Law on Partnership and Corporation (BL 102)

CORPORATION LAWSummer 2015

FUNDAMENTALS AND CONCEPTS

FORMS OF BUSINESS ORGANIZATION

A. SOLE PROPRIETORSHIP

A sole proprietorship is the oldest, simplest, and most prevalent form of business enterprise. It is unorganized business owned by one person who has full control/authority of its own and owns the assets, personally owes and answers all liabilities or suffers all losses but enjoys all the profits to the exclusion of others.

A sole proprietorship must apply for a Business Name and be registered with the Department of Trade and Industry (DTI).

In the case of Mangila v. Court of Appeals (435 Phil. 870, 886 [2002], the Supreme Court held that:

In fact, there is no law authorizing sole proprietorship to file a suit in court.

A sole proprietorship does not possess a juridical personality separate and distinct from the personality of the owner of the enterprise. The law merely recognizes the existence of a sole proprietorship as a form of business organization conducted for profit by a single individual and requires its proprietor or owner to secure licenses and permits, register its business name, and pay taxes to the national government. The law does not vest a separate legal personality on the sole proprietorship or empower it to file or defend an action in court.

B. PARTNERSHIP

Under the Civil Code of the Philippines, by the contract of partnership two or more persons bind themselves to contribute money, property or industry to a common fund, with the intention of dividing the profits among themselves.

Two or more persons may also form a partnership for the exercise of a profession.

Partnerships may either be general partnerships, where the partners have unlimited liability for the debts and obligation of the partnership, or limited partnerships, where one or more general partners have unlimited liability and the limited partners have liability only up to the amount of their capital contributions.

Article 1768 (Civil Code of the Philippines) also provides that a partnership has a juridical personality separate and distinct from that of each of the partners.

A partnership may be constituted in any form except when real property or real rights are contributed thereto, in which case a public instrument is necessary. Further, a contract of partnership having a capital of three thousand pesos (Php 3,000.00) or more, in money or property, must register with the Securities and Exchange Commission (SEC).

C. CORPORATION

Corporations are artificial beings 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. Corporations are juridical persons with personality separate and distinct from that of its stockholders. The liability of the shareholders of a corporation is limited to the amount of their share capital. It consists of at least five (5) to fifteen (15) incorporators each of who must hold at least one share and must be registered with the Securities and Exchange Commission (SEC). The minimum paid up capital required is not less than five thousand pesos (Php 5,000.00).

RESEMBLANCES OF CORPORATION AND PARTNERSHIP

1. Both are association of persons or both are composing of group or persons.

2. Both are regarded by law as juridical persons or artificial beings.

3. Both exist only by legal fiction and can only act through its legitimate representatives.

4. Both as having possessed a personality separate and distinct from the person composing it.

5. Both are subject to the same corporate income tax rates subject to the provisions of the National Internal Revenue Code.

DISTINCTIONS OF CORPORATION AND PARTNERSHIP

POINTS OF COMPARISONCORPORATIONPARTNERSHIP

1. As to law that governsCorporation Code of the PhilippinesCivil Code of the Philippines

2. As to creationBy operation of lawBy agreement

3. As to formationAt least five (5)At least two (2)

4. As to purposeFor profit or notFor profit

5. As to exposure or liabilityStockholders are not liable beyond their contributionGeneral parties are liable

6. As to period or life50 years subject to extensionBy agreement of partners

7. As to birthUpon issuance of Certificate of Incorporation by the SECMeeting of the minds of the partners

8. As to transfer of interestEven withoutMust be with the consent of the partners

9. As to successionYesNo

10. As to managementBoard of Directors/Board of TrusteesPartners

11. As to dissolutionMust be with the consent of the stateEven without the consent of the state

DEFINITION OF CORPORATIONA 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. [Sec. 2, Corporation Code]

ATTRIBUTES OF CORPORATIONBased upon the definition of a corporation stated in Section 2 of the Corporation Code, the following are the attributes of a corporation:

It is an artificial being; Created by operation of law; With the right of succession; Has only the powers, attributes, and properties as expressly authorized by law or incident to its existence.

A. CORPORATION AS AN ARTIFICIAL BEING (1st attribute)

The law recognizes two types of persons:

(a) Natural (human beings); and

(b) Juridical

Corporations come under the latter in accordance with Article 44(3) of the Civil Code which provides the following as juridical persons, to wit: Corporations, partnerships and associations for private interest or purpose to which the law grants a juridical personality, separate and distinct from that of each shareholder, partner or member.

A juridical person is a being of legal existence, susceptible of rights and obligations, or of being the subject of juridical relations. A corporation is a juridical person. It may acquire and possess property of all kinds, as well as incur obligations and bring civil or criminal actions, in conformity with the laws and regulations of their organization.

It is, of course, not in fact and in reality a person but the law treats it as though it were a person by process of fiction or by regarding it as an artificial person distinct and separate from its individual members or stockholders. It is a live thing with a separate existence which cannot be swept aside as a technicality. It is, however, only a creature of the law and does not have a physical existence, but exists only in contemplation of law.

A corporation, being an artificial person, is entitled to -

1. Due process of law

Chapter II, Section 1 of the Philippine Constitution provides that no person shall be deprived of life, liberty or property without due process of law, nor shall any person be denied equal protection of the laws.

The due process clause is universal in its application to all persons without regard to any differences of race, color, or nationality. Private corporations, likewise, are persons within the scope of the guaranty insofar as their property is concerned. (Smith Bell & Co. vs. Natividad, 40 Phil. 136, 144).

According to Daniel Webster, due process is a law which hears before it condemns, which proceeds upon inquiry and renders judgment only after trial.

Due Process of law implies the right of the person affected thereby to be present before the tribunal which pronounces judgment upon the question of life, liberty, or property, in its most comprehensive sense; to be heard, by testimony or otherwise, and to have the right of controverting, by proof, every material fact which bears on the

question of right in the matter involved. If any question of fact or liability be conclusively presumed against him, this is not due process of law. (Blacks Law Dictionary, 6th Edition, page 500)

2. Equal protection of the law

It refers to the right of all persons to have the same access to the law and courts and to be treated equally by the law and courts, both in procedures and in the substance of the law. It is akin to the right to due process of law, but in particular applies to equal treatment as an element of fundamental fairness.

The Philippine Constitution provides in its Bill of Rights that no person shall be denied the equal protection of the laws. Equal protection has been traditionally defined by the Philippine Supreme Court as a guarantee that laws will treat alike persons who are similarly situated, and treat differently those who are differently situated. Classic examples of laws that mean to attain equal protection are tax laws. Everyone earning an income is taxed and the rates of tax are based on the same standards for persons similarly situated.

The equal protection of the law clause is against undue favor and individual or class privilege, as well as hostile discrimination or the oppression of inequality. It is not intended to prohibit legislation, which is limited either in the object to which it is directed or by territory within which is to operate. It does not demand absolute equality among residents; it merely requires that all persons shall be treated alike, under like circumstances and conditions both as to privileges conferred and liabilities enforced.

