of the purchasing public,
the word or phrase has come to mean that
the article was his product.
Requisites:
1. Period of use;
2. The use must be exclusive.
Case: Lyceum of the Philippines
*The exclusivity requirement was not
satisfied by Lyceum of the Philippines.
*In case of change of name, the corporation
is not dissolve nor create a new
corporation; it also does not extinguish the
corporate liability.
*Change of name can be done by amending
the Articles of Incorporation.
Procedure:
1. Obtain approval of majority of the Board
and 2/3 stockholders;
2. Submission to the SEC for approval.
Purpose Clause*Only one primary purpose. Primary
purpose defines the business activities of
the corporation. It is the ordinary course of
business of the corporation.
*Secondary Purpose is for future expansion.
There is no limit on the secondary purpose.
*In case the primary purpose is not viable
then secondary purpose may be used.
Principal Office*The principal place of business may
determine the venue of court cases
involving corporations. It may alsodetermine if service of summons and
notices was properly made. It is also
important for tax purposes (local taxation).
*The SEC requires the exact address to be
indicated in the Articles of Incorporation.
*It is the residence of the corporation. It is
where the corporation maintains its books
and records and where normally the bulk of
its business is being conducted or
undertaken.*For personal action, venue is the
residence.
Term of Existence*A corporation has a maximum term of 50
years. It may be extended for a period not
exceeding 50 years in any single instance.
As a rule, no extension can be made earlier
than 5 years prior to the expiration of the
term.
*No limitations regarding number of
extension can apply.
Reason: To compel the stockholders to
meet the corporations term.
Exception: If for compelling reasons, earlier
extension will be allowed.
*During the three year winding up period,
the corporation still has personality but
activities are limited to the liquidation of
the corporation affairs and not to transact
further business.
As a rule, after the term has expired, no
more extensions be allowed or entertained
by the SEC.
Reason: No more period to extend.
Exception: Doctrine of RelationThe filing
and recording of a certificate of extension
after the term cannot relate back to the
date of the passage of the resolution of the
stockholders to extend the life of the
corporation. However, the doctrine of
relations applies if the failure to file the
application for existence within the term of
the corporation is due to neglect of the
officer with whom the certificate is required
to be filed or to wrongful refusal on is part
to receive it.
*The delay in submitting the application for
extension is justifiable.
Keywords:
1. Excusable delay;
2. Beyond the control of the corporation
(insuperable intervening causes)
Incorporators*Once an incorporator always an
incorporator. (Fait accompli an
accomplished fact which cannot be altered)
*They are the signatories to the Articles of
Incorporation.*They are originally forming the corporation
Q: What is the reason behind the phrase
that an incorporator is not always a
corporator?
A:To be an incorporator it is not necessary
to own a share unlike as a corporator.
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*Number is limited to 5 to 15.
*They must have a contractual capacity.
*Juridical person cannot create another
juridical person.
*There is no citizen requirement but special
laws may require otherwise.
*Majority must be a resident of the
Philippines.
Directors and trustees*The Board of Directors is the governing
body in a stock corporation while Board of
Trustees is the governing body in a non-
stock corporation.
*They exercise the powers of the
corporation.
Qualifications:
1. Every director must own at least one (1)
share of the capital stock;
2. Majority of the directors or trustees must
be residents of the Philippines.
*Any director who ceases to be the owner
of at least one share of the capital stock of
the corporation of which he is a director
shall thereby cease to be a director.
*Trustees of non-stock corporations must
be members thereof.
*Initial directors/trustees shall hold office
for one year until their successors are
elected and qualified.
CapitalizationSection 14(8) states that: If it be a stock
corporation, the amount of its authorizedcapital stock in lawful money of the
Philippines, the number of shares into
which it is divided, and in case the share are
par value shares, the par value of each, the
names, nationalities and residences of the
original subscribers, and the amount
subscribed and paid by each on his
subscription, and if some or all of the shares
are without par value, such fact must be
stated.*It is required that at least 25% of the
subscribed capital must be paid and in no
case may be paid-up capital be less than
P5,000.
Authorized Capital Stock the amount
fixed in the articles of incorporation to be
subscribed and paid by the stockholders of
the corporation.
*Shows the total number of shares
Subscribed Capital that portion of the
authorized capital stock that is covered by
subscription agreements whether fully paid
or not.
Paid-Up Capital the portion of the
authorized capital stock which has been
subscribed and actually paid.
Outstanding Capital Stock the total
shares of stock issued to subscribers or
stockholders, whether or not fully or
partially paid except treasury shares so long
as there is a binding subscription
agreement.
Shares of stockQ: Why shares of stock?
A: Because there is a share on the
capitalization.
Economic Value:
1. expectancy on the share in the profits
2. expectancy on the share of assets in case
of dissolution/liquidation.
Political Value:
1. vote
2. control in the management of the
corporation.
Doctrine of Equality of SharesExcept 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.
- Provides that where the Article of
Incorporation do not provide for any
distinction of the shares of stock, all shares
issued by the corporation are presumed to
be equal and enjoy the same rights and
privileges and are also subject to the same
liabilities.
Classes of Shares:
1.
Par Value Share shares that have anominal value in the certificate of stock.
Contractual Significance:The minimum
price at which the shares are to be
issued.
*The price is fixed. It is stated in the
Articles of Incorporation.
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2. No Par Value Share those shareswhich do not have nominal value.
However, they have issued value stated
in the certificate or articles of
incorporation.
*There is flexibility in the price.
*The price is determined by the Board.
