Notes-II

Sec 10 - Any number of natural persons not less than five (5) but not more than fifteen (15), all of legal age and a majority of whom are residents of the Philippines, may form a private corporation for any lawful purpose or purposes. Each of the incorporators of a stock corporation must own or be a subscriber to at least one (1) share of the capital stock of the corporation.

Any number of natural persons not less than five (5) but not more than fifteen (15) all of legal age a majority of whom are residents of the Philippines, may form a private corporation for any lawful purpose or

purposes Each of the incorporators of a stock corporation must own or be a subscriber to at least one (1) share of the capital stock of the

corporation

Incorporation of a private corporation a mere privilege

o generated by agreements of a group of persons but legislative authority is necessary to put a stamp

of state intervention in the creation of corporations one of the attributes of sovereignty

o special privilege conferred upon a group of persons by the sovereign power of the State

right to be and act as a corporation does NOT belong to any person as a natural and civil right

o under sec 10- formation of a corporation “for any lawful purpose/s” provided it is in accordance with the Code

is a matter of right cannot be restrained

o since a corporation is merely a creation of law it can be dissolved at any time by legislative

enactment subject to certain limitations

Advantages of the corporate form

1. any number of persons may unite in a single enterprise without using their own names without difficulty or inconvenience with valuable right

i. to contract ii. to sue or be sued

iii. to hold or convey property in the corporate name

iv. to act as legal unit2. individual stockholder may invest in the corporate

enterprise as much or as little as he sees fit without risking more in the absence of statutes to the contrary

i. is the limit of his liability (doctrine of limited liability, of corporate fiction)

can transfer their shares without the consent of the other stockholders

3. the rights and obligation of a corporation are NOT affected by the death or change of the individual members

Business continues uninterrupted and unaffected so long as corporate entity continues

Credit is strengthened by such continuity of existence

4. Modern corporation makes great undertakings feasible It enables many individuals to cooperate in order to

furnish large amounts of capitali. to finance gigantic enterprises

ii. large scale enterprise lowering costs of production

Corporations and Associations

Concept of association-

one of vague meaning used to indicate a collection of persons who have

joined together for a certain object properly applied to an unincorporated society or

body of individuals formed for moral, benevolent, social, political

purposes

Association CorporationAs to possession of juridical personality

A creature of contract without a legal entity separate from the individuals composing it

A legal entity deriving its existence from franchise

As to governing law

Generally governed by the Civil Code or some other lawsAcc to Art 45 “partnerships and associations for private purposes are governed by the provisions of the (civil) code on partnerships

Private corporations are governed by the Corporation Code

Capacity to act in its name

Not competent to act as agent or create agents or confer upon another authority to act on its behalf Cannot sue or be sued Cannot enter into contracts in

the name of the assoc Neither can it acquire properties

under its common name Contracts entered on its behalf

make the person signing personally liable to the contracting party

Art 46- corporation as juridical person“juridical persons may acquire and possess property of all kinds as well as incur obligations and bring civil and criminal actions in conformity with the laws and regulations of their organization”

Validity and enforcement of acts

May be valid although unenforceable

Sue as individuals to enforce their rights

But not in the name of the group or assoc, it not being a legal unit

o Although assoc has no juridical personality, its subscription to the

capital stock of a corporation is NOT NECESSARILY invalid

o It should not have been accepted under such name in the first place

As to powers, rights and priveleges

Not being engaged in businessNot desirous of acquiring juridical personality

Need NOT be registered with the Securities and Exchange Commission

o Cannot exercise powers, rights, privileges incident to incorporation, expressly granted to registered corps

Policy of Judicial non-interference

Courts will not interfere with the internal affairs of an unincorporated association so as to settle disputes between members on questions

Of policy Discipline Internal government

Concept of Franchise

Franchise-

Any special privilege or right affected with public interest Conferred by the State on corporations or persons

