Corporation Midterm Reviewer - WWW and Notes-Edited

CORPORATION LAW MIDTERM REVIEWER WWW COMPILATION AND NOTES [403 SY 2011-2012]1
11/11/11 - Friday
Section 1. Title of the Code. - This Code shall be known as "The Corporation Code of the
Philippines".
Story of Genesis:
Before God created man, he prepared the birds in the sky, the land...etc. to create the world. When
everything was ready, from out of mud he created Adam, but finding Adam very lonely, despite all that he
created to make him happy. God being wise, he knows what Adam exactly needed. He put him to sleep
and out of his ribs, he made a woman.
Then, the woman found out from the snake and was deceived by him that if they ate the fruit from the
Garden, they would become like God. They then, realized that it was a deception from the devil, and when
God, he said uyy, what happened?
They passed on the blame, from Adam to Eve and then to the snake. ;)
So that if you will compare genesis from the course, business organization, exactly the same. The basic
form of business organization is sole proprietorship where only one person carries on his business. And
when God created man out of mud, then he whispered into that mud, Adam came out. Like Genesis, its
like the sole proprietorship.
Sole proprietorship needed a partner, and so partnership came out. Just like the Genesis, when God found
out Adam lonely, he made him a partner from his ribs named Eve. Everytime Eve gets home, he counted
the ribs of Adam, to make sure theres no other woman in this world. Thats the beginning of their quarrel.
Now, because of the investment of Adam, the partnership flourished, thats why Cain and Abel came out
because of their industry. DOING OVERTIME, NIGHT & DAY WORKING, DAY & NIGHT! ;) THEN, THE
corporation was born.
PARTNERSHIP
-at least 2
-contract and perfected by mere consent
CORPORATION
-at least 5; not less than 5 and not more than 15
-a creation of law; derives its power & existence
from law; law provides for the requirements of a
juridical person and how that juridical person would
carry out its power by electing its officers; who has
the sole authority to manage the corporation
The corporation is different from the partnership. It is a contract and perfected by mere consent. A
corporation is not just a contract among its stockholders, it is a tripartite agreement.
1. Contract between stockholders and corporation;
2. Contract between corporation and the state;
3. Contract between corporation and the public.
Sec. 5. Corporators and incorporators, stockholders and members. - Corporators are those who
compose a corporation, whether as stockholders or as members. Incorporators are those
stockholders or members mentioned in the articles of incorporation as originally forming and
composing the corporation and who are signatories thereof.
Corporators in a stock corporation are called stockholders or shareholders. Corporators in a
non-stock corporation are called members.
STOCKHOLDERS & CORPORATION
The corporation exist because the law has granted it the power to exist, and not because the stockholders
wanted to. And the law would grant if the corporation would comply with the requirements and other terms
and conditions under which the authority and the power was connected. Thus, THE CORPORATION DOES
NOT DERIVE ITS POWER FROM STOCKHOLDERS, BUT FROM THE LAW.
SO that its not accurate to say, that stockholders have authority over the corporation, although they
would constitute the corporation.
This is the reason why once the stockholders elect the board of directors which actually manages the
corporation, the stockholders cannot say that youre decision as a board will not be approved by us.
cherrynotes (SPECTRA ARCHIVES) SY 2011-2012
Once the board is elected, it is answerable to the state.

The decisions of the board are not subject to the whim of the stockholders.
So long as the board complies with the law of the state who granted them the powers.
The decision of the board will stand, regardless of what the stockholders will decide.
But there are certain acts where the stockholders can opt to review the decisions of the BOARD, by way of
exception. Although the
stockholders elect the members of the board, the board is not answerable to the stockholders but to the
LAW.
Sec. 10. Number and qualifications of incorporators. - 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 s stock corporation must own or be a subscriber to at
least one (1) share of the capital stock of the corporation.
The people who organized the corporation are called incorporators. Each incorporator is a stockholder.
One may be a stockholder, but not necessarily an incorporator. But an incorporator is necessarily a
stockholder.
Incorporators refer to those who started and pioneered the corporation. What they execute would be the
articles of incorporation.
Article of incorporation describes the substance of the corporation itself; basic info about corporation
- with the name of the corporation; how long will it intend to exist; to be learned later that max of
50 years and extension of another 50 years. The name of the incorporators is important
because they would be the one to sign the articles of incorporation.
- the portion where the state can identify who are responsible for these corporation. The
incorporators will invest and these will represent the stockholdings. The stocks will then form
part of the capital of the corporation.
- in the article of incorporation, the authorized capital stock will be indicated which is actually the
maximum amount that the corporation intends to invest and the maximum amount that the law
will allow the corporation to have as capital.
- It does not mean that whatever is the maximum authorized capital amount, that will be the
amount immediately invested. It is just a maximum. It may be fully paid or subscribed later and
may not be.
- The law only requires that out of the authorized capital stock, only 25% may be subscribed
which refer to the contract of the corporation.
- SUSCRIBED refers to the contract with the corporation. Out of how much the individual
incorporator stockholder would be willing to invest. That investment of the individual
incorporators and the total of all the actual subscription should not be less than 25% of the
authorized capital stock. Does not mean that if they make that commitment they will
immediately pay.
- The law only requires that out of the subscribed capital stock, only need 25% of that
subscription to be actually paid as capital.
o Ex: out of the 100,000 shares, I need not come out w/ the 100,000 shares. Law requires
that at least only 20,000 or 25%. So of out of your subscribed capital stock, you need to
subscribed, then out of your subscription only 25% will have to be paid.
CORPORATION & THE STATE
- AFTER THE ARTICLES OF INCORPORATION, we go to government/state through Securities and
Exchange Commission. It processes, monitors, regulates and even disciplines corporations and
officers.
- You have to file AOI to the SEC, have an option to file it by itself or already include the articles of
incorporation & by-laws of the corporation.
- BY-LAWS: rules of procedure among and within the corporation. Rules as to whom and what
officers to elect, how elected, number of votes required, when meetings held (monthly, annual,
special), how are meetings called and who will call. The officers, their duties and functions as
President, VP, chairman. Election process, votes required.
By laws may accompany the articles of incorporation.

SEC will check WON the contents of Art of Incorporation are true and correct, whether the
amounts are correct.
o What is proof that payments of subscription are made?
The treasurers affidavit.
Appoint a temporary or active treasurer who will deposit it to the bank and bank
will issue an acknowledgement receipt stating that the amount of payments of
the subscription is on deposit with them. The certificate will be incorporated with
the treasurers affidavit.
o Once established, the SEC will issue the Birth certificate of the corporation. The SEC will
issue the certificate of incorporation. The official document that shows the existence of a
duly organized corporation under Philippine law.
o Once given, officers will call all the stockholders. In that meeting, they will elect board of
directors. It will depend on how many is indicated in the articles of incorporation. Also,
they may invite other parties to become stockholders. The parties may subscribe for
certain shares, but no longer incorporators because their names are fixed.
o The board of directors once created will have to organize themselves.
o BOARD OF DIRECTORS MEETING:
Members of the board will organize themselves. Elect the chairman, president,
secretary, treasurer and other officers mentioned in the by-laws.
o Once organized, they are now ready to function. Now have the BOARD to whom
management is given, then board may appoint other officers mentioned in the by-laws.
Needs secretary, whom must be under ATTY.E, 10,000 per meeting! (haha)
Function of secretary: guide the board in meeting, assist stockholder in meeting, prepare the
issuances, stock certificates.
Now that you are issued the certificate of incorporation. SEC will tell you, that this is already
approved.
o Required to submit 2 books:
Stock and transfer book - record of every movement of stocks; one portion has
ledger which contains names of all stockholders, certificate number issued to
them; whenever youd like to assign/transfer/sell stocks, youll have to endorse
the certificates, and the endorsement will be reflected in this book
Who is the previous holder, whom the certificate was issued, number of
stocks indicated, or carried in the certificate
Book of stocks certificates - like diploma, used as proof that one is a
stockholder.
o So, as a corporate secretary, youll have to maintain these books and coordinate with
SEC and submit the annual reports of the corporation. Annual reports include financial
statements, general info sheet (an update, showing the basic info of the corporation,
officers, stockholders, directors, capitalization)
MONEY MART/ STOCK MARKET
o AS distinguished from Private Corporation, they are called Publicly Listed corporation.
Because the corporation is listed with the Phil stock exchange, which means that stock is
for sale to anyone interested.
o The Phil stock exchange is just a stock market where the sellers & brokers, buyers and
agents are there.
LIKE if they buy certain stocks today, sell it tomorrow or wait until price go up.
Later the broker would call back, that he has already purchase 1,000 stocks at a
certain price. Following day, if price go up, 5cents, then you sell stocks that have
been brought yesterday. Brought 100,000 shares and gain of 5cents, youll have
500,000.
o Not just any corporation can sell their shares in stock market, but has to register with the
Philippine stock exchange. Its not a public corporation, but a publicly listed corporation
because theres a different public corporation which has purpose to govern certain
portions of the state like the barangays, municipalities, cities, province., countries,
states.
o There are several types of other corporations:
1. Private corporations
Publicly listed corporation
Corporations engaged in public service or quasi-public corporation they
render public service; telecommunications, power corporations,
transportations,; governed by Public Service Act;
Profit/non profit
o Non-profit does not mean that you have to sell without profit,
simply means that all profits will not be distributed as dividends,
but only be used for that corporation to enhance and improve the
facilities. The members will get their share not in the guise of
profits but in the facilities for their convenience and comfort.
Non-stock/stock
o Although non stock is not intended for profit, but there prices are
much higher than other corporations for profit.
Religious corporations
11/16/11 Wednesday
Sec. 2. Corporation defined. - A corporation is an artificial being created by operation of law,

having the right of succession and the powers, attributes and properties expressly authorized
by law or incident to its existence.
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.
Sec. 19. Commencement of corporate existence. - A private corporation formed or organized
under this Code commences to have corporate existence and juridical personality and is
deemed incorporated from the date the Securities and Exchange Commission issues a
certificate of incorporation under its official seal; and thereupon the incorporators,
stockholders/members and their successors shall constitute a body politic and corporate under
the name stated in the articles of incorporation for the period of time mentioned therein,
unless said period is extended or the corporation is sooner dissolved in accordance with law.
Sec. 22. Effects on non-use of corporate charter and continuous inoperation of a corporation. If a corporation does not formally organize and commence the transaction of its business or
the construction of its works within two (2) years from the date of its incorporation, its
corporate powers cease and the corporation shall be deemed dissolved. However, if a
corporation has commenced the transaction of its business but subsequently becomes
continuously inoperative for a period of at least five (5) years, the same shall be a ground for
the suspension or revocation of its corporate franchise or certificate of incorporation.
This provision shall not apply if the failure to organize, commence the transaction of its
businesses or the construction of its works, or to continuously operate is due to causes
beyond the control of the corporation as may be determined by the Securities and Exchange
Commission.
Q: Definition of Corporation
A: A corporation is an artificial being created by operation of law having the right of succession and the
powers, attributes and properties expressly authorized by law or incident to its existence. It is a creation of
law, its the law which grants authority to exist. Law requires for it to continue existing. It must exist in
compliance with all the rules and regulations. And it is supposed to be a separate personality.
Q: So that one of the SH owes Mr. X, can he go to corporation and demand corporation to pay debt of SH?
A: no. corporation has nothing to do with the SH debt
Q: Rights of a corporation
A: Due process. Corporation also has the right against unreasonable search and seizure.
Q: Why this latter right? So that if an agent from DOLE wanted to search records of a corporation, can he
do that?
A: Yes. Thats an exception. There is a special provision of labor code which gives DOLE the power to
inspect records. Only the records mentioned in the law, otherwise it will be violative of the right against
illegal search.
Q: So that if that employee was threatened by manager and he went to labor department and claim illegal
dismissal, so that DOLE came and said, where is your gun, we want to search for the gun, can that be
done?
A: NO unless DOLE secures a Search Warrant. DOLE has right to inspect and examine but this time its not
part of your duty to look for the gun so Search Warrant is needed.
As a juridical person, corporation is entitled to exercise its right.
Q: SH are all residing at a condominium, where should the office of corporation be?
A: Principal place of the business. That does not mean the residence of SH is resident of corporation
because of their separate personality.
Q: Right to life?
A: Corporation is not entitled to right to life. Only natural persons are entitled to right to life. Although, the
corporation has its life which refers to the term of its existence.
The corporation in so far as existence is concerned cannot be dissolved without due process of law.
Q: Liberty?
A: Corporation is not entitled to right to liberty. You cannot send corporation to jail, because it is only an
artificial being. Although, there are lots of laws which impose criminal liability not to corporation but
perhaps to directors or officers.
In tax laws, there could be provision there that in case a violation is committed by corporation the officers,
presidents, and directors may be held criminally liable if they were responsible of the approval of criminal
acts. It does not mean that corporation can just violate any law with assurance that it will not be criminally
liable.
Provisions are clear that should the act of corporation make that corporation criminally liable then liability
may be imposed on its officers.
Q: Damages?
A: While corporation does not suffer mental anguish because he does not have the facilities to suffer that
type of damages, it may suffer damages if its reputation is being scandalized or besmirched. Like for ex.
libelous item in newspaper and due to this corporation suffered maybe having less number of customers
and less volume of sales, then corporation may file for damages. Not sleepless nights, not untold worries
and mental anguish because corporation is not capable. But besmirched reputation? yes. It refers to the
good will.
Here, when we say a separate person, we are drawing the line between SH itself and corporation. SH are
mere investors of corporation. They do not constitute the corporation itself and so that once certificate of
incorporation is granted. Corporation begins to exist, separate personality exists and separate from SH.
Corporation extends veil of protection.
Veil of corporate fiction:
Corporation is covered by that veil. Once is the veil is placed by the law, that veil protects whoever is
under the veil. The public will have to rely on that veil and deal with that veil. So that any liability will not
affect whoever is under that veil. Any potential transaction that the group has entered will never involve
whoever is under that veil. You are now dealing with the corporation not the people under it.
Q: However there are instances will allow you to lift that veil, but perhaps to sue the individuals under that
veil. In other words, it is not absolute that the individuals will forever be protected. Law allows instances
that we can pierce the veil of corporate fiction. Those are occasions when individual SH composing the
group supposedly protecting the veil may be personally liable:
A: 4 instances when lifting of veil is allowed:
1. When intended to cover a fraud
2. When intended to defeat public convenience
3. Justify wrong
4. Defend a crime
Under these, SH did not have an honest intention that corporation rather under these instances it could be
proven. And if it could be proven that corporation was formed to commit any of above instances, then
Stockholders may become personally liable and the veil of corporate entity that should protect them has
been pierced.
Q: Example of an instance to Cover Fraud? In our situation, we have to establish that the corporation was
organized precisely to cover up fraud. How do we demonstrate that?
11/18/11 Friday
Doctrine of Piercing the Veil of Corporate Entity
A. Instances when the lifting of the corporate veil is allowed (4):
1. Defeat public convenience
2. Justify wrong
3. Protect fraud
4. Defend a crime
B. Examples Given (2):
1. The corporation is being used by the stockholders as a consignee to receive the illegal goods
and they used the corporate personality as a shield for their illegal schemes or activities.
2. An insolvent created a corporation to evade his obligations to the creditors so he transferred his
properties to the corporation in order that those creditors can no longer go against the
properties which were already transferred to the said corporation.
C. In other words, there must be a clear intention of committing a crimedefrauding othersthat
intention is there. And to achieve that intention, he decided to create a corporation to evade any
personal obligation. Therefore, the corporate veil may be lifted and so the officers and the directors
would be personally liable.
D. The protection extended by the law covers only legitimate objectives. Thats the purpose of the law in
covering these stockholders with the protective mantle of corporate fiction. But if the intention is to
commit a crime, defeat public convenience, protect fraud, then it has violated the very purpose for
which the state has created them. Because we said that it is created by the law or the state then its
existence must be in accordance with this creation.
Definition of a Corporation, Section 2
A corporation is an artificial being created by operation of law having the right of succession and the
powers, attributes and properties expressly authorized by law or incident to its existence.
Right of Succession
Here are five stockholders of a very successful corporation. The 5 of them were necessarily the directors.
And being so successful they decided for the first time to hold their stockholders meeting in Singapore. So
the notice of the meeting was served, even telling them to bring along their spouses, with everything
taken care of by the board. So they did. They chartered a 737. After the meeting which lasted for 1 hour
they stayed for 1 more week together with their spouses. Of course they were not required to present any
marriage certificate so they would not be sure xxx. After going around in Singapore, they came home.
After, the pilot announced: We wish to inform you that we are encounteringencountering
encountering encountering Communications got lost and nothing has been heard of the aircraft.
Nothing has been heard of the stockholders.
What happens to the corporation?
ANS: The corporation will still exist notwithstanding the death of the 5 stockholders since it has a
right of succession. So, their stockholdings would now be transferred to the heirs. The corporation
does not die with the death of the stockholders. In other words, the corporation continues to exist
and this is another advantage of a corporation. And we learned in partnership that if a partner dies,
the partnership ceases to exist. If all the partners died, with more reason that the partnership will
be dissolved.
Here, even if all the stockholders would die of course it has a right of succession the corporation
remains to exist.
and so, a notice for stockholders meeting was served. It so happened that all of the stockholders who
died were fairly young. The eldest among the stockholders had an eldest son. When he was served with
the notice, he was asked, Anak kang stockholder X? [Eldest Son] OJA! OJA! OJA! (HA! HA!) The other
stockholders did not have children.
So who will appear in the stockholders meeting?
ANS: A guardian may be appointed on the minor sons behalf. So that it does not give us any reason
why, of course theoretically, why a corporation ceases to exist because we learned in succession
that everybody has an heir. Of course if no heir would come out, the property is escheated in favor
of the state.
Their death does not dissolve the corporation because we learned in succession that the heir assumes the
estate at the moment of death. So guardians may be appointed, or administrators could be designated, or
executors, for all we know there could be executors.
Differentiate an executor from an administrator:
1. Executor appointed in the will to administer the properties
2. Administrator appointed by the court if there is no will
Corporate Existence
A. It exists for 50 years; renewable for another 50 years. So that I if you were a stockholder at the age
of 21, plus 50 = 71, plus another 50, at the age of 121, you would still be able to renew the
corporation.
B. Of course while it could be renewable for another 50 years, but if it doesnt seem to be good, it can
be dissolved. They could shorten their period. In the articles of incorporation they could designate
that their existence would be for 50 years. If it turns out to be unsuccessful they could shorten their
existence to 5 years.
Powers of a Corporation
Express those expressly authorized by law
Implied those incidental to its existence
Example:
So that USC, lets assume, is a corporation. Its main purpose is to provide education so that the students
would earn a degree: a masteral degree, baccalaureate degree or any other four year course.
However, because USC having been granted to run, operate, and maintain an educational institution,
noticed that its assets are being underutilized. They are not earning as much as they should. They noticed
that this building for example after 8:30 becomes idle. As a business policy, all assets as much as possible
must be earning 24/7.
[Example where the assets of a business must be earning:
(1) if you are in a transportation business, you are a shipping company, you should worry if the
ships are anchored in the pier. They should be moving, thats the only indication that it is earning.
(2) If you own buses, and your garage is always filled up you cannot even park your car because all
your buses are there, you will not be happy to see those buses in the garage. The buses should be
in the streets. Those are the indicators that they are earning.
(3) In the pier, you see 6 container vans, it will assure you that the company who owns those vans
is not earning money. They have more vans than what they need. They have less cargoes than what
they expected. Those vans are just lying in the pier. However, if the yard is empty, it means that the
van is moving, and so, it earns money. So these are the indicators.]
So one time Father President was around after 8:30, the building was dark and nobody was inside. Fr.
President would not be happy to see the building. They spent millions, and the building is to be used only
until 8:30. So he called a meeting and then somebody proposed to have a USC (Universal Songhits
Corporation) KTV. They decided to use all the rooms for KTV in line with their educational objective to teach
Cebuanos not only music but dancing as well.
Question, is the KTV incidental?
ANS: Apply the two tests in determining the implied powers of the corporation:
a. when it is in furtherance of the business
b. when it is reasonably necessary to the exercise of the business
Putting a KTV is not in furtherance of the business since USC provides education. USC offers
academic courses, courses that will give you a degree. This is not just a dancing or driving school.
So its never in furtherance of the academic courses.
USC, as we know, is engaged in operating, maintaining and managing a hotel (SC hotel). It is a part
of the educational purpose since the staff is composed students. It is part of the HRM course. It is
allowed since it is an activity closely related to the courses offered. There you train the students. So
the courses offered should be related to the academic purpose, which is the main purpose of the
university.
Other Examples:
A If a railroad company would operate railways from Carcar to Danao, they have to expropriate the
parcel of land where the railways will pass. Though none is indicated that it can expropriate land, it
should be allowed to do so. Otherwise, the purpose of the railroad company would be limited or
useless since they cannot operate without the rails.
B. Another case involving a cement corporation: Since a cement factory has a huge power
requirement, the corporation brought in and assembled a big power plant,. They installed the power
plant within the cement factory. The local power company opposed and said that the cement
corporation does not have that power since they (the power company) were the ones who were
granted the franchise to operate within the entire province.
In that case, the corporation should be allowed to operate and maintain an electric plant for the purpose
exclusively of supplying electricity to its cement factory. Such is incidental only and they have the right to
provide themselves with their own power.
Distinctions Between a Partnership and a Corporation (13)
1. Creation
2. Number of
incorporators
3. Commencement of
juridical
personality
4. Powers
5. Management
6. Effect of
mismanagement
Partnership
Created by mere agreement of
the parties
May be organized by at least 2
persons
From the moment of execution of
the contract of partnership
Corporation
Created by law or operation of law
May exercise any power

