2015 JHEZ NOTES ON CORPORATION LAW ARELLANO UNIVERSITY ... · PDF file2015 JHEZ NOTES ON CORPORATION LAW ARELLANO UNIVERSITY SCHOOL OF LAW, . — – Securities and Exchange Commission

2015 JHEZ NOTES ON CORPORATION LAW ARELLANO UNIVERSITY SCHOOL OF LAW

Notes By: ENGR. JESSIE A. SALVADOR, MPICE | http://wordpress.com/engrjhez

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ATTY. RUBEN C. LADIA Saturday 1:00PM-4:00PM Sunday 1:00PM-3:00PM MIDTERM EXAMS – LAST MINUTE TIPS Corporation by Estoppel;1 Ostensible Corporation Section 21. Corporation by estoppel. – All persons who assume to act as a corporation 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 corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality. On who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation. N.B. The doctrine of corporation by estoppel applies against a third party “only when he tries to escape liability on a contract from which he has benefitted on the irrelevant ground of defective incorporation”.2 Common Shares3 v. Founders Shares4

Common Shares Founder’s Shares One which entitle its owner to an equal pro-rata division of profits without preference or advantage over any other stockholder; May be denied the right to vote in favor of Founder’s shares

May exercise exclusive right to vote and be voted for in the election of directors within a limited period (not to exceed five years) to the exclusion of the others.

1 Ladia, The Corporation Code of the Philippines (Annotated), Revised (2007) Edition, p.74 2 Supra, p.75 3 Supra, p.53 4 Supra, p.58

Voting Requirements in the Election of Directors/Trustees

• Majority of the outstanding capital stock (in person or proxy)

• Viva voce; otherwise, by ballot, upon request by any voting stockholder

• Cumulative voting5 for stock corporations (not available in non-stock corporations unless allowed by the articles of incorporation or by-laws

President – must be a Director Treasurer – may or may not be a Director Secretary – a resident and citizen of the Philippines Not Allowed:

• President and Secretary • President and Treasurer

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

5 Total No. of Votes = [No. of Shares] x [No. of Directors]; may be given to only one Director



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Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in capital stock, except:

(1) when justified by definite corporate expansion projects or programs approved by the board of directors; or

(2) when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or

(3) when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies.

Subscribed Capital Stock v. Subscriber’s Subscription Section 13. Amount of capital stock to be subscribed and paid for the purposes of incorporation. – At least twenty-five percent (25%) of the authorized capital stock as stated in the articles of incorporation must be subscribed at the time of incorporation, and at least twenty-five (25%) per cent of the total subscription must be paid upon subscription, the balance to be payable on a date or dates fixed in the contract of subscription without need of call, or in the absence of a fixed date or dates, upon call for payment by the board of directors: Provided, however, That in no case shall the paid-up capital be less than five Thousand (P5,000.00) pesos. Section 61. Pre-incorporation subscription. – A subscription for shares of stock of a corporation still to be formed shall be irrevocable for a period of at least six (6) months from the date of subscription, unless all of the other subscribers consent to the revocation, or unless the incorporation of said corporation fails to materialize within said period or within a longer period as may be stipulated in the contract of subscription: Provided, That no pre-incorporation subscription may be revoked after the submission of the articles of incorporation to the Securities and Exchange Commission.

Nationality v. Residency requirements, as to incorporation

Nationality Residency Relevant in determining the compliance with the Constitution and nationality laws as to minimum Filipino ownership

Relevant in determining qualification of incorporators (a majority of whom are residents of the Philippines)

Minimum Authorized Capital Stock Section 12. Minimum capital stock required of stock corporations. – Stock corporations incorporated under this Code shall not be required to have any minimum authorized capital stock except as otherwise specifically provided for by special law, and subject to the provisions of the following section. Minimum Paid-up Capital Section 13. x x x Provided, however, That in no case shall the paid-up capital be less than five Thousand (P5,000.00) pesos. Quorum Section 25. Corporate officers, quorum. – xxx The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and the by-laws of the corporation. Unless the articles of incorporation or the by-laws provide for a greater majority, a majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of corporate business, and every decision of at least a majority of the directors or trustees present at a meeting at which there is a quorum shall be valid as a corporate act, except for the election of officers which shall require the vote of a majority of all the members of the board. Directors or trustees cannot attend or vote by proxy at board meetings.



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Section 52. Quorum in meetings. – Unless otherwise provided for in this Code or in the by-laws, a quorum shall consist of the stockholders representing a majority of the outstanding capital stock or a majority of the members in the case of non-stock corporations. (n) Section 97. Articles of incorporation. – The articles of incorporation of a close corporation may provide:

x x x 3. For a greater quorum or voting requirements in meetings of stockholders or directors than those provided in this Code.

