CORPORATION CODE Professor: Dean Nilo T. Divina Sources: Aquino, Timoteo B. (2006). PHILIPPINE CORPORATE LAW COMPENDIUM. Quezon City: Rex Printing Company, Inc.; Marx Notes

BATAS PAMBANSA BLG. 68 THE CORPORATION CODE OF THE PHILIPPINES

TITLE I - GENERAL PROVISIONS DEFINITIONS AND

CLASSIFICATIONS

Section 1. Title of the Code. - This Code shall be known as "The Corporation Code of the Philippines." (n)

Section 2. Corporation defined. A corporation is

1) an artificial being 2) created by operation of law, 3) having the right of succession and 4) the powers, attributes and properties expressly

authorized by law or incident to its existence. (2) ARTIFICIAL BEING it exist in contemplation of law. It derives its existence to the law that created it either by a general or special law. It is not a natural person but the law considers the corporation not just a group of persons but as a person. A legal person and therefore it has a personality that is separate and distinct from the person composing it. (DOCTRINE OF LEGAL ENTITY)

can acquire properties, enter into contracts can have a cause of action, can incur liabilities principal-agent relationship applies can be held liable for torts or quasi-delict can be entitled to constitutional protections like

unreasonable search and seizure can be held liable for a crime if the penalty is fine or

forfeiture of license or franchise but not if the penalty is imprisonment

can be entitled to moral damages o GR: A corporation is not entitled to moral

damages because, not being a natural person it cannot experience physical suffering or sentiments.

o XPN: When the corporation has a reputation that is debased, resulting to humiliation in the business realm

o Case: Tortuous act should have directly resulted to the destruction or impairment of the reputation or good will of the corporation (MERALCO v. TEAM ELECTRONICS)

o Case: Under the NCC, in case of libel, oral defamation or slander, the aggrieved person is entitled to moral damages. (FILIPINAS BROADCASTING v. AGO MEDICAL)

CREATED BY OPERATION OF LAW the corporation owes its existence to the State thru a law enacted by Congress (CONCESSION THEORY)

A private corporation can only be organized in accordance with the Corporation Code.

A GOCC that may have a charted on its own, are not organized under the Corporation Code.

Congress cannot enact a special law to create a private corporation to compete with another private corporation (See Sec. 4)

Congress can only enact a special law creating a corporation only if such corporation is owned and controlled by the Government (at least 51%) and is organized for a governmental purpose. Otherwise, such law is unconstitutional and it cannot even create a de facto corporation (See Sec. 20)

2 kinds of franchise: 1. Primary franchise the authority to act as a

corporation. All corporation registered in SEC has primary franchise

2. Secondary franchise a special authority given to a corporation to engage in a specialized business. (banks, insurance companies, etc.)

RIGHT OF SUCCESSION A corporation is not immortal but is capable of continued existence because any change of ownership or in the composition of the stockholders will not result to the dissolution of the Corporation. It will continue to exist for as long as there is an extension of corporate term (See Sec. 11)

in case of death, ownership of shares is transmitted to the heirs by operation of law

POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY AUTHORIZED BY LAW OR INCIDENT TO ITS EXISTENCE these powers are found in the Corporation Code, AOI, By-laws. It also includes powers incidental to its express powers of incorporation. DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION

1. a doctrine 2. that allows the State (judicial function) 3. to disregard for certain justifiable reasons the notion

that a corporation has a personality separate and distinct from the person composing it

Objective: To make the stockholders liable for the

debts and obligations of the corporation and not the other way around.

Rules: a. The obligation of the corporation is not the

liability of the stockholders, officers or directors

b. The properties of the Corporation are not properties of the stockholders, officers or directors

i. a stockholder is not a tenant, not an owner nor a co-possessor or usufructuary

Factors not enough to disregard the separate legal

personality of the corporation: a. controlling ownership or ownership over

the controlling shares b. common directors

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c. substantial identity of the incorporators and similarity of business

Various test adopted by the SC:

a. Fraud test when the corporate identity is used to defeat public convenience, justify wrong, protect fraud, or defend crime; when the corporation is being used to accomplish an intent to commit a wrong

b. Alter Ego or Instrumentality test when the corporation is a mere alter ego or business conduit of a person, or when the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another persons. Fraud is not an element

c. Control test i. 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 f its own;

ii. 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 plaintiff's legal right; and

iii. the aforesaid control and breach of duty must proximately cause the injury or loss complained of

d. Objective test the end result is to make the stockholders liable for the debts and obligations of the Corporation and not the other way around.

As a general rule, the buyer of corporate assets are not bound to honor or assume the obligation of the seller except:

1. merger or consolidation 2. if the buyer us only an extension or continuation of

the corporate personality of the seller 3. if the sale of assets is made in bad faith 4. if the buyer assumes the obligation of the seller

There are only 6 cases where a director or officer may be held solidarily liable with the corporation:

1. gross negligence or bad faith in directing the affair of the corporation

2. assenting or consenting to a patently unlawful act 3. acquiring interest in conflict of his duty as a director

or officer 4. if he agrees to make himself solidarily liable with the

corporation 5. if by express provision of law he is made liable 6. issuance of watered stocks

Section 3. Classes of corporations.

Corporations formed or organized under this Code may be 1) stock or 2) non-stock corporations.

Corporations which have

a) capital stock divided into shares and b) are authorized to distribute to the holders of such

shares dividends or allotments of the surplus profits c) on the basis of the shares held are stock corporations.

All other corporations are non-stock corporations. (3a) Classification of Corporations:

A. Function 1. Public organized for the government to

govern a portion of a State; governed by the special law creating it

2. Private organized for a private purpose; governed by the Corporation Code and its AOI and By-laws

B. Existence of shares 1. Stock See Sec. 3 2. Non-stock defined by exclusion (See also

Secs. 87 and 88) Capital stock the absolute amount specified in the AOI and is available for subscription Capital represents the assets of the Corporation. It fluctuates, maybe more or less, depending on the results of operation Stock an integral unit of the capital stock

C. Legal status 1. De jure a corporation that fully conforms

with the requirements for incorporation under the law. A corporation in law and in fact.

2. De facto a corporation with a colorable imitation or substantial compliance with the requirements prescribed by law. A corporation in fact but not in law.