authorized by the partners
provided it is not contra bonus
mores
When management is not agreed
upon, every partner is an agent
of the partnership
A partner as such can sue a copartner who mismanages
Can exercise only the powers expressly

granted by law or implied from those
granted or incident to its existence
Requires at least 5 incorporators

From the date of issuance of the
certificate of incorporation by SEC
The power to do business and manage

its affairs is vested in the board of
directors or trustees
The suit against a member of the board
who mismanages must be in the name
7. Rights of
succession
8. Extent of liability
to third persons
9. Transferability of
interest
10.Term of existence
11.Firm name
12.Dissolution
13.Governing law
of the corporation
Has
None
Partners are liable personally and
subsidiarily for partnership debts
to 3rd persons
Partners cannot transfer his
interest in partnership so as to
make the transferee a partner
without the unanimous consent
of all the existing partners
because the partnership is based
on trust
May be established for any
period of time stipulated by the
partners
Limited partnership is required by
law to add the word Ltd. to its
name
May be dissolved at any time by
any or all of the partners
Governed by the NCC
Stockholders are liable only to the

extent of the shares subscribed by them
Stockholder has generally the right to
transfer his shares without prior consent
of the other stockholders because
corporation is not based on trust
May not be formed for a term in excess

of 50 years extendible to not more than
50 years in any one instance
May adopt any name provided it is not
the same as or similar to any registered
firm name
Can only be dissolved with the consent
of the state
Governed by the Corporation Code
Stock and Non-Stock Corporations

Definition
Stock a corporation which has capital stock divided into shares and is authorized to distribute to the
holders of such shares, dividends or allotments of the surplus profits on the basis of the shares held
Non-stock a corporation which does not issue stocks nor distribute dividends to their members
Profits of Stock and Non-stock Corporations
1. In a stock corporation, it earns profits and distributes them as dividends to its stockholders.
2. In a non-stock corporation, it earns profits but it uses those profits to improve its facilities or
services. USC for example uses its profits to construct buildings and to improve its facilities.
Capitalization
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.
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.
Illustration:
Authorized Capital Stock
(ACS)
Subscribed Capital Stock
(SCS)
Paid-up Capital Stock
(PCS)
Php10M
Maximum
Php2.5M
At least 25% of the ACS
Php625K
At least 25% of the SCS
Authorized
(ACS) maximum amount which the law allows that corporation to invest.
Capital Stock
So in this example, Php10M the most. Later on if business is good, they could always amend the articles
and maybe increase the ACS. They could increase it anytime.
Subscribed Capital Stock (SCS) it is the amount of the capital stock subscribed, whether fully paid or
not.
Out of the entire ACS, they need not make that investment immediately.
The law requires the incorporators that out of the Php 10M ACS, they will subscribe only to at least 25%.
Meaning, thats the commitment of the incorporators. They commit that out of the Php10 million, they will
commit to subscribe, that is their individual commitment.
And the law does not require you to pay that immediately, you may pay that depending on your
agreement, or according to the decision of the board. You are only required to pay 25% Paid-up Capital
Stock (PCS).
So this corporation needs only 625k to start it. The rest depends upon their agreement or maybe depends
upon the BODs, when the BODs make a call. When we say call, the BODs are now requiring all the
stockholders to pay off any unpaid subscription they may have. Thats the decision of the board.
STOCK CORPORATION:
If this is a stock corporation, the capital is divided into shares and such corporation is authorized to
distribute to the holders of such shares, dividends or allotments of the surplus profits on the basis of the
shares held.
The purpose of identifying the shares is to measure their share in the losses or their share in the profits.
So, a stock corporation simply assigns a value to each share, so that if Php10M is the ACS, and you want to
divide this into 1 million shares, the par value (value of the share) would be Php 10.00 per share (Php 10M
ACS divided by 1 million shares). So each share is now given a par value. The value will be used to
measure your share in the corporation.
If after 1 year of operations, we have profits amounting to Php 1M and we wanted to distribute these
assets to the stockholders. Assuming all the 1 million shares have been subscribed to, each share would be
entitled to Php 1.00 profit (Php 1M profits / 1 million shares). So if you have 100 shares, you have Php
100.00 share of the profits or dividends.
You dont divide losses here unlike partnership. There is no such thing as stock partnership. There is no
need to measure because in a partnership, you have to divide according to your contribution. Here, you do
not have to share losses because we said that my liability is only up to the extent of my subscription.
Although I have not fully paid it yet (the subscription), I have committed to pay it. If this is not enough to
pay all the obligations, of course, I can be compelled to pay the SCS not because I have a share in the
losses but because I have earlier committed to pay the SCS. So this is a stock corporation.
NON-STOCK CORPORATION:
In a non-stock corporation, there is no need for the division of capital into shares because it is useless.
Because in a stock corporation, we purposely divided it into shares to come out with the par value so that
later on it would be used to measure dividends. But in a non-stock corporation, we do not have to divide
them into shares because we do not distribute profits.
Though a non-stock corporation may not distribute profits, it does not mean that the corporation will not
realize profits. As a matter of fact, their margin of profits most of the time are much wider than ordinary
stock corporations.
Example: Membership in clubs: Country Club, Casino Espaol, Alta Vista, etc.
The profits of these non-stock corporations are ploughed back in terms of improved facilities for the
members, better food and more options insofar as facilities are concerned.
In non-stock corporations, there are shares issued for a fixed price, but they are not based on capital. They
are just shares issued to those whoever would want to avail of the facilities of the club for example.
Sometimes they limit the number of members because if it becomes too many, it might get crowded.
Eventually they have to limit the number of shares. That is why even if you have all the millions, you would
still have to apply for membership.
In the bulletins of these places, you would have to apply for membership and there is a committee on
admission. Not just anyone could be a member. So they have to know your character, your behavioral
patterns. Theres a membership board and the members of the board will deliberate. They have two balls,
the white ball and black ball. The members will decide. If you think he is to be admitted, you will drop your
white ball. If you think you have objections on this applicant, you drop your black ball. So nobody will know
who objected to whom.
Sec. 3. Classes of corporations. - Corporations formed or organized under this Code may be
stock or non-stock corporations. Corporations which have capital stock divided into shares and
are authorized to distribute to the holders of such shares dividends or allotments of the
surplus profits on the basis of the shares held are stock corporations. All other corporations
are non-stock corporations.
Sec. 4. Corporations created by special laws or charters. - Corporations created by special laws
or charters shall be governed primarily by the provisions of the special law or charter creating
them or applicable to them, supplemented by the provisions of this Code, insofar as they are
applicable.
Classifications of a Corporation:
1. As to organizers
a. Public by State only
b. Private by private persons alone or with the State
2. As to purpose
a. Public organized for the government of a portion of the State for the general
good and welfare
b. Private formed for some private purpose, benefit or end
3. As to governing law
a. Public special laws and LGC
b. Private Law on private corporations
4. As to legal right to corporate existence
a. De jure corporation created in strict or substantial conformity with the mandatory
statutory requirements for incorporation and the right of which to exist as a
corporation cannot be successfully attacked or questioned by any party even in a
direct proceeding for that purpose by the stare
b. De facto organized with a colorable compliance with the requirements of a valid
law and its existence cannot be inquired collaterally but such inquiry may be made
by the SolGen in quo warranto proceeding
5. As to laws of incorporation
a. Domestic corporation formed, organized or existing under Phil. laws
b. Foreign a corporation formed, organized or existing under any laws other than
those of the Phils.
6. As to whether they are open to the public or not
a. Open one which is open to any person who may wish to become a stockholder or
member thereto
b. Close those whose shares of stock are held by limited number of persons like the
family or other closely-knit group
7. As to number of persons who compose them
a. Aggregate a corporation consisting of more than one person or member
b. Corporation sole a corporation consisting of only one person or member, a
special form of corporation usually associated with the clergy
8. As to whether they are for religious purposes or not
a. Ecclesiastical one organized for religious purposes
b. Lay one organized for a purpose other than for religion
9. As to whether they are for charitable purposes or not
a. Eleemosynary one established for or devoted to charitable purposes or those
supported by charity
b. Civil one established for business or profit
Public Corporations
A. Public Corporations are those organized for the government of a portion of the State for the
general good and welfare.
B. DepEd, DSWD, DND, DOJ, PCGG are NOT Public Corporations.
C. Example: LGUs, barangays, etc
11/21/11 Monday
Stock Corporations
Why should divide their capital and distribute it to shares?
-to determine their share in profits
Authorized Capital Stock (ACS)
-maximum that corporation will invest
-mentioned in Articles of Incorporation (AOI)
-cannot invest more, unless they amend the AOI
Subscribed Capital Stock (SCS)
-stocks subscribed by an individual/stockholder
-at least 25% of ACS
Paid-Up Capital Stock (PCS)
-subscribed stocks that are actually paid for
-at least 25% of SCS
Example:
ACS 10M
SCS at least 25% of ACS = 2.5M
PCS at least 25% of SCS = 625K
If we have 5 stockholders and all of them agree that they will subscribe equally, how much will they have?
-500K each (2.5M divided by 5)
A
B
C
D
E
Subscriptions
500,000
500,000
500,000
500,000
500,000
SCS (25% of ACS)

500K
500K
500K
500K
500K
Total: 2.5M
625K
PCS (25% of SCS)

125,000
125,000
125,000
125,000
125,000
-if 500,000 is their subscription, they will have to pay 25% of SCS which is 125,000
To simplify things, the law states that in a stock corporation, you divide your capital stock into shares.
So if ACS is 10M, and supposing you divide ACS into 10M shares, you have a par value of 1Peso per share.
So that, if par value is 1Peso per share, and you have PCS of 125,000 each, how much share would A have?
-125,000 shares (125,000 PCS x 1Peso per share)
Purpose of dividing stocks into shares:
-to measure later on your dividends which will represent your share in the profits
Kinds of Dividends
If there are profits later, board may decide that part of these profits may be distributed as dividends, and
these dividends usually are declared in cash, called Cash Dividends.
But there are occasions when corporation will not have cash but have excess properties and thus decide to
distribute properties and thus called Property Dividends.
If no property or cash dividends, we have excess shares so instead of distributing cash or property, will just
distribute stocks, or Stock Dividends.
Distribution of Profits
If profit is worth 200,000, how many shares will this be?
-200,000 shares because it is at 1Peso per share
If we have 200,000 profit equivalent to 200,000 shares, how much additional shares of stock will each
stockholder have?
-40,000 each (200,000 shares divided by 5 stockholders)
-So, their original stockholding which is 500,000 plus 40,000 additional stocks equals 540,000 stocks for
each stockholder.
-Thus, since each stockholder has 540,000 shares then total subscribed capital stock is now 2.7M (540,000
times 5)
Distribution of Losses
But, aside from profits, we also have losses, how do we distribute losses?
-not required to put up additional because there is still unpaid commitment of 1,875,000
How to get unpaid commitment (stocks that were not paid for):
Get total amount of PCS (125,000 x 5 = 625,000)
Get total amount of SCS (500,000 X 5 = 2.5M)
Subtract PCS from SCS (2.5M 625,000 = 1,875,000)
Unpaid Commitment is 1,875,000
-so, use this. Collect the unpaid commitment.
If the loss is only 200,000 and there is unpaid commitment of 1,875,000, what happens?
-stockholders still have to pay the unpaid commitment
-use the unpaid commitment to settle the 200,000 loss
-if there is extra, it goes to the corporation
If there are still losses after fully paying the subscriptions, what happens?
-no longer liable for anything more because our liability is limited to our subscriptions
When will they pay unpaid subscriptions?
-anytime the board calls for payment
Non-Stock Corporation
On the other hand, in non-stock corporation?
-no need for division of shares
Why no need to divide capital into stocks?
-because they do not distribute profits to the stockholders
-we could say that purpose of dividing capital into shares of stock is to be able to measure their share in
the profits because in a non-stock corporation, there is no sharing of profits thus there is no need to
convert or divide capital into shares
Other Classes of Corporation
De Jure:
compliance with requirements
De Facto:
no compliance with requirements; only exist in fact but not in law
Close:
Open:
limited to certain groups of people, i.e. family

open to the public
Parent or holding: control member of board in that other corporation

Subsidiary: other corporation held by another corporation who owns majority
Affiliated:
one corporation stockholder of another
Sister:
activities of two corporations are closely-related
Parties of a Corporation
Corporators: compose a corporation whether stockholders or members
Incorporators:
originally forming and composing the corporation
Stockholders:
corporators in a stock corporation
Members:
corporators of a non-stock corporation
Promoters: takes initiative in founding and organizing the business
Underwriter:guarantees distribution and sale of securities of a company
11/23/11 Wednesday
Q: Classification of Corporations as to relationship
1. Parent-holding corporation
2. Subsidiary corporation
3. Affiliated corporation
There could be several corporations operating and existing, it is possible that one corporation is entirely
owned by another, meaning, all of these shares of stock of one corporation may be owned by another
corporation.
Example:
Here is X incorporated engaged in land transportation. Basically, this is the business operating with
hundred units of buses. Many of these transportation corporations operate hundreds of buses and perhaps
it will save you if you supply your own spare parts. So each incorporated may operate or may maintain or
organize another corporation, and this other corporation could be entirely owned by an existing company,
Y corp. If Y corp has a subscribed capital stock of 10M, perhaps X incorporated could be the owner of
9,975,000 pesos. So theres only 25k left for other parties, namely:
- M (manager) owns 2000
- S (secretary) owns 1,000
- T (treasurer) owns 1,000
- Janitor owns 1,000
Total = 10M
These are just what we called nominees. They only hold a very small portion of the capital. So the
corporation will be under the control of X and so the business of these could be very related. Perhaps this
is engaged in spare parts or tires. So other than selling the spare parts and tires to X incorporated, they
also sell spare parts and tires to other. Other than realizing profits here, they also have profits in Y corp. at
the same time assuring X corporation of spare parts, that they will never run out of tires.
On the other hand, they may further operate another one, namely Z Corp. The same stockholdings but this
time operating machine shop where they have to repair trucks and buses, so if their buses need repairs,
they have their own shop and at the same time, other customers may avail. So we have profits here and
there. So thats the purpose of corporations maintained by a mother corporation.
Mother corporation may refer to operating corporation.
Holding corporation need not be an operation. It is not engaged in specific business. It is only engaged
in maintaining corporations.
An Example could be AEV corporation which simply makes investments to other corporation. It is into
power, banks, before shipping, condominiums and some others.
All these Stockholdings of these corporations are being controlled by AEV. May be they owned 80% or 60%,
the thing is they control all these. All the profits go to AEV. If profits are good, AEV is a publicly listed
corporation, the prices of shares of AEV will be going high and SH will be assured of returns of dividends.
This is a holding company because they are not engaged in any specific business and they only holding the
majority or controlling interest of all these corporations.
Affiliates and Subsidiaries are very closely related. One owns the other and management is the same.
President of one corporation could also be the president of the other but since these corporations are
separate from each other, one could be president of many corporations. If Im president of many
corporations, my influence on corporations is very critical. So those are the related corporations.
Q: Other corporations
As to number of persons
1. Corporation aggregate more than one corporators
2. Corporation sole only one corporator

