BA 160, January 2015

CORPORATIONS

Constitution, Article XII, Section 16 - National Economy and PatrimonyThe 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 viability.

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3CHARACTERISTIC PARTNERSHIP CORPORATION

How created voluntary agreement of parties created by the state in the form of a special charter or by a general enabling law

term of existence no time limit except by agreement of the parties

not more than 50 years

as to liability to strangers

may be liable with their private property beyond their contribution to the firm

liable only up to the extent of their subscribed capital stock

transferability of interest

transferee does not become a partner unless all other partners consent

transferee becomes a stockholder even without the consent of the others

ability to bind the firm

generally, partners act as agents of the partnership and as such can bind the firm and the partners

it is the board of directors or its duly authorized representative who can bind the corporation

mismanagement a partner can sue a partner who mismanages

a stockholder cannot sue a member of the BOD who mismanages, it is the corporation itself which must file the action

nationality a partnership is a national of the country where it was created

national of the country under whose laws it was incorporated with exceptions

attainment of legal personality

the firm becomes a juridical person from the time the contract begins

the firm becomes a juridical person from the time of issuance of its certificate of incorporation by the SEC

dissolution a partner may dissolve the partnership by his act or withdrawal

cannot be dissolved without the approval of the BOD and SH, and the consent of the state.

Definition of Corporation

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. Section 2, Corporation Code

Attributes of a Corporation1. It is an artificial being; 2. It is created by operation of law; 3. It has the right of succession; 4. It has only the powers, attributes and

properties expressly authorized by law or incident to its existence.

Corporation an artificial person

A corporation is a legal or juridical person with a personality separate and apart from its individual members or stockholders. It is not in fact and in reality a person but the law treats it as though it were a person by process of fiction.

ATTRIBUTES

Consequences of Artificial Personality? It may not, generally, be made to answer for acts or liabilities of its

stockholders; ? It may acquire and possess property of all kinds, as well as incur

obligations and bring civil and criminal actions in the same manner as a natural person;

? Property conveyed to or acquired by the corporation is in law the property of the corporation itself as a distinct legal entity and not that of the stockholders or members as such and vice-versa;

? A corporation has no personality to bring an action for the purpose of recovering property which belong to its stockholders in their personal capacities;

Consequences of Artificial Personality?All contracts entered into it its name by its regular appointed

officers and agents are the contract of the corporation and not those of the stockholders or members; ?A corporation cannot be held liable for the personal

indebtedness of a stockholder even if he should be its president; ?A corporation may have a good reputation which if besmirched

may be a ground for recovery of moral damages ?A corporation remains unchanged and unaffected in its identity

by changes in its individual membership.

Doctrine of Piercing the Veil of Corporate EntityBeing a mere creature of law, a corporation may be allowed to exist solely for LAWFUL purposes but where the fiction of corporate entity is being used as a cloak or cover for fraud or illegality, this fiction will be disregarded and the individuals composing it will be treated as identical.

Corporation as a Creation of LawCorporations cannot come into existence by mere agreement of the parties. They require special authority or grant from the State. This power is exercised by the State through the legislature either by a special incorporation law or charter which directly creates the corporation or by means of a general law which, in the Philippines, is the Corporation Code. Corporations can only come into existence in the manner prescribed by law. The acts required to be done must be complied with substantially before legal corporate existence can be acquired.

ATTRIBUTES

Right of Succession of a Corporation Under the law, the life of a corporation is limited to the period of time stated in the articles of incorporation not exceeding 50 years from the date of incorporation unless sooner dissolved or unless said period is extended. The extension of the life of a corporation is, however, a privilege and not a right. Certain requirements have to be complied with. A corporation has a capacity of continuous existence irrespective of the death, withdrawal, or incapacity of the individual stockholders and regardless of the transfer of their interest or shares of stock.

ATTRIBUTES

Powers, Attributes, and Properties

A corporation, being purely a creation of law, may exercise only such powers as are granted by the law of its creation. An express grant, however, is not necessary. All powers which may be implied from those expressly provided by law, and those which are incidental or essential to the corporations existence may also be exercised.

ATTRIBUTES

Powers of a Corporation An individual has absolute right

fully to use, enjoy and dispose of his properties, to perform all acts and to make all contracts without any control except when they are forbidden by law. Since a natural person does not owe his existence to the state, they can perform any act not prohibited by law. The same is true of a partnership.

Powers of a Corporation Unlike a natural person, a

corporation owes its existence to the state and therefore, it has only such powers as are expressly and impliedly granted by law or those incidental to its existence. a corporation, as an artificial person, created by or under authority of law, is without natural rights.

