corpo (to be printed)

Corporation CodeMJGAMBON

CORPORATION - artificial being, created by operation of law, having the

right of succession, and powers, attributes and properties expressly authorized by law.

ATTRIBUTES/CHARACTERISTICS OF CORPORATION

Artificial being; Created by operation of law; Having the right of succession; It has powers, attributes, properties expressly authorized

by law.

LBC EXPRESS VS CA.

As general rule, CORPORATION being an artificial being, existing only in contemplation of law is NOT ENTITLED TO MORAL DAMAGES. Exception:

o If the corporation has a good moral reputation that is debased (it is merely an obiter dictum [Mambulao Lumber vs PNB 22 SCRA 359]);

o In cases of libel/slander or any form of defamation (Article 2219 [7]).

CORPORATION vs. PARTNERSHIP

CORPORATION PARTNERSHIPCREATION Operation of law Mere agreement of

the partiesDURATION Limited to 50 yrs

but subject to extension

Exist for indefinite period except those created for a certain purpose. Upon the performance of which partnership dissolves

MEMBERS Atleast 5 incorporators (natural person only) except corporation sole

2 or more natural persons

LIMITATION Can only exercise powers and functions expressly granted by law and those necessary and incidental to its existence

No limitiation as long as it is in the agreement and not contrary to law, morals, good customs, public or order

BINDING POWERS Can transact business only though the Board of Directors

In the absence of any agreement, any partner can bind the partnership

SUCCESSIONAL RIGHT

It has right of succession

None. It is based on trust & confidence.

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TRANSFERABILITY SH can transfer, share, assign his shares without the consent of the other

A partner cannot T,S,A without the consent of the other

LIABILITY Liability is limited to the extent of their subscription

Liable pro rata with all their property except limited partnership

DISSOLUTION Consent of the State is necessary to dissolve

Mere agreement to dissolve the partnership is sufficient

I. CLASSES OF CORPORATION

1. STOCK CORPORATION – corporations which have capital stock divided into shares and are authorized to distribute the holders of such shares, dividends or allotments of the surplus profits on the basis of the shares held.

2. NON - STOCK CORPORATION – are those where no part of their income is distributable as dividends to its members, trustees or officers subject to the provisions on dissolution.

STOCK CORP vs. NON-STOCK CORP

STOCK CORP NON-STOCK CORPExists primarily for profit. Thus, any profits gained can be distributed as dividends among stock holder except for corporate expansion necessary for the sustenance of the corporation.

Does not exist primarily for profit. Thus, profits obtained cannot be distributed as dividends BUT they are used for the furtherance of their purpose.

CIR VS. CLUB FILIPINO, INC. DE CEBU(non-stock corporation)

Club that derived profits from the operation of its bar and restaurant does not necessarily convert it into profit making enterprise. The bar and restaurant are not necessary adjunct of the club to foster its purpose and the profits derived therefrom are necessarily incidental to the primary object of developing and cultivating sports for the healthful recreation and entertainment of the SH and members.

What is determinative of whether or not the Club is engaged in such business is its object or purpose as stated in the AOI or by-laws.

CORP CREATED BY SPECIAL LAW OR CHARTER (sec. 4 CCP)

Sec. 4. Corporations created by special laws or

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charters. - Corporations created by special laws or charters shall be governed primarily by the provisions of the special law or charter creating them or applicable to them, supplemented by the provisions of this Code, insofar as they are applicable.

All GOCCs, operate under the special law or charter such that registration with SEC is not required for them to acquire legal and juridical personality.

PNOC-ENERGY DEV’T CORP vs. NLRC

Under the former rule, employees of GOCC, whether created by special law or under the General Corporation Law are governed by the Civil Service Law and not by the Labor Code.

Under the present rule, the test in determining whether a GOCC is subject to the Civil Service Law is the manner of its creation, such that government corporations created by special charter are subject to its provisions while those incorporated under the General Corporation law are not within its coverage.

o Corp created by special charter (has chater of its own) – governed by such charter

o Corp created under Corp Code – governed by such Code.

II. OTHER CLASSES OF CORPORATIONS

A. Private and Public Corporation

Private Corp – those formed for some private purpose, benefit, or aim. They are created for the immediate benefit and advantage of the individuals composing it and their franchise may be considered as privileges conferred by the State to be exercised and enjoyed by them in the form of corporation.

Public Corp – those formed or organized for the State or any of its political subdivisions and which have for their purpose the general good and welfare.

Those created by the State as its own device and agency for the accomplishment of its own public purpose.

The following instances are NOT ipso facto public corporation: Mere fact that the undertaking in which the corp is

engaged in is one which the State itself might enter into as part of its public work;

Fact that the State granted property or special privileges to a corp doesn’t render it public;

Stocks in the corp are held but the governement doesn’t make it public.

TRUE TEST of the nature of the corporation whether public or private is found in relation of the body to the State.

NATIONAL COAL vs. COLLECTOR OF INTERNAL REVENUE

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The mere fact that the government happens to be a majority stockholder doesn’t make it a public corporation.

B. Ecclesiastical or Religious and Lay Corporations

Ecclesiastical Corp – are comporsed exclusively of ecclesiastics organized for spirtual purposes or for administering ptoprties held for religious ones.

Lay Corp – are those established other than religion.

They exist for secular or business purpose and may be classified further as eleemosynary or civil.

i. Eleemosynary Corp – created for charitable and benevolent purpose, i.e those organized for maintaining of hospitas amd houses for the sick or aged or poor.

ii. Civil Corp – organized not for the purpose of public charity but for the benefit, pecuniary or otherwise, of its members.

C. Aggregate and Sole Corporations

Aggregate Corp – those composed of number of individuals vested with corporate powers

Sole Corp – those that consist of one person only and who is made as bodies corporate and politic in order to give them some legal capacity and advantage which they cannot have. (sec 110 CCP) It is formed by the chief archbishop, bishop, priest, minister, rabbi, or other presiding elder of religious denomination or sect.

D. Closed and Open Corporations

Closed Corp – those whose shares of stock are held by limited number of persons like the family or other closely-knit group. (limited SH) sec 96 CCP

Limitation: i. Not more than 20 specified personsii. Cannot sell or transfer its share to the general public

NOTE: i & ii must be stated in the AOI in order to be considered as Closed Corp.

Open Corp – formed openly to accept outsiders as SH or investors. Unlike Closed Corp, they are authorized to list in the stock exchange and offer their shared to the public.

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E. Domestic and Foregin Corporations

Domestic Corp – those that are organized under the Philippines laws, either by legislative act (special law) or under the general provision of the Corporation Law.

Foreign Corp – those formed or organized under any laws laws other than those of the PH and whose law allows Filipino citizens and corp to do business in its own country.

F. Parent or Holding Companies and Subsidiaries and Affiliates

Parent or Holding Companies – corp that confine their acitvites to owning stock in, and supervising management of other companies.

It usually owns a controlling interest in the companies whose stocks it holds. Thus, it control its subsidiaries with regard to the power and authority to elect management.

Investment Companies, on the other hand, are active in the sale or purchase of shares of stock ot securities, parent or holding companies have a passive portfolio and hold the securities merely for purposes of control and management.

Subsidiary Corp – those which another corp owns atleast majority of the shares, thus have control.

In effect, it is a corp under the control of another corp which is the holding company.

Affiliates or Sister Companies are corporation which are subject to common control and operated as part of a system since the stockholdings of a corp is not substantial enough to control the former.

NOTE: A subsidiary has an independent and separate juridical personality, distinct from that of its parent company hence any claim or suit against the latter does not bind the former and vice versa.

G. Quasi and Quasi-public Corporations

Quasi Corp –the term applies to public bodies or municipal societies, i.e. townships, countries school districts, road or highway district, though not vested with the general powers of the corp.

They possess some corporate functions and attributes but they are PRIMARILY POLITCAL SUBDIVISIONS and their corporate functions are granted to enable them more readily to perform their public duties.

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Quasi-Public Corp – (known as public service corporations) private corp that have been acceted from the State the grant of frnachise or contract involving the performance of public duties.

H. De Jure and De Facto Corporations

De Jure Corp – juridical entites created in the strict/substantial compliance with the statutory requirement of incorporation and whose rights to exists as such cannot be attacked even by the State in a quo warranto proceedings.

De Facto Corp – those exist by virtue of an irregularity in the organization or from some omission to comply with the condition precedents by which the de jure corpo are created, BUT there was a colorable compliance with the requirements of law under which they might lawfully incorporated. Its existence can be attacked by a direct action of quo warranto proceedings.

Requisites for De Facto Corp: (C-U-Gf)i. An attempt, in GF, to form a corp or a colorable

compliance with law;ii. A user of corporate powers ;iii. Good faith in claiming to be and doing business as a corp.

Purpose of Recognition of De Facto Corp: It is necessary to promote the security of business

transactions and to eliminate arguments over the irregularities.

MUNICIPALITY OF MALABANG vs. BENITO

In cases where a de facto municipal corp was recognized as such despite the fact that the statute creating it was later invalidated, the decision could fairly be made to rest on the consideration that there was some other valid law giving corporate vitality to the organization. – DE FACTO (Pelaez case)

On the other hand, the mere fact that a municipal corp was organized at the time when the statue had not been invalidated cannot conceivable make it a de facto corporation as there is NO other valid statue to give color of authority to its creation. (check Ladia book)

I. Corporations by Estoppel (sec 21 CCP)

All persons who assume to act as a corp knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof. PROVIDED, however, that when any such ostensible corporation is sued on any transaction entered by it as a corp or on any tort committed by it, it shall NOT be allowed to use as a defense it’s lack of corporate personality.

those which are do defectively formed as NOT EITHER de jure or de facto corp BUT which are considered as corp in relation only to those who cannot deny their corporate existence due to their agreement, admission, or conduct.

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GR: those who participate in holding out an association as a corporate body and thereby induced persons to deal with it as such are estopped to deny the representation to their prejudice.

EXCEPTION: SALVATIERRA vs. GARLITOS – when there is fraud in the transaction.

TEST to determine WON the agents of the association are estopped is when the acts relied upon must be equivalent to a representation or admission of corporate existence.

** AS TO THIRD PARTIES contracting with a pretended corporation is estopped to deny its existence in a suit filed by the alleged corp to enforce the contract. It is because a party who enters into a contract with an assumed corp may be considered to admit it to be a corporation.

The Doctrince of Estoppel applies against a third party only when he tries to escape liability on a contract from which he has benefited on the irrelevant grounds of defective corporation. (INTERNATIONAL EXPRESS TRAVEL & TOURS SERVICES, INC. vs. CA)

LOZANO vs. DELOS SANTOS

Corporation by estoppel is founded on the pronciple of equity and is designed to prevent injustice and unfairness.

It applies when persons assume to form a corporation and exercise corporate functions and enter into business relations with the third persons. Where there is NO third person involved and the conflict arises only among those assuming to form a corp, who has knowledge that it has not been registered, there is NO corp by estoppel.

ALBERT vs. UNIVERSITY PUBLISHING CO., INC.

One who has induced another to act upon his willful misrepresentation that a corp was duly organized and existing under the law, cannot, thereafter set up against his victom the principle of corp by estoppel.

Thus, a person acting or purporting to act on behalf of a corporation which as no valid existence assumes such privileges and obligations and becomes personally liable for contracts entered into or for other act performed as such agent.

SALVATIERRA vs. GARLITOS (exception to the rule)

While as GR a person who has contracted with an assoc in such a way as to recognize its existence as a corporate body is estopped from denying the same in an action arising out of such transaction YET this doctrine is NOT applicable where fraud takes part in the said transaction.

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A corp cannot be held liable for the personal indebtedness of a SH even if he should be its president and conversely, a SH cannot be held personally liable for a financial obligation by the corp in excess of his unpaid subscription. (Doctrine??)

ASIA BANKING CORP vs. STANDARD PRODUCTS CO., INC.

In the absence of fraud, a person who has contracted or otherwise dealt with an association in such a way as to recognize and in effect admits its legal existence in any action leading out or involving such contract unless its existence is attacked for causes which have arisen since making the contract or other dealing relied on as an estoppel and this applies to both foreign or domestic corp. (Doctrine of Estoppel applies to both domestic or foreign corp, in the absence of fraud)

GEORG GROTJAHN GMBH & CO vs. ISNANI

The doctrine of estoppel applies to BOTH foreign and domestic corp.

If the corporation by estoppel exists and enter into a contract with a third party, the latter has 3 possible REMEDIES:

i. File suit against the ostensible corporation to recover from the corp properties;

ii. File the case directly against the associates personally who held out the association as association as a corp; and

iii. Against BOTH the ostensible corp and persons forming it, jointly and severally.

III. FORMATION AND ORGANIZATION OF CORPORATION

STAGES IN THE LIFE OF CORPORATION (C-R-D)

i. creation;ii. reorganization or quasi-reorganization; andiii. dissolution and winding up.

For purposes of creation, there are 3 stpes: (P-I-O)

1. Promotion2. Incorporation3. Organization and Commencement of Business

PROMOTIONAL STAGE is undertaken by the organizers or promoters who bring together persons interested in the business venture.

Question is… who is liable on these contracts?

Generally, promoters will be held personally liable on contracts made by him for the benefit of a corp he intends to organize. This liability CONTINUES even after the contemplated

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corporation is formed UNLESS there is NOVATION or other agreement to release him from liability.

REASON: Promoters could not act for a projected corporation since that which had no legal existence could have no agent.(A corp is deemed to exist upon issuance of the AOI by the SEC)

EXCEPTION TO THE RULE:

i. He may make a continuing offer on behalf of the corp, which if accepted, will become a contract;

ii. The promoter may make a contract at the time binding himself, with the understanding that if the corp, once formed, accepts the contract, he will be relieved of responsibility;

iii. The promoter may bind himself personally and assume the responsibility of looking to the proposed corp when formed, for reimbursement.

PROCESS OF INCORPORATION

(drafting – preparation – submission – filing – issuance)

It includes the drafting of AOI, preparation and submission of additional and supporting documents, filing with the SEC and the subsequent issuance of the Certificate of Incorporation.

CONTENTS of AOI (sec 14 CCP)

i. Name of the corp;ii. Specific purpose/s for which the corp is being

incorporated. Provided, a NONSTOCK corp may not include a purpose which would change or contradict its nature as such;

iii. Place where the principal office of the corp is to be located;

iv. Term for which the corp is to exist BUT not exceeding 50 years;

v. Names, nationalities and residences of incorporators;vi. Numberof directores/trustees which shall not be less

than 5 but not more than 15;vii. Names, nationalities and residences of the persons who

shall act as directors/trustess until the first regular directors/trustees are duly elected;

viii. If it’s STOCK CORP, the amount of authorized capital stock (ACS) in PH currency, number of shares into which it is divided, and IN CASE OF PAR VALUE SHARES, the par value of each, the names, nationalities and residences of original subscribers, and the amount subscribed and paid by each on his subscription, and if some or all of the share are without par value, such fact must be stated;

ix. If it’s NON STOCK, the amount of its capital, the names, nationalities and residences of contributors and the amount contributed by each; and

x. Such other matters as not inconsistent with law.

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Also, SEC shall NOT accept AOI of any stock corp UNLESS accompanied by a sworn statement by the treasurer elected by subscribers showing that:

i. 25% of the ACS of the corp has been subscribed , and ii. at least 25% of the total subscription has been fully paid

to him in actual cash and/or in property the fair valuation of which is equal to at least 25% of the said ubscription,

iii. such paid up capital being not less than 5K pesos.

CORPORATE NAME: (sec 18 CCP)

NOTE: A corporation, once formed, cannot use any other name, unless it has been amended in accordance with law as well as difficulties of administration and supervision.

RATIONALE OF SEC 18:

Avoidance of fraud upon the public which would have the occassion to deal with the enitity concerned;

Avoidance of the evasion of legal duties and obligations; Reduction of difficulties of administration and

supervision over corporations.

LIMITATION IN THE USE OF CORPORATE NAMES (GUIDELINES)

a. the law requires the corp to append the word “Corporation/Incorporated” or “Corp/Inc.” to its proposed name;

-“corp” shall be used if the business has not yet been in operation.- “inc” shall be used if the business is already in operation and subsequently converted to corporation. (noted by: mj)

b. if the proposed name contains a word already used as part of the firm name, the proposed name must contain TWO OTHER WORDS different and distinct from the name of the company already registered;

c. name or surname is used as part of corp name, there must be a basis for the use of such name;

d. if the name used is that of another person, consent of the latter or his heirs must be secured and submitted to SEC;

e. if the corp name contains initials, the meaning thereof must be indicated in the verification slip or explanation to the effect that it is merely a coinage and no meaning at all;

f. if the corp is a subsidiary of a foreign entity, the word “Philippines/Phils” must be attached in the corp name;

g. the word “State, Maharlika and Barangay” CANNOT be used as part of a business name because they are reserved exclusively for government use;

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h. Banking Laws prohibit the use of word “Banks, Banking, Bankers and Buildind Loans Association” or word of similar import UNLESS duly licensed by the Monetary Board of BSP.

EXCEPTION: Philippine National Bank (BNP) because it was created by the law itself. It is a GOCC.

i. Rural Bank Act prohibits the use of the word “Rural Banks” as part of the corp name UNLESS authorized to use the same;

j. Act No. 6212 disallows the use of “National” as part of corp name DOING BUSINESS AS BANKERS, BROKERS OR SAVING INSTITUTIONS. However, heroes may be allowed provided it is NOT national heroes;

k. RA 8556 prohibits the use of the words “Finance” and “Financing” unless the entity is to be organized as such under the said law;

l. For commercial or business purpose, it prohibits the use of the words “United Nations” or Bureau” either full or abbreviated form;

m. RA 1582 reserves the exclusive use of the words “Engineers” and “Architects” for professional partnership;

n. SEC prohibits the use of the word “design” or “designers” IF the ENTIRE corp name would confusingly signify that it is engaged in technical concern.

RED LINE TRANSPORTATION CO. vs.. RURAL TRANSIT CO.

The law gives a corporation NO express or implied authority to assume another name, which is set apart from it and protected by law. Otherwise, if any corp could assume at pleasure as an unregistered trade name, the name of another corp, this practice would result in confusion of administration and supervision.

UNIVERSAL MILLS CORP vs. UNIVERSAL TEXTILE MILLS, INC.