The equal protection clause is not infringed by legislation which applies only to those persons falling within a specified class, if it applies alike to all persons within such class, and reasonable grounds exists for making a distinction between those who fall within such class and those who do not. (Ichong vs. Secretary of Finance and City Treasure of Manila, G.R. No. L-7995, 31 May 1957)

C. Against unreasonable Searches and Seizure

Corporations are protected by the constitutional guarantee against unreasonable searches and seizures, but that the officers of a corporation from which documents, papers and things were seized have no cause of action to assail the legality of the seizures, regardless of the amount of shares of stock or of the interest of each of them in said corporation, and whatever the offices they hold therein may be, because the corporation has a personality distinct and separate from those of said officers. The legality of a seizure can be contested only by the party whose rights have been impaired thereby; and the objection to an unlawful search is purely personal and cannot be availed of by such officers of the corporation who interpose it for their personal interests. (Stonehill vs. Diokno, 20 SCRA 383)

A corporation is but an association of individuals under an assumed name and with a distinct legal entity. In organizing itself as a collective body it waives no constitutional immunities appropriate for such body. Its property cannot be taken without compensation; can only be proceeded against by due process of law; and is protected against unlawful discrimination. (Bache & Co. (Phil.), Inc. vs. Ruiz, 37 SCRA 823, 837)

B. CREATED BY OPERATION OF LAW (2nd attribute)

It means that, it is not really the Corporation Code that creates the corporation. The law is the only authority that allows a corporation to be created. It is the process of putting into course of action, in accordance or in substantial compliance of the law that makes the operation, or simply, the creation of the corporation.

From the registration requirements, to the filing of the articles of Incorporation and by-laws, until the time a certificate of incorporation is issued, it encompasses the creation of a corporation by operation of law.

The right to be and act as a corporation is not a natural right or a civil right of any person. The right to be and act as a corporation, and to enjoy the immunities and privileges resulting from incorporation constitute a franchise given by the state. A corporation, therefore, cannot be created except by or under special authority from the state. Such authority is granted by the state through its legislative department by special law which directly creates the corporation or by a general law under which persons desiring to be and act as a corporation may incorporate.

A corporation, being a creature of law, "owes its life to the state, its birth being purely dependent on its will," it is "a creature without any existence until it has received the imprimatur of the state acting according to law." A corporation will have no rights and privileges of a higher priority than that of its creator and cannot legitimately refuse to yield obedience to acts of its state organs. (Tanyag v. Benguet Corporation)

C. RIGHTS OF SUCCESSION (3rd attribute)

It simply means that the death of any stockholder or director does not dissolve the corporation. Mere death by the stockholder or director cannot end the life of the corporation. Its life continues to exist until the term expires or unless sooner dissolved in accordance with law.

Upon the death of the shareholder or director, the heir is called upon by operation of law or through succession to inherit the corresponding stocks or shares of the decedent-stockholder or director.

As distinguished from a partnership, death of a partner dissolves the partnership. This is because, in a partnership, the relationship is personal, more of a fiduciary in nature and likewise, it is founded under the principle of delectus personae [(Latin, Choice of the person) This phrase is applied to show that partners have the right to select their co-partners; and that no set of partners can take another person into the partnership, without the consent of each of the partners.]

By succession is not meant that the corporation is immortal. It simply means that a corporation has a continuity of existence independent of that of its members or shareholders. This continued existence of a corporation is, however, limited to the period stated in its articles of incorporation or in the act creating it. Subject only to this limitation, the death or withdrawal of the members or shareholders of a corporation does not affect its corporate existence.

D. HAS ONLY THE POWERS, ATTRIBUTES, AND PROPERTIES AS EXPRESSLY AUTHORIZED BY LAW OR INCIDENT TO ITS EXISTENCE (4th attribute)

As a corollary of the theory that a corporation is a fictitious entity created by law, the doctrine has been established that a corporation has no powers except those conferred upon it by the state or those incident to its existence. Thus, under the law a corporation can have only the powers, attributes and properties expressly authorized by law or incident to its existence, and of course, those implied therefrom. This means that a corporation cannot act or enter into a contract unless the act or contract is within the powers, attributes and properties expressly authorized by law or incident to its existence. This is what has been called the doctrine of limited or special capacities.

THEORIES ON FORMATION OF CORPORATION

A. THEORY OF CONCESSION

To organize a corporation that could claim a juridical personality of its own and transact business as such, is not a matter of absolute right but a privilege which may be enjoyed only under such terms as the State may deem necessary to impose (Ang Pue & Co. v. Sec. of Commerce and Industry, 5 SCRA 645 [1962]).

Before a corporation may acquire juridical personality, the State must give its consent either in the form of a special law or a general enabling act, and the procedure and conditions provided under the law for the acquisition of such juridical personality must be complied with. The failure to comply with the statutory procedure and conditions does not warrant a finding that such association achieved the acquisition of a separate juridical personality, even when it adopts sets of constitution and by-laws. (International Express Travel & Tour Services, Inc. v. Court of Appeals,343 SCRA 674).

Since all corporations, big or small, must abide by the provisions of the Corporation Code, then even a simple family corporation cannot claim an exemption nor can it have rules and practices other than those established by law (Torres v. Court of Appeals, 278 SCRA 793 [1997]).

B. THEORY OFENTERPRISEENTITY

Corporations are composed of natural persons and the legal fiction of a separate corporate personality is not a shield for the commission of injustice and inequity, such as the use of separate personality to avoid the execution of the property of a sister company.(Tan Boon Bee & Co., Inc. v. Jarencio, 163 SCRA 205).

A corporation is but an association of individuals, allowed to transact under an assumed corporate name, and with a distinct legal personality. In organizing itself as a collective body, it waives no constitutional immunities and perquisites appropriate to such a body.(Philippine Stock Exchange, Inc. v. Court of Appeals,281 SCRA 232).

DISADVANTAGES OF INCORPORATION

1. The limited liability of the stockholders serves to limit the credit available to the corporation.

2. The transferability of shares permits the uniting of incompatible and conflicting elements in one venture.

3. The minority stockholders are subservient to the wishes of the majority.

4. In large corporations, stockholders voting rights have become largely theoretical because of widespread ownership, disinterest in management, and inaccessible meeting places.

5. In large corporations, management and control has been separated from ownership.

6. By virtue of its statutory character, the corporation is limited in the transaction of its business to the state of its incorporation, unless it qualifies in other states as a foreign corporation.

7. Corporations are subject to governmental restrictions, controls, and report requirements not imposed on other forms of business organizations.

ADVANTAGES OF INCORPORATION

1. The capacity to act as a legal unit. This affords the important convenience of being able to acquire, hold and convey property, to contract, to sue and be sued, and generally to act, as a single distinct unit under its own name.

2. Limited shareholder liability. This is sometimes said to be the most essential privilege, which enables a corporation to attract investors and assemble large capital. Thus, the stockholder may contribute as much or as little as he sees fit, but he does not risk more.

