Professional Documents
Culture Documents
2011-2012
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2 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
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- Much simpler to form - 2 persons are sufficient to form a partnership - Mere agreement gives rise to the juridical personality of a partnership - Formation usually entails less expenses - Management factor: all the owners actively participate - Makes for more flexibility as far as internal arrangements are concerned - Nature of liability: partners are personally liable for the debts of the partnership which its assets cannot satisfy (as opposed to stockholders of a corporation cannot be made to personally answer to corporate creditors beyond the amount which they have contributed)
- Where business associates belong to a small, closelyknit group, like a family, they usually prefer to keep the organization exclusive and would not welcome strangers - ULTIMATE EFFECT: a de facto partnership with a corporate shell
Government Regulation of Corporations - By the Legislature government regulation of corporations can be justified not only by the police power of the state, but also by the fact that they owe their existence to it o The power to regulate corporations in their activities and operations is exercised through the legislative and executive branches of government - By the SEC o Administrative supervision over corporations is vested by law in the SEC, a quasi-judicial body charged with the enforcement of all laws affecting corporations PD 902-A, Sec. 3. The Commission shall have absolute jurisdiction, supervision and control over all corporations, partnerships, or associations, who are the grantees of primary franchises and/or a license or permit issued by the government to operate in the Philippines, and in the exercise of its authority, it shall have the power to enlist the aid and support of and to deputize any and all enforcement, agencies of the government, civil or military as well as any private institution, corporation, firm, association or person. Significant Powers of the SEC: (1) To approve or reject AOI (2) To approve by-laws of corporations and amendments thereto (3) To approve registration of securities, like shares and bonds, before they can be publicly sold (4) To approve amendments to AOI (5) To approve increase or reduction of capital stock (6) To conduct investigations as it may consider necessary in the enforcement of the Corporation Code and other related laws, and in this connection, to inspect the books of any corporation within its jurisdiction, to issue subpoenas and subpoenas duces tecum as well as to order the search and seizure of documents and records of any person or entity under investigation (7) To punish for contempt, direct or indirect (8) To require corporations to submit financial and other reports as it may deem necessary in the public interest or for the proper discharge of its duties (9) to issue rulings and opinions as to the proper interpretation and application of laws entrusted to it for administration (10) to impose fines and/or penalties for violation of the laws implemented by it, as well as its rules and regulations, its orders, decisions and/or rulings (11) to act on complaints of any violation of law, rule or regulation required to be enforced by it or for non-compliance of any term or condition of any certificate, license or permit issued by it
3 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
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4 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
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Steps in Formation of Corporation 1. Promotional Stage Promoter one who brings together persons who become interested in the enterprise, aids in procuring subscriptions and sets in motion the machinery which leads to the formation of the corporation itself He formulates the necessary initial business and financial plans, and if necessary, buys the rights and property which the business may need, with the understanding that the corporation when formed, shall take over the same Rev. Securities Act, Sec. 2. Definitions -- (r) "Promoter" includes (1) any person who, acting alone or in conjunction with one or more other persons, directly or indirectly, takes initiative in founding and organizing the business or enterprise of an issuer; or (2) any person who, in connection with the founding and organizing of the business of an issuer, directly or indirectly, receives in consideration of services or property or both services or property ten (10%) per centum or more of any class of securities of the issuer or ten (10%) per centum or more of the proceeds from the sale of any class of such securities. However, a person who receives such securities or proceeds either solely as underwriting commissions or solely as consideration of property shall not be deemed a promoter within the meaning of this paragraph if such person does not otherwise take part in founding and organizing the enterprise The code requires that before incorporation at least 25% of the authorized capital stock of the proposed corporation should be subscribed and at least 25% of this subscription should be paid in the promoters must therefore secure these before the corporation can be registered In many cases, the promoters are also incorporators If they can supply the minimum capital requirement, then no additional subscription need be solicited 2. Drafting Articles of Incorporation AOI the contract between the corporation and its stockholders as well as the agreement among the stockholders CorpCode, 14. Contents of the articles of incorporation. - All corporations organized under this code shall file with the Securities and Exchange Commission articles of incorporation in any