Redeemable Shares Section 8. Redeemable shares. – Redeemable shares may be issued by the corporation when expressly so provided in the articles of incorporation. They may be 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, and upon such other terms and conditions as may be stated in the articles of incorporation, which terms and conditions must also be stated in the certificate of stock representing said shares. Close Corporation Section 96. Definition and applicability of Title. - A close corporation, within the meaning of this Code, is one whose articles of incorporation provide that: (1) All the corporation’s issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); (2) all the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another

corporation which is not a close corporation within the meaning of this Code. Any corporation may be incorporated as a close corporation, except mining or oil companies, stock exchanges, banks, insurance companies, public utilities, educational institutions and corporations declared to be vested with public interest in accordance with the provisions of this Code.

The provisions of this Title shall primarily govern close corporations: Provided, That the provisions of other Titles of this Code shall apply suppletorily except insofar as this Title otherwise provides. Four (4) Liabilities of BOD, personally and solidarily

• willfully and knowingly vote for patently unlawful acts of the corporation

• willfully and knowingly assent to patently unlawful acts of the corporation

• gross negligence or bad faith in directing the affairs of the corporation

• acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees

Section 31. Liability of directors, trustees or officers. – x x x When a director, trustee or officer attempts to acquire or acquire, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation. Doctrine of Piercing the Veil of Corporate Fiction When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud or defend crime, the law will regard the corporation as mere association of persons, or in the case of two corporations, merge them into



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one, the one being mere dummy and serves no business purpose and is intended only as a blind, or an alter ego or business conduit for the sole benefit of the stockholders.6 Concept Builders v. NLRC 257 SCRA 149 It is a fundamental principle of corporation law that a corporation is an entity separate and distinct from its stockholders and from other corporations to which it may be connected. But, this separate and distinct personality of a corporation is merely a fiction created by law for convenience and to promote justice. So, when the notion of separate juridical personality is used to defeat public convenience, justify wrong, protect fraud or defend crime, or is used as a device to defeat the labor laws, this separate personality of the corporation may be disregarded or the veil of corporate fiction pierced. This is true likewise when the corporation is merely an adjunct, a business conduit or an alter ego of another corporation. The conditions under which the juridical entity may be disregarded vary according to the peculiar facts and circumstances of each case. No hard and fast rule can be accurately laid down, but certainly, there are some probative factors of identity that will justify the application of the doctrine of piercing the corporate veil, to wit: ‘1. Stock ownership by one or common ownership of both corporations. ‘2. Identity of directors and officers. ‘3. The manner of keeping corporate books and records. ‘4. Methods of conducting the business. The SEC en banc explained the “instrumentality rule” which the courts have applied in disregarding the separate juridical personality of corporations as follows:

“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. The control necessary to invoke the rule is not majority or even complete stock control but such domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own, and is but a conduit for its principal. It must be kept in mind that the control must be shown to have been exercised at the time the acts complained of took place. Moreover, the control and breach of duty must proximately cause the injury or unjust loss for which the complaint is made.” The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as follows: ‘1. Control, not mere majority or complete stock control, but complete domination, not only of finances but of

6 Supra, p.101

policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; ‘2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff’s legal rights; and ‘3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of. The absence of any one of these elements prevents ‘piercing the corporate veil. ‘in applying the ‘instrumentality’ or ‘alter ego’ doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendant’s relationship to that operation. Thus, the question of whether a corporation is a mere alter ego, a mere sheet or paper corporation, a sham or a subterfuge is purely one of fact. Transferability of Shares

Advantage Disadvantage Shares of stocks may be transferred by the owner without consent of the other stockholders

Transfers of the shares may result to uniting incompatible and conflicting interests

Compensation of Directors Section 30. Compensation of directors. – In the absence of any provision in the by-laws fixing their compensation, the directors shall not receive any compensation, as such directors, except for reasonable per diems: Provided, however, That any such compensation other than per diems may be granted to directors by the vote of the stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholders’ meeting. In no case shall the total yearly compensation of directors, as such directors, exceed ten (10%) percent of the net income before income tax of the corporation during the preceding year. Western Institute v. Salas 278 SCRA 216

There is no argument that directors or trustees, as the case may be, are not entitled to salary or other compensation when they perform nothing more than the usual and ordinary duties of their office. This rule is founded upon a presumption that directors /trustees



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render service gratuitously and that the return upon their shares adequately furnishes the motives for service, without compensation Under the foregoing section, there are only two (2) ways by which members of the board can be granted compensation apart from reasonable per diems: (1) when there is a provision in the by-laws fixing their compensation; and (2) when the stockholders representing a majority of the outstanding capital stock at a regular or special stockholders’ meeting agree to give it to them.