Universal Textile Mills, Inc and Universal Mills Corp, are they confusingly similar?

They are NOT identical BUT they are confusingly similar because they have SIMILARITY of PURPOSE under the 2nd

amendment of its AOI.

LYCEUM OF THE PHILS INC vs. CA

Doctrine of Secondary Meaning – it is a word/phrase originally incapable of excussive? appropriation (usually generic) with reference to an article in the market, because of geographically or otherwise descriptive, might nevertheless have been used so long and so exclusive by one producer with reference to his article that, in that trade and to that branch of the purchasing public, the word or phrase has become to mean that the article was his product.

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PHILIPS EXPORT B.V. vs. CA

General Rule, each corp must have a name by which it s to sue and be sued and do all legal acts. A corp can no more use a corp name already acquired so as to mislead the public and injure another.

To come within the scope, 2 requisites must be proven:o That the complainant acquired PRIOR RIGHT

OVER THE USE OF SUCH CORP NAME;o The proposed name is either:

(I-D/C similar-P deceptive)i. Identical;

ii. Deceptively or confusingly similar to that of any existing corp; and

iii. Patently deceptive, confusing and contrary to law.

As to the 1st requisite, the right to the exclusive use of a corp name is determined by PRIORITY OF ADOPTION.

As to the 2nd requisite, the determination of existence of confusing similarity in corp names is (TRUE TEST) whether the similarity is such as to MISLEAD a person using ordinary care and discrimination. (Proof of actual confusion need not be shown. It suffices that confusion is probably or likely to occur.)

AMENDMENT OR CHANGE OF CORP NAME

EFECTS: Any change upon a corporate identity or name does not affect the rights of the corporation or lessen or add to its obligations. A mere change in the name of the corp, either by legislative act or by the SH does not affect the identity of the corp. Thus, it is in NOT a new corp nor the successor of the original corporation. It is the SAME corporation with different name, and its character is NOT changed.

The power to amend the charter necessarily includes power to alter/change the name of the corp subject to the limitation imposed by law and rules & regulation implementing the same.

Amendment of AOI which are governed by special law, there must be a favorable recommendation from the appropriate gov’t agency. (sec 17 CCP, last paragraph)

PHILIPPINE INSURANCE CO. vs. HARTIGAN

A change in the corporate name does not make a new corp. It has no effect on the identity of the corp, or on its property rights or liabilities. The corp continues responsible in its new name for all debts or other liabilities which it had previously contracted or incurred.

THE PURPOSE CLAUSEThe statement of the objects or purpose or powers in the

charter (AOI) results practically in defining the scope of the authority of the corporate enterprise.

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Doctrine of Limited Capacity or Theory of Special Capacities-- no corporation shall possess or exercise any corporate

powers, EXCEPT those:i. conferred by law (express);

ii. those implied from express powers; and iii. those as are necessary or inicidental to the exercise of the

powers so conferred.

NOTE: If the act done is not those in the purpose clause or under the doctrine of limited capacity, the act is ultra vires.

Reasons for requiring the purpose clause:

1. in order that the SH shall know within what lines of business his money is to be put at risk; (SH’s money put at risk)

2. so that the Board of Directors (BOD) and management may know within what lines of business they are authorized to act (BOD’s authority to act);

3. so that anyone who deals with the company may ascertain whether a contract or transaction into which he contemplates entering is one within the general authority of he management. (anyone may ascertain if the corp is acting within the general authority of the management.)

NOTA BENE:

No limitation as to number of purpose BUT there’s a guideline provided if there’s more than one purpose (sec.

14 CCP) Also, such purpose must be lawful. Hence, the SEC is duty bound to determine the legality of the purpose/s before it issues the certificate of registration.

A corporation may NOT be formed for the purpose of practicing a profession, i.e. law, medicine or accountancy. They are reserved exclusively for professional partnerships.

Carriage of mails CANNOT be a purpose of corporation UNLESS a special franchise has been granted to it.

The RETAIL TRADE BUSINESS shall exclusively belong to Filipinos where the corporate capital is less than $2.5M or its peso equivalent. However, exact $2.5M foreigners are allowed to incorporate.

Corp with foreign equity are NOT allowed to engage in the restaurant business BUT a corp with such foreign equity can pursue such undertaking IF IT IS INCIDENTAL or inconnection with HOTEL or INN-KEEPING BUSINESS.

Management consultants, advisers and/or specialist must submit the personal information sheet of the incorporators and directors in order that SEC may be able to determine WON the applicant corp is qualified.

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For bonded warehousing companies, an undertaking to comply with the General Bonded Warehousing Act must be submitted along with the AOI.

PRINCIPAL OFFICE (sec 14 CCP)

Principal office must be located within the PH. It must also indicated in the AOI (complete address). The law, however, does not require a statement as to the place of corporate operations and, therefore, may be dispensed with.

Purpose of statement of the location of the principal office:

1. Necessary as to where the chattel mortgage of shares should be registered (registration of chattel mortgage);

2. Venue of actions;3. Service of summons; and4. Determination of validity of meeting of SH or members.

CLAVECILLA RADIO SYSTEM vs. ANTILLON

Service of summons must be given to those specified under the law and in the principal office of the corp. In case given to the proper officer BUT NOT in the prinicipal office – NOT VALID. (i.e. residence of the President of the corp – not valid)

TERM OF EXISTENCE

As a rule, a corporation can sue or be sued and transact its business only while it possesses a juridical personality. Once it ceases to exist, its legal personality also expires and could not thereafter, act in its own name for the purpose for of prosecuting its business.

EXCEPT For purposes of:1. prosecuting and defending suits for or against it; and 2. by enabling t gradually settle and close its affairs.

(liquidation purposes, 3years limitation of its it ceased to exist).

A corporation shall EXIST for a period of 50 yrs, in the absence of express terms of duration in the AOI. It may, however, be extended for another 50yrs by any single instance by amendment of AOI PROVIDED no extension can be made earlier than 5yrs prior to the original or subsequent expiry date UNLESS there are justifiable reasons for an earlier extension as may be determined by SEC.

Procedure for amendment of corp term (ordinary amendment)1. approval by majority vote of the BOD;2. written notice of the proposed action and time and place

of meeting shall be served to each SH either by mail or personal service;

3. ratification by SH representing at least 2/3 of the OCS ;

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4. in case of extension, no extension can be made earlier than 5 yrs EXCEPT for justifiable reasons for earlier than 5 yrs.

5. In case of extension, the dissenting SH may exercise its appraisal right under the conditions prescribed in sec 81&82.

ALHAMBAR CIGAR & CIGARETTE MFG. CO. INC vs. SEC

The privilege of extension is purely statutory. As a rule, the corp is ipso facto dissolved as soon as the

time expires. So where the extension is by amendment of the AOI, the amendment must be adopted before that time. When the corp life of the corp was ended, there was nothing to extend.

INCORPORATORS and CORPORATORS

Incorporators are those SH or members mentioned in the AOI as originally forming and composing the corp and who are signatories thereof.

Corporators are those persons who compose the corp at any given time and need not be among those who execute the AOI at the start of formation.

NOTE: An incorporator may be considered as corporator provided he continues to be a SH or member BUT not all corporators are incorporators.

A minor can be a corporator provided they are represented by their guardian. Also a corporation may likewise be a corporator, i.e. holding companies.

RULE: A corporation, however, CANNOT be an incorporator for the law provides that incorporators must be NATURAL PERSONS. (NOT ABSOLUTE)

EXCEPTION: cooperatives and corporation primarily organized to hold equities in rural banks.

The law does not provide for citizenship requirement BUT only residency requirement. Except in cases of: (1) war and for (2) investment purposes, nationality requirement is necessary. – nationality of the controlling SH. (Commercial Law Review, Sundiag p. 169)

DIRECTORS and TRUSTEES

GENERAL RULE (GR): AOI must indicate the number of directors or trustees which shall not be less than 5 but not more than 15.

EXCEPTION:1. non-stock educational corporations – though not less

than 5 but not more than 15 SHOULD BE DIVISIBLE BY 5;2. close corp – where all SH are considered as members of

BOD thereby ALLOWING 20 MEMBERS in the board (20 person max corporators);

3. sole corporation (only one).

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QUALIFICATION of directors/trustess in domestic corp:1. Every director must own atleast 1 share of capital stock

of the corp which he is a director, which share shall stand in his name in the books of corp;

2. Majority of the directors/trustessof all corp must be residents of the PH. (in cases of aliens, residency requirement must be satisfied except corp exclusively reserved for Filipinos, .i.e Retail Trade Business capital less than $2.5M or its peso equivalent)

NOTE: Every alien may be elected as director provided the residency requirement is met. Aliens, however, may not qualify as directors or elected as such if the corp is exclusively reserved to Filipino citizens.

DISQUALIFICATIONS: (NOT ABSOLUTE)

No person (1) convicted of final judgment of an offense punishable by imprisonment for a period of 6years or (3) a violation of this code committed within 5 years PRIOR to the date of his election/appointment shall qualify as director, trustee, or officer (DTO) of any officer.

NOTE: Dis/Qualifications are not absolute. It may , however, be subject to additional disqualification provided it is in the by-law of the corp.

CAPITALIZATION:

Authorized Capital Stock (ACS) – maximum amount fixed in the AOI to be subscribed and paid by the subscribers. OR the maximum number of shares the corp can issue.

Subscribed Capital Stock – means total number of shares and its total value for which there are contracts for their acquisition/subscription.

Paid Up Capital Stock/Paid-in Capital Stock – actual amount which has been actually contributed or paid to the corp in consideration of the subscription made thereon.

Consideration of Stock (sec 62 CCP)

1. Actual cash paid;2. Property received by the corp & necessary for its use at a

fair valuation;3. Labor performed to the corp;4. Previously incurred indebtedness by the corp;5. Amounts transferred from unrestricted retained earnings

(URE) to stated capital;6. Outstanding shares in exchange for stocks in the event of

reclassification.

NOTE: Promissory notes and future services are NOT allowed to be used as consideration for the issuance of shares as their realization are NOT certain.

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NOTE: Where the consideration is other then cash or consist of intangible property, the valuation thereof shall be determined by the incorporators or the BOD, subject to the approval of SEC.

The value of tangible properties may be determined either by means of:

1. Appraisal report of independent appraiser;2. Zonal valuation; or3. Market value indicated in the Real Estate Tax

Declaration.

The value of intangible properties shall initially determined by the:

1. Incorporators;2. BOD subject to the approval of the SEC.

The SEC is NOT precluded from requiring the corp to submit an appraisal report of an independent appraiser to determine the true value of said property.

Labor performed may also be the basis for the issuance of stocks as long as they are capable of valuation and are fairly valued.

True Value Rule – motives or intent of those making the valuation are disregarded and the sole and decisive factor question is WON the property or services are in fact worth the value placed on them.

Good Faith Rule – is based on the proposition that the value of property or services is a matter about which there can be an honest difference.

NOTE: Set off or satisfaction of debt due from corp is a lawful and valid consideration for the issuance of stock as provided in the Code.

Shares of stock shall not be issued in exchange of PN or future service

ISSUE PRICE OF NO PAR VALUE SHARES may be fixed in:1. AOI;2. By the BOD pursuant to the authority conferred upon it

by AOI;3. By-laws;4. In the absence thereof, by the SH representing atleast

majority of OCS

Shares of Stock – interest or right which the owner has in the management of the corp and in the surplus profits and, in case of dissolution, in all of its assets remaining after the payment of its debts.

NOTE: Corporations are NOT required to classify the shares. The only purpose of classifying the shares is to insure the compliance with constitution or legal requirement.

** No share may be deprived of voting rights EXCEPT:

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1. those classified and issued as “preferred” ; and2. “redeemable shares”; UNLESS the issuance of founder

shares. – 1 & 2 has no voting rights except sec 6 CCP Provided further, there shall always be a class of share which have complete voting rights. (please refer to sec 6 CCP) The following are instances when NON-VOTING shares MAY VOTE:

1. amendment of AOI;2. adoption and amendment of by-laws;3. increase/decrease of capital stock;4. sale or disposition of all or substantially all of corporate

property;5. merger/consolidation of corp;6. investments of funds in another corp;7. corp dissolution.

Purpose of Classification of Shares:

1. to specify and define the rights and privileges of the SH;2. for regulation and control of the issuance of shares of

stock;3. as a management control device;4. to comply with the statutory requirements (as to

nationalize industries);5. to better insure return on investment which can be

affected through the issuance of redeemable shares or preferred shares;

6. for flexibility in price.

Common Stock:i. most commonly issued shares of stock of a corporation; ii. one which entitles its owner to an EQUAL PRO RATA

division of profits; iii. It usually carries the right to vote.

Preferred Stock:i. stock that gives the holder the preference over the holder

of common stocks with respect to payment of dividends and/or the distribution of capital upon liquidation;

ii. no voting rights EXCEPT sec 6 CCP;iii. They are presumed non-participation. Thus, no right over

common shares beyond their stated preference.

Preferred Share are subject to LIMITATIONS:1. Can be issued only with stated par value;2. Preference must be stated in the AOI and in the

certificate of stock. Otherwise, pro-rata or equal sharing.

COMMULATIVE PREFERRED SHARES OF STOCK – those that entitle to the owner thereof to the payment not only of current dividends BUT also back dividends not previously paid whether or not during the past years, dividends were paid or declared.

NON-COMMULATIVE PREFERRED SHARES – those which grant the holders of such shares only to the payment of current dividends BUT not back dividends.

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GR: Under the PH jurisdiction, shares of stock are presumed NON-COMULATIVE because under the express provision of law that “shares are presumed to be equal in all respects UNLESS otherwise stated in the AOI and in the certificate stock.

EXCEPTION: In order to be cumulative, the same must be expressly provided in the AOI and certificate of stock.

Principal Types of NON-Cumulative Preferred Shares of Stock:

DISCRETIONARY DIVIDEND TYPE

Gives the holder of shares the right to have the dividends paid thereon in a particular year depending on the judgment or discretion to the BOD.

MANDATORY IF EARNED TYPE Impose a positive duty on directors to declare dividends every year when profits are earned.

In effect, it gives the preferred SH the right to annual profits and leave the directors no discretion to withhold dividends.

EARNED CUMULATIVE OR DIVIDEND CREDIT TYPE

Gives the holder the right to arrears in dividends IF there

were profits earned during the previous years BUT dividends were not declared.

Cumulative Shares vs Dividend Credit Type

CUMULATIVE SHARES DIVIDEND CREDIT TYPEEntitles to back dividends which were DECLARED

Entitled to dividends which were NOT DECLARED

Entitles the holder to dividends which were declared

Profits were earned BUT dividends were not declared

PAR and NON-PAR VALUE SHARES

Par Value Shares – those whose value is fixed in the AOI.

Function:1. To fix the minimum subscription OR original issue price

of the shares; and2. Indicates the amount, which the original subscribers are

suppose to contribute to the capital as the basis of the privilege of profit sharing with limited liability.

NOTE: the par value indicated in the AOI and certificate of stock MAY NOT be the true value of the shares BECAUSE the same may fluctuate depending on the liability and net worth of the corp.

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Thus, to arrive at a TRUE VALUE of the shares, determination of the net worth must be made and dividing the same by the number of outstanding shares.

No Par Value Shares – issued price are not stated in the certificate of stock BUT which may be fixed in the AOI or by the BOD when so authorized by the said AOI or by-laws. In the absence thereof, by the SH themselves.

Limitation to the Issuance of NO par value shares:a. Shares , once issued, are deemed fully paid. Thus, non-

assessable;b. Consideration for its issuance should not be less than 5

pesos;c. The entire consideration for its issuance constitutes

capital. Hence, not available for dividend declaration;d. They cannot be issued as preferred shares;e. They cannot be issued by banks, trust companies,

insurance companies, public utilities and bldg. and loan association.

Advantages of issuance of No par value shares:i. Flexibility in price EXCEPT only that it shall not be issued

at less than Php5;ii. Results to evasion of the danger of liability upon watered

stock;

iii. Since they are deemed fully paid and non-assessable, there is a disappearance of personal liability on the part of the holder thereof for unpaid subscription.

FOUNDER’S SHARES (sec 7 CCP)REDEEMABLE SHARES – those issued by a corp subject to redemption as may be provided by the terms of subscription contract. (sec 8 CCP) (may be redeemed through purchased or taken up by the corporation upon the expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the books of the corporation)

2 Types of Redeemable shares:i. Optional;ii. Mandatory.

GR: A corp may acquire its own shares if it has an URE. Exception: Redemption of redeemable shares.

TREASURY SHARES – are shares of stock which have been issued and fully paid for, but subsequently reacquired by the issuing corp by PURCHASE, REDEMPTION, DONATION, or through some OTHER LAWFUL MEANS.

Shares in treasury (while in treasury), they have NO votiong right BECAUSE they are NOT considered as outstanding shares. If they are reissued, however, they can already vote.

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CAPITAL REQUIREMENT (sec 12 & 13 CCP)

25% of ACS in the AOI must be subscribed at the time of incorporation.

25% of the TOTAL SUBSCRIPTION must be paid upon subscription. The balance shall be paid in installments in the fixed dates in the contract of subscription. In the absence thereof, upon CALL for the payment by the BOD.

GR: Corps are NOT REQUIRED to provide restriction or preferences in the transfer of shares in AOI.

If the corp would want to put restriction , it must be indicated in the AOI and stock certificate.

Failure to do so , such restriction/preferences would not bind the purchser in GF even if its indicated in the by-laws.

EXCEPTION: In CLOSE CORP – they are REQUIRED to provide restriction and preferences. It must be stated in the AOI, stock certificate and by-laws. Otherwise, it will not bind purchaser in GF.

Purpose of restrictions and preferences: May serve as protection of the corp and SH thereof from

other persons.

NO TRANSFER CLAUSE

It must be included in the AOI It is necessary in a nationalized corp or those corp engage

in the activity reserved, fully or partially, to citizens of the PH.

In order to enable the State to determine whether such a corp would contribute to the sound balance development of the PH economy.

EXECUTION CLAUSE

Part of the AOI where the incorporators sign the document with an indication as to where it was signed and when the same was executed.