of the official languages duly signed and acknowledged by all of the incorporators, containing substantially the following matters, except as otherwise prescribed by this Code or by special law: 1. The name of the corporation; 2. The specific purpose or purposes for which the corporation is being incorporated. Where a corporation has more than one stated purpose, the articles of incorporation shall state which is the primary purpose and which is/are he secondary purpose or purposes: Provided, That a nonstock corporation may not include a purpose which would change or contradict its nature as such; 3. The place where the principal office of the corporation is to be located, which must be within the Philippines; 4. The term for which the corporation is to exist; 5. The names, nationalities and residences of the incorporators; 6. The number of directors or trustees, which shall not be less than five (5) nor more than fifteen (15); 7. The names, nationalities and residences of persons who shall act as directors or trustees until the first regular directors or trustees are duly elected and qualified in accordance with this Code; 8. If it be a stock corporation, the amount of its authorized capital stock in lawful money of the Philippines, the number of shares into which it is divided, and in case the share are par value shares, the par value of each, the names, nationalities and residences of the original subscribers, and the amount subscribed and paid by each on his subscription, and if some or all of the shares are without par value, such fact must be stated; 9. If it be a non-stock corporation, the amount of its capital, the names, nationalities and residences of the contributors and the amount contributed by each; and 10. Such other matters as are not inconsistent with law and which the incorporators may deem necessary and convenient. The Securities and Exchange Commission shall not accept the articles of incorporation of any stock corporation unless accompanied by a sworn statement of the Treasurer elected by the subscribers showing that at least twenty-five (25%) percent of the authorized capital stock of the
5 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
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NINTH: That the above-named subscribers have paid at least twenty-five (25%) percent of the total subscription as follows: Name of Subscriber ................................... ................................... ................................... ................................... ................................... Amount Subscribed ...................................... ...................................... ...................................... ...................................... ...................................... Total Paid-In ............................... ............................... ............................... ............................... ...............................
(Modify Nos. 8 and 9 if shares are with no par value. In case the corporation is non-stock, Nos. 7, 8 and 9 of the above articles may be modified accordingly, and it is sufficient if the articles state the amount of capital or money contributed or donated by specified persons, stating the names, nationalities and residences of the contributors or donors and the respective amount given by each.) TENTH: That ....................................... has been elected by the subscribers as Treasurer of the Corporation to act as such until his successor is duly elected and qualified in accordance with the by-laws, and that as such Treasurer, he has been authorized to receive for and in the name and for the benefit of the corporation, all subscription (or fees) or contributions or donations paid or given by the subscribers or members. ELEVENTH: (Corporations which will engage in any business or activity reserved for Filipino citizens shall provide the following):
6 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
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SIGNED IN THE PRESENCE OF: ............................................ ............................................. (Notarial Acknowledgment) REPUBLIC OF THE PHILIPPINES ) CITY/MUNICIPALITY OF ) S.S. PROVINCE OF ) I, ...................................., being duly sworn, depose and say: TREASURER'S AFFIDAVIT
That I have been elected by the subscribers of the corporation as Treasurer thereof, to act as such until my successor has been duly elected and qualified in accordance with the by-laws of the corporation, and that as such Treasurer, I hereby certify under oath that at least 25% of the authorized capital stock of the corporation has been subscribed and at least 25% of the total subscription has been paid, and received by me, in cash or property, in the amount of not less than P5,000.00, in accordance with the Corporation Code. ....................................... (Signature of Treasurer) SUBSCRIBED AND SWORN to before me, a Notary Public, for and in the City/Municipality of .................................. Province of .........................................., this ............. day of ........................., 19 ........; by ............................................ with Res. Cert. No. ..................... issued at ................. on ......................, 19 .......... NOTARY PUBLIC My commission expires on ..........................., 19 ........ Doc. No. ...............; Page No. ...............; Book No. ..............; Series of 19..... (1) Corporate Name The name of a corporation is essential to its existence since it is through it that the corporation can sue and be sued and perform all legal acts It is the only means of identifying it not only from its members or stockholders, but also from other entities and corporations The code therefore does not allow it to adopt a name identical or confusingly similar to that of any existing corporation or to any other name already protected by law or which is patently deceptive, confusing or contrary to existing laws CorpCode, 18. Corporate name. - No corporate name may be allowed by the Securities and Exchange Commission if the proposed name is identical or deceptively or confusingly similar 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. A corporation should transact business only in its corporate name. it may amend such name provided it is done in accordance with the procedure laid down by the Code for amendments of AOI, and the SEC approves such change (2) Purpose Clause Significance: it congers as well as limits the powers which a corporation may exercise A corporation has only such powers are as expressly granted to it by law and by its AOI, those which may be incidental to such conferred powers, those reasonably necessary to accomplish its purpose and those which may be incident to its existence Reasons for requiring a purpose clause (Ballantine) (1) So that a prospective stockholder who is contemplating an investment in a business enterprise shall know within what lines of business his money is to be risked; (2) So that the management may know within what lines of business it is authorized to act (3) So that anyone who deals with the corporation may ascertain, if he wishes, whether a contract or transaction into which he contemplates entering is one within the general authority of the management Under Sec. 14(2), a corporation may have as many purposes as it wish to include, subject to the ff. conditions: (1) The articles of incorporation must specify which is the corporations primary purpose and which are the secondary purposes. - It should be noted that the Code does not require that the secondary purpose or purposes be related to the main purpose (2) Corporations for which special provisions are made in the CorpCode or which are governed by special laws, can have only the purpose peculiar to them and no other - E.g. educational corporations cannot engage in the export/import business nor an insurance corporation be at the same tiem a commercial bank (3) The purpose/s must be lawful - The SEC, before it issues a certificate of incorporation, not only has the power but the duty to determine the legality of the corporate purpose stated in the AOI - CorpCode, 17(2). Grounds when articles of incorporation or amendment may be rejected or disapproved. - The Securities and Exchange Commission may reject the articles of incorporation or disapprove any amendment thereto if the same is not in compliance with the requirements of this Code: Provided, That the Commission shall give the incorporators a reasonable time within which to correct or modify the objectionable portions of the articles or amendment. The following are grounds for such rejection or disapproval: 2. That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations - But, if the purpose stated is lawful, the SEC has no authority to inquire whether the corporation has purposes other than those stated, and mandamus will lie to compel it to issue a certificate - A corporation may not be formed for the purpose of practicing a profession CorpCode, 88. Purposes. - Non-stock corporations may be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agricultural and like chambers, or any combination thereof, subject to the special provisions of this Title governing particular classes of non-stock corporations.
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9 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
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Chapter IV. The Corporate Entity Theory of Corporate Entity: Its Effects The issuance of the certificate of incorporation marks the beginning of the corporations existence as a legal entity As such, it acquires the right to sue and be sue, to hold property in its own name, enter into contracts with third persons, and to perform all other legal acts. It is well-settled doctrine both in law and in equity, that as a legal entity, a corporation has a personality distinct and separate from its individual stockholders or members, and is not affected by the personal rights, obligations and transactions of the latter Since corporate property is owned by the corporation as a juridical person the stockholders have no claim on it as owners, but have merely an expectancy or inchoate right to the same should any of it remain upon dissolution of the corporation after all corporate creditors have been paid A stockholder can therefore not bring an action for replevin to recover property of the corporation Although his interest in the corporation may be attached by his personal creditor, the latter cannot use corporate property to satisfy the same A corporation, as a juridical person, is entitled to immunity against unreasonable search and seizure, and can therefore question the admissibility of evidence obtained through such search and seizure Corporations may be civilly liable for torts in the same manner as a natural person Disregarding Corporate Entity The privilege of being treated as an entity distinct and separate from the stockholders is confined to legitimate uses and is subject to equitable limitations to prevent its being exercised for fraudulent, unfair, or illegal purposes If evidence of any such purpose is present, the courts will pierce the veil of corporate entity and disregard t he corporate fiction Aside from this general guideline, no hard and fast rule can be laid down to cover all cases where the corporate entity theory cannot be availed of, and each case will have to be considered on its merits If any general rule can be laid down in the present state of authority, it is that a corporation will be looked upon as a