This proscription, however, against granting compensation to directors/trustees of a corporation is not a sweeping rule. Worthy of note is the clear phraseology of Section 30 which states: “xxx [T]he directors shall not receive any compensation, as such directors, xxx.” The phrase as such directors is not without significance for it delimits the scope of the prohibition to compensation given to them for services performed purely in their capacity as directors or trustees. The unambiguous implication is that members of the board may receive compensation, in addition to reasonable per diems, when they render services to the corporation in a capacity other than as directors/trustees In the case at bench, Resolution No. 48, s. 1986 granted monthly compensation to private respondents not in their capacity as members of the board, but rather as officers of the corporation, more particularly as Chairman, Vice-Chairman, Treasurer and Secretary of Western Institute of Technology.

x x x

Clearly, therefore , the prohibition with respect to granting compensation to corporate directors/trustees as such under Section 30 is not violated in this particular case. Lyceum of the Philippines v. C.A. 219 SCRA 610 REGISTRATION OF PROPOSED NAME WHICH IS IDENTICAL OR CONFUSINGLY SIMILAR TO THAT OF ANY EXISTING CORPORATION, PROHIBITED; CONFUSION AND DECEPTION EFFECTIVELY PRECLUDED BY THE APPENDING OF GEOGRAPHIC NAMES TO THE WORD "LYCEUM". — The Articles of Incorporation of a corporation must, among other things, set out the name of the corporation. Section 18 of the Corporation Code establishes a restrictive rule insofar as corporate names are concerned: "Section 18. Corporate name. — No corporate name may be allowed by the Securities an Exchange Commission if the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws. When a change in the corporate name is approved, the Commission shall issue an amended certificate of incorporation under the amended name." The policy underlying the prohibition in Section 18 against the registration of a corporate name which is "identical or deceptively or confusingly similar" to that of any existing corporation or which is "patently

deceptive" or "patently confusing" or "contrary to existing laws," is the avoidance of fraud upon the public which would have occasion to deal with the entity concerned, the evasion of legal obligations and duties, and the reduction of difficulties of administration and supervision over corporations. We do not consider that the corporate names of private respondent institutions are "identical with, or deceptively or confusingly similar" to that of the petitioner institution. True enough, the corporate names of private respondent entities all carry the word "Lyceum" but confusion and deception are effectively precluded by the appending of geographic names to the word "Lyceum." Thus, we do not believe that the "Lyceum of Aparri" can be mistaken by the general public for the Lyceum of the Philippines, or that the "Lyceum of Camalaniugan" would be confused with the Lyceum of the Philippines. DOCTRINE OF SECONDARY MEANING; USE OF WORD "LYCEUM," NOT ATTENDED WITH EXCLUSIVITY. — It is claimed, however, by petitioner that the word "Lyceum" has acquired a secondary meaning in relation to petitioner with the result that word, although originally a generic, has become appropriable by petitioner to the exclusion of other institutions like private respondents herein. The doctrine of secondary meaning originated in the field of trademark law. Its application has, however, been extended to corporate names sine the right to use a corporate name to the exclusion of others is based upon the same principle which underlies the right to use a particular trademark or trade name. In Philippine Nut Industry, Inc. v. Standard Brands, Inc., the doctrine of secondary meaning was elaborated in the following terms: " . . . a word or phrase originally incapable of exclusive appropriation with reference to an article on the market, because geographically or otherwise descriptive, might nevertheless have been used so long and so exclusively 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 come to mean that the article was his product." The question which arises, therefore, is whether or not the use by petitioner of "Lyceum" in its corporate name has been for such length of time and with such exclusivity as to have become associated or identified with the petitioner institution in the mind of the general public (or at least that portion of the general public which has to do with schools). The Court of Appeals recognized this issue and answered it in the negative: "Under the doctrine of secondary meaning, a word or phrase originally incapable of exclusive appropriation with reference to an article in the market, because geographical or otherwise descriptive might nevertheless have been used so long and so exclusively by one producer with reference to this article that, in that trade and to that group of the purchasing public, the word or phrase has come to mean that the article was his produce (Ana Ang vs. Toribio Teodoro, 74 Phil. 56). This circumstance has been referred to as the distinctiveness into which the name or phrase has evolved through the substantial and exclusive use of the same for a considerable period of time. . . . No evidence was ever presented in the hearing before the Commission which sufficiently proved that the word 'Lyceum' has indeed acquired secondary meaning in favor of the appellant. If



