CORPORATION CODE

Manageme
nt

Aug 13, 2012 Lecture

Corporation
an artificial being created by operation
of law having the right of succession,
powers &
artificial being & juridical persons are
the same
Corporation vs. Partnership
identical in the sense that they are both
juridical persons
distinctions
PARTNERSHI CORPORATIO
P
N
Manner of
GR:
mere Created by law
Creation
agreement of or operation of
partners
law
EX: if capital
contribution
more
than
3,000,
must
be in writing
& filed with
the SEC; if it
involves real
properties,
there must be
a list of real
properties and
must be in a
public
instrument;
forming
a
limited
partnership
Name they may use a corporate
may use
name as long name
must
as it is not use Corp. or
similar
or Inc.
confusingly
similar
to
another name
Purposes
always
for may not be for
profits
profit
Term of
partners may incorporators
Existence
agree as to cannot agree
any term
on
a
term
longer than 50
years
Number of minimum of 2 GR: min of 5,
Organizers
max of 15
EX:
corporation
sole

Amount of
Capitalizati
on
Right of
Succession
Extent of
Liabilities

managed by
all
the
partners;
decisions are
made by the
partners
having
controlling
interest
no prescribed
minimum
paid-up
capitalization
does not exist
general
partners can
still
be
obliged to pay
some more

Causes of
Dissolution

at will

Sharing of
Profits

profits
and
losses
are
shared
in
accordance
with
the
agreement of
the partners
not
just
a
person, also a
contract
partners may
validly claim
that they are
co-owners of
properties in
the name of
the
partnership

GR: managed
by a Board
EX:
corporation
sole;
closed
corporations

paid-up capital
of
at
least
5,000
Expressly
given
once
a
subscriber has
fully paid for
his
subscription,
he cannot be
obliged to pay
some
more
except when it
is proper to
apply
the
doctrine
of
piercing
the
corporate veil
cannot
be
dissolved
at
will
dividends are
always
distributed pro
rata

just a person
stockholders
cannot
claim
that they are
co-owners
of
the
corporation's
properties

organizers of a corporation: organizers

incorporator
a natural person who is among the
organizers of a corporation and who
signs the AOI

at
the
time
of
incorporation,
incorporator is also a corporator
at the time of forming the corporation,
incorporator may cease to be a
corporator
once an incorporator, always an
incorporator
applies to both stock and non-stock
should be natural persons with capacity
to contract
majority of it must be Philippine
residents
not necessarily Filipinos unless the law
requires minimum Filipino participation

corporator
stock: stockholder or shareholder
non-stock: member
stock
corporation
vs.
non-stock
corporation
stock
1. having an authorized capital stock
divided into shares
2. authorized to distribute dividends
from surplus
non-stock:
does
not
need
both
qualifications
how to form
file with the SEC the AOI and other
documents required by the SEC
practical note:
1. think first of the name
2. check the name's availability
3. go to the SEC & fill up the name
verification slip
reservation fee of 40 good for 1
month
4. file the necessary documents with
the SEC
name verification slip, AOI,
treasurer's affidavit, undertaking
to
change
corp
name,
registration data sheet, by-laws
two docs previously required by
the SEC: bank certification of
deposit & undertaking to allow
inspection of bank deposit
articles of incorporation
prescribed doc to be filed with the SEC
for the purpose of incorporation
actually a contract
law
prescribes
the
minimum
stipulations
stipulations for stock corporations
[clause 1-6 also apply to non-stock
corporations]