Also as to State Law/citizenship
1. Domestic formed, exist under Philippine Law
2. Foreign formed, existing other than Philippine Law
Q: Who are promoters?
A: the one who initiate in founding or organizing the business.
Sec. 6. Classification of shares. - The shares of stock of stock corporations may be divided into
classes or series of shares, or both, any of which classes or series of shares may have such
rights, privileges or restrictions as may be stated in the articles of incorporation: Provided,
That no share may be deprived of voting rights except those classified and issued as
"preferred" or "redeemable" shares, unless otherwise provided in this Code: Provided, further,
That there shall always be a class or series of shares which have complete voting rights. Any
or all of the shares or series of shares may have a par value or have no par value as may be
provided for in the articles of incorporation: Provided, however, That banks, trust companies,
insurance companies, public utilities, and building and loan associations shall not be permitted
to issue no-par value shares of stock.
Preferred shares of stock issued by any corporation may be given preference in the
distribution of the assets of the corporation in case of liquidation and in the distribution of
dividends, or such other preferences as may be stated in the articles of incorporation which
are not violative of the provisions of this Code: Provided, That preferred shares of stock may
be issued only with a stated par value. The board of directors, where authorized in the articles
of incorporation, may fix the terms and conditions of preferred shares of stock or any series
thereof: Provided, That such terms and conditions shall be effective upon the filing of a
certificate thereof with the Securities and Exchange Commission.
Shares of capital stock issued without par value shall be deemed fully paid and non-assessable
and the holder of such shares shall not be liable to the corporation or to its creditors in
respect thereto: Provided; That shares without par value may not be issued for a consideration
less than the value of five (P5.00) pesos per share: Provided, further, That the entire
consideration received by the corporation for its no-par value shares shall be treated as
capital and shall not be available for distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose of insuring compliance with
constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and stated in the certificate of
stock, each share shall be equal in all respects to every other share.
Where the articles of incorporation provide for non-voting shares in the cases allowed by this
Code, the holders of such shares shall nevertheless be entitled to vote on the following
matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all
of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other
corporations;
7. Investment of corporate funds in another corporation or business in accordance with
this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote necessary to approve a
particular corporate act as provided in this Code shall be deemed to refer only to stocks with
voting rights.
Sec. 7. Founders' shares. - Founders' shares classified as such in the articles of incorporation
may be given certain rights and privileges not enjoyed by the owners of other stocks, provided
that where the exclusive right to vote and be voted for in the election of directors is granted,
it must be for a limited period not to exceed five (5) years subject to the approval of the
Securities and Exchange Commission. The five-year period shall commence from the date of
the aforesaid approval by the Securities and Exchange Commission.
Sec. 8. Redeemable shares. - Redeemable shares may be issued by the corporation when
expressly so provided in the articles of incorporation. They may be purchased or taken up by
the corporation upon the expiration of a fixed period, regardless of the existence of
unrestricted retained earnings in the books of the corporation, and upon such other terms and
conditions as may be stated in the articles of incorporation, which terms and conditions must
also be stated in the certificate of stock representing said shares.
Sec. 9. Treasury shares. - Treasury shares are shares of stock which have been issued and fully
paid for, but subsequently reacquired by the issuing corporation by purchase, redemption,
donation or through some other lawful means. Such shares may again be disposed of for a
reasonable price fixed by the board of directors.
Q: what are the various types of shares?
1. Common shares entitled pro rata distribution of profits. Fundamental forms of shares.
2. Preferred shares holder enjoys certain preferential rights or privileges, not necessarily granted
to holders of shares.
Q: what preferences?
These preferences include distribution of dividends.
If dividends are to be distributed then corporation may design certain preferences. In
case of distribution of dividends, holders of these shares may be given ahead or
preferred as compared to holders of common shares.
Not only dividends, they may also be given preferences as to distribution of assets.
In time of dissolution, if there are assets remaining after paying all liabilities, these
assets could be distributed back to SHs. There could be a provision that holders of
preferred shares may be given priority in so far as assets are concerned.
3. Par value we said capital is divided into shares and each share is given a certain value, thats the
par value of that share. it may happen, after dividing that share, they do not assign any value to
that share. They stop there.
Q: if that happens, how much would that share be?
A: at least the value of that share is 5.00, it cannot go lower than 5.00
4. Non-par value
5. Redeemable shares shares of a corporation that may be redeemed by a corporation after a
fixed period or any other date specified in AOI.
Q: what happens in redeemable share?
A: when a corporation issues a redeemable share, the holder is expected to be paid by the
corporation when period for payment becomes due.
6. Founders Shares
Q: Purpose of issuing redeemable shares
A: this is necessary if a corporation intends to have or acquire fresh capital or additional capital
Q: if the corporation needs additional capital usually want should be done?
A: increase capital by increasing the capital
Q: and if you increase capital, who will invest?
A: the existing stockholders, that is if they want to retain exactly the same control that they have over a
corporation.
Because If there are 5 of you and you agree SCS is a certain amount, you agree that only 5 of you will
invest, the best way, each one of you controls 20% or 1/5th of capital and in case of voting, you have the
extent of your interest over the corporation, you have voting rights up to 20%. If there are 3 of you, you
have 60%, you can already decide on what to do with corporation and normally you want to retain this,
especially the 3 of you has been planning to keep that control the longest that you could, you will always
be watching if other people are investing, because one day you might discover other investors will come in
without you knowing and only to find out your 60% before has gone down to only 40% because other
investors came in and acquired more stocks. And thats very crucial in management of corporation so you
must watch.
So if you need additional capital and you want to retain the same control, necessarily?
If they issue redeemable share, they might not have control anymore, so you have to double subscriptions
to be sure you retain control. However they might not be ready to put up that additional capital, existing
corporation may not have the funds needed to increase capital.
So option would be for additional capital which is the normal option would be to borrow from bank.
If you borrow from bank, you will not think of control. Bank is not interested in control because if
you pay the loan the bank will be happy, unless the loan is so huge, the amount lent is so huge that
there are occasions that bank would like to closely monitor the capital of that corporation otherwise
the amount that they have lent will go to waste, time will come the corporation cannot pay it
obligations or time will come that the amount lent might have been used for something else.
So there are occasions when bank wants to monitor so that when bank allows a certain loan in
millions of pesos and bank wants to monitor the activities, the bank as a condition of that loan will
require the corporation to issue at least 1 share in the name of bank rep and require corporation to
vote that bank representative in the board, so any decision done, the bank is a representative, the
bank is fully aware.
Thats why in big corporations it is not unusual that a bank representative is there every meeting of
the board because it wants to monitor its financial so if there are indicators that a corporation is
using money for something else, bank can always demand immediately or declare corporation in
default.
So Corporation needs capital. The 1st option is to borrow. However if we borrow it might not be easy
because
1. Interest might be high
2. It requires collaterals, security. Mortgages or assets, it might not have enough assets to secure
payment of loan in bank
Q: Other option we said is for existing stockholders is to double investments is not available either so no
bank loan, additional capital from existing stockholders, the remaining option is?
A: To borrow from public.
How? We issue redeemable shares. So tell the public whoever would like to invest in our company, we will
issue to you redeemable share Meaning no guarantee interest, but if company make good, the dividends
you will received will be much more that you expect. This is guaranteed, as long as we have profit we will
redeem. Meaning, as long as corporation has enough retained earnings, we will buy back the shares, after
you will get more. After years, show us redeemable share, say for your 10M, we will pay or return 11M. You
are happy, Corp is happy.
Q: There is guarantee so long as there are unrestricted earnings. Meaning?
A: means we have extra. After determining our assets, after determining liabilities, we have retained
something, we have profit and we will give this back to you.
Q: Treasury shares
A: they may refer any other shares which have been reacquired by a corporation most probably the
redeemable share. Once redeemed, its taken back by a corporation, they are now considered as treasury
shares.
Or they might be shares which were outstanding before, they may have been fully paid and corporation
decided to buy them back, Its allowed but not usual, because you have buy back stocks which are
outstanding unless you have profits, the thing is any share which have gotten back to corporation is called
treasury shares. So called treasury shares because it goes back to treasury of corporation and now its
owned again by corporation.
Q: Founders Shares
A: Founder shares in effect binds the other stockholders to keep on holding holders of these founders
shares and let them stay there at least 5 years. In effect holders of founders share enjoy special privilege
to be in the board for the next five years.
A: What could be the reason?

A: These are the people who had the vision. They know where to go, how to go there, they know the steps
to take. So they have the entire plan on how to start the corporation because if you don t give them that
privilege, it may happen for the 2nd year, they will vote for other people and every plan is gone. So here
intention of the law is to allow corporation to grow during its initial stage and the only way to allow this is
to grow is to give the management a certain group to make sure that they will be able to achieve their
objectives and the law feels 5 years is enough to nurture that corporation until its ready to be on its own.
However FS, when privilege expires are not disqualified to be voted again but it becomes voluntary and the
rest of SH are no longer obliged to elect them.
Q: Other shares
A: Outstanding shares.
Q: Going back to treasury shares, while they are now on the treasury, who owns them?
A: The Corporation owns them as an asset and every share is entitled to voting rights but no voting shares
for treasury shares.
Q: How come? What could happen to BOD who will act and exercise the right to vote?
A: if we give voting rights to treasury shares, during elections, who will act in behalf of corporation? The
board.
So that if the board will be given that authority to exercise votes of these treasury shares. Because if they
will be given that authority to vote in behalf of treasury shares, they will vote for themselves. And if they
are allowed to vote for themselves, they will be there forever and perpetuate themselves in management,
thats why law says no more voting rights.
Q: will the treasury shares be entitled of dividends?
A: NO. If Treasury Shares were entitled of dividends, money owned by a corporation, they will just transfer
it to the left pocket. So no logic in giving them dividends.
11/25/11 Friday
Sec. 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 non-stock 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 corporation has been subscribed, and at least twenty-five (25%) of the total subscription
has been fully paid to him in actual cash and/or in property the fair valuation of which is equal
to at least twenty-five (25%) percent of the said subscription, such paid-up capital being not
less than five thousand (P5,000.00) pesos.
Sec. 15. Forms of Articles of Incorporation. - Unless otherwise prescribed by special law,
articles of incorporation of all domestic corporations shall comply substantially with the
following form:
ARTICLES OF INCORPORATION
OF
__________________________
(Name of Corporation)
KNOW ALL MEN BY THESE PRESENTS:
The undersigned incorporators, all of legal age and a majority of whom are residents of the
Philippines, have this day voluntarily agreed to form a (stock) (non-stock) corporation under
the laws of the Republic of the Philippines;
AND WE HEREBY CERTIFY:
FIRST: That the name of said corporation shall be
".............................................., INC. or CORPORATION";
SECOND: That the purpose or purposes for which such corporation is incorporated are: (If
there is more than one purpose, indicate primary and secondary purposes);
THIRD: That the principal office of the corporation is located in the City/Municipality
of ............................................., Province of .................................................., Philippines;
FOURTH: That the term for which said corporation is to exist is ................ years from and after
the date of issuance of the certificate of incorporation;
FIFTH: That the names, nationalities and residences of the incorporators of the corporation are
as follows:
NAME
NATIONALITY
RESIDENCE
..................................... ..................................... .....................................
..................................... ..................................... .....................................
..................................... ..................................... .....................................
..................................... ..................................... .....................................
..................................... ..................................... .....................................
SIXTH: That the number of directors or trustees of the corporation shall be .............; and the
names, nationalities and residences of the first directors or trustees of the corporation are as
follows:
NAME
NATIONALITY
RESIDENCE
..................................... ..................................... .....................................
..................................... ..................................... .....................................
..................................... ..................................... .....................................
..................................... ..................................... .....................................
..................................... ..................................... .....................................
SEVENTH: That the authorized capital stock of the corporation

is ................................................. (P......................) PESOS in lawful money of the
Philippines, divided into ............... shares with the par value of ...................................
(P.......................) Pesos per share.
(In case all the share are without par value):
That the capital stock of the corporation is ........................... shares without par value. (In
case some shares have par value and some are without par value): That the capital stock of
said corporation consists of ........................ shares of which ....................... shares are of the
par value of .............................. (P.....................) PESOS each, and of
which ................................ shares are without par value.
EIGHTH: That at least twenty five (25%) per cent of the authorized capital stock above stated
has been subscribed as follows:
Name of Subscriber Nationality No of Shares Amount
Subscribed Subscribed
.................................. .................... ........................ .......................
.................................. .................... ........................ .......................
.................................. .................... ........................ .......................
.................................. .................... ........................ .......................
.................................. .................... ........................ .......................
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):
"No transfer of stock or interest which shall reduce the ownership of Filipino citizens to less
than the required percentage of the capital stock as provided by existing laws shall be allowed
or permitted to recorded in the proper books of the corporation and this restriction shall be
indicated in all stock certificates issued by the corporation."
IN WITNESS WHEREOF, we have hereunto signed these Articles of Incorporation,
this ................... day of .............................., 19 ........... in the City/Municipality
of ........................................, Province of ................................................., Republic of the
Philippines.
............................................ .............................................
............................................ .............................................
................................................
(Names and signatures of the incorporators)
SIGNED IN THE PRESENCE OF:
............................................ .............................................
(Notarial Acknowledgment)
REPUBLIC OF THE PHILIPPINES )
CITY/MUNICIPALITY OF ) S.S.
PROVINCE OF )
TREASURER'S AFFIDAVIT
I, ...................................., being duly sworn, depose and say:

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..... (7a)
Sec. 17. 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:
1. That the articles of incorporation or any amendment thereto is not substantially in
accordance with the form prescribed herein;
2. That the purpose or purposes of the corporation are patently unconstitutional, illegal,
immoral, or contrary to government rules and regulations;
3. That the Treasurer's Affidavit concerning the amount of capital stock subscribed
and/or paid if false;
4. That the percentage of ownership of the capital stock to be owned by citizens of the
Philippines has not been complied with as required by existing laws or the Constitution.
No articles of incorporation or amendment to articles of incorporation of banks, banking and
quasi-banking institutions, building and loan associations, trust companies and other financial
intermediaries, insurance companies, public utilities, educational institutions, and other
corporations governed by special laws shall be accepted or approved by the Commission
unless accompanied by a favorable recommendation of the appropriate government agency to
the effect that such articles or amendment is in accordance with law.
CONTENTS OF THE ARTICLES OF INCORPORATION
1. Name of the corporation
2. Specific purpose or purposes
3. Principal place of business
4. Term for which it is to exist

5. Names, nationalities and residences of the incorporators
6. Number of directors or trustees, which shall not be less than 5 nor more than 15
7. Names, nationalities and residences of the persons who shall act as directors or trustees until the first
regular directors or trustees are duly elected
8. If it be a stock corporation, the ACS, number of shares, par value, names, nationalities and residences of
the original subscribers and the amount subscribed, 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 capital, names, nationalities and residences of the
contributors and the amount contributed by each
10. Such other matters as are not inconsistent with law and which the incorporators may deem necessary
and convenient
Accompanied by a sworn statement of the Treasurer showing that at least 25% of the ACS has been
subscribed, and at least 25% of the total subscription (SCS) has been fully paid.
PRINCIPAL PLACE OF BUSINESS
The principal place of business of the corporation is located somewhere at the mountain barangays of
Cebu City. Is that enough?
NO. It must be complete and specified so that the SEC will be able to monitor or regulate the
corporation, and also to locate the corporation, so that the notices or any order from the SEC will
reach the corporation.
PURPOSE
Must be specified in order that the persons who will be transacting with the corporation would know
whether or not the corporation is acting within the purpose for which it was constituted.
So the articles of incorporation indicated that the purpose is to sell and offer to the public joy and fun.
What do you think?
Purpose must be specific as to what kind of business.
Their purpose of selling joy and fun is dangerous because its like an all-encompassing purpose. The
SEC will not be able to determine what kind of activity the corporation is engaged in. Joy and fun
might be illegal, or even immoral. And that could be questioned.
NAME
HAPYUD-HAPYUD INCORPORATED
Nothing wrong with the name since what the law requires is that it must not be identical, or
deceptively or confusingly similar to that of any existing corporation.
The name must not also convey a purpose which is different from the purpose for which it was
organized.
Here, the name is merely descriptive of the purpose of the corporation.
The only objection insofar as names are concerned is that the name must not be identical to any
existing corporation, or that it would not deceive or confuse the public.
HAPYUD-HAPYUD HILUT-HILUT HUWAP-HUWAP PIK-PIK
Not confusing since they have different meanings.
EXAMPLES OF CORPORATIONS WITH CONFUSING NAMES:
1. PLANTERS was the best salted peanuts around, until GROWERS came. Exactly the same
packaging, color schemes, packaging, materials. So the public became confused.
2. Efficascent Oil and Efficient Oil
These are similar names for basically the same product, and that could trigger controversies.
Thats what the law is trying to protect.
CLOSE CORPORATIONS
A. If you want a close corporation, there should be a provision or paragraph in the articles of
incorporation to the effect that the stockholder, before he transfers his shares of stocks to another
person, he should first offer that among the incumbent stockholders in that case you can control
the transfer. Thats the only way that you could make sure that the stocks will be maintained by the
incumbent stockholders.
B. However the prohibition cannot be absolute. The prohibition has to be relative in the sense that you
must only first offer to the other stockholders. If none of the incumbent stockholders are interested,
then of course, you can sell it to the public. Then it becomes OPEN.
C. That prohibition should not be absolute. Otherwise, if it were an absolute prohibition in the sense
that you cannot sell your stocks except to the incumbent stockholders, and you want to dispose the
stocks but the incumbent stockholders are not willing, you could not dispose it. Its not a fair
prohibition.
D. If you allow the absolute prohibition, it would violate the very essence of a corporation because in a
corporation, transferability of the rights or stocks is the basic consideration. You would, in effect, be
limiting or restricting the corporation.
E. It involves the right of succession, so to whomever you should transfer, he succeeds in your rights.
If you impose the absolute prohibition, then I could no longer transfer this property to another and
therefore, if I die, my heirs would not be able to succeed. If all of the stockholders would die, they
cannot transfer because transfer is prohibited absolutely. It deprives the corporation that basic right
of succession.
F.
Moreover, as an owner of a property, you have the right to dispose. You are depriving me one basic
right of ownership. As the owner, you have the right to use, the right to dispose and the right to
the fruits of the property. And in latin, jus disponendi, jus fruendi, and jus utendi!
G. In other words, maybe you could prohibit me relatively, but not absolutely. Relative in the sense
that at least you have given the other stockholders the preferential right to acquire. If you want to
stay by yourselves, if you want this corporation close, then you buy my stocks. Otherwise, if none of
you is interested, you could not also prevent me from offering this to others. So the prohibition may
be allowed so long as the prohibition is relative or qualified.
CAPITALIZATION
A. The AOI must be accompanied by a sworn statement of the Treasurer showing that at least 25% of
the ACS has been subscribed, and at least 25% of the total subscription (SCS) has been fully paid.
B. You have to submit a proof that the paid up capital has been duly collected.
C. We will not have any problems if the payments were made in cash. All you have to do is to deposit
the payment with the bank and the bank will issue to you a certificate of deposit. This is now the
passbook. It is a specific document duly acknowledged before a notary public where the bank
officer will certify that a certain amount representing the paid up capital of a corporation whose
incorporation is pending approval with the SEC; that the amount is paid and is now in the bank; with
an invitation to any SEC officer if it so desires to visit the bank and check whether indeed the
money is there.
D. However, it is not always required that cash will be used in the payment of subscription. As a
matter of fact, property may be used to pay that paid up portion of the subscription. If property will
be used, there will be a certification from the treasurer that the property is being used as a mode of
payment for the paid up capital stock which has the value of 25%.
E. We could prove the value by presenting a valuation report from independent or private appraisers.
Considering the deteriorating credibility of our government agencies or offices, very few will honor
or recognize the values that they indicated. Aware that these officers can be easily influenced
especially insofar as monetary matters are concerned, the SEC oftentimes rely more on private
appraisers. We have existing appraiser companies. These are companies whose business is to
appraise certain properties and they could come out with some schemes on appraising. You could
trust that they could come out with an accurate valuation report.
F.
You will have to establish that that is the value of your property. Because if you overvalue your
property, it would not reflect the true paid up portion. That would show that the paid up potion is
lower than what the law requires. And if that happens, you are misleading the public because the
paid up portion is supposed to reflect the true value of the assets of the corporation.
LEGAL CAPITAL versus ACTUAL CAPITAL