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there was any of this kind, the same tend to prove only that the appellant had been using the disputed word for a long period of time. . . . In other words, while the appellant may have proved that it had been using the word 'Lyceum' for a long period of time, this fact alone did not amount to mean that the said word had acquired secondary meaning in its favor because the appellant failed to prove that it had been using the same word all by itself to the exclusion of others. More so, there was no evidence presented to prove that confusion will surely arise if the same word were to be used by other educational institutions. Consequently, the allegations of the appellant in its first two assigned errors must necessarily fail." We agree with the Court of Appeals. The number alone of the private respondents in the case at bar suggests strongly that petitioner's use of the word "Lyceum" has not been attended with the exclusivity essential for applicability of the doctrine of secondary meaning. Petitioner's use of the word "Lyceum" was not exclusive but was in truth shared with the Western Pangasinan Lyceum and a little later with other private respondent institutions which registered with the SEC using "Lyceum" as part of their corporation names. There may well be other schools using Lyceum or Liceo in their names, but not registered with the SEC because they have not adopted the corporate form of organization. CORPORATE NAMES MUST BE EVALUATED IN THEIR ENTIRETY TO DETERMINE WHETHER THEY ARE CONFUSINGLY OR DECEPTIVELY SIMILAR TO ANOTHER CORPORATE ENTITY'S NAME. — petitioner institution is not entitled to a legally enforceable exclusive right to use the word "Lyceum" in its corporate name and that other institutions may use "Lyceum" as part of their corporate names. To determine whether a given corporate name is "identical" or "confusingly or deceptively similar" with another entity's corporate name, it is not enough to ascertain the presence of "Lyceum" or "Liceo" in both names. One must evaluate corporate names in their entirety and when the name of petitioner is juxtaposed with the names of private respondents, they are not reasonably regarded as "identical" or "confusingly or deceptively similar" with each other. Pre-emptive Rights Section 39. Power to deny pre-emptive right. – All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto: Provided, That such pre-emptive right shall not extend to shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; or to shares to be issued in good faith with the approval of the stockholders representing two-thirds (2/3) of the

outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt. Section 102. Pre-emptive right in close corporations. – The pre-emptive right of stockholders in close corporations shall extend to all stock to be issued, including reissuance of treasury shares, whether for money, property or personal services, or in payment of corporate debts, unless the articles of incorporation provide otherwise. Cumulative Shares in Favor of 1 Candidate (See Footnote 5) Issuance of Stocks Section 62. Consideration for stocks. – Stocks shall not be issued for a consideration less than the par or issued price thereof. Consideration for the issuance of stock may be any or a combination of any two or more of the following:

1. Actual cash paid to the corporation; 2. Property, tangible or intangible, actually

received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued;

3. Labor performed for or services actually rendered to the corporation;

4. Previously incurred indebtedness of the corporation;

5. Amounts transferred from unrestricted retained earnings to stated capital; and

6. Outstanding shares exchanged for stocks in the event of reclassification or conversion.

Where the consideration is other than actual cash, or consists of intangible property such as patents of copyrights, the valuation thereof shall initially be determined by the incorporators or the board of directors, subject to approval by the Securities and Exchange Commission. Shares of stock shall not be issued in exchange for promissory notes or future service. The same considerations provided for in this section, insofar as they may be applicable, may



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be used for the issuance of bonds by the corporation. The issued price of no-par value shares may be fixed in the articles of incorporation or by the board of directors pursuant to authority conferred upon it by the articles of incorporation or the by-laws, or in the absence thereof, by the stockholders representing at least a majority of the outstanding capital stock at a meeting duly called for the purpose. Section 64. Issuance of stock certificates. – No certificate of stock shall be issued to a subscriber until the full amount of his subscription together with interest and expenses (in case of delinquent shares), if any is due, has been paid. Section 65. Liability of directors for watered stocks. – Any director or officer of a corporation 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 knowledge thereof, does not forthwith express his objection in writing and file the same with the corporate secretary, shall be solidarily, liable with the stockholder concerned to the corporation 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. Better right Re Dividend at the time of declaration Section 63. Certificate of stock and transfer of shares. – The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or vice president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-laws. 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, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number

of the certificate or certificates and the number of shares transferred.

No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation.

Section 86. Notation on certificates; rights of transferee. – Within ten (10) days after demanding payment for his shares, a dissenting stockholder shall submit the certificates of stock representing his shares to the corporation for notation thereon that such shares are dissenting shares. His failure to do so shall, at the option of the corporation, terminate his rights under this Title. If shares represented by the certificates bearing such notation are transferred, and the certificates consequently cancelled, the rights of the transferor as a dissenting stockholder under this Title shall cease and the transferee shall have all the rights of a regular stockholder; and all dividend distributions which would have accrued on such shares shall be paid to the transferee. Removal of Directors/Trustees Section 28. Removal of directors or trustees. – Any director or trustee of a corporation may be removed from office by a vote of the stockholders holding or representing at least two-thirds (2/3) of the outstanding capital stock, or if the corporation be a non-stock corporation, by a vote of at least two-thirds (2/3) of the members entitled to vote: Provided, That such removal shall take place either at a regular meeting of the corporation or at a special meeting called for the purpose, and in either case, after previous notice to stockholders or members of the corporation of the intention to propose such removal at the meeting. A special meeting of the stockholders or members of a corporation for the purpose of removal of directors or trustees, or any of them, must be called by the secretary on order of the president or on the written demand of the stockholders representing or holding at least a majority of the outstanding capital stock, or, if it be a non-stock corporation, on the written demand of a majority of the members entitled to vote. Should the secretary fail or refuse to call the special meeting upon such demand or fail or refuse to give the notice, or if there is no secretary, the