Limitations:
1. No par value shares cannot have an
issued price of less than P5.00;
2. The entire consideration for its
issuance constitutes capital so that no
part of it should be distributed as
dividends;
3. They cannot be used as preferred
stocks;
4. They cannot be issued by banks, trust
companies, insurance companies,
public utilities and building and loan
association (Reason: imbued with
public interest);
5. The articles of incorporation must
state the fact that it issued no par value
shares as well as the number of said
shares;
6. Once issued, they are deemed fully
paid and non-assessable.
3. Voting Sharesshares with the right tovote. They have the right to participate
in the management of the corporation
through the exercise of such right.
4. Non-voting Sharesshares without theright to vote.
*Has only a limited right to vote.
General Rule:Shareholder owning non-
voting shares has no right to vote.
Exceptions:
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 the Corporation Code;
8. Dissolution of the corporation.
*The exceptions are exclusive; the list is
a closed list
Statutory Constraint: Sec. 6 of the
Corporation Code
*The corporation cannot provide for
shares with no voting right
General Rule: Only redeemable and
preferred shares are deprived of voting
right.
Exception: Common shares may be
denied of its voting right in the
following instances: 1. Delinquent in
paying the subscription; 2. If there was
a founders share where it was given
the right to vote exclusively for 5 years
(Sec. 7).
5. Common Shares the most commontype of shares which enjoy no
preference.
*The basic class of stock ordinarily and
usually issued without extraordinary
rights and privileges, and the owners
thereof are entitled to a pro rata share
in the profits of the corporation and in
its assets upon dissolution and,
likewise, in the management of its
affairs without preference or advantage
whatsoever.
6. Preferred Shares- shares which enjoypreference as to dividends or assets
upon dissolution as stated in the
Articles of Incorporation.
Reason:To attract investors.
*Preference does not give them a lienupon the property nor make them
creditors of the corporation.
*Characterized as redeemable shares.
Kinds:
1. Preferred shares as to assetsshare
which gives the holder thereof
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preference in the distribution of the
assets of the corporation in case of
liquidation;
2. Preferred shares as to dividends
share which gives the holder thereof
preference in the distribution of the
dividends to the extent agreed upon
before any dividends at all are paid to
the holders of common shares;
3. Participating preferred shares the
holders thereof are still given the right
to participate with the common
stockholders in dividends beyond their
stated preference;
4. Non-participating preferred shares
where there is no such participation;
5. Cumulative preferred shares the
shareholder is entitled to recover
dividends in arrears. While dividend
declaration may not be compelled, once
it is declared, the shareholder is
entitled to the said arrears;
6. Non-cumulative preferred shares
not entitled to arrears only to present
dividends.
7. Redeemable Shares are those whichpermit the issuing corporation to
redeem or purchase its own shares.
Limitations:
1. Redeemable shares may be issued
only when expressly provided for in the
Articles of Incorporation;
2. The terms and conditions affecting
said shares must be stated both in the
certificate of stock representing such
share;
3. Redeemable shares may be deprived
of voting rights in the Articles of
Incorporation, unless otherwise
provided in the Corporation Code;
4. The corporation is required to
maintain a sinking fund to answer forredemption price if the corporation is
required to redeem;
5. The redeemable shares are deemed
retired upon redemption unless
otherwise provided in the Articles of
Incorporation;
6. Unrestricted retained earnings is not
necessary before shares can be
redeemed but there must be sufficient
assets to pay the creditors and to
answer for operations.
8. Treasury Shares shares which havebeen earlier issued as fully paid and
have thereafter been acquired by the
corporation by purchase, donation,
redemption or through some lawful
means.
-Shares which are previously issued by
the corporation but subsequently
reacquired by the corporation.
*Retired thus can no longer be re-
issued.
*They are not entitled to dividends.
*They are not entitled to voting rights.
Rationale: to prevent abuse by the
management.
*These shares may again be disposed of
for a reasonable price fixed by the
Board of Directors.
9. FoundersShares classified as such inthe articles of incorporation may be
given certain rights and privileges not
enjoyed by the owners of other stocks,
provided that where the exclusive right
to vote and be voted for in the election
of directors is granted, it must be for
the limited period not to exceed 5 years
subject to the approval of the SEC. The
5 year period shall commence from the
date of the approval by the SEC.
Treasurers affidavit*The SEC shall not accept the Articles of
Incorporation of any stock corporation
unless accompanied by a sworn statement
of the Treasurer elected by the subscribers
showing that at least 25% of the authorized
capital stock of the corporation has been
subscribed, and at least 25% of the totalsubscription has been fully paid to him in
actual cash and/or in property the fair
valuation of which is equal to at least 25%
of the said subscription, such paid up capital
being not less than P5,000.
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*If the Treasurers affidavit is false such act
is tantamount to fraud. (PD 902-A)
*Fraud on the part of the corporation is a
ground for revocation or suspension of
license depending upon the extent of the
violation committed.
*If theres no Treasurers Affidavit, the first
ground shall apply, i. e., noncompliance
with the minimum requirement.
General Rule:25% must be subscribed and
25% must be paid.
Exception: If the law provides otherwise,
i.e., special laws.
C. Grounds for rejection of the Articles ofIncorporation
1. The articles of incorporation or anyamendment thereto is not substantially in
accordance with the form prescribed
herein;
2. The purpose or purposes of the corporationare patently unconstitutional, illegal,
immoral, or contrary to government rules
and regulations;
3. The Treasurers Affidavit concerning theamount of capital stock subscribed and/or
paid is false;
4. The percentage of ownership of the capitalstock to be owned by citizens of the
Philippines has not been complied with as
required by existing laws or the
Constitution.