legal entity as a general rule, and until sufficient reason to the contrary appears, but 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 an association of persons. Main effect of disregarding the corporate fiction: stockholders will be held personally liable for the acts and contracts of the corporation whose existence is ignored In this case, it is not the due incorporation which is questioned but its use of the privileges which attach to the corporate entity Therefore, when a court disregards the corporate entity in a proper case, it is not denying corporate existence for all purposes, but merely refuses to allow the corporation to use the corporate privilege for the particular purpose involved in the case before it GR: separate personality Exception: cases where veil may be pierced o There was a violation of rights or injury in all these cases where veil was pierced o Elements of ownership, control, mgt in the corporate entity Inevitable that these will exist All elements have to be satisfied so the corporate veil can be pierced o What determines pierceability? Motive/intention Liability arising Injury or damage or loss Estate planning: o No impediment to use corporate as vehicle for estate planning o Corporation can be put up by a single person o Nothing prevents an individual from funding a corporation o To meet requirements of code, assign nominal shares to persons o If it is money, can be used to acquire assets; still corporate-owned o Even a 99.9% owner cannot distribute the property, only the shares
10 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
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11 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
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12 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
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13 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
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Chapter XI. Financing the Corporation; Capital Structure Sources of Financing 3 main source (1) Contributions of its stockholders = equity of the stockholders/equity investment a. Investor making equity investments expects that his returns shall be tied up with the success or loss of the operations of the corporation i. Return of equity investor is intricately woven into the business affairs of the corporation and participates in the income ii. Investor/SH is given a say in the managementhe is entitled to participate in the election of the board and cast votes on corporate matters where SHs are required to give ratificatory action iii. Absence of carrying cost since corporation is not bound to pay any return on investment unless there are profits and subject to business judgment of the board in declaring dividends b. Equity investment generally non-withdrawable for so long as the corporation has not been dissolved c. Investors of equity can only receive a return of their investment only from the remaining assets after payment of creditors (2) Loans or advances by creditors a. Person extending a loan or debt looks at the financial condition and operations of the corporations as a means of gauging capacity to pay i. Creditor puts no stake on the operations of the business; his relationship to the corporation is based on contract ii. Contractual obligation of corporation to pay the stipulated return (in the form of interest) remains even when losses are incurred b. Expected return: creditor can only demand the stipulated fixed return/interest c. Legal preference in payment from corporate propertiesonce insolvent, the corporation shall devote and prefer all corporate assets towards the payment of creditors (3) Profits which the corporation may earn Initial financing can possibly involve only (1) and (2) Promotion of corporation oftentimes involves only equity interest because of the high risk involved when the business venture still has to prove its worth debt financing: may be resorted to by organizers who may want control of the corporation but do not have sufficient resources of their own after the business has become a going concern, profits, instead of being distributed as cash dividends, may be capitalized to increase the capital of the corporation if more is needed, contributions of stockholders may be increased and debt financing, if feasible, may be resorted to Capital Structure Refers to the aggregate of the securities issued by the corporation Two classes of securities: o Shares of stock o Debt securities o Senior securities: those which have a prior but limited claim upon corporate earnings (such as debt and typical PS) o Equity securities: those which have the residual interest in corporate earnings (such as CS and participating PS) Important characteristics of securities as forms of investments: o Right to any early claim on the income before other security holders o Right to residual income o Right to vote Only 25% of authorized capital stock need be subscribed initially o Promoters are not bound to limit the starting capital needed by the business o Other sources of capital may be tapped, at the initial stages or when the corporation is already a going concern Two questions to consider: o What should be the relation between basic equity interests and senior securities o What type of senior securities should be issued? Capital and Capital Stock Distinguished Capital Capital Stock Actual property of the corporation, including cash, real and personal The amount fixed, usually by the corporate charter, to be subscribed and property paid in or secured to be paid in by the shareholders of a corporation, either in money or property, labor or services at the organization of the corporation or It therefore includes all corporate assets contributions of stockholders, afterwards, and upon which it is to