Professional Documents
Culture Documents
CHAPTER 1: INTRODUCTION
CORPORATE LAW: body of laws, principles, and doctrines covering private corporations
Proper Treatment of the Corporation Code
- Comes from the common law system of USA
- Product of commercial developments
Interpretation of the CC
- It should be given a reasonable or literal interpretation that will best execute its purpose,
even though such construction should not be permitted to defeat the policy and purpose
of the Code
Corporation Code
- It has for its subject matter the corporation, which is a medium or tool of doing business,
then the Code may be viewed as the manual of instructions by which to properly operate
the medium or tool, that is the corporation
HISTORICAL BACKGROUND
1. Sociedades Anonimas
a commercial partnership, a sort of corporation, “where upon the execution of the public
instrument in which its Articles of agreement appear, and the contribution of funds and
personal property, becomes a juridical person
Prior to the arrival of the American occupying forces in the Philippines, the main business
vehicles under the Spanish colonial administration that were similar to the Anglo-Saxon
corporations were SA
Introduced on December 1, 1988
the inscribing of its articles of agreement in the commercial register was not necessary to
make it a juridical person – a corporation.
Such inscription only operated to show that it partook the form of a commercial
corporation
Similarities with Corporations
a. Limited Liability
b. Centralized Management
Section 75 of the Corporation Law
o A sociedad anonima existing at the time of the passage of the law was authorized at
its option to either continue doing business as such entity or to transform and be
organized under and by virtue of the provisions of the Corporation Code
In the event that it elected to transform and re-organize under
the provision of the law, it was provided that the entity shall transfer
all corporate interests to the new corporation
The election to transform or to retain status quo was to be made within a
reasonable time from the effectivity of the Code
Section 191 of the Corporation Law
o Sociedad anonimas which did not opt to reform and organize under the Corporate
Law, continued to be governed by the laws that were in force prior to the passage
of said law, particularly the provisions of the Code of Commerce on sociedad
anonimas, in relation to their organization and method of transacting business and
to the rights of members thereof as between themselves
2. The Corporate Law
Act No. 1459: first corporate statute in the PH jurisdiction
Became effective on April 1, 1906
It provides that:
a. No corporation shall be authorized to conduct business of buying and selling public
lands
b. No corporation is permitted to hold or own real estate, except as such as may be
reasonably necessary to enable it to carry out the purposes for which it was created
c. No agricultural corporation shall in anywise be interested in any other agricultural
corporation
d. No non-agricultural corporation shall own in excess of 15% of the outstanding capital
stock of any agricultural corporation, which holding shall be for the purpose of
investment only
e. A mining corporation may acquire and hold not more than 40% of the voting capital
of another mining corporation, or not more than 30% of the voting capital of each
of not more than 3 mining corporations, and subject restrictions of equity ownership
3. Corporation Code of the Philippines
Batas Pambansa Blg. 68: adopted various corporate doctrines previously enunciated
by the Supreme Court under the supplanted Corporation Law
Became effective on May 1, 1980
It did not maintain the various particular penal clauses under the old
Corporation Law, but instead merely provides for a general penal clause
It maintains the concept of corporation as a “creature of limited powers”
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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.”
o Juridical entity with a personality separate and distinct from the members or
stockholders that compose it, as well from any other legal entity to which it may be
related
o A corporation is but a fiction extended by law to investors, managers, and
businessmen by which to conduct their commercial affairs
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Article 45: “The juridical persons organized as public corporations are governed by the
laws creating or recognizing them, while private corporations are regulated by laws of
general application on the subject.”
3. Franchises of Corporations
J.R.S Business Corp vs Imperial Insurance: recognized the differences between the
primary and secondary franchises of corporations:
1. Corporate or General Franchises
Is the franchise to exist as a corporation
The primary franchise of a corporation, that is, the right to exist as such,
is vested in the individuals who compose the corporation and not in the
corporation itself and cannot be conveyed in the absence of a legislative
authority to do so.
