Corporation Code

5/28/2018 Corporation Code

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LADIA NOTES:

CORPORATION LAW

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

INTRODUCTION

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

the exclusion of others

Limited shareholders responsibility Paid subscription in full, you are no longer liable Partnership Based on mutual trust and confidence Joint venture one time grouping of persons whether they be natural or juridical does not entail continuity because after the undertaking is completed it is already the end particular partnership and joint venture would be similar, but there is already a decision of the

Supreme Court declaring them as different

when they do not register, it does not exist Foreign corporations enters into an agreement with a domestic corporation, it must be registered.

Generally they do not need to be registered.

Corporations They may enter into joint venture, but generally they cannot enter into a partnership, but there are

exceptions allowed by the SEC: the 3 exceptions must go hand in hand

The articles of incorporation expressly authorized the corporation to enter into contracts ofpartnership;

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

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

DEFINITION AND ATTRIBUTES

4 attributes of a corporation Artificial being Created by operation of law Right of succession Powers, attributes and properties expressly authorized by law or incident to its existence. Doctrine of limited capacity Only such powers as are expressly granted to it by law and by its articles of incorporation

including others which are incidental to such conferred powers, those reasonably necessary toaccomplish its purpose and those which may be incidental to its existence

Can do things as the law asks or allows it to do If it does anything beyond, it shall be considered as ULTRA VIRES General rule: Moral damages cannot be granted to corporations Exception: Filipinas Broadcasting Network Inc. vs. Ago Med In cases of slander, libel and other forms of defamation (should not qualify because the code does

not qualify whether natural or juridical) Art. 2219 of the civil code:


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

(1) A criminal offense resulting in physical injuries;

(2) Quasi-delicts causing physical injuries;

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

(4) Adultery or concubinage;

(5) Illegal or arbitrary detention or arrest;

(6) Illegal search;

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

(8) Malicious prosecution;

(9) Acts mentioned in Article 309;

(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.

The parents of the female seduced, abducted, raped, or abused, referred to in No. 3 of this article,may also recover moral damages.

The spouse, descendants, ascendants, and brothers and sisters may bring the action mentioned inNo. 9 of this article, in the order named.

Advantages (SEE LADIA BOOK) No. 2 may also be a disadvantage No. 5 may also be a disadvantage A corporation is a person, therefore protected by the due process clause and equal protection

clause of the Constitution

CLASSIFICATION OF CORPORATIONS

Section 3 Stock and non-stock Importance of knowing, determining what provisions of the code or the law may be applicable

Section 3.Classes of corporations.- Corporations formed or organized under this Code

may be stock or non-stock corporations. Corporations which have capital stock divided intoshares and are authorized to distribute to the holders of such shares dividends or allotments of thesurplus profits on the basis of the shares held are stock corporations. All other corporations arenon-stock corporations. (3a)

Non-stock- title 10 Stock- section 51 Stockholders must generally cast their votes in the meeting; section 4 governed primarily by the

law creating them


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Section 4.Corporations created by special laws or charters. - Corporations created byspecial 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 theyare applicable. (n)

Section 3 The two requisites must always concur That they have a capital stock divided into shares; and, That they are authorized to distribute dividends or allotments as surplus profits to its stockholders

on the basis of the shares held by each of them.

Section 4 Created by a special law, they have their own character They are not immune from suit unless provided by the law of their creation Primarily governed by the law creating them Their subsidiaries are entirely different or independent from that of the other Close corporation There is no exemption it is absolute Public corporation Political or governmental purposes Those formed or organized for the government or a portion of the State or any of its political

subdivision and which have for their purpose the general good and welfare

Private Corporation Immediate benefit, aim or advantage of private individuals Those formed for some private purpose, benefit, aim or end Distinction: public for governmental purpose Corporation Sole Exemption to the rule because it is composed only of one person An incorporator may also be a juridical person

Close corporation There is exclusivity of shares of stock Section 96-105 Restrictions to transfer shares Only those indicated can own shares Article must provide that there will be no public offering Open corporation openly admit investors example: stock exchange Domestic/ Foreign Test Incorporation test If incorporated under the laws of the Philippines it is a domestic corporation ME Gray vs. CA Parent or Holding/ subsidiaries and affiliates Affiliates- no majority vote

SMC 12%

HERSHEY CBPl 12%


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12%

Affiliate is subject to common control by the 12 % owners

De jure cannot be attached by the state even in a quo warranto proceeding De facto exists by virtue of colorable compliance Attached directly only by the state in a quo warranto proceeding Corporation by estoppel So defectively formed, but still considered corporation, but only in relation to those who cannot

deny their existence section 20 and 21

FORMATION AND ORGANIZATION

3 stages Creation Re-organization or quasi-reorganization Dissolution/winding-up

Purpose clause Defining the scope of authority of the corporate enterprise pr undertaking. Both confirmed and

limited

4 limitations of purpose clause Lawful Specific or stated concisely More than one, the primary and secondary must be specified Lawfully combined

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

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

Metro Manila- paid up capital requirement is 10 M Non- stock- mere mention of the operating capital Mention the authorized capital Restrictions Mandatory in close Not mandatory in ordinary Non-stock If value is not more than 100,000 A corporation cannot use any other name unless it has been amended Section 19 If confusingly similar it will not be allowed to be registered Verification slip from the records officer

Section 19. Commencement of corporate existence. - A private corporation formed or

organized under this Code commences to have corporate existence and juridical personality and isdeemed incorporated from the date the Securities and Exchange Commission issues a certificateof 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 thearticles of incorporation for the period of time mentioned therein, unless said period is extendedor the corporation is sooner dissolved in accordance with law. (n)


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Words corporation or inc. either in full or abbreviated form must be includedSection 18.Corporate name.- No corporate name may be allowed by the Securities and

Exchange Commission if the proposed name is identical or deceptively or confusingly similar tothat of any existing corporation or to any other name already protected by law or is patently

deceptive, confusing or contrary to existing laws. When a change in the corporate name isapproved, the Commission shall issue an amended certificate of incorporation under the amended

name. (n)

Doctrine of secondary meaning A word or phrase originally incapable of exclusive appropriation [usually generic] with reference

to an article in the market, because of geographically or otherwise descriptive, might neverthelesshave been used so long and so exclusively by one producer with reference to his article that, inthat trade and to that branch of the purchasing public, the word or phrase has become to mean that

the article was his product.