1. corporate name
must not be similar or
confusingly similar with the
name
of
an
existing
partnership or corporation
[Refractories Corp. case]
should have the word Corp.
or Inc.
SEC Rules: cannot anymore
use as first word Philippine,
Republic,
National,
State
[reserved for the exclusive
use of the Phil government]
2. purposes
only 1 primary purpose
may have any number of
secondary purposes as long
as they are compatible with
the primary purpose and are
compatible with one another
cannot
state
primary
purpose very briefly
3. term
not longer than 50 years
may be extended before it
expires
no limit on the number of
extensions
a corp may have a perpetual
existence
may be extended but not
earlier than 5 years before it
expires unless there be a
justifiable reasons
may be shortened but if it is
for
the
purposes
of
dissolving the corp, such
shall
require
prior
BIR
clearance
4. principal office
SEC Rules: must state a
complete address; Metro
Manila may no longer be
states as the principal office
5. full
name,
nationality
and
complete address of every
incorporator
only individuals may be
incorporators
address cannot be PO box
6.1.
number of directors
stock: min of 5, max of 15
non-stock: min of 5
6.2.
full name, nationality &
complete
address
of
incorporating directors

 mentioned in the AOI as

directors
stock: every incorporating
director
must
have
subscribed even to at least 1
share of the corporation
7. amount of authorized capital
stock,
number
of
shares
representing the stock & value
assign to every share
authorized
capital
stock:
always expressed in pesos,
max amount the corp will be
initially capitalized
amount of authorized CS:
unless a law or regualtion
requires a minimum paid-up,
the
incorporators
could
agree on any amount
assigned value: par value
[minimum par value: 1
centavo]
8. full name & nationality of the
subscribers, number of shares
subscribed, value of subscription
total of which must be
equivalent to 25% of the
authorized capital stock
total of which must be
equivalent
to
the
total
amount of subscription
min subscription: 25% of the
authorized CS
9. name of treasurer
10. applicable only to corporations
the business of which is
reserved by law for Filipinos
SEC wants it included in
every AOI
subscribers
don't have to be incorporators
can be juridical persons
no limit on the number of subscribers
value of shares
possible for corporation to issue shares
without a value
no par value
assumed issued for 5 pesos each
all subscriptions should be paid in
full
payment is capital contribution &
cannot be used in payment of
dividends
certain corp are not allowed to issue
it such as banks, insurance com,

trust com, public utilities & building

& loan associations
Article 7 of a non-stock corporation
donations of donors
donors
cannot
get
anything
in
exchange unlike a subscriber who
parted with his cash but gets dividends
in exchange
by-laws
can be filed simultaneously with the
AOI
all incorporators must sign
must be filed within 30 days from the
issuance of the registration
only a majority of the incorporators
need to sign it
practical note: when you file your own
documents, slow processing
fast if you use the express lane
forms [about 2 weeks]
set of house rules
what must be stated
1. meetings
corp must have an annual
meeting known as the regular
meeting
must state the day and time
of annual meeting
must not be a specific date
usually meetings are held in
the afternoon
place: principal office of the
corporation but it cannot
accommodate all the SHs or
members, it can be held in
the city or municipality of
the
principal
place
of
business of the corporation
agenda
of
the
annual
meeting:
election
of
directors for the following
year [most important]
special meetings
held upon call of the
President
written notice sent to all SHs
or members at least 10 days
before
the
scheduled
meeting
matters to be taken up must
be stated
no other matter may be
taken up without the consent
of all present
attendance

 SHs or members may attend

in person or by proxy
there must be quorum at the
start of the meeting
if no quorum at the start, the
meeting must be adjourned
quorum in a stock corp:
presence of SHs in person or by
proxy representing at least a
majority of the outstanding
shares
outstanding shares
all shares issued excluding
treasury
shares
[shares
previously issued but which
were later on reacquired by
the corp]
ACS:
P 1M, 1M shares
subscribed:
250,000
[issued or outstanding]
unsubscribed:
750,000
new shares:
300,000
bal of unsubs
450,000
total of subs
550,000
[issued or outstanding]
stock dividends 110,000
[20% of 550,000]
new bal of unsubs
340,000
total subs
550,000
total issued
660,000
total outstanding 660,000
quorum in non-stock
presence in person or by proxy
of at least the majority of the
members
if the intention of the organizers
is to accept to new members,
you should define quorum in the
by-laws [for every meeting of
the members, the presence of
20 would constitute a quorum;
or the presence of any number
of members shall constitute a
quorum]
proxy
2 meanings: representative or
written authority
arises from the contract of
agency
form
of
written
authority:
written, signed by the SH, does
not have to be in the form of a
power of attorney; signature of
the
SH
must
match
the
specimen signature in the files
of the corp
rules