3. Continuity of existence. This arises from the corporate right of perpetual succession. It enables the corporation to exist either perpetually or for a fixed period, notwithstanding the death or change of its members. If a shareholder dies, his shares pass like other personal property to a successor. If he transfers his shares, the transferee becomes a member in his place.

4. Transferability of shares. As already stated, shares of stock can be transferred without the consent of the other stockholders.

5. Centralized management. The vesting of the powers of management and of appointing officers and agents in a board of directors gives to a corporation the benefits of centralized administration which is a practical business necessity in any large organization.

6. Standardized methods. In the corporation, there is standardization of its constitution, management, finance, liabilities and remedies which is provided under a well-drawn general corporation law. The corporation statutes enter into the charter contract and these are constantly being interpreted by the courts. An established system of regulation of management and of protection of shareholders and creditors rights has thus been and is being evolved.

7. Feasibility of great undertakings. As a consequence of the aforementioned factors and reason of the flexibility allowed in the choice of securities, the corporation is ideally suited to serve as a medium of gathering together for a common project the separate funds of many investors. Thus, the modern corporation makes great undertakings feasible since it enables many individuals to cooperate in order to furnish the large amounts of capital necessary to finance the gigantic enterprises of modern times.

CLASSIFICATION OF CORPORATIONS

Corporations formed or organized under the Corporation Code (Sec. 3) may be:

A. STOCK CORPORATIONS

Corporations which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held.

B. NON-STOCK CORPORATIONS

It is a corporation organized principally for public purposes such as charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agricultural and like chambers, or any combination thereof. No part of its income is distributable as dividends to its members, trustees, or officers. Further, any profit which a non-stock corporation may obtain as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized.STOCK vs. NON-STOCK CORPORATIONS

StockNon-Stock

DefinitionCorporations which have capital stock divided into shares andare authorized to distribute to the holders of shares dividends or allotments of the surplus profits on the basis of the shares (Sec. 3)All other private corporations (Sec. 3)One where no part of its income is distributable as dividends to its members, trustees or officers. (Sec. 87)

PurposePrimarily to make profits for its shareholdersMay be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes like trade, industry, agricultural and like chambers, or any combination thereof. (Sec. 88)

Distribution of ProfitsProfit is distributed to shareholdersWhatever incidental profit made is not distributed among its members but is used for furtherance of its purpose. AOI or by-laws may provide for the distribution of its assets among its members upon its dissolution. Before then, no profit may be made by members.

CompositionStockholdersMembers

Scope of Right to VoteEach stockholder votes according to the proportion of his shares in the corporation. No shares may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares, and as otherwise provided by the Code. (Sec. 6)Each member, regardless of class, is entitled to one (1) vote UNLESS such right to vote has been limited, broadened, or denied in the AOI or by-laws. (Sec. 89)

Voting by ProxyMay be denied by the AOI or the by-laws. (Sec. 89)Cannot be denied. (Sec. 58)

Voting by MailMay be authorized by the by-laws, with the approval of and under the conditions prescribed by the SEC. (Sec. 89)Not possible.

Who Exercises Corporate Powers Board of Directors or TrusteesMembers of the corporation

Governing BoardBoard of Directors or Trustees, consisting of 5-15 directors / trustees.Board of Trustees, which may consist of more than 15 trustees unless otherwise provided by the AOI or by-laws. (Sec. 92)

Term of Directors or TrusteesDirectors / trustees shall hold office for 1 year and until their successors are elected and qualified (Sec. 23).Board classified in such a way that the term of office of 1/3 of their number shall expire every year. Subsequent elections of trustees comprising 1/3 of the board shall be held annually, and trustees so elected shall have a term of 3 years. (Sec. 92)

Election of OfficersOfficers are elected by the Board of Directors (Sec. 25), except in close corporations where the stockholders themselves may elect the officers. (Sec. 97)Officers may directly be elected by the members UNLESS the AOI or by-laws provide otherwise. (Sec. 92)

Place of MeetingsAny place within the Philippines, if provided for by the by-laws (Sec. 93)Generally, the meetings must be held at the principal office of the corporation, if practicable. If not, then any place in the city or municipality where the principal office of the corporation is located. (Sec. 51)

Transferability of interest or membership

Transferable.Generally non-transferable since membership and all rights arising therefrom are personal. However, the AOI or by-laws can provide otherwise. (Sec. 90)

THE CORPORATE ENTITY

Q: What is the difference between Articles of Incorporation and By Laws?ANSWER: By way of summary, articles of incorporation are also sometimes called a certification of formation or a charter. The articles of incorporation contain general information about a corporation, such as the name and location of the business. Bylaws, on the other hand, contain information about the rules and regulations that govern a corporation. In addition, corporate bylaws help to establish the roles and duties of the company's directors and officers.

Corporate by-laws are created for internal governance whereas articles of incorporation are required by law to be filed in order to create a corporation. Although by-laws are also required by law, they are a non-public document. Articles of Incorporation have to be filed with the Securities and Exchange Commission (SEC) and be publicly available for review. Articles are also more difficult to change than by-laws. Therefore, it is always desirable to keep Articles filled to minimum, while putting more provisions in the by-laws.

Articles of Incorporation typically deal with the fundamental organizational aspects of the corporation. They will usually include the name of the corporation, stipulations about the amount of directors the corporation may have, the address of the corporations registered office, the name(s) and address(es) of the first director(s), any restrictions on the corporations business, classes and maximum number of shares, and any other fundamental stipulations the incorporators feel are necessary.

By-laws will typically deal with less permanent and less fundamental aspects of the corporations organization and are adopted at meetings of the directors and shareholders of the corporation. Usually, a corporation will have a first meeting within six months of its incorporation in order to adopt any by-laws it may feel are important to have. By-laws will usually set out the requirements to be a director, where and when the directors and shareholders will meet, the remuneration of the companys directors, officers, and accountant, stipulations around issuing shares and dividends, the corporations fiscal year end date, and any other important corporate governance provisions that the corporation wishes to be governed by.

Q: When does the corporations existence as a legal entity commence?ANSWER: Upon issuance by the SEC of the certificate of incorporation (Sec. 19)Q: What rights does the corporation acquire?ANSWER: The right to:(a) sue and be sued(b) hold property in its own name;(c) enter into contracts with third persons; and (d) perform all other legal acts.Since corporate property is owned by the corporation as a juridical person, the stockholders have no claim on it as owners, but have merely an expectancy or inchoate right to the same should any of it remain upon the dissolution of the corporation after all corporate creditors have been paid. Conversely, a corporation has no interest in the individual property of its stockholders, unless transferred to the corporation. Remember that the liability of the stockholders is limited to the amount of shares.