The signatures of the incorporators as witnessed by two disinterested persons are important as the AOI serves as a contract between the signatories thereof, by and among themselves, with the corp, and the latter with the State. (3 Fold Contract)

GROUNDS FOR DISAPPROVAL OF AOI (sec 17 CCP)

The SEC may reject the AOI if the same is not in compliance with the requirements set by law. PROVIDED that the commission shall give the incorporators a reasonable time within which to correct/modify the objectionable portion of the AOI.The following are GROUNDS FOR DISAPPROVAL: (NOT EXCLUSIVE)

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a. AOI is not substantially in accord with the prescribed form;

b. Purpose of the corp are patently unconstitutional, illegal, immoral and contrary to govt rules and regulation;

c. Treasurer’s Affidavit is false;d. Percentage of ownership has not been complied with as

required by existing laws or the Consti.

COMMENCEMENT OF CORPORATE EXISTENCE

GR: Corp commences to exist is RECKONED a t the time of issuance of its certificate of incorporation .

EXEPT: Corporation Sole – commence to exist upon filing of verified AOI and other documents required.

CAGAYANG FISHING DEVELOPMENT vs, SANDIKO

The sale made by Tabora to plaintiff company was effected on May 31, 1930 at a time the said company was not yet incorporated. It was so incorporated only on October 30, 1930.

A corporation shold have a full and complete organization and existence, as an entity BEFORE it can enter into contract or transact business would seem to be self-evident. A corp, until organized, has no being, franchises or faculties. Nor do those engaged in bringing it into being have any power to bind it by contract, unless so authorized by the charter, there is no corp, nor does it

possess franchise or faculties for it to exercise , until it acquires full existence.

ORGANIZATION AND COMMENCEMENT OF BUSINESS (sec 22 CCP)

A. CORPORATE ORGANIZATION

Formal Organization – refers to the process of structuring the corporation to enable it to effectively pursue the purpose for which it was organized.

It includes the following:1. Organizational meeting of the SH to elect it BOD;2. Adoption of by-laws, if not simulatenously filed with AOI,

and its subsequent filing with the SEC must be within 1 month from the issuance of incorporation;

3. Organizational meeting of the BOD elected to elect the corp officers, adoption of corp seal, accepting pre-incorporation subscriptions, establishing principal office, and other necessary steps to transact legitimate business.

NOTE: Strict compliance with the organizational requirement imposed by law is NOT required. Substantial compliance therewith is sufficient.

If a corp does not formally organize and commence the transaction of its business WITHIN 2YRS from the date of

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incorporation, its corp powers CEASE and the corp shall be DEEMED DISSOLVED.

If a corp has commenced the transaction of its business but continuously inoperative for a period of at least 5YRS, the same shall be a ground for the suspension or revocation of its corp franchise or cert of registration.

NOTE: Does NOT APPLY (EXCEPTION) if the failure to organize, commence, or fails to continuously operate is due to the causes BEYOND THE CONTROL OF THE CORP as may be determined by the SEC.

B. COMMENCEMENT OF BUSINESS/TRANSACTION

Commencement of the transaction of corporate business means that the corporation has actually functioned and engaged in the business for which it was organized.

The code requires that the corp , upon issuance of the certificate of registration, is required to commence its transaction within 2yrs from the date of its incorporation. Otherwise, it is deemed dissolved.

Except: if its failure is due to causes beyond the control of the corp as may be determined by the SEC.

V. THE INCORPORATE CHARTER AND ITS AMENDMENTS

Corporate charter – signifies an authority from the sovereign power, bestowing right, and is often used convertibly with the term “act of incorporation”, where the corporation was formed under a special act of legislature, and with the AOI, when the corporation was formed under the general law.

Charter of a Corporation is regarded as a 3-FOLD CONTRACT:(between S&C, C&SH, among SHs)

1. between corp and the State insofar as it concerns its primary franchise to be and act as a corp;

2. between the corp and SH insofar as it governs their respective rights and obligations;

3. between and among SH as far as their relationship with one another is concerned.

NOTE: Charter is NOT synonymous with AOI. Also charter is NOT synonymous with franchise.

Charter consist of AOI and other relevant laws under which it is created, or the Corp Code itself inclusive of the by-laws adopted thereunder and all other provisions of statute governing them.

Franchise applies to the right or privilege itself to be and act as a corporation or to do certain act WHILE Charter applies to the instrument by which the state vests such right or priviliege.

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A franchise may either be:1. primary; or2. secondary.

CORPORATE ENTITY THEORY

the corp is possessed with personality separate and distinct from the individual SH or members and is not affected by the personal rights, obligations & transaction by the latter. (SULO NG BAYAN INC vs. GREGORIO ARANETA INC)

CARAM vs. CA

In the absence of proof of existence of fictitious corporation to justify the principal SH to be held liable, the bona fide corporation should alone be liable for its corporate acts as duly authorized by its directors and officers.

RUSTAN PULP & PAPER MILLS, INC vs. IAC

Officers of the corp who entered into and signed a contract in his official capacity, cannot be made liable thereunder in his individual capacity in the absence of stipulation to that effect due to the personality of the corp being separate and distinct from the person composing it.

CRUZ vs. DALISAY

It is well settled doctrine, both in law and in equity that as legal entity a corp has a personality distinct and separate from its individual SH or members. The mere fact that one is president of a corporation does not render the property he owns or possess the prop of the corp, since the president, as individual and the corporation are separate entities.

PALAY INC vs. CLAVE

As a GR, a corp may not be made to answer for acts or liabilities of its SH or members.

As EXCEPTION, the veil of corp fiction may be pierced when it is used as:1. Shield to further an end subversive justice ; or2. For purposes that could not have been intended by

the law created it; or3. To defeat public convinience, justify wrong, protect

fraud, or defend a crime; or4. To perpetuate fraud or confuse legitimate issues; or5. To circumvent the law or prpetuate deception .

In the case at bar, one cannot be made liable for the liability of the corp because he appears to be the controlling SH. Mere ownership by a single SH or by another corp of all or almost all of the capital stock of the

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corp is NOT sufficient ground for piercing the corporate fiction.

SORIANO vs. CA

Piercing the corporate veil of the corp can be done to attach its officers only if the same is used for fraudulent, unfair and illegal manner. In the absence of these, the corp cannot be pierced.

PIERCING THE VEIL OF THE CORPORATE FICTION

The doctrine is NOT absolute because the applicability of corporate entity theory is confined to legitimate transactions and is subject to equitable limitations to prevent its being used as a cloak or cover for fraud or illegality, or to work an injustice.

The juridical personality of the corp is but a legal fiction introduce for the PURPOSE of convenience and to subserve the ends of justice. However if it is used to:

a. Defeat public convenience;b. Justify wrong;c. Protect fraud;d. Defend crime;e. Used to evade taxes;f. When necessary for the protection of

creditors, or even perpetuate deception

the law will disregard its juridical personality and thus, regard it as a mere association of the persons.

PALACIO vs. FELY TRANSPORTATION COMPANY

ISSUE: WON the corporation can be held liable subsidiarily for the civil liability of the employer.

Employer and the corporation may be regarded as one and the same person. It is evident that the employer’s purpose in forming the corp was to evade his subsidiary civil liability resulting from the conviction of his driver-employee.

This conclusion is borne out by the fact that the incorporators of the corporations are employer’s wife, son and two daughters. Thus, it is believe that this is a case where the corp should not be considered as separate and distinct personality from its members because to allow it would be to sanction the use of the fiction of corp entity as a shield to further end subversive justice.

MARVEL BUILDING CORP vs DAVID

YUTIVO & SONS C. vs. CTA

CIR vs. NORTON & HARRISO CO.

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Well settled rule that the ownership of all of a corp by another corp does not breed an identity of corporate interest between two companies and be considered as a sufficient ground for disregarding the distinct personalities. However, when the other corporation is merely used as an adjunct, business conduit or alter ego, of the other, the fiction of corporate entity may be disregarded.

LA CAMPANA COFFEE FACTORY vs KAISAHAN NG MGA MANGGAGAWA SA LA CAMPANA.

The attempt to make the two factories appear as two separate businesses, when in reality, they are but one, is but a device to defeat the ends of law and should not be permitted to prevail.

EMILIO CANO ENTERPRISE, INC. vs. CIR

Closed family corporation where its incorporators and directors belong to single one family. Thuse, here is an instance where the corporation and its members can be considered as one. And to hold such entity liable for the acts of its members is not to ignore the legal fiction but merely to give meaning to the principle that such fiction cannot be invoked if its purpose is to use it as a shield to further an end subversive of justice.

TELEPHONE ENGINEERING SERVICE CO, vs. WCC

Sister companies operating under one single management and housed in the same building. The employees are interchangeable. Thus, corporate entity theory should be disregarded because to allow it would be made as a shield to confuse the legitimate issues.

CLARPAROLS vs. CIR

Where the corporation was a continuation and successor of the first entity, and its emergence was skillfully timed to avoid the financial liability that already attached to its predecssor. Both predecessor and successor were owned and controlled by Claparrols and there was no break in the succession and continuity of the same business. Therefore, it is very obvious that the 2nd corporation seeks protective shield of a corporate fiction whose veil could and should be pierced as it was deliberately and maliciously designed to evade its financial obligation to its employees.

NATIONAL FEDERATION OF LABOR UNION vs. OPLE

Where the second corp seeks the protective shield of the corp fiction to achieve its illegal purpose, it should be pierced as it was deliberately and maliciously to evade financial obligation to its employees.

As Libra/Dolphin Garmens is but an alter ego of the old emploer, Lawman Industrial, the former must bear the

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consequences of the latter’s unfair acts by reinstating the petitioner to their former positions without loss of seniority rights.

AC RANSON LABOR UNION-CCLU vs. NLRC

Where the incorporators and directors belong to a single family, the corporation and its members can be considered as one in order to avoid its being used as an instrument to commit justice.

CONCEPT BUILDERS INC. vs. NLRC

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 PROVIDED the following must be present in order to determine that the second corp is adjunct or mere alter ego of the other:

a. Domination of control, not only of finances but of policy and usiness practice in respect to the transaction;

b. The control must have been used to commit fraud, perpetuate the violation of a statutory or ther positive legal duty;

c. Such control is the proximate cause of the injury/unjust loss complained of.

MCCONNEL vs. CA

CEASE vs. CA

WHEN PIERCING THE CORPORATE VEIL IS NOT JUSTIFIED

REMO vs. IAC

In the absence of cogent basis of intent to defraud anyone, piercing of corp fiction cannot be made.

DEL ROSARIO vs. NLRC

For the separate and juridical personality of a corp to be disregarded the wrongdoing must be clearly and convincingly established. Wrongdoing is NOT presumed.

An intent to evade payment of his claims cannot be implied from the expiration of Philsa’s license and delisting.

AS DISTINGUISHED FROM THE CASES OF:

a. La Campana Coffee Factory, Inc. – they had one office, one management, and a single payroll for both businesses. The laborer of Guagua factory and the coffee factory were also interchangeable;

b. Claparrols – Both corp were substantially owned and controlled by the same person and there was no break or

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cessation in operations. Moreover, all assets of the steel and nail plant were transferred to the new corp;

c. AC Ransom – it would appear that Ransom foreseeing the possibility of payment of back wages to the 22 strikers, organized Rosario Corp to replace ransom, with the latter to be eventually phased out if the 22 strikers win the case.

INDPHIL TEXTILE MILL WORKERS UNION vs. CALICA

The fact that the businesses of the private respondent and Acrylic are related, that some of the employees of the private respondent are the same persons manning and providing for auxiliary services to the units of Acrylic.

As distinguished from the case of Umali vs. CA, the legal corp entity is disregarded only if it is sought to hold the officers and SH directly liable for a corp debt or obligation. IN THE INSTANT CASE, if the petitioner does not seek to impose a claim against the members of the Acrylic.

PNB vs. RITRATTO GROUP, INC.

The mere fact that a corp owns all of the stocks of nother corp, taken alone is NOT sufficient to justify their being treated as one entity.

YU vs. NLRC

AMENDMENT OF CORPORATE CHARTER (sec 36 CCP)

Amendment of AOI

By MAJORITY VOTE of BOD/Trustees and WRITTEN ASSENT of the SH of at least 2/3 of OCS w/o prejudice to dissenting SH – Stock Corp and or vote or assent of at least 2/3 of the members if it be a non-stock.

In the absence of majority vote of BOD/T, only written assent would be necessary for ORDINARY AMENDMENT.

EFFECTIVITY of Amendment of AOI:

Upon approval of the SEC; or From the filing date with the SEC, if the latter did not act

upon within 6 months (reckon from filing date). This, however, does NOT apply in:

a. Increasing or decreasing the capital stock;b. Shortening of the corporate term

In other words, it applies only in cases of ORDINARY amendment.

STEPS for an Effective Amendment of AOI.

a. Resolution by at least majority of the BOD/T;b. Vote or written assent of the SH representing at least 2/3

of the OCS or 2/3 of the members, in case of non-stock

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corp (non-voting shares are included in determining the voting and quorum requirement);

c. Submission and filing of amendments with the SEC:i. copy of the original and amended AOIii. copy thereof, duly certified under oath by the corp

secretary and a majority of the directors/trustees stating the fact that such amendments have been duly approved by the required vote of the SH

iii. favorable recommendation of the appropriate govt agaency.

NOTE: Ordinary amendments shall be governed by sec 16; special amendments governed by sec 37 & 38 (extend/shorten corp term and increase/decrease capital stock)

GR: Any provision stated in the AOI is subject to amendment.EXCEPT: fait accompli – matters beyond the powers or authority of the corp to change, alter or modify.

VI. BOARD OF DIRECTORS/TRUSTEES AND OFFICERS (sec 23 CCP)

The corp vests unto the BOD/T the authority to: (E-C-C)1. exercise corporate powers;2. conduct all business; and3. control and hold all properties of the corp.

Board of Directors (BOD) – is the supreme authority in matters of management of the regular and ordinary business affairs of the corp. Their authority, HOWEVER, does not extend to the fundamental changes in the corporate charter which belong to the SH as a whole.

The SH may have all the profits BUT shall turn over the management of the corp to the BOD.

Terms of Directors (Subject to Extension)

Stock Corp Director – 1yr;NS Corp Director – 3yrs;Educational or Non Profit Inst. – 5yrs.

As a rule, CORPORATE POWERS are exercised by the BOD. Exception, the BOD may DELEGATE such powers to either

1. Executive committee; or2. Officials; or3. Contracted managers.

GR: Corp is bound by the acts of its corp officers if they act within the scope of their powers and these are the following:

1. Express powers (doctrine of limited capacity);2. Incidental powers which are reasonable and necessary to

carry out the corp purpose/s;3. Inherent powers or act that go with the office;4. Apparent powers ;5. Powers arising out of customs, usage, or emergency.

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RAMIREZ vs. ORIENTALIST CO.

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 it be found that the director had permitted the agent to exercise that authority and thereby held him out as a person competent to bind the corp, or had acquiesced in a contract and retained the benefit supposed to have been conferred by it, the corporation will be bound, notwithstanding with the actual authority may never have been granted.

The public is NOT supposed nor required to know the transactions which happen around the table where the corp BOD/SH are from time to time convoked.

It is therefore reasonable in a case where an officer of a corp ha made a contract in its name, that the corp should be required, if it denies his authority, to state such defense in its anwer. Failure to do so shall have the effect of eliminating the question of his authority from the case.

BARRETO vs LA PREVISORA FILIPINA

Settled rule is that a contract between the corp and third person must be made by the director and not by the SH. Thus, if there where a meeting of the SH is called for the purpose of passing on the proprietary of making a corp contract, its reslolutions are at most advisory and not binding on the BOD.

VOTING TRUSTS (sec 58 CCP)

One or more SH of stock corp may create a voting trust for the PURPOSE of conferring upon a trustees/s the right to vote and other pertaining to the shares for a period NOT EXCEEDING 5 yrs at any one time. EXCEPT in the case of loan agreement, said voting trust may exceed the 5yr period BUT shall automatically expire upon full payment of the loan.

Voting Trust Agreement (VTA) must be: (W-N-S-F)i. In writing;ii. Notarized; andiii. Shall specify the terms and conditions thereof;iv. Must be filed with the SEC.

Otherwise, VTA shall be ineffective and unenforceable.

NATURE: VTA results in the separation of the voting rights of the SH from his other rights, i.e. right to receive dividends, right to inspect books of the incorporation, right to sell certain interests in the assets of the corp.

TESTS in order to DISTINGUISH PROXYY FROM VTA:

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1. Voting rights of stock are separated from other attributes of ownership;

2. Voting rights granted are intended to be irrevocable for a definite period of time;

3. Principal purpose of the grant of voting rights is to acquire voting control of the corp.

NOTE: Parties in VTA:1. SH/Director – beneficial title;2. Trustee – legal tie.

** Beneficial ownership may be transferred by issuing a voting trust cert.

LEE vs. CA

ISSUE: SH and at the same time director of a corp enters into a VTA, can such SH-director be still a director of the said corp?

The answer must be qualified. If the director transfer his all shares to the trustee in the VTA, the director can no longer be qualified to be as such UNLESS he still owns atleast one share of stock in his own right which shall stand in his name on the books of the corp.

Settled rule that inorder to be a director, what is material is the legal title to NOT beneficial title over the shares.

DETECTIVE & PROTECTIVE BUREAU vs. CLORIBEL

GR: the BOD shall serve for a term of 1yr until their successors are elected and qualified. This means that if NO election is conducted or no qualified candidate is elected, the incumbent director shall continue to act as such in a hold-over capacity until an election is held and a qualified candidate is so elected.

ELECTION AND VOTING

At all election of directors/trustees, there must be preset, either in person or by representative authorized to act by written proxy. – MAJORITY OWNERS of OCS.If there’s no capital stock, MAJORITY MEMBERS entitled to vote.

In STOCK CORP, every SH shall be entitled to vote by either in person or by proxy the number of shares standing, at the time fixed in the by-laws, in his own name.

Where the by-laws are silent, at the time of election

Cumulative Voting – SH may vote such number of shares for as many persons as there are directors to be elected OR he may cumulate said shares and give one candidate as many votes as the number of directors to be multiplied by number of his shares shall equal OR he may disribue them on the same principle as among as many candidates as he shall see fit. PROVIDED no delinquent stock shall be divided. Number of directors X number of shares = number of right to give the vote.

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REASON why cumulative voting is a matter of right, is to allow minority SH to have a rightful representation in the BOD.