3. By estoppel if a group of person assumes to be or represents themselves to be a corporation when they have no legal authority to do so and as such they are precluded from denying their corporate existence as regards to the 3rd persons who relied on the representation.

4. By prescription a corporation since time immemorial have all the attributes and powers of a corporation (e.g. Roman Catholic Church)

D. Relationship of management and control 1. Parent a corporation that owns shares in

another corporation. It has the power to elect the board of directors of a subsidiary or affiliate thru the ownership of shares

2. Holding a corp that owns shares in various companies for investment purposes

3. Subsidiary if the parent owns shares in another corp, if the investee is 50% or more owned by the other corp

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4. Affiliate if the parent owns shares in another corp, if the investee is less than 50% owned by the other corp

E. Place of Incorporation 1. Domestic a corp formed organized and

existing under Philippine laws 2. Foreign a corp formed organized and

existing under foreign laws AND whose government allows Filipino citizens to do business in their own country

F. Composition 1. Sole a corp with only 1 corporator 2. Aggregate at least 5 incorporators

G. Other classification 1. Open shares are made available to the

public 2. Close a corp whose AOI provides that (1)

the shares should be held by specified number of persons not exceeding 20 and (2) subject to certain restrictions on transfer of shares and (3) whose shares are not available for listing in the stock exchange

3. Religious 4. Educational

Corporation going public the shares will be listed in the stock exchange Corporation going private it will limit the number of shares to a certain number of stockholders

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) Discussion:

GOCC with charter Civil Service; not subject to SEC except only to determine whether or not GOCC

Corporation organized under the Corporation Code RTC as special commercial court (corporate officers) or Labor court (ordinary officers)

Government-acquired corporations not subject to rules of GOCC

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)

Incorporator Corporator

Signatory of the AOI x

Always a corporator Not always an incorporator

Not less than 5 but not more than 15 except in case of corporation sole (1 only)

There is no limit except for a close corporation (20 only)

Must be a natural person except in case of a registered cooperative or a rural bank

May be a natural or juridical person

Majority must be Philippine resident

No such requirement

Names in the AOI can never be amended! Tri-level hierarchy

1. Stockholders elect the BOD 2. BOD appoints the corporate officers; exercises

corporate powers 3. Corporate officers appoint employees of the

corporation; implements the policies laid down by the BOD

Promoter person who brings about the formation of the corporation; he may or may not be an incorporator

Is the corporation bound by the contract entered into by promoters? No, there is no corporation yet.

Subscriber/ stockholder one who owns shares in the corporation Underwriter one who sells security or shares in the corporation

1. Firm commitment shares acquired by the underwriter are considered sold

2. Best effort acts as an agent, shares not sold will be returned to the corporation

Nationality of the corporation, how determined

1. Incorporation test place of incorporation 2. Domiciliary test where the corporation is located 3. Control test the nationality of the stockholders

determines the nationality of the corporation, e.g. 60% of the capital Case: "Capital" all types of shares, in terms of

voting, management, finance, etc. (GAMBOA v. TEVES, on MR)

Nationalized activities: 100%

1. Mass media 2. Retail and trade if capital of the corporation

exceeds $2.5M, foreigners may be stockholders 3. Rice and corn 4. Security, watchman and detective agency

75%

5. Recruitment 70%

6. Advertising 60%

7. Exploration of natural resources/mining 8. Public utility/transport service 9. Educational 10. Banks 11. Realty 12. Investment house

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Foreigners cannot occupy any executive position in any corporation engaged in a nationalized activity, whether wholly or partly nationalized GRANDFATHER RULE a method to determine the nationality of the corporation by making reference to the nationality of the stockholders of the investor corporation DOUBLE 60% RULE in case of registered enterprise corporations under the Foreign Investments Act of 1991, 60% of the stockholders must be Filipinos and 60% of the BOD must be Filipinos

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

1) "preferred" or 2) "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. (COMMON SHARES) Any or all of the shares or series of shares may

1) have a par value or 2) 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

1) in the distribution of the assets of the corporation in case of liquidation and

2) in the distribution of dividends, or 3) 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

1) 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:

2) Provided; That shares without par value may not be issued for a consideration less than the value of five (P5.00) pesos per share:

3) 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)

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,

1) 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

2) 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)

Section 8. Redeemable shares. Redeemable shares may be issued by the corporation when expressly so provided in the articles of incorporation.

1) They may be purchased or taken up by the corporation upon the expiration of a fixed period,

2) regardless of the existence of unrestricted retained earnings in the books of the corporation, and

3) upon such other terms and conditions as may be stated in the articles of incorporation,

4) which terms and conditions must also be stated in the certificate of stock representing said shares. (n)

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Section 9. Treasury shares. Treasury shares are shares of stock

1) which have been issued and fully paid for, 2) but subsequently reacquired by the issuing

corporation by a. purchase, b. redemption, c. donation or d. through some other lawful means.

Such shares may again be disposed of for a reasonable price fixed by the board of directors. (n) Classification of shares

1. Common and Preferred 2. Par Value and No Par Value 3. Voting and Non Voting 4. Founder's 5. Redeemable 6. Treasury 7. Watered 8. Other Classifications as may be provided for in the

AOI Street Certificate

a. indorsed in blank by the stockholder (quasi-negotiable instrument)

b. held by a stock broker for the benefit of a client Common shares not accorded with any special privileges, rights, except that they always have the right to vote and be voted Preferred

1. As to assets in case of dissolution and liquidation, they get the assets of the corporation ahead of the common shares; they are given priority or preference with respect to distribution of assets

2. As to dividends they have to be paid ahead of the holders of common shares; they are not absolutely entitled, it depends on the availability of surplus profits; they are not creditors

a. Cumulative the right to receive dividends are carried over to the succeeding year (accrued)

b. Non-cumulative the right to receive dividends only in the year the dividends were declared; if no declaration made, extinguished

c. Participating can participate in the residual dividends with the holders of the common shares

d. Non-participating not allowed to participate in the residual dividends

Preferred shares are not bonds or borrowing instruments. The relationship between the holders of the preferred shares to the corporation is different from the relationship of the corporation with the bond holders or creditors Par Value the assigned value for the share determined by the BOD indicated in the stock certificate and in the AOI

Book Value actual value of share based on the finances and capital of the corporation (Formula: Capital or Net worth / # of outstanding shares)

FMV the value in which the seller is willing to sell and a buyer is willing to buy without any compulsion

Par value is a limitation on the amount of the shares to be issued by a corporation, not to the shares sold or transferred by the stockholder to another

Par value is the minimum amount for which the corporation may issue shares

Corporation cannot issue value below par; otherwise, watered shares

Stockholder can sell his share below par No Par Value

a corporation cannot issue a No Par value share below P5.00; in Par Value shares, the minimum is 1 centavo

Limitations on the issuance of No Par Value shares 1. 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:

2. That shares without par value may not be issued for a consideration less than the value of five (P5.00) pesos per share:

3. 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.