2. Special or Secondary Franchises
Certain rights and privileges conferred upon existing corporations, such as
the right to use the streets of a municipality to lay pipes or tracts, erect
poles or string wires
These are vested in the corporation and may ordinarily be conveyed or
mortgaged under a general power granted to a corporation to dispose of
its property, except such special or secondary franchises as are charged
with a public use
ATTRIBUTES OF A CORPORATION
1. Artificial Being
- It is the fiction of law which creates the person of the corporation, with the same attributes
of an individual having full capacity to enter into a contractual relations
2. Creature of Law
- The juridical existence of a corporation is dependent on the consent or grant of the State
- Apply Theory of Concession
3. Right of Succession
- A corporation has the capacity for continuous existence despite the death or replacement
of its shareholders or members, for it has a personality separate and distinct than those
who compose it
4. Creature of Limited Powers, Attributes and Properties
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NATIONALITY OF CORPORATIONS
1. Place of Incorporation Test
- A corporation is a national of the country under which the laws of which it has been
organized and registered
2. Control Test
- The nationality of a corporation is determined by the nationality of the majority of
stockholders on whom equity control is vested, on the theory that they would be able to
elect the majority of the BoD
- Cannot overcome the Place of Incorporation Test
Exception: Foreign Investment Act of 1991
- Also applies to:
a. Exploitation of Natural Resources – 60-40
b. Ownership of Private Lands –
c. Public Utilities – 60-40
d. Mass Media – 100
e. Advertising – 70-30
3. War-Time Test
- In times of war, the nationality of a private corporation is determined by the citizenship
of its controlling stockholders
4. Investment Test and the Grandfather Rule
GR Rule, as a sub-application under the Control Test
Where the various nationality tests shall first be applied on the SH of the holding
companies, to determine the nationality of the equity in the target corporation,
and thereby arrive at the nationality of such target corporation
Grandson: target company
Father: holding company
Grandfather: person or entity holding shares in the holding
company
- In essence, it is the method by which the percentage of Filipino equity is computed, in
a corporation engaged in fully or partly nationalized areas of activities provided under the
Constitution and other nationalized laws, in cases where the corporate shareholders are
present in the situation by attributing the nationality of the second or even subsequent
tiers of ownership to determine the nationality of the corporate shareholder.
CLASSIFICATION OF CORPORATIONS
1. Public – those created for political purposes connected with the public good in the
administration of the civil government
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2. Private –
a. Stock: those which have a capital stock divided into shares and are authorized to
distribute the holders of such shares dividends or allotments of the surplus profit on the
basis of the shares held
b. Non-Stock: all other private corporations; further classified as to their purpose
I. Profit-seeking
II. Religious
III. Eleemosynary or those
organized for charitable,
scientific or vocational purposes
Types of Private Corporations:
A. Those organized under the Corporation Code for private ends
B. Those organized under the Corporation Code as GOCCs to achieve certain
purposes of the government
C. Those GOCCs organized with their own charter
3. Quasi-Public Corporation – it is a cross between private corporations and public
corporationsl; it usually cover school districts, water districts and the like
4. Domestic – one incorporated under the laws of the Philippines
5. Foreign – a foreign corporation may be licensed by SEC to do business in the Philippines only
under the principle of reciprocity, after securing a certificate of authority from the Board of
Investment or the Omnibus Investments Code, and after complying with the conditions for
issuance of the license on application forms, structural organizations and capitalization
It has no legal existence beyond the bounds of the state or sovereignty by which it
is created. It exists only in contemplation of law and by the force of law, and where
the law ceases to operate, the corporation can have no existence
Objectives of the statutory provisions prescribing conditions under which
foreign corporations are permitted to do business in a state other than
that of their creation:
a. To place them equally with DC
b. To subject them to inspection so that their condition may be known
c. To protect the residents of the state doing business with them by subjecting
them to the courts of the state
6. De Jure – a corporation has de jure existence if there is a full or substantial compliance with
the requirements of an existing law permitting organization of such corporation as by proper
articles of incorporation duly executed and filed
Its juridical personality is not subject to attack in courts from any source
Its due incorporation cannot be successfully attacked even in a quo warranto
proceeding by the State
7. De Facto – a corporation has de facto existence where there is a bona fide attempt to