Section 18

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

actual confusion is not necessary-Philips caseit is enough that there is probable confusion 2 requisites must be proven that the complainant corporation acquired a prior right over the use of such corporate name identical, deceptively or confusingly, patently deceptive principal office statement of principal office is required city and municipality not only province must be specified principal office NOT operations office necessary because it will establish the residence of corporations venue of actions for or against the corporations venue of meetings section 51 meetings may only be within the boundaries of the city where the principal office non-stock may be held anywhere in the Philippines, if provided in its by-laws where summons may be served registration of chattel mortgage must be registered in the register of deeds where the principal

office is located

Clavecilla Radio System vs. Antillon action not upon a written contract city where the defendant resides term of existence corporate term required determining what point in time the juridical personality will cease to exist enter into contract only when it has juridical personality once it ceases to exist, it no longer has personality exist for another 3 years only for purposes of liquidation Dissolution- it is automatic When should extension be made? General rule: Not earlier than 5 years Exception: unless there are justifiable reasons


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May it be extended after expiration? Alhambra cigar vs. SEConce it ceases to exist it has no vested politic, exist only for a period of 3

years only for liquidation and for that purpose only

Article 5 How many incorporators should there be? 5-15 May a corporation be an incorporator? General rule: only natural persons Exception: cooperatives and corporation primarily organized to hold equities in rural banks How about minors? NO, because they must be of legal age May a corporation organized by incorporators consisting solely of foreigners Yes, there is no nationality requirement only residence, as long as majority are residents of the

Phil

Define incorporators Those person mentioned in the articles as originally forming the corporation and who are

signatories of the articles of incorporation.

Must be signatories to be incorporatorsSection 5.Corporators and incorporators, stockholders and members.- Corporators are

those who compose a corporation, whether as stockholders or as members. Incorporators arethose stockholders or members mentioned in the articles of incorporation as originally formingand composing the corporation and who are signatories thereof.

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

Define corporators All persons who compose the corporation at any given time and need not be among those who

execute the articles of incorporation at the start of its formation and organization.

Originally or subsequently Section 5 provides:

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

May a corporation be a corporator? YES. There is nothing to prevent a corporation from being a stockholder Incorporator must subscribe to 1 share There are those that are exclusively reserved to Filipinos An incorporator maybe a corporator as long as he is a stockholder section 6

Section 6.Classification of shares. - The shares of stock of stock corporations may bedivided into classes or series of shares, or both, any of which classes or series of shares may havesuch rights, privileges or restrictions as may be stated in the articles of incorporation: Provided,That no share may be deprived of voting rights except those classified and issued as "preferred"

or "redeemable" shares, unless otherwise provided in this Code: Provided, further, That thereshall always be a class or series of shares which have complete voting rights. Any or all of theshares or series of shares may have a par value or have no par value as may be provided for in thearticles of incorporation: Provided, however, That banks, trust companies, insurance companies,


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public utilities, and building and loan associations shall not be permitted to issue no-par valueshares of stock.

Preferred shares of stock issued by any corporation may be given preference in the

distribution of the assets of the corporation in case of liquidation and in the distribution ofdividends, or such other preferences as may be stated in the articles of incorporation which are

not violative of the provisions of this Code: Provided, That preferred shares of stock may beissued 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 thereofwith the Securities and Exchange Commission.

Shares of capital stock issued without par value shall be deemed fully paid and non-

assessable and the holder of such shares shall not be liable to the corporation or to its creditors inrespect thereto: Provided; That shares without par value may not be issued for a consideration

less than the value of five (P5.00) pesos per share: Provided, further, That the entire considerationreceived by the corporation for its no-par value shares shall be treated as capital and shall not beavailable for distribution as dividends.

A corporation may, furthermore, classify its shares for the purpose of insuringcompliance with constitutional or legal requirements.

Except as otherwise provided in the articles of incorporation and stated in the certificateof 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 followingmatters:

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 thecorporate 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.


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Except as provided in the immediately preceding paragraph, the vote necessary toapprove a particular corporate act as provided in this Code shall be deemed to refer only to stocks

with voting rights. (5a)

How many directors should there be? General rule: Not less than 5 not more than 15 Exceptions: Educational corporations registered as non stock corporation whose number of trustees, though

not less than five and not more than [15] should be divisible by five [5], meaning they must haveeither five, ten, or fifteen trustees and no other;

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

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

Qualifications of the governing board Requires mere residency

Section 23.The board of directors or trustees.- Unless otherwise provided in this Code,the corporate powers of all corporations formed under this Code shall be exercised, all businessconducted and all property of such corporations controlled and held by the board of directors or

trustees to be elected from among the holders of stocks, or where there is no stock, from amongthe members of the corporation, who shall hold office for one (1) year until their successors are

elected and qualified. (28a)

Every director must own at least one (1) share of the capital stock of the corporation ofwhich he is a director, which share shall stand in his name on the books of the corporation. Anydirector who ceases to be the owner of at least one (1) share of the capital stock of the corporation

of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations

must be members thereof. A majority of the directors or trustees of all corporations organizedunder this Code must be residents of the Philippines.

May a domestic corporation have a governing board consisting solely of foreigners? YES, section 23 majority of them must be residents of the Philippines, no nationality requirement Anti-dummy act If the business undertaking or activity is only partially nationalized, aliens can be elected as such

directors, [unless the law provides otherwise] but their number shall only be in proportion to theirequity or participation in the capital stock of the corporation.

Disqualifications The disqualifications provided for is absolute and may not be done away with. Corporate by-laws

may, however, provide for additional qualifications and disqualifications.

Section 27.Disqualification of directors, trustees or officers. - No person convicted byfinal judgment of an offense punishable by imprisonment for a period exceeding six (6) years, ora violation of this Code committed within five (5) years prior to the date of his election or

appointment, shall qualify as a director, trustee or officer of any corporation. (n)

Section 27 and 23 minimum disqualifications and qualifications Lee vs. CA


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By laws may provide for additional Govt vs. El hogar Filipino, Gokongwei vs. SMC

Capital structureFoundation- minimum paid-up capital 3M

Authorized capital 1 M No. of shares 1M shares par value 1.00Amount of shares subscribed

50 K A50 K B

C 250K

DE

PAID UP =62,500Corporation cannot exceed more than 1 M it is the maximum amount it cannot issue more unlessamended

Maximum shares it can issue is 1M shares unless amended

How much shares should be subscribed? Must be at least 25% of the authorized capital stock Paid- up must be at least 25%-minimum Section 30 Total subscription compliance with minimum 25% total Any combination would comply with the minimum required by section 30

Section 30.Compensation of directors.- In the absence of any provision in the by-lawsfixing 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 perdiems may be granted to directors by the vote of the stockholders representing at least a majorityof 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 netincome before income tax of the corporation during the preceding year. (n)

Minimum for a domestic corporation? In no case shall the paid- up capital be less than 5k Is there a minimum authorized capital imposed by the code? If there is minimum paid-up logically there should also be a minimum capital =5000 Minimum paid-up capital for a financing company metro manila 10 M if located in MM Shares of stock Purpose of classification To specify and define the rights and privileges of the stockholders; For regulation and control of the issuance of sale of corporate securities for the protection of

purchasers and stockholders.

As a management control device. To comply with statutory requirements particularly those which provide for certain limitations on

foreign ownership and shares like overseas employment agencies requiring to own at least 75% ofthe shares of stock thereof.