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call for the meeting may be addressed directly to the stockholders or members by any stockholder or member of the corporation signing the demand. Notice of the time and place of such meeting, as well as of the intention to propose such removal, must be given by publication or by written notice prescribed in this Code. Removal may be with or without cause: Provided, That removal without cause may not be used to deprive minority stockholders or members of the right of representation to which they may be entitled under Section 24 of this Code. Power to Dispose Property and Assets – Requirement of Stockholders Section 40. Sale or other disposition of assets. – Subject to the provisions of existing laws on illegal combinations and monopolies, a corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon such terms and conditions and for such consideration, which may be money, stocks, bonds or other instruments for the payment of money or other property or consideration, as its board of directors or trustees may deem expedient, when authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or in case of non-stock corporation, by the vote of at least to two-thirds (2/3) of the members, in a stockholder’s or member’s meeting duly called for the purpose. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder may exercise his appraisal right under the conditions provided in this Code. A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated.

After such authorization or approval by the stockholders or members, the board of directors or trustees may, nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, pledge or other disposition of property and assets, subject to the rights of third parties under any contract relating thereto, without further action or approval by the stockholders or members. Nothing in this section is intended to restrict the power of any corporation, without the authorization by the stockholders or members, to sell, lease, exchange, mortgage, pledge or otherwise dispose of any of its property and assets if the same is necessary in the usual and regular course of business of said corporation or if the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of its remaining business. In non-stock corporations where there are no members with voting rights, the vote of at least a majority of the trustees in office will be sufficient authorization for the corporation to enter into any transaction authorized by this section. Power to Acquire own Shares Section 41. Power to acquire own shares. – A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the following cases: Provided, That the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired:

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

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

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

GOOD LUCK ON THE MIDTERM EXAMS!

(As of 30 March 2015)



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FINAL EXAMS – LAST MINUTE TIPS Ø Foreign corporation’s capacity to sue General Rule: Foreign corporation’s capacity to sue must be affirmatively pleaded in order that it may proceed and effectively institute a case in a case in Philippine courts. But if the case will be dismissed with prejudice on the ground of non-averment of foreign capacity to sue, there will be no bar for re-institution of the same case.7 Exception: Averment of capacity to sue is not necessary if the action involves a complaint for violation of Revised Penal.8 Ø Corporation Sole to own and alienate

real property Acquisition and alienation of property. – Any corporation sole may purchase and hold real estate and personal property for its church, charitable, benevolent or educational purposes, and may receive bequests or gifts for such purposes. Such corporation may sell or mortgage real property held by it by obtaining an order for that purpose from the Court of First Instance of the province where the property is situated upon proof made to the satisfaction of the court that notice of the application for leave to sell or mortgage has been given by publication or otherwise in such manner and for such time as said court may have directed, and that it is to the interest of the corporation that leave to sell or mortgage should be granted. The application for leave to sell or mortgage must be made by petition, duly verified, by the chief archbishop, bishop, 7 Supra Note 1, p.573. 8 Le Chemise Lacoste, S.A. v. Fernandez, 129 SCRA 377, 21 May 21 1984.

priest, minister, rabbi or presiding elder acting as corporation sole, and may be opposed by any member of the religious denomination, sect or church represented by the corporation sole: Provided, That in cases where the rules, regulations and discipline of the religious denomination, sect or church, religious society or order concerned represented by such corporation sole regulate the method of acquiring, holding, selling and mortgaging real estate and personal property, such rules, regulations and discipline shall control, and the intervention of the courts shall not be necessary.9 Ø Trustee’s vote by proxy The voting trustee or trustees may vote by proxy unless the agreement provides otherwise.10 Ø Educational corporation / institution Educational institutions, other than those established by religious groups and mission boards, shall be owned solely by citizens of the Philippines or corporations or associations at least sixty per centum of the capital of which is owned by such citizens. The Congress may, however, require increased Filipino equity participation in all educational institutions. The control and administration of educational institutions shall be vested in citizens of the Philippines.11 Ø A director who has been declared

delinquent The Corporation Code requires that the director must own at least one (1) share

9 B.P. Blg. 68, Section 113. 10 B.P. Blg. 68, Section 59 (last paragraph). 11 Constitution (1987), Article XIV, Section 4(2).