incorporate, colourable compliance with the stature and user of corporate powers
Its due incorporation may not be inquired collaterally in any private suit of which a
corporation may be a party. Such inquiry may only be made in a quo warranto
proceeding
8. Corporation by Estoppel – although an entity may not be a corporation de jure or de facto,
a particular person may, by estoppel, be precluded from denying its corporate existence. A
group of persons may assume to do business as a corporation without having gone far enough
to achieve a de facto corporate existence
9. Corporation by Prescription – Roman Catholic is corporation, with an acknowledged
juridical personality inasmuch as it is an institution which antedated by almost a thousand years
any other personality in Europe, and which existed when Grecian eloquence still flourished in
Antioch and when idols were still worshipped in the temple of Mecca
10. Stock Corporations – those which hava a capital stock divided into shares and are authorized
to distribute to the holders dividends
Requisites for its existence:
a. A capital stock is divided into shares
b. Authority to distribute dividends
11. Non-Stock Corporations – is one where no part of its income is distributable as dividends
to its members, trustees or officers, subject to the provisions on dissolution, provided that any
profit which a non-stock corporation may obtain as an incident to its operations shall, whenever
necessary or proper be used for the furtherance of the purpose or purposes for that which the
corporation was organized
12. Parent Company – is one that controls another as a subsidiary or affiliate by the power to
elect its management
13. Holding Company – one which holds stocks in other companies for purposes of control rather
than mere investment
14. Affiliate – a person that directly or indirectly, through one or more intermediaries, controls,
or is controlled by, or is under common control with, the person specified, through the
ownership of voting shares, by contract or otherwise
AMLA: Affiliate means an entity at least 20%, but not exceeding 50% of the voting
stock of which is owned by another company
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Elements:
a. There must have been fraud or an evil motive in the affected transaction, and the
mere proof of control of the corporation would not authorize piercing
b. Corporate entity has been used in the perpetuation of fraud or in the justification of
wrong, or to escape personal liability
c. The main action should seek for the enforcement of pecuniary claims pertaining to
the corporation against corporate officers or SH, or vice-versa
Fraud Piercing need not necessarily be accompanied by alter ego elements to make
fraud case stick, because fraud is a matter of proof, and often it is a state of the mind
being founded on malice
Applicable to:
a. Tax Evasion Cases
b. Evasion of Lawful Obligations
c. Parent-Subsidiary Scenarios in Fraud Piercing Cases
d. Impose liability on corporate officers
Some probative factors of identity that will justify the application of the
doctrine of piercing the veil (Concept Builders Case)
a. Stock ownership by one or common ownership of both corporations
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The requirements of due process may well be complied with even when the individuals
sought to be made liable are not initially and formally made parties to the litigation, so
long as when the basis for the application of the piercing doctrine, they are given an
opportunity to contest its application and meet the evidence adduced for its enforcement
Requisites:
1. The court must first acquire jurisdiction over the corporation involved before its or
their separate personalities are disregarded
2. The doctrine of piercing the veil of corporate entity can only be raised during a full-
blown trial over a cause of action duly commenced involving parties duly brought
under the authority of the court by way of service of summons or what passes as
such service
Labor Cases
- The doctrine shall not be applicable to all types of officers, such as
the general manager, even if he is the highest ranking officer, when
such officer is neither a SH or a member of the Board of Directors
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- Secs. 60 & 61 as special provisions of the CC, override the general provisions of Contract
law and mandate that the pre-incorporation contracts are valid and enforceable
Pre-Incorporation Agreement
- A type of promoter’s contract, and it is consistent with the fact that a promoter’s contract
is not necessarily binding on the corporation once it is formed or organized and may be
refused by the corporation once formed
- The only time when the corporation is bound by the promoter’s contract is when it has at
the time of its constitution received benefits from the contract
CORPORATION BY ESTOPPEL
It represents an exemption to the principle embodied under Sec. 2 of the CC
It is meant to hold the contractual parties to their representations or expectations at the time
the contract was perfected
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Jurisprudence provides that the general rule is that in the absence of fraud, a person whi
has contracted or otherwise dealt with an association in such as way as to recognize and in
effect admit its legal existence as a corporate body is thereby estopped to deny its corporate