A. When talk of capital, we are referring to the legal capital. When we say legal capital, it would refer
to the subscribed capital which is such amount that the stockholders committed to the public that
they would subscribe to.
B.
Cash
Real Property
Personal Property
Total
10K
15k
12k
37k*
If you sell your personal property amounting to 12k, your capital would fluctuate depending on the
price paid for the personal property. It goes up, or it goes down. This is the ACTUAL CAPITAL.*
But LEGAL CAPITAL, it is fixed. It stays there. Thats the commitment of the stockholders. Thats the
capital reflected on the records. It will remain in that amount, unless the stockholders will subscribe
to additional shares, it would increase, but in the absence of any additional subscriptions, that legal
capital is fixed.
C. OUTSTANDING CAPITAL STOCK is what we also call SUBSCRIBED CAPITAL STOCK. It is already out
there. Its already outstanding. But once outstanding, it may come back as TREASURY SHARES. Its
(TS) part of the subscription because there has been an earlier issuance, but reacquired as treasury
shares. So its no longer outstanding.
Sec. 20. De facto corporations. - The due incorporation of any corporation claiming in good
faith to be a corporation under this Code, and its right to exercise corporate powers, shall not
be inquired into collaterally in any private suit to which such corporation may be a party. Such
inquiry may be made by the Solicitor General in a quo warranto proceeding.
DE FACTO CORPORATIONS
A. Now that everything has been submitted, we cannot start yet because we still have to wait for the
Certificate of Incorporation from the SEC. That would signify the birth of the corporation.
If we start operating without the certificate, it could be considered as a de facto corporation.
B. A de facto corporation is one which actually exists for all practical purposes as a corporation. The
effect is that the transactions that it would enter into would still be binding upon it. And so here
despite the lack of legal capacity, the law recognizes certain acts.
If the de facto corporation is engaged in selling trucks, and it sold a truck to buyer Mr. X, and Mr. X
later on refused to pay the balance. So the de facto corporation sued Mr. X for the balance. Mr. X
said that the de facto corporation has no personality to sue since it has not fully complied with the
requirements of the law. What do you think?
The de facto corporation can sue since under the law it is given a separate juridical personality.
C. Moreover, the personality of the de facto corporation cannot be subject to collateral attack. What is
allowed is only a direct attack. The Solicitor General, as counsel of the State, may question the
existence of that corporation through a quo warranto proceeding. It is the state who has the
authority to question. It was the state whose procedure was not complied with. So it is the state
who could question the existence of that corporation in a special quo warranto proceeding.
Otherwise, if we allow anyone to question the existence of any corporation, then we would be
flooded with complaints. People will start to hesitate entering into transactions with anyone. So
here, the state feels that since it was the party who was injured by the inappropriate acts of this
group, then only the state can question.
The transaction that you have entered into with the other party would remain to be a valid
transaction and therefore, the buyer in this case cannot file a motion to dismiss that the corporation
has no personality to sue.
D. Requisites:
1. A valid law under which a corporation with powers assumed might be incorporated;
2. A bona fide attempt to organize a corporation under such law; and
3. Actual user or exercise in good faith of corporate powers conferred upon it by law.
Sec. 21. Corporation by estoppel. - All persons who assume to act as a corporation knowing it
to be without authority to do so shall be liable as general partners for all debts, liabilities and
damages incurred or arising as a result thereof: Provided, however, That when any such
ostensible corporation is sued on any transaction entered by it as a corporation or on any tort
committed by it as such, it shall not be allowed to use as a defense its lack of corporate
personality.
One who assumes an obligation to an ostensible corporation as such, cannot resist
performance thereof on the ground that there was in fact no corporation.
CORPORATION BY ESTOPPEL
A. A corporation by estoppel is one which in reality is not a corporation but because of its appearance
or its representations to the public it is considered as a corporation.
B. In a corporation by estoppel, the individuals who misrepresented themselves are not protected by
the corporate fiction. In which case, their liability is similar to that of a general partner. In a de facto
corporation, the individuals are protected by the corporate fiction.
C. In the case of a suit, can a corporation by estoppel file a suit as a corporation? NO.
May the other party who is being sued by the corporation attack directly? YES.
They were misrepresenting. Making it appear that they were duly incorporated when in fact they
were not. The law says that misrepresentation has no standing in law. It was bad enough that you
misrepresented yourself, it would be worse if we grant you certain rights. Nobody should profit out
of their misrepresentation. No matter what you did, anything you did, the law does not recognize. In
the first place, you misrepresented to the public. You misled the public into believing that you are
duly organized when in truth you are not.
D. In a corporation by estoppel, where there was misrepresentation, the law says you have no right at
all.
In a de facto corporation, where there was noncompliance, the law says you have the right.
How do you explain that? Why give the right to one and deny that right to the other?
As to a de facto corporation, there was substantial compliance. Its not correct to say that
there was no compliance. In fact, there was an honest intention to organize under that law.
There was a desire to comply.
In a corporation by estoppel where there was misrepresentation, there was no compliance at
all.
11/28/11 Monday
Q: The purpose must be indicated in the articles of incorporation. We also said the name of the
corporation as well as the principal business. In the discussing the purpose, why is it important to indicate
the purpose?
A: This is the guide. The name of the company is something that should describe it, although usual.
Sometimes people love their name so much that they want it the name of the corporation but sometimes
the name will indicate the nature of the business as what we have indicated last time, and we said Pekpek
Corporation.
Q: so in the purpose, we maintain operate, manage the place where we sell unlimited joy and excessive
fun. That is our business, unlimited joy. We said thats purpose. Could it already pass the test?
A: No. It has to be specific, that purpose is too broad.
Q: and so our business is to maintain and manage, sell soft drinks, pepsi, seven-up, sprite, coke, all soft
drinks, pandesal. We also sell nails. Everything is listed, what do you think of our purpose?
A: It should not be too specific and not too broad by expressing only the description of the
business.
Q: what about the franchise? We could say that the purpose of the corporation is to operate and maintain
buses and trucks, the route would manila jolo, cebu, bohol, siquijor and camiguin. What should be the
guide?
A: purpose has to be lawful.
Q: lets just assume that the purpose is to distribute all types of soft drinks. In their survey, they notice
that sales in other areas is very high. In fact they ask what soft drink they prefer and they said they prefer
sprite, the only thing is there is no road and so the soft drink company, tried to expropriate several parcels
of land, same that we have to pass here to be able to sell here. So we have to expropriate the land. Do you
think they can expropriate the land?
A: they could not expropriate because expropriation is the compulsory way of acquiring land.
Q: why do you think they cannot?
A: because their purpose is to sell or delivery soft drinks, and to expropriate is not within their power. They
are not engaged into public service. They are only into delivery of soft drinks.
Q: and so the problem is settled, whether or not they could expropriate and how did we do that?
A: we consulted the purpose
Q: what is the most important purpose of the purpose?
A: the purpose of the purpose is to guide us and find out whether or not the power exercised is
within the purpose, because the moment it is no longer within the purpose it might be considered ultra
vires or beyond the power of the corporation.
So thats the importance of the purpose, to guide the state, the public and even the management of the
corporation to determine whether or not certain acts are still within its power by consulting the purpose.
Q: then another important thing is the principal place of business
A: important so that the public would know where the corporation operates and in case of notices, those
will be sent out to the principal place of business of the corporation. So that SEC will be able to send out
appropriate communications because as we said the State monitors the corporations.
Q: in occasions where cases might be filed, whats the rule on venue? Where should the complaint be
filed?
A: complaint must be filed where the plaintiff resides or the residence of defendant at the option of the
plaintiff unless otherwise agreed. Because venue can be agreed, but not jurisdiction.
Q: here is corporation X whose main office or principal place of business is in Cebu City but it operates
various branches in Manila and other major cities. It filed the complaint in Manila because it has a branch
office there in Manila. So at its option of plaintiff filed the case. So defendant who is from Cagayan de Oro
did not want to go Manila filed a motion to dismiss, improper venue, so opposition to motion to dismiss, so
corporation X said no you are wrong because venue means where we reside at our option. We are residing
here because we are residing here. What do you think your honor? Corporation X we want to file it here in
Manila for convenience and practicality. Can they consider that as residence? Is it practical?
A: convenience and practicality should be taken into consideration. It depends on the agreement, if there
was an agreement on the venue then it should be there, otherwise venue is the principal place of business
of the corporation
12/05/11 Monday
Contents of AOI
1. Name
2. Purpose
3. Principal place of business
4. Term
5. Names, nationalities and residences of the incorporators
6. Number of directors or trustees, which shall not be less than 5 nor more than 15
7. Names, nationalities and residences of the persons who shall act as directors or trustees until the first
regular directors or trustees are duly elected
8. If stock corporation, the ACS, number of shares, par value, names, nationalities and residences of the
original subscribers and the amount subscribed, and if some or all of the shares are without par value,
such fact must be stated
9. If non-stock corporation, the amount of capital, names, nationalities and residences of the contributors
and the amount contributed by each
10. Such other matters not inconsistent with law and the incorporators may deem necessary and
convenient
Location, Place of business: Why should it be indicated?
-for SEC to send notices or communications to corporation
-for purposes of filing an action, in matters of jurisdiction
Capitalization, what is required?
-sworn statement by treasurer indicating authorized capital stock, at least 25% is subscribed, at least 25%
of subscribed is paid
What happens to the unpaid?
-receivable by the corporation
If we want to introduce changes, what do we do?
-amend the articles of incorporation
Sec. 16. Amendment of Articles of Incorporation. - Unless otherwise prescribed by this Code or
by special law, and for legitimate purposes, any provision or matter stated in the articles of
incorporation may be amended by a majority vote of the board of directors or trustees and the
vote or written assent of the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, without prejudice to the appraisal right of dissenting stockholders
in accordance with the provisions of this Code, or the vote or written assent of at least twothirds (2/3) of the members if it be a non-stock corporation.
The original and amended articles together shall contain all provisions required by law to be
set out in the articles of incorporation. Such articles, as amended shall be indicated by
underscoring the change or changes made, and a copy thereof duly certified under oath by the
corporate secretary and a majority of the directors or trustees stating the fact that said
amendment or amendments have been duly approved by the required vote of the stockholders
or members, shall be submitted to the Securities and Exchange Commission.
The amendments shall take effect upon their approval by the Securities and Exchange
Commission or from the date of filing with the said Commission if not acted upon within six (6)
months from the date of filing for a cause not attributable to the corporation.
Amendment of Articles of Incorporation (AOI)
-may be amended by majority vote of BOD and vote of stockholders (or members if non-stock)
representing at least 2/3 of the outstanding capital stock
-original and amended articles shall contain all provisions required by law to be set out
-articles, as amended, shall be indicated by underscoring changes
-copy thereof duly certified under oath by corporate secretary and majority of directors
-submitted to SEC
-effective after approval by SEC

First step should be meeting by BOD, will discuss what should be amended, what changes to be
introduced, since they are going to restructure a basic part of the corporation. The deliberation and
decision of amending articles is not as simple as it appears because we are trying to change the basic
agreement or contract.
This contract is between the corporation and state; between corporation and stockholders; and among
stockholders themselves.
After BOD meeting, they will vote. How much vote needed?
-at least majority
Once approved by majority of BOD?
-referred to stockholders
Stockholders will then discuss among themselves, how much vote is required?
-not required that unanimous decision; law says at least 2/3 of stockholders will have to approve
If you are not among this 2/3?
-law says without prejudice to the appraisal right of dissenting stockholders
-if you do not agree with decision of majority, it could simply mean that you are no longer interested and
you may opt to leave; although not necessarily true to some
By exercising appraisal right, it means?
-can demand payment for their shares of stocks
-they may opt to leave the corporation
If they decide to leave the corporation, they have a lot of options available, what are these?
-they may opt to share these shares to other stockholders, or sell their shares to outside persons
They could sell their shares with different value, and what are these values?
-par value of shares
Par value: value of shares as indicated in the articles
But, that might not be profitable because corporation may have been very successful or profitable so
although the par value is fixed, we have different value which is book value, which could be much higher
than par value.
-book value: assets of the corporation divided by outstanding shares
Example:
Par value:
fixed
P10M
10M shares
Book value: assets
P20M
10M shares
Market value: determined by market forces
= 1.00/share
= 2.00/share
If the corporation is successful and business is good, corporation may even decide to sell at a higher price
which is the market value.
-market value: value where seller is willing to sell and buyer is willing to buy
-determined by market forces
As dissenting stockholder, you exercise what?
-appraisal right: meaning, tell corporation that you are leaving and now will determine the value of his
shares which is usually determined by book value
-rights of dissenting stockholder:
a. exercise of appraisal right
b. sell your shares to outsiders
When you exercise appraisal right, do you think you will immediately get the value of your shares?
-no because you cannot compel the corporation
-you have to wait until there are surplus profits (unrestricted retained earnings in excess of the assets of
the corporation)
This is important because we cannot touch the assets or allow someone to leave the corporation and take
part of the assets. Can we allow dissenting stockholder to take part of the assets?
-no, because of the trust fund doctrine (corporations are just holding these assets in trust for the
creditors)
-after determining his appraisal right and value of his shares, he cannot demand for it right away because
he has to wait until corporation has unrestricted retained earnings
Unrestricted Retained Earnings: surplus profits of the corporation; assets minus the liabilities; it is free
from any liability or potential expense
Thus, it is not easy to compel corporation to pay because you have to wait for unrestricted retained
earnings and it could be prolonged because corporation may have potential expenses
Trust Fund Doctrine: assets of the corporation are not owned by the corporation but by the creditors;
corporation are just holding these assets in trust for the creditors
Now, we have the amendments and amendments have been approved by stockholders, what do we do
next?
-original and amended articles shall contain all provisions required by law to be set out
-articles, as amended, shall be indicated by underscoring changes
-copy thereof duly certified under oath by corporate secretary and majority of directors
-submitted to SEC
Finally, shall take effect upon approval by SEC. Two ways of approval:
-by action: approved by SEC
-by inaction: not acted upon within 6 months from date of filing for a cause not attributable to the
corporation
Management of Corporation
To whom entrusted?
-board of directors
Powers of Board of Directors
-conduct business
-manage property
-exercise corporate power
-BOD has control over management of corporation; which way corporation should go, what policies to
adopt, whether or not corporation should pursue certain activities
Can powers of BOD be delegated?
-yes
Under what circumstances?
(enumerate, cite from book)
12/07/11 Wednesday
POWERS OF CORPORATION
Powers of the Board of Directors:
manage and control the corporation,
conduct business,
adopt policies,
decide as to which activities to undertake
Sec. 23. The board of directors or trustees. - Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by the board of directors
or trustees to be elected from among the holders of stocks, or where there is no stock, from
among the members of the corporation, who shall hold office for one (1) year until their
successors are elected and qualified.
Every director must own at least one (1) share of the capital stock of the corporation of which
he is a director, which share shall stand in his name on the books of the corporation. Any
director who ceases to be the owner of at least one (1) share of the capital stock of the
corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock
corporations must be members thereof. a majority of the directors or trustees of all
corporations organized under this Code must be residents of the Philippines.
Sec. 27. Disqualification of directors, trustees or officers. - No person convicted by final
judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or a
violation of this Code committed within five (5) years prior to the date of his election or
appointment, shall qualify as a director, trustee or officer of any corporation.
Q: because they have to exercise these powers, can stockholders review their decisions?
A: No. once BOD has been elected. Law confers powers upon the BOD.
Q: I thought the SH elected them?
A: So that here the authority of SH is limited to electing Board, once they are elected empowered to
exercise. Management is vested by the state or by the law which created the corporation/. The SH do not
vest power upon them.
The SH merely elects them. Once elected, SH has no authority to review and change the decision of the
board.
MATTERS TO BE REVIEWED BY STOCKHOLDERS
Decisions that according to the law as well should be incurred by the SH, should be ratified by SH by way
of specific exceptions provided by law:
amendment of AOI,
adoption and amendment of by-laws,
sale or lease of corporate property,
bonded indebtedness
increase/decrease capital stock
merger or consolidation,
investment in another corporation
dissolution
Reason:
A: these decisions involve the very existence of the corporation.
DIRECTORS
Example:
3 japanese, 2 Americans form a corporation in the Philippines, can they form a corporation?
A: Yes, so long as majority are residents of the Philippines
Q: can they also become Board of Directors?
A: yes, as long as requirements are complied. Of legal age, majority are residents of the Philippines,
must be holder of once share Etc.
Q: board of directors must be a holder of a share, so that if he loses this share, what happens?
A: he automatically ceases to be a director
Q: When he ceases to be a director, what happens?
A: there is a vacancy. Reason of vacancy is that he loses his share. And so special election can be called.
RESOLUTION
Q: among 5 directors, there was an issue to be approved and one early morning the messenger was busy
hopping from residence of director to the other and then he passed around a resolution and each of the
directors signed that resolution. Is that resolution valid?
A: its not.
Q: what should be done?
A: There should be a deliberation, so that all directors can participate by giving ideas, sharing ideas,
raising issues, express objections and let proponents answer, explain the validity and importance of that
issue. Thats how resolutions should be passed because it is a deliberative body, there should be free
exchange of ideas. Everyone should be heard. In that case, there was no deliberation. They just passed the
resolution around through the messenger. There is something wrong. Resolution is not valid.
RATIFICATION
Q: is there anything we can do?
A: There must be ratification. in a subsequent meeting, part of agenda is the review of minutes and in the
review you might see there that that resolution is inserted. Can we deliberate on this? Yes.
Q: If the majority are in agreement, what may now be done?
A: then, they may pass now a resolution ratifying the resolution.
Q: otherwise if there is no ratification, it shall not be an act of the board. unless?
A: If the directors are themselves the stockholders. In which case any resolution, even without the
meeting, if they themselves are the ONLY stockholders, whats the use. Ila ila ra btaw na. bahala nag naas
kan.ana or dili ebutang sa refrigerator. If they themselves are the stockholders then there is no need. so
here, if for example they are just family members, that formality of deliberation might be disregarded if
they themselves are just family. If anything happens to that resolution, they themselves will suffer the
consequences because they are the SH. Although we said, the Stockholders are not supposed to review
but in a corporation where directors are themselves stockholders, with more reason no need for
deliberation.
PROXY
Q: being a deliberate body, any director may request someone else to request the meeting. For Ex. A
general meeting would call for discussion of the auditors report. One director might say, dili man jud ko
kasabot ani, oy accountant man ka, ikaw adto tunga lang sa per diem. Can the director do that? Is proxy
allowed?
A: No. Precisely they were elected by the board because of some skills, qualifications and even
competence or even integrity that is why they are elected by SH. Therefore, these are things that a
director must exercise.
Sec. 35. Executive committee. - The by-laws of a corporation may create an executive
committee, composed of not less than three members of the board, to be appointed by the
board. Said committee may act, by majority vote of all its members, on such specific matters
within the competence of the board, as may be delegated to it in the by-laws or on a majority
vote of the board, except with respect to: (1) approval of any action for which shareholders'
approval is also required; (2) the filing of vacancies in the board; (3) the amendment or repeal
of by-laws or the adoption of new by-laws; (4) the amendment or repeal of any resolution of
the board which by its express terms is not so amendable or repealable; and (5) a distribution
of cash dividends to the shareholders.
EXECUTIVE COMMITTEE; MATTERS THAT MAY BE DELEGATED BY BOARD
Q: there could be some exceptions, there are things or instances therefore that a board may delegate to
some other parties?
A: this could be done by an executive committee. A smaller group which law allows to be organized out of
the bigger board and which board may from time to time allow to make decisions.
Q: these decisions usually may include?
A: routinary decisions/transactions
EXCEPT:
approval of any action where approval of SH is also required,
filling of vacancies,
amendment, repeal, or adoption of by-laws,