4. 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.

5. That preferred shares of stock may be issued only with a stated par value.

Voting/ Non-Voting

Common shares cannot be denied the right to vote or be voted

Treasury shares, by their nature, cannot vote or be voted

Shares that may be deprived the right to vote: 1. Preferred 2. Redeemable

In computing, exclude the non-voting shares when the law requires at least 2/3 of the outstanding capital stock

Founder's

accorded certain rights and privileges that are not given to ordinary shares IF AUTHORIZED BY AOI

must be classified as such IN THE AOI The 5-year limitation, with regard the exclusive right

to vote and be voted subject to the approval of the SEC, is reckoned from the date of said approval

Redeemable

1. Compulsory if the corporation has no choice but to redeem the shares UNLESS it will result in the insolvency of the corporation

2. Optional there is no mandatory obligation on the part of the corporation to redeem the shares

SEC issued a regulation that any corporation issuing redeemable shares must set up a savings fund. Savings fund in the sense that every year until the term arise, the corporation

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must allocate or earmark or segregate certain funds to be able to meet the cost of redemption The law says there is no need to have surplus profit or retained earnings to effect the redemption Instances when a corporation may reacquire shares even without U.R.E

1. when shares are redeemable 2. when it is a close corporation

Once reverted to the corporation, they form part of the treasury shares. Thus, they are no longer outstanding, they can no longer declare dividends. Once redeemed, they are retired (cease to exist) unless reissuance is expressly authorized by the AOI Treasury

as distinguished from redeemable shares, a corporation may acquire its own shares ONLY IF it has unrestricted retained earnings

no need for a provision in the AOI to acquire its own shares. Mere board approval suffices

may be reissued by the Corporation upon approval of the BOD.

Trust Fund Doctrine the legal capital of the corporation which cannot be touched or impaired because it is intended for the benefit of the creditors. This cannot be used to acquire treasury shares The corporation has to have money on top of the legal capital, such is called surplus profits. "Other lawful means" (See Sec. 41)

1. To eliminate fractional shares arising out of stock dividends;

2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and

3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code.

Appraisal right the right of the stockholder to dissent from a proposed corporate act and demand the payment of the fair value of the shares (See Sec. 81) POINT OF CLARIFICATION:

If the shares are redeemed, apply Section 8: shares are retired by redemption, thus, can no longer be reissued unless reissuance is expressly authorized by the AOI

If the shares are reacquired other than redemption, apply Section 9: shares can be reissued.

TITLE II - INCORPORATION AND ORGANIZATION OF PRIVATE

CORPORATIONS

Section 10. Number and qualifications of incorporators. Any number of

1) natural persons 2) not less than five (5) but not more than fifteen (15),

3) all of legal age and 4) a majority of whom are residents of the Philippines,

may form a private corporation for any lawful purpose or purposes. Each of the incorporators of a stock corporation

must own or be a subscriber to at least one (1) share of the capital stock of the corporation. (6a)

Qualifications

1) natural persons except in case of a cooperative as regards rural banks (but still through a representative)

2) not less than five (5) but not more than fifteen (15) except in case of a corporation sole

3) a majority of whom are residents of the Philippines except when engaged in a nationalized activity

4) all of legal age Citizenship is NOT a requirement except if the corporation is engaged in a nationalized activity SEC & DOJ: GRANDFATHER RULE will only apply if the percentage of share ownership of Filipinos is less than 60% of the investor corporation

Section 11. Corporate term. A corporation shall exist for a period not exceeding fifty (50) years from the date of incorporation unless sooner dissolved or unless said period is extended. The corporate term as originally stated in the articles of incorporation may be extended for periods

1) not exceeding fifty (50) years 2) in any single instance 3) by an amendment of the articles of incorporation, in

accordance with this Code;

4) Provided, That no extension can be made earlier than five (5) years prior to the original or subsequent expiry date(s)

a. unless there are justifiable reasons for an earlier extension

b. as may be determined by the Securities and Exchange Commission. (6)

No limit as to number of extensions Extension of corporate term entails an amendment in the AOI thus, approval of the BOD by at least majority vote and by the vote of the stockholders representing at least 2/3 of the outstanding capital stock or in case of a non-stock, 2/3 of the members

Section 12. Minimum capital stock required of stock corporations. Stock corporations incorporated under this Code SHALL NOT BE REQUIRED TO HAVE ANY MINIMUM AUTHORIZED CAPITAL STOCK except

1) as otherwise specifically provided for by special law, and

2) subject to the provisions of the following section.

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Section 13. Amount of capital stock to be subscribed and paid for the purposes of incorporation.

1) At least twenty-five percent (25%) of the authorized capital stock as stated in the articles of incorporation must be subscribed at the time of incorporation, and

2) at least twenty-five (25%) per cent of the total subscription must be paid upon subscription,

the balance to be payable

1) on a date or dates fixed in the contract of subscription without need of call, or (Demand is not necessary to put the obligor in default)

2) in the absence of a fixed date or dates, upon call for payment by the board of directors:

Provided, however, That in no case shall the paid-up capital be less than five Thousand (P5,000.00) pesos. (n) Under certain special laws, there are certain corporations that are required to have a minimum capital, e.g.:

1. Universal bank 4.95B 2. Commercial bank 2.4B 3. Thrift bank 325M/52.5M 4. Insurance company 5. Investment company

If there is no special law, there is no minimum authorized capital stock Under the 25-25 Rule, it is not always required to pay up the subscription

GR: Partial payment is allowed for as long as the first tranche represent at least 25% of the total subscription

XPN: Must be fully paid a. No Par Value shares b. Non-Resident Foreign Subscriber unless it is

secured by a surety undertaking made by a Filipino resident

The corporation cannot declare dividends out of the subscribed capital stock

Section 14. Contents of the articles of incorporation. All corporations organized under this code shall file with the Securities and Exchange Commission articles of incorporation in any of the official languages duly signed and acknowledged by ALL OF THE INCORPORATORS, containing substantially the following matters, except as otherwise prescribed by this Code or by special law:

1) The name of the corporation; 2) The specific purpose or purposes for which the

corporation is being incorporated. a. Where a corporation has more than one

stated purpose, the articles of incorporation shall state which is the primary purpose and which is/are the secondary purpose or purposes: (See Sec. 42)

1

b. Provided, That a non-stock corporation may not include a purpose which would change or contradict its nature as such;

1 Investment of corporate funds in the secondary purpose requires

stockholders' approval by 2/3 of the outstanding capital stock

3) The place where the principal office of the corporation is to be located, which must be within the Philippines;

4) The term for which the corporation is to exist; 5) The names, nationalities and residences of the

incorporators; 6) The number of directors or trustees, which shall not

be less than five (5) nor more than fifteen (15); 7) The names, nationalities and residences of persons

who shall act as directors or trustees until the first regular directors or trustees are duly elected and qualified in accordance with this Code;

8) If it be a stock corporation, a. the amount of its authorized capital stock in

lawful money of the Philippines, b. the number of shares into which it is

divided, and c. 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

d. if some or all of the shares are without par value, such fact must be stated;

9) If it be a non-stock corporation, a. the amount of its capital, b. the names, nationalities and residences of

the contributors and c. the amount contributed by each; and

10) Such other matters as are not inconsistent with law and which the incorporators may deem necessary and convenient.

The Securities and Exchange Commission 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

a. at least twenty-five (25%) percent of the authorized capital stock of the corporation has been subscribed, and

b. at least twenty-five (25%) of the total subscription has been fully paid to him in actual cash and/or in property the fair valuation of which is equal to at least twenty-five (25%) percent of the said subscription,

c. such paid-up capital being not less than five thousand (P5,000.00) pesos.

Section 15. Forms of Articles of Incorporation. - x x x ELEVENTH: (Corporations which will engage in any business or activity reserved for Filipino citizens shall provide the following): "No transfer of stock or interest which shall reduce the ownership of Filipino citizens to less than the required percentage of the capital stock as provided by existing laws shall be allowed or permitted to be recorded in the proper books of the corporation and this restriction shall be indicated in all stock certificates issued by the corporation." x x x

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Documents needed: 1. Articles of Incorporation 2. By-laws (See Sec. 46)

a. to be with the AOI b. within 1 month from approval of

incorporation 3. Treasurer's Affidavit proof of compliance. 2

situations when needed: a. upon incorporation b. amending the AOI that concerns the

increase of capital stock 4. Bank Certification showing money is in the hands of

the treasurer; deposit in the name of the "treasurer in trust for the corporation"

5. Name Verification Slip an undertaking to change the name if it is identical or similar to an existing corporate name (See Sec. 18)

6. Company data maintenance sheet 7. In case of special corporation, an endorsement from

the appropriate government agency 8. Payment of Fees

SEC will issue a certificate of registration which is the operative date by which a corporation acquires legal personality (See Sec. 19) Place where the principal office of the corporation is to be located Test: the place where the books are kept and where the meeting is held must be consistent with what appears in the AOI

for purposes of venue in filing an action (the principal place in the AOI.

it would be easy on the part of the corporation to evade service of process, it will just keep on changing the principal office of the corporation

Section 16. Amendment of Articles of Incorporation. 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

1) by a majority vote of the board of directors or trustees and (ENTIRE BOARD)

2) the vote or written assent of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock,

a. without prejudice to the appraisal right of dissenting stockholders in accordance with the provisions of this Code,

3) or the vote or written assent of at least two-thirds (2/3) of the members if it be a non-stock corporation.

The original and amended articles together shall contain all provisions required by law to be set out in the articles of incorporation. (CERTIFICATE OF AMENDMENTS)

1) Such articles, as amended shall be indicated by underscoring the change or changes made, and

2) a copy thereof duly certified under oath by the corporate secretary and a majority of the directors or trustees stating the fact that said amendment or amendments have been duly approved by the required vote of the stockholders or members, (include when it was approved)

3) shall be submitted to the Securities and Exchange Commission.

The amendments shall take effect 1) upon their approval by the Securities and Exchange

Commission or 2) from the date of filing with the said Commission if not

acted upon within six (6) months from the date of filing for a cause not attributable to the corporation.

With respect to the board approval, it is indispensable that there be a board meeting.

Section 17. Grounds when articles of incorporation or amendment may be rejected or disapproved. The Securities and Exchange Commission may

1) reject the articles of incorporation or 2) disapprove any amendment thereto if the same is not

in compliance with the requirements of this Code: a. 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

1) banks, banking and quasi-banking institutions, 2) building and loan associations, 3) trust companies and other financial intermediaries, 4) insurance companies, 5) public utilities, 6) educational institutions, and 7) 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) Section 17 is not exclusive,. Other possible grounds:

1. fraud or misrepresentation in filing the AOI or in procuring certificate of registration/incorporation

2. non-filing of by-laws within one month from incorporation

Section 18. Corporate name. No corporate name may be allowed by the Securities and Exchange Commission if the proposed name is

1) identical or deceptively or confusingly similar to that of any existing corporation or

2) (identical or deceptively or confusingly similar) to any other name already protected by law or

3) is patently deceptive, confusing or contrary to existing laws.

9 | P L A T O N

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 if the generic word has become distinctive such that it is associated with the mind of the public as it has been sourced or manufactured by a person or a corporation then it is entitled to protection under the law Requisites:

1. the one who opposes the use of the corporate name must have acquired a prior right over such corporate name (through registration from filing with the SEC

2. See Enumerations under Sec. 18. Obligations of a corporation under the old name will be absorbed by the same corporation under the new corporate name

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)

Section 20. De facto corporations. 1) The due incorporation of any corporation (VALID

LAW) 2) claiming in good faith to be a corporation under this

Code, and 3) its right to exercise corporate powers,

shall not be inquired into collaterally in any private suit to which such corporation may be a party.