And which does not belong to the citizens of the country as a matter of common right1.) Primary or corporate franchise

a. Right or privilege granted to individuals by the State

b. To be and act as a corporation after its incorporation

c. Privilege granted to incorporatorsi. Enables them to act for certain

designated purposes as a single individual

ii. And exempts them, unless otherwise especially provided, from individual liability for corporate debts

d. Is granted to and vests in the individuals who compose the corporation

i. NOT to the corporation itself2.) Secondary or special franchise

a. Franchise to exercise powers and privileges granted to the corporation in order to carry out business for which it was created

i. Including those conferred for public benefit

1. Ie power of eminent domain2. Powers and privileges enjoyed

by public utilities b. Conferred upon the corporation AFTER its

incorporation i. NOT upon the individuals who compose

the corporation

Transferability of franchise

1.) Primary franchise-a. By nature, inalienableb. Part of the corporation

i. CANNOT be sold or assignedii. Otherwise, corporation would be created

without legislative consentiii. Maybe conveyed PROVIDED there is

EXPRESS legislative authority to do so2.) Secondary franchise-

a. Granted to the corporation itselfi. So Ordinarily, maybe conveyed or

mortgaged under a general power granted to a corporation to dispose of its property

1. Except if such franchise is charged with public use (ie for public utilities)

a. May be sold only with PRIOR approval and authorization of the proper government authorities such as the National telecommunications commission for telcos

b. Even if sold under execution, without such authority, transferor or grantee continues to be responsible under the

franchise in relation to the Commission and the public

i. Transferee holds the property as agent for the registered owner (as far as the law is concerned)

ii. Subject to levy and sale on execution1. Together with all the property

necessary for the enjoyment thereof

2. BUT WHERE the judgment DOES NOT contain any special decree making the franchise of a private corporation answerable for its judgment debt

a. Inclusion of such franchise, trade name, and capital stocks has NO justification and should be SET ASIDE insofar as it authorizes such levy and sale

Steps in the creation of a corporation

1.) Promotion2.) Incorporation3.) Formal organization and commencement of business

Promotion of corporations

Promotion-

Not a legal but a business term A number of business operations peculiar to the commercial

world by which a company is brought into existence Not really a formal part of the organization of a corporation

o It occurs outside the corporate formo Theoretically, independent thereof

Usually undertaken by a “promoter”o but formation and organization may be done by the

incorporators themselves without getting the services of a promoter

Promoter-

one who, alone or with others, takes it upon himself to organize a corporation:

o to procure the necessary legislation, where necessary

o to procure the necessary subscribers to the articles of incorporation, where the corporation is organized under general laws

o to see that the necessary document is presented to the proper office to be recorded and the certificate of incorporation issued

o generally “to float the company” to sell shares in a company or business to

the public for the first time

The term "float" refers to the regular shares that a company has issued to the public that are available for investors to trade.

This figure is derived by taking a company's outstanding shares and subtracting from it any restricted stock. (Restricted stock is stock that is under some sort of sales restriction: for example, stock that is held by insiders and cannot be traded because they are in a lock-up period following an initial public offering.)

A company's float is an important number for investors because it indicates how many shares are actually available to be bought and sold by the general investing public.

The company is not responsible for how shares within the float are traded by the public - this is a function of the secondary market. Therefore, shares that are purchased, sold or even shorted by investors do not affect the float because these actions do not represent a change in the number of shares available for trade: they simply represent a redistribution of

shares. Similarly, the creation and trading of options on a stock do not affect the float.

Still don't quite understand what a float is? Here's an example:

Say the TSJ Sports Conglomerate has 10 million shares in total, but 3 million shares are held by insiders who acquired these shares through some type of share distribution plan. Because the employees of TSJ are not allowed to trade these stocks for a certain period of time, they are considered to be restricted; therefore, the company's float would be 7 million (10 million - 3 million = 7 million). In other words, only 7 million shares are available for trade.