amendment or repeal of board resolution which is not amendable or repealable,
distribution of cash dividends
AMENDMENTS
Q: amendments of the articles, are they covered by the Executive Committee?
A: they are not one of those which are considered as powers of the Executive Committee, as a matter of
fact amendments cannot be delegated to the Executive Committee because such matter requires the
approval of majority of the board and thereafter, it needs to 2/3 by the stockholders.
Q: what else can be delegated?
A: they may delegate portions of management. Total delegation could be equal to abdication or
abandonment of the boards power. So that delegation may be allowed but must be limited.
Sec. 24. Election of directors or trustees. - At all elections of directors or trustees, there must
be present, either in person or by representative authorized to act by written proxy, the
owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority
of the members entitled to vote. The election must be by ballot if requested by any voting
stockholder or member. In stock corporations, every stockholder entitled to vote shall have
the right to vote in person or by proxy the number of shares of stock standing, at the time
fixed in the by-laws, in his own name on the stock books of the corporation, or where the bylaws are silent, at the time of the election; and said stockholder may vote such number of
shares for as many persons as there are directors to be elected or he may cumulate said
shares and give one candidate as many votes as the number of directors to be elected
multiplied by the number of his shares shall equal, or he may distribute them on the same
principle among as many candidates as he shall see fit: Provided, That the total number of
votes cast by him shall not exceed the number of shares owned by him as shown in the books
of the corporation multiplied by the whole number of directors to be elected: Provided,
however, That no delinquent stock shall be voted. Unless otherwise provided in the articles of
incorporation or in the by-laws, members of corporations which have no capital stock may cast
as many votes as there are trustees to be elected but may not cast more than one vote for one
candidate. Candidates receiving the highest number of votes shall be declared elected. Any
meeting of the stockholders or members called for an election may adjourn from day to day or
from time to time but not sine die or indefinitely if, for any reason, no election is held, or if
there not present or represented by proxy, at the meeting, the owners of a majority of the
outstanding capital stock, or if there be no capital stock, a majority of the member entitled to
vote.
Sec. 26. Report of election of directors, trustees and officers. - Within thirty (30) days after the
election of the directors, trustees and officers of the corporation, the secretary, or any other
officer of the corporation, shall submit to the Securities and Exchange Commission, the names,
nationalities and residences of the directors, trustees, and officers elected. Should a director,
trustee or officer die, resign or in any manner cease to hold office, his heirs in case of his
death, the secretary, or any other officer of the corporation, or the director, trustee or officer
himself, shall immediately report such fact to the Securities and Exchange Commission.
ELECTIONS
Q: so who can vote in the election of the board?
A: Generally stockholders have voting rights.
Q: There are occasions when the owner of share of stocks would surrender his certificate of stocks to
someone else. For ex. If Id borrow money from bank and bank would require security or collateral from
me, I could offer my certificate of stocks because these are evidence of ownership and when I pledge these
certificate of stocks, what happens in pledge?
A: surrender possession
Q: So at time of Elections, who will be in possession of certificates? Would it the lender or borrower?
A: lender.
Q: so who will vote, the pledgor who has possession, may he vote for those shares? Who could vote?
A: stockholders
Sec. 25. Corporate officers, quorum. - Immediately after their election, the directors of a
corporation must formally organize by the election of a president, who shall be a director, a
treasurer who may or may not be a director, a secretary who shall be a resident and citizen of
the Philippines, and such other officers as may be provided for in the by-laws. Any two (2) or
more positions may be held concurrently by the same person, except that no one shall act as
president and secretary or as president and treasurer at the same time.
The directors or trustees and officers to be elected shall perform the duties enjoined on them
by law and the by-laws of the corporation. Unless the articles of incorporation or the by-laws
provide for a greater majority, a majority of the number of directors or trustees as fixed in the
articles of incorporation shall constitute a quorum for the transaction of corporate business,
and every decision of at least a majority of the directors or trustees present at a meeting at
which there is a quorum shall be valid as a corporate act, except for the election of officers
which shall require the vote of a majority of all the members of the board.
Directors or trustees cannot attend or vote by proxy at board meetings.
QUORUM
Q: in Elections, in the board, when we have elections, we count numbers and follow rules. What is a
quorum? The purpose of requiring quorum?
A: number required to hold or conduct a meeting. Without a quorum, there can be no meeting. Not
necessarily to decide because you might not decide in that meeting but at least you can hold that meeting
because you have a quorum.
Q: so a majority must be a quorum, is it not? Quorum requires majority?
A: It can be simple majority or qualified majority.
Simple majority 50% plus one.
Qualified majority specifically stated in articles of incorporation.
The way we define quorum in a group of 5, 2 can be quorum if that is what the articles or by laws require,
why not.
Because quorum is the number required to hold a meeting. If the articles says so they can.
Though most usually a quorum it is at least the simple majority and in some cases in voting for example in
amending articles, how much is required to approve the amendments?
In amendment majority of the board and 2/3 Stockholders.
12/12/12 Monday
Quorum, Majority (2 types: Simple or Qualified), Voting shares and Non-voting shares (when
the very existence of the corporation is in issue)
Ways of voting:
Viva Voce or Secret Balloting - the latter being a means of voting where the stockholders would not
want their votes to be known (e.g. in termination/removal of a director where they would not want the
officer to know their votes, and other cases)
Method of voting:
Cumulative voting - shares that the SH have times the no. of directors to be voted for. The SH can
apportion it as he wants. In this kind of voting, he concentrates all his votes for one candidate
Illustration:
Stockholders:
A - has 4 shares = 20 votes (since they are to elect 5 directors)
B - has 4 shares = 20
C - has 4 shares = 20
D - has 4 shares = 20
E- has 5 shares = 25
F - has 4 shares = 20
So that, in this illustration, where A, B, C, D, and F connived to vote and get themselves in the board,
ostracizing E in the process, the latter can still assure himself a seat in the board through cumulative
voting (concentrating all the votes he has on himself)
The intention of this method is to protect the minority.
Straight voting
LIABILITY
General Rule: the officers are not liable.
Exceptions: (instances when the director can be made liable)
1. When he assents or votes for a patently unlawful act
Example: In a board meeting, the directors agreed to sell illegal drugs
Situation provided: the wife of a director was caught by the janitor having extramarital affair
with another director. Liable under patently unlawful act or not?
No, it has to be unlawful act of the corporation since there is a separate personality.
Lets chop the problems into pieces. We are here talking about the liability of a director, are
we not? We discussed that they are generally not liable for corporate actions since they are
covered by the corporate veil
It is not required that damage be sustained by the corporation, as long as the requisites
are present: that the director consented or voted for the conduct of the patently unlawful
acts.
Another illustration: A resolution was passed on the importation of meat and to bribe the
customs police in the process. In this case, the consenting director would be liable.
Otherwise, (effect on the stockholders) if the corporation would be penalized due to the
unlawful act, the corporate fund will be affected and the investments of the stockholders will
be in jeopardy. This could have been avoided had the board not passed the resolution. Thus,
they should be liable for the patently unlawful act because that is part of their job; it is their
responsibility to ensure that the corporation will not incur such unnecessary penalties.
2. Gross negligence- (hmmm, did not really discuss this part not illustrated it. It was just accepted
as one of the grounds and then, skipped na to conflict of interest where he focused jud)
3. Conflict of interest Another situation, Director Alcordo: if in the board meeting, the corporation wanted to
acquire parcels of land when one of the directors have a land that he would like to sell. In
this case, there is a conflict of interest because a buyer would definitely like to buy at the
lowest possible price while a seller would like to sell at the highest possible price. In this
case, is there something wrong?
A: There is nothing wrong with this situation as long as your dealings are fair and reasonable
and you let the other directors or experts assess for the fair value anyway.
So, an example where conflict of interest occurs:
Where a director conspires with the seller of a land where the corporation is wanting to buy
parcels of land with a certain budget. He cajoles the seller to sell the land at the ceiling
price, instead of the much lower price, with the intent to personally gain from the
transaction.
Is there conflict of interest already?
-Not yet. Until the next board meeting where he pushes for/supports the transaction to gain
from it personally.
Remember:
Generally, a director can deal with or do business with the corporation.
But even without suspicion, it is still a voidable transaction or valid until annulled.
Circumstances it can be declared void or annulled:
When the vote of the subject director is necessary to have the resolution passed; or
When the attendance of the subject director is necessary to form a quorum

OR VICE VERSA: The transaction IS NOT be annulled if:
Vote of the subject director is NOT necessary, or
Attendance of the subject director is NOT necessary to form a quorum.
12/14/11 Wednesday
CUMULATIVE VOTING
Q: Cumulative Voting
A: He has the option to cast all his votes in favor of one or some or all.
Q: Purpose of cumulative voting
A: Allow minority representation
LIABILITIES OF DIRECTORS
Q: when are the directors liable?
A: when they assented to unlawful act, gross negligence, when there is conflict of interest
Q: so here, these are instances when directors are liable to the corporation and when we say liable, what is
the measure of their liability?
A: up to the extent of their profit which the corporation could have gained in the transaction
DEALINGS WITH THE CORPORATION
Q: are you saying that the director could not be allowed to deal with the corporation? What is the effect if
they deal with the corporation? Is it valid transaction?
A: voidable.
Q: because it is voidable, what could happen? What are the conditions? Sec32
A: the corporation can annul such contract, UNLESS:
the presence of such director in the board meeting in which the contract was approved was not
necessary to constitute a quorum for such meeting;
the vote of such director was not necessary for the approval of the contract;
the contract is fair and reasonable under the circumstances;
the contract has been previously authorized by BOD.
A: the contract will be invalidated if the presence of director is necessary for the quorum, his presence is
necessary to vote
In those instances, the contract is voidable.
Q: so under what circumstances may the corporation be denied the option to declare it annulled?
A: presence of such director in the board meeting in which the contract was approved was not necessary
to constitute a quorum for such meeting, that the vote of such director was not necessary for the approval
of the contract; that the contract is fair and reasonable under the circumstances and that contract has
been previously authorized by BOD.
LIABILITY VS. VOIDABLE CONTRACTS
Q: so here, we now talk of liability on one hand and voidable contracts on the other? How do we distinguish
the situation? When would one fall be liable and when would one be liable on a voidable contract? If a
director is made merely liable, what has happened?
A: one involves that the director entered into a contract, while in the other, he did not enter a contract
If he entered into a contract, he is liable in the second provision but if he is guilty of fraud without entering
into a contract, the 1st provision shall apply.
INTERLOCKING DIRECTORS
Director is a director in two or more corporations.
Q: is this allowed?
A: yes
Q: is this not conflict?
A: for as long as there is no fraud