Dual Franchise Requirement: No articles of
incorporation or amendment to articles of
incorporation of banks, banking and quasi-
banking institutions, building and loan
associations, trust companies and other
financial intermediaries, 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
favourable recommendation of the appropriate
government agency to the effect that such
articles or amendment is in accordance with
law.
D. Commencement of Corporate Existence
Sec. 19 of the Corporation Codestates that A
private corporation formed or organized under
this Code commences to have corporate
existence and juridical personality and is
deemed incorporated from the date the SEC
issues a certificate of incorporation under its
official seal; and thereupon the incorporators,
stockholders/members and their successors
shall constitute a body politic and corporate
under the name stated in the articles of
incorporation for the period of time mentioned
therein, unless said period is extended or the
corporation is sooner dissolved in accordance
with law.
*For purposes of determining whether a
corporation enjoys the status of a de facto
corporation, it must have been at least issued a
certificate of registration.
E. Amendment of the Articles of IncorporationSec. 16 of the Corporation Code states that:
Unless otherwise prescribed by this Code or by
special law, and for legitimate purposes, any
provision or matter stated in the articles of
incorporation may be amended by a majority
vote of the board of directors or trustees and
the vote or written assent of the stockholders
representing at least 2/3 of the outstanding
capital stock, without prejudice to the appraisal
right of dissenting stockholders in accordance
with the provisions of this Code, or the vote or
written assent of at least 2/3 of the members if
it be a non-stock corporation.
*It is effective upon the approval of the SEC.
*There may be an amendment by inaction.
Amendment by InactionUpon filing with the
SEC of the amendment and the Commission
failed to act on it within 6 months from the date
of filing for a cause not attributable to the
corporation.
F.
Effects of Non-Use of Corporate CharterSec. 22 of the Corporation Codestates that: If
a corporation does not formally organize and
commence the transaction of its business or the
construction of its work within 2 years from the
date of its incorporation, its corporate powers
cease and the corporation shall be deemed
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dissolved. However, if the corporation has
commenced the transaction of its business but
subsequently becomes continuously inoperative
for a period of at least 5 years, the same shall
be a ground for the suspension or revocation of
its corporate franchise or certificate of
incorporation. This provision shall not apply if
the failure to organize, commence the
transaction of its businesses or the construction
of its works, or to continuously operate is due
to causes beyond the control of the corporation
as may be determined by the SEC.
*The period must be counted from the issuance
of the Certificate of Incorporation.
*Automatic dissolution is not contemplated
under Section 22. (SEC Opinion).
*Section 22 must be read in conjunction with
Sec 6(1) of PD 902-A which requires that the
corporation must be given the opportunity to
be heard in compliance with the requirement of
due process before the revocation of its license.
CONTROL AND MANAGEMENT OF A CORPORATION:
A. Levels of Corporate Control1. By Stockholders/Shareholders;
2. By Corporate Officers;
3. By Directors/Trustees
B. Board of Directors/Trustees General Powers of the Board
Sec. 23 of the Corporation Codestates that:Unless otherwise provided in this Code,
the corporate powers of all corporations
formed under this Code shall be exercised,
all business conducted and all property of
such corporations controlled and held by
the board of directors or trustees to be
elected from among the holders of stocks,
or where there is no stock, from among the
members of the corporation, who shall hold
office for one year until their successors areelected and qualified.
Powers of the Board of Directors:
1. Corporate Powers;
2. Manage the Corporation; and
3. Control over and hold the properties of
the Corporation.
*Board of Directors/Trustees is the
statutory representative of the corporation.
General Rule: All corporate powers
emanate from the Board of
Directors/Trustees.
Exception: Unless otherwise provided in
this Code. (Limiting Clause)
The limiting clause means that there are
certain corporate matters that cannot be
done by the Board by reason that such
matters fall upon the shareholders; or
corporate matters that cannot be resolved
by the Board alone, i.e., it must be done
with the approval of the shareholders.
Business Judgment RuleBusiness Judgment Rule questions of
policy or management are left solely to the
honest decision of officers and directors of
a corporation and the courts are without
authority to substitute their judgment for
the judgment of the board of directors; the
board is the business manager of the
corporation and so long as it acts in good
faith its orders are not reviewable by the
courts or the SEC.
- A resolution or transaction pursued within
the corporate powers and business
operations of the corporation, and passed
in good faith by the board of
directors/trustee, is valid and binding, and
generally the courts have no authority to
review the same and substitute their own
judgment, even when the exercise of such
power may cause losses to the corporation
or decrease the profits of a department.
*Great respect is accorded to the decisions
of the Board of Directors/Trustees.
*The directors are not liable to the
stockholders in performing such acts.
Qualifications of the Board MembersSec. 23 of the Corporation Codestates that:
Every director must have at least oneshare of the capital stock of the corporation
of which he is a director, which share shall
stand in his name on the books of the
corporation. Any director who ceases to be
the owner of at least one share of the
capital stock of the corporation of which he
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is a director shall thereby cease to be a
director. Trustees of non-stock corporations
must be members thereof. A majority of the
directors or trustees of all corporations
organized under this Code must be
residents of the Philippines.
*In order to be eligible as director, what is
material is the legal title to and not
beneficial title or ownership of the stocks
appearing on the books of the corporation.
*The directors/trustees must be natural
persons.
*They must also be of legal age.
*He must possess other qualifications as
may be prescribed in the by-laws of the
corporation.
*Under Sec. 27 of the Corporation Code:
No person convicted by final judgment of
an offense punishable by imprisonment for
a period exceeding 6 years, or a violation of
this Code committed within 5 years prior to
the date of his election or appointment,
shall qualify as a director, trustee or officer
of any corporation.
Reason:The position is based on trust and
confidence.