Descriptive Cases:

SAN JUAN STRUCTURAL & STEEL FABRICATORS v. CA(296 SCRA 631)A corporation is a juridical person separate and distinct from its stockholders or members. Accordingly, the property of the corporation is not the property of its stockholders or members and may not be sold by the stockholders or members without express authorization from the corporation's Board of Directors.In this case, the sale of a piece of land belonging to Motorich Corporation by the corporation treasurer (Gruenberg) was held to be invalid in the absence of evidence that said corporate treasurer was authorized to enter into the contract of sale, or that the said contract was ratified by Motorich. Even though Gruenberg and her husband owned 99.866% of Motorich, her act could not bind the corporation since she was not the sole controlling stockholder.STOCKHOLDERS OF F. GUANZON V. REGISTER OF DEEDS(6 SCRA 373)Properties registered in the name of the corporation are owned by it as an entity separate and distinct from its members. While shares of stock constitute personal property, they do not represent property of the corporation. A share of stock only typifies an aliquot part of the corporation's property or the right to share in its proceeds to that extent when distributed according to law and equity, but its holder is not the owner of any part of the capital of the corporation. Nor is he entitled to the possession of any definite portion of its property or assets.The act of liquidation made by the stockholders of the corporation of the latters assets is not and cannot be considered a partition of community property, but rather a transfer or conveyance of the title of its assets to the individual stockholders. Since the purpose of the liquidation, as well as the distribution of the assets, is to transfer their title from the corporation to the stockholders in proportion to their shareholdings, that transfer cannot be effected without the corresponding deed of conveyance from the corporation to the stockholders. It is, therefore, fair and logical to consider the certificate of liquidation as one in the nature of a transfer or conveyance.PIERCING THE CORPORATE VEIL

Q: What is the theory of corporate entity?ANSWER: That a corporation has a personality distinct from its shareholders, and is not affected by the personal rights, obligations and transactions of the latter. The entity theory maintains the assumption that the economic activities of a corporation is distinct from those of its shareholders. And that the activities of a corporation can be accounted for separately from the activities of its shareholders, therefore the shareholders are not personally responsible for the debts or other liabilities taken on by the corporation.

Q: What does the phrase piercing the corporate veil means?

ANSWER: The phrasepiercing the corporate veilis used to describe the action of a court to hold corporate shareholders personally liable for the debts and liabilities of a corporation.

Corporations are separate entities from their shareholders and in normal circumstances, if a corporation is sued, the individual shareholders and officers cannot be brought into the lawsuit. But there are cases in which the corporation's officers and shareholders could be sued fornegligenceor for debts; the action of bringing in these shareholders to be sued is called "piercing the corporate veil" or "lifting the corporate veil."Q: What are the instances when the veil of corporate entity be pierced?ANSWER: Instances in which the corporate veil might be pierced by the court, allowing shareholders to be sued are when it is used as:

1. a shield to 1.1 further an end subversive of justice; or 1.2 further purposes that could not have been intended by law that created it; or 1.3 defeat public convenience, justify wrong, protect fraud or defend crime; or 1.4 perpetuate fraud; or 1.5 confuse legitimate issues; or 1.6 circumvent the law; or 1.7 perpetuate deception

2. an alter ego, adjunct or business conduit for the sole benefit of the stockholders.Q: What are the effects of disregarding the corporate veil?

ANSWERS:(a) Stockholders would be personally liable for the acts and contracts of the corporation whose existenceat least for the purpose of the particular situation involved is ignored.(b) Court is not denying corporate existence for all purposes but merely refuses to allow the corporation to use the corporate privilege for the particular purpose involved.

CORPORATE POWERSGENERAL POWERS OF CORPORATION (SEC. 36)

(a) To sue and be sued in its corporate name;(b) Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificateof incorporation;(c) To adopt and use a corporate seal;(d) To amend its articles of incorporation in accordance with the provisions of the Corporation Code;(e) To adopt by-laws not contrary to law, morals, or public policy, and to amend or repeal the same in accordance withThe Corporation Code;(f) In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury stocks in accordance with the provisions of The Corporation Code; and to admit members to the corporation if it be a non-stock corporation;(g) To purchase, receive, take, 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;NOTE: There are two (2) general restrictions on the power of the corporation. to acquire and hold properties:(g.1)that the property must be reasonable and necessarily required by the transaction of its lawful business, and(g.2)that the power shall be subject to the limitations prescribedby other special laws and the Constitution.(h) To adopt any plan of merger or consolidation as provided in this Code;(i) To make reasonable donations, including those for the public welfare of 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;(j) To establish pension, retirement and other plans for the benefit of its directors, trustees, officers and employees; and

(k) 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.SPECIFIC POWERS OF CORPORATION

(a) Extension or shortening of the corporate term (Sec. 37)

(b) Increase or decrease of the capital stock (Sec. 38)

(c) Incur, create or increase bonded indebtedness (Sec. 38)

(d) Denial of the pre-emptive right (Sec. 39)

The pre-emptive right is the right belonging to existing shareholders of a corporation to avoid involuntary dilution of their ownership stake by giving them the chance to buy a proportional interest of any future issuance of common stock. The anti-dilutive pre-emptive right has also been called the subscription right or subscription privilege.

For example: The Terra Firma Coffee Company has 100 shares of stock outstanding. You own 10 of these shares, or 10% of the entire company. To raise capital to expand, the Board of Directors decides to sell another 100 shares in the company for Php50 each. If the pre-emptive right did not exist, this would dilute your ownership to 5% (10 shares divided by 200 shares outstanding). You exercise your pre-emptive right to maintain your proportional interest and agree to buy (or "subscribe") to 10 shares of the new stock. You promptly cut a check for Php500 (10 new shares x Php50 offering price = Php500) and now you own 20 shares out of 200 outstanding; the same 10%.(e) Sale or other disposition of substantially all its assets. (Sec. 40)

A sale is deemed to substantially cover all the corporate property and assets if such sale renders the corporation incapable of continuing the business or accomplishing the purpose for which it was incorporated.

(f) Acquisition of its own shares. (Sec. 41) (g) Investment in another corporation or business. (Sec. 42)

(h) Declaration of dividends. (Sec. 43)

A dividend is a distribution of profits of a corporation to its shareholders. A dividend is paid as an amount per share of stock the shareholder owns. Corporations typically pay dividends quarterly. The dividend is paid to shareholders according to the shares they own on a specific date.(i) Entering into management contracts with another corporation. (Sec. 44)

Management contract refers to any contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation, whether such contracts are called service contracts or operating agreements.

Section 44 refers only to a management contract with another corporation. Hence, it does not apply to management contracts entered into by a corporation with natural persons.IMPLIED POWERS

Under Sec. 36, a corporation is given such powers as are essential or necessary to carry out its purpose or purposes as stated in the articles of incorporation. This phrase gives rise to such a wide range of implied powers, that it would not be at all difficult to defend a corporate act versus an allegation that it is ultra vires.A corporation is presumed to act within its powers and when a contract is not its face necessarily beyond its authority; it will, in the absence of proof to the contrary, be presumed valid.