It should also be noted that there is an inverse correlation between the size of a company's float and the volatility of the stock's price. This makes sense when you think about it: the greater the number of shares available for trade, the less volatility the stock will show

because the harder it will be for a smaller number of shares to move the price.

Read more: http://www.investopedia.com/ask/answers/04/091004.asp#ixzz2CwtXwxjZ

Aka projectors, agents, stewards, trustees “one who acts in the

o Formationo Establishmento Control

Of a companyPrior to the incorporation and the assumption of control by

the board of directors Agents of the incorporators

Stages in Corporate Promotion

1.) Discovery- represent a new product or service or the promoter may simply organize another company in an existing line of business

2.) Investigation- involves an analysis of needs 1. Financial2. Management3. Materials4. Labor

And a decision on whether the estimated earnings justify the effort

3.) Assembly- last stage, consists of bringing together the property, money and personnel into an organization. The promoter must have some assurance of control lest some 3rd parties deprive him of the fruits of his labor. Control may involve acquisition of patents, leases, contracts for services

Legal Issue involving promoters: esp as to the extent of his rewards and the manner of obtaining them

Nature of relations of promoters

1.) To Corporation NOT in any sense the agents of the corporation

before it comes to existence There cannot be any agency unless there is

a principal May become agents of the corporation

ONLY after the corporation has been formed

Must be with ASSENT, express or implied by the corporation

a. Ie inclusion in the articles of incorporation/ contract

Occupy a fiduciary or quasi-trust relationship 1.) with the corporation When it finally

comes to existence 2.) and to the subscribers prior to its

organization, as long as they are acting as promoters

promoter must act in GOOD FAITH in all dealings in behalf of the corporation

To protect corporation from dishonest promoters

Promoter violated the duty: a. Promoter secretly acquires

property which he knows will be bought by the corporation then sells it to the corporation at a secret profit

2.) To subscribers or corporators Maybe agents of the subscribers or corporators

Before formation, it cannot be agents of the corporation itself but

There must be an AGREEMENT TO THIS EFFECT

Agency is a contract DO NOT become partners with subscribers

Without agreement to such effect One of trust and confidence

Impose perfect good faith on promoter to act in the interest of all the subscribers and corporators

Stockholders cannot be held personally liable for promoter’s claim for compensation for the organization of the corporation

Without any proof that said stockholders contracted such services

Fact that they benefited from such services is NO justification to hold them personally liable

Corporation alone should be liable for the corporate acts as authorized by its officers and directors

3.) Inter se Do not becomes partners between themselves

Unless there is mutual agreement between the parties

Liability of corporation for Promotion Fees

a.) General Rule- Corporation not liable to its promoters for any

payment in services rendered or expenses incurred BEFORE its incorporation in promoting it

i. UNLESS AFTER its incorporation,I. it EXPRESSLY agrees to make such

paymentII. Or from other facts, the court can

infer a new contract to REIMBURSEii. More reasonable to hold such services as

performed gratuitously Because of the general good or

private benefit expected to result from the object of the corporation

And it is unjust to stockholders who subscribe and pay for stock, that their property be subject to claims

to which they have no voice in creating

It is fraud for promoters to undertake to decide for the future stockholders in the corporation to be organized that a large part of the capital stock is a fair remuneration for their services

to issue such remuneration for themselves and then to invite the public to subscribe to stock without disclosing that fact and getting the subscribers consent to the payment of that remuneration

b.) authorization by stockholders after due organization, it may,

i. WITH THE CONSENT of the stockholdersii. And where there is no question as to the

rights of subsequent stockholdersAuthorize the payment of compensation to promoters and issuance of stock to them

Unless prohibited by statutec.) Under the Revised Securities Act

Corporation code does not have any provision regarding the payment of promotion fees for the promotion of corporations

But the revised securities act authorizes the payment of such fees

i. IF provided for in the registration statement of securities filed with the SEC