*No citizenship requirement.
*The By-Laws may provide additional
qualifications/disqualifications.
Election of the Board MembersSec. 24 of the Corporation Code provides
that: At all elections of directors or
trustees, there must be present, either in
person or by representative authorized to
act by written proxy, the owners of a
majority of the outstanding capital stock, or
if there be no capital stock, a majority of
the members entitled to vote. The election
must be by ballot if requested by any voting
stockholder or member. In stock
corporations, every stockholder entitled to
vote shall have the right to vote in personor by proxy the number of shares of stock
standing, at the time fixed in the by-laws, in
his own name on the stock books of the
corporation, or where the by-laws are silent
at the time of the election; and said
stockholder may vote such number of
shares for as many persons as there are
directors to be elected or he may cumulate
said shares and give one candidate as many
votes as the number of directors to be
elected multiplied by the number of his
shares shall equal, or he may distribute
them on the same principle among as many
candidates as he shall see fit: Provided, that
the total number of votes cast by him shall
not exceed the number of shares owned by
him as shown in the books of the
corporation multiplied by the whole
number of directors to be elected:
Provided, however, that no delinquent
stock shall be voted. Unless otherwise
provided in the articles of incorporation or
in the by-laws, members of the
corporations which have no capital stock
may cast as many votes as there are
trustees to be elected but may not cast
more than one vote for one candidate.
Candidates receiving the highest number of
votes shall be declared elected. Any
meeting of the stockholders or members
called for an election may adjourn from day
to day or from time to time but not sine die
or indefinitely if, for any reason, no election
is held, or if there not present or
represented by proxy, at the meeting, the
owners of a majority of the outstanding
capital stock, or if there be no capital stock,
a majority of the member entitled to vote.
*It is the stockholders or corporators who
elect members of the Board of Directors.
*The only procedure required by the Code
is through Election. There can be no other
modes.
*The election must be by ballot if requested
by any voting member or stockholder.
*A stockholder cannot be deprived in the
articles of incorporation or in the by-laws of
his statutory right to use any of themethods of voting in the election of
directors.
*No delinquent stock shall be voted.
*It is not required that the candidate
received the majority vote, what the law
provides is only plurality of votes.
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*Majority number is required only for the
existence of a quorum.
Not included in outstanding capital stocks:
1. Unissued stocks;
2. Non-voting stocks;
3. Treasury Shares.
Methods of Voting:
1. Straight Votingevery stockholder may
vote such number of shares for as many
persons as there are directors to be elected.
2. Cumulative Voting for One Candidatea
stockholder is allowed to concentrate his
votes and give one candidate as many votes
as the number of directors to be elected
multiplied by the number of his shares shall
equal.
*Example: X has 10 shares in his name;
there are 5 numbers of directors to be
elected. X has 50 votes (10x5) available to
him. X may opt to concentrate all his 50
votes to a particular candidate.
3. Cumulative Voting by Distribution a
stockholder may cumulate his shares by
multiplying also the number of his shares by
the number of directors to be elected and
distribute the same among as many
candidates as he shall see fit.
*Example: X has 10 shares in his name;
there are 5 numbers of directors to be
elected. X has 50 votes available to him. X
may opt to distribute the votes to as many
candidates as there are provided that the
total number of votes does not exceed 50.
Purpose of cumulative voting: To protect
the minority stockholders.
*The elected officer must act as a body.
*In a stock corporation, cumulative voting is
a statutory right whereas in a non-stock
corporation, cumulative voting is applicable
if it is provided in the Article of
Incorporation.
Sec. 26 of the Corporation Code providesthat: Within 30 days after the election of
the directors, trustees and officers of the
corporation, the secretary, or any other
officer of the corporation, shall submit to
the SEC, the names, nationalities and
residences of the directors, trustees and
officers elected. Should a director, trustee
or officer die, resign or in any manner cease
to hold office, his heirs in case of his death,
the secretary, or any other officer of the
corporation, or the director, trustee or
officer himself, shall immediately report
such fact to the SEC.
Term of Office*The directors or trustees shall hold office
for one (1) year subject to the hold over
principle, i.e., they continue in office until
their successors are elected and qualified.
*The one year period does not apply to
directors initially elected for purposes of
incorporation.
Quorum Requirement in Board MeetingsSec. 25 of the Corporation Codestates that:
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.
Q: Is the director allowed to let a proxy
attend a board meeting in behalf for
himself?A:NO.Proxy prohibition.
Reason: Because of their personal
qualifications.
*Quorum requirement should always be
computed based on the number specified in
the Articles of Incorporation regardless of
ensuing vacancies.
*The basis is always the number specified in
the Articles of Incorporation.
*The corporation can modify the number byproviding a different provision in the
articles of incorporation, however, the law
provides that the modification must be for a
number greater than that provided in the
law. It cannot provide for a number less
than the general requirement of the code.
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*For voting purposes, majority of the
member present constituting a quorum.
Except: election of directors.
Removal of Board MembersSec. 28 of the Corporation Codestates that:
Any director or trustee of a corporation
may be removed from office by a vote of
the stockholders holding or representing at
least 2/3 of the outstanding capital stock, or
if the corporation be a non-stock
corporation, by a vote of at least 2/3 of the
members entitled to vote: Provided, that
such removal shall take place either at a
regular meeting of the corporation or at a
special meeting called for the purpose, and
in either case, after previous notice to
stockholders or members of the
corporation of the intention to propose
such removal at the meeting. A special
meeting of the stockholders or members of
a corporation for the purpose of removal of
directors or trustees, or any of them, must
be called by the secretary on order of the
president or on the written demand of the
stockholders representing or holding at
least a majority of the outstanding capital
stock, or, if it be a non-stock corporation,
on the written demand of a majority of the
members entitled to vote. Should the
secretary fail or refuse to call the special
meeting upon such demand or fail or refuse
to give the notice, or if there is no
secretary, the call for the meeting may be
addressed directly to the stockholders or
members by any stockholder or member of
the corporation signing the demand. Notice
of the time and place of such meeting, as
well as of the intention to propose such
removal, must be given by publication or by
written notice prescribed in this Code.