To better insure return on investment which can be affected through the issuance of redeemableshares or preferred shares, i.e., granting the holders thereof, preference as to dividends and/or

distribution of assets in case of liquidation; and,


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

Section 6 Each shall be equal in all respects to every other share Preferred shares Specific preference Dividends or during liquidation No par Can sell it with the network of the corporation Distinction between the subscribed and outstanding stocks? Section 137

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

Voting and dividend rights, it refers to the outstanding capital stocks Only outstanding stocks are allowed to vote and receive dividends Actually the same Treasury shares are also subscribed shares while they remain in the treasury, no voting and dividend rights may be reissued by the corporation once reissued they become outstanding stocks again common shares carry the right to vote preferred shares

grants the holder preference preference as to dividends preference as to distribution of the remaining assets upon dissolution or both YOU MUST STATE THE PREFERENCE BECAUSE IF NOT THEY ARE PRESUMED TO

BE EQUAL

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

They can be issued only with sated par value; and, The preferences must be stated in the articles of incorporation and in the certificate of stock,

otherwise, each share shall be, in all respect, equal to every other share.

Participating Must be stated because the presumption is that it is participating Cumulative Irrespective of whether or not they where earned Preferred May be denied Unless denied they are still entitled


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What if hindi i-declare kahit na may dividends rights for the previous years? May they be denieddividend rights because they are non holders of non-cumulative? NOTE: YOU CANNOTCOMPEL THE CORPORATION TO DECLARE DIVIDENDS UNLESS IT EXCEEDS 100 %

PAID UP CAPITAL SEC. 43

Section 43.Power to declare dividends. - The board of directors of a stock corporationmay 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 thedelinquent stockholder until his unpaid subscription is fully paid: Provided, further, That no stockdividend 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 thepurpose. (16a)

Stock corporations are prohibited from retaining surplus profits in excess of one hundred

(100%) percent of their paid-in capital stock, except: (1) when justified by definite corporateexpansion projects or programs approved by the board of directors; or (2) when the corporation is

prohibited under any loan agreement with any financial institution or creditor, whether local orforeign, from declaring dividends without its/his consent, and such consent has not yet beensecured; or (3) when it can be clearly shown that such retention is necessary under special

circumstances obtaining in the corporation, such as when there is need for special reserve forprobable contingencies. (n)

It depends because there are three types of non-cumulative preferred shares Discretionary dividend type Mandatory if earned Earned cumulative or dividend credit type Compare cumulative share from non-cumulative, earned cumulative or dividend credit type Cumulative sharewhether or not earned Non-cumulative earned cumulative or dividend credit type- only if earned Par stated par value; shall not be issued less than par No par without stated par value once fully paid no longer liable Corporations cannot use its capitals in declaring dividends; not all can issue no par value section

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Voting entitled to vote at any motion brought up in writing Non-voting not entitled to vote What types of shares may be denied of the right to vote? Preferred and redeemable shares Is it correct to state that common shares can never be denied the right to vote? Only preferred and redeemable shares are denied unless provided in this code PWEDENG MA-DENY YUNG COMMON SHARES, KASI YUNG FOUNDERS SHARES

MERON SILANG EXCLUSIVE RIGHTS NA SILA LANG ANG MERON, SO PWEDE


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SILANG BUMOTO WITH REGARDS TO SOMETHING NA HINDI NA SAKOP NGCOMMON SHARE RIGHTS

Example: founders shares- may be given certain rights and privileges Even common shares may be denied the right to vote of founders shares issued

Section 7.Founders' shares. - Founders' shares classified as such in the articles ofincorporation may be given certain rights and privileges not enjoyed by the owners of otherstocks, provided that where the exclusive right to vote and be voted for in the election of directors

is granted, it must be for a limited period not to exceed five (5) years subject to the approval ofthe Securities and Exchange Commission. The five-year period shall commence from the date ofthe aforesaid approval by the Securities and Exchange Commission. (n)

Do you include non-voting shares in passing a valid corporate act? Even non-voting shares are entitled to vote under section 6 Redeemable shares Discretionary/optional Obligatory or mandatory Generally a corporation can reacquire its own shares if it has unrestricted retained earnings Exception: redeemable shares may be reacquired irrespective of retained earnings Treasury shares They are treasury while in the treasury account of the corporation May they be reissued by the corporation? YES If they are reissued will they be denied the right to vote? Once reissued they shall become outstanding stocks again and purchasers shall be entitled to all

the rights and privileges as the other holders have

Section 57 treasury shares have no voting and dividend rights. Why not?Section 57.Voting right for treasury shares.- Treasury shares shall have no voting right

as long as such shares remain in the Treasury. (n)

Answer: commissioner vs. manningpage 62 first par.Although authorities may differ on the exact legal and accounting s tatus of so-called

treasury shares, they are more or less in agreement that treasury shares are stocks issued and fully

paid for and reacquired by the corporation either by purchase, donation, forfeiture or other means.Treasury shares are therefore issued shares but being in the treasury they do not have the status ofoutstanding shares. Consequently, although a treasury share, not having been retired by thecorporation re-acquiring it, may be re-issued or sold again, such shares, as long as it is held by thecorporation as a treasury share, participates neither in dividends, because dividends cannot be

declared by the corporation to itself, nor in meetings of the corporation as voting stock, forotherwise equal distribution of voting powers among stockholders will be effectively lost and the

directors will be able to perpetrate their control of the corporation, though it still represents a paidfor interest in the property of the corporation. The foregoing essential features of a treasury stocksare lacking in the questioned shares.

In this case, and under the terms of the trust agreement, the shares of stock of Reeseparticipated in dividends which the trustee received and the said shares were voted upon by the

trustee in all corporation meetings. They were not, therefore, treasury shares.

When the law speaks of outstanding rights it does not include treasury shares Treasury shares may be reissued


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They are actually assets of the corporation Once re-issued they become outstanding stocks again The corporation may cancel them; in effect there will be a reduction in the outstanding capital

stocks

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

Example: right of first refusal The restriction must be contained in the articles of incorporation If provided in by-laws but not in the articles of incorporation then it will not be binding Restrictions and preferences are mandatorily required in close corporations If it does not provide restrictions it is not a close corporation Specified persons- close corporations If not one of those specified you are not included because there is exclusivity in close

corporations

Should also be in the by-laws not only in the articles of incorporation No transfer clause Execution clause Acknowledgment Treasurer affidavit part of the articles of incorporation Section 23-27 minimum qualifications, but there may be additional Grounds for disapproval Only substantial and not strict is required May the SEC refuse or reject registration?

Section 17.Grounds when articles of incorporation or amendment may be rejected ordisapproved.- The Securities and Exchange Commission may reject the articles of incorporationor disapprove any amendment thereto if the same is not in compliance with the requirements of

this Code: Provided, That the Commission shall give the incorporators a reasonable time withinwhich to correct or modify the objectionable portions of the articles or amendment. The followingare grounds for such rejection or disapproval:

1. That the articles of incorporation or any amendment thereto is not substantially in accordancewith 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 isfalse;

4. That the percentage of ownership of the capital stock to be owned by citizens of the Philippines

has not been complied with as required by existing laws or the Constitution.