a. for big corps, proxies must

be presented fornvalidation
at least 5 days before the
scheduled meeting
b. period of the proxy could not
be more than 5 years
c. proxy
may
be
revoked
except if it was issued
pursuant to a contract [may
only be revoked with the
consent of the proxy]; such
revocation could be express
or implied [SH would himself
attend the meeting]
2. stock certificates
3. corporate seal
4. amendments
once the cert for registration is issued,
there is already a corp in the eyes of the
law
as a person, it can enter into contracts,
may acquire properties exclusively in its
own name, may sue and be sued in its own
name
corp is a person of itsown separate and
distinct from its incorporators, directors or
officers
there were occasions when the separate
personality of the corp were set aside and
its liabilities were made hat of individuals
doctrine of piercing the veil of
corporate identity
based on jurisprudence, no provision of
law
pronouncements of the SC
1. not
because
a
person
has
controlling interest, it would not
follow that he would pay in case of
insolvency of the corporation
2. separate
personality
of
a
corporation may be set aside when
there is clear and convincing
evidence when the corporation was
organized purposely to
a. commit tax evasion,
b. defeat public convenience,
c. commit fraud
d. the corporation is the alter ego
of the SH
e. when it may be said of 2
corporations, 1 of them is a
mere instrumentality of the
other

August15 Lecture
meetings
stock corporations
voting trust agreement
SH entrusts his votes to a voting
trustee
term: max of 5 years
vs. proxy
VTA
PROXY
stock corporation only both stock & nonstock
must be in a public maybe in a private
instrument
instrument
filed with SEC
filed with Corporate
Secretary
SH entrusts his stock no delivery of stock
certificate
to
the certificate
to
the
voting trustee who in proxy
exchange delivers to
the SH a voting trust
certificate
directors
one must have all the qualifications
provided on the law and the by-laws
should
have
none
of
the
disqualifications provided in the law
and the by-laws
qualifications under Corporation Code
1. must own at least 1 share or a
member in case of non-stock
ownership of a share
at least subscribed to it
not required to have paid for
it
but if the by-laws state that
it mist be fully paid, then the
director must fully pay for it
to comply with the by-laws
can be a common or
preferred shares
in
practice,
preferred
shareholders are denied the
right to elect directors as
well as be elected as one
2. in case of banks, fit and proper rule
disqualifications
1. sentenced to final judgment for
imprisonment of 6 years

2. committed a violation of the Corpo

Code within 5 years prior to being
elected as director
3. classic example of a disqualification
under the by-laws: Gokongwei vs.
San Miguel case [being an owner of
a competitor business]
GR: one is not entitiled to regular
compensation
EX: may receive regular compensation
if
1. such is provided in the by-laws
2. pass
a
resolution
giving
themselves
regular
compensation and
such is
ratified by 2/3 of all outstanding
common shares
directors receive reasonable per diems
for attending meetings of the board
reasonable
depends
on
the
resources of the corporation
directors can receive a share in the net
profits of the corporation but such shall
not exceed 10% of the net profits
before income tax
Sales
Less: Cost of Sales
Gross Income
Expenses
Net Income Before Tax
Income Tax
Net Income After Tax
Q: what is the term of a director
A: refer to the by-laws first
if no term is provided, it is 1 year
except when somebody was elected
as a director to fill a vacancy [only
for the unexpired term]
directors of educational corporation
number must be multiples of 5
their terms must expire one after
the other
if the director whose term expires is
re-elected, his new term would be 5
years
vacancy in the board
due to death, resignation or
incapacity
1. expensive way: calling a special
SH meeting
2. inexpensive
way:
if
the
remaining
directors
still
constitute a quorum, they may
fill a vacancy by themselves
removal of a director
by SH or members
may be with or without valid cause
except when removing a director