Powers of a Corporation

1. Those expressly granted or authorized by law, i.e., those conferred by the Corporation Code and its articles of incorporation (EXPRESS);

2. Those incidental to its existence or to the exercise of the powers so conferred (INCIDENTAL);

3. Those that are necessary to the exercise of the express or incidental powers (IMPLIED).

Powers of a CorporationSec. 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;

Powers of a CorporationSec. 36. Corporate powers and capacity Every corporation

incorporated under this Code has the power and capacity: 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 with other corporations merger or consolidation as provided in this Code;

Powers of a CorporationSec. 36. Corporate powers and capacity Every corporation

incorporated under this Code has the power and capacity: 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 its articles of incorporation.

Powers of a Corporation

Sec. 37 Power to extend or shorten corporate term A private corporation may extend or shorten its term as stated in

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

Powers of a CorporationSec. 37 Power to extend or shorten corporate term 1.approval by a majority vote of the board of

directors or trustees 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

Powers of a CorporationSec. 38 Power to increase or decrease capital stock; incur, create or increase bonded indebtedness No corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority vote of the board of directors and, at a stockholder's meeting duly called for the purpose, two-thirds (2/3) of the outstanding capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Xxx xxx xxx

Powers of a CorporationSec. 38 Power to increase or decrease capital stock; incur, create or increase bonded indebtedness 1.approval by a majority vote of the board of directors 2.Approval of stockholders representing 2/3 of the outstanding capital stock 3.Approval made at a stockholder's meeting duly called for the purpose

Powers of a CorporationSec. 39 Power to deny pre-emptive right 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 two-thirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt.

Right of pre-emption, defined

Whenever the capital stock of a corporation is increased and new shares of stock are issued, the new issue must be offered first to the stockholders who are such at the time the increase was made in proportion to their existing shareholdings and on equal terms with other holders of the original stocks before subscriptions are received from the general public. This principle is known as the right of pre-emption or pre-emptive right of stockholders.

The rule aims to safeguard the right of a stockholder to preserve unaltered and unimpaired his proportionate influence and interest in the corporation and the relative value of his holdings.

Powers of a CorporationSec. 40 Power to sell, lease, etc. all or substantially all corporate assets 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 two-thirds (2/3) of the outstanding capital stock, or in case of non-stock corporation, by the vote of at least to two-thirds (2/3) of the members, in a stockholder's or member's meeting duly called for the purpose. Xxx xxx xxxx

Powers of a CorporationSec. 40 Power to sell, lease, etc. all or substantially all corporate assets 1.Subject to the provisions of existing laws on illegal combinations and monopolies 2.majority vote of its board of directors or trustees 3.authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or in case of non-stock corporation, by the vote of at least to two-thirds (2/3) of the members 4.Authority of the stockholders/members given in a stockholder's or member's meeting duly called for the purpose.

Powers of a CorporationSec. 41 Power to acquire own shares 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 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.

Powers of a CorporationSec. 42 Power to invest corporate funds in another corporation or business or for any other purpose Subject to the provisions of this Code, a private corporation may invest its funds in any other corporation or business or for any purpose other than the primary purpose for which it was organized when approved by a majority of the board of directors or trustees and ratified 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 the case of non-stock corporations, at a stockholder's or member's meeting duly called for the purpose. Xxx xxx xxx Provided, however, That where the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in the articles of incorporation, the approval of the stockholders or members shall not be necessary.

Powers of a CorporationSec. 42 Power to invest corporate funds in another corporation or business or for any other purpose 1.approval by a majority of the board of directors or trustees 2.ratification 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 the case of non-stock corporations, 3.Approval and ratification made at stockholder's or member's meeting duly called for the purpose.

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

Dividends, conceptDistinguished from profits A dividend is that part or portion of the profits

of a corporation set aside, declared and ordered by the directors to be paid ratably to the stockholders on demand or at a fixed time

A dividend is that portion of the profits or net earnings which the corporation has set aside for ratable distribution among the stockholders. Thus dividends come from profits profits are the source of dividends

Powers of a CorporationSec. 44 Power to enter into management contracts No corporation shall conclude a management contract with another corporation unless such contract shall have been approved by the board of directors and by stockholders owning at least the majority of the outstanding capital stock, or by at least a majority of the members in the case of a non-stock corporation, of both the managing and the managed corporation, at a meeting duly called for the purpose: Provided, That (1) where a stockholder or stockholders representing the same interest of both the managing and the managed corporations own or control more than one-third (1/3) of the total outstanding capital stock entitled to vote of the managing corporation; or (2) where a majority of the members of the board of directors of the managing corporation also constitute a majority of the members of the board of directors of the managed corporation, then the management contract must be approved by the stockholders of the managed corporation owning at least two-thirds (2/3) of the total outstanding capital stock entitled to vote, or by at least two-thirds (2/3) of the members in the case of a non-stock corporation. No management contract shall be entered into for a period longer than five years for any one term. Xxx xxx xxx

Management Contract Section 44 refers only to a management contract

with another corporation. It does not apply to management contracts entered into by a corporation with natural persons.