No articles of incorporation or amendment to articles of incorporation of banks, bankingand quasi-banking institutions, building and loan associations, trust companies and other financialintermediaries, insurance companies, public utilities, educational institutions, and other

corporations governed by special laws shall be accepted or approved by the Commission unless


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accompanied by a favorable recommendation of the appropriate government agency to the effectthat such articles or amendment is in accordance with law. (n)

But the grounds in section 17 are not exclusive When will the corporation commence to exist? Section 19

Section 19. Commencement of corporate existence. - A private corporation formed or

organized under this Code commences to have corporate existence and juridical personality and isdeemed incorporated from the date the Securities and Exchange Commission issues a certificateof 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 thearticles of incorporation for the period of time mentioned therein, unless said period is extended

or the corporation is sooner dissolved in accordance with law. (n)

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

TRUE EXCEPTION: CORPORATION SOLE

Section 112.Submission of the articles of incorporation. - The articles of incorporationmust be verified, before filing, by affidavit or affirmation of the chief archbishop, bishop, priest,minister, rabbi or presiding elder, as the case may be, and accompanied by a copy of the

commission, certificate of election or letter of appointment of such chief archbishop, bishop,priest, minister, rabbi or presiding elder, duly certified to be correct by any notary public.

From and after the filing with the Securities and Exchange Commission of the said

articles of incorporation, verified by affidavit or affirmation, and accompanied by the documentsmentioned in the preceding paragraph, such chief archbishop, bishop, priest, minister, rabbi or

presiding elder shall become a corporation sole and all temporalities, estate and properties of thereligious denomination, sect or church theretofore administered or managed by him as such chiefarchbishop, bishop, priest, minister, rabbi or presiding elder shall be held in trust by him as a

corporation sole, for the use, purpose, behalf and sole benefit of his religious denomination, sector church, including hospitals, schools, colleges, orphan asylums, parsonages and cemeteries

thereof. (n)

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

General rule section 19 Vested with judicial capacity upon issuance of the certificate by the SEC

However it is not accurate according to atty. Ladiabecause there are those that can issuefor example cooperatives- BUREAU OF COOPERATIVES which register, homeinsurance guaranty corporation- HOME OWNERS

Cagayan Fishing vs. Sandika Corporations are created by law Commence to exist upon issuance by the CONCERNED government corporation or agency Prior there to it has no being The transfer of the property was not valid, it likewise did not have the right to transfer De jure


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Strict or substantial compliance De facto 4 requisites must go hand in hand take out anyone of them there can be no de facto corporation There is a valid statute under which the corporation could have been created as a de jure

corporation.

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

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

Good faith in claiming to be and doing business as a corporation. Are the rights and obligations between officers and directors of a de jure and de facto the same? YES. Governed by the same law, rules and regulations Only important in determining, is for the purpose of applying the rules with regards to the direct

and collateral attack

The existence of a de jure cannot be questioned even by the State, either directly or indirectly Existence of a de facto can be questioned only by the State directly in a quo warranto proceeding

only

Municipality of Malabang vs. Benito What is the missing link so as to consider it a de facto? A law, because the executive order is

unconditional

An unconditional act affords no rights, creates no office Legal contemplation it was never passed at all It can therefore be questioned by any person If the certificate of registration has not been issued, may a corporation de facto exist? NO! Number 4 requirement, good faith in claiming to be and doing business as a corporation Hall vs. Piccio Missing link is good faith The certificate was not yet issued by the SEC, the members knew and therefore they were not

acting in good faith, therefore anybody can question its existence

Corporation by estoppel So defectively formed so that they are not to be considered a de jure or de facto General partners- liable even beyond his promise even his personal properties are prone to

attachment

Lozano vs. Delos Santos Founded on principle of equity Exercise corporate powers Enters with business with 3rdparties When there is no 3rdpersons involved and the problem arises between there members, therefore

they themselves know that there is no corporation by estoppel

Albert vs. University 1965 case, no section 21 yet Applied where the rules governing agency A person purporting in behalf of a non existing corporation Section 21, you arrive at the same decision Chiang Kai Siek vs. CA SC based its decision from the provision of the education act It cannot immune itself by virtue of its non compliance with the law


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Assuming there was no law? YES, it may still be sued as a school for the past 32 years the school represented itself as

possessed of juridical personality

General rule: a 3rdparty transacting with a non existent corporation shall be estopped to deny Asia banking vs. standard products General rule: absence of fraud a person who has dealt with a non incorporated corporation shall

be stopped to deny from actions in which it had benefited

Exemptions: when there is fraud the general rule shall not apply Salvatierra vs. Garlitos As a general rule a person who has contracted it a corporation lacking personality Doctrine is not applicable where fraud takes part in the transaction Another exemption International express travel and tours vs. CA No fraud in this case How come Kahn was made liable? Doctrine of incorporation Applies only if that person is trying to escape from a contract where he is benefited In this case petitioner is not trying to escape liability, but rather the one claiming from the

contract

Would this apply to foreign corporation? YES, it may apply Georg Grotjahn vs. Isnami A foreign corporation cannot gain access to our courts unless they attain a license to engage in

business in the Philippines but applying corporation by estoppels, the court allowed

Municipality of Malabangcase No law, hence may be questioned by any person An unconstitutional act is not a law, t confers no rights, it imposes no duties, it affords no

protections, it crates o office, it is in legal contemplation, as inoperative as though it had neverbeen passes

Hall vs. Piccio No good faith Corporation by estoppel Admission, conduct or agreement Will not apply among members themselves there must be a 3 rdparty Cannot escape when benefited General rule: you deal with a corporation, as to estop it Exceptions: 1. fraudulently misrepresents the third person may file an action directly to those

members, 2. 3rd

party will not be estopped if he is not trying to escape liability

2 possible remedies Chiang kai siek case Albert case What would be the effect if the corporation failed to commence transaction? Automatic Operated but becomes subsequently inoperative for 5 years only a ground for suspension, proper

notice and hearing

Commencement Example realty company

CORPORATE CHARTER AND ITS AMENDMENTS


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What do you understand by the word charter? Is it the same as articles of incorporation? Corporate charter is broader Franchise Primary power granted by the state to be and act as a corporation Secondary franchise is the right or privilege that the corporation may exercise

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

Corporate entity Corporation exist separately and independently from the stockholders Stockholders cannot bring an action, to bring back the properties of a corporation Corporation has no interest in the individual properties of its members Sulo ng Bayan vs. Araneta Corporation cannot bring an action for the recovery of the properties of its members Caram vs. CA Stockholders cannot be held liable for the legitimate obligations of the corporation, they exist

separately and independently from one another

Cruz vs. Dalisay Final judgment against a corporation cannot be enforced against stockholders Rustan Pulp vs. CA Corporation exist separately and independently Corporation are juridical entities, they exist only in legal contemplation, can act only through its

authorized representatives

Soriano vs. CA They are not personally liable They where signed for and in behalf of the corporation Palay inc. vs. Clave Liabilities incurred by the corporation cannot be enforced against stockholders, etc., even if

stockholders, etc. happens to own a substantial interest in the corporation, mere ownership doesnot disregard the corporate entity theory