Removal may be with or without cause:
Provided, that removal without cause maynot be used to deprive minority
stockholders or members of the right of
representation to which they may be
entitled under Sec. 24 of this Code.
Requisites:
1. It must take place either at a regular
meeting or special meeting of the
stockholders or members called for the
purpose;
2. There must be previous notice to the
stockholders or member of the intention to
remove;
3. The removal must be by a vote of the
stockholders representing 2/3 outstanding
capital stock or 2/3 of members;
4. The director may be removed with or
without cause unless he was elected by the
minority, in which case, it is required that
there is cause for removal.
Reason: The functions of directors are
fiduciary in nature.
Requisites for the removal of minority
directors are:
1. Justifiable cause;
2. Satisfaction of the voting requirements,
i.e., 2/3 of OCS or members.
*It is the secretary of the corporation upon
order of the president or in case there is no
secretary, stockholder representing
majority of the outstanding capital stocks or
member signing the demand who may call a
meeting for the purpose of removal.
Vacancies in the BoardSec. 29 of the Corporation Code provides
that: 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.
A directorship or trusteeship to be filled byreason 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
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directors or trustees if so stated in the
notice of the meeting.
General Rule: Power to elect directors is
vested in the stockholders
Exception: Vacancy occurring in the board
of directors or trustees other than by
removal by the stockholders or members or
by expiration of term may be filled by the
vote of at least a majority of the remaining
directors or trustees if still constituting a
quorum.
Compensation of Board MembersSec. 30 of the Corporation Code provides
that: 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 10% of the net income
before income tax of the corporation during
the preceding year.
General Rule: Directors are not entitled to
receive compensation
Exceptions:
1. When their compensation is fixed in the
by-laws;
2. If compensation is 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.
Limitation: In no case shall the total yearly
compensation of directors exceed 10% of
the net income before income tax of the
corporation during the preceding year.Reason:In order to avoid temptation on the
part of directors to abuse powers by
appropriating compensation packages since
they are in control of corporate assets.
C. Corporate Officers
Concept of Corporate Officers*Corporate powers reside on the Board of
Directors; decision/policymaking resides on
them. Implementation of rules/policy lies
on the corporate officers
Categories:
1. Statutory Corporate Officers
President (must be a stockholder);
Secretary (must be a resident and citizen of
the Philippines); Treasurer (must be a
resident and citizen of the Philippines).
2. As provided by the By-Lawsmust
be clearly stated in the By-Laws that such
office is a corporate office.
3. Those designated by the Board of
Directors provided the Board of Directors
is authorized to do so by the By-Laws.
Validity and Binding Effect of Acts ofCorporate Officers
General Rule: No one, even corporate
officers can bind the corporation. It is only
the Board of Directors who has the
authority to bind the corporation.
Exceptions:
1. If the By-Laws provides that such act is
part of the function of such office;
2. If authorized by the Board of Directors
Doctrine of Apparent AuthorityDoctrine of Apparent Authority/Doctrine
of Estoppel If a corporation, knowingly
permits one of its officers, or any other
agent, to act within the scope of anapparent authority, it holds him out to the
public as possessing the power to do those
acts; and thus, the corporation will, as
against anyone who has in good faith dealt
with it through such agent, be stopped from
denying the agents authority.
Cases: Peoples Aircargo; Inter-Asia; Lapu-
Lapu
*Requires good faith on the part of third
person.
D. Liability of Directors, Trustees and Officers Instances when Corporate
Officers/Directors are held Solidarily Liable
Sec. 31 of the Corporation Code provides
that: Directors or trustees who wilfully and
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knowingly vote for or assent to patently
unlawful acts of the corporation or who are
guilty of gross negligence or bad faith in
directing the affairs of the corporation or
acquire any personal or pecuniary interest
in conflict with their duty as such directors
or trustees shall be liable jointly and
severally for all damages resulting
therefrom suffered by the corporation, its
stockholders or members and other
persons. When a director, trustee or officer
attempts to acquire or acquires, in violation
of his duty, any interest adverse to the
corporation in respect of any matter which
has been reposed in him in confidence, as
to which equity imposes a disability upon
him to deal in his own behalf, he shall be
liable as a trustee for the corporation and
must account for the profits which
otherwise would have accrued to the
corporation.
General Rule: Directors/Trustees/Officers
are not solidarily liable with the
corporation.
Exceptions:
1. Wilfully and knowingly vote for andassent to patently unlawful acts of
the corporation (Sec. 31).
Case: Carag v NLRC
2. Guilty of gross negligence or badfaith in directing the affairs of the
corporation (Sec. 31).
Case: David v Construction
Industry
3. Acquire any personal or pecuniaryinterest in conflict of their duty
(Sec.31).
4. Consent to the issuance of wateredstocks or having knowledge thereof,
fails to file objections with the
secretary (Sec. 65).
5.
Agree or stipulate in a contract tohold himself personally liable with
the corporation.
6. By virtue of a specific provision oflaw such as BP 22; Trust receipts
Law; RA 7832 (Anti-Electricity
Pilferage Act of 1997); Securities
Regulation Code
*In Carag v NLRC, the Supreme Court held
that not any violative of law, the Code means
that violation must have a corresponding
penalty. Patently unlawful act means that a law
declares an act unlawful and that such law
provides penalty for that unlawful act.