If not registered under the securities act, observed the prevailing rule of proper corporate practice on payment of promoter’s fee

But if registered under the said act, provisions of the registration statement should be followed

d.) Amount Not given in lump sum

i. But in stages as the company proceeds in its operations

Amount allowed by SEC depends oni. Principally, on effort exerted

ii. Difficulties encounterediii. Expenses incurred in promoting and

organizing corporation Nor hard and fast rule

i. But in mining companies, must not exceed 5% of total paid up subscriptions

Liability of corporation on promoter’s contractsa.) Before incorporation and organization-

Corporation has i. No being, franchise or faculties

ii. Its promoters are 1. In no sense identical with the

corporation2. Nor do they represent it in any

relation of agency

3. Or have any authority to enter into preliminary contracts binding upon the corporation

Therefore, not liable upon any contract which a promoter enters for it, prior to its organization

UNLESS the contract is expressly or impliedly ADOPTED or RATIFIED by the corporation after its organization is completed

Or such liability is imposed by statute

b.) After incorporation and organizationo For corporation to assume liability

Such contract must be one which the corporation itself can make

Corporation cannot assume an ultravires contract

Contracts entered into by promoters should at most be DEEMED SUSPENDED and ENFORCEABLE only AFTER incorporation and organization

Liability of promoters for failure to organize corporation 1.) To subscribers

Money is paid to promoters or provisional directors by a subscriber for shares in aprojected corporation prelim to organization

And promoters and provisional directorsi. Fail to organize the corporation according

to the prospectus or other agreement ii. Or abandon the enterprise before its

execution iii. = money paid of a consideration which has

failed Subscriber may recover it from the promoters

i. Notwithstanding that it was actually spent on preliminary expenses

But promoters are not personally liable for such amount

i. If the subscriber must agrees that the amount paid may be applied on certain promotional or developmental expenses and it is so applied

Subscriber must showi. That the person receiving the money was

authorized to receive it for the promoters or provisional directors

ii. That he in fact did receive it2.) To each other

As between themselves, the right of the stockholders in a defectively incorporated association

i. Governed by the laws of the State relating thereto

ii. Not by the rules on partnership Partners inter se

i. If persons who attempt but fail to incorporate their association and who nevertheless carry on business under the corporate name become partners inter se

ii. But one who takes no part except to subscribe for stock in a proposed corporation DOES NOT become a partner w/ other subscribers

Underwriting Agreements- Resorted to float stock issues of large corporations- General types

Firm commitment Members severally agree to purchase the WHOLE issue

OUTRIGHT At a particular price For resale at a price differential

to the public or to dealers who sell at

another differential to the public

All-or-nothing commitment Members agree to accept liability For the purchase of an issue at a given

price Only if the entire issue is NOT sold

(usually within a 30 day period)

Standby commitment Members will purchase stocks And distribute at predetermined prices

to the public Any amount of the issue Not taken by stockholders in exercising

their pre-emptive rights

Best efforts commitment Members will use its best efforts to

distribute the issue to the public Such members do not agree to

purchase the issue at predetermined prices

Security is sold for whatever price it will bring

Underwriters take a predetermined spread

Issuers take the residual Variation: fixed price but no guarantee

on the quantity sold

Underwritingo “ the act or process o Of guaranteeing the distribution and sale of

securities of ANY kind issued by another corporation”

Incorporation distinguished from creation- Incorporation

Narrower in scope Refers to the performance of conditions, acts,

deeds and writings by incorporators and the official acts, certifications or records which give the corporation its existence

- Creation In its broadest sense, includes all acts and

doings from the enactment of the general incorporation law by the legislature

To the promotion, underwriting, preparation and execution and filing of the incorporation papers and obtaining the certificate or charter