In case of NON-STOCK CORP, members of the corp may cast as many votes as there are trustees to be elected but may not cast more than one vote for one candidate.

As to the MEETINGS, any meeting of the SH/members called for an election may adjourn from day to day or from time to time BUT not sine die or indefinitely if NO election is held as when the required quorum is NOT obtained.

CORPORATE OFFICERS (sec 25 CCP)

Immediately after the election of the BOD, the directors of a corp must formally organize by the election of the following:

1. President – who shall be a director;2. Treasure – need not be a director;3. Secretary – need not be a director BUT must be a resident

and citizen of PH.4. Other officers as may be provided by the by-laws.

GR: Any two or more positions may be held concurrently by the same person.EXCEPT: No one shall act as:

i. President and Secretary;ii. President and Treasurer, at the sametime.

As a rule, the President elects “other officer” EXCEPT in NonStock Corp and Closed Corp where it is the SH elects other officer.

Validity and Binding Effect of Actions of Corporate Officers

Quorum requirement for a valid board meeting is the MAJORITY of the number of the board fixed in the AOI. GREATER MAJORITY, however, may required in the AOI. If that’s the case, the latter shall prevail.

To have a valid corporate act, decision of at least majority of the directors/trustees present at the meeting. EXCEPTION: election of corporate officers where the voting requirement is majority of all the member of the board.

Any action of the board without a meeting and without the required voting and quorum requirement will NOT bind the corporation UNLESS ratified, expressly or impliedly.

Express Ratification – is made through a formal board action

Implied Ratification – is made through silence/acquiescence; acceptance and/or retention of benefits; or by recognition or adoption.

Individual directors can be considered as agents of the corp and although they cannot bind the corp by their individual acts there are EXCEPTIONS:

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i. Delegation of corporate authority;ii. Where expressly confereed;iii. Where the officer is clothed with apparent authority.

YAO KA SIN TRADING vs. CA

Settled rule is that although an officer or agents acts without, or in excess of his actual authority if he acts within the scope of an apparent authority with which the corp has clothed him by holding out or permitting him to appear as having authority, the corp is bound thereby in favor of a person who deals with him in good fait in reliance on such apparent authority.

Apparent authority may result from:a. The general manner by which the corp holds out

an officer or agent as having power to act;b. The acquiescence in his acts of a particular nature,

with actual or constructive notice thereof, whether within/without the scope of his ordinary powers.

LOPEZ REALTY, INC vs. FOTENCHA

GR: A corp should act in the manner and within the formalities, if any, prescribed by its charter or by the general law.

The action of the BOD during meeting, which was illegal for lack of notice, may be ratified either expressly, by the action of the directors in subsequent legal meetings or

impliedly by the corporation’s subsequent course of conduct. (EXCEPTION)

REMOVAL & FILLING UP OF VACANCIES (sec 28 CCP)

A. REMOVAL

Requirements for the removal of director:1. Removal should take place at general/special meeting

duly called for that purpose;2. Removal must be by vote of the SH representing at least

2/3 of the OCS/members entitled to vote in cases of non-stock corporation;

3. There must be previous notice to SH.

The meeting must be called by:1. Secretary;2. On order of the President;3. On the written demand of the SH representing majority

of the OCS or majority of the members entitled to vote.

The law grants the PROPER COURT, the power and authority to hear and decide cases “involving controversies in the election or appointment of directors, trustees, officers, or managers of such corporation, partnership/association.”

In case of DEADLOCK in a CLOSE CORP, the SEC is authorizdto isse orders as it deems appropriate.

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B. VACANCIES

1. If the vacancies results from:a. Removal;b. Expiration of the term; c. Death, resignation or abandonment, there’s an

increase in number o directors (other grounds); and

d. Where the remaining directors do not constitute a quorum,

-- it may be filled by a vote of the SH in a meeting, regular or special, duly called for that purpose.

2. If the vacancies result from cases NOT reserved to the SH/members, the majority of the remaining directors shall be necessary to fill up for such vacancy.

NOTE: Any change in the constitution of the BOD/T must be reported to the SEC (sec 26 CCP)

The Secretary or any other officer of the corp shall submit to the SEC the names, nationalities and residences (NNR) of the directors, trustees or officers (DTO) elected.

It must be made within 30 days after the election. If the DTO should resign, die or in any other manner

cease to hold office, the following shall report such fact to the SEC:

a. Heirs of the deceased DTO;b. Secretary; orc. Any other officer of the corp; ord. The DTO himself,

In the second instance, it must be filed immediately to the SEC.

Objective: to give the public information of the nature of the business, and operational status of the corp so that those dealing with it and those who intend to do business may know the facts concerning the corporation’s financial resources and business responsibility.

** Tenure of the director filling up a vacancy – shall only be for the unexpired term of his predecessor in office. If the successor is, however, not qualified – he continues to hold the office in a “hold-over capacity” and shall cease after the election of the qualified successor.

COMPENSATION OF DIRECTORS (sec 30 CCP)

GR: Directors are NOT entitled to receive any compensation

REASON TO THE GR: the officers are usually filled up by those chieftly interested in the welfare of the institution by virtue of their interest in stock or other advantages, and such interest are presumed to be the motive for executing duties of the officee without compensation.

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EXCEPT: for reasonable per diems unless the by-laws so provide.

NOTE: They may receive compensation by:a. the vote of the SH representing at least a majority

of the OCS; and provided b. that their yearly compensation shall not exceed

10% of the net income before income tax of the corp; or

c. if the director concerned performs special or extra-ordinary service (means outsie the regular duties of a director).

NOTE: Courts will not generally undertake to review the fairness of official salaries unless wrongdoing and oppression or possible abuse of fiduciary position is shown.

A showing of fraud, BF, oppression or wastage of corp assets is required to call for the interference of the courts.

Much weight is given to the action of the SH, and the by-laws is supported by the presumption of regularity and continuity.

If a bonus payment has no relation to the value of services for which it is given, it is in reality a gift in part, and the majority GH have NO power to give away corp property against the protest of the minority.

CENTRAL COOPERATIVE EXCHANGE vs. TIBE, JR.

Directors of corporations presumptively serve without compensation and in the absence of an express agreement or a resolution thereto, NO claim can be asserted.

No recovery for compensation UNLESS expressly provided for, when a director serves a president or vp, as sec or treas or cashier, as member of executive committee, as chairman of a bldg committee, or similar offices.

Thus, directors assigning themselves additional duties acted within their power BUT by voting for themselves compensation for additional duties, they acted beyond the scope of their power.

WESTERN INSTITUTE OF TECHNOLOGY vs. SALAS

The phrase as such directors is not without significance for it delimits/determine the scope of the prohibition to them for services performed purely in their capacity as directors or trustees. The unambiguous implication is that, the members of the board may receive compensation, in addition to reasonable per diems, when they render services to the corp in a capacity other than as dirctors/trustees.

In the case at bar, the Board Reso granted monthly compensation to private respondents not in their capacity as members of the Board but rather as officers of the corp, more particulary as Chairman, VC, Treas, Sec of the company.

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GOV’T vs. EL HOGAR FILIPINO

The power to fix the compensation is left to the sole discretion of the sorp, to be determined in its by-laws.

LIABILITY OF CORPORATE OFFICERS

GR: Corp dirctors, officers and agents are NOT generally liable for obligations incurred by the corp through their acts if they did so:

i. Within the scope of their authority; andii. In GF

TRAMAT MERCANTILE INC vs. CA

EXCEPTION: (Instances where DTO may be held personally liable)

1. He assents to patently unlawful act of the corp; or2. For bad faith; or3. Gross negligence in directing its affairs; or4. For conflict of interest, resulting in damages to the corp,

its SH or third persons;5. He assents to the issuance of watered stocks6. He agrees to hold himself personally and solidarily liable

with the cor with the corp;7. He is made, by specific provision of law, to personally

anwer for his corp action.

LLAMADO vs. CA

Where the check is drawn by a corporation, company, or entity, the person or persons who actually signed the check in behalf of such drawer shall be liable under this Act. (BP 22)

UICHICO vs. NLRC

In LABOR cases, corporate directors and officers are solidarily liable with the corp for the termination of employment of corporate employess done with malice pr in badfaith.

THREE-FOLD DUTY OF DIRECTORS TO THE CORPORATION (sec 31 CCP)

1. Duty of Obedience – refers to assenting either willldully or knowinglym to patently unlawful acts thereby making the responsible director jointly and severally liable for damages.

2. Duty of Diligence – directors are required to manage corporate affairs with reasonable care and prudence bec liability of is not limited to willful breach of trsut but also extends to negligence.

Degree of Diligence: degree of care and diligence, which an ordinary prudent director could reasonably be expected to exercise in a like position under the similar circumstances.

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Business Judgment Rule – states that the questions of policy and management are left solely to the honest decision of the BOD and the courts are without authority to substitute its judgment as against the former.

Reason for the rule: Because their duties DO NOT make them insurer of the property of the corp NOR guarantors that the enterprise undertaken by the corp shall be successful.

MONTELIBANO vs. BACOLOD MILLING, CO. INC.

Director is not liable for misconduct of co-directors or other officers UNLESS he connives/participates in it; or he is negligent in not discovering or acting to prevent it.

TEST to determine: Absent of actual knowledge of the wrongful activities on the part of co-directors, the same cannot be imputed on the other director unless in the exercise of reasonable care attending his responsibilities he should have been aware of suspicious circumstances demanding corrective action.

3. Duty of Loyalty --- directors are considered in equity as bearing a fiduciary relation to the corp and its SH.

Instances where Duty of Loyalty is Violated:

1. When a director/trustee acquires any personal or pecuniary interest in conflict with his duty as such director or trustee;

2. When he attempts to acquire/s, in violation of his duty, any interest adverse to the corporation in respect to any matter which has been reposed in him in confidence;

3. When he, by virtue of his office, acquires for himself business opprtuniy which should belong to the corp, thereby obtaining profit (forbidden profits) to the prejudice of such corp.

Forbidden profits – directors and officers are fiduciary representatives of the corp and as such they are not allowed to obtain any profit, commisision, bonus, or gain for their official actions.

Corporate Opportunity Doctrine – it places a director of a corp in the position of a fiduciary and prohibits him from 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 the corporation.

Sec 31 Sec 34Makes the director liable to the account for profits if he attempts to acquire/s any

If director acquires for himself a business opportunity which should belong to the

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interest adverse to the corp in respect to any matter reposed in him in confidence.

corporation, he is bound to account for such profits unless his act is ratified by the SH owning/representing at least 2/3 of OCS.

STRONG vs. REPIDE

SELF-DEALING DRECTORS One who deals or transact business with his own

corporation. Such dealings are voidable.

A contract of the corp with one or more of its directors is VOIDABLE, at the option of such corp UNLESS all the ff are present:

i. That the presence of such director/trustee in the board meeting in which the contract which the contract was approved was not necessary to constitute a quorum for such meeting;

ii. That the vote of such director/trustee was not necessary for the approval of the contract;

iii. That in case of an officer, the contract has been previously authorized by the BOD.

If any of i and ii is absent such contract may be ratified by:a. the vote of at least 2/3 of the OCS/members; PROVIDED

that

b. full disclosure of the adverse interest of the directors/trustees involved is made at such meeting: PROVIDED that

c. the contract is fair and reasonable under the circumstances.

PRIME WHITE CEMENT CORP vs. IAC

In the absence of express stipulation, a contract entered into by its President ay still bind the corporation if the Board should ratify the same, expressly or impliedly.

Furthermore, even in the absence of express/implied authority by ratification, the President as such may as a general rule, bind the corp by a contract in the ordinary course of business, provided that the same is reasonable under the circumstances. They apply where the president or other officer, purportedly acting for the corp, is dealing with a third person.

A director holds a position of trust and as such, he cannot sacrifice the latter to his own advantge and benefit.

MEAD vs. MC CULLOUGH

While a corp remains solvent, there is no reason for a director/officer, by the authority of a majority of SH, may NOT deal with the corp, loan its money or buy property from it, in like manner as strangers.

So long as purely private corp remains solvent – its directors are agents or trustees for the SH. They owe no

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duties or obligation to others. BUT the moment the corp becomes insolvent – its directors are trustees of all creditors, whether they are members of the corp or not, and must manage its prop and assets with strict regard to their interest and if they themselves are creditors while the insolvent corp is under their management – they will not be permitted to secure themselves by purchasing the corp property or otherwise any personal advantage over other creditors.

Nevertheless, a director or officer may in GF and for an adequate consideration purchase from a majority of directors or SH the prop even of an insolvent corp, and a sale thus made to him is valid and binding upon the minority.

INTERLOCKING DIRECTORS

Interlocking director is a director in one corp who deals/transact business with another corp of which he is also a director.

GR: A contract between two or more corp having interlocking directors shall NOT be invalidated on that ground alone.EXCEPT: the contract is tainted with fraud and not fair and reasonable.

Such contract is voidable if the interest of the interlocking director is substantial (stockholdings exceeds 20% of the OCS) and his interest in the other

corp is merely nominal (stockholdings is 20% and below). – it shall be valid provided the following conditions are present:

i. The presence of such director/trustee in the board meeting in which the contract was approved was NOT necessary to constitue a quorum;

ii. The vote of such director/trustee was NOT necessary for the approval of the contract;

iii. Contract is fair and reasonable.

Where any of i & ii is absent the contract can be ratified by vote of SH representing at least 2/3 OCS or 2/3 of the member in case of non-stock PROVIDED that

i. Full discretion of the adverse interest of the directors/trustees is made on such meeting;

ii. The contract is fair and reasonable. (sec 32 CCP)

Contract is valid, if the interlocking directors own substantial interest in both corp.

SUITS BY STOCKHOLDERS/MEMBERS

1. Derivative Suit – those brought by one or more SH/members in the name and on behalf of the corp:

a. to redress wrongs committed against it;b. protect of vindicate corp rights whenever the

officials of the corp refuse to sue, or the ones to be sued, or has control of the corp.

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Requisites:a. party bringing the suit should be a SH as of the

time of the transaction complained of;b. has exhausted intra-corporate remedies; andc. the cause of action actually devolves on the corp

and not the particular SH bringing the suit;d. minority of the SH must allege in his complaint

before the proper forum that he is suing under a derivative cause of action on behalf of the corp and all other SH.

2. Individual/Personal Suit – those brought by the SH in his own name against the corp when a wrong is directly inflicted against him.

3. Representative/Class Suit –those brought by the SH in behalf of himself and all other SH similarly situated when a wrong is committed against a group of SH.

GR: BOD may institute proceeding against all accountable persons in order to protect & preserve the assets of corp.RATIONALE: To allow any SH institute a case would result to violate the doctrine of corporate entity and may result to multiplicity of suits. Also would violate the settled rule that all corp powers should be excercised by the BOD.

PASCUAL vs. OROZCO

Right to sue on behalf of the corp (derivative suit) must depend upon when, how, and for what purpose he acquired the shares which he now owns.

Settled rule that a SH in a corp who was not such at the time of the transaction complained of (not yet SH at the time of the suit), or whose shares had not devolved upon him since by operation of law, can not maintain suits of this character, UNLESS such transactions continue and are injurious to the SH or affect him specially in some other way.

EVERETT vs. ASIA BANKING CORP(exception to the GR)

GR: SH cannot ordinarily sue in equity to redress wrongs done to the corp BUT that the action must be brought by the BOD.

EXCEPTION: if the corp is under the complete control of the principal defendants in the case. Thus it ispbvious that a demand upon the BOD to institute action and prosecute the same effectively would have been useless, and the law does not require litigants to perform useless acts.

REPUBLIC BANK vs. CUADERNO

Settles rule that an individual SH is permitted to institute a derivative or representative suit on behalf of the corp wherein he holds stock in order to protect or vindicate corp rights, whenever the officials of the corp refuse to

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sue or who are one to be sued. Or hold the control of the corp. In such actions, the suing SH is regarded as nominal party with the corp as the real party in interest.

The corp should be made a party, either as party-plaintiff or defendant, in order to make the court’s judgment binding upon it, and thus, bar fututre litigation of the same issues.

WESTERN INSTITUTE OF TECHNOLOGY vs. SALAS

Requirement for derivatives suits to prosper is that the minority SH who is suing for and on behalf of the corp must allege in his complaint before the proper forum that he is suing on a derivative cause of action on behalf of the corp and all other SH.

SEC shall have exclusive jurisdiction over derivative suits, being inta-corporate dispute.

REYES vs. TAN

GAMBOA vs. VICTORIANO

EVANGELISTA vs. SANTOS

Any benefit or damages shall pertain to the corp. This is because a derivative suit is instituted for and in behalf of

the corp and not for the protection or vindication of a right/s of a particular SH.

EXECUTIVE COMMITTEE (sec 33 CCP)

The BOD may delegate the powers and functions that may be fully delegated t other corp officers or agents for convenience and appropriate action on matters that may require immediate attention.

The said committee may act and bind the corp by a majoriy vote of all its members EXCEPT the following:

a. Approval of ay action for which SH’s approval is required;b. The filling of vacancies in the board;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 amenable or repealable; and

e. Distribution of cash dividends.

VII. CORPORATION POWERS AND AUTHORITY (sec 36 CCP)

A corp merely exist by virtue of a grant by the State and may, therefore, only exercise such powers, authority or functions that the State allows it to do.

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Thus, the statement of the objects, purposes or powers in the AOI results in defining the scope of the authorized corp enterprise or undertaking. It limits the actual authority of the corp

Classes of Corporate Authority:1. Those expressly granted or authorized by law inclusive of

corp charter or AOI;2. Those impliedly granted as are necessary in carrying out

of the express powers;3. Those that are incidental.

The following are the EXPRESS Powers of the Corporation:1. To sue and be sued in its corp name;2. Power and capacity of succession by its corp name for the

period of time stated in the AOI or the certfcate of incorp;3. To adopt and use a corp seal;4. To amend its AOI;5. To adopt by-laws, not contrary to moral, or public policy

and to amend and repeal the same;6. In case of SC, to issue or sell stocks to subscribers and to

sell treasury stocks and to admit member to the corp, if it be NSC;

7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage, or otherwise deal with such real and personal prop;

8. To enter into merger or consolidation;

9. To make reasonable donations, provided that no corp. domestic or foreign, shall give donations in aid of any political party, or candidate, or for purposes of partisan political activity;

10. To establish pension, retirement, and other plans for the benefit of its DTO, and employees; and

11. To exercise other powers as may be essential or necessary to carry out its purpose.

Other powers expressly granted by law are the following:a. Power to extend/shorten corp term;b. Power to increase/decrease capital stock;c. Power to incure, create or increase bonded indebtedness;d. Power to deny pre-emptive rights;e. Power to acquire own shares;f. Power to invest corp funds in another corp;g. Power to declare dividends;h. Power to enter into management contract.