conduct its operations loans by 3rd persons, and earnings less losses Example: Corporation has Authorized Capital Stock of 500,000 divided into 5,000 shares with a par value of 100 each - Corporation can issue as many as 5,000 shares at 100 each to represent the contribution of subscribers - It does not have to issue all such shares at one time, but once it reaches that number, it can no longer issue new shares without amending its AOI so as to increase its capital stocks When it has not yet issued all such shares, then its outstanding or subscribed capital stock is only the amount subscribed, which may be less than the authorized capital stock as stated in the AOI - If only 2,000 out of 5,000 have been subscribed, the subscribed capital stock is 200,000 - It still has 3,000 shares with a total par value of 300,000 which it can issue later without any amendment of its AOI Legal/stated capital: aggregate par/issued value of subscribed capital stock - Sets the minimum limit of corporate assets that should be retained as protection to creditors, and which amount as a rule may not be withdrawn by, nor distributed to, shareholders Remains the same unless AOI amended
It fluctuates depending on the current profits obtained or losses suffered by the business
Shares of Stock; Kinds When a person contributes capital to a corporation by way of equity, he acquires a unit or several units of interest therein called shares of stock Shares of stock units into which capital stock is divided
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15 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
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16 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
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In the presence of preferred stocks, common stocks are usually vested with the exclusive rights to vote and have the residuary rights to the profits and the net assets upon liquidation, after the preferences have been complied with
Preference as to dividends - Dividends payable only when there are profits earned by the corporation - GR: even if there are existing profits, BOD has discretion to determine w/n dividends are to be declared - Contract of preferred SH may give him the privilege of being paid first before any dividend is paid to common stocks - Amount of preference stated in his contract Participating stocks after getting their fixed dividend preference, they share with the common stocks the rest of the dividends Cumulative/ noncumulative: - Presumption: cumulative in any given
Limitations on the issuance of no-par value shares: a) Once issued, are deemed fully paid and therefore nonassessable b) Consideration cannot be less than P5.00 c) Entire consideration for the issuance constitutes capital d) Cannot be issued as PS e) Cannot be issued by banks, trust companies, etc
AOI must state the fact that no-par shares were issued
17 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
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18 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
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19 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
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20 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
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Liability on Watered Stocks Watered stocks are those which are issued as fully paid up in consideration of property at an overvaluation Bonus shares are those issued gratuitously Discount shares are those issued as fully paid up in consideration for cash at less than par Evils: Injures to corporation because it is deprived of needed capital and of the opportunity to sell its securities at more advantageous prices Prejudices other stockholders, existing as well as future, because it dilutes their proportionate interest in the corporation Also injures present and future creditors because it reduces the value of the corporate assets which stand as a substitute for the SHs personal liability to them Trust Fund theory: treats the capital stock of a corporation as a trust fund for the payment of its debts, and as a substitute for the lack of personal liability of the SH for such debts Fraud or misrepresentation theory: More favored one liability is based on the false representation to creditors that the par value has been paid or agreed to be paid in full o Only creditors subsequent to the issuance of the watered stocks and without notice are protected by this theory CorpCode, 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. How Payment of Shares Enforced When a person subscribes to shares in a corporation, he oftentimes does not pay for his subscription in full Any unpaid balance would then be a debt owed by the subscriber to the corporation, for which he may be liable to pay interest He may not be released from such obligation to pay the unpaid balance, unless it is with the consent of all the stockholders, without prejudice to creditors, and upon adequate consideration CorpCode, 13, supra. CorpCode, 67. Payment of balance of subscription. - Subject to the provisions of the contract of subscription, the board of directors of any stock corporation may at any time declare due and payable to the corporation unpaid subscriptions to the capital stock and may collect the same or such percentage thereof, in either case with accrued interest, if any, as it may deem necessary. Payment of any unpaid subscription or any percentage thereof, together with the interest accrued, if any, shall be made on the date specified in the contract of subscription or on the date stated in the call made by the board. Failure to pay on such date shall render the entire balance due and payable and shall make the stockholder liable for interest at the legal rate on such balance, unless a different rate of interest is provided in the by-laws, computed from