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which shall stand in his name in the books of the corporation.12 Delinquency does not deprive the director of ownership of shares. The effects of delinquency are provided in Section 71 of the Corporation Code. Ø By-Laws of a stock corporation By-laws are rules and ordinances made by a corporation for its own government; to regulate the conduct and define the duties of the stockholders or members towards the corporation and among themselves. Ø Corporate Opportunity Doctrine Corporate officers are not permitted to use their position of trust and confidence to further their private interests. The doctrine recognizes that the fiduciary standards could not be upheld where the fiduciary was acting for two entities with competing interests.13 Ø Religious Society Religious society is not mandated by law to register as a corporation but it may do so to acquire juridical personality for the purpose of administration of its temporalities and properties and even to acquire properties of its own. Like a corporation sole, the articles of incorporation of a religious society need not contain a term of its existence as it is supposed to exist in perpetuity.14 Ø “Doing business” …is continuing the body or substance of business or enterprise for which it has substantially retired from it and turned it

12 B.P. Blg. 68, Section 23. 13 Gokongwei, Jr. v. SEC, 89 SCRA 336 14 Ladia, p. 481.

over to another. The term implies a continuity of commercial dealings and arrangements and contemplates, to the extent, the performance of acts or works or the exercise of some functions normally incident to and in progressive prosecution of, the purpose and objects of its organization.15 Ø “Doing Business”, appointment of an

exclusive dealer Doing business does not include mere appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account. 16 Ø Dissolved corporation in a merger Although there is dissolution of the absorbed corporation, there is no winding up of their affairs or liquidation of their assets, because the surviving corporation automatically acquires all their rights, privileges and powers, as well as their liabilities.17 Ø Non-Filing of by-laws in period

provided for (suspension) Non-filing of by-laws will not result in automatic dissolution of the corporation. The SEC is empowered only to “suspend or revoke, after proper notice and hearing, the franchise or certificate of registration of corporation” on the ground inter alia of “failure to file by-laws within the required period.”18 15 Ladia, p. 537. 16 Ladia, p. 538. 17 Associated bank v. CA, G.R. No. 123793, June 29, 1998 (also see Ladia, p.427) 18 Loyola Grand Villas Homeowners (South) Association, Inc. v. CA, 276 SCRA 681, (also see Ladia, p.305)



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Ø Effects of delinquency (to vote,

receive cash and stock) No delinquent stock shall be voted.19 No delinquent stock shall be voted for or be entitled to vote or to representation at any stockholder’s meeting, nor shall the holder thereof be entitled to any of the rights of a stockholder except the right to dividends in accordance with the provisions of this Code, until and unless he pays the amount due on his subscription with accrued interest, and the costs and expenses of advertisement, if any.20 Ø Three (3) methods of liquidation and

their effects

(1) By the Corporation itself through the Board of Directors – the Board will only have 3 yrs to finish its task of liquidation, claims for or against the corporation not filed within the 3 year period will become unenforceable as there exists no corporate entity against which they can be enforced. Actions pending for or against the corporation when the 3 year period expires are abated since after that period the corporation ceases for all intents and purposes and is no longer capable of suing or being sued after that period.

(2) By a Trustee appointed by the

corporation – the 3 year period will not apply provided the designation of a trustee is made within the 3 year period.

(3) By appointment of a receiver on

petition or motu proprio upon the dissolution of the corporation – the 3 year period will not apply because the dissolved

19 B.P. Blg. 68, Section 24. 20 B.P. Blg. 68, Section 71.

corporation is substituted by the receiver who may sue or be sued beyond the 3 year period. Ø General requirements for a valid

stockholders meeting

(1) It must be held on the date fixed in the by-laws or in accordance with law.

(2) Prior notice must be given. (3) It must be held at the proper place. (4) It must be called by the proper party. (5) Quorum and voting requirements

must be met. Ø Rights of stockholders to compel

corporation to pay value of his shares is broader in a close corporation than in ordinary stock

A stockholder of a close corporation, may, for any reason compel the corporation to purchase his shares at their fair value, which shall not be less than their par or issued value, with the limitation only that the corporation has sufficient assets to cover its liabilities exclusive of capital stock.21 In an ordinary stock corporation, unless a stockholder sells his shares, a stockholder cannot get back his investment nor compel the corporation to buy his shares, except in the exercise of his appraisal right.22 Ø In case of deadlock in close

corporation the courts can interfere The SEC is granted a wide discretion in respect to the management of a close corporation in the event of a deadlock. This jurisdiction of the SEC has been transferred




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to the regular courts under RA 8799 or the Securities and Regulation Code.23 Ø Cumulative voting in non-stock

corporation General Rule: Not allowed. Exception: The right of the members of any class or classes to vote may be limited, broadened or denied to the extent specified in the articles of incorporation or the by-laws. Unless so limited, broadened or denied, each member, regardless of class, shall be entitled to one vote.24 Ø Voting by proxy in non-stock

corporations General Rule: Allowed. Exception: Unless otherwise provided in the articles of incorporation or the by-laws, a member may vote by proxy in accordance with the provisions of this Code. Ø Voting by mail or any other means in

non-stock corporations Voting by mail or other similar means by members of non-stock corporations may be authorized by the by-laws of non-stock corporations with the approval of, and under such conditions which may be prescribed by, the Securities and Exchange Commission. Ø Lack of requisite license, doing

business The general rule is that “it is not the lack of required license but doing business without


a license which bars a foreign corporation form access to our courts.” No foreign corporation transacting business in the Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the Philippines; but such corporation may be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws.25 Ø Dissolved corporation may undertake

any of the ways of liquidation:

(1) By the corporation itself though Board of Directors;

(2) By a trustee/assignee appointed by the corporation;

(3) By appointment of a receiver/liquidator;

Ø In a corporate controversy, service of

summons Service upon domestic private juridical entity. — When the defendant is a corporation, partnership or association organized under the laws of the Philippines with a juridical personality, service may be made on the president, managing partner, general manager, corporate secretary, treasurer, or in-house counsel.26 Ø In an intra-corporate controversy,

service of summons Service upon domestic private juridical entities. – If the defendant is a domestic corporation, service shall be deemed

25 B.P. Blg. 68, Section 133. 26 Rules of Court, Rule 14, Section 11



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adequate is made upon any of the statutory or corporate officers as fixed by the by-laws or their respective secretaries. If the defendant is a partnership, service shall be deemed adequate if made upon any of the managing or general partners or upon their respective secretaries. If the defendant is an association service shall be deemed adequate if made upon any of its officers or their respective secretaries.27 Ø Issuance of certificate of stock The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or vice president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-laws.28 Ø Subscriptions of Shares of Stock

(indivisible) No certificate of stock shall be issued to a subscriber until the full amount of his subscription together with interest and expenses (in case of delinquent shares), if any is due, has been paid.29 Ø certificate of stock merely quasi-

negotiable A certificate of stock is not regarded as negotiable in the same sense that a bill or a note is negotiable, even if it is endorsed in blank. Thus, while it may be transferred by endorsement coupled with delivery thereof, and therefore merely quasi-negotiable, it is nonetheless non-negotiable in that the transferee takes it without prejudice to all 27 Interim Rules of Procedure Governing Intra-

Corporate Controversies under R.A. No. 8799, Rule 2, Section 5


the rights and defenses which the true and lawful owner may have except in so far as the principles governing estoppel may apply.30 Ø Wash Sale By effecting any transaction in such security which involves no change in the beneficial ownership thereof.31 Ø Matched Order By entering an order or orders for the purchase or sale of such security with the knowledge that a simultaneous order or orders of substantially the same size, time and price, for the sale or purchase of any such security, has or will be entered by or for the same or different parties;32 Ø Short Sale Refers to any sale of a security which the seller does not own or any sale which is consummated by the delivery of a security borrowed by, or for the account of the seller. This is not illegal per se. No person shall use or employ, in connection with the purchase or sale of any security any manipulative or deceptive device or contrivance. Neither shall any short sale be effected nor any stop-loss order be executed in connection with the purchase or sale of any security except in accordance with such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest for the protection of investors.33

30 Ladia, p. 347. 31 R.A. No. 8799, Section 24.1(a)(i) 32 R.A. No. 8799, Section 24.1(a)(ii) 33 R.A. No. 8799, Section 24.2



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Ø Instances when a foreign corporation with no license to do business can sue in the country

Averment of a foreign corporation’s capacity to sue is not necessary:34

• if the action involves a complaint for violation of the Revised Penal Code;35

• if not suing or maintaining a suit but is merely defending itself from one filed against it.36

Ø Inspection of corporate books The records of all business transactions of the corporation and the minutes of any meetings shall be open to inspection by any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, in writing, for a copy of excerpts from said records or minutes, at his expense.37 Ø Insider Trading It shall be unlawful for an insider to sell or buy a security of the issuer, while in possession of material information with respect to the issuer or the security that is not generally available to the public, unless: (a) The insider proves that the information was not gained from such relationship; or (b) If the other party selling to or buying from the insider (or his agent) is identified, the insider proves: (I) that he disclosed the information to the other party, or (ii) that he had reason to believe that the other party

34 Ladia, p.573 35 Le Chemise Lacoste, S.A. v. Fernandez, 129 SCRA 377, 21 May 21 1984. 36 Times, Inc. v. Reyes, 39 SCRA 303 37 B.P. Blg. 68, Section 74, par.2

otherwise is also in possession of the information.xxx38 Ø Material nonpublic information Information is "material nonpublic" if: (a) It has not been generally disclosed to the public and would likely affect the market price of the security after being disseminated to the public and the lapse of a reasonable time for the market to absorb the information; or (b) would be considered by a reasonable person important under the circumstances in determining his course of action whether to buy, sell or hold a security.39 Ø Dissolution of Corporation

(1) by expiration of its term;

(2) by voluntary surrender of its primary franchise (voluntary dissolution); Modes : (a) voluntary dissolution when there

are creditors affected; (b) voluntary dissolution where

creditors are affected; (c) shortening of corporate term;