POWER TO SUE AND BE SUED

Generally, in any legal action, the rules governing jurisdiction and venue of actions filed by or against an individual likewise apply to suits filed for or against a corp.

As to the VENUE of action, it is well settled rule that the same must be instituted at the place of the principal office of the corp.

Residence of the corp is the place of its principal office.

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Service of Summons upon Domestic Private Juridical Entity – service of summons may be made upon the President, Managing Partner, General Manager, Corporate Secretary, Treasurer, or In-house Counsel. (EXCLUSIVE)

Strict compliance with the mode of service is necessary to confer jurisdiction of the court over a corporation.

DELTA MOTOR SALES CORP vs. MANGOSING

Strict compliance with the mode of service is necessary to confer jurisdiction of the court over the corporation. It must be served on any of the following,:

i. President;ii. General Manager;iii. Managing Partner;iv. Secretary;v. Treasure; and vi. In-house Counsel

And the same must be served at the corporation’s principal office. Otherwise, it is invalid.

The purpose is to render it reasonably certain that the corporation will receive prompt and proper notice in an action against it or to insure that the summons be served on a representative so indicated with the corp that such person will know what to do with the legal papers served on him.

EB VILLAROSA & PARTNER CO., LTD. vs. BENITO

Strict compliance with the mode of service is necessary to confer jurisdiction of the court over a corp. The officer upon whom service is made must be one who is named in the statue; otherwise, the service is invalid.

POWER OF SUCCESSION

It means that it persis to exists to exit despite the death, incapacity, civil interdiction or withdrawal of the SH.

It has the capacity of continuity of existence despite the changes on the persons who compose it. Thus, the personality continues despite the change of SH, member board members or officers.

POWER TO ADOPT AND USE CORPORATE SEAL

The right is merely permissive. Because the corp seal performs no further function than to impart prima facie evidence of the due execution by the corp of a written document/obligation.

A corp may exist without a seal.

POWER TO AMEND AOI

Amendment of AOI is a matter of right

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A corporations created by special law, however, may not be amended as a matter of right

POWER TO ADOPT BY-LAWS

Corp are empowered to adopt its corp by-laws but in fact requires a corp formed or organized under it to so adopt its by-laws not contrary to law, moral, or public policy, within 1 month from receipt of official notice of issuance of certificate of incorporation or registration.

POWER TO ISSUE/SELL STOCKS AND ADMIT MEMBERS

This power is an inherent right of any stock corp created by this Code EXCEPT only as it may be regulated by law or by the AOI.

The admission as well as termination of members is a prerogative granted by law to non-stock corp and the manner, requirements or procedure for such admission or termination may be contained in itaws.

POWER TO ACQUIRE/ALIENATE PERSONAL PROPERTY

The corp is empowered to acquire or alienate properties provided that it must be acquired, held or conveyed “as the transaction of the lawful business of the corp may reasonably and necessarily require.

GR: The Constitution provides that private corp may not hold alienable lands of the public domain (except agricultural lands) but only by lease for a period not exceeding 20yrs renewable for not more than 25yrs, and not exceeding 1000 hectares.

EXCEPTON:

DIRECTOR OF LAND vs. CA

Corp may register alienable public lands if it has been held by it, personally or through his predecessor in interest, openly, continuously and publicly within the prescribed statutory period of 30yrs under the Public Land Law, as amended, since it is converted into private property by mere lapse of completion of said period.

POWER TO MAKE REASONABLE DONATIONS

A pure gift of funds or property by a corp not created for charitable purpose is not authorized and would constitute a violation of the rights of its SH UNLESS it is empowerd by the statute.

GR. Pure gift of funds or property by a corp NOT created for charitable purposes is not authorized.EXCEPTION:

i. The donation is reasonable;ii. It must be for public welfae or for hospital, charitable,

scientifict, cultutral or similar purpose; and

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iii. It shall not be in aid of political party/candidate, or for purposes of partisan political party.

POWER TO ESTABLISH PENSION, RETIREMENT, AND OTHER PLANS

The power to establish pension, retirement and other plans for its directors, trustees, officers and employees is a power expressly granted by law to all corp registered under the general provision of the Corp Code.

Scope of the power:a. Corp may furnish medical care and other aid to its

officials employees as is necessary to enable the corp to fittingly carry out its purposes and business;

b. It may include any act to promote the conveience, welfare, and benefit of the employees or officers.

REPUBLIC vs. ACOJE MINING COMPANY, INC.

Although not expressly authorized to do so a corp may become a surety where the particular transaction is reasonably necessary or proper to the conduct of its business, and here it is undisputed that the establishment of local post office is reasonable and proper adjunct to the conduct of the business of appellant company. Indeed such post office is a vital improvement in the living condition of its employees and laborers who came to settle in its mining camp which is far from the postal

facilities or means of communication accorded to people living in a city or municipality.

POWER TO EXERCISE SUCH OTHER POWERS ESSENTIAL OR NECESSARY TO CARRY OUT ITS PURPOSES (IMPLIED POWERS)

Powers incident are those that attach to the corp from the date of its incorporation which may likewise be said to be inherent to corporate existence.

As to powers “essential or necessary” to carry out the corporate purpose or purposes, no uniform rule has been laid down as to what would constitute reasonably necessary to the exercise of the corp’s express powers. It depends upon its particular facts and circumstances and upon the nature of the power granted.

Settled rule is that the corp has authority to do what will legitimately tend to effectuate the express purposes and objects; that it may ordinarily do all things that are convenient, suitable, or necessary to enable it to fully perform the undertaking designated in its AOI and for which it was organized.

TEST TO BE APPLIED: WON the act in question is in direct and immediate furtherance of the corporation’s business, fairly incident to the express powers and reasonably necessary to their existence.

Implied Powers which the Corp may exercise:a. Acts in the usual course of business;

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b. Acts to protect debts owing to the corp;c. Embarking in a different business;d. Acts in part or wholly to protect or aid employees; ande. Acts to increase businees.

TERESA ELECTRIC AND POWER vs, PSC

NATIONAL POWER CORPORATION vs. VERA

The NPC was created and empowered not only to construct, operate, and maintain power plants, reservoirs, transmission, lines and other works BUT ALSO to exercise such powers and do such thing as may be reasonably necessary, useful, incidental, or auxiliary to accomplish its purpose.

In determing WON the NPC falls within the purview of the above provision, the court must decide WON a logical and necessary relation exists between the act questioned and the corporate purpose expressed in the NPC charter:

a. For if the act done which is lawful in itself and not otherwise prohibited; and

b. Is done for the purpose of corporate ends; andc. Reasonably contributes to the promotion of those

ends in a substantial and not in a remote and fanciful sense, it may be fairly considered within the corp’s charter powers.

POWERS vs. MARSHALL

Expansion of the school facilities, which is to be done by improving old and/or constructing new ones, is an ordinary business transaction well within the competence of he BoT to act upon. Being directly related to the purpose of elevating and maintaing the school’s standard of instruction, which is ordained in fact by PD No. 732, the expansion cannot result in any radical or fundamental change in the kind of activity being conducted by the school that miht require the consent of the members composing it.

Since the collection of the development fee had been approved by the BoT if the International School, Inc., it was a valid exercise of the corporate power of the Board and was binding upon all other members of the corp.

POWER TO INCREASE/DECREASE CAPITAL STOCK; CREAT, INCUR/INCREASE BONDED INDEBTEDNESS

Requirements and Procedure should be complied with in increasing or decreasing the corp capital:

a. Approval by majority vote of the BOD;b. Ratification by the SH representing 2/3 OCS at a meeting

duly called for that purpose;c. Prior written notice;d. A certificate in duplicate must be signed by majority of

the directors, countersigned by the chairman, and secretary of the SH’s meeting;

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e. In case of INCREASE capital stock, 25% of such increased capital must be subscribed and that at least 25% of the amount subscribed must be paid;

f. In case of DECREASE in capital stock, the same must not prejudice the right of the creditors;

g. Filing of the certificate of the increase and amended articles with SEC; and

h. Approval thereof by the SEC.

Methods in Increasing the Capital Stock of a Corporation:1. Increasing the par value of existing number of shares

without increasing the number of shares;2. Increasing the number of existing shares without

increasing the par value thereof;3. Increasing the number of existing shares and at the same

time increasing the par value shares.

NOTE: In case of decrease of capital stock, the methods are the opposite of the above rules.

In decreasing the capital stock of the corp, varied reasons or purposes exist to warrant the same. It may either be:

i. To reduce or wipe out existing deficit where no creditors would thereby be affected;

ii. When the capital is more than what is necessary to procreate the business or reduction of capital surplus;

iii. To write down the value of its fixed assets to reflect there present actual value.

Trust Fund Doctrine – which states that subscriptions to capital of the corporation constitute a fund which the creditors have a right to look up to for the satisfaction of their claims.

PHILIPPINE TRUST COMPANY vs. RIVERA

A corp has no power to release an original subscriber to its capital stock from the obligation of paying for his shares, without a valuable consideration for such release; and as against creditors a reduction of the capital stock can take place only in the manner under the conditions prescribed by the statute or the charter of the AOI.

MADRIGAL & COMPANY vs. ZAMORA

POWER TO DENY PRE-EMPTIVE RIGHTS (sec 39 CCP)

Pre-emptive Right is right granted by law to all exiting SH of a stock corp to subscribe to all issue or disposition of shares of any class, in proportion to their respective stockholdings, subject only to the limitations imposed under the sec 39 of CCP.

The PURPOSE being to enable the stockholdings to retain his proportionate control in the corp and to retain his equity in the surplus.

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Basis of this right: -- the preservation, unimpaired and undiluted, of the SH’ relative and proportionate voting strength and control, that is, the existing ratio of their proprietary interest and voting power in the corp.

Pre-emptive Right is NOT available in the following; EXCEPTIONS:

a. when the shares to be issued to comply with laws requiring stock offering or minimum stock ownership by the public;

b. when the shares issued in GF WITH the approval of the SH representing 2/3 OCS either:

i. in exchange for property needed for corporate purpose;

ii. shares issued in payment of previously contracted debts;

c. in case the right is denied in the AOI;d. if one of the SH does not want to exercise his pre-emptive

right, the other shareholders are not entitled to purchae the corresponding shares of the shareholder who declined. BUT if nobody purchased the same and later on the board re-issued the shares , the pre-emptive right applies.

NOTE: The exception will not apply to SH of a close corp because under sec 102 CCP, pre-emptive right shall extend to all stock corp to be issued including reissuance of TS whether for money, property/personal services or in payment of corpBENITO vs. SEC

GR: the pre-emptive right is recognized only with respect to new issue shares, and not with respect to additional issues of originally authorized shares.

POWER TO SELL OR DISPOSE CORPORATE ASSETS (sec 40 CCP)

Requirement and Procedure of Power to Sell or Dispose corp assets:

a. Resolution by majority vote of the BOD/T;b. Authorization from the SH representing at least 2/3 of

the OCS or 2/3 members entitled to vote;c. Ratification of the SH/members must be made at a

meeting duly called for that purpose;d. Prior written consent of the proposed action and of the

time and place of meeting must be made addressed to all SH of record;

e. Sale of assets shall be subject to the provisions of existing laws on illegal combinations and monopolies;

f. Any dissenting SH shall have the option to exercise his appraisal right.

The above requirement will NOT APPLY if the sale DOES NOT involve all or substantially all of the assets of the corp as to render it incapable of continuing the business or accomplishing the purpose for which it was incorporated.

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GR: Where one corp sells or otherwise transfers all its assets to another corp, the latter is not liable for the debts and liabilities of the transferor.

EFFECTS: the transferee/buyer of all or substantially all of the assets will NOT be liable for the debts of the transferor.

EXCEPTION:i. If there’s an express assumption of liabilities;ii. Consolidation or merger;iii. If the purchase was in fraud of creditors;

If the seller becomes a continuation of the seller. (EDWARD J NELL CO vs. PACIFIC FARMS, INC)

ISLAMIC DIRECTORATE OF THE PHILIPPINES vs. CA

For the sale to be valid, the majority vote of the legitimate BOT, concurred in by the vote of at least 2/3 of the bona fide members of the corp should have been obtained.

POWER TO ACQUIRE OWN SHARES (sec 41 CCP)

Condition in order for the corp to acquire its own shares:a. The capital is not thereby impaired;b. It should be for a legitimate and propoer cooperative

objectives;c. Condition of the corp affairs warrant it;d. The transaction is designed and carried out in GF and

without prejuice to the right of creditors and SH;

e. There in intended and there results no undue advantage to a few favored SH at the expense of the remainder;

f. The rights of the creditors are not jeopardized;g. There must be surplus profits to reacquire the same.

The corporation may acquire its own shares provided that it is for a legitimate corporate purpose and that the corp has an URE. Provided further that the reacquisition of shares shall not be limited to the following instances:

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

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

c. To redeem redeemable shares.

NOTE: the corp must at all time have Unrestricted Retained Earnings (URE) – NOT ABSOLUTE

EXCEPTION: 1. redemption of redeemable shares where the corp ay so

acquire is shares regardless of the existence URE;2. exercise of SH to compel “close corp” to purchase his

shares.

** Where a corp acquires its own shares either by purchase, surrender, donation, or forfeiture, the shares are NOT thereby

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extinguished UNLESS it is acquired by the corp with the intention ad may thereafter be issued.

While in the possession of the corp, they are considered as Treasury Shares. they have no voting rights and dividend right.

If the corp has NO intention of reissuing them, the reacquired share maybe retired and cancelled and thereby removed from issue effectively reducing the number of shares stated in the AOI.

Basis for Limiting Share Purchases : the necessity of imposing safeguards against the depletion of a corp of its assets and impairment of its capital needed for the protection of creditor.

Trust Fund Doctrine – subscription of the capital stock of the corp constitute a fund which the creditors have the right to look up to for the satisfaction of their claims.

STEINBERG vs. VELASCO

POWER TO INVEST FUNDS (sec 42 CCP)

May invest its funds means that an investment in the form of money, stock, bonds, and other liquid assets does not include real properties or other fixed assets.

Requirements and Procedure for VALID Investment of Funds:a. Resolution by majority of the BOD/T;b. Ratification by the SH representing at least 2/3

OCS/members, in case on non-stock;c. The ratification must be made at a meeting duly called for

that purpose;d. Prior written notice of the proposed investment;e. Any dissenting SH shall have the option to exercise his

appraisal right.

NOTE: The ratification or approval of the SH is NOT ABSOLUTE. It applies only to investments that are beyond the corporation’s primary purpose.

DELA RAMA vs. MA-AO SUGAR CENTRAL CO., INC.

When the investment is necessary to accomplish its purpose/s as stated in the AOI, the approval of the SH is NOT necessary.

GOKONGWEI, JR. vs. SEC

Mere ultra vires acts or those which are not illegal and void ab initio, but they are not merely within the scope of

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the APO, are merely voidable and may become binding and enforceable when ratified by the SH

POWER TO DECLARE DIVIDENDS (sec 43 CCP)

Dividends – are corporate profits set aside, declared and ordered by the BOD to be paid to SH, in proportion of their respective capital.

The law requires that dividends are to be declared out of the URE of the corp.

URE means the undistributed earnings of the corp which have not been allocated for any managerial, contractual, or legal purposes and which are free for distribution to the SH as dividends.

It is well-settled that a corp has NO power to declare dividends if its paid up capital is not maintained or impaired.

The capital represent a trust fund which, at all times, must be kept intact for the protection of the creditors who have the right to rely on such subscription and the paid-up capital for the satisfaction of their claims.

Types of Dividends

1. Cash Dividends – those that are payable in lawful money or currency;

2. Property Dividends – those that are paid in the form of property instead of cash;

3. Stock Dividends – refer to the corp’s shares of stock itself or the certificates evidencing it.

GR: The BOD has exclusive authority as to WON the corporation declare cash or property dividends.EXCEPTION: Stock Dividends – the approval of the SH, representing 2/3 OCS is required.

EFFECT in Declaration of Dividends:1. As to Cash or Property Dividends – reduce corp assets to

the extent og dividends declared;2. As to Stock Dividends – increase the subscribed paid up

capital of the corp.

Authority to Declare Dividends.

GR: members of the BOD are te managers of the corp, the power or authority to declare dividends is vested in the BOD.

It is absolute as long as they act in the exercise of an honest and impartial judgment.

NOTE: Judgment of the BOD is conclusive EXPECT in BF, or for dishonest purpose/act fraudulently, oppressively, unreasonably, or unjustly or abuse of discretion can be shown so as to impair the rights complaining of the SH to their just proportion of corporate profits.

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Essntial test of BAD FAITH:: if the policy of the directors is indicated by their personal interest rather than the corporate welfare. In other words, there is a conflict of interest.

When Dividend Rights Vest::

The right of the SH to be paid dividends vests as soon as they have been lawfully and finally declared by the BOD.

GR: NO revocation of dividendsEXCEPT:

a. It has not been officially communicated to the SH – in case of cash/property dividends;

b. Revocable anytime prior to distribution – stock dividends.

NOTE: Any dividend already declared when shares are transferred belongs to the owner of the shares at the time of the declaration. A subsequent transfer of such stock would not carry with it the right to dividends which have been declared but not yet paid.

** The declaration of dividends provides that it shall be payable to the SH of record on specified future date (unless agreed to the contrary). Therefore, whoever is the registered owner on the specified record date is entitled to the dividends.

NEILSON & CO., INC vs. LEPANTO CONSOLIDATED MINING CO.

POWER TO ENTER INTO MANAGEMENT CONTRACT (sec 44 CCP)

Requirement for VALID Management Contract:a. Resolution of the BOD;b. Approval by the SH representing a majority of the

OCS/members of both the managing and managed corporation;

c. The approval of the SH/members must be made at the meeting called for that purpose;

d. The contract shall not be for a period longer than 5yrs for any one term EXCEPT those which relate to exploration, development or utilization of natural resources.