representing the minority SHs, who

may only be removed for valid
cause
SC: any action involving the
removal of a director is considered
an intracorporate dispute and thus
must be filed in the
in stock corps only, there is cumulative
voting
purpose: to enable minority SHs to
have a representation in the board
stock
1 stock = 1 vote
x # of directors to be elected =
total votes
SH can give all his votes in favor of
a candidate
non-stock
1 share = 1 vote
x # of directors to be elected =
total votes
member must cast his total votes in
favor of all the candidates

board of Directors
sets the policies of the corporation
implementation of such is with the
officers, particularly the President
frequency of meeting
first, refer to the by-laws
most corps do it monthly
but
there
are
corps
whose
investment are considered passive,
as such the board does not have to
meet frequently
in every meeting, there must be a
quorum
quorum
presence of majority of the
number of directors without
considering their stockholding
[in person]
as a matter of law, cannot be
through proxy [can be done in
practice]
determined at the start of the
meeting
to pass a resolution
majority of the present
directors
may a director enter into a contract
with the corporation where he serves as
a director?
yes, under the following conditions
1. his proposal was approved in a
meeting of the board in which
meeting there was a quorum
without counting his presence

2. proposal was approved by a

majority of the quorum without
counting his vote
3. terms and conditions must be
fair and reasonable
suppose on the date of the annual
meeting, no meeting was held
who manages the corporation
the directors in their hold-over
capacity
directors shall serve as such
until their successors shall have
been elected and have qualified
a director should not take advantage of
whatever information he may have
acquired as director of a corporation
interlocking directors
2 or more corps with a common
director
nothing wrong with it

officers
every corporation must have them
a person may hold 2 or more
compatible offices
who are they
1. President
should be a director
surely a SH
cannot at the same time be
Treasurer or Secretary
presides at meetings of the
board
some are also Chairman of the
Board
2. Secretary
no need to be a director
minutes of the meetings
3. Treasurer
no need to be a director
incompatible offices
1. treasurer & auditor
2. chief accountant & auditor
is an officer elected or appointed?
does not matter
board appoints or elects officers
term
refer to the by-laws
suppose the by-laws does not
provide for it, an office is coterminous with the board that
filled it up
law does not provide a term
an officer serves at the pleasure of
the board, if not pressure from the
board

an officer may enter into a contract

with the corporation where he holds
office
same terms and conditions as that
of a director
by-laws may provide for additional
offices
can there be an office that is not
provided in the by-laws?
yes, board may create offices
if you are VP, do you become President
once the President dies?
no, just performing the functions of
the President in the meantime
unless the board wants you to
become President
not automatic must qualify first

stock and transfer book

a register where stock ownership is
recorded
SEC Rules: corporation should register
it within 30 days from the issuance of
registration
stock certificate
different from share of stock [unit of
participation, part of capital stock]
document issued by the corporation
upon full payment of a subscription
Corporate Secretary can only issue it
upon full payment of a subscription
as such, he is one of the signatories
counter-signatory:
usually
the
President
or
another
person
authorized by the by-laws or the
board
cannot be issued for as long as there is
a balance on one's subscription
a SH is not entitled to a certificate as
long as the subscription is not fully paid
a subscription agreement is considered
as an indivisible agreement
if the certificate has a lot of initials,
then such was prepared by a stock
transfer agent
such initials are those of the people
who prepared it
handling of a certificate
not like an ordinary sheet of paper
must be like a certificate of title
SH
shall
not
be
issued
a
replacement certificate
usually takes a year
earlier than 1 year, SH must
post a bond representing the
value of the lost certificate