Such inquiry may be made by the Solicitor General in a quo warranto proceeding. (n)

There is NO de facto corporation unless there is a certificate of incorporation issued by the SEC which presupposes the filing of AOI Stockholders of such corporation have the same rights and subject to the same obligations of stockholders of a de jure corporation A de facto corporation for all intents and purposes, is a de jure corporation except that the State reserves the right to question its corporate existence through a quo warranto proceeding Other examples of infirmities resulting to de facto existence:

1. majority of the residences of the incorporators 2. treasurer's affidavit is false 3. information indicated in the AOI inaccurate 4. non-submission of by-laws

Section 21. Corporation by estoppel. 1) All persons 2) who assume to act as a corporation knowing it to be

without authority to do so 3) shall be liable as general partners for all debts,

liabilities and damages incurred or arising as a result thereof:

Provided, however, That when any such ostensible corporation is sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality. On who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation. (n) Only those who made representations! So, anyone who benefited from the transaction The doctrine cannot be invoked when there is no 3rd party involved

Section 22. Effects on non-use of corporate charter and continuous inoperation of a corporation.

1) If a corporation does not formally organize and commence the transaction of its business or the construction of its works within two (2) years from the date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved.

2) However, if a corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least five (5) years, the same shall be a ground for the suspension or revocation of its corporate franchise or certificate of incorporation. (19a)

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 Securities and Exchange Commission.

When the corporation appoints the board and the board appoints the corporate officers within 2 years, it is deemed organized Other grounds to suspend or revoke corporate franchise:

1. failure to submit by-laws 2. violation of Code 3. Non-submission of reports 4. fraud or misrepresentation

TITLE III - BOARD OF DIRECTORS/TRUSTEES AND OFFICERS

Section 23. The board of directors or trustees. Unless otherwise provided in this Code

2, 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

2 certain powers are reserved for the stockholders solely, or jointly with the BOD

10 | P L A T O N

1) to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation,

2) who shall hold office for one (1) year until their successors are elected and qualified. (28a) (HOLD OVER CAPACITY)

3

Every director

1) must own at least one (1) share of the capital stock of the corporation of which he is a director,

a. which share shall stand in his name on the books of the corporation.

b. 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.

2) A majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines.

Qualifications of a BOD:

1. All the qualifications under the Code, as well as under the By-laws

2. None of the disqualifications under the Code, as well as under the By-laws

Qualifications under the Code:

4

1. natural person except cooperative 2. legal age 3. ownership of at least 1 share registered in his name in

the books. (continuing qualification) When required to own?

a. as indicated in the by-laws, or b. upon assumption of office

*acquisition is not a mode for the election or appointment of a director *when legal title is lost then the director automatically losses his seat *a trustee can qualify as a director even if he is not a full owner because it is the legal title that counts not the beneficial title

4. not less than 5 nor more than 15 except in case of corporation sole (only 1) or in case of merger or consolidation (up to 21) or non-stock (more than 15) except educational (up to 15)

5. majority must be Philippine residents except when engaged in nationalized activity (if 100%)

Disqualifications: See Sec. 27. Any transaction not authorized by the board is ultra vires or beyond the authority of the corporation, thus, unenforceable. The following must be required:

1. Board resolution that the transaction has been approved by the board

3 Not a fresh term! In case the director resigns, it will be

considered as expiration of term NOT resignation. (Relevant to Sec. 29) 4 By laws may expand the qualifications as long as it is not

intended to deprive minority representation.

2. The officer concerned is duly authorized by the board for that purpose

Powers of the BOD in a hold over period: Same as regular BOD BUSINESS JUDGMENT RULE stockholders or the courts cannot interfere with the BOD on how to run the affairs of the corporation. (questions of policy)

remedy: removal with or without cause, derivative suit, don't elect next time

Majority of the entire board + 2/3 stockholders

1. amendment of AOI 2. adoption or amendment of by-laws 3. power to extend or shorten corporate term 4. power to increase or decrease capital stock; incur,

create or increase bonded indebtedness 5. sale or other dispositions of substantially all or all

assets 6. power to invest corporate funds in another

corporation or for any other (secondary) purpose 7. merger or consolidation 8. dissolution

Majority of the board of directors (quorum) + Majority of stockholders (outstanding shares)

1. power to enter into management contract Note: See Section 44

Section 24. Election of directors or trustees. At all elections of directors or trustees,

1) 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 (may only be 1, e.g. Henry Sy)

5, or

a. if there be no capital stock, a majority of the members entitled to vote.

2) The election must be by ballot if requested by any voting stockholder or member. (generally viva voce)

In stock corporations,

1) every stockholder entitled to vote shall have the right to vote in person or by proxy

2) the number of shares of stock standing, a. at the time fixed in the by-laws, b. in his own name on the stock books of the

corporation, or c. where the by-laws are silent, at the time of

the election; and 3) said stockholder may vote

a. such number of shares6 for as many persons

as there are directors to be elected (spread) b. 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,

c. or he may distribute them on the same principle among as many candidates as he shall see fit: (apportion)

d. Provided, That the total number of votes cast by him shall not exceed the number of

5 If meeting will deal on other matters, you need a higher

number of those present if the Code requires such 6 Subscribed, not necessarily paid up!

11 | P L A T O N

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. (non-voting shares shall also be excluded) Unless otherwise provided in the articles of incorporation or in the by-laws, members of 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 are 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. (31a) INDEPENDENT DIRECTORS requirement of at least 2 independent directors for

1. issuers of registered securities to the public whether or not listed in the PSE

2. public companies or those with assets of at least 50M and having 200 or more holders each holding at least 100 shares

3. finance co 4. investment houses 5. broker and dealers of securities 6. investment co 7. pre-need co 8. subsidiaries or branches of foreign corporations

which operate in the Philippines and are listed in the PSE

9. stock and other securities exchange/s Must not be:

1. a director or officer or substantial stockholder 2. a relative of any d, o, subs SH 3. acting as a nominee or representative of a subs SH 4. employed in any exec capacity 5. retained as professional adviser 6. engaged in any transaction with the corporation or

with any of its company or with any of its subs SH The law does not mandate the stockholders to vote for independent directors There will still be only one election held; Computation is still no. of shares x 15

Section 25. Corporate officers, quorum. Immediately after their election, the directors of a corporation must formally organize by the election of

1) a president, who shall be a director,7

2) a treasurer who may or may not be a director,8

7 He must have all the qualifications and none of the

disqualifications of a director 8 SEC: must be a resident

3) a secretary who shall be a resident and citizen of the Philippines, and

4) 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

1) as president and secretary or 2) 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) Points to remember:

The president is required to be a Filipino citizen if the corporation is engaged in a nationalized activity, wholly or partly, under the Anti-Dummy Law. No foreigner will be allowed to occupy an executive position

SEC: President cannot be chairman Foreigner can be a chairman if such position is non-

executive Secretary must be a Filipino. See also other

qualifications according to the SEC Treasurer need not be a citizen but must be a

resident Treasurer can be a secretary General counsel may be a secretary Vice president not required to be a stockholder unless

it takes the place of the president Other positions: controller

Importance in determining whether one is a corporate officer or an ordinary officer:

1) jurisdiction: a. C.O.: Intra-corporate controversy = RTC as

special commercial court b. O.O.: Labor dispute = Labor court

2) manner of creation: a. C.O.: required by the by-laws b. O.O: created by the BOD

Majority "of the entire board" or "of the board"

1. amendment of AOI (+ SH 2/3) 2. adoption or amendment of by-laws (+ SH majority) 3. power to extend or shorten corporate term (+ SH 2/3) 4. power to increase or decrease capital stock; incur,

create or increase bonded indebtedness (+ SH 2/3)

12 | P L A T O N

5. sale or other dispositions of substantially all or all assets (+ SH 2/3)

6. power to invest corporate funds in another corporation or for any other (secondary) purpose (+ SH 2/3)

7. merger or consolidation 8. dissolution 9. election, appointment or removal of corporate

officers 10. delegation of powers to the executive committee

"Majority of the directors" (quorum)

1. declaring cash dividends 2. declaring stock dividends (+ SH 2/3) 3. power to enter into management contract (+ SH

majority) 4. filling up vacancies not due to removal, expiration or

increase in number of directors 5. investment for primary purpose 6. sale mortgage or other dispositions in ordinary course

of business

Section 26. Report of election of directors, trustees and officers. - Within thirty (30) days after the election of the directors, trustees and officers of the corporation,

1) the secretary, or any other officer of the corporation, 2) shall submit to the Securities and Exchange

Commission, a. the names, nationalities and residences of

the directors, trustees, and officers elected. b. 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 Securities and Exchange Commission. (n)

General Information Sheet controlling as to the names of directors elected

Section 27. Disqualification of directors, trustees or officers. No person

1) convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or

2) 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 28. Removal of directors or trustees. Any director or trustee of a corporation may be removed from office

1) by a vote of the stockholders holding or representing at least two-thirds (2/3) of the outstanding capital stock, or if the corporation be a non-stock corporation, by a vote of at least two-thirds (2/3) of the members entitled to vote:

2) 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,

3) after previous notice to stockholders or members of the corporation of the intention to propose such removal at the meeting.

4) A special meeting of the stockholders or members of a corporation for the purpose of removal of directors or trustees, or any of them,

a. 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,

b. 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

1) by publication or 2) by written notice prescribed in this Code.

Removal may be with or without cause: Provided, That removal without cause may not be used to deprive minority stockholders or members of the right of representation to which they may be entitled under Section 24 of this Code. (n) Important points:

The provisions in the by-laws contrary to this Section will not justify the acts of the BOD in removing a director

the power to remove belongs solely to the stockholders

Removal of a director cannot included as other matters. There must be notice of the intention to remove!

The replacement may be appointed by the stockholders in the same meeting where the removal was effected or in a meeting called for the purpose of electing a replacement

Section 29. Vacancies in the office of director or trustee. Any vacancy occurring in the board of directors or trustees OTHER THAN

1) by removal by the stockholders or members or 2) by expiration of term,

a. may be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum;

b. 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.

13 | P L A T O N

3) Any directorship or trusteeship to be filled by reason

of an increase in the number of directors or trustees a. shall be filled only by an election at a

regular or at a special meeting of stockholders or members duly called for the purpose,

b. or in the same meeting authorizing the increase of directors or trustees if so stated in the notice of the meeting. (n)

The stockholders in these cases has the power to fill up vacancies:

1. due to expiration of term, removal and increase in the number of board seats

2. Not due to No. 1 but the remaining directors do not constitute a quorum

3. Not due to No. 1 and the remaining directors constitute a quorum the directors but they decided to delegate the matter or responsibility to the stockholders

The board is NOT obligated to fill up the vacancy. Term of the replacement director: unexpired portion

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) Compensation any form of remuneration GR: No compensation because of the presumption that the return of their investment is enough compensation. XPN: provided that it has been authorized by the

1. by-laws 2. stockholders representing at least majority of the

outstanding capital stock at a regular or special stockholders' meeting

3. OR when they render services to the corporation other than as director

a. Example: director as president Per diem

allowance for the attendance during the meetings must be reasonable

LIMITATION: Must not exceed 10% of the net income before income tax of the corporation during the preceding year The limitation does not apply to payment of compensation for other services meaning it was rendered in a capacity other than as a director

Section 31. Liability of directors, trustees or officers. Directors or trustees

1) who wilfully and knowingly vote for or assent to patently unlawful acts of the corporation or

2) who are guilty of gross negligence or bad faith in directing the affairs of the corporation or

3) 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. (n)

In a broad sense, management has threefold duties namely, (a) obedience, (b) diligence, and (c) loyalty

GR: As a rule, directors and officers are not solidarily liable with the corporation. Obligations incurred by them, acting as such corporate agents, are not theirs but the direct accountabilities of the corporation they represent XPN: In the following cases, personal liability may be incurred by directors and officers: In addition to Sec. 31, 1-3: 4) When a director has consented to the issuance of

watered stocks or who, having knowledge thereof, did not forthwith file with the corporate secretary his written objection thereto (Sec. 65)

5) When a director, trustee or officer is made, by specific provisions of law, personally liable for his corporate actions (e.g. Trust Receipts Law)

6) When a director, trustee or officer has contractually agreed or stipulated to hold himself personally and solidarily liable with the corporation (e.g. surety or guarantor)

Enumeration is EXCLUSIVE.

Conflict of interest per se is not a ground for liability:

Doctrine of Corporate Opportunity The duty of loyalty mandates that directors should not give preference to their own personal amelioration by taking the opportunity belonging to the corporation.