NOT ONLY majority BUT also by 2/3 of the OCS /members would be required for the approval of management contract under the following instances:

i. Where the SH representing the same interest of both the managing and managed corporation own or control more than 1/3 of the OCS of the managing corp;

ii. Where majority of the members of the BOD of the managing corp also constitute the majority director of the managed cop;

iii. Where the contract would constitute the management or operation of all or substantially all of the business of another corp.

ULTRA VIRES ACT (sec 45 CCP)

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Ultra-vires acts are those that can not be excuted or performd by the corp because they are not within its xpress, inherent, or implied powers as defined by its charter or AOI.

If it acts beyond such power or authority, the act thus performed is ultra-vires allowing collateral attack upon the authority of the corp to engage in such particularity endeavor.

Any transaction which is fairly incidental or auxillary to the main business of the corp may be undertaken – it is NOT ultra-vires act UNLESS expressly prohibited/illegal.

Ultra-vires Acts vs. Illegal Acts

Ultra-vires Acts Illegal ActsMay no be necessariy be illegal BUT merely acts beyond the power of the corp to perform.

Those acts that are contrary to law, morals, public policy or order.

Merely voidable which may be enforced by performace, ratification or estoppel.

Acts are void and cannot be validated.

Effects of Ultra-vires Act

1. On the Corp itself – the proper forum may suspend or revoked, after proper notice and hearing, the franchise or certificate of registration of he corp for serious

misrepresentation as to what the corp can do or is doing to the great damage or prejudice od the general public

2. On the Rights of the SH – a SH may bring either an individual or derivative suit to enjoin a threatened ultra-vires act or contract. liability will depend on whether they acted in GF and with reasonable diligencein entering into contract.

3. On the immediate partiesi. Executed Contract – courts will not set aside with

such contracts;ii. Executoy Contract – no enforcement even at the

suit of either party (unenforceable)iii. Partly executed and Partly executory – principle of

unjust enrichment shall apply.

PRIVANO vs. DELA RAMA STEAMSHIP CO.

Donations which the corp has seen fit to give to the children of the late Enrico Privano from the point of view of the power of the corp as expressed in its AOI. It may perhaps be argued that the donation given to the children is so large and disproportionate that it can hardly be considered a pension or gratuity that can be placed on a par with the instances above-mentioned, BUT this argument overlooks one consideration:

o The gratuity given was NOT merely motivated by pure liberality or act of generosity BUT by a deep sense of recognition of the valuable services rendered by late Privano which had immensely

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contributed to the growth of the corp to the extent that from its humble capitalization it blossomed into a multi-million corporation that it is today.

CARLOS vs. MINDORO SUGAR CO.

When a contract is NOT on its face necessarily beyond the scope of the power of the corp by which it was made, it will, in the absence of proof to contrary, be presumed to be valid.

Corp are presumed to contract within their powers. The doctrine of ultra-vires, when invoked for or against a corp, should no be allowed to prevail where it would defeat the ends of justice or work a legal wrong.

JAPANESE WAR CLAIMANTS ASSOC. vs. SEC

The AOI authorize the collection of fees from members; BUT they do not autorize the corp to engage in the business of registering and accepting war notes for deposit and collecting fees from such service.

The contention that the association has authority to accept and collect fees for reparation claims for civilian casualties and other injuries is beyond the powers of the association as embodied in its AOI. It has absolutely no relation to the avowed purpose of the association to work for the redemption of war notes.

CRISOLOGO-JOSE vs. CA

The NIL which holds the accommodation party liable on the instrument to a holder for value, although such holder at the time of taking the instrument knew him to be only on an accommodation does not include nor apply to corp which are accommodation parties. This is bec the issue or indorsement of negotiable paper by a corp without consideration and for the accommodation of another is ultra-vires

By way of EXCEPTION, an officer or agent of a corp shall have the power to execute or indorse a negotiable paper in the name of the corp for the accommodation of a third person only IF specifically authorized to do so.

Corollarily, corp officers have no power to execute for a mere accommodation a negotiable instrument of the corp for their individual debts or transactions arising from or in relation to matters in which the corp has no legitimate concern.

VIII. BY-LAWS (sec 46 CCP)

By-laws are rules and ordinances made by a corp for its own government; to regulate the conduct and define the duties of the SH or memberstowards the corp and among themselves.

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Ways and Rules in Adoption of By Laws

A. After the issuance of certificate of incorporation1. Must adopt by-law within 1 month after the issuance

of cert of incorporation;2. Must be an affirmative vote of MAJORITY

OCS/members;3. The by-laws shall be signed by the SH;4. The same must be kept in the principal office subject

to inspection of SH during office hours;5. Copy thereof, duly certified by the majority of the

directors/trustees countersigned by the secretary, shall be filed with SEC which shall be attached to the AOI.

B. Prior to the issuance of certificate of incorporation or Upon submission of AOI with SEC.1. By-laws shall be approved and signed by ALL the

INCORPORATORS; and2. Submission with SEC together with AOI (it must be

adopted on the same date of submission of AOI)

NOTE: SEC shall not accept for filling the by-laws or amendment thereto of any bank, banking institution, building and loan association, trust company, insurance company, public utility, educational institution, or other special corp governed by special UNLESS accompanied by a certificate of the appropriate agncy to the effect that such by-laws or amendments ae in accordance with law.

Effectivity of By-Laws: it shall take effect upon the issuance by the SEC of a

certification that the by-laws are not inconsistent with law.

Contents of By-laws (sec 47 CCP)

By-laws may be necessary for the government of the corp BUT they are subordinate to the AOI as well as the corp code.

In case of discrepancy between AOI and by-laws, AOI prevails.

FAILURE to adopt by-laws, may result to suspension or revocation of its corp franchise after proper notice and hearing, although it will NOT result to an outright demise or dissolution of the corp.

Elements of Valid By-laws:1. It must not be contrary to law, public policy, or morals;2. It must not be consistent with the AOI;3. It must be general and uniform in its effect or applicable

to all alike or those similarly situated;4. It must not impair obligation and contract or vested

rights;5. It must be reasonable.

Two Modes of Amendment of By-laws (sec 48 CCP)

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1. By majority vote of the directors/trustees and the majority vote of the OCS/members in nonstock corp at a regular or special meeting called for that purpose;

2. By the BOD alone when delegated by 2/3 of the OCS/ 2/3 members in non-stock corp, which are entitled to vote.

This delegated power is revoked whenever a majority of the OCS/members shall vote at a regular/special meeting.

LOYOLA GRAND VILLAS HOMEOWNERS ASSOC INC vs. CA

Failure to file by-laws within the period does not imply the demise of the corp.

Settled that by-laws may be necessesary for the govt of the corp BUT these are subodinate to the AOI as well as to the CCP and related statute.

NO automatic dissolution of the corp simply because the incorporators failed to abide by the required filing of by-laws. The SEC, in case of failure to file by-laws on time, may impose penalty but it is merely imposition of an administrative fine without affecting the corp existence of the erring firm.

FLEISCHER vs. BOTANICA NOLASCO INC.

As GR the by-laws are valid if they are reasonable and calculated to carry into effect the objects of the corp and not contrary to the general policy f the laws of the land.

By laws are INTENDED merely for the protection of the corp, and prescribe regulation and NOT restriction.

The jus dispodendi, being an incident of the ownership of property, the general rule is that every owner of corp shares has the same uncontrollable right to alienate them which attached to the ownership of any other species of prop.

A SH has no obligation to refrain from selling his shares at the sacrifice of his personal interest, in order to secure the welfare of the corp, or to enable another SH to make gains and profits.

GOVERNMENT vs. EL HOGAR FILIPINO

Upon failure of a quorum at any annual meeting the directorate naturally holds over and continues to function until another directorate is chosen and qualified. Unless the law or the charter of a corp expressly provides that an office shall become vacant at the expiration of the term of office for the which the officer was elected, the general rule is to allow a hold over until his successor is duly qualified.

Mere failure of the corp to elect officer does not terminate the terms of existing officers nor dissolve the corp. It results that the practice of directorate of filling vacancies by the action of directors themselves is valid.

GOKONGWEI JR vs. SEC

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Settled rule that corps have the power to make by-laws declaring a person employed in the service of a rival company to be ineligble for the corp’s BOD. (valid)

This is based upon the principle that where the director is so employed in the service of a rival company, he cannot serve both, but must betray one or the other.

It is also well-settled that corp officers are not permitted to use their position of trust and confidence to further their private interests.

IX. MEETINGS (sec 49 CCP)

A. STOCKHOLDER’S MEETING (sec 50 CCP)

Requisites for Valid SH’s meeting:1. It must be held on the fixed date in the by-laws or in

accordance with law; Exceptions where annual meeting cannot be held on

time for some valid and meritorious reasons, i.e. force majeure or the inability to obtain the required quorum.

2. There must be prior notice given; Regular meeting – 2 weeks; Special – 1 week (NOT

ABSOLUTE) unless by-laws provide otherwise. Failure to give prior notice renders the resolution

made voidable at the option of the SH who was not notified.

Notice may be waived, expressly or impliedly.

o Implied waiver – the fact that a SH attended the meeting even without prior notice.

o Express waiver – 3. It must be held at the proper place;

Meetings of SH must be held in the city/municipality where the PO of the corp is located EXCEPT non-stock corp

4. It must be called by the proper party; BOD has the authority to call for the meeting, regular

or special. However, the President of the corp presides at the meeting.

Who are authorized to call for a meeting?a. Person/s authorized under the by-law provision;b. In the absence of any provision in the by-laws, the

President;c. By the secretary on order of:

a. the President; orb. on written demand of the SH representing

majority of the OCS/members entitled to vote; or c. the SH/member making the demand if there is or

the secretary refuses to do so;

PONCE vs. ENCARNACION

5. Quorum and voting requirements must be met. Basis of determining quorum:

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a. In case of Stock Corp, total subscription of the SH, irrespective of the amount paid by them;

b. In case of Non-Stock Corp, total number of registered voting members;

NOTE: Where a quorum is once present to organize a SH meeting, it is not broken by subsequent withdrawal of a part or fraction of the SH, whether present in person or in proxies.

Types of SH’s meeting1. Regular meeting; requirements:

a. It shall be held annually on a date fixed in the by-laws, if not fixed, on any date of April of every year (reason for April: point in time the audited financial statement have been preprared by the auditors)

b. There must be written prior notice to all SH/members of record at least 2 weeks prior to the meeting unless period is required by the by-laws.

2. Special meeting; requirements:a. It shall be held at anytime deemed necessary;b. There must be written prior notice to all

SH/members of at least 1 week unless otherwise provided in the by-laws;

NOTE: Notice of any meeting may be waived, expressly or impliedly, by any SH/member.

d. On order of the proper forum.

In the absence of the authorized person to call for a meeting, the SEC upon petition of a SH/member and upon showing of good cause, may issue an order to the petitioning SH/member directing him to call a meeting of the corp by giving prior notice required by the by-laws or the law.

The presiding officer shall preside thereat until at least a majority of the SH/members present have chosen one of their number as presiding officer.

GR: SH have no power to act as or for the corpEXCEPT: at a corp meeting called and conducted according to law.REASON: the need to protect the SH by providing them with notice of meeting and giving them opportunity to attend the meeting discuss the issues and vote.

B. DIRECTOR’S/TRUSTEES’ MEETING (sec 53 CCP)

Types of D/T’s meeting:1. Regular meeting – shall be held monthly unless the

by-laws provides otherwise.2. Special meeting – may be held anytime upon the call

of the President or as provided in the by-laws.

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NOTE: Director’s meeting, regular or special, may be held anywhere in or outside of the PH unless the by-laws provide otherwise. Notice of meeting, regular or special, must be sent to every director at least 1 day prior to the scheduled meeting unless otherwise provided by the by-laws.

Purpose of Notice To determine the legality and binding effect of the

resolution passed thereon. If notice requirement not complied with, the meeting

is illegal and will not bind the corp.EXCEPTION: A special meeting is valid without notice where the directors are all present or where they consent to the meeting. – presence in the meeting tantamounts to waiver of the want of notice.

NOTE: teleconference on director’s meeting is valid.

STOCKHOLDERS’ RIGHT TO VOTE AND MANNER OF VOTING

Right to vote is a right that is inherent in and incidental to the ownership of corporate stock, and as such, it is a property right.

It is a right which cannot be deprived of, nor can be impaired by either the legislature or by the corp without

his consent, through amendment of the charter or AOI or by-laws.

GR: A SH can vote his shares the way he pleasesExcept it is restricted by law, AOI, or the by-laaws of the corp. Among the EXCEPTIONS are the ff:

a. Non-voting shares are not entitled to vote;b. Treasury shares;c. Shares of stock of declared delinquent;d. Unregistered transferees of shares of stock.

NOTE: Treasury shares shall have no voting rights. REASON: to prevent the incumbent directors or officers of the corp from perpetuating themselves as such or prolong their stay in the office by voting on the shares of stock reacquird by it.

PROXY AND OTHER REPRESENTATIVE VOTING (sec 58 CCP)

Proxy is properly the authority given by the SH/member to another to vote for him at a SH’s meeting/

As a rule, Directors/Trustees are NOT allowed to vote for proxy BEC they are elected as such for their expertise in the management of the corp.

GR: Proxy voting is a right granted by law to all SH entitled to vote in Stock Corp.

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EXCEPT: 1. Non-stock corp; 2. in a stock corp, the by-law may prohibit the use of proxies.

Requisites for Valid Proxy:1. it must be in writing;2. signed by the SH/member or his duly authorized

representative;3. filed on or before the scheduled meeting with the corp

secretary.*Notarization is not required for its validity.

Types of Proxies1. General – gives general power of attorney to vote for

directors and all ordinary matters that may properly come before a meeting.

2. Limited – restricts the authority to vote on specified matters only and may direct the manner in which the vote will be cast.

A proxy is REVOCABLE unless complied with an interest and revocation need not be made by formal notice in writing.Proxy may be expressed to the:

i. Proxy holder;ii. Election committee;iii. By a subsequent proxy to another; or iv. By sale of the shares.

(For VTA refer to Chapter VI. Page xxviii)

VOTING TRUST PROXYBeneficial owner ceases to be the SH of record of the corps ice the shares are transferred to the trustee

Legal title remains with the beneficial owner

Vote as owner of the shares Votes merely as agentBeneficial owner is disqualified to be a director in a voting trust

Owner of the shares may be elected as such since legal title thereof remains with him

Purpose is to acquire voting control over the corp

Purpose is to secure voting and quorum requirements

irrevoable Revocable UNLESS coupled with interest – it becomes irrevocable

Trustee can act and vote at any meeting during the duration of VTA

Can vote only for specified meeting

VTA may exceed 5yrs Shorter duration and may not exceed 5yrs

Must be notarized and filed with SEC

Need not be notarized nor is it required by law

NATIONAL INVESTMENT $ DEVT CORP vs. AQUINO

Corp is not a privy in the VTTA. Hence, it has no locus standi/personality to enforce the VTA by its SH.

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X. STOCKS AND STOCKHOLDINGS

Way to become a SH:1. By contract of subscription with the corp;2. By purchase of treasury shares from the corp;3. By purchase or acquisition of shares from existing SH.

Subscription – mutual agreement between the subscribers to take and pay for the stocks of a corp.

Subscription contract – any contract for the acquisition of unissued stock in an existing corp or a corp still to be formed shall be deemed a subscription.

NOTE: There’s no distinction between purchase and subscription.

** A subscription contract need not be in writing such that an oral contract of subscription is valid and enforceable under the statute of fraud.

Subscription may be made upon:

1. Conditional Subscription – ore one made upon a condition precedent, does not make the subscriber amenable or render him to pay the amount of his

subscription, until performance or fulfillment of the action.

2. Subscription Upon Special Terms – an absolute condition making the subscriber a SH, rendering him liable as such, as soon as the subscription is accepted.

NOTE: In case of doubt as the the subcriptions, it should be considered as an absolute subscription upon special terms.

Also, conditional subscriptions are valid PROVIDED 1. there is nothing in the charter prohibiting the same; and2. the conditions are not such as to render their

performance beyond the powers of the corp or in violation of law or contrary to public policy.

TRILLANA vs. QUEZON COLLEGE INC.

PRE-INCORPORATION SUBSCRIPTIONS (sec 61 CCP)

Pre-incorp Subscription make reference to subscriptions for shares of stock of a corp still to be formed. (mandatory)

Subscription of shares of a corp still to be formed shall be irrevocable for a period of at least 6months from the date of subscription

EXCEPT: all of other subscribers consent to revocation OR the incorporation of said corp fails to materialize within the period.

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EXCEPTION to EXCEPTION: No pre-incorporation subscription may be revoked after the submission of AOI to SEC.

Post-incorp Subscription are those made or executed after the formation or organization of the corp.

NOTE: Stock issuance is generally the initial and primary source of corporate capital. Corp earnings may also be a source of corp funds if it is reinvested or ploughed back to the company.

Issue – generally employed to indicate the making of a share contract or contract of subscription, that is, transaction by which a person becomes the owner of shares and by which new share contracts are created.

Par or Issue Price – merely indicates the amount which the original subscribers are supposed to contribute to corp capital as the basis of the privilege of profit sharing with limited liability.

NOTE: Set off or satisfaction of debt due from corp is a lawful and valid consideration for the issuance of stock as provided in the Code.

Amounts transferred from URE to stated capital – refer to the declaration and distribution of stock dividend where corporate earnings are capitalized rather than being distributed as cash dividend.

Outstanding shares exchanged for stock in the event of reclassification or convention speaks of shares of stock surrendered to the corp in exchange for new or different type of shares.

NOTE: Promissory notes and future services are NOT allowed to be used as consideration for the issuance of shares as their realization are NOT certain.

NATIONAL EXCHANGE CO., INC. vs. DEXTER

GR: Agreement between a corp and a particular subscriber, by which the subscription is not to be payable , or is to be payable in part only is illegal and void as in fraud of other SH or creditors or both and cannot be either enforced by the subscriber or interposed as a defense in an action on the subscription.

The stipulation which obligates the corp to pay nothing for the shares except as dividends may accrue upon the stock is illegal, In the contingency that no dividends are declared and paid, there is no liability at all. This is a discrimination in favor of the particular subscriber and, hence, the stipulation is unlawful.