THE ULTRA VIRES DOCTRINE

Blacks Law Dictionary Definition:Ultra viresacts are those acts beyond the scope of the powers of the corporation, as defined by its charter or laws of state of incorporation. The term has a broad application and includes not only acts prohibited by the charter, but acts which are in excess of powers granted and not prohibited, and generally applied either when a corporation has no power whatever to do an act, or when the corporation has the power but exercises it irregularly.Q: What are the consequences ofultra viresacts?

ANSWERS:(a) The corporation may be dissolved under a quo warrranto proceeding.(b) The Certificate of Registration may be suspended or revoked by the SEC. (c) Parties to the ultra vires contract will be left as they are, if the contract has been fully executed on both sides. Neither party can ask for specific performance, if the contract is executory on both sides. The contract, provided that it is not illegal, will be enforced, where one party has performed his part, and the other has not with the latter having benefited from the formers performance.

(d) Ultra vires acts may become binding by the ratification of all the stockholders, unless third parties areprejudiced thereby, or unless the acts are illegal.(e) Any stockholder may bring an individual or derivative suit to enjoin a threatened ultra vires act or contract. If the act or contract has already been performed, a derivative suit for damages against the directors maybe filed, but their liability will depend on whether they acted in good faith and with reasonable diligence in entering into the contracts. When the suit against the injured party who had no knowledge that the corporation was engaging in an act not included expressly or impliedly in its purposes clause.

CONTROL AND MANAGEMENTALLOCATION OF POWER AND CONTROL

Q: What are the three levels of corporate control/power?

ANSWERS:(a) Board of directors or trustees-responsible for corporate policies and the general management of the business and affairs of the corporation.(b) Officers-execute the policies laid down by the board.(c) Stockholders or members-have residual power over fundamental corporate changes like amendments of articles of incorporation.CORPORATE OFFICERS AND AGENTS

A. Minimum set of officers and their qualifications (Sec. 25)

1. President (who shall be a director)2. Corporate Secretary (who shall be a resident and Filipino citizen); and3. Treasurer (who may or may not be a director)The by-laws, however, may provide for other officers.Any 2 or more positions may be held concurrently by the same person, except that no one shall act as (a) president and secretary, or (b) president and treasurer at the same time.

B. Disqualifications (Sec. 27)1. Conviction by final judgment of an offense punishable by imprisonment > 6 yrs.2. Violation of Corporation Code committed within 6 yrs. prior to the date of election or appointmentC. What is the doctrine of apparent authority?The doctrine of apparent authority provides that a corporation will be liable to innocent third persons for the acts of its agent where the representation was made by the agent in the course of business and acting within his/her general scope of authority even though, in the particular case, the agent is secretly abusing his authority and attempting to perpetrate a fraud upon his/her principal or some other person for his/her own ultimate benefit.

BOARD COMMITTEESThe By-laws of the corporation may create an executive committee, composed of not less than 3 members of the Board, to be appointed by the Board. The executive committee may act, by majority vote of all its members, on such specific matters within the competence of the board, as may be delegated to it in either (1) the By-laws, or (2) on a majority vote of the board.

However, the following acts mayneverbe delegated to an executive committee:a. Approval of any action for which shareholders' approval is also required.

b. Filling of vacancies in the board (Sec. 29).

c. Amendment or repeal of by-laws or the adoption of new by-laws.

d. Amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable.

e. Distribution of cash dividends to the shareholders.

STOCKHOLDERS OR MEMBERSIn the following basic changes in the corporation, although action is usually initiated by the board of directors or trustees, their decision is not final, and approval of the stockholders or members would be necessary:a. Amendment of articles of incorporation

b. Increase and decrease of capital stock

c. Incurring, creating or increasing bonded indebtedness

d. Sale, lease, mortgage or other disposition of substantially all corporate assets

e. Investment of funds in another business or corporation or for a purpose other than the primary purpose for which the corporation was organized

f. Adoption, amendment and repeal of by-laws

g. Merger and consolidation

h. Dissolution of corporationIn all of these cases, even non-voting stocks, or non-voting members, as the case may be, will be entitled to vote. (Sec. 6)

DUTIES OF DIRECTORS AND CONTROLLING STOCKHOLDERS

A. Duties and Liabilities of Directors

1. What is the 3-fold duty that directors owe to the corporation?

a. Diligence b. Loyalty c. ObedienceObedience- directors must act only within corporate powers and are liable for damages if they acted beyond their powers unless in good faith. Assuming that they acted within their powers, liability may still arise if they have not observed due diligence or have been disloyal to the corporation.

2. When does liability on the part of directors, trustees or officers arise?

In general, liability of directors, trustees or officers arises when they either:

a. willfully and knowingly vote for or assent to patently unlawful acts of the corporation; or

b. are guilty of gross negligence or bad faith in directing the affairs of the corporation; or

c. acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees.In such cases, the directors or trustees shall be liablejointly and severallyfor all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons.3. Duty of Diligence: Business Judgment Rule

a. What is the business judgment rule?As a general rule, directors and trustees of the corporation cannot be held liable for mistakes or errors in the exercise of their business judgment, provided they have acted in good faith and with due care and prudence.

Contractsintra vires*entered into by the board of directors are binding upon the corporation, and the courts will not interfere unless such contracts are so unconscionable and oppressive as to amount to a wanton destruction of the rights of the minority.

*Latin for within powers, in the law of corporations, referring to acts of a corporation and/or its officers within the powers and/or authority allowed under the Corporation Law. Acts that are intra vires may equivalently be termed valid However, if due to the fault or negligence of the directors the assets of the corporation are wasted or lost, each of them may be held responsible for any amount of loss which may have been proximately caused by his wrongful acts or omissions. Where there exists gross negligence or fraud in the management of the corporation, the directors, besides being liable for damages, may be removed by the stockholders in accordance with Sec. 28 of the Code.

Summary of RuleGeneral Rule:Contractsintra viresentered into by BoD are binding upon the corporation and courts will not interfere.Exception:When such contracts are so unconscionable and oppressive as to amount to a wanton destruction of the rights of the minority.

b. What kind of diligence is expected of directors?Directors are expected to manage the corporation with reasonable diligence, care and prudence, i.e. the degree of care and diligence which men prompted by self-interest generally exercise in their own affairs. Thus, they can be held liable not only forwillfuldishonesty but also for negligence.

Although they are not expected to interfere with the day-to-day administrative details of the business of the corporation, they should keep themselves sufficiently informed about the general condition of the business.

c. What factors should be considered in determining whether reasonable diligence has been exercised?The nature of the business, as well as the particular circumstances of each case. The court should look at the facts as they existat the time of their occurrence, not aided or enlightened by those which subsequently took place.