14 | P L A T O N

If there is an interest that belongs to the corporation, it must not be seized or taken advantage of by the director or officer, otherwise any interest, income or profit earned by that venture or undertaking must be fully accounted for and remitted to the corporation. There is an obligation on the part of the director or officer to hold the profit in trust for the benefit of the corporation (Sec. 34)

Section 34. Disloyalty of a director. Where a director, by virtue of his office,

1) acquires for himself a business opportunity which should belong to the corporation,

2) 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 two-thirds (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. (n)

Section 34 applies if the corporate/business opportunity:

1) is one which the corporation is financially able to undertake;

2) from its nature, is in line with corporation's business and is of practical advantage to it; and

3) is one in which the corporation has an interest or a reasonable expectancy

The burden of proof on the questions of good faith, fair

dealing and loyalty of the officer to the corporation should rest upon the officer who appropriated the business opportunity for his own advantage

The theory is that profits made and advantage gained by an agent belongs to the principal

The corporation may choose to ratify the acts of the

director

Property or business opportunity ceases to be a corporate opportunity and is transformed into personal opportunity where the corporation is definitely no longer able to avail itself of the opportunity

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: 1) Provided, That full disclosure of the adverse

interest of the directors or trustees involved is made at such meeting:

2) Provided, however, That the contract is fair and reasonable under the circumstances. (n)

Self-dealing directors, trustees, or officers are those who

personally contract with the corporation in which they are directors, trustees or officers

o It is discouraged because the directors, trustees and officers have fiduciary relationship with the corporation and there can be no real bargaining where the same is acting on both sides of the trade

The contract between the corporation and the self-dealing

director, trustee or officer is voidable. However, the contract is valid if the requirements for its validity under Section 32 are present

However, even if not all the requirements are met, the contract with the self-dealing director, trustee or officer may still be ratified by a vote of stockholders representing at least 2/3 of the Outstanding Capital Stock or by the vote of at least 2/3 of the members in a meeting called for the purpose provided the following conditions are met:

1) There must be full disclosure of the adverse interest of the directors or trustees involved is made at such meeting

2) the contract is fair and reasonable under the circumstances

Discussion: When may a corporate officer bind the

corporation? 1) Authorized by the By-Laws 2) Authorized by the Board of Directors 3) If not authorized by By-Laws nor the Board, the act

can be ratified by the Board 4) Doctrine of Apparent Authority (must be related to

his function)

Section 33. Contracts between corporations with interlocking directors.

1) Except in cases of fraud, and 2) provided the contract is fair and reasonable under the

circumstances, a contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone:

Provided, That if the interest of the interlocking director in one corporation is substantial and his interest in the other corporation or corporations is merely nominal,

o he shall be subject to the provisions of the preceding section insofar as the latter corporation or corporations are concerned.

Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be considered substantial for purposes of interlocking directors. (n)

15 | P L A T O N

Interlocking directorship by itself is not prohibited under

the Corporation Code. However, the by-laws may contain provisions that disallow interlocking directorship in certain cases. A contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone

There is an interlocking director in a corporation when one

(or some or all) of the directors in one corporation is (or are) a director(s) in another corporation

If the interest of the interlocking director in one of the

corporations is nominal in one and substantial in the other, a contract between the two corporations shall be valid, if the conditions under Section 32 are present

Contract between corporations with interlocking

directors/trustees must always meet the third condition, that is, said contracts must be fair and reasonable under the circumstances

o If the contract is fair and reasonable, the absence of either the first or second condition makes the contract voidable and capable of ratification

Section 33 which provides for rules regarding transactions between corporations with interlocking directors applies if the contract results in prejudice to one of the corporations. This rule does not apply if the corporation allegedly prejudiced is a third party, not one of the corporations with interlocking directors

o The option to nullify the contract belongs to the parties to the contract (stockholders, directors, corporations) only and not to a third party

Interlocking directors are not allowed between banks,

quasi-banks, investment houses, insurance companies without prior BSP approval.

o How about in non-banks? Allowed, except if there is a contrary provision (e.g. Gokongwei)

SUMMARY For a contract between 2 corporations with

interlocking directors to be valid: 1) there is no fraud 2) the contract if fair and reasonable 3) the interest of the interlocking director in one

corporation is substantial and his interest in the other corporation is merely nominal

4) compliance with the requirements in Section 32 in so far as the nominal corporation is concerned

Section 35. Executive committee. The by-laws of a corporation may create an executive committee,

composed of not less than three 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: (Limitations)

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. N.B. Distribution of stock dividends falls under the first exception

The Corporation Code allows the creation of an executive

committee because the board may not readily face the contingency of confronting urgent matters which requires its attention

The executive committee can only be created by virtue of a provision in the by-laws. The board, by itself, cannot create an executive committee if nothing is stated in the by-laws

o GR: The board alone or the board per se cannot create a mini board or a committee that will function as BOD

o XPN: 1) the by-laws may authorize the creation of

the executive committee 2) the BOD pursuant to an authority under the

by-laws may likewise create an executive committee

TEST: Will that committee perform board functions? Will

that committee act on matters according to the board competence?

If yes, then it requires authority in the by-laws. If it does not perform the functions of the board and is for administrative purposes only, the BOD can create such by mere board approval.

Section 35 provides that an executive committee must be

composed of not less than three members of the board, to be appointed by the board. This means that there can be members of the executive committee who are not directors provided that at least three members are directors

o Can non-board directors be members? Yes, provided their function is merely

recommendatory or advisory in nature. They cannot vote.

o SEC Opinion, November 5, 1984: The required majority vote requirement for an executive committee shall be interpreted to mean majority of all the committee members regardless of the classification of the membership into director/members or non-director/members

A foreigner can be a member of the executive committee

in proportion to the foreign shareholdings in the corporation

The executive committee has all the authority of the board

to the extent provided in the resolution of the board or in the by-laws. The resolutions passed and approved by the executive committee are as valid as the resolutions of the

16 | P L A T O N

board provided the resolutions have been made at the time the committee is constituted

Decisions of executive committee are not absolute. It can

be abdicated by the board of directors o SEC Opinion, July 29, 1995: The decision of the

executive committee is not subject to appeal to the board. They are valid and unappealable. However, if the resolution of the executive committee is invalid (as for instance it is not one of the powers conferred thereto) it may be ratified by the board

If the executive committee was not validly constituted, the

members thereof may be considered de facto officers Read CASE OUTLINE in Marx, pages 57-70