CERTIFICATE OF STOCK AND THEIR TRANSFER (sec 63 CCP)

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Share of Stock – profit sharing contract, a series of units of interest and participation in a corp in consideration of a proportionate right to participate in dividend and other distributions.

Certificate of Stock – is the piece of paper or document which evidences the ownership of shares and a convenient instrument for the transfer of title.

NOTE: Shares of stock are personal properties and the owners have absolute right to transfer the same to anyone they please subject only to reasonable charter provisions.

Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney in fact or other person legally authorized to make the transfer.

No transfer of stock shall be valid EXCEPT as between parties, UNTIL the transfer is recorded in the books of corp.

No shares of stock against the which the cor holds any unpaid claim shall be transferable in the books of the corp. Thus, No certificate of stock shall be issued until the full amount of his subscription together with interest and expenses, if any is due, has been paid.

Requisites for the Issuance of Certificate of Stock:1. It must be signed by the President/VP and countersigned

by the secretary or asst. sec.;2. It must be sealed with corp seal; and

3. The entire value should have been paid.

Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a SH.

** Issuance of stock cert is not a condition sine qua non to consider a subscriber a SH. The moment his subscription becomes effective, he becomes a SH for all intents and purposes EXCEPT only that he cannot be issued stock cert until full amount of his subscription is paid.

Instances when a SH may not be able to exercise his right as such:

1. When his shares are declared delinquent;2. When he exercises his appraisal right.

NOTE: A certificate of stock is NOT regarded as negotiable even if it is endorsed in blank. – it is merely quasi-negotiable.

** The Rule on Non-Negotiability of Certificate of Stock is subject to the equitable principles of estoppel. – the doctrince which states that a bona-fide purchaser of such certificate will acquire no better title to the shares than his transferor had, and that he took the shares subject to all rights, remedies, and defenses which the true and lawful owner may have no matter how innocent or ignorant the purchaser or transferee may have been, will have no application where estoppel governs.

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NOTE: 1. Transfer of shares AND recorded in the books of corp is VALID as to the corp and 3rd person;

2. Transfer of shares WITHOUT recording in the books of corp is VALID only between parties.

Effects of NonRegistration:a. Cannot enjoy the status of SH;b. Cannot vote nor be voted for; andc. Will not be entitled to dividends.

Purpose of Registration:a. To enable the transferee to exercise all the right of a SH;

andb. To inform the corp of any change in shares of ownership.

Registration is NECESSARY for the following reasons:a. To enable the corp to know who its SH are;b. To enable the transferee to exercise his rights as SH;c. To afford the corp an opportunity to object or refuse

registration of the transfer;d. To avoid fictitious and fraudulent transfers; ande. To protect creditors who have right to look upon SH, in

case of non payment or watered shares, for the satisfaction of their claims.

** The duty of corporate secretary to record the transfer of shares is MINISTERIAL. Hence, refusal or failure to do so, mandamus will lie.

RURAL BANK OF SALINAS vs. CA

As a rule, no restriction as to whom the stocks may be transferred. The only LIMITATION is when the corp holds any unpaid claim against the shares intended to be transferred.

The right of a transferee/assignee to have the stocks transferred to his name is an inherent right flowing from his ownership of the stocks. Thus, whenever a corp refuses to transfer and register stock, mandamus will lie to compel the officers of the corp. to transfer said stock in the books of the corp.

Instances Mandamus will NOT lie:

The contract of pledge does not make him the owner of the shares pledged.

o Further, the contract of pledged contained a common proviso which states that in the event of failure of the pledgor to pay the amount within a period of 6months from date thereof, the pledgee is hereby authorized to foreclose the pledge upon the said shares of stock hereby created by selling the same at public/private sale with/without notice to the pledgor, at which case the pledgee may be the purchaser at his option, and the pledgee is hereby authorized an empowered at his option to transfer the said shares on the books of corp.

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There is no showing that there was an attempt to foreclose or sell the shares through public or private auction. Therefore, ownership of the shares could not have passed to him.

Modes of Transferring of Shares of Stock1. By endorsement of the stock cert COUPLED with delivery

(if the corp has already issued a stock cert);2. By duly notarized deed. (if there’s no stock cert issued.)

EMBASSY FARMS vs. CA

No delivery of indorsed shares of stock cannot effectively transfer to otger person or his nominees the undelivered shares of stock.

For an effective transfer of shares of stock the mode and manner of transfer as prescribed by law must be followed. As the law provides that shares of stock may be transferred by delivery to the transferee of the certificate properly indorsed. However, no transfer of stock shall be valid, EXCEPT, as between parties until the transfer is properly recorded in the books of the corp.

RAZON vs. IAC

Indorsement of the certificate of stock is mandatory requirement for an effective transfer of certificate of stock.

NOTE: The right to transfer shares of stock may not be unreasonably restricted or prohibited. The SC held the every owner of corp shares has the same uncontrollable right to alienate them and is under no obligation from selling them at his sacrifice and for the welfare and benefit of the corp and other SH.

**Unreasonable restriction as rule is NOT allowed. The right to transfer may, however. Be regulated to give the corp protection against colorable or fraudulent transfer or to enable it to know who its SH are.

SEC allows preferential rights to existing SH and/or corp, giving them the first option to purchase the shares of a selling SH within a reasonable time bit exceeding 30days provided that the same is contained in the AOI.

*Restrictions must be made in the AOI and should be subject to reasonable terms and conditions. EXCEPTION: In CLOSE CORP – they are REQUIRED to provide restriction and preferences. It must be stated in the AOI, stock certificate and by-laws. Otherwise, it will not bind purchaser in GF.

Other restrictions on the right to transfer shares would include:a. It is not valid, except as between parties, until recorded

in the books of corp;b. Shares of stock against which the corp hold any unpaid

claim shall not be transferable in the books of corp;

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* Unpaid claims refer to claims arising from unpaid restriction and not to any indebtedness which a SH may owe the corp such as monthly dues.

c. Restrictions required to be indicated in the AOI, by-laws and stock cert in Close corp;

d. Restrictions imposed by special law;e. Sale to aliens in violation of maxmum ownership of

shares under the Nationalization Laws;f. Those covered by reasonable agreement.

LAMBERT vs. FOX

GR: Stipulation in the contract suspending the power to sell is an illegal stipulation. EXCEPTION: the power to sell has a beneficial purpose, results in the protection of the corp as well as of the individual parties to the contract, and is reasonable as to the length of time of suspension.

RURAL BANK OF SALINAS vs. CA

As a rule, no restriction as to whom the stocks may be transferred. The only LIMITATION is when the corp holds any unpaid claim against the shares intended to be transferred.

The right of a transferee/assignee to have the stocks transferred to his name is an inherent right flowing from his ownership of the stocks. Thus, whenever a corp refuses to transfer and register stock, mandamus will lie

to compel the officers of the corp. to transfer said stock in the books of the corp.

* transfer, in transfer of stock cert, refers to ABSOULUTE and UNCONDITIONAL transfer to warrant registration in the books of the corp in ordr to bind the latter and other 3rd person.

GR: Shares of corp stock, the owner of such may dispose of them as he sees fit.

MONSERRAT vs. CERON

Only transfer or ABSOLUTE CONVEYANCE of ownership of the title to a share need be entered and noted upon the books of the corp in order that such transfer may be valid.

Therefore, a chattel mortgage is not the transfer hich transfer should be entered and noted upon the books of a corp in order to be valid, and which means the absolute and unconditional conveyance of the title and ownership of a share of stock.

CHUA GUAN vs. SAMAHANG MAGSASAKA INC.

Two ways for Executing a Valid Chattel Mortgage which shall be effective against third persons.

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o First, the possession of the property mortgage must be delivered to and retained by the mortgage; and

o Second, without such delivery the mortgage must be recorded in the proper office/s of the register/s of deeds.

If the chattle mortgage of shares of stock of a corp may validly made without the delivery of possession of the prop to the mortgage and the mere registration of the mortgage is sufficient constructive notice to third parties.

** As to the proper registration of the mortgage, GR: the mortgage shall be registered in the province where the mortgagor resides at the time of making the same OR EXCEPT (1)if the person is non-resident, in the place where the property is situated; and (2)if the prop is situated in different province, in which the mortgagor resides, the mortgage shall be recorded in BOTH in the province of mortgagor’s residence and place where the prop is situated.

The situs of shares of stock is at the domicile of the owner/corp. As a rule, for purposes of execution, attachment, and garnishment, it is not the domicile of the owner of stock cert BUT the domicile of the corp which is decisive. The prop in the shares may be deemed to be situated in the province in which the corp has its principal office or place of business.

If the province is also the domicile of owner’s domicile, a single registration is sufficient. If not, the chattel mortgage should be registered BOTH at the owner’s

domicile and in the province where the corp has its principal office.

PADGETT vs. BABCOCK & TEMPLETON

Shares of stock being regarded as property, the owner of such shares may, as a rule, dispose of them as he sees fit UNLESS (1) the corp has been dissolved, or (2) unless the right to do so is properly restricted, or (3) the owner’s privilege of disposing his shares has been hampered by his own action.

A SH cannot be controlled or restrained from exercising his right to transfer by the corp or its officers or by other SH, even though the sale is to a competitor of the company, or to a insolvent person, or even though a controlling interest is sold to one purchaser.

NAVA vs. PEERS MARKETING

A corp cannot release an original subscriber from paying his shares without a valuable consideration or without the unanimous consent of SH.

Well settled rule that without certificate of stock, which is the evidence of owership of corp stock, the assignment of corp shares is effective only between parties to the transaction.

The delivery of stock cert is essential for the protection of both the corp and its SH.

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RURAL BANK OF LIPA vs. CA

Requisites for a Valid Transfer of Shares:a. There must be delivery of stock cert;b. The certificate must be endorsed by the owner or

his atty in fact or other person legally authorized to make transfer;

c. To be valid against third parties, the transfer must be recorded in the books of the corp;

Non-compliance therewith, assignment is valid only between parties. Consequently, the assigness cannot enjoy the status of a SH; cannot vote not be voted for, and will not be entitled to dividends in so far as the assigned shares are concerned.

TAN vs. SEC Exception to the rule that delivery of stock cert is

necessary.o Where it appears that the person sought to be

held as SH are officers of the corp and have the custody of the stock book.

WON vs. WACK WACK GOLF & COUNTRY CLUB,INC.

The moment the certificate of stock was assigned, the right to have the assignment registered commenced to exist BUT it would not follow that said right should be

exercise immediately or within the a definite period. As it is already observed, there is no fixed period for registering an assignment.

Statute of Limitations will not apply.

FORGED AND UNAUTHORIZED TRANSFERS

Forged and Unauthorized Transfer means what is forged is the transfer of the certificate of stock from the true and lawful owner to another person.

Unauthorized Issuance of Stock Cert refers to the act in issuing the certificate, either fraudulently or by mistake.

EFFECT of Forged or Unauthorized Transfer: The purchaser will acquire NO title as against the lawful

owner thereof by virtue of the doctrine of non-negotiability of certificates of stock.

However, subsequent purchaser in gf took the shares not by virtue of a forged or unauthorized sale BUT on reliance of the genuineness of the cert issued by the corp OR by virtue of the representation made by the corp that the same is valid and subsisting and that the person named therein is SH. He may, therefore, compel the corp to recognize him as a SH, or claim reimbursement and damages against the latter.

WATERED STOCKS (sec 65 CCP)

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One which is issued by the corp as fully paid-up shares, when in fact the whole amount of the value thereof has not been paid in full. (PROHIBITED)

Any director/officer of the corp consenting to the issuance of stocks for a consideration less than its par or issued value or for a consideration in any form other than cash, valued in excess of its fair value, or who having t=knowledge thereof, does not fortwith express his objection in writing and file the same with the corp sec, shall SOLIDARILY LIABLE with the SH concerned to the corp and its creditors for the difference between the fair value received at the time of issuance of the stock and the par or issued value of the same.

Watered Stock may be issued in either of the following ways:1. For a monetary consideration less than its pr or issued

value;2. For a consideration in property, valued in excess of its

FMV;3. Gratuitously or under agreement that nothing shall be

paid at all;4. In the guise of stock dividends when there are no surplus

profis of the corp.

Effects of issuance of watered stocks (Evil Effects):1. The corp is deprived of its capital thereby hurting its

business prospects financial capability and responsibility;

2. SH who paid their subscriptions in full are injured and prejudiced by the reduction of their proportionate interest in the corp;

3. Present and fututre creditors are deprived of the corp assets for the protection of their interest.

Fraud or Misrepresentation Theory – liability is based on the false representation made by the corp and the SH concerned to the creditors that the true par value or issued price of the shares has been paid or promised to be paid in full.

Effects of Issuance of Watered Stocks:

a. As to the Corp – when the corp is guilty of ultra-vires/illegal acts, the State may institute a quo warranto proceedings to forfeit its charter for the misuse/abuse of its franchise.

b. As between the Corp and the SH – subscription is void. To render it valid and effective, the subscriber is liable to pay the full issued value.

c. As to the Consenting SH – they are estopped from raising any objection thereto.

d. As to the Dissenting SH – they may be compelled the payment of the water in the stock solidarily against the responsible and consenting directors/officers.

e. As to the Creditors – they may be enforced of the difference in he price or the water in the stock solidarily against the responsible directors/officers and the SH concerned;

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f. As against of the Watered Stock – same right as that transferor.

If, however, a cert of stock has been issued and duly indorsed to a bona fide purchaser, without knowledge, actual or constructive, the latter cannot be held liable, at least as against the corp, since he took the shares on reliance of the misrepresentation made by the corp that the stock cert is valid and subsisting.

ENFORCEMENT OF PAYMENT OF SUBSCRIPTIONS

Unpaid Subscription shall be paid either:1. On the date/s fixed in the contract of subscription;2. On the date/s that may be specified by the BOD pursuant

to a call declaring any or all unpaid portion thereof to be so payable.

Two Possible Remedies to Eforce Payment of Unpaid Subscription:

1. By board action in accordance wih the precedure laid down is sec sec. 67-69 of the Code; anf

2. By collection case in court.

** Failure/refusal of the court to enforce or collect payment of unpaid subscription will NOT prevent the creditors or the receiver of the corp to institute a court action to collect the unpaid portion thereof. – BEC the capital of the corp. is the basis

of the credit of and financial responsibility of the corp. (Trust Fund Doctrine)

PAYMENT OF BALANCE SUBSCRIPTIONS: (sec 67 CCP)1. Payment shall be made UPON the “call” (anytime) of the

BOD as it may deem necessary EXCEPT the contract of subscription provides;

2. Payment of UNPAID subscription shall be made on:a. The stated in the call made by the Board; orb. The date stated in the contract of subscription.

**Failure to pay on such date render the entire balance due and payable and and shall make the SH liable for interest at the legal rate UNLESS a different rate of interest is provided in the by-laws.

If within 30days from the said date of payment of the balance no payment is made, ALL stocks covered by said subscription shall become DELINQUENT and shall be subject to sale UNLESS the BOD orders otherwise.

DELINQUENCY SALE (sec 68 CCP)1. The BOD may, by resolution, order:

a. the sale of delinquent of delinquent stock andb. shall specifically state the amont due on each

subscriptionc. plus all accrued interest, andd. the date, time and place of the sale which shall not

be less than 30 days nor more tha 60 days FROM the date the stocks become delinquent.

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2. Notice, with a copy of the reso, shall be sent to every delinquent SH either personally or by mail.

3. Publication by once a week for 2 consecutive weeks in a newspaper of general circulation in the province or city where the principal office of the corp is located. NOTE: Publication of notice of call is NOT required unless the by-laws provide otherwise.

MODE of SELLING the DELINQUENT STOCK:

The delinquent stock shall be sold at PUBLIC AUCTION to such bidder who shall offer to pay the full amount of the balance together with accrued interest, costs of advertisement and expense of sale, for the smallest number of shares. (Highest Bidder)

** Should there be NO BIDDER at the public auction, the corp may bid for the same PROVIDED there’s URE except redeemable shares or in Close Corp, and the total amount due shall be credited as paid in full in the books of the corp. The shares so purchased by the corp shall be vested in the latter as treasury shares.

Summarized Procedure:1. The BOD, by formal Resolution, declares the whole or any

percentage of unpaid subscriptions to be due and payable on a specified date. Howver, if the contract of

subscription provides for the date/s when payment is due, NO “call” by the board is necessary.

2. The SH concerned are given notice of the Board Reso by the corp either personallu or by registered mail. Publication of notice of call is not required unless the by-laws provide otherwise. Notice is not likewise necessary if the contract of subscription stipulates a specific date when an unpaid portion is due and payable.

3. Payment shall be made on the date specified in the call or on the date provided in the contract of subscription.

4. Failure to pay on the date required in the call or as specified in the contract of subscription will render the entire balance due and payable and making the SH liable for interest.

5. If within 30days from the date stated in the call or in the contract of subscription no payment is made, all stock covered by the subscription shall become delinquent and shall be subject to delinquency sale.

6. The Board, bby resolution, orders the sale of delinquent stock stating the amount due and the date, time and place of the sale.

7. The sale shall be made not less than 30 days nor more than 60 days from the date the stocks become delinquent.

8. Notice of sale, with copy of reso should be sent to every delinquent SH either personally or registered mail.

9. Publication of notice of sale must be made once a week for 2 consecutive weeks in the newspaper of general circulation in the province where the principal office is located.

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10. Sale at public auction if NO payment is made by the delinquent SH in favor of the bidder who offered to pay the full amount of the balance in the subscription for the smallest number of shares.

11. Registration or transfer of the shares of stock in the name of the bidder and corresponding issuance of the stock cert covering the shares successfully bidded.

12. If there be any remaining shares, the same shall be credited in favor of the bidder who shall be entitled to the issuance of a certificate of stock covering such shares.

13. If there is NO bidder, the corp may bid PROVIDED there’s URE except redeemable shares or in Close Corp, and the total amount due shall be credited as paid in full in the books of the corp.

14. The shares so purchased by the corp shall be vested in the latter as treasury shares.

WHEN SALE MAY BE QUESTIONED (sec 69 CCP)

NO ACTION to recover delinquent stock can be sustained upon the ground of (1) irregularity or defect in the sale, or (2) in the sale itself of delinquent stock UNLESS the party seeking to maintain such action:

1. First pays to the party holding the stock sum for which the same was sold, with interest from the date of the sale at the legal rate; and

2. It is commence by the filling of a complaint within 6 months from the date of sale.

Call – is a condition precedent before the right of action accrues OR before the SH declares to be delinquent, upon call and non-payment of the same. However, NO call is necessary if the contract of subscription provides for a date/s when payment is due, or when the corp has become insolvent.