To the organization and 1st meeting and election of a corporation

Incorporation distinguished from corporation - Corporation

A civil institution Established by law of the state form

considerations of public policy Its existence, capacities and powers are all

conferred by law from some real or supposed public benefit

A political institution by the State- Incorporation

Act by which such institution is created

Steps in incorporation1.) Drafting and execution of the articles of incorporation by

the incorporators and other documents required for registration of the corporation

a. Temporary treasurer must also execute:i. An affidavit certifying compliance with

subscription and paid-up requirements as to capital stock

2.) Filing with the SEC of the articles of incorporation with the ff:

a. Treasurer’s affidavit in the form prescribed in Section 15

i. At least 25 % of the entire authorized shared has been subscribed

ii. At least 25% of the subscription has been paid in cash and/or property to the corporation

b. If corporation governed by special law, (educational corporation)

i. Favorable recommendation of the appropriate governmental agency that such articles of incorporation are in accordance with law

3.) Payment of the filing and publication fees

4.) Issuance by the SEC of the certificate of incorporation if all the papers filed after verification and examination are found in order

Substantial Compliance with requirements

- Where corporation not governed by special laws SEC may accept and approve the articles of

incorporation or amendments upon mere showing of a substantial

compliance with the corporation code and that it meets the guidelines

established by SEC- substantial compliance

Sec 14 requires that articles of incorporation shall contain “substantially” the matters enumerated “except as otherwise provided by the Code or by special law”

Sec 15 article of incorporation shall comply “substantially” with the FORM prescribed therein

Sec 17 (1) requires substantial compliance with the form prescribed in the Code relative to the approval of articles of incorporation and any amendment thereto

- Substantial compliance with all legal requirements= registration of proposed corporation becomes a MATTER of RIGHT

- Express lane by SEC for the public for nominal fees

Incorporators: numbers and qualifications

- Unless otherwise provided in the Articles of incorporation,o Corporation cannot impose other qualificationso Same rule applies to stockholders

- General practice: incorporators serve as first directors of the corporation

Not less than 5 not more than 15o If number of incorporators are more. Excess will not

be deemed as incorporatorso All must be natural persons

Corporation cannot be an incorporator it does not have the faculties to create other artificial persons

Exception: Duly established cooperatives and

corporation primarily organized to old equities in RURAL BANKS may organize rural banks and/or subscribe to shares of stock of any rural bank

Corporation may still be a stockholder just not an incorporator

All of legal ageo Capacity to enter into a valid contract

Act of forming a corporation is contractual o Minors emancipated by marriage or by voluntary

concession of the parents cannot be incorporators A majority of whom are residents of the Philippines

o The rest of the persons may neither be residents or citizens of the Phils

o A corporation composed entirely of aliens is allowed

As long as majority of the incorporators are RESIDENTS of the Phils

Except in nationalized corporations Residence= domicile

Physical presence in the State Intention to remain therein Place of habitual residence Wher eone has his true, fixed,

permanent home and to which he has the intention of returning

Requirement mandatory Each of whom must own or subscribe to at least one share

of the capital stock of the corporation o Where an incorporator has a pecuniary interest in

the corporation, he will be concerned with the management of its affairs

Requirement regarding minimum number of incorporators mandatory

- A de jure corporation cannot be legally formed by less than the prescribed number

o Except in a corporation sole

1.) Reduction of stockholders or members to less than minimum

- After the corporation is organized, number of stockholders/members may become less than the minimum number required for incorporation

i. Without affecting corporate existence 1. Unless valid grounds exist to pierce

or lift the corporate veil2.) Beneficial ownership in one individual

- Requirement of minimum number of incorporators is formal rather than substantial

i. Regularly evaded in actual practice- Law permits a scheme where all the shared are

owned by a single individual i. May incorporate provided he has associates

to incorporate with him, with the number required by law

ii. Validity of incorporation not affected iii. “qualifying stockholders” “men of straw”