B. The Self-Dealing Director

1. What is a self-dealing director? (sec. 32)A self-dealing director is one who enters into a contract with the corporation of which he is a director.2. What is the nature of contracts entered into by self-dealing directors?Voidable at the option of the corporation, whether or not it suffered damages. It is possible that the self-dealing director may have the greatest interest in its welfare and may be willing to deal with it upon reasonable terms.However, such contract may be upheld by the corporation if all of the following conditions are present:a. The presence of the self-dealing director or trustee in the board meeting for which the contract was approved was not necessary to constitute a quorum for such meeting. According to Robert's Rules, aquorumis the minimum number of voting members who must be present at a properly called meeting in order to conduct business in the name of the group. There are corporations which set majority as quorum.b. The vote of such self-dealing director or trustee was not necessary for the approval of the contract.c. The contract is fair and reasonable under the circumstances.d. In the case of an officer, the contract has been previously authorized by the Board of Directors.

CORPORATE BOOKS AND RECORDSANDTHE RIGHT OF INSPECTIONA. WHAT BOOKS AND RECORDS MUST A CORPORATION KEEP? (Sec. 74)1. Record of all business transactions2. Minutes of all meetings of stockholders or members3. Minutes of all meetings of Board of Directors or Trustees4. Stock and Transfer book4.1 What is a stock and transfer book?(Sec. 75)A stock and transfer book is a record of all stocks in the names of the stockholders alphabetically arranged. It likewise contains the following information:4.1.1 Installments paid and unpaid on all stock for which subscription has been made, and the date of any installment;

4.1.2 A statement of every alienation, sale or transfer of stock made, the date thereof, and by whom and to whom made;4.1.3 Such other entries as the by-laws may prescribeThe stock and transfer book shall be kept in the principal office of the corporation or in the office of its stock transfer agent, and shall be open for inspection by any director or stockholder of the corporation at reasonable hours on business days.

4.2 Who is a stock transfer agent? (Sec. 75)

A stock transfer agent is one who is engaged principally in the business of registering transfers of stocks in behalf of a stock corporation. He or she must be licensed by the SEC; however, a stock corporation is not precluded from performing or making transfer of its own stocks, in which case all the rules and regulations imposed on stock transfer agents, except the payment of a license fee, shall be applicable.

B. WHAT IS THE BASIS OF THE RIGHT OF INSPECTION?

Ordinary stockholders, the beneficial owners of the corporation, usually have no say on how business affairs of the corporation are run by the directors. The law therefore gives them the right to know not only the financial health of the corp. but also how its affairs are managed so that if they find it unsatisfactory, they can seek the proper remedy to protect their investment.1. What is the nature of the right to inspect?1.1 Preventive : Deterrent to an ill-intentioned management knowing its acts are subject to scrutiny; and 1.2 Remedial: A dissatisfied stockholder may avail of this right as a preliminary step towards seeking more direct and appropriate remedies against mismanagement.C. WHO IS THE CUSTODIAN OF CORPORATE RECORDS?In the absence of any provision to the contrary, the corporate secretary is the custodian of corporate records. Corollarily, he keeps the stock and transfer book and makes the proper and necessary entries. (Torres, et al. vs. CA,278 SCRA 793; 1997)D. WHAT IS MEANT BY THE PHRASE CORPORATE RECORDS?

1. Records of ALL business transactionsThis includes book of inventories and balances, journal, ledger, book for copies of letters and telegrams, financial statements, income tax returns, vouchers, receipts, contracts, papers pertaining to such contracts, voting trust agreements (sec. 59)

2. By-lawsThese are expressly required to be open to inspection by stockholders/members during office hours (Sec. 46).Note: There is no similar provision as to AOI, but these are filed with the SEC anyway. 3. Minutes of directors meetingsThis is to inform stockholders of Board policies. Such right arises only upon approval of the minutes, however. 4. Minutes of stockholders' meetings 5. Stock and transfer booksThese are records of all stocks in the names of the stockholders alphabetically arranged. Contain all names of the stockholders of record. Useful for proxy solicitation for elections. SEC has however ruled that a stockholder cannot demand that he be furnished such a list but he is free to examine corp. books.

6. Most recent financial statementSec. 75 of the Code provides that within 10 days from the corporation's receipt of awrittenrequest from any stockholder or member, the corporation must furnish the requesting party with a copy of its most recent financial statement, which shall include a balance sheet as of the end of the last taxable year and a profit or loss statement for said taxable year.

E. EXTENT AND LIMITATIONS ON RIGHT

1.The exercise of this right is subject to reasonable limitations similar to a citizens exercise of the right to information. Otherwise, the corporation might be impaired, its efficiency in operations hindered, to the prejudice of stockholders.2.Such limitations to be valid must be reasonable and not inconsistent with law (Sec. 36[5] and 46).3.A corporation may regulate time and manner of inspection but provisions in its by-law which gives directors absolute discretion to allow or disallow inspection are prohibited.Limitations as to time and place:

3.1 Exercise of right only at REASONABLE HOURS on BUSINESS DAYS.3.2 Such business days should be THROUGHOUT THE YEAR. Board of Director cannot limit such to merely a few days within the year. (Pardo v. Hercules Lumber)4.By-laws cannot prescribe that authority of president must first be obtained.5.Inspection should be made in such a manner as not to impede the efficient operations6. Place of inspection:Principal office of the corporation. Stockholder cannot demand that such records be taken out of the principal office.7.As to purpose:

7.1 PRESUMPTION: that stockholders purpose is proper. Corporation cannot refuse on the mere belief that his motive is improper (sec 74).7.2 BURDEN OF PROOF: lies with corporation which should show that purpose was illegal.7.3 To be legitimate, the purpose for inspection must be GERMANE to the INTEREST of the stockholder as such, and it is not contrary to the interests of the corporation.

7.3.1 Legitimate: inquiry about failure to declare dividend 7.3.2 Not legitimate: for mere satisfaction or speculation.7.4 Belief in good faith that a corp. is being mismanaged may be given due course even if later, this is proven unfounded.7.5 If motive can be clearly shown as inimical to corp., right may be denied.F. WHO MAY EXERCISE RIGHTEvery director, trustee, stockholder, membermay exercise right personally or through an agent who can better understand and interpret records (impartial source, expert accountant, lawyer).

DERIVATIVE SUITES

A. NATURE AND BASIS

An action brought by a stockholder on behalf of the corporation to enforce corporate rights against the corporations directors, officers, or other insiders.

A stockholder may sue for mismanagement, waste or dissipation of corporate assets because of a special injury to him for which he is otherwise without redress.

In a derivative suit -1) Cause of action belongs to the corporation and not to the stockholder2) Under Sections 23 and 36 of the Corporation Code, the directors or officers, as provided under the by-laws, have the right to decide whether or not a corporation should sue. Since these directors or officers will never be willing to sue themselves, or impugn their wrongful or fraudulent decisions, stockholders are permitted by law to bring an action in the name of the corporation to hold these directors and officers accountable. Thus, the stockholder is given the right to sue on behalf of the corporation.3) An effective remedy of the minority against the abuses of management4) An individual stockholder is permitted to bring a derivative suit to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue or are the ones to be sued or hold the control of the corporation.5) The real party in interest is the corporation, while the stockholder is a mere nominal party.6) A stockholder can only bring suit for an act that took place when he was a stockholder; not before.