Q: so that if A were the director of Philippines Airlines and at the same time a director of a catering
company offering in food service in airlines passengers, is that allowed? Is there anything wrong?
A: thats allowed, nothing is wrong. So that A who may be a director of airline company and at the same
time director of food catering service company
Q: may A be disqualified from being director of the 2 corporations?
A: cannot be disqualified. He is qualified. Unless however there is fraud or unless contract is unreasonable
Q: illustrate a transaction tainted with fraud
A: corporation D shoe company, Corporation C department store. Therefore here is a director who seats in
the board, makes some decisions who is also a director of a supplier company and he tells the supplier
company, the corporation where he seats as a member of BOD, if you accept our supplies which I am also
a director, we will be giving you discounts and I will be receiving refunds, thats clearly fraud, once this is
discovered, his being an interlocking director will be questioned
Q: but because it involves also a director in effect dealing with corporation where he also seats as a
director, what is the effect? Did you notice that director is a director of the same 2 corporations, corp1 and
corp2 if corp 1 deals with corp2, in effect is he dealing with his own corporation? in a way he is, is that
also valid?
A: yes unless it is unreasonable. It will under the instance where a director will be liable for fraudulent
transactions or it will fall under voidable transactions because in effect he is dealing with his own
corporations and
Q: if the director SH deals with his own corporation what is the effect?
A: contract is voidable
so here being an interlocking director, if he deals with either of the corporations therefore in effect we said
the contract is voidable because that director is dealing with his own corporation therefore we apply the
rules on a director having transaction with his own corporation.
Q: So here is a beer company, BEER GIANT in that country and here is someone who also operates and
run another beer company, its a starting beer company but trying to get some market shares on the
existing beer giant, because he has his own beer company he was wondering what is the secret of that
beer giant. So why are they trying to control the big company? What do you think did this businessman
do? That owner of a small company, if he is really planning big for a small company, what do you think will
he do?
A: try steal the recipe, he will go through the main gate of that beer company by buying shares of that
company, buy as much shares as I could which is what he did. So he tried to acquire as many shares as he
could and eventually he was ready for the confrontation. He wanted to join elections of board with big
bundle of shares to support coz all he need will be enough votes through shares that he own to assure him
a seat on board.
Q: Do you think Beer giant will be happy to welcome? His objective was to steal the recipe.
A: No. they would be worried, so the beer giant consulted his lawyers, what do we do to prevent that owner
to have a seat in the board.
Because this is a public corporation, there is no such thing as preemptive right. And so there was no way
but the lawyers came up with an idea, Lawyers said, before elections we amend our bylaws, we provide
paragraph there that any person who owns also a beer company in direct competition with our company
should not be qualified to be nominated as a member of the board.
Q: Do you think that SH to wanted to steal that recipe would be happy to to hear that amendment?
A: No.
So he went to court and argued to court, your honors, this cannot be done, I am the owner of the several
shares of stocks and under corporation code, among my rights as owner of these shares will be my right to
vote and be voted for, there is no way they could prevent me from being voted upon.
BEER giant said, your honor if we allow anyone who holds a beer company, a competitor to seat in the
board that would be very suicidal on our part, that would therefore endanger the very existence of our
corporation. Thats why we are not allowing anyone to come in, like a stockholder of a competitor. that
competitor said but this provision is designed solely for me, there is no other person in the country who
owns a beer company so in effect they are trying to discriminate me as SH. Those were the arguments
Q: and how do you think the SC ruled?
A: SC ruled San Miguel vs Lucio Tan (or is this Gokongwei? Not sure), that is a valid amendment, they
cannot be forced to allow anyone to endanger the very existence of the corporation and so Lucio Tan was
not allowed to be nominated in the board of directors of San Miguel.
Q: however, if amendment said provided Lucio Tan should not be nominated in the BOD? Would there have
been a difference? if amendment specifies Lucio Tan is not allowed?
A: the amendment will now be discriminatory. But Lawyer of San Miguel was not that ignorant. He knew
that if will name Lucio Tan there, court will said discriminatory. As an owner he has all the rights to vote
and be voted upon that is why the amendment we do not name. We simply say anyone who also owns
beer company in direct competition to the company.
Q: What should be the rule? Interlocking directors?
A: General Rule: interlocking directors are valid, UNLESS that person who is supposed to be an interlocking
director comes from a corporation who is a competitor of the corporation where he intends to be director
in which case that cannot be allowed. If they are directors in 2 competitive corporations, that will have to
be reviewed specifically if it will endanger the very existence of one corporation.
Q: Because that can be very disadvantageous to the SH, imagine if he is there, if he succeeds in carrying a
seat in the board, what will happen?
A: in a board meeting, he could easily summon some officers of the corporations, instead of summons,
invitations to appear, like wed like to invite the comptroller of the corporation so that in that board we Mr.
comptroller we are trying to investigate, why do we have 80% of market, we would like to get 85% of the
market, could you please submit to these board a list of all our customers? So he gets this list and use it
to his own company and try to find who these customers are, offer them better packages, offer them
better price and sooner or later these customers will transfer. Next officer he will invite is chief cook or
Chief chemist. He will try to invite chief chemist, and mr. chemist, there are some complaints that our
beer is salty, why? what is really our recipe? And then he gets the recipe. That is the
01/04/12 Wednesday
Disqualification of a stockholder to be nominated as a member of the BOD - applies to member who is a
director of a competing corporation
PRESIDENT AND VICE PRESIDENT
President - he must be a stockholder and be a member of the board of director.
The Vice-president on the other hand does not need to be a member of the board of directors to become
such. The law does not require that of him.
So how may the vice president qualify if the president dies and yet he is not a director and does not have
shares of stocks?
FACT: requirement of VP - must be elected as such. There is no requirement that the VP must be a director
or that he must also be a stockholder.
SITUATION:
An individual who was not a director and not a stockholder was elected as vice president. This was
accepted by the corporation because to be a vice president, there was no requirement of being director
and to own shares of stocks.
The by-laws on the other hand, stipulated that the vice president must succeed the president in case the
latter dies, is incapacitated or resigns.
So there is a conflict now. Under the by-laws, he could succeed the president, but under the law, he
cannot.
What do we do?
There should be an election, but not an election for the president, but an election for the vice
president to be a member of the board or to be a director. In that case, he should also buy a share
in the corporation.
But, others may contend that there must be an election of a new president because the vice president was
not qualified to be president under the law, before acquiring his shares. One director may say that he may
nominate himself to be president because he had every right to have a chance to be president since he
already had shares and was already a director even before the vice president acquired his own shares and
had become a director.
TWO CONTENTIONS:
VICE PRESIDENT: I could now buy stocks, I could be elected to be part of the board. That way I could
succeed the President since I would already qualify for the said position.
OTHER CONTENTION: you could buy stocks, submit yourself for election to the board, then submit yourself
to the election of president.
RESOLVING THE CONFLICT:
The provisions of the by-laws already provide that the vice president shall succeed the president. He must
just comply with the requirement of having stocks and be a member of the board, then he may assume the
position of president by virtue of the by-laws. In Other Words, once the vice president becomes a member
of the board and acquires shares of stocks then being a vice president and being a director, he may now
assume the office of the president.
For the second contention: SC ruled that there is no need for two elections, since the vice president was
duly elected as the vp. He was qualified for the position, so he was validly elected as a vice president. He
may not have been qualified to be President, but once he complies with what was lacking then he can
validly assume the office of the president.
CORPORATE OFFICERS
Once organized as a corporation, we hold a SH meeting to elect members of the board.
Once the board is elected the meeting is then adjourned.
Then the first organizational meeting of the board will commence to elect the corporate officers.
SH elect the directors - directors elect the corporate officers.
Corporate officers are indicated in the by-laws. Most important: president, secretary, treasurer. These 3
are sufficient.
Some corporations elect other officers like the chairman, vice chairman, CEO, chief officers, division heads,
department head, VP of department, manager, personnel.
Election of corporate officers basically means electing officers for the entire corporation - depends on the
size of the corporation.
President vs. Chairman
Who is higher? Depends on the by-laws.
Chairman may be elected because he is the eldest of the family or he has the most number of shares.
Necessarily, the chairman is higher than the President, but again this will depend on the powers vested by
the by-laws to the officers.
The organization of the corporation must be tailored fit to the purpose of the corp.
Some officers may not be elected but merely appointed.
Basically, the law refers to only 3 fundamental officers - president, secretary, treasurer.
So long as you have this, you will already function as a corporate body.
01/06/12 Friday
Sec. 32. Dealings of directors, trustees or officers with the corporation. - A contract of the
corporation with one or more of its directors or trustees or officers is voidable, at the option of
such corporation, unless all the following conditions are present:
1. That the presence of such director or trustee in the board meeting in which the
contract was approved was not necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was nor necessary for the approval of the
contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in case of an officer, the contract has been previously authorized by the board of
directors.
Where any of the first two conditions set forth in the preceding paragraph is absent, in the
case of a contract with a director or trustee, such contract may be ratified by the vote of the
stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of at
least two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full
disclosure of the adverse interest of the directors or trustees involved is made at such
meeting: Provided, however, That the contract is fair and reasonable under the circumstances.
DEALINGS OF DIRECTORS WITH THE CORPORATION
May a director of a corporation deal with his own corporation?
Yes. If he enters into a transaction with his corporation, that would be perfectly valid. However, the
contract is voidable at the option of the corporation voidable in the sense that it is valid until the
corporation decides to void such transaction.
If it is voidable, what can be done?
Being voidable, the defect can be cured by ratification.
So here, even if the director was involved in the transaction, that transaction remains binding upon
the corporation.
Sec. 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and
knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of
gross negligence or bad faith in directing the affairs of the corporation or acquire any personal
or pecuniary interest in conflict with their duty as such directors or trustees shall be liable
jointly and severally for all damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons.
When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any
interest adverse to the corporation in respect of any matter which has been reposed in him in
confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall
be liable as a trustee for the corporation and must account for the profits which otherwise
would have accrued to the corporation.
LIABILITY OF DIRECTORS
Under what circumstances may a director become liable to a corporation?
1. BODs would enter into illegal transactions
2. Gross negligence
3. Conflict of interest
If he was guilty of conflict of interest, he could be liable. But at the same time, he can enter into any
transaction with the corporation, of which he is a member of the board. How do we reconcile that? Here is
a director of an airline company, who at the same time operates and runs a catering service. When the
airline company was looking for a catering service provider, this director offered his own catering services
to that airline company.
Can he offer and enter into a catering services agreement with the company?
YES.
Would he not be guilty of conflict of interest?
He would not be guilty for as long as he submits a proposition to the board. If he can submit a
proposition that is reasonable and competitive at the same time, and the BOD decided to choose
this particular catering service, then he would not be liable for conflict of interest.
There should not be any conflict of interest because he should submit it to the board for approval. If
they availed of the catering services and the corporation would then ask for a higher price, and
they think it is too much, then it is no longer fair and reasonable and they could always have the
transaction voided.
It is incumbent upon that director to prove that the transaction is fair and reasonable. So what makes a
transaction fair and reasonable? How should a director establish that it is fair and reasonable?
You show that the proper procedures were observed. There was a proper bidding where everybody
was given an opportunity to offer their services. You have to show that it went through the regular
process of approval.
More importantly, you prove that you have not influenced the decision of the board by showing
that:
a. Your presence as such director in the board meeting in which the contract was approved was
not necessary to constitute a quorum
b. Your vote as such director was not necessary for the approval of the contract
Point is, there is nothing wrong with a director to entering into any transaction with the corporation.
Otherwise, if the director would not be allowed, no one would like to become a director.
If I happen to be a director of a land transportation company, and I am dealing with tires, I am free to offer
my tires to the land transportation company for as long as the transaction is fair and reasonable.
So that if I am a director of an airline company, and I own an insurance company offering passenger
insurance, I can also deal with the airline company. So there is nothing wrong with it so long as it is fair and
reasonable. Otherwise, the transaction is voidable.
So long as you are sure that you have complied with all the procedural requirements on bidding for
example, for as long as you are sure that you have not influenced the decision of your board, then that
transaction is perfectly valid.
Sec. 33. Contracts between corporations with interlocking directors. - Except in cases of fraud,
and provided the contract is fair and reasonable under the circumstances, a contract between
two or more corporations having interlocking directors shall not be invalidated on that ground
alone: Provided, That if the interest of the interlocking director in one corporation is
substantial and his interest in the other corporation or corporations is merely nominal, he
shall be subject to the provisions of the preceding section insofar as the latter corporation or
corporations are concerned.
Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be
considered substantial for purposes of interlocking directors.
INTERLOCKING DIRECTORS
Who is an interlocking director?
He is one who sits as a director in two or more corporations.
Is there a law prohibiting a person from becoming a director in two companies who are engaged in the
same business?
No. Theres no such law. As a matter of fact, an interlocking director is perfectly allowed. Being an
interlocking director, he could share his knowledge and experience in one corporation with the
board of another corporation engaged in the same business. If done in a legitimate way, indeed it is
advantageous.
However, even if interlocking directors are allowed, there are instances wherein a director in one company
cannot be allowed to be a director in another company who is a direct competitor.
In the case of Gokongwei, Jr. v. SEC (89 SCRA 336 [1979]), petitioner Gokongwei was a director of a new
beer company. This beer company was just starting, but because of their price strategy, they was slowly
crept into the market share of the beer giant SMC. Here, Gokongwei bought shares of stocks left and right
of SMC until he was able to accumulate enough stocks to put him in the board. He could concentrate all his
votes by cumulative voting to guarantee himself a seat in the board.
SMC became aware of this because during the trading of the stocks, they will have to monitor the
shareholdings of every stockholder. Usually, publicly listed corporations engage the services of stock and
transfer agents who monitor every movement of every share of stock. However, there are ways of avoiding
them. You could always let someone assume ownership of your stocks but eventually, in an election, you
can only cast votes according to the volume of stocks listed under your name. But here, they were able to
identify through the stock and transfer agents and spies. They learned that Gokongwei already has enough
stocks to put himself in the board.
So, the legal team of SMC was consulted. They want to know what they can do to prevent Gokongwei from
becoming a director. And so, the legal team decided to amend the by-laws of the corporation, which they
did before the elections. They were able to introduce the amendment by indicating there something to this
effect:
That no person who is a director of another corporation engaged in a business similar to our
business should be qualified to be nominated to the board.
That was the provision. No name was mentioned. No person was specified.
And so this director from this new beer company questioned that amendment, claiming that the
amendment violates his right of ownership. As an owner of stocks, we have learned that his ownership
carries, among others, the right to vote and to be voted upon. That was what he questioned.
Now, the case was brought to the SC, who ruled that the amendment was valid. Both parties presented
their evidence and SMC was able to convince the SC. Because truly, once this guy is already in the board,
nothing could prevent this guy from inviting the officers of SMC to the board meeting in the guise of
inquiring, he might just say, Id like to invite our VP for marketing, why is our sales going down? So
during that meeting, he also requested that the list of customers be brought and presented to the board.
Once you have that list of customers, he could always share that with the other company, Now these are
the customers of our competitor. Go! Visit these customers and offer them attractive packages of our
products. It could be that, or it could call on the brew master and try to inquire in the board meeting
under the guise of improving the quality of the beer, so hell inquire from the brew master, Whats
happening to the quality of our beer? Where is the formula? Id like you to explain the formula.
Thats what they were afraid of and so it was discouraged. There was a danger that in the entry of this
director, there is a possibility that the very existence of the corporation would be affected.
So, interlocking directorship is allowed, unless, the corporation itself through its by-laws will prevent or try
to prohibit the nomination of any person who could cause or jeopardize the very existence of the
corporation.
DISLOYALTY
When we talk of disloyalty, the director, by virtue of his office, acquires for himself a business opportunity
which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation.
EXAMPLE:
A corporation is engaged in the distribution of beer in Cebu City. And this guy was a director in that
corporation. It so happened that in Mandaue City, the distributor of beer in that city decided to give up his
franchise. So the beer company offered the franchise to the corporation. The director tried to influence his
fellow directors in the board, saying that, You know we should not take this opportunity because its bad,
blah blah blah So the board decided not to take the opportunity. But then, the next day, he formed his
own group and they took the franchise. So he used his influence to get the franchise for himself.
01/11/12 Wednesday
Sec. 28. Removal of directors or trustees. - Any director or trustee of a corporation may be
removed from office by a vote of the stockholders holding or representing at least two-thirds
(2/3) of the outstanding capital stock, or if the corporation be a non-stock corporation, by a
vote of at least two-thirds (2/3) of the members entitled to vote: Provided, That such removal
shall take place either at a regular meeting of the corporation or at a special meeting called
for the purpose, and in either case, after previous notice to stockholders or members of the
corporation of the intention to propose such removal at the meeting. A special meeting of the
stockholders or members of a corporation for the purpose of removal of directors or trustees,
or any of them, must be called by the secretary on order of the president or on the written
demand of the stockholders representing or holding at least a majority of the outstanding
capital stock, or, if it be a non-stock corporation, on the written demand of a majority of the
members entitled to vote. Should the secretary fail or refuse to call the special meeting upon
such demand or fail or refuse to give the notice, or if there is no secretary, the call for the
meeting may be addressed directly to the stockholders or members by any stockholder or
member of the corporation signing the demand. Notice of the time and place of such meeting,
as well as of the intention to propose such removal, must be given by publication or by written
notice prescribed in this Code. Removal may be with or without cause: Provided, That removal
without cause may not be used to deprive minority stockholders or members of the right of
representation to which they may be entitled under Section 24 of this Code.
Sec. 34. Disloyalty of a director. - Where a director, by virtue of his office, acquires for himself
a business opportunity which should belong to the corporation, thereby obtaining profits to
the prejudice of such corporation, he must account to the latter for all such profits by
refunding the same, unless his act has been ratified by a vote of the stockholders owning or
representing at least two-thirds (2/3) of the outstanding capital stock. This provision shall be
applicable, notwithstanding the fact that the director risked his own funds in the venture.
REMOVAL
Consequence of being disloyal:
suffer all the liabilities and return the profit
And because of this disloyalty his behavior calls for more drastic action from the SH, SH could move for
removal. Necessarily if he is removed, what could happen?
There could be vacancy.
To remove a director what is supposed to be done?
A meeting will be called and there is due process?
Notice should be served.
Notice of hearing of the possible items to be discussed and which most likely to indicate the
removal of the director.
Notice of meeting is done how? that removal of director may be done with or without cause.
Would be a director would be entitled to stay like any other government official?
NO. He could be removed even without cause of course that there should be notice for him to be able to
know the reason for the removal. Although in practice this seldom happens, it is seldom to meet and just
removed somebody but law is clear, with or without cause simply indicates that the director serves at the
pleasure of fellow members of board or SH. There is actually no requirement to find cause for removal. In
practice, there is a cause for removal, otherwise the consequence if there is no cause for removal, the
power to remove a fellow director might be abused in a way that the right of the minority to be
represented in the board might suffer. Once that minority is represented they might have one member of
the board, if there was no limitation, he could be removed even w/o cause
Intention of law, protect minority at the same time members of board based on trust and confidence.
That right should not be exercised if the minority could be deprived of his representation. If board member
minority is party guilty of abused, he can be removed. Once removed there could be vacancy. Removal
creates a vacancy.
VACANCY
Once vacancy occurs what could happen?
- filling up of vacancy would depend upon the cause.
- may be filed majority of the SH or directors.
So how is vacancy created again?
Vacancy is created when director abandons, retires, removal, disqualification, resignation.
If vacancy occurs by removal or expiration, may be filled by SH.
Other than removal or expiration, vacancy may be filled up by BOD.
Vacancy may be filled up by SH if there is increase in the number of directors.
Increase in the number of directors by the amendment of AOI. There is a need to amend, because the
number of directors are indicated in the articles. Amendment is necessary and if that creates a vacancy in
the board, vacancy is filled depends on the reason for vacancy.
When are SH required to fill up vacancy
- removal
- expiration
- increase in number of directors
Creation of vacancy would depend upon the cause so that if vacancy occurs and director is unable to finish
his term, the successor or the replacement will serve for the unexpired term.
EXECUTIVE COMMITTEE
When may a matter be referred to the board, when may a particular be referred to an executive
committee?
The executive committee can act of matters which a board which supposed to act.
Executive committee can act in routinary matters.
In hiring a president?
hiring a president is not a routinary act;
necessarily law requires that it must be the board who should elect president and law further
requires that the president be elected.
Law requires during organizational meeting that president must be elected by the board of
directors. If executive committee can elect president, they are in effect amending the by-laws.
They cannot do that; this is a limitation. They cannot even amend resolution unless that resolution
allows amendment.
So when do we give it to executive committee?
- day to day transactions.
Exceptions:
a) approval of any action for which shareholders' approval is also required
b) filling of vacancies in the board
c) amendment or repeal of by-laws or adoption of new by-laws
d) amendment or repeal of any resolution of the board
e) distribution of cash dividends to the shareholders
Are we not allowing absolute delegation?
NO, that is tantamount abandonment of office as directors. So here, Executive committee was
created by law and that creation must be indicated in the by-laws.
Objective of law of creating Executive committee:
to give BOD opportunity to focus on more relevant matters, to compliment functions of board,
without bod abdicating their functions.
POWERS OF CORPORATION
Which is more powerful? corporation or partnership?
- partnership is more powerful, corporation owes its existence by state, so corporation can only
perform powers provided for by corporation.
- a partnership theoretically holds more power than a corporation simply because the corporation is
a creation of state and being a creation of state, state limits its powers and distinguish by
partnership.
- the partnership is a contract by agreement of powers, can partners stop business anytime?
yes. Although same with corporation, but there are certain requirements to follow.
As to partnership, they can stop corporation so long as they take care of creditors, thats the only
concern.
If they want to donate? Corporation can donate but not to a political party.
A partnership may also be prohibited. In other aspects of donation, they are allowed to donate, as long as
no creditors are affected, they could donate, unlike a corporation, necessarily there are instances when
you have to consult SH themselves which are inconvenient.
In other words, the decision making in partnership is much faster, they exercised their power is much
faster than that of a corporation.
In corporation, the exercise of its power would be referred to SH most especially existence of corporation.
Theoretically partnership, because they decide faster, would be more powerful than corporation.
Although in terms of capital, partnership has the leeway to increase its capital, for corporation, they still
have to go through process. In so far as source of capital, in corporation it is unlimited.
In partnership, once parties agree to put in more capital, then the requirement are not as much and as
cumbersome of that corporation.
In corporation, we have to go through securing permission from SEC for issuing of shares of stock.
What could be some power of corporation?

1. express powers
2. implied powers
3. incidental to existence.
Express powers: those laid down by law
Implied powers: tools to carry out what is expressly created; gives tooth to the powers already exercised
by the corporation
01/13/12 Friday
CLASSIFICATIONS OF POWERS
The three classes of powers of a corporation:
Express powers directly conferred by law
Implied powers reasonably necessary to carry out the express powers
Incidental powers inherent to a corporation; incidental to the existence of the corporation
How would we know whether or not a corporation has this certain power?
Express we just have to inquire from the law or statute that granted the express powers of the
corporation
Implied the test is whether or not these powers are reasonably necessary to carry out those
powers expressly conferred
Sec. 36. Corporate powers and capacity. - Every corporation incorporated under this Code has
the power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the articles of
incorporation and the certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal
the same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks
to subscribers and to sell treasury stocks in accordance with the provisions of this Code;
and to admit members to the corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal property, including securities and bonds of
other corporations, as the transaction of the lawful business of the corporation may
reasonably and necessarily require, subject to the limitations prescribed by law and the
Constitution;
8. To enter into merger or consolidation with other corporations as provided in this
Code;
9. To make reasonable donations, including those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or similar purposes: Provided, That no corporation,
domestic or foreign, shall give donations in aid of any political party or candidate or for
purposes of partisan political activity;
10. To establish pension, retirement, and other plans for the benefit of its directors,
trustees, officers and employees; and
11. To exercise such other powers as may be essential or necessary to carry out its
purpose or purposes as stated in the articles of incorporation.
POWERS OF THE CORPORATION, Section 36
Corporate powers and capacity
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the articles of incorporation
and the certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend the articles of incorporation in accordance with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same
in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury stocks in
accordance with the provisions of this Code; and to admit members to the corporation if it be a
non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise
deal with such real and personal property, including securities and bonds of other corporations,
as the transaction of the lawful business of the corporation may reasonably and necessarily
require, subject to the limitations prescribed by law and the Constitution;
8. To enter into with other corporations merger or consolidation as provided in this Code;
9. To make reasonable donations, including those for the public welfare or for hospital, charitable,
cultural, scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign,
shall give donations in aid of any political party or candidate or for purposes of partisan political
activity;
10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers
and employees; and
11. To exercise such other powers as may be essential or necessary to carry out its purpose or
purposes as stated in its articles of incorporation.
POWER TO MAKE REASONABLE DONATIONS, Section 36(9)
Why are corporations prohibited from making donations to political parties especially during election time?
Such that if Estrada had won for example, and let us just assume that Estrada was able to receive a
donation from a big corporation, then this corporation wanted to recover what it donated to Estrada. So,
they will engage in smuggling, they will smuggle in some items which are not allowed, and when the
Bureau of Customs apprehended them, what do you think he might do?
Estrada as a president might be extending them favors; he might be giving them a chance or
opportunity to circumvent the law.
That would be a source of corruption. That is precisely the reason why the law does not allow it.
Thats in the law but whether or not the law would be able to address it is a big question. The
culture of corruption is deeply entrenched in the system.
Thus, the donations in aid of any political party or candidate, or for the purposes of partisan political
activity are prohibited so as the officials who would be elected sooner or later will not be given the
opportunity to circumvent the law or make illegal transactions with the corporation in consideration for the
help that has been given by such corporation.
POWER OF SUCCESSION, Section 36(2)
What is the power of succession?
Succession is one of the features of the corporation wherein in case of death or retirement, the right
to succession is given to those remaining Board of Directors or stockholders.
Succession is the power of the corporation where its existence is continued despite death of its
directors or stockholders; the right transmits to the heirs who will in turn become stockholders
themselves
POWER TO SUE AND BE SUED, Section 36(1)
If you were the lawyer of a corporation who filed a case against somebody else, a simple collection case for
example, what do you think should you first prepare?
The first thing that lawyer should do is to ask for a board resolution authorizing him to represent the
corporation.
Without that board resolution, he does not have the authority to represent the corporation
If you were also the adverse counsel, what will you do?
You can inquire if the opposing counsel has with him the board resolution. So, the opposing counsel
should be able to present the appropriate resolution or authority from the corporation, authorizing
him to represent the corporation. Without the resolution, the lawyer can never represent the
corporation.
So now, what would the counsel for the defendant do (if there is no board resolution)?
He can file a motion to dismiss on the ground that the counsel is the improper party that the case
was not filed on behalf of the real party. So, he has no authority to file a case.
Subsequently, the case was dismissed and in another case which was re-filed, everything was already
supported with proper authority. Alright, so there was proper complaint. And because the defendant was
also a corporation, the defendant filed an answer on behalf of the corporation. The pretrial is set and both
parties were called for a pretrial conference.
During the pretrial what could happen?
There could be a stipulation of facts.
So, in the pretrial order, the counsel should be ready to participate in the pretrial conference and
they should have the authority to, among others, stipulate facts or admissions, and most
importantly, enter in to a compromise agreement or an amicable settlement. That authority must
be specific, for without that authority, the compromise agreement is not binding upon the
corporation. As a matter of fact, they could not enter in to a compromise agreement because they
do not have the authority during pretrial.
If he has no authority to attend the pretrial, the effect is that the party could be declared in default.
So those are the things that we have to prepare. To prove that we have the authority to sue and be sued,
we present a board resolution.
Sec. 37. Power to extend or shorten corporate term. - A private corporation may extend or
shorten its term as stated in the articles of incorporation when approved by a majority vote of
the board of directors or trustees and ratified at a meeting by the stockholders representing
at least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the
members in case of non-stock corporations. Written notice of the proposed action and of the
time and place of the meeting shall be addressed to each stockholder or member at his place
of residence as shown on the books of the corporation and deposited to the addressee in the
post office with postage prepaid, or served personally: Provided, That in case of extension of
corporate term, any dissenting stockholder may exercise his appraisal right under the
conditions provided in this code. (n)
POWER TO EXTEND OR SHORTEN CORPORATE TERM, Section 37
Why should a corporation shorten its term?
The Board of Directors or the stockholders probably realized that the business is no longer
profitable.
So, if the corporate term is reduced, then the corporate property or assets may be disposed and
there is a
possibility that the corporate assets would not be enough to satisfy its liabilities to the
creditors.
In effect, they are liquidating. If they have to liquidate or dissolve, they will dispose or distribute
their assets. And if they have to dispose their assets, the creditors may be affected as it involves
their (the creditors) rights.
Thats why although it is allowed to shorten its corporate term, the law requires that it should not
affect or it should not prejudice the rights of its creditors. It should address the concerns of the
creditors first.
It cannot be allowed to terminate its existence without addressing its creditors interests or rights.
On the other hand, why is the corporation also given the power to extend its corporate term?
If the business is doing well, there is a good reason to extend its term.
So again, although allowed, what are our concerns if we extend our term?
There might be some SH who are no longer interested to remain in the corporation or who might
want to
disengage themselves from the corporation.
So we have to address their concerns.
Thats why the law requires that there should be a meeting and it should be duly approved by a majority
vote of the Board of Directors and ratified at a meeting by the stockholders representing at least 2/3 of the
outstanding capital stock.
These changes must also be indicated in the articles of incorporation.
POWER TO ENTER INTO WITH OTHER CORPORATIONS MERGER OR CONSOLIDATION, Section 36(8)
Distinguish Merger from Consolidation
Merger is a form of business combination wherein an entity is acquired by another corporation