VELASCO vs. POIZAT

A stock subscription is a contract between the corp and the subscriber and courts will not enforce it for or against either. It is a rule that a subscription of shares of stock does not require an express promise to pay the amount subscribed, as the law implies promise to pay on the part of the subscriber.

The subscriber is as much bound to pay the amount of the share subscribed by him as he would be able to pay any other debt, and the right of the company to demand payment is no less incontestable.

2 REMEDIES FOR ENFORCEMENT OF STOCK SUBSCRIPTION:

a. permitting the corp to put up the unpaid stock and dispose of it for the account of the delinquent subscriber;

b. by action in court as provided in sec 49 CCP – nothing in this Act shall prevent the directors from collecting, by action in any court of proper jurisdiction, the amount due on any unpaid subscription, together with accrued interest and costs and expenses incurred.

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DE SILVA vs. ABOITIZ & CO.

It is discretionary on the part of the BOD to declares the unpaid shares delinquent or collect or enforce payment of the same despite the provision of the by-laws of the corp.

LINGAYEN GULF ELECTRIC POWER, INC. vs. BALTAZAR

As a rule, NOTICE of any CALL for the payment of unpaid subscription should be made not only personally but also by publication. – the reason for this is not only to assure notice to all subscribers but also to assure equality and uniformity in the assessment on SH.

EXCEPTION to the rule: when the corp becomes INSOLVENT, with the proceedings instituted by the creditors to wind up and distribute its assets, NO call is necessary before the institution of suits to collect unpaid balance on subscription.

BUT when the corp is SOLVENT, call is mandatory. Therefore, the GR: a valid and binding subscription for

stock of a corporation cannot be cancelled so as to release the subscriber from liability thereon without the consent of all the SH/subscribers.

EXCEPTION:1. When there’s a bona fide compromise;2. To set off a debt due from the corp;

3. Release supported by consideration, will be effectual as against dissenting SH and subsequent and xisting creditors.

APOCADA vs. NLRC

NLRC has no jurisdiction to determine such intra-corporate dispute between the SH and the corp as in the matter of unpaid subscriptions.

Assuming the NLRC has jurisdiction with the case, the unpaid subscriptions are not due and payable UNTIL a call is made by the corp for payment. No doubt such set off was NOT a lawful basis, if not premature.

PNB vs. BITULOK SAWMILL INC.

It is established doctrine that subscriptions to the capital of a corp constitute a fund to which creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debts,

A corp has NO power to release an original subscriber to its capital stock from the obligation of paying his shares, without a valuable consideration for such release; and as against creditors a reduction of the capital stock can take place only in the manner and under the conditions prescribed by the statute or the charter or the AOI.

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EDWARD KELLER & CO. LTD. vs. COB GROUP MARKETING, INC.

As to the liability of the SH, it is settled that a SH is personally liable for the financial obligations of a corp to the extent of his unpaid subscription.

Effect of Delinquency (sec 71 CCP)

“No delinquent stock shall be voted for or be entitled to vote or to representation at any SH’s meeting NOR shall the holder thereof be entitled to any of the rights of a SH except the rights to dividends in accordance with the provisions of this Code, intil and unless he pays the amount due on his subscription with accrued interest, and the costs and expenses for advetisement, if any.

As to the right of the SH to receive dividends, (sec 43) any cash dividends DUE on delinquent SH shall first be applied to the unpaid balance on his subscription PLUS costs and expense WHILE stock dividends shall be withheld until his unpaid subscription is paid in full.

Sec 72 – holders of subscribed shares NOT fully paid which are not delinquent shall have all the rights of a SH. (correlate to sec 43 CCP) – The only exception to this rule is that shares of stock not fully paid is NOT entitled to be issued certificate of stock.

RULE ON LOST OR DESTROYED CERTIFICATES (sec 73 CCP)

1. The registered owner of certificate of stock shall file with the corp an affidavit in triplicate setting forth:

a. the circumstances as to how the certificates were lost, stolen or destroyed;

b. the number of shares represented by such certificate;

c. the serial number/s of the certificate/s; andd. the name of the corp which issued the same.

2. After verification, the corp shall publish a notice in a newspaper of general circulation in the principal office of the corp, once a week for 3 consecutive weeks at the expense of registered owner of the certificates which has been lost, stolen, or destroyed.

o The notice shall state the following:i. Name of the corp;ii. Name of the registered owneriii. Serial number of the said certificate/siv. Number of shares represented by such

certificate/s v. After the expiration of 1 year from the

date of its last publication, the right to make a contest to such certificate shall be barred and the corp shall cancel in its books the certificate/s of stock and issue in lieu thereof new certificate/s of stock

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vi. UNLESS the registered owner files a bond effective for a period of 1 year – in which case a new certificate of stock shall be issued even before the expiration of 1year period PROVIDED that if a contest has been presented to said corp or if an action is pending in court regarding the ownership of said certificates, the issuance of the new certificate shall be suspended until the final decision by the court regarding the ownership of said certificates.

EXCEPT: in case of fraud, BF, or negligence on the part of the corporation and its officers, NO action may be brought against any corp which shall have issued certificat/s of stock in lieu of those lost, stolen, or destroyed cert stock.

RATIONALE of the Rule: To avoid duplication of cert stock; and Avoidance of fictitious and fraudulent transfers. It is intended for the protection of the corp against

damage from whatever source arising from the issuance of duplicate certificate.

RIGHTS OF SH:a. Right to vote and be voted upon either personally or by

proxy (sec 50&58);b. Right to enter into a VTA (sec 50);

c. Right to receive dividends and to compel declaration of dividends (sec 43);

d. Right to transfer shares subject only to reasonable restrictions (sec 63);

e. Right to be issued cert of stock for fully-paid shares (sec 64);

f. Right to exercise pre-emptive rights (sec 39);g. Right to exercise their appraisal right (sec 81, 42 and

105);h. Right to institute and file derivative suits;i. Right to recover shares of stock unlawfully sold for

delinquency (sec 69);j. Right to inspect books of the corp (sec 73);k. Right to be furnished by most recent financial statement

of the corp (sec 75);l. Right to be issued a new stock certificate in lieu of the

lost or destroyed stock cert (sec 73);m. Right to have the Corp dissolved (sec 118 to 121 & 10d,

in close corp);n. Right to participate in the distribution of assets of the

corp upon dissolution (sec 122);o. IN CASE OF CLOSE CORP, Right to petition the SEC to

arbitrate in the event of deadlock (sec 104);p. IN CASE OF CLOSE CORP, Right to withdraw thereform,

for any reason, and compel the corp to purchase its shares (sec 105)

OBLIGATIONS and LIABILITIES OF SH:

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a. To pay to the corp the balance of his unpaid subscriptions subject to the provision of sec 76 to 70;

b. To pay interest on his unpaid subscription IF required by the by-laws or by the contract of subscription (sec 66);

c. To answer to the creditors for the unpaid portion of his subscription;

d. To answer the water in his stocks (sec 65);e. To be liable, as general partners, for all debts, liabilites

and damages of on determinable corp (sec 21 – corp by estoppel);

f. To be personally liable for torts;

XI. CORPORATE BOOKS AND RECORDS (sec 74 CCP)

The following shall be KEPT and MAINTAINED by the Corp:a. Records of all business transactions;b. Minutes of all meetings of SH/members and of the

directors or trustess setting forth in detail the date, time and place of meeting, how authorized, the notice given whether the same be regular or special, and if special, the purpose thereof shall be specified, those present and absent, and every act done or ordered done thereat which must likewise be kept at the principal office of the corp; and

c. Stocks and Transfer Book showing the names of the SH, the amount paid or unpaid on all stocks for which subscription has been made…

Right to Financial Statements (sec 75 CCP)

Within 10 days from receipt of a written request of any SH/member, a corp shall furnish its most recent financial statement which shall include:

o A balance sheet as of the end of taxable year; ando Profit or loss statement for said taxable year

showing in reasonable detal its assets and liabilities and the result of its operation.

However, if the paid up capital is less than 50K the financial statements may be certified under oath by the treasurer or any responsible officer of the corp.

NOTE: Right of the SH to inspect and examine corp books is NOT absolute whereas the right of the DIRECTOR/TURSTEE to inspect/examine corp books is ABSLOUTE, UNQUALIFIED and WITHOUT REGARD TO ANY MOTIVEReason: the director supervises, directs and manages the corp business and it is necessary that he be equipped with all information and data with regard to the affairs of the corp.

NOTE: The right of the SH to examine corp books extends to a wholly owned subsidiary which is completely under the control and management of the parent company. BUT if the 2 entities (subsidiary and parent) are legally being operated as separate and distinct entities, there is no such right of inspection on the part of the SH of the parent company.

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The right of SH are entitiled to inspect books and records of the corp BUT may NOT gain access to highly sensitive and confidential information. This include among others:

a. Marketing strategies and pricing structure;b. Budget for expansion and diversification;c. Research and development; andd. Sources of funding, availability of personnel, proposals of

mergers/tie-ups with other firms.

Should a SH Unjustifiably refused the right to inspect the corp books, he has the following remedies:

a. Mandamus;b. Damages either against the corp or the responsible

officer who refused the inspection;c. Criminal complaint for violation of his right to inspect.

Defenses Available by the Corp (Defenses to Escape Liablity)a. Person demanding has improperly used any information

secured through any prior examination of the records;b. SH was not acting in GF or for a legitimate purpose in

making his demand; orc. The right is limited by special law or law of its creation.

PHILPOTTS vs. PHILIPPINE MANUFACTURING CO

The right of inspection given to a SH can be exercised by himself or by any proper representative/attorney-in-fact. The right may be regarded as personal in the sense that

only SH may enjoy it; BUT the inspection and examination may be made by another. Otherwise, it would be unavailing in many instances.

PARDO vs. HERCULES LUMBER, CO.

The general right given by the statute may not be lawfully abridged to the extent attempted in this resolution. It may admitted that the officials in charge of a corp may deny inspection when sought at UNUSUAL hours or other IMPROPER CONDITIONS; but neither the executive officer nor the BOD have the power to deprive a SH of the right altogether. (Instances when the right to inspect may be denied)

VEGARUTH vs. ISABELA SUGAR CO.

Right of inspection is NOT to be denied on the ground that the director or SH is on UNFRIENDLY terms with the officer of the corp whose abstracts and memoranda of documents books and papers as an incident to the right of inspection but cannot, without an order of court be permitted to take books from the office of the corp.

GOKONGWEI vs. SEC

The SH’s right of inspection of the corp’s books and records is based upon their ownership of the assets and property of the corp. It is, therefore, incident of

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ownership of the corp property whether this interest or ownership be termed an equitable ownership, a beneficial ownership or quasi-ownership. The right is predicated upon the necessity of self-protection.

In other words, the inspection has to be germane to the petitioner’s interest as SH and has to be proper and lawful in character and not inimical to the interest of the corp.

Where a corp owns approximately no property except the shares of stock of subsidiary corp which are merely agents or instrumentalities of the holding company, the legal fiction of distinct corp entity may e disregarded and the books, papers and documents of all corp may be required to be produced for examination.

Failure by the corp to grant the same, MANDAMUS may be proper remedy to compel the corp to inspect BOTH subsidiary’s and parent corporation’s books upon proof of sufficient control or dominion by the parent showing the relation of principal.

Mandamus will not lie where the the subsidiary corp is a separate and distinct corp domiciled and with its books and records in another jurisdiction; and is not legally subject to the control of parent company although it owned a vast ajority of the stocks of the subsidiary.

GONZALES vs. PNB

Conditions sine qua non in invoking the right to inspect and examine the books and records of the corp are the following:

o It must not have been guilty of using improperly any information secured through a prior examination; and

o That the person requesting it must not have been guilty of using improperly any information secured through a prior examination; and

o That the person asking for such examination must be acting in GF and for a legitimate purpose.

NOTE: PNB is not an ordinary corp. Having charter of its own, it is not governed, as a rule, by the charter and not by the CCP. Thus, even if privatized SH cannot inspect UNLESS the charter has been repealed.

XII. MERGER AND CONSOLIDATION (sec 76 CCP)

Two Common Types of Corporate Reorganization1. Merger – two or more corp may merge into a single corp

which shall be one of the constituent corporations.a. A union effected by absorbing one or more

existing corp by another which survives and continures the combined business.

2. Consilidation – two or more corp may consolidate into a new corp which shall be the consolidated corp.

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a. Uniting or amalgamation of two or more existing corp to form new corp. It signifies a union as necessarily results in the creation of a new corp ad the termination of existence of the old ones.

AIM/OBJECTIVEo To put the company upon sound financial basis

and to enable it to take care of its obligations thereby avoiding liquidation or bankruptcy.

The BOD/T of EACH corp shall approve the plan of consolidation/merger setting forth the following:

a. The names of the corp to merge or consolidate;b. The terms of merger or consolidation and the mode of

carrying the same into effect;c. A statement of the changes, if any, in the AOI of the

surviving corp in case of merger BUT in case of consolidation, all the statements required to be set forth in the AOI for corp organized under this Code.

d. Other provision with respect to the proposed merger or consolidation as are deemed necessary or desirable.

VOTING REQUIREMENTS for SH APPROVAL: (sec 77 CCP)a. Majority vote of each BOD of the constituent corp;b. Submission for SH’s approval of each corp t a separate

meetings duly called for that purpose;c. Notice of meeting must be given 2weeks prior the date of

meeting which include a copy/summary of the plan of merger/consolidation.

d. Affirmative vote of SH of atleast 2/3 of OCS/members entitled to vote, in case of NS.

Any Amendment to the plan of merger/consolidation may be made PROVIDED such amendment is approved by majority vote of the respective BOD/T of all constituent corp and ratified by the affirmative vote of the SH representing atleast 2/3 OCS/members, in case of NS.

Articles of Merger or Consolidation (sec 78 CCP)

After the approval by the SH, articles of merger or articles of consolidation shall be executed by EACH constituent corporations, to be signed by the president OR vp AND certified by the secretary or asst. secretary of each corporation setting forth:

1. The pln of merger or consolidation;2. As to stock corp. the number of shares outstanding, or in

the case of NS, the number of members; and3. As to each corp, the number of shares or members voting

for and against such plan, respectively.

Requirements and Procedure to accomplish merger or consolidation

a. The BOD/T of each constituent corp shall approve a plan of merger or consolidation setting forth sec 76;

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b. Approval of the plan by the SH representing 2/3 of the OCS or 2/3 of member in non-stock corp of each corp at a separate corp meetings called for that purpose;

c. Prior notice with a copy of summary of the plan of merger or consolidation shall be given to all SH at least 2 weeks before the scheduled meeting;

d. Execution of Articles of Merger/Consolidation by each constituent corp to be signed by the president or vp and certified by the sec or asst secretary of each corp in accordance with sec 78;

e. Submission of Articles of Merger/Consolidation in QUADRUPLICATE to the SEC subject to the requirement of sec 79 (inclusion of favorable recommendation of government agency concerned);

f. Issuance of the certificate of merger or consolidation by SEC at which time the merger or consolidation shall be effective.

Effects of Merger/Consolidation

a. There will be single corp. i. In case of merger, the surviving corp;ii. In case of consolidation, the consolidated corp

(new corp);b. The termination of corporate existences of the

constituent corp except that of the survinving/consolidated corp;

c. The surviving or consolidated corp will possess all the rights, privileges, immunities, and powers shall be

subject to all duties and liabilities of a corp organized under the Code;

d. The surviving/consolidated corp shall possess all right, privileges, immunites and franchise of the constituent corp and all property and all receivables due including subscriptions to shares and otger choses in action, and every interest of, or belonging to or due to the constituent corp shall be deemed transferred to and vested in such surviving or consolidated corp without further act and deed.

ASSOCIATED BANK vs. CA

In case of merger, although there is a dissolution of the absorbed corp, there is no winding up of their affairs or liquidation of their assets, because the surviving corp AUTOMATICALLY acquires all their rights, privileges and powers, as well as their liabilities.

X. APPRAISAL RIGHT

Appraisal right – is the method of paying a SH for the taking of his property. It is a right to withdraw from a corp and demand payment of the FMV of his shares after dissenting from any corp acts which involves fundamental changes in corporate structure. (sec 81 CCP)

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PURPOSE: to protect the property rights of dissenting SH from actions by the majority SH which alters the ature and character of their investment.

Instances of Appraisal Right: (NOT EXCLUSIVE)1. In case of amendment of AOI has the effect of restricting

the rights of any SH or class of shares or of authorizing preferences in any resect superior to those of outstanding shares of any class, or of extending or shortening the corp term of existence;

2. In csdr og dslr, lease, exchange, mortgage, or pledge (SLEMP) or orher disposition of all or substantially all of the corp property;

3. In case of merger or consolidation.

(NOT EXCLUSIVE) Other Instances: It may also cover situation involving investment of fund

in another corp or business or for any other purpose other than its primary purpose. (see sec 42)

In a close corp, the SH has unbridled right to compel the corp buy his shares at a value which shall not be less than the par or issued value.

Procedure and requirements for valid exercise of appraisal right:

1. The SH must have voted against the proposed action in any of the instances allowed by law for the exercise of appraisal right;

2. The written demand for payment must be made by the dissenting SH within 30 days after the date on which the vote was taken thereon.

a. NOTE: Failure to make demand within the period shall be deemed to be a waiver on the part of the SH concerned to exercise his appraisal right.

3. Surrender of the certificate of stock by the dissenting SH for notation in the corp books and the payment by the corp of the FMV of said shares prior to the date on which the vote was taken;

4. The fair value of the shares of the dissenting SH must be paid by the corp ONLY IF it has URE in its books to cover such payement.

a. If NO URE, the dissenting SH may not be able to effectively exercise his right. (What’s the effect?)

5. Upon payment of the shares by the corp, the dissenting shall transfer his shares to the corp.

Effect of Demand and Termination of Right: From the time of demand for payment of the fair value of

a SH’s shares until either:o The abondment of the corp action involved; oro The purchase of the said shaeres by the corp

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corpo (to be printed)

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