A management contract is an agreement under which a corporation delegates the management of its affairs to another corporation for a certain period of time.

Powers of a CorporationPower to enter into management contracts General requirement 1.approval by the board of directors 2.Approval by the stockholders owning at least the majority of the outstanding capital stock, or by at least a majority of the members in the case of a non-stock corporation, of both the managing and the managed corporation, 3.Approval made at a meeting duly called for the purpose

Powers of a Corporation

Power to enter into management contracts where stockholders have 1/3 interests in both managed and managing corporations 1.approval by the stockholders of the managed corporation owning at least two-thirds (2/3) of the total outstanding capital stock entitled to vote, or by at least two-thirds (2/3) of the members in the case of a non-stock corporation 2.Approval at a meeting duly called for the purpose.

Powers of a CorporationSec. 45 Ultra vires acts of corporations 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 the powers so conferred.

Structure of Corporate Organization

SHAREHOLDERS

BOARD OF DIRECTORS

OFFICERS

Shareholders/StockholdersRights and Remedies1. Right to attend and vote in person or by proxy at

stockholders meetings 2. Right to elect and remove directors 3. Right to approve certain corporate acts 4. Right to adopt and amend or repeal the by-laws or

adopt new by-laws 5. Right to compel the calling of meetings of stockholders

when for any cause there is no person authorized to call a meeting

Shareholders/StockholdersRights and Remedies6. Right to issuance of certificate of stock or other

evidence of stock ownership and be registered as shareholder

7. Right to receive dividends when declared 8. Right to participate in the distribution of corporate assets

upon dissolution 9. Right to transfer of stock on the corporate books 10. Right to pre-emption in the issue of shares 11. Right to inspect corporate books and records

Shareholders/StockholdersRights and Remedies12.Right to be furnished the most recent financial

statements upon request and to receive a financial report of the corporations operations

13.Right to bring individual and representative or derivative suits

14.Right to recover stock unlawfully sold for delinquency

15.Right to enter into a voting trust agreement

Shareholders/StockholdersRights and Remedies16.Right to demand payment of the value of

his shares and withdraw from the corporation in certain cases; and

17.Right to have the corporation voluntarily dissolved.

Actions by stockholders, Categories1. Individual suit An action brought by a

stockholder against the corporation for direct violation of his contractual rights as such individual stockholder, such as the right to vote, the right to share in the declared dividends, the right to inspect corporate books and records and similar other examples.

Actions by stockholders, Categories2. Representative suit When a wrong is

committed against a group of stockholders, a stockholder may bring a suit in behalf of himself and all other stockholders who are similarly situated. This is called a shareholders representative suit which is a kind of class suit. It saves the persons involved in the action substantial time and money.

Actions by stockholders, Categories3. Derivative suit one brought by one or more

stockholders or members in the name and on behalf of the corporation to redress wrongs committed against it or to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue, or are the ones to be sued, or hold control of the corporation. It is a remedy designed by equity for those situations where the management through fraud, neglect of duty or other cause, declines to take the proper and necessary steps to assert the Corporations rights.

Voting Trust Agreement It is an agreement in writing whereby one or more

stockholders of a stock corporation transfer their share to act as a trustee for the purpose of vesting in such person or persons or corporation as trustee or trustees voting or other rights pertaining to the shares for a certain period and upon the terms and conditions stated in the agreement

A voting trust agreement results in the separation of the voting rights of a stockholder from his other rights.

Board of Directors / Trustees Governing body of the corporation Corporate powers of corporations shall be exercised,

all business conducted, and all properties controlled and held by the board of directors or trustees

With the exception only of some powers reserved by law to stockholders (or members), the directors (or trustees) have sole authority to determine policy and conduct the ordinary business of the corporation within the scope of its charter

Limitations on powers of BOD/Trustees

Limitations imposed by law, articles of incorporation, or by-laws of the corporation

It cannot perform constituent rights such as acts involving fundamental changes in the corporation which the require the approval of the shareholders or members

It cannot exercise powers not possessed by the corporation

Limitations on powers of BOD/Trustees

Directors of a corporation presumptively serve without compensation

The power of the BOD to control the corporations property and business does not empower them to provide themselves compensation

The BOD or trustees must act together as a body in order to bind the corporation by their acts. (To exercise their powers, they must meet as directors or trustees and act at a meeting at which there is quorum

Corporate Officers Carry on the day to day management of the business The task of actual management and carrying on the

details of business operations and corporate policies are delegated to the officers elected by the BOD and over whom it exercises supervision

The only officers of a corporation are those who are given that character either by the Code or the by-laws; the rest can be considered merely as employees or subordinate officials