21 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
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22 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
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23 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
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Chapter XIII. Dividends and Purchase by Corporation of Its Own Shares Sec 43 Sec 43: power of the corporation to declare dividends-only the board may declare dividends and only out of unrestricted retained earnings, payable in cash, property, or stock to SHs of OCS Most important rights of a SH: o Right to vote o Right to proportional share of the corporate assets upon liquidation o Right to share in the corporate profits
Concept of Dividend o A dividend is that portion of the profits of a corporation set aside, declared and ordered by the directors to be paid ratably to the SHs on demand or at fixed time. o It is payment to the SHs as a return upon their investment o All SHs of the same class share in it is proportion to the respective amounts of stock which they hold Defn of Dividend: portion of corporate profits which is set aside for distribution to the SHs in proportion to their subscription to the capital stock of the corporation Power of the corporation to declare a dividend only out of unrestricted retained earnings on the basis of outstanding capital stock held by SHs Form of Dividends Cash, property, or stock dividend Cash: most common form o May be declared by the board under a formal resolution and does not require the approval or ratification of the SHs o Amount to be received by SH as his share of the dividends would depend on the amount of stock held by him, regardless of whether or not he has paid his full subscription But if shares become delinquent, any cash dividends due will first be applied to the amount of the delinquency (if stock dividends, he cannot get them until he has fully paid his subscription) Cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses o Revocable before the announcement to the SHs of the declaration of dividends; as soon as cash dividends are publicly declared, SHs have the right to their pro rata shares o No par shares: must be fully paid to be considered as issued Thus holders of no par shares not fully paid are not entitled to dividends Property: SEC rules Stock: distribution to the SHs of the companys own stock o Stock dividends are in the nature of shares of stock, the consideration for which is the amount of unrestricted retained earnings converted into equity in the corporations books o It is actually two (2) things: A dividend, and the enforced use of dividend money to purchase additional shares of stock at par o stock dividends require: board resolution ratification of SHs representing 2/3 OCS o Villanueva: stock dividends, unlike cash or property dividends, may be declared out of premium surplus or paid-in capital o Corporate profits are transferred to capital stock and shares representing the increase in capitalization are distributed o Stock dividends cannot be declared without first increasing the capital stock, unless there are still unissued shares o Although number of shares increase, their investment and proportional interest remain the same o Cannot be issued ifo persons not SHs Liquidating dividends: form part of the capital, and cannot be declared from the unrestricted retained earnings Source of Dividends CorpCode, 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. (16a) Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in capital stock, except: (1) when justified by definite 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. Source: unrestricted retained earnings Defn of unrestricted retained earnings: the undistributed earnings of the corporation which have not been allocated for any managerial, contractual, or legal purposes and which are free for distribution to the SHs as dividends (property or cash)
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Dividend Declaration Discretionary with Board CorpCode, 43, supra. GR: The decision to declare dividends are matters addressed to the business judgment of the board o The fact that profits have accrued does not necessarily impose upon the directors the duty to declare them as dividends o Courts have no power to compel them to make the distribution of dividends in the absence of BF or fraud or clear abuse of discretion o Unless tainted with BF, fraud, or gross negligence, courts will not interfere, and SHs will be bound If for expansion of business, SH cannot complain If board capitalizes profits instead of distributing them (i.e. issues stock dividends), requires approval of at least 2/3 OCS o But the board cannot abuse their discretion and accumulate profits unreasonably o Remedy of SH: file an action in court to compel payment of dividends Burden of proof lies with the SH Mandamus is not a proper remedy since the SH has no individual interest in the profits of a corporation until and unless a dividend is declared Retention of excess profits 43: stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-in capital stock Exceptions: o When justified by corporation expansion projects approved by the board o When corporation is prohibited under any loan agreement with any financial institution or creditor and without the latters consent o When such retention is necessary under special circumstances Preference as to Dividends When Right to Dividends Vests; Rights of Transferee Right vests as soon as the dividends have been lawfully declared by the board; from that time on, it becomes a debt owing by the corporation to each SH and no revocation can be made Whenever such dividend is declared, or the declaration of