and there is only one surviving entity. If corporation A would merge with corporation B then the
surviving entity would either be corporation A or corporation B. So, one corporation is dissolved and
the other corporation survives.
Consolidation is also a form of business combination wherein two or more corporations would
combine
and they are forming an entirely new corporation or entity. So for example if
corporation A and B would consolidate, a new corporation, corporation C, is created.
MERGER
When two or more corporations merge together,
one will be dissolved and the other will survive.
CONSOLIDATION
Two or more corporations consolidate themselves
together (with all of their assets and all of their
liabilities) and all of these constituting corporations
will be dissolved and a new one will be born or
created.
Why should corporations form mergers or consolidations?

Corporations merge or consolidate probably because they want to expand their market or expand
their operations. For example you are a corporation engaged in selling cars then probably you will
enter into a merger or consolidation with another corporation which is engaged in the production of
cars so it would be easier to control the quality of your cars.
Sec. 38. Power to increase or decrease capital stock; incur, create or increase bonded
indebtedness. - No corporation shall increase or decrease its capital stock or incur, create or
increase any bonded indebtedness unless approved by a majority vote of the board of
directors and, at a stockholder's meeting duly called for the purpose, two-thirds (2/3) of the
outstanding capital stock shall favor the increase or diminution of the capital stock, or the
incurring, creating or increasing of any bonded indebtedness. Written notice of the proposed
increase or diminution of the capital stock or of the incurring, creating, or increasing of any
bonded indebtedness and of the time and place of the stockholder's meeting at which the
proposed increase or diminution of the capital stock or the incurring or increasing of any
bonded indebtedness is to be considered, must be addressed to each stockholder at his place
of residence as shown on the books of the corporation and deposited to the addressee in the
post office with postage prepaid, or served personally.
A certificate in duplicate must be signed by a majority of the directors of the corporation and
countersigned by the chairman and the secretary of the stockholders' meeting, setting forth:
(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock or number of shares of
no-par stock thereof actually subscribed, the names, nationalities and residences of the
persons subscribing, the amount of capital stock or number of no-par stock subscribed
by each, and the amount paid by each on his subscription in cash or property, or the
amount of capital stock or number of shares of no-par stock allotted to each stockholder if such increase is for the purpose of making effective stock dividend therefor
authorized;
(4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of the meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital stock, or the incurring,
creating or increasing of any bonded indebtedness.
Any increase or decrease in the capital stock or the incurring, creating or increasing of any
bonded indebtedness shall require prior approval of the Securities and Exchange Commission.
One of the duplicate certificates shall be kept on file in the office of the corporation and the
other shall be filed with the Securities and Exchange Commission and attached to the original
articles of incorporation. From and after approval by the Securities and Exchange Commission
and the issuance by the Commission of its certificate of filing, the capital stock shall stand
increased or decreased and the incurring, creating or increasing of any bonded indebtedness
authorized, as the certificate of filing may declare: Provided, That the Securities and Exchange
Commission shall not accept for filing any certificate of increase of capital stock unless
accompanied by the sworn statement of the treasurer of the corporation lawfully holding office
at the time of the filing of the certificate, showing that at least twenty-five (25%) percent of
such increased capital stock has been subscribed and that at least twenty-five (25%) percent
of the amount subscribed has been paid either in actual cash to the corporation or that there
has been transferred to the corporation property the valuation of which is equal to twenty-five
(25%) percent of the subscription: Provided, further, That no decrease of the capital stock
shall be approved by the Commission if its effect shall prejudice the rights of corporate
creditors.
Non-stock corporations may incur or create bonded indebtedness, or increase the same, with
the approval by a majority vote of the board of trustees and of at least two-thirds (2/3) of the
members in a meeting duly called for the purpose.
Bonds issued by a corporation shall be registered with the Securities and Exchange
Commission, which shall have the authority to determine the sufficiency of the terms thereof.
(17a)
POWER TO INCREASE OR DECREASE THE CAPITAL STOCK, Section 38
Reason for the increase of capital stock:
Probably they want to acquire more capital. So by increasing their capital stock, they can issue
more shares thereby increasing their resources to finance their operations.
Do we have any problem there?
One stockholder may not be able to maintain his interest or control in the corporation.
If you increase the capital stock, then subsequently the corporation would issue new shares and of
course being a stockholder, you should protect your interest. So if you had 30% shareholdings then
by increasing the capital stock, probably your 30 percent would now be 25 %.
Most likely, if you have the money, you could make additional subscriptions and protect your
current interest. You have 30% holdings, you want to protect that 30, then subscribe to the
increase. Anyway you are assured of that because of your preemptive right. Problem is, if you dont
have the resources to buy the shares, be ready for a reduction of your control. You r shareholdings
will be diluted.
On the other hand, a decrease or capital, what could be the effect? Would we have a problem?
The creditors would be prejudiced since we said that the capital is held in trust for the creditors. So
if the corporation decreases it, then there would be no more guarantee for the creditors, in
violation of the trust fund doctrine.
Why would the law allow decreasing if indeed it would jeopardize the interest of the creditors? Are there
protections which would address their concerns?
There are protections given by the law, so when the corporation decides to decrease its capital, it
should be approved by the SEC.
There must be an approval by a majority vote of the BOD and, at a stockholders meeting duly
called for the purpose, by a vote of the stockholders representing at least 2/3 of the outstanding
capital stock (CS).
There must also be a certification signed by a majority of the BOD and countersigned by the
chairman and the secretary, stating that no creditors would be prejudiced by such move. Even if
there were, at least these creditors concern has been duly addressed. Maybe there were some
arrangements. The thing is you must prove to the SEC that the creditors concern has been
addressed. Either the creditors were paid, or that the creditor were assured of something else to
protect their interest in the corporation.
POWER TO INCUR, CREATE, OR INCREASE BONDED INDEBTEDNESS, Section 38
This is a bonded indebtedness and not just a plain loan because the principal debt has a security which is
the bond. Here, the corporation obligates itself to pay a definite sum of money at a fixed time with a fixed
interest.
The corporation might need additional cash or capital, and they would rather not go the bank because the
bank sometimes imposes excessive charges and interests. So what they usually do is borrow from the
public. They would first secure authority from the SEC, allowing them to issue bonds to the public. So these
bonds are more or less mere promissory notes, with an undertaking to pay after a certain period with a
certain interest. This is what we call floating bonds; this is what we refer to when the law says bonded
indebtedness.
So if I were the corporation needing capital, I would issue bonds, and these bonds contain some serial
numbers. The terms and conditions of these bonds are also indicated on the bond itself. If you are
interested to buy these bonds, you just go to the corporation, but usually, corporations would endorse
these bonds to a bank, and the bank will be the one to issue the bonds in the name of the corporation.
So, depending on the term of these bonds, perhaps after 5 years, you go to the bank and present the
bond, and the bank will pay you plus interest. So these are what we call bonded indebtedness.
Sec. 39. Power to deny pre-emptive right. - All stockholders of a stock corporation shall enjoy
pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion
to their respective shareholdings, unless such right is denied by the articles of incorporation
or an amendment thereto: Provided, That such pre-emptive right shall not extend to shares to
be issued in compliance with laws requiring stock offerings or minimum stock ownership by
the public; or to shares to be issued in good faith with the approval of the stockholders
representing two-thirds (2/3) of the outstanding capital stock, in exchange for property
needed for corporate purposes or in payment of a previously contracted debt.
POWER TO DENY PRE-EMPTIVE RIGHT, Section 39
Basically, when a corporation issues shares, the stockholders have the preemptive right which means that
they have the right to initially subscribe to these shares before they are offered to the public. But there are
circumstances wherein these preemptive rights are denied.
Instances when Pre-Emptive right is not available:
1. Shares to be issued to comply with laws requiring stock offering or minimum stock ownership by
public
2. It does not apply to shares that are being reoffered together with all the shares.
3. Shares issued in good faith in exchange for property needed for corporate purposes.
4. In case the right is denied in the articles of incorporation
5. Waiver of the right by the stockholder
Sec. 40. Sale or other disposition of assets. - Subject to the provisions of existing laws on
illegal combinations and monopolies, a corporation may, by a majority vote of its board of
directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or
substantially all of its property and assets, including its goodwill, upon such terms and
conditions and for such consideration, which may be money, stocks, bonds or other
instruments for the payment of money or other property or consideration, as its board of
directors or trustees may deem expedient, when authorized by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock, or in case of non-stock
corporation, by the vote of at least to two-thirds (2/3) of the members, in a stockholder's or
member's meeting duly called for the purpose. Written notice of the proposed action and of
the time and place of the meeting shall be addressed to each stockholder or member at his
place of residence as shown on the books of the corporation and deposited to the addressee in
the post office with postage prepaid, or served personally: Provided, That any dissenting
stockholder may exercise his appraisal right under the conditions provided in this Code.
A sale or other disposition shall be deemed to cover substantially all the corporate property
and assets if thereby the corporation would be rendered incapable of continuing the business
or accomplishing the purpose for which it was incorporated.
After such authorization or approval by the stockholders or members, the board of directors or
trustees may, nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage,
pledge or other disposition of property and assets, subject to the rights of third parties under
any contract relating thereto, without further action or approval by the stockholders or
members.
Nothing in this section is intended to restrict the power of any corporation, without the
authorization by the stockholders or members, to sell, lease, exchange, mortgage, pledge or
otherwise dispose of any of its property and assets if the same is necessary in the usual and
regular course of business of said corporation or if the proceeds of the sale or other
disposition of such property and assets be appropriated for the conduct of its remaining
business.
In non-stock corporations where there are no members with voting rights, the vote of at least
a majority of the trustees in office will be sufficient authorization for the corporation to enter
into any transaction authorized by this section. (28 1/2a)
SALE OR OTHER DISPOSTION OF ASSETS, Section 40
It involves the capital assets of the corporation, and so it must be approved by the BOD and ratified by the
stockholders representing at least 2/3 of the outstanding capital stock.
The disposition of those assets is leading to the cessation of operations of the corporation as it already
involves the capital.
If a corporation engaged in a transportation business has 10 buses, and it disposed 6 of their buses, would
this already be tantamount to disposal?
The disposal should be substantial and the SC in a decision stated that substantial is 80% and 6 is not 80%
yet so it cannot be considered substantial disposition of the assets. Although the law says that the
disposition of substantially all of its assets should be to the effect that it would not be able to
pursue or
perform further its business or objectives.
Sec. 41. Power to acquire own shares. - A stock corporation shall have the power to purchase
or acquire its own shares for a legitimate corporate purpose or purposes, including but not
limited to the following cases: Provided, That the corporation has unrestricted retained
earnings in its books to cover the shares to be purchased or acquired:
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation, arising out of unpaid
subscription, in a delinquency sale, and to purchase delinquent shares sold during said
sale; and
3. To pay dissenting or withdrawing stockholders entitled to payment for their shares
under the provisions of this Code. (n)
POWER TO ACQUIRE OWN SHARES, Section 41
Example, the corporation needs additional capital, so it can sell some shares with the promise that it can
buy them back later with interest, and that is what we call redeemable shares. Once we reacquired those
redeemable shares, they now become treasury shares, which can be resold by the corporation back to the
stockholders.
The corporation used its own funds to reacquire these treasury shares and if it sells back these treasury
shares, the proceeds of the sale would necessarily go back to the corporation.
Sec. 42. Power to invest corporate funds in another corporation or business or for any other
purpose. - Subject to the provisions of this Code, a private corporation may invest its funds in
any other corporation or business or for any purpose other than the primary purpose for which
it was organized when approved by a majority of the board of directors or trustees and ratified
by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or
by at least two thirds (2/3) of the members in the case of non-stock corporations, at a
stockholder's or member's meeting duly called for the purpose. Written notice of the proposed
investment and the time and place of the meeting shall be addressed to each stockholder or
member at his place of residence as shown on the books of the corporation and deposited to
the addressee in the post office with postage prepaid, or served personally: Provided, That
any dissenting stockholder shall have appraisal right as provided in this Code: Provided,
however, That where the investment by the corporation is reasonably necessary to accomplish
its primary purpose as stated in the articles of incorporation, the approval of the stockholders
or members shall not be necessary. (17 1/2a)
POWER TO INVEST CORPORATE FUNDS IN ANOTHER CORPORATION, Section 42
If we invest in another corporation, it is required that it must be in furtherance of the primary purpose of
the business but like the other powers, there must be a written notice to the stockholders, and it must be
approved by a majority vote of the BOD and ratified by a vote of the stockholders representing at least 2/3
of the outstanding capital stock, in a meeting duly called for the purpose.
That was my concern, because I thought management is vested in the board. Here we are just trying to
invest but why should we bother ourselves to inform the stockholders?
Here, the requirement is in relation to making investments for purposes other than the primary purpose
of the corporation. If it is for the primary purpose, then those requisites do not apply. So, not all
investments of the corporation should be referred to the stockholders. We refer to the stockholders only if
we invest for other than the primary purpose.
So that if the corporation is engaged in farming, could it invest in a corporation which is engaged in
airlines?
The requisites under section 42 must be complied with because it is not in relation to its primary
purpose. Its primary purpose is farming.
If for example there are thousands of hectares to farm and the farm manager wants to take a look at every
square inch of the farm, so he needs an aircraft to survey the area. Is it related?
It is still not related. Thats stretching too far as it is not related at all.
Of course, it can be justified. In a banana plantation in Davao for example they have aircrafts spreading
the fertilizers. They spread the fertilizers in their plantation through the use of an aircraft. Sometimes they
engage the services of private aircraft companies or sometimes they have their own private planes to
spread the fertilizers. Sometimes, the passengers of the aircraft would not use the fertilizers and instead of
spreading the fertilizers, if they want to relieve themselves, they could use their (HA! HA!)
Sec. 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. (n)
POWER TO DECLARE DIVIDENDS, Section 43
What are dividends?
Dividends are given to the stockholders as a return of their investments. It is their share of the
profits of the corporation. The source of the dividends is nothing else but the profits of the
corporation and without profits, the corporation could not distribute dividends.
Otherwise, if they declare cash dividends without profits, it will be taken from the capital and
therefore, it would be in violation of the trust fund doctrine.
If they send back part of the capital to the stockholders, they are not distributing dividends but
rather they are distributing the assets.
Types of
1.
2.
3.
Dividends:
Property Dividends
Stock Dividends
Cash Dividends
Property Dividends
We issue property dividends when the earnings of the corporation are not in cash so you issue
these property dividends to the stockholders because the corporation cannot issue cash.
So when we distribute property dividends, are we not distributing assets in violation of the trust
fund doctrine?
No. We cannot distribute assets which are part of the capital but sometimes these properties are
considered as profits or earnings in the books of the corporation so it is lawful to distribute them.
In effect we are still distributing portions of the profits but because we do not have cash but we
have excess property, we could decide to distribute the properties instead. Especially if we have a
lot of treasury stocks, we do not need the treasury stocks, we could distribute them as property
dividends.
As we said, we cannot distribute these unless we have profits.
Stock Dividends
Stock dividends are given when a corporation wants to distribute dividends in the form of stocks.
This is especially true if the corporation needs these profits to be invested again to the corporation.
Basically, in the books of the corporation, the distribution of stock dividends is simply a transfer
from the profits to the capital account.
So, instead of distributing cash, we retain the cash and issue stocks to the stockholders. And these
cash will no longer be part of the profits, it will be dragged out of the profits into the assets of the
corporation, as if the stockholders themselves had invested fresh capital. But it is not fresh capital,
it is the same money that ought to go to the stockholders, and the stockholders decided to put it
back to the corporation. Instead of giving them cash, you give them stocks.
Therefore, the stockholders are richer, not in cash, but in stocks.
Cash Dividends
The corporation gives dividends by way of cash to the stockholders based on their shareholdings.
What is required in cash dividends?
Only the approval of the board.
When would the stockholders conformity be required?
Only in case of stock dividends.
Once the corporation declares cash dividends, it distributes cash to its stockholders. Every end of
the year, in the filing of the income tax return, the stockholders would declare in their Income Tax
Return that they have received income from the corporation by way of cash dividends. That will be
part of the taxable income.
But when this money was earned by the corporation, there was income to the corporation. What did the
BIR do there?
It was already taxed by the BIR as corporate income. The same money was again taxed by the BIR
when it
was distributed to the stockholders. So double taxation. But this is allowed because
this is income. Thats why the corporate stockholders would not be happy about this, so the
corporation would not always issue cash dividends. They would not issue cash dividends because
they do not want to be subjected to double taxation, especially the family corporations.
Here, the corporation, as much as possible would try to avoid a second tax on the same money. What
would they do every year?
The corporation will say it will not have dividends but it will have a stockholders meeting in Europe.
Arriving at Amsterdam, proceeding to Switzerland, then on to Germany, passing by Rome, and then
to Singapore. Thats the amount that the corporation will distribute. No tax there. As a matter of
fact, if they buy tickets, they would charge those as expenses, so deductible. No tax, instead