TITLE IV - POWERS OF CORPORATIONS

Section 36. Corporate powers and capacity. Every corporation incorporated under this Code has the power and capacity:

1. To sue and be sued in its corporate name; 2. Of succession by its corporate name for the period of

time stated in the articles of incorporation and the certificate of incorporation;

3. To 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. (13a)

A corporation may exercise

1) Express powers the powers expressly provided by the

a. The Corporation Code;

i. The general powers under Section 36 and

ii. The specific powers under Section 11, 16 and 37 to 44

b. Applicable special laws; c. Administrative regulations; and d. The Articles of Incorporation and by-

laws of the corporation 2) Implied powers all powers that are reasonably

necessary or proper for the execution of the powers expressly granted and are not expressly or impliedly excluded

3) Incidental powers powers that are deemed conferred on the corporation because they are incidental to the existence of the corporation. It includes:

a. Right to succession b. Right to have a corporate name c. Right to make by-laws for its

government d. Right to sue and be sued e. Right to acquire and hold properties

for the purposes authorized by the charter

To sue and be sued in its corporate name

This power is exercised by the corporation through the board. Hence, the Supreme Court now requires corporations to attach a copy of the Board Resolution authorizing the filing of the complaint or petition The suit must be in the name of the corporation. It should use the complete name and not an acronym (LIDECO v. CA)

Of succession by its corporate name for the period of

time stated in the articles of incorporation and the certificate of incorporation

Section 11

To adopt and use a corporate seal A corporate seal is a sign, emblem, device adopted by the corporation to distinguish it from other corporations Under the Corporation Code, a seal is not indispensable for the transactions or contracts of the corporation. A document may be considered valid and binding even in the absence of a seal. However, one instance when a seal is necessary is with respect to the certificate of stock as provided for under Section 63 (merely directory not mandatory, thus, the absence of such will not invalidate the certificate)

To amend its articles of incorporation in accordance with

the provisions of this Code (not to adopt because AOI is required at the outset)

Section 16

To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this Code

Section 46 and 48

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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

Sections 60-72

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, 1) as the transaction of the lawful business of the

corporation may reasonably and necessarily require, 2) subject to the limitations prescribed by

a. law and b. the Constitution

The power under this provision can be exercised by the Board without concurrence of the stockholders.

covered by Sections 40 and 42. What are the basic requirements/limitations? 1) It must be reasonably and necessarily required

by the transaction of the lawful business of the corporation

a. It can mortgage its properties to secure its obligations

b. Parent can mortgage its properties to IF (1)

the latter is wholly-owned by the former, and (2) it will not prejudice third persons.

c. It can act as an accommodation mortgagor IF it is engaged in the business of a surety, bonding company, etc.

d. In case of donations, if such is contrary

the AOI first before accepting. 2) It is subject to limitations prescribed by law and

the Constitution a. Foreign corporations are not allowed

to acquire private lands in the Philippines unless 60% of its capital stock is owned by Filipinos

b. Corporation cannot acquire alienable lands of public domain

c. Domestic corporation owned by Filipinos can lease a public land

d. Foreign banks can be a mortgagee but cannot foreclose properties. Remedy: They assign the right to their lawyers.

e. Bulk Sales Law

To enter into merger or consolidation with other corporations as provided in this Code

Section 76

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

The Corporation Code now allows corporations to make donation so long as the following are complied with:

1) The donation must be reasonable; 2) The donation must be for valid purposes

including public welfare or for hospital, charitable, cultural, scientific, civic, or similar purposes;

3) The donation must not be in aid of any political party or candidate or for purposes of partisan political activity

Factors to determine reasonableness:

1) Income of the corporation 2) Capital/Assets of the corporation 3) Operations 4) Volume or magnitude of the donation

To establish pension, retirement, and other plans for the

benefit of its directors, trustees, officers and employees superior than what the law provides

Article 27 of the Labor Code provides a default retirement plan: If 60 years of age and at least 5 years in service, you get month salary for every year of service A corporation can act as a collection agent as long as it will not earn any commission or remuneration from that arrangement

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

ALL ENCOMPASSING A corporation cannot enter into a contract of partnership. This limitation is based on public policy since in a partnership, the corporation would be bound by the acts of the persons who are not its duly appointed and authorized agents and officers, which would be entirely inconsistent with the policy of the law that the corporation shall manage its own affairs separately and exclusively. By way of exception, the SEC allows a corporation to be a partner if the following conditions are present:

1) The authority to enter into a partnership relation is expressly conferred by the charter or Articles of Incorporation of the corporation, and the nature of the business venture to be undertaken by the partnership is in line with the business authorized by the charter or articles of incorporation of the corporation involved

2) The partnership must be a limited partnership and the corporation must be a limited partner

3) If it is a foreign corporation, it must obtain a license to transact business in the country

A corporation can enter into a joint venture agreement The general rule is that a corporation may not ordinarily be bound by a contract of guarantee or surety for the benefit of third persons. However, such guaranty may be given in the accomplishment of any object for which the corporation was created, or when the particular transaction is reasonably necessary or proper in the conduct of its business Consistently, a corporation cannot act as an accommodation party in a negotiable instrument

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o UNLESS it is engaged in such nature of business (e.g. surety, bonding company, etc)

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

1) when approved by a majority vote of the board of directors or trustees and

2) 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.

3) 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)

Limitations on the power: 1) Done during the lifetime of the corporation

a. X expiration of term, liquidation or winding up. The corporation is already dissolved, there is nothing more to extend. Remedy if term already expired: Reincorporation.

2) Approved by at least majority of the board a. Entails amendment of the AOI therefore

approval by the stockholders representing at least 2/3 of the OCS is required at a meeting

b. For purposes of sucwritten 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 residences as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally

3) Must not exceed 50 years at any given time 4) Cannot be done earlier than 5 years or prior to the

original or subsequent expiry date unless there are justifiable reasons for an earlier extension as may be determined by the SEC

5) In case of banks, insurance companies, public utilities, the favorable endorsement of the appropriate government agency

6) A copy of the amended articles of incorporation shall be submitted to the SEC for its approval

Appraisal right is available in extension AND shortening of

corporate term (see Sec. 81). However, if shortening will

longer practical.

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

1) approved by a majority vote of the board of directors and, But when you issue shares from the unissued

portion of the capital stock without the

corresponding increase in capital stock board approval suffices

2) 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.

3) 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 t