dividends is made, the corporation becomes a debtor and the right of the SH to distribution, unless a record date is specified, becomes fixed by the declaration. o The amount due to a SH belongs to him and it cannot without his consent be reverted to the surplus account of the corporation Whoever owns or is the SH-of-record of the stocks at the time of declaration also own the dividends o GR: Subsequent transfer would not carry with it the right to dividends Liability for Illegal Dividends 1. Directors GR: not liable personally Exception: BF, negligence, willful violation of the law If liable: liable to corporation and creditors upon insolvency 2. Stockholders GR: in the absence of an express provision of law, an innocent SH is not liable to return the dividends received by him out of capital, unless the corporation was insolvent at the time of payment SHs who received wrongfully or illegally declared dividends can be held liable to refund them to the corporation or its creditors o Why? In receiving the dividends, they do not act in a corporate capacity and is not a ratificatory act of the SHs Purchase by Corporation of Its Own Shares 1. Limitations on Power: Proper Purposes and Existence of Surplus CorpCode, 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
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Sec 41: expressly empowers the corporation to acquire its own shares for a legitimate corporate purpose, provided it has unrestricted retained earnings to cover the shares to be purchased. o So long as the acquisition of shares does not exceed the unrestricted retained earnings, the corporate creditors are deemed protected o Equivalent to subjecting dividend declaration to the extent of unrestricted retained earnings o Acquired shares by the corporation become treasury shares Corporate purposes: To eliminate fractional shares To collect or compromise an indebtedness to the corporation arising out of an unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold To pay dissenting or withdrawing SHs entitled to payment (appraisal right) 1. Limitations on power: proper purposes and existence of surplus
A corporation has the power to purchase its own stocks, provided o that payment is made out of surplus profits, i.e. unrestricted retained earnings, and o it is for a legitimate purpose o subject to appraisal right of SH under 81 shares reacquired by the corporation become treasury shares, which may be declared as property dividends to be issued out of retained earnings previously used to support their acquisition, provided that the amount of the retained earnings has not be impaired by losses reasons for purchase of own shares: o deadlocks in close corporations (no need for unrestricted retained earnings) o SHs may want to keep the corporation close and prevent unwelcome strangers Corporation may want to exercise contractual right to redeem PS or bonds, regardless of URE (Sec 8) 2. Remedies in case of Improper Purchase As to creditors: those prejudiced by the repurchase by an insolvent corporation can recover against the selling SHs by recovering the consideration paid o Directors can be personally liable for approving the repurchase in BF or with negligence (Sec 31) As to SHs: it reduces what is due them as dividends o Repurchase can be discriminatory to the other SHs o Shift in voting control o Remedy: right of action against the directors under Sec 31 Dividends: cashdirectors approval sufficient; stock/property2/3 approval OCS GR: only those who contributed are entitled to dividends; contributions become part of corporate assets; no declaration of dividends, still corporate property GR: dividend declaration discretionary with the board (23) Why? Unrestricted retained earnings are owned by the corporation Cash v stock/property dividend; willing to risk a stock dividend (more often than not, stock prices drop when stock dividends are declared) Unrestricted retained earnings represent fruits of the investment money; corporation doesnt need the money. As an investor, I am entitled to return! Services rendered can be used as consideration for subscription If 100% paid up capital, declare dividends! But it does not mean that the capital stock is fully-paid up (could only be 25%) 43: limitationsneeds of company, contractual obligation (ex IPO) but need not comply w/ 43; other ways to do it but corporation has to contend with an opposing SH cash: just board approval required stock: deferring dividends; plowed back as corporate funds; cannot yet be enjoyed and possibility that it can never be realized property: same as stock divs; risk that it could be 0% book value Berks: relate to Strong v Repide; psychic return? Must be realized first! Mandatorily declare dividends when unrestricted retained earnings are 10% of paid-in capital stock; does not include unpaid and outstanding stocks St Paul Milk: earmarking for benefit of directors: illegal St Paul-Dodge-Burk: comparable cases involving declaration of dividends and right to compel declaration by the SHs; expansion, nondeclaration, board discretion After declaration: debtor-creditor relationship created but conditions in 43 must still be satisfied! Prior to declaration, verify if any retained earnings form part of the assets of the corporation GR: disposition of corporate assets= authority of the board Reasonable exercise of judgment= board may opt not to declare Remedy of SH: mandamus Burden of proof: SH to prove corporate does not need it Declaration of dividends: once declared, SH does not obtain shares of ordinary creditor Cash: results in recovery of investment SH need not wait for dissolution but does not guarantee that it will be paid non-cash: SH conformity must be secured why? Deferring payment of cash prolongs exposure to risk of SHs dividends stock dividends: plowed back into corporation