Corporate entity for legal or legitimate purposes only Two or more corporations, one of them will be treated as a mere alter-ego You cannot pierce the veil of corporate fiction when there are no facts attendant in the case Corporate Entity Theory The corporation is possessed with a personality separate and distinct from the individual

stockholders or members and is not affected by the personal rights, obligations or transactions ofthe latter

Instrumentality rule Where one corporation is so organized and controlled and its affairs are conducted so that it is, in

fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the

instrumentality may be disregarded Courts are concerned with reality and not form Mere ownership of all or substantially all of the shares of stock of a corporation is not, in itself,

insufficient ground for disregarding the separate corporate personality. And for the separatepersonality of the corporation to be disregarded, the wrong doing must be clearly andconvincingly established

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


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Palacio vs. Fely Piercing the veil of corporate fiction Fely trans and the other corporation is one and the same Marvel bldg. vs. David There must be facts before the court will be justified in piercing the veil of corporate fiction

Corporation was a mere extension of the personality of the person Yutivo and sons vs. Court of Tax Appeals What where the facts or circumstances arrived by the court here? Subscribed capital where all advanced by Yutivo, the board where the same as Yutivo Commissioner of Internal Revenue vs. Norton and Harrison

Court applied the general rule Mere substantial ownership does not mean that it has a same corporate entity

La Campana Coffee Factory, Inc. vs. KKM Two corporations managed by the same family, workers were made interchangeably Emilio Cano vs. CIR Sued in there official capacity Reverse of Soriano vs. CA(signed in their official capacity) Tesco vs. WCC The two corporations where located in the same office Claparols vs. CIR Same as NAFLU and A.C. Ransom Concept builders vs. NLRC Instrumentality rule. What is the instrumentality rule? where one corporation is so organized and

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

Has no separate mind of its own. What is the degree of control? Control, not mere majority or complete stock control, but complete domination, not only of

finances but of policy and business practice in respect to the transaction attacked so that the

corporate entity as to this transaction had at the time no separate mind, will or existence of itsown.

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

plaintiffs legal rights; and,

The aforesaid control and breach of duty must proximately cause the injury or unjust losscomplained of.

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

There must facts and circumstances before warrant piercing the veil of corporate fiction The control necessary does not mean stock ownership MCConnel vs. CA were located in the same floor while the mere ownership of all or nearly all of the capital stock of a corporation does not

necessary mean that it is a mere business conduit of the stockholder, that conclusion is amplyjustified where it is shown, as in the case before us, that the operations of the corporation were somerged with the stockholders as to be practically indistinguishable from them. To hold the latter

liable for the corporations obligations is not to ignore the corporations separate entity, butmerely to apple the established principle that such entity cannot be invoked or used for purposes

that could not have been intended by the law that created that separate personality.


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Tan boon bee vs. Jarencio Why would a drug company need a printing machine The property must be in pursuance of a company business Cease vs. CA Alter-ego or the extension of the person of forest ware does the court pierced the veil of corporate

fiction

As to not deprive the holders of their successional rights Mere ownership of all or substantially all is not a justification of piercing the veil of corporate

fiction

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

Fraud must be clear and convincing evidence more than preponderance Remo Jr. vs. IAC The resolution was not entered to defraud anyone Del Rosario vs. National Labor Commission The wrongdoing must be clearly established There must be facts to support Payment of claims cannot thus be presumed Indophil Textile Mill vs. CALICA How do you distinguish this ruling toLa Campana, having the same issues: La campana, one payroll, employees were made interchangeable. Acrylic had its own standards PNB vs. Ritratto Group Control test Not mere majority but rather complete Twin ace was only a subsequent interested party Assets and machineries Amendment of the articles of incorporation Express power granted to a corporation

Section 16 Appraisal right Section 81 to object on certain acts and transactions

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

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

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

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

Right granted only in specified instancesAre non-voting shares included in amending the articles of incorporation

100/s XYZ-----ABC


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100/sTo10 100/s

=1M/S what would be the 2/3?Section 6 last paragraphVoting shares are excluded except the foregoing instances

1 12 2

3 34 45 5

61 & 2=absent 1&2=absent but gave their written assent3 & 4= objected 3&4=objected

5 & 6= approved the amendment 5&6=approvedWould there be a valid amendment

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

Section 37.Power to extend or shorten corporate term. - A private corporation mayextend 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 representingat least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of themembers 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 ofresidence 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 corporateterm, any dissenting stockholder may exercise his appraisal right under the conditions provided inthis code. (n)

Section 38.Power to increase or decrease capital stock; incur, create or increase

bonded indebtedness.- No corporation shall increase or decrease its capital stock or incur, createor 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 outstandingcapital stock shall favor the increase or diminution of the capital stock, or the incurring, creating

or increasing of any bonded indebtedness. Written notice of the proposed increase or diminutionof the capital stock or of the incurring, creating, or increasing of any bonded indebtedness and ofthe time and place of the stockholder's meeting at which the proposed increase or diminution of

the capital stock or the incurring or increasing of any bonded indebtedness is to be considered,must be addressed to each stockholder at his place of residence as shown on the books of the

corporation and deposited to the addressee in the post office with postage prepaid, or servedpersonally.

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

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

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


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(3) If an increase of the capital stock, the amount of capital stock or number of shares of no-parstock thereof actually subscribed, the names, nationalities and residences of the persons

subscribing, the amount of capital stock or number of no-par stock subscribed by each, and theamount paid by each on his subscription in cash or property, or the amount of capital stock ornumber of shares of no-par stock allotted to each stock-holder if such increase is for the purposeof making effective stock dividend therefor authorized;

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

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

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

(7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creatingor increasing of any bonded indebtedness.

Any increase or decrease in the capital stock or the incurring, creating or increasing of

any bonded indebtedness shall require prior approval of the Securities and ExchangeCommission.

One of the duplicate certificates shall be kept on file in the office of the corporation andthe other shall be filed with the Securities and Exchange Commission and attached to the original

articles of incorporation. From and after approval by the Securities and Exchange Commissionand the issuance by the Commission of its certificate of filing, the capital stock shall standincreased or decreased and the incurring, creating or increasing of any bonded indebtedness

authorized, as the certificate of filing may declare: Provided, That the Securities and ExchangeCommission shall not accept for filing any certificate of increase of capital stock unless

accompanied by the sworn statement of the treasurer of the corporation lawfully holding office atthe time of the filing of the certificate, showing that at least twenty-five (25%) percent of such

increased capital stock has been subscribed and that at least twenty-five (25%) percent of theamount subscribed has been paid either in actual cash to the corporation or that there has beentransferred to the corporation property the valuation of which is equal to twenty-five (25%)

percent of the subscription: Provided, further, That no decrease of the capital stock shall beapproved by the Commission if its effect shall prejudice the rights of corporate creditors.

Non-stock corporations may incur or create bonded indebtedness, or increase the same,with the approval by a majority vote of the board of trustees and of at least two-thirds (2/3) of the

members in a meeting duly called for the purpose.