expense. Thats what they do. Because this was already becoming an irritant, what did the code
provide?
The corporation code provides that corporations are now prohibited from retaining
surplus profits in excess of 100% of their paid-in capital stock. Beyond 100%, they
must declare cash dividends. Otherwise, if you do not declare, BIR says, the corporation
would be penalized with improperly
accumulated earnings tax.
However, the law allows 3 exceptions:
1. When justified by definite corporate expansion projects or programs;
2. When the corporation is prohibited under any loan agreement with any financial
institution or creditor from declaring cash dividends without securing its/his consent;
or
3. When it can be clearly shown that such retention is necessary under special
circumstances, such as when there is a need for special reserve for probable
contingencies.
Once these dividends are declared, they become due. But can the stockholders demand that the board
should now issue or declare dividends?
No. Stockholders do not have the right to demand as the declaration or issuance of dividends is
discretionary on the part of the board.
However, it becomes a right to the stockholders once the surplus profits exceed 100% of their paidin capital stock. In which case, they can now demand for the dividends.
RULE ON SET-OFF OF DIVIDENDS WITH UNPAID SUBSCRIPTIONS:
If cash dividends are issued, and you have an unpaid subscription, you are not entitled to payment unless
it should be first applied to the unpaid subscription.
If stock dividends are declared instead and there is an unpaid subscription, such stock dividends shall be
withheld from the delinquent stockholder until his unpaid subscription is fully paid.
RULE ON FALSE DECLARATION OF DIVIDENDS (DECLARED BUT LATER ON DISCOVERED THAT NO
UNRESTRICTED RETAINED EARNINGS); SOLVENT VS INSOLVENT:
One day, the board declared cash dividends. It was Christmas time and the board wanted the stockholders
to be happy so they declared cash dividends. When the auditor reported for work the following year, it was
discovered that there was no profit at all.
So what happens to the cash dividends?
It depends if the corporation is solvent or insolvent:
INSOLVENT:
If the cash dividends were declared at a point of time when the corporation was insolvent, they will
have to return because clearly it was unfair. Not only did the corporation not have any profit, it was
insolvent. In other words, its assets were less that the liabilities.
SOLVENT:
On the other hand, if the corporation was solvent, but the only thing was that it did not have profits,
there are conflicting views:
1. One says, yes they should return.
2. The other says no, they should not return.
Atty. Espedido is inclined to believe that it should be returned because it violates the trust fund
doctrine.
1/18/12 Wednesday
Power of succession
In partnership when one partner dies, the partnership is dissolved.
In corporation, when one of the stockholders die, the corporation is not dissolved; continues to exist for a
period stated in the articles of incorporation.
The death of the stockholder does not dissolve the corporation.
What happens to the stocks of the dead stockholder?
- The heirs of the stockholder who dies will become the stockholders themselves.
- In that plane crash when all the stockholders die, the corporation still survive bec of the power of
succession.
Pre-emptive rights
The preferential rights of the stockholders to subscribe for new shares
Purpose: to retain the extent of controlling interest
Power to deny pre-emptive rights: (Instances)
1. This is not provided in the AOI.
2. If the law requires the minimum initial public offering.
3. If in good faith and is ratified by SH representing 2/3 of the outstanding capital stock, issuance is made
in exchange for property needed for corporate purposes
4. If in good faith and is ratified by SH representing 2/3 of the outstanding capital stock, issuance is made
in payment of a previously contracted debt
Power to issue dividends
3 types of dividends:
1. Property dividends if no enough cash for the corporation, it is allowed to issue property dividends in
lieu of cash.
a. Before dividends are issued, it is required that there must be profits.
2. Cash dividends - dividend payable in cash
3. Stock dividends dividend payable in unissued or increased or additional shares of the corporation
instead of in cash or in property out of the unrestricted retained earnings.
Exceptions if the corporation has accumulated earnings in excess of 100%:
1. When justified by definite corporate expansion projects or programs;
2. When the corporation is prohibited under any loan agreement with any financial institution or creditor
from declaring cash dividends without securing its/his consent; or
3. When it can be clearly shown that such retention is necessary under special circumstances, such as
when there is a need for special reserve for probable contingencies.
Declaration of dividends vs. Payment of unpaid subscription
Only the board may demand to declare dividends.
Cannot compel the board to declare dividends because it is DISCRETIONARY on the part of the board
GENERAL RULE:
SH cannot compel the board to declare dividends
EXCEPTION:
When there is excess accumulated earnings or unrestricted retained earnings
this is not based on the assumption that the stockholders can compel them to declare, but because
the LAW requires them to declare.
The moment the unrestricted retained earnings exceeds 100%, then, the stockholders can compel
because the LAW requires
The stockholders cannot be compelled to pay unpaid subscriptions.
But the dividends can be offsetted to the stockholders liability to the corporation.
Otherwise, if the stockholder refuses to pay the unpaid subscriptions, their shares will be declared
delinquent and offered to be sold in public.
The stockholders cannot compel the board declare dividends. Otherwise, they cannot be compelled to pay
their unpaid subscriptions. They will merely rely on the declaration of dividends and apply it later in
payment of unpaid subscriptions.
WHY CAN THE CORPORATION COMPEL THE STOCKHOLDERS TO PAY UNPAID SUBSCRIPTIONS
WHILE THE STOCKHOLDERS CANNOT COMPEL THE BOARD TO DECLARE DIVIDENDS?
The power of the corporation to compel the stockholders to pay unpaid subscriptions because their
relationship is based on a contract (the subscription agreement entered into by the stockholder with the
corporation)
On the part of the stockholders, it becomes their obligation to pay the unpaid subscriptions since at the
inception of the corporation, they have made their commitment to pay their subscriptions.
The source of their obligation is the CONTRACT named as the Subscription Agreement. When you
subscribed you enter into a contract with the corporation which is called the subscription agreement.
When the stockholders enter into a contract, they have entered in a subscription agreement.
When one entered in such agreement, the stockholders became the debtor.
He owes the corporation the remaining unpaid subscription.
The payment of unpaid subscriptions is a mandatory obligation.
In effect, the corporation now becomes the creditor.
A debtor- creditor relationship arises between the corporation and the stockholders.
On the other hand, the declaration of dividends cannot be compelled.
Dividends are sourced from profits. It is like an investment of the stockholder.
In this case, there is no debtor-creditor relationship.
The stockholders are now considered investors. They took the risk of losing or gaining profits.
INVESTOR vs. DEBTOR
The investor took the risk of losing. While in a debtor, he has the obligation to pay. Whatever happens, the
debtor is liable whether there are profits or not. The investor is entitled only if there are profits in the same
manner he is liable for losses.
With respect to dividends, the stockholder is an investor. While in unpaid subscriptions, the stockholder is a
debtor.
1/20/12 Friday
Sec. 44. Power to enter into management contract. - No corporation shall conclude a
management contract with another corporation unless such contract shall have been approved
by the board of directors and by stockholders owning at least the majority of the outstanding
capital stock, or by at least a majority of the members in the case of a non-stock corporation,
of both the managing and the managed corporation, at a meeting duly called for the purpose:
Provided, That (1) where a stockholder or stockholders representing the same interest of both
the managing and the managed corporations own or control more than one-third (1/3) of the
total outstanding capital stock entitled to vote of the managing corporation; or (2) where a
majority of the members of the board of directors of the managing corporation also constitute
a majority of the members of the board of directors of the managed corporation, then the
management contract must be approved by the stockholders of the managed corporation
owning at least two-thirds (2/3) of the total outstanding capital stock entitled to vote, or by at
least two-thirds (2/3) of the members in the case of a non-stock corporation. No management
contract shall be entered into for a period longer than five years for any one term.
The provisions of the next preceding paragraph shall apply to any contract whereby a
corporation undertakes to manage or operate all or substantially all of the business of another
corporation, whether such contracts are called service contracts, operating agreements or
otherwise: Provided, however, That such service contracts or operating agreements which
relate to the exploration, development, exploitation or utilization of natural resources may be
entered into for such periods as may be provided by the pertinent laws or regulations. (n)
POWER TO ENTER INTO MANAGEMENT CONTRACT
MANAGEMENT CONTRACT
an agreement under which a corporation delegates the management of its affairs to another corporation
for a certain period.
Is it therefore pointless for the code to say that management is vested in the board of directors? NO.
Under what circumstances can the corporation enter into management contract?
as long as it is for routinary acts of the corporation, that requires technical or special skills, and not totally
an abdication of its power, it may enter into management contracts
Power of the board may not be delegated to the managing corporation:
Power to declare dividends because this power can be exercised solely by the board.
Demonstrate how this management agreement would exist:
If you are an airline company and your core business will definitely be transportation of passengers. You
sell tickets, conduct the check-in process, take care of passengers, give them the convenience while on
board.
When the airline would require maintenance and repairs, do you have to know how to repair your aircraft?
Not necessarily. This will just divert your attention to activities which many of your people will not be able
to carry out. Instead of focusing on core business your attention is shifted. So the airline company might
decide to engage the services of another company who is skilled in maintenance of aircrafts. So you can
focus on selling your tickets. This is how the need to engage the services of management company may
come into play.
So that if this airline company decides to engage in land transportation buses, can it engage the services
of an existing bus company to manage this new venture?
NO, because this is a totally foreign business. It has nothing to do with the airline business. You might
exceed the powers or primary purpose of your company which is to engage in the airline business. Airline
is totally different from land transportation.
You cannot justify this by claiming that you are entering into a management agreement because this is a
total deviation from your principal purpose as a corporation.
YOUR GUIDE IS: WILL THAT MANAGEMENT AGREEMENT GO IN CONFLICT WITH THE PRINCIPAL BUSINESS OF
THE CORP?
If yes, then it might not be allowed.
Circumstances can the corporation increase its capital:
If we increase our capitalization what is the effect insofar as the SH are concerned?
New stocks are issued. The existing SH can exercise their pre-emptive right.
Otherwise this will cause the dilution of their stockholdings if they dont give them their pre-emptive right.
If we decrease the capital, creditors should not be prejudiced.
CLASSIFICATION OF POWERS OF THE CORPORATION
1.express
2.implied
3.incidental
Sec. 45. Ultra vires acts of corporations. - No corporation under this Code shall possess or
exercise any corporate powers except those conferred by this Code or by its articles of
incorporation and except such as are necessary or incidental to the exercise of the powers so
conferred. (n)
ULTRA VIRES ACTS
If a corporation executes an act which is beyond these powers, what is the effect?
It is considered as ULTRA VIRES ACTS.
ULTRA VIRES ACTS are acts not within the express, implied, and incidental powers of the corporation
conferred by the Corporation Code or articles of incorporation.
So that if a director executes an act selling a property of the corporation without any authority. How should
that transaction be treated?
VOIDABLE
This is not ultra vires but there is defect. The defect is lack of authority to sell on the part of the director.
So it is not ultra vires although defective.
In an ultra-vires acts the defect is the lack of power on the part of the corporation.
If it is ultra vires act, the defect is the lack or absence of power on the part of the corporation.
So here if the lack of authority was the defect, can it be cured?
YES. Ratification.
Upon the other hand, here is another director who also decided to sell another property of the corporation.
He was given the authority however the authority given was a verbal authority. Since it involves a real
property, to be able to convey real property what is needed when we talk of agency?
The authority must be in writing SPA.
This was not given. Is the sale valid?
No. it will not bind the corporation.
Why?
The defect is in the lack of formalities required. And if this is the defect, it is not an ultra vires act.
The 3rd director while driving on a clients call, he was about to consummate a transaction that will give the
corporation profits, he hit a pedestrian who died. Is the corporation liable?
Ultra vires because all torts and crimes committed are ultra vires.
And because it is ultra vires, if the parents of the deceased corporations will sue the corporation, the
corporation will raise the defense of ultra vires?
No! The corporation is still liable.
Acts of negligence are ultra vires. But if it is ultra vires why is the corporation liable?
Sources of liability:
Law
Contracts
Delicts
Quasi-delicts
Hitting a pedestrian is a quasi-delict. If quasi-delict is committed by its agents, yes the corporation is liable.
Respondeat Superior.
The corporation is liable not because it was guilty of ultra vires but because of the negligence of its agent.
From this therefore when we talk of ultra vires acts, do we talk of laibilities of quasi-delicts?
NO.
When we talk of ultra vires we refer to CONTRACTS.
Because ultra vires are acts of corporation beyond its express, implied, incidental powers.
So we cannot talk of ultra vires acts if not contracts.
Ultra vires acts are always illegal?
NO.
Ultra vires acts are not necessarily illegal acts?
YES.
Illegal acts are not necessarily ultra vires acts?
NO.
Illegal acts are always ultra vires act.
But was hitting a pedestrian an illegal act?
YES.
But because it is illegal, it is ultra vires?
NO, because when we talk of ultra vires we always refer to acts arising from contracts.
Thats why we say ultra vires acts are not necessarily illegal.
Many ultra vires are not only legal but rather praiseworthy. They are even admirable, but cannot bind the
corporation but no matter how legal or praiseworthy, the corporation has no power.
Ex. Donating 100M to Pnoy is very admirable. But it is ultra vires. No authority.
In another angle, there are defective acts.
What are these defective acts?
when we say ultra vires acts the defect is lack of power on the part of the corporation. IT IS THE CORPO
THAT HAS NO POWER.
NOT ULTRA VIRES ACTS
An act could be defective because it did not comply formalities. Inability to comply with formalities.
Another act could be defective because the party acting has no authority.
In all of these we said in an ultra vires act what happens? How do we resolve ultra vires acts?
If we simply follow, or in every transaction of the corporation we always question the acts of that
corporation, what happens to the transaction?
It will not bind the corporation.
So if we have to be very strict, everytime a corporation does something beyond its powers, so that in every
transaction, the other party always has always to examine the law, AOI, this is if we strictly follow the law
on ultra vires. If we follow this there would be endless review of the transactions. Many transactions would
be invalidated if the lack of power is discovered.
If many transactions are invalidated, there will be chaos in the business community.
RULES ON RESOLVING ULTRA VIRES ISSUES:
When there is an ultra vires issue in a problem how do we resolve this?
1. An ultra vires contract, while executory on both sides, cannot be enforced by either party thereto.
Neither can compel the other to proceed with the transaction.
2. When an ultra vires contract has been fully performed on both sides, neither party can maintain an
action to set aside the transaction or to recover what has been parted with. The law leaves them as
they are.
Example: Fishing corp bought farming equipment and farms. They have consummated the
deed. Later on a SH discovered this because they did not have power and authority to do
this. Farming and fishing are 2 different business. Can the SH still question the transaction
and demand return of the money? NO. because it has already been cosummated. And the
law says, ultra vires and consummated, leave them where they are.
3. When an ultra vires contract has been performed on one side and the other has received benefits
by reason of such performance, no one can be compelled to perform.
The corporation who paid while the other party has not done its part can demand the return of payment.
So those are the rules when an ultra vires issue would arise.
So here, if that is the case whats the use of the concept of ultra vires? Especially in the situation when the
transaction has already been consummated.
Because these are defective transactions how can they be cured? By Ratification.
If one has the opportunity the question the act, what are the condiitons under which one may question the
ultra vires act?
Who could invoke or question an ultra vires act:
State
SH
Prejudiced creditors
Questioning an act as ultra vires is discouraged. As we said the ultimate objective of providing the law on
ultra vires is TO GIVE ALL THOSE CONCERNED THE OPPORTUNITY TO SEEK JUSTICE.
But without necessarily causing any disruption in the business community.
It is true that being a corporation, the powers are limited. It cannot perform acts beyond these powers and
yet from here, although utlra vires clearly, the law tells us, leave them where they are, we have to close
our eyes.
As a matter of fact, even if ultra vires, not just any person can question the act. Only certain parties can
question because as much as possible we want to preserv the stability of the business commmunity
otherwise there will be chaos. We cannot compel everybody to open and question.
If we do question, it should be the ultimate remedy.
Though ultra vires not just anyone can invoke this.
This can be invoked only by:
1. state because it was the state that created the corp.
2. Stockholder being a SH, he has the responsibility to see to it that the corp will comply with
exisitng regulations. He should questions this only under certain circumstances:
a. it must be PROMPTLY. As soon the opportunity to question it arises. = he is not guilty of laches.
b. When he is not guitly of estoppel. = if he was part of the one who approved it, he has no right to
question it.
3. Creditors are not strangers. But they should be PREJUDICED CREDITORS in order to invoke this.
Who cannot invoke:
Stranger cannot question. They must go to the state and the state will question.
Competitors cannot question. They are also strangers. If they are allowed, it will be to the detriment of
the corporation.

Corporation Midterm Reviewer - WWW and Notes-Edited

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CORPORATION LAW MIDTERM REVIEWER WWW COMPILATION AND NOTES [403 SY 2011-2012]1

Once the board is elected, it is answerable to the state.

By laws may accompany the articles of incorporation.

cherrynotes (SPECTRA ARCHIVES) SY 2011-2012

Sec. 2. Corporation defined. - A corporation is an artificial being created by operation of law,

May exercise any power

Can exercise only the powers expressly

cherrynotes (SPECTRA ARCHIVES) SY 2011-2012

Requires at least 5 incorporators

The power to do business and manage

Stockholders are liable only to the

May not be formed for a term in excess

Stock and Non-Stock Corporations

At least 25% of the ACS

At least 25% of the SCS

SCS (25% of ACS)

PCS (25% of SCS)

limited to certain groups of people, i.e. family

Parent or holding: control member of board in that other corporation

2. Corporation sole only one corporator

A: What could be the reason?

9. If it be a non-stock corporation, the amount of its capital, the names, nationalities

SEVENTH: That the authorized capital stock of the corporation

I, ...................................., being duly sworn, depose and say:

4. Term for which it is to exist

LEGAL CAPITAL versus ACTUAL CAPITAL

-effective after approval by SEC

cherrynotes (SPECTRA ARCHIVES) SY 2011-2012

amendment, repeal, or adoption of by-laws,

When the attendance of the subject director is necessary to form a quorum

A: for as long as there is no fraud

What could be some power of corporation?

Merger is a form of business combination wherein an entity is acquired by another corporation

Why should corporations form mergers or consolidations?

cherrynotes (SPECTRA ARCHIVES) SY 2011-2012

cherrynotes (SPECTRA ARCHIVES) SY 2011-2012

cherrynotes (SPECTRA ARCHIVES) SY 2011-2012

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