procedure
1. SH prepares and files an
affidavit of loss with the
Corporate Secretary
2. publication of notice of loss in a
newspaper of general circulation
once a week for 3 consecutive
weeks
3. waiting period of 1 year from the
date of last publication
4. issuance by the Corp Sec of a
replacement certificate
shares of stocks are personal property
as such, could be the object of a
mortgage or pledge
in practice, creditors prefer a pledge
[indorse the stock certificate]
SC: for the transfer of shares, it is
enough that the certificate had
been indorsed
if the stock is listed and traded
through
the
stock
exchange,
indorsement is enough
broker's commission: max of
2%
if the stock is listed in the stock
exchange but not traded through
the stock exchange, indorsement is
not enough since CGT have to be
paid [based on actual gains]
over the counter transaction
shares listed with the stock
exchange but are sold not
through the exchange
Deed of Sale, tax returns,
clearance from BIR

corporate seal
usual provision in the by-laws, its
design, size, shape and configuration
are left with the board
use: for stock certificates
amendment of AOI and by-laws
articles
ratified by 2/3 of all outstanding
shares
by-laws
at least a majority of all outstanding
shares
can be at least 2/3
if to be filed simultaneously with the
AOI, all incorporators must sign
if after, a majority of all the
incorporators
acts involved
1. original is copied verbatim

only the amended portion is

underscored
right after which indicate as
amended on...
2. amended AOI or by-laws are not
signed by anyone even an initial
3. must use letter size bond paper
[SEC does not accept legal-sized
documents]
4. after review, certificate of filing
amended AOI or by-laws to which
the copy of the amended AOI or bylaws & copy of the directors'
certificate
[authenticates
the
amendment] are attached
dividends

board only may declare dividends

directors, if functioning as executive
committee, cannot declare dividends
for the efficient conduct of corporate
business & to avoid delay, the board can
create an executive committee
at least 3 members of the board
should be members of the executive
committee
when may the board declare dividends?
only when the corporation has surplus
profits
surplus profits
surplus or retained earnings
net profits after income tax
without
any
impairment
or
diminution of the paid-up capital
paid-up capital
amount actually remitted to the
corporation
what impairs it: losses
when may the board be obliged to pay
dividends?
no provision in Corporation Code
SC: no court can order the board to
declare dividends [an exercise of
business judgment]
what the law provides is that no
corporation can maintain surplus
profits more than 100% of paid-up
capital
forms
1. cash
usually a check
requirements
a. board resolution
b. fixing by the board of the date
of distribution
2. properties
any property belonging to the
corporation
requirement: board resolution

board can fix the date of

distribution immediately except
for treasury shares due to the
need to get the ratification of at
least 2/3 of all outstanding
common shares
why is there a need to ratify?
SH actually suffers a
dilution in his investment
3. new shares of the corporation
same requirements as that of
property dividends
stock dividends are not subject to
income tax
when subject to income tax
a. when
the
shares
representing
the stock
dividends are sold or
b. exchanged with another
property
pre-emptive right
SH have pre-emptive rights
rationale: enable the DH to maintain or
retain the present ratio of their
stockholdings in the corporation
right to be given preference to subscribe
to new issue of shares of the corporation
before these shares are offered to nonSHs
a property right that arises from personal
property
may be waived & no public policy
involved
may be transferred either by onerous or
gratuitous title
are not absolute rights since there are
occasions when they do not exist
when they do not exist
1. when so provided in the AOI or bylaws that they do not exist
2. when new shares are issued to
pay for a property that the
corporation needs but for which
property
the
owner
wants
payment in shares
3. when new shares are issued to
comply with a legal requirement
that the corporation must go
public
4. when new shares are issued
pursuant to a stock option plan for
officers and/or employees of the
corporation
watered stocks
shares of stocks issued by a corporation
but for which shares the corporation did
not get the full fair value
there is no problem unless there are
unpaid creditors

 remedy of unpaid creditor: collect the

difference
directors who did not object to its
issuance shall be solidarily liable with
the person who received the watered
stocks [even those who abstained]
those directors who were sick can still
object to the issuance upon learning
of it