Bonds issued by a corporation shall be registered with the Securities and Exchange

Commission, which shall have the authority to determine the sufficiency of the terms thereof.

(17a)

The vote must be cast at the meeting called for that purpose Written assent would not suffice When do amendments become valid and effective? Only upon the approval of the SEC TRUE OR FALSE? FALSE because it can be valid upon the date of filing if not acted upon within 6 months without

fault attributable to the corporation


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Why is it retroactive? What provision may be amended, altered or repealed Can you change name, address for example she married or changed address? NO. you cannot change that Fait accompli, are beyond the powers or authority of the corporation to change, alter or modify.

These would include the following:

Names of the incorporators and The incorporating directors or trustees, The name of the treasurer originally or first elected by the subscribers or members to act as such

until his successor has been duly elected and qualified,

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

The date and place of execution of the articles of incorporation, The signatories and acknowledgment thereof. All other provisions or matters stated or contained in the articles are subject to amendment. Founders or signatories hindi pwede palitan Names, nationalities- you cannot Capital- right granted by law to all corporation Paid up capital- NO Restriction and transfer of shares in ordinary stock corporations You can, but close corporation cannot Section 96, otherwise it will not be a close corporation

Section 96.Definition and applicability of Title. - A close corporation, within themeaning of this Code, is one whose articles of incorporation provide that: (1) All thecorporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by

not more than a specified number of persons, not exceeding twenty (20); (2) all the issued stockof all classes shall be subject to one or more specified restrictions on transfer permitted by this

Title; and (3) The corporation shall not list in any stock exchange or make any public offering ofany of its stock of any class. Notwithstanding the foregoing, a corporation shall not be deemed a

close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned orcontrolled by another corporation which is not a close corporation within the meaning of thisCode.

Any corporation may be incorporated as a close corporation, except mining or oil

companies, stock exchanges, banks, insurance companies, public utilities, educational institutionsand corporations declared to be vested with public interest in accordance with the provisions of

this Code.

The provisions of this Title shall primarily govern close corporations: Provided, That the

provisions of other Titles of this Code shall apply suppletorily except insofar as this Titleotherwise provides.

Transfer clause, executor clause, acknowledgment, treasury affidavit-NO Philippine First Insurance case Mere change in the name of a corporation or by merely complying with the law is general

amendment

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


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Extending the same can never be made 7 years prior? TRUE or FALSE FALSE. It can be if there are justifiable reasons for earlier extension as may be determined by

the SEC

Can you extend the corporate term if it has already expired? Once the term expires without an amendment having happen it ceases to exist as a body politic. It

is dissolved automatically on the day it expires.

Alhambra cigar and PNB case Instances when the SEC allowed extension whose term has already expired All of them involved are institutions of learning, it was the case in order to avoid confusion that

would arise later on.

BOARD OF DIRECTORS/TRUSTEES

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

the corporate powers of all corporations formed under this Code shall be exercised, all businessconducted and all property of such corporations controlled and held by the board of directors ortrustees to be elected from among the holders of stocks, or where there is no stock, from among

the members of the corporation, who shall hold office for one (1) year until their successors areelected and qualified. (28a)

Every director must own at least one (1) share of the capital stock of the corporation of

which he is a director, which share shall stand in his name on the books of the corporation. Anydirector 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 corporationsmust be members thereof. A majority of the directors or trustees of all corporations organizedunder this Code must be residents of the Philippines.

Controlled by the board of directors Authority are however restricted to the day to day Stockholders may have all the profit but will turn over the management to the governing board But unless the law provides the power may be delegated General rule Corporations must sit and act as a body Will be bound by corporate officers if they acted within the 5 classification page 150 Ramirez vs. Orientalist co. What was the position of Fernandez in this case? TREASURER Why did the court rule that actions of Fernandez bound the corporation when he is not even a

board of director?if a man is found acting for a corporation with the external indicia of authority, any

person not having notice of want of authority, may usually rely upon those appearances; and if itbe found that the directors had permitted the agent to exercise that authority and thereby held himout as a person competent to bind the corporation, or had acquiesced in a contract and retained the

benefit supposed to have been conferred by it, the corporation will be bound, notwithstanding the

actual authority may never have been granted.

Contracts must be made by the director and not the stockholders Actions of the stockholders in such matters is only advisory and not in any way binding in the

corporation

Barreto vs. La previsora Filipina Everything emanates from the board of directors


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

Qualifications: No citizenship requirement, at least majority must be residents Can have a governing board consisting solely of foreigners But we have to take into consideration partly nationalized industries and other laws which

prohibits or limits foreign ownership

Anti-dummy act Utilization development of natural resources 60% must be owned by Filipino citizens, therefore

they only own 40%---10 members they can only have 4 seats, but not entirely correct because thelaw may provide otherwise; educational institutions restricted to Filipinos, but there are

exceptions when created by religious and charitable institutions.

By-laws may provide additional qualifications and disqualifications To qualify as a director he must own at least 1 share Should the stockholder be the equitable or beneficial owner in order to qualify as a director? NO, it is not necessary, as long as you are listed in the books as owner of one share Lee vs. CA As long as you are listed in the books as owner of one share Under the old law he must be the beneficial owner and legal owner thereof but in the new law it is

not required as long as it stands in his name he is qualifies1 A-100t/S B (own in the trust of X) is B qualified to be a director?

23-102transferring there voting rights in favor of VT

Other rights will accrue in favor of them, but not the voting rightsvoting rights must be recorder in the books of the corporation that it is transferred

PNB-IFL- wholly owned subsidiary of PNBPNB will assign to PNB-IFL nominal shares and PNB-IFL now will be able to be nominated

Gen. Rule: Term of one year who will serve as such until there successors are elected and qualified Exception: Non-stock corporation can serve for a term of 3 years Educational non-stock- term of the governing board can be 5 years May this term exceed one year? Yes, they may serve in a hold over capacity until their successors have been duly elected and

qualified

Detective and protective bureau vs. Cloribel In the by-laws, managing director must be elected from among themselves Must be duly elected and qualified

How are the directors elected?

1-100T/S2-100T/S3-100T/Sto 10=1M/S

Do you include the vote of 1 & 2 to have a quorum to have a valid meeting? NO, quorum requirements is 401,000

Quorum requirement is 501kHolders of non-voting shares are only entitled to vote in last par. Of section 6

1-200k


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2-200k3-200k

4-100k5-100k6-100k7-50k

8-40k9-5k10-5k=1MS1&2 is absent, 3&4 ayaw tumakbo and hindi nagvote 6-10, tumakbo and ninominate nila yung sarili nilaand cast all their shares on themselves

Who wins? Or who gets elected? No vote requirement, the one who gets the most number of votes gets elected, section24. What is cumulative voting? Process of multiplying the number of shares to the number of director to be elected Matter of right granted to stockholders in a stock corporation

1 to 5 has 200k/s and members of the same family- majority 800k they have 4M votes they are guaranteed4 seats

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

Cumulative to allow the minority to have a rightful representation in the board Is it allowed in a non-stock corporation? Not generally available Section 89 unless the articles or by-laws allow cumulative voting

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

to one vote.