(3) by revocation of its corporate

franchise (involuntary dissolution) Ø Exercise of appraisal rights

(1) In case amendment of the articles of incorporation has the effect of changing or restricting the rights of any stockholder, or class of shares,

38 R.A No. 8799, Section 27.1 39 R.A No. 8799, Section 27.2



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or of authorizing preferences in respect superior to those outstanding shares of any class, or extending or shortening of the term of corporate existence;

(2) In case of sale, lease, exchange , mortgage, pledge or other disposition of all or substantially all of corporate property and assets;

(3) In case of merger or consolidation; Ø Improperly held or called

stockholder’s meeting All proceedings had and any business transacted at any meeting of the stockholders or members, if within the powers or authority of the corporation, shall be valid even if the meeting be improperly held or called, provided all the stockholders or members of the corporation are present or duly represented at the meeting.40 Ø Attending director’s meeting by proxy A director or trustee cannot attend or vote by proxy at any board or meeting since he was supposedly elected because of his expertise in the management or his business acumen such that he is expected to personally attend and vote on matters brought before the meeting.41 Ø Requisites of voting trusts

(1) In writing (2) Notarized (3) Specified terms/conditions (4) Certified copy filed with the

corporation and SEC Ø 3-ways of becoming stockholder

40 B.P. Blg. 68, Section 51, par. 3 41 Ladia, p.326

(1) By contract of subscription (2) Purchase of treasury shares (3) Purchase or acquisition of shares

from existing stockholders N.B. Acquisition of unissued shares of stocks is always a subscription contract notwithstanding the fact that parties refer to it as purchase or some other contract.42 Ø Meaning of “Transfer” As used in the Code, refers to absolute and unconditional transfer to warrant registration in the books of the corporation in order to bind the latter and other third persons.43 Ø Interests on unpaid subscription General Rule: No interest Exception: If stated the by-laws. Ø Important effect of merger or

consolidation The surviving or the consolidated corporation shall thereupon and thereafter possess all the rights, privileges, immunities and franchises of each of the constituent corporations; and all property, real or personal, and all receivables due on whatever account, including subscriptions to shares and other choses in action, and all and every other interest of, or belonging to, or due to each constituent corporation, shall be deemed transferred to and vested in such surviving or consolidated corporation without further act or deed;44

42 B.P. Blg. 68, Section 60 43 Ladia, p. 350 44 B.P. Blg. 68, Section 80(4)



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Ø Grounds for dissolution of closed corporation

[A]ny stockholder of a close corporation may, by written petition to the Securities and Exchange Commission, compel the dissolution of such corporation whenever

• any of acts of the directors, officers or those in control of the corporation is illegal, or fraudulent, or dishonest, or oppressive or unfairly prejudicial to the corporation or any stockholder, or

• whenever corporate assets are being misapplied or wasted.45

Ø Dissolution of corporation sole A corporation sole may be dissolved and its affairs settled voluntarily by submitting to the Securities and Exchange Commission a verified declaration of dissolution.xxx46 Ø Grounds for involuntary dissolution To suspend, or revoke, after proper notice and hearing, the franchise or certificate of registration of corporations, partnerships or associations, upon any of the grounds provided by law, including the following: [1] Fraud in procuring its certificate of registration; [2] Serious misrepresentation as to what the corporation can do or is doing to the great prejudice of or damage to the general public; [3] Refusal to comply or defiance of any lawful order of the Commission restraining commission of acts which would amount to a grave violation of its franchise;

45 B.P. Blg. 68, Section 105 46 B.P. Blg. 68, Section 115

[4] Continuous inoperation for a period of at least five (5) years; [5] Failure to file by-laws within the required period; [6] Failure to file required reports in appropriate forms as determined by the Commission within the prescribed period; Ø Appointment of Management

Committee A reading of the aforecited legal provision reveals that for a minority stockholder to obtain the appointment of an interim management committee, he must do more than merely make a prima facie showing of a denial of his right to share in the concerns of the corporation;

• he must show that the corporate property is in danger of being wasted and destroyed; that the business of the corporation is being diverted from the purpose for which it has been organized; and

• that there is serious paralyzation of operations all to his detriment.47

Ø Marking the close The placing of purchase or sale order, at or near the close of the trading period. The person making the order would thus post a higher or lower price for the security just barely before the close of the market. Ø Painting the tape Akin to marking the close but the activity is made during normal trading hours.

GOOD LUCK ON THE FINAL EXAMS! (26 May 2015)

ENJOY THE MID-YEAR VACATION!

47 Sy Chim vs. Sy Siy Ho & Sons (480 SCRA 2006)

2015 JHEZ NOTES ON CORPORATION LAW ARELLANO UNIVERSITY ... · PDF file2015 JHEZ NOTES ON CORPORATION LAW ARELLANO UNIVERSITY SCHOOL OF LAW, . — – Securities and Exchange Commission

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