“dummies” - Not necessary so long as legal title to stock is held

by the incorporator3.) Subsequent accumulation of shares by one individual

- Existence of corporation not affected i. Unless circumstances exist to warrant the

piercing of the veil of corporate entity

Sec 11. Corporate term. - A corporation shall exist for a period not exceeding fifty (50) years from the date of incorporation unless sooner dissolved or unless said period is extended. The corporate term as originally stated in the articles of incorporation may be extended for periods not exceeding fifty (50) years in any single instance by an amendment of the articles of incorporation, in accordance with this Code; Provided, That no extension can be made earlier than five (5) years prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as may be determined by the Securities and Exchange Commission.

A corporation shall exist for a period not exceeding fifty (50) years

from the date of incorporation unless sooner dissolved or unless said period is extended. The corporate term as originally stated in the articles of

incorporation may be extended for periods not exceeding fifty (50) years in any single instance by an amendment of the articles of

incorporation , in accordance with this Code Provided, That no extension can be made earlier than five

(5) years prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as may be determined by the Securities and Exchange

Commission

- term specified in the articles of incorporation o not exceeding 50 years

unless sooner dissolved or unless its registration is revoked upon

any of the ground provided by law - corporate life may be reduced or extended

o by amendment of the articles of incorporation by complying with the procedural requirements under sec 37

Limitation on Extension

1.) term shall not exceed 50 years in any one instance2.) amendment is effected before the expiration of the

corporate terms of existencea. after dissolution, no more corporate life to extendb. therefore, extension cannot be done during the 3

year period of liquidation 3.) extension cannot be made earlier than 5 years prior to the

expiration datea. unless there are justifiable reasons therefore as

may be determined by SEC

Effect of extension

- constitutes a continuation of the old corporationo not a creation of a new one

Effect of expiration of term

- expiration of period

- or absence compliance with the legal requisites for the extension of the period

o corporation CEASES to EXIST and is dissolved IPSO FACTO

o does not produce immediate dissolution for all purposes

- may be reincorporatedo only by complying with the registration

requirements under the Corporation code filing of new articles of incorporation and by

laws accompanied by supporting documents

required for registration o if reincorporated, does not automatically succeed to

the assets of the original corporation which is deemed dissolved, in the absence of corporate liquidation

Automatic extension of term

- Sec 11 allows for automatic extension o By amendment of the articles of incorporation o Within 5 years before expiration date of existing

termo During which SEC may look, if necessary,

into the financial structure of the corporation

and its past operations

no limit as to number of extensions in the corporation code

Sec 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.

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.

- Sec 13 requires that not less than P5,000 as paid up capital o Arbitrary does not assure any practical protection to

corporate creditorso Special laws may require Higher paid up capital for

certain industries Commercial banks Insurance companies Investment houses

Filipino percentage of ownership

Corporation for exploration, development and utilization of natural resources

At least 60% Capital = outstanding capital stock *pldt case

Public service corporation

At least 60% Capital -Any foreign

involvement limited to

proportionate share of its capital

-All executive and managing affairs exclusive to Filipino citizens

Educational corporation – other than those established by religious orders and mission boards

At least 60% Capital -Control and

administration exclusive to Filipino citizens

Mass media corporation

100% Owned and managed

Advertising corporation

At least 70% Capital stock-Owned by citizens of

phils -Any foreign

involvement limited to proportionate share of its capital

Banking corporation At least 60% Capital stockOwned by citizens of phils

Retail trade 100%Rural banks 100% By Filipino citizens,

Qualified corporation, cooperative, associations allowed by phil law to own or

hold such capital stock

Coastwise shipping At least 60 % But interest in said capital is totally owned by citizens of Phils.

financing At least 60 % Capital stockPawnshop business At least 70% Voting capital stockRecruitment and placement of workers local or abroad

At least 75% Of authorized and voting capital

Private detective, watchman, security guard

100%

Under Flag law At least 75% capital

Sec 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.

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.