Self-Dealing Directors/OfficersSec. 32 of the Corporation Codestates that:
A contract of the corporation with one ormore of its directors or trustees or officers
is voidable, at the option of such
corporation, unless all of 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 2/3 ofthe outstanding capital stock or of at least
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.
Example:
In XYZ Corporation, A is a director. The
corporation acts through the Board ofDirectors. XYZ Corporation and A entered
into a lease contract. A as the lessor and
XYZ Corporation as lessee. The contract was
approved by the Board of Directors.
Q: What is the status of the contract?
General Rule:The contract is voidable.
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Exception:If the requisites provided in Sec.
32 are present.
Exception to the Exception: If requirement
number 1 or 2 is absent, in the case of a
contract with a director or trustee, such
contract may be considered valid by the
ratification of at least 2/3 of the
outstanding capital stock or 2/3 of the
members.
Requisites:
1. The presence of such director or trustee
in the board meeting in which the contract
was approved was not necessary to
constitute a quorum for such meeting;
2. The vote of such director or trustee was
not necessary for the approval of the
contract;
3. The contract is fair and reasonable under
the circumstances;
4. In case of an officer, the contract has
been previously authorized by the board of
directors.
Reason: As presence in the board meeting
might affect the status of the contract.
Self-Dealing Directors/Officers
directors/officers who transact business
with their own corporation.
- This is not prohibited by law.
Interlocking Directors those who have
been elected as directors in 2 or more
different corporations.
- May be prohibited by the By-Laws
(Gokongwei case).
-Not prohibited by law however there are
consequences.
Contracts involving Inter-locking DirectorsSec. 33 of the Corporation Code provides
that: Except in cases of fraud, and
provided the contract is fair and reasonable
under the circumstances, a contract
between two or more corporations havinginterlocking directors shall not be
invalidated on that ground alone: Provided,
That if the interest of the interlocking
director in one corporation is substantial
and his interest in the other corporation or
corporations is merely nominal, he shall be
subject to the provisions of the preceding
section insofar as the latter corporation or
corporations are concerned. Stockholdings
exceeding 20% of the outstanding capital
stock shall be considered substantial for
purposes of interlocking directors.
Example:
A is a director of two corporation, ABC
Corporation and XYZ Corporation. XYZ
Corporation and ABC Corporation entered
into a lease contract where ABC
Corporation is the lessor and XYZ
Corporation is the lessee.
Q: Can this contract be invalidated on the
ground that there is an interlocking
director?
A: NO.
Q:What is the status of the contract?
A: General Rule:Contracts between two or
more corporations having interlocking
directors are valid.
Exceptions:
1. Contracts are void if contracts arefraudulent or if contracts are unfair
and unreasonable.
2. If the By-Laws prohibits interlockingdirector.
Case:Gokongwei, Jr. v SEC
*The interest is nominal if his interest is
20% or less of the outstanding capital stock.
The interest is substantial if his interest is
more than 20% of the outstanding capital
stock.
*If the interlocking director has a
substantial interest in one corporation and
has a nominal interest in the other
corporation, the director must comply with
the requisites provided in Sec. 32 on self-
dealing directors.
Reason: The case is analogous to that of
transactions involving self-dealing directors
because such director holds substantialinterest with the other company.
Doctrine of Corporate OpportunitySec. 34 of the Corporation Codestates that:
Where a director, by virtue of his office,
acquires for himself a business opportunity
which should belong to the corporation,
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thereby obtaining profits to the prejudice of
such corporation, he must account to the
latter for all such profits by refunding the
same, unless his act has been ratified by a
vote of the stockholders owning or
representing at least 2/3 of the outstanding
capital stock. This provision shall be
applicable notwithstanding the fact that the
director risked his own funds in the
venture.
General Rule:A director shall refund to the
corporation all the profits he realizes on a
business opportunity which: 1. the
corporation is financially able to undertake;
2. from its nature, is in line with
corporations business and is of practical
advantage to it; and 3. the corporation has
an interest or a reasonable expectancy.
Exception: His act has been ratified by a
vote of the stockholders owning or
representing at least 2/3 of the outstanding
capital stock.
*A business opportunity ceases to be
corporate opportunity and transforms to
personal opportunity where the
corporation refuses or is definitely no
longer able to avail itself of the opportunity.
E. Executive CommitteeSec. 35 of the Corporation Code states that:
The by-laws of a corporation may create an
executive committee composed of not less than
3 members of the board to be appointed by the
board. Said committee may act, by majority
vote of all its members, on such specific matters
within the competence of the board, as may be
delegated to it in the by-laws or on a majority
vote of the board, except with respect to: (1)
approval of any action for which shareholders
approval is also required; (2) the filing of
vacancies in the board; (3) the amendment or
repeal of by-laws or the adoption of new by-laws; (4) the amendment or repeal of any
resolution of the board which by its express
terms is not so amendable or repealable; and
(5) a distribution of cash dividends to the
shareholders.
Keyword: BY-LAWS
*It must be stated in the By-Laws.
*Board Resolution is not sufficient if there is no
provision in the By-Laws.
*The decision of the executive committee is
considered a Board Resolution.
*The decision of the executive committee is not
subject to appeal to the board. However, if the
resolution of the Executive Committee is invalid
it may be ratified by the Board.
*The decision of the executive committee
needs no confirmation from the Board.
Case: Filipinas Port, Inc.
*The corporation may create other committees.
Distinction: In executive committee, there is a
statutory restriction on members whereas in
other committee there is no such restriction.