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

Voting by mail or other similar means by members of non-stock corporations may be

authorized by the by-laws of non-stock corporations with the approval of, and under suchconditions which may be prescribed by, the Securities and Exchange Commission.

Other corporate officers other than the governing board section 25Section 25.Corporate officers, quorum. - Immediately after their election, the directors

of a corporation must formally organize by the election of a president, who shall be a director, atreasurer who may or may not be a director, a secretary who shall be a resident and citizen of thePhilippines, and such other officers as may be provided for in the by-laws. Any two (2) or more

positions may be held concurrently by the same person, except that no one shall act as presidentand secretary or as president and treasurer at the same time.

The directors or trustees and officers to be elected shall perform the duties enjoined onthem by law and the by-laws of the corporation. Unless the articles of incorporation or the by-


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laws provide for a greater majority, a majority of the number of directors or trustees as fixed inthe 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 whichthere is a quorum shall be valid as a corporate act, except for the election of officers which shallrequire the vote of a majority of all the members of the board.

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

Is the president required to be a stockholder. YES The chairman may be another person The president may also be another person Prohibited is president to be secretary or treasurer at the same time Board of director must sit and act as a body to arrive at a corporate act What would constitute a quorum if 5 then 3 must be present May the vote of 2 members past a 5 man governing board pass a valid corporate act? YES. Voting requirement is majority of directors present at which there where a quorum

1 1 and 2 present=valid voting requirement

2 1 and 2 voted yes3 3 voted no

45

Is it absolute? NO, except in the election because it requires the majority of all the members of the board If by-laws or articles provide a higher voting requirement Artificial beings must act through its members and act as a body to have a valid corporate act Exception: Delegation Expressly conferred Where the officer or agent is clothed with actual or apparent authority Otherwise it will not bind the corporation Yao ka sin trading case already asked in the bar Only bind the corporation to the extent of authority confined to him or virtue of customs, usage

and policy

Must pass first the controller and counsel What if the notice requirement is not complied with? Lopez realty vs. Fotencha Notice requirement must be complied with hence it should have been with force and effect, but

according to the SC, it may be ratified expressly if there is a subsequent meeting called for thatpurpose

Impliedly through acts Asuncion was aware of the corporations obligation There was implied ratification or she was estopped Pua casim vs. Neumark and Co. Considered 3 circumstanced Check which was the proceed of the loan which was endorsed and deposit in the corporate

account

Neumark as president and also stockholder Yu chuck vs. Kong Li Po General manager usually has the power to hire but the SC said the contract must be reasonable


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The contract here is so onerous that it would throw the corporation into insolvency Francisco vs. GSIS GSIS cannot evade the binding effect of the telegram Only 15 months later that the corporation said there was a mistake The silence coupled with the unconditional acceptance of the other subsequent remittances is

binding to the corporation

Board of liquidators vs. KalawSettled jurisprudence has it that where similar acts have been approved by the directors

as a matter of general practice, custom and policy, the general manager may bind the companywithout formal authorization of the board of directors. In varying language, existence of such

authority is established, by proof of the course of business, the usages and practices of thecompany and by the knowledge which the board of directors has, or must be presumed to have, ofacts and doings of its subordinates in and about the affairs of the corporation. So also, xx

authority to act for and bind a corporation may be presumed from acts of recognition in otherinstances where the power was in fact exercised. xx Thus, when, in the usual course of business

of a corporation, an officer has been allowed in his official capacity to manage its affairs, hisauthority to represent the corporation may be implied from the manner in which he has been

permitted by the directors to manage its business.In the case at bar, the practice of the corporation has been to allow its general manager to

negotiate and execute contracts in its copra trading activities for and in NACOCOs behalf

without prior board approval. If the by-laws were to be literally followed, the board should giveits stamp of prior approval on all corporate contracts. But that Board itself, by its acts and throughacquiescence, practically laid aside the by-law requirement of prior approval.

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

Buenaseda vs. Bowen Express ratification is made through a formal board action Implied ratification is through: silence or acquiescence, acceptance benefits and lastly recognition

or adoption

An unauthorized act may nevertheless be binding either by express or implied by estoppels By virtue of silence the board had impliedly accepted the act By recognition or adoption By virtue of payment of obligations arising therefore-Lopez realty May directors or trustees be disqualified to act as such? YES, crime, etc. disqualifications in book Possess or dispossess any of the qualifications or disqualifications , cease to hold at least one

share

May directors be ousted from office? At least 2/3 of members representing outstanding capital stock. Again notice requirement must be

complied with1-200 1-5 same family

2-2003-200

4-1005-100 electing6-100 6 to 10 not related7-508-40

9-510-5 outstanding director


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Meetings called by the president or the secretary ordered by the president It depends if the removal is without cause they cannot do so because removal without cause shall

not deprive the minority stockholders or members of the right of representative

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

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

Section 29.Vacancies in the office of director or trustee.- Any vacancy occurring in theboard of directors or trustees other than by removal by the stockholders or members or by

expiration of term, may be filled by the vote of at least a majority of the remaining directors ortrustees, if still constituting a quorum; otherwise, said vacancies must be filled by thestockholders in a regular or special meeting called for that purpose. A director or trustee so

elected to fill a vacancy shall be elected only or the unexpired term of his predecessor in office.

Any directorship or trusteeship to be filled by reason of an increase in the number ofdirectors or trustees shall be filled only by an election at a regular or at a special meeting of

stockholders or members duly called for the purpose, or in the same meeting authorizing theincrease of directors or trustees if so stated in the notice of the meeting. (n)

Other than by removal or expiration of term they do not have the power When will the vacancies be filled up? Is notice required, to fill up vacancies due to removal? What if the vacancy is due to an increase, can it be filled up in the same meeting where in the

number is increased?

Election due to removal-in the same meeting notice is not required Election due to increase in number- it must be so stated in the meeting Section 30

Section 30.Compensation of directors.- In the absence of any provision in the by-lawsfixing 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 perdiems may be granted to directors by the vote of the stockholders representing at least a majorityof the outstanding capital stock at a regular or special stockholders' meeting. In no case shall thetotal yearly compensation of directors, as such directors, exceed ten (10%) percent of the net

income before income tax of the corporation during the preceding year. (n)

Generally not entitled to receive compensation because they render it gratuitously Unless the by-laws allows Stockholders may also grant pursuant to a majority vote Must not exceed net income of 10% tax of the preceding year Acting in special capacity In, sum directors may receive compensation when there is a provision in the by-laws to that effect When the stockholders, by a majority vote of the outstanding capital stock grant the same; and, If the director renders extra-ordinary or unsual service Central cooperative exchange vs. Tibe By-laws may allow, stockholders may also allow such What do you understand by the phrase as such directors


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Western institute vs. Salas Compensation was granted without by-laws authority Prohibition is not a sweeping rule Members of the board may receive when they receive in a special capacity Mere act of the board will suffice