B. REQUIREMENTS RELATING TO DERIVATIVE SUITS

In Hi-Yield Realty, Incorporated v. Court of Appeals, the Supreme Court enumerated the requisites for filing a derivative suit, as follows:

(1) the party bringing the suit should be a shareholder as of the time of the act or transaction complained of, the number of his shares not being material;

(2) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of directors for the appropriate relief but the latter has failed or refused to heed his plea; and

(3) the cause of action actually devolves on the corporation, the wrongdoing or harm having been, or being caused to the corporation and not to the particular stockholder bringing the suit. Lisam Enterprises, Inc., represented by Lolita A. Soriano and Lolita A. Soriano vs. Banco de Oro Unibank, Inc., et al., G.R. No. 143264, April 23, 2012.

C. SAMPLE CASE

Atlantis Realty Corporation (ARC), a local firm engaged in real estate development, plans to sell one of its prime assets -a three-hectare land valued at about P100- million. For this purpose, the board of directors of ARC unanimously passed a resolution approving the sale of the property for P75-million to Shangrila Real Estate Ventures (SREV), a rival realty firm. The resolution also called for a special stockholders meeting at which the proposed sale would be up for ratification.

Atty. Edric, a stockholder who owns only one (1) share in ARC, wants to stop the sale. He then commences a derivative suit for and in behalf of the corporation, to enjoin the board of directors and the stockholders from approving the sale.

QUESTIONS:

1. Can Atty. Edric, who owns only one (1) share in the company, initiate a derivative suit? Why or why not?

2. If such a suit is commenced, would it constitute an intra-corporate dispute? If so, why and where would such a suit be filed? If not, why not?

3. Will the suit prosper? Why or why not?

ANSWERS:

1. Yes Atty. Edric can file a derivative suit. Regardless of the number of shares held, a stockholder may file a derivative suit for and in behalf of the corporation when by virtue of a corporate act the interest of the corporation will be prejudiced and the shareholder has no other remedy either because the board refuses to act or the board itself is involved in the corporate act being questioned. In this case, the corporation will obviously incur loss if the sale of its asset will prosper and since the board itself was the one who initiated the sale Atty. Edric has no other effective remedy but to file a derivative suit.

2. Yes a derivative suit is considered an intra- corporate dispute and such falls under the jurisdiction of the RTC acting as a special commercial court.

3. Yes the suit will prosper. A derivative suit is one commenced by a stockholder for and in behalf of the corporation to question or enjoin a corporate act which is prejudicial to the interest of the corporation and the stockholder/s has left with no other remedy because the board itself which is supposed to safeguard the interest of the corporation refuses to act or is the one involved in the questioned corporate act. All the requisites for a derivative suit to prosper is present in this case, the sale of the corporate asset for a lower amount is obviously prejudicial to the corporation considering that the buyer is the rival corporation. Since the board itself was the one who initiated and authorized the sale and if such would be approved in the stockholders meeting Atty. Edric has no other remedy but to file a derivative suit because his share is obviously not sufficient to enjoin the sale of the property. (2009 Bar Question)

DISSOLUTION AND LIQUIDATION

A. WHAT IS DISSOLUTION?

The term dissolution as applied to a corporation signifies the extinguishment of its franchise to be a corporation and the termination of its corporate existence. It denotes the complete destruction of the corporation. And within contemplation of law, is equivalent to its death, being sometimes likened to the death of a natural person.

B. HOW MAY A CORPORATION BE DISSOLVED?1. Failure to organize and commence business within two years from date of incorporation(Sec. 22);

2. Continuous inoperation for 5 years(Sec. 22);

3. Expiration of original, extended, or shortened corporate term;4. Voluntary dissolution(Sec. 118-119);a) Where no rights of any creditor having a claim against a corporation are affected(Sec. 118)This is effected by majority vote of the BOD and a 2/3 vote of the OCS or members. (Note the special notice requirements.)The copy of the resolution authorizing the dissolution shall be certified by a majority of the Board of Directors and countersigned by the corporate secretary of the corporation. The SEC shall thereupon issue the certificate of dissolution.

b) Where rights of creditors are prejudice(Sec. 119) b.1. Filing of petition for dissolution with SEC

A petition for dissolution must be filed with the SEC after having been signed by a majority of the BOD, verified by the president or secretary or one of the directors, and resolved upon by the affirmative vote of 2/3 of the stockholders or members. The petition must set forth all claims and demands against the corporation, and the fact that the dissolution was approved by the stockholders with the requisite 2/3 vote.b.2 Fixing of date by SEC for filing of objections to petitionIf the petition is sufficient in form and substance, the SEC shall fix a date on or before which objections thereto may be filed by any person.Date: Not less than 30 days nor more than 60 days after the entry of the orderb.3 Publication of order

Before the date fixed by the SEC, the SEC order shall be published and posted accordingly.b.3.1. Newspaper:Once a week for 3 weeks in a newspaper of general circulation published in the municipality or city where the corporation's principal office is situated, or there be no such newspaper, in a newspaper of general circulation in the Philippines.

b.3.2. Posting: For 3 consecutive weeks in 3 public places in the city or municipality where the corporation's principal office is situated.

b.4 Hearing of the petition for dissolution

Upon 5 days notice, given after the date on which the right to file objections to the order has expired, the SEC shall proceed to hear the petition and try any issue made by the objections filed.

If no objection is sufficient, and the material allegations are true, the SEC shall render judgment dissolving the corporation and directing such disposition of its assets as justice requires.Note: The SEC may appoint a receiver to collect such assets and pay the debts of the corporation.

5. Involuntary dissolution(Sec. 121):5.1 Revocation of Certificate of Registration by SEC (Sec. 121)A corporation may be dissolved by the SEC upon filing of a verified complaint and after proper notice and hearing on grounds provided by existing laws, rules and regulations.5.2 Quo Warranto proceeding

A quo warranto proceeding is a special civil action commenced by a verified petition in the name of the Republic of the Philippines against an association which acts as a corporation within the Philippines without being legally incorporated or without lawful authority so to act.

6. Shortening of corporate term (Sec. 120) NOTE: The simplest and most expedient way of effecting dissolution is by shortening the corporate term and waiting for such term to expire. C. WHAT ARE THE EFFECTS OF DISSOLUTION?

1. Corporation ceases to be a juridical person and consequently can no longer continue transacting its business.2. Corporate existence continues for 3 years following dissolution for the following purposes only:

2.1 winding up of affairs; and

2.2 liquidation of corporate assets.3. Corporation can no longer continue its business, except for winding up.

D. WHAT IS LIQUIDATION?

It refers to the collection of all assets of the corporation, payment of all its creditors, and the distribution of the remaining assets, if any, among the stockholders thereof in accordance with their contracts, or if there be no special contract, on the basis of their respective interests.