General Rule:The executive committee may act
on specific matters within the competence of
the board as may be delegated to it in the by-
laws or on a majority vote of the board.
Exceptions:
1. Approval of any action for whichshareholders approval is also required;
2. The filing of vacancies in the board;3. The amendment or repeal of by-laws or the
adoption of new by-laws;
4. The amendment or repeal of any resolutionof the board which by its express terms is
not so amendable or repealable;
5. A distribution of cash dividends to theshareholders.
CORPORATE POWERS:
A. Doctrine of Limited Capacity; Concept of UltraVires Act
Sec. 45 of the Corporation Code states that:
No corporation under this Code shall possess
or exercise any corporate powers except those
conferred by this Code or by its articles of
incorporation and except such as are necessary
or incidental to the exercise of powers so
conferred.Ultra Vires Actsan act committed outside the
object for which a corporation is created as
defined by the law of its organization and
therefore beyond the power conferred upon it
by law.
Effects of Ultra Vires Acts:
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1. Executed Contract courts will not setaside or interfere with such contracts.
2. Executory Contractno enforcement evenat the suit of either party.
3. Partly executed and Partly executorycontract principle against unjust
enrichment shall apply.
B. Classes of Corporate Powers1. Express2. Implied3. Incidental Express those expressly authorized by the
Corporation Code and other laws, and its
Articles of Incorporation or Charter.
Impliedthose that can be inferred from ornecessary for the exercise of the express
powers.
Incidentalthose that are incidental to theexistence of the corporation.
Doctrine of Necessary Implicationthose which can be
reasonably inferred from the express powers given
since they are necessary for the corporation to perform
a particular act are deemed part of such powers.
C. Statutory Powers of a Corporation and theLimitations on their Exercise
Sec. 36 of the Corporation Code states that:
Every corporation incorporated under this
Code has the power and capacity: 1. To sue and
be sued in its corporate name; 2. Of succession
by its corporate name for the period of timestated in the articles of incorporation and the
certificate of incorporation; 3. To adopt and use
a corporate seal; 4. To amend its articles of
incorporation in accordance with the provisions
of this Code; 5. To adopt by-laws, not contrary
to law, morals, or public policy, and to amend
or repeal the same in accordance with this
Code; 6. In case of stock corporations, to issue
or sell stocks to subscribers and to sell treasury
stocks in accordance with the provisions of this
Code; and to admit members to the corporation
if it be a non-stock corporation; 7. To purchase,
receive, take or grant, hold, convey, sell, lease,
pledge, mortgage and otherwise deal with such
real and personal property, including securities
and bonds of other corporations, as the
transaction of the lawful business of the
corporation may reasonably and necessarily
require, subject to the limitations prescribed by
law and the Constitution; 8. To enter into
merger or consolidation with other
corporations as provided in this Code; 9. To
make reasonable donations, including those for
the public welfare or for hospital, charitable,
cultural, scientific, civic, or similar purposes:
Provided, That no corporation, domestic or
foreign, shall give donations in aid of any
political party or candidate or for purposes of
partisan political activity; 10. To establish
pension, retirement, and other plans for the
benefit of its directors, trustees, officers and
employees; and 11. To exercise such other
powers as may be essential or necessary to
carry out its purpose or purposes as stated in
the articles of incorporation.
Amendment of Articles of IncorporationSec. 16 of the Corporation Codestates that:
Unless otherwise prescribed by this Code
or by special law, and for legitimate
purposes, any provision or matter stated in
the articles of incorporation may be
amended by a majority vote of the board of
directors or trustees and the vote or written
assent of the stockholders representing at
least 2/3 of the outstanding capital stock,
without prejudice to the appraisal right of
dissenting stockholders in accordance with
the provisions of this Code, or the vote or
written assent of at least 2/3 of the
members if it be a non-stock corporation.
*The following are excluded in counting the
outstanding capital stock: 1. Treasury stock;
2. Unissued shares.
*Aside from the votes of majority of the
board and assent of the 2/3 of the OCS, the
approval of the SEC is necessary for the
amendment of the AOI.
*There is an implied approval of the SEC,i.e., failure to act on the application filed by
the corporation within 6 mos.
Q: How to get the approval of the
stockholders?
A: 1. Call for a meeting; 2. Obtain the
written assent of the stockholders.
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*In Tan v Sycip, the Supreme Court held
that in case of a non-stock corporation,
membership is personal and non-
transferrable unless the by-laws provides
otherwise. The deceased member is not
entitled to vote.
Four changes in Articles of Incorporation that require
the approval of the stockholders.
1. Extension of corporate term;
2. Shortening of corporate term;
3. Increase or Decrease of Capital Stock;
4. Increase or Decrease of Bonded indebtedness.*Approval of Stockholders is necessary in these changes
because they are necessary for the corporations
existence.
Extension/Shortening of Corporate TermSec. 37 of the Corporation Codestates that:
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 trusteesand ratified at a meeting by the
stockholders representing at least 2/3 of
the outstanding capital stock or by at least
2/3 of the members in case of non-stock
corporation. 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 addresseein 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.
Increase or Decrease of Capital Stock/Incurrence, Creation or Increase of Bonded
Indebtedness
Sec. 38 of the Corporation Codestates that:
No corporation shall increase or decreaseits capital stock or incur, create or increase
any bonded indebtedness unless approved
by a majority vote of the board of directors
and, at a stockholders meeting duly called
for the purpose, 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 stockholders
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. xxx.
Q: When the corporation increases its
capital stock, is the 25% requirement
necessary? How can it be computed?
A:YES. The SEC ruled that the 25% applies
to the increase amount.