Is the 10% ceiling applicable to other officers? NO. the phrase as such director was used twice The SC ruled that the 10% ceiling will not likewise apply if they acted in a capacity other than

as such directors

Government vs. El Hogar Judicial intervention is not proper The appropriates remedy is to those who can make or unmake the by-laws Liability of corporate officers Obligations incurred by those acting for and in behalf of the corporations are not theres BUT

there are exceptions even if they are acting for and in behalf of the corporation

Tramat vs. CA General rule was applied in the case Ong acted as officers and acted within the scope of his authority Court laid down 4 instances when even if acting within the scope of his authority he is held

solidarily liable

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

He consents to the issuance of watered stocks or who, having knowledge thereof, does notforthwith file with the corporate secretary his written objection thereto;

He agrees to hold himself personally and solidarily liable with the corporation; He is made, by a specific provision of law, to personally answer for his corporate action. Watered stocks- issued, fully paid up when in fact they have not been fully paid or promised as

such

Llamado vs. CA The corporate entity theory cannot be used as a defense to escape liability in violation of B.P. 22 Where the check is drawn by a corporation the persons who signed the check shall be liable. Uichico vs. NLRC Labor case corporate directors and officers are solidarily liable with the corporation for the

termination of employment of corporate employee done with malice and bad faith

3 fold duty of directors obedient diligent loyal Business judgment rule Questions of policy and management are left solely to the honest decision of the board of

directors and the courts are without authority to substitute its judgment as against the former. Thedirectors are the business managers of the corporation and as long as they act in good faith, its

actuations are not subject to judicial review.Montelibano vs. Bacolod Murcia Milling

questions of policy and management are left solely to the board of directors BOD, business manager of the corporation and as long as they act in good faith, its actuations are

not subject to judicial review


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

Montelibano vs. Bacolod Murcia Milling Co. Directors are not liable due to imprudence or honest error of judgment Duty of loyalty of corporate directors 31,32,33,34 31,32,33- specific instances when corporate officers may violate loyalty 32,33 self-dealing and interlocking director Corporate opportunity doctrine It places a director of a corporation in the position of a fiduciary and prohibits him form seizing a

business opportunity and/or developing it at the expense and with the facilities of the corporation.

He cannot appropriate to himself a business opportunity which in fairness should belong to thecorporation.

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

Distinction between section 31 and 34 relative to the ratification by the stockholders The second paragraph of section 31 which makes a director liable to account for profits if he

attempts to acquire or acquires any interest adverse to the corporation in respect to any matterreposed in him in confidence as to which equity imposes a disability upon him to deal in his own

behalf is not subject to ratification by the stockholders. Whereas, in section 34 if a directoracquires for himself a business opportunity which should belong to the corporation, he is bound

to account for such profits unless his act is ratified by the stockholders owning ore representing atleast 2/3 of the outstanding capital stock.

If reposed in him in confidence, not subject to ratification If the acquisition is merely that of a business opportunity which has not been reposed in him in

confidence, the same may be subject to ratification by the stockholders.

Director x co.A-REALTYB

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

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

It can be ratified he merely acquired a business owning to the corporation It would be different if it was entrusted in his confidence

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

in confidence

A corporation cannot reaquire its share if it has no restricted unretained earnings Strong vs. Rapide What duty did he violate? He violated his duty of loyalty The law would be impotent if the sale were not invalidated Self-dealing director and interlocking director What is a self-dealing director? Director of a corporation dealing or transacting business with his corporation


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Are the contracts and dealing of a self0dealing director valid? General rule: voidable May the contracts of a self-dealing director be valid per se. YES. If all the 4 conditions are present they will be valid per se 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;

That the vote of such director or trustee was not necessary for the approval of the contract; That the contract is fair and reasonable under the circumstances; and That in case of an officer, the contract has been previously authorized by the board of directors. When do they become voidable? When any of the two requisites are absent it is voidable, but subject to ratification by 2/3 of the

outstanding capital stock or 2/3 of the member

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

it must be at a meeting called for the purpose full disclosure of the adverse interest of the director concerned must be made the contract is fair and reasonable under the circumstances Problem if self-dealing director involved owns all or substantially all of the shares of stock of the

corporation thereby making it easily possible to have the contract ratified

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

Section 32.Dealings of directors, trustees or officers with the corporation.- A contractof the corporation with one or more of its directors or trustees or officers is voidable, at the optionof 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 wasapproved 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 thecase of a contract with a director or trustee, such contract may be ratified by the vote of thestockholders representing at least two-thirds (2/3) of the outstanding capital stock or of at leasttwo-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full

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

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

Prime white cement vs. IAC a director of a corporation owes a position in trust in case of conflict between himself and that of the corporation, he cannot sacrifice the interest of

the corporation to his own advantage

as a director he should have acted in a manner as not to unduly prejudice the corporation he cannot be allowed to enrich himself May corporate directors purchase the corporate property?


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Mead vs. Mccullogh interlocking director- a director of one corporation who deals and transacts business with another

corporation who is himself a director

director of X company also a director of Y corporation Both companies enter into a contract and A sits, is the contract valid? Yes on the ground of fraud or if it is unfair May be subject to the provision of section 32 Section 32 contract may become voidable, hence it may also be ratified

X Co. Y Co.

A owe 20% A owe 20%Is it generally valid or voidable? VALID25% 25% VALID

15% 25% VOIDABLE SUBJECT TO section 32

More than 20 substantial BOD mismanages corporate officers. Who may file a suit? General rule: BOD which can institute a case because it has all the powers. To allow stockholders

to file would violate the doctrine of corporate entity and may result to multiplicity of suits

Stockholders cannot therefore generally file a case EXCEPT of course in a DERIVATIVE SUIT Derivative suit An action based on injury to the corporation-to enforce a corporate right- wherein the corporation

itself is joined as a necessary party, and recovery is in favor of and for the corporation.

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

Available suits individual or personal Wrong done against his person as a stockholder Class suit Filed by a stockholder in representation of other stockholders A wrong or redress done, a derivative suit in nature Intra-corporate remedies Demand to the BOD to institute such action Negated by the BOD The one who instituted must be a stockholder at the date when the act was done, must have been a

stockholder by that time

Demand will not be required if the majority of the BOD are the ones guilty of the wrong charged The corporation must be made a party in the case whatever side will not matter because underPhilippine law misjoinder is not a ground for dismissal Non-joinder is a ground for dismissal Any benefit should inure to the corporation Stockholder bringing the action is entitled to reimbursement such as attorneys fee ONLY IF the

case is SUCCESSFUL to avoid harassment suit to their management

Pascual vs. Orozco By virtue of the fact that he is a stockholder, may maintain a derivative suit Depend on how, when and what reason


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Seeking for the years 1898 all the way 1907 Only became a stockholder in 1903 He can sue only in 1903 forward because he must be a stockholder The right of action is personal in nature. He became a stockholder only in 1902 Derivative suit

By a stockholder to address a wrong done against the corporation and the stockholder indirectly Essential requisite must have been a sto

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