E. WHAT ARE THE METHODS OF LIQUIDATION OF A CORPORATION?1. Liquidation by the corporation itself through its board of directorsAlthough there is no express provision authorizing this method, neither is there any provision in the Corporation Code prohibiting it.2. Conveyance of all corporate assets to trustees who will take charge of liquidation (Liquidation by Trusteeship)If this method is used, the 3-year limitation will not apply provided the designation of the trustees is made within said period. There is no time limit within which the trustee must finish liquidation, and he may sue and be sued as such even beyond the 3-year period unless the trusteeship is limited in its duration by the deed of trust. (See Nat'l Abaca Corp. v. Pore, supra)3. Liquidation is conducted by the receiver who may be appointed by the SEC upon its decreeing the dissolution of the corporation (Liquidation by Receivership)

As with the previous method, the three-year rule shall not apply. However, the mere appointment of a receiver, without anything more, does not result in the dissolution of the corporation nor bar it from the exercise of its corporation rights.

F. FOR HOW LONG MAY THE LIQUIDATION OF A CORPORATION BE UNDERTAKEN?Generally, a corporation may be continued as a body corporate for the purpose of liquidation for 3 years after the time when it would have so dissolved. (Sec. 122)However, it was held in the case ofClemente v. CA (supra)that if the 3-year period has expired without a trustee or receiver having been expressly designated by the corporation itself within that period, the BOD itself may be permitted to so continue as "trustees" by legal implication to complete the corporate liquidation.G. WHAT CAN AND SHOULD BE DONE DURING THE PERIOD OF LIQUIDATION? 1. Collection of corporate assets and property;

2. Conveyance of all corporate property to trustees for the benefit of stockholders, members, creditors, and other persons in interest;

3. Payment of corporation's debts and liabilities;

4. Distribution of assets and property.

MERGER AND CONSOLIDATION

A. DEFINITION OF CONSOLIDATIONIt is the union of two or more existing corporation to form a new corporation called the consolidated corporation.

It is a combination by agreement between two or more corporations by which their rights, franchises, and property are united and become those of a single, new corporation, composed generally, although not necessarily, of the stockholder of the original corporations.

(Corporation A + Corporation B = Corporation C)

B. DEFINITION OF MERGER It is a union whereby one corporation absorbs one or more existing corporation, and the absorbing corporation survives and continuous the combined business.

(Corporation A + Corporation B = Corporation A or Corporation B)

C. EFFECT OF MERGER OR CONSOLIDATIONThe parties to a merger or consolidation are called constituents corporations.

1. Effects of Consolidation

a. All the constituents are dissolved and absorb by the new consolidated corporation.

b. No liquidation of assets of the dissolved corporations, the consolidated corporation acquires all the properties, rights, and franchises.

c. The consolidated corporation assumes automatically the liabilities of the dissolved corporations regardless of whether the creditors have consented or not to such consolidation. 2. Effects of Merger

a. All the constituents are dissolved except the surviving corporation.

b. No liquidation of assets of the dissolved corporations, the surviving corporation acquires all the properties, rights, and franchises.

c. The surviving corporation assumes automatically the liabilities of the dissolved corporations regardless of whether the creditors have consented or not to such consolidation.

OTHER CORPORATIONS

CLOSE CORPORATIONS

A. DEFINITION OF CLOSE CORPORATION

A close corporation is one whose articles of incorporation provides that

1. Its stockholders are limited in number, not exceeding twenty (20).

2. Transfer of shares of stocks is subject to the following restrictions:

2.1 Restrictions on the right to transfer shares must appear in the AoIBL as well as in the certificate of stock; otherwise, the same shall not be binding on any purchaser thereof in good faith.

2.2 The restriction pertains to granting the existing stockholders or the corporation the option to purchase the shares of the transferring stockholder to purchase the shares of the transferring stockholder within a reasonable period of time.

2.3 If upon the expiration of said period, the existing stockholders or the corporation fails to exercise the option to purchase, the transferring stockholder may sell his shares to any third person.

2.4 Any of its stocks shall not be listed in any stock exchange or offered to the public.

B. NEED FOR SPECIAL RULES FOR CLOSE CORPORATIONS

The existence of close corporations can be attributed to the desire of intimate groups of business associates to obtain the advantages of a corporate organization, like that of limited liability. However, the identity and personality of each shareholder are important to his associates. So, although, they may consider their business as a corporation in their dealings with third persons, among themselves the stockholders act and feel as partners.

C. ANY CORPORATION MAY BE INCORPORATED AS A CLOSE CORPORATION, EXCEPT :

1. Mining or oil companies2. Stock exchanges3. Banks4. Insurance companies5. Public utilities6. Educational institutions7. Corporations declared to be vested with public interest.

NON-STOCK CORPORATIONS

A. DEFINITION OF NON-STOCK CORPORATION

A non-stock corporation is one where no part of its income is distributable as dividends to its members, trustees, or officers.

B. TREATMENT OF PROFIT

Any profit which a non-stock corporation may obtain as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized.

C. PURPOSES

Non-stock corporations may be formed or organized for:

1. Charitable2. Religious3. Educational4. Professional5. Cultural6. Fraternal7. Literary8. Scientific9. Social10. Civil Service11. Similar purposes like trade, industry, agricultural and like chambers, or any combinations thereof.

EDUCATIONAL CORPORATION

A. DEFINITION OF EDUCATIONAL CORPORATION

An educational corporation is a stock or non-stock corporation organized to provide facilities for teaching or instruction.

Such corporation normally maintain a regular faculty and curriculum and normally have a regular organized body of pupils or students, or attendance at the place where the educational activities are regularly carried on.

B. BOARD OF TRUSTEES

1. For non-stock educational corporation

1.1 The number of trustees shall not be less five (5) nor more than fifteen (15)

1.2 It shall be in multiples of five (5), i.e., their member shall be five (5), ten (10), or fifteen (15).

2. For stock educational corporation

The number and term of directors shall be governed by the provisions on stock corporations.

C. INCORPORATION

Philippine law expressly require the approval by the Securities and Exchange Commission of the articles of incorporation of an educational corporation.

RELIGIOUS CORPORATION

A. DEFINITION OF RELIGIOUS CORPORATION

A religious corporation has been defined as a corporation composed entirely of spiritual persons and which is erected for the furtherance of a religion or for perpetuating the rights of the church or for the administration of the church or religious work or property.

B. KINDS OF RELIGIOUS CORPORATION

1. Corporation Sole

It is incorporated by one person and consists of one member or incorporator only and his successors, such as a bishop.

It may be formed by the chief archbishop, bishop, priest, minister, or rabbi or other presiding elder of a religious denomination, sect or church for the purpose of administering and managing, as trustee, the affairs, property and temporalities* of such religious denomination, sect or church.

*The money revenues of a church, derived from pew rents, subscriptions, donations, collections, cemetery charges, and other sources.

2. Religious Societies

Religious societies are aggregate religious corporations consisting of two or more persons, as distinguished from the corporation sole which consists of a single member.

The following may incorporate as aggregate religious corporations: any

2.1 Religious society2.2 Religious order2.3 Diocese2.4 Synod2.5 District organization of any religious denomination, sect or church

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