*The corporation is required to maintain a
sinking fund.
Q: What does bonded indebtedness mean?
A:Requires longer time of payment; special
burden on the corporation; involves the
important assets of the corporation.
Denial of Pre-emptive RightSec. 39 of the Corporation Code states that:
All stockholders of a stock corporation
shall enjoy pre-emptive right to subscribe to
all issues or disposition of shares of any
class, in proportion to their respective
shareholdings, unless such right is denied
by the articles of incorporation or an
amendment thereto: Provided, That such
pre-emptive right shall not extend to shares
to be issued in compliance with laws
requiring stock offerings or minimum stock
ownership by the public; or to shares to be
issued in good faith with the approval of the
stockholders representing 2/3 of theoutstanding capital stock, in exchange for
property needed for corporate purposes or
in payment of a previously contracted
debt.
*Coming from the increased authorized
capital stock.
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* Similar to Right of First Refusal
*It is not a matter of right. It can be denied
by the corporation through denial of such
right in the articles of incorporation.
Purposes:
1. In order that the stockholder may be able
to maintain their relative proportional
voting trend and control in the corporation;
2. To avoid dilution of their proportionate
voting and control in the corporation.
General Rule:Pre-emptive right is available
to stockholders.
Exception: if it is denied in the Articles of
Incorporation or through amendment.
Exception to the Exception: Pre-emptive
right shall not extend to:
1. Shares to be issued in compliance with
laws requiring stock offerings or minimum
stock ownership by the public;
2. Shares to be issued in good faith with the
approval of the stockholders representing
2/3 of the outstanding capital stock, in
exchange for property needed for corporate
purposes; and
3. In payment of a previously contracted
debt.
*Pre-emptive right is satisfied as long as the
corporation gives the stockholder the
opportunity to buy the shares.
*The offer must first be made to the
stockholders.
Sale or Disposition of AssetsSec. 40 of the Corporation Codestates that:
Subject to the provisions of existing laws
on illegal combinations and monopolies, a
corporation may, by a majority vote of its
board of directors or trustees, sell, lease,
exchange, mortgage, pledge or otherwise
dispose of all or substantially all of its
property and assets, including its goodwill,
upon such terms and conditions and for
such consideration, which may be money,stocks, bonds or other instruments for the
payment of money or other property or
consideration, as its board of directors or
trustees may deem expedient, when
authorized by the vote of the stockholders
representing at least 2/3 of the outstanding
capital stock, or in case of non-stock
corporation by the vote of at least 2/3 of
the members, in a stockholders or
members meeting duly called for the
purpose. 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 any
dissenting stockholder may exercise his
appraisal right under the conditions
provided in this Code. A sale or other
disposition shall be deemed to cover
substantially all the corporate property and
assets if thereby the corporation would be
rendered incapable of continuing the
business or accomplishing the purpose for
which it was incorporated. xxx.
Q: What makes the disposition peculiar?
A:The disposition is of all or substantially all
of the corporations properties and assets.
Q:What kind of disposition involve?
A: 1. Sell; 2. Lease; 3. Exchange; 4.
Mortgage; 5. Pledge.
Requirements:
1. Majority vote of the Board.2. Vote of the Stockholders representing
2/3 of the OCS.
3. The sale does not bring about the illegalcombinations and monopolies.
*No need for the approval of the SEC.
Tests:
1. Quantitative Test no statutory test;pertains to the disposition of all assets
2. Qualitative Test there is a statutorytest; pertains to the disposition of
substantially all of its assets.
*The provision is so strict because the law
wants the corporation will reach itsexpiration term.
Q: With the sale of all the assets of the
corporation, will the same result to its
dissolution?
A: NO.Possession or continued possession
of corporate properties is not a condition
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for the existence of a corporation.
Corporation still exists despite the
disposition of all its properties and assets.
Q: Will the buying corporation be made
answerable for the liabilities of the selling
corporation?
A: NO. The two corporations are two
separate personalities thus they are
separate and distinct from each other
hence the buying corporation cannot be
held liable to the obligations of the selling
corporation.
General Rule:The sale of all or substantially
all of the assets of the corporation does not
make the buyer answerable for the
obligations of the seller.
Exceptions:
1. If the buyer expressly agrees to assumethe obligations of the seller.
2. If sale amounts to merger orconsolidation.
3. If and when application of piercing theveil of corporate entity doctrine is
warranted.
4. If the purchaser becomes acontinuation of the seller.
5. Sale was done in violation of the BulkSales Law.
Case: PNB v Andrada
Acquisition of Corporate SharesSec. 41 of the Corporation Codestates that:
A stock corporation shall have the power
to purchase or acquire its own shares for a
legitimate corporate purpose or purposes,
including but not limited to the following
cases: Provided, That the corporation has
unrestricted retained earnings in its books
to cover the shares to be purchased or
acquired: 1. To eliminate fractional shares
arising out of stock dividends; 2. To collect
or compromise an indebtedness to the
corporation, arising out of unpaidsubscription, in a delinquency sale, and to
purchase delinquent shares sold during said
sale; and 3. To pay dissenting or
withdrawing stockholders entitled to
payment for their shares under the
provisions of this Code.
Requisites:
1. Unrestricted Retained Earnings2. The acquisition must be for legitimate
purpose
Q: What is an unrestricted retained
earnings?
A: Earnings not allocated for any other
purpose.
Q:What happens to reacquired shares?
A: General Rule: They are automatically
deemed retired.
Exception:The AOI provides otherwise.
Trust Fund Doctrine The capital stock, property and
other assets of the corporation are regarded as equity
in trust for the payment of the corporate credito