existence in any action leading out or involving such contract or dealing, unless its existence is
attacked for causes which have arisen, since making the contract or other dealing relied on as
an estoppel and this applies to foreign as well as to DC
Sec. 21: 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 arising
as a result thereof, provided, however, that when such any 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 for its lack of corporate personality
Corporation by estoppel applies only when one party to a contract was under the
impression that the other corporate party was a duly incorporated entity. It applies when a
certificate is issued
When fraud or misrepresentation occurs, the actor is personally liable on the contract as
a general partner
By using general partners, the implication is that the one who knows a
corporation not to exist would be liable not only with what he purported to
invest in the venture, but also he could be held liable to all his properties, even
those not actually invested or promised to be invested in the corporate venture
When no fraud or misrepresentation occurs, it would prevent both sides from raising the
non-existence of the corporation as a means to avoid the enforcement of the contract
The persons acting in good faith for the purported corporation would still
be personally liable, but only to the extent of their actual or promised
investment in the corporate venture
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ARTICLES OF INCORPORATION
Represents the highest form of Corporate Law, defining the charter of the corporation
When it has been approved by SEC, constitutes every duly registered corporation’s charter, the
basis by which to adjudge whether it exists for legal purposes, as well as the extent of its
powers and capacities, or what is termed in Civil Law as its juridical capacity to act
Contract between the ff parties:
a. State and Corporation
b. SH and the State
c. Corporation and SH
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REQUIREMENTS:
1. Treasurer’s Affidavit
- 25% of the total capital stock authorized is subscribed and at least
25% of such has been fully paid in case or in property
2. Certificate of Deposit
- SEC Guidelines require that a bank certificate covering the deposit
of the paid-up capital, in accordance with a prescribed form
subscribed under oath by a responsible bank officer, must
accompany the incorporation papers
3. Letter of Authority to Examine Bank Deposit
- Authorizing the SEC to examine not only the bank deposit account
but also the corporation’s book of accounts and supporting records
to determine the existence and utilization of the paid-up capital
capital stock must also be determined
4. Written Undertaking to Change Corporate Name
CORPORATE NAME
The incorporators constitute a body politic and corporate under the name stated in the
certificate
Essential to corporate’s existence, and it cannot change its name except in the manner provided
by statute
Since it is the main practical means of identifying a corporation from its members or SH, and
other entities, the CC does not allow a corporation to adopt a name identical, deceptively or
confusingly similar, to any other name already protected by law or which is patently deceptive,
confusing or contrary to existing laws
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PURPOSE CLAUSE
Significance: It confers, as well as limits, the powers which a corporation may exercise.
It must specify which is the corporation’s primary purpose and those which are the secondary
purpose
Other reasons for indicating purpose in the charter of the corporation:
1. Prospective investors shall know the kind of business the corporation deals
2. Management shall know the limits of its actions
3. A third party can know whether his dealings with the corporation are within the corporate
powers and functions
Indication of Primary Purpose: necessary for the administrative supervision and monitoring
of the State, as it can determine which particular agency shall have jurisdiction over the
operations of the corporation
If the purpose stated is lawful, SEC cannot ask for other purpose other than those stated,
hence, mandamus will lie to compel SEC to issue certificate of incorporation, UNLESS, under
declared policies, the SEC may need to regulate certain lawful purposes or activities in
consonance with the declared national economic policies
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CORPORATE TERM
Corporation commences its existence from the moment the SEC issues a Certificate of
Incorporation
INCORPORATING SH OR MEMBERS
Sec. 10: Any number of natural persons not less than 5 but not more than 15 all of legal age
and a majority of whom are residents of the PH, may form a private corporation for any lawful
purpose
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CHAPTER 7: BY LAWS
BY LAWS
• Meant to be an intramural document, to govern the relationship between and among members
of a corporate family
• Traditionally defined as regulations, ordinances, rules or laws, adopted by an association or
corporation or the like, for its internal governance, including rules for routine matters such as
calling meeting and the like
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• BY LAWS shall:
1. Be signed by the SH or members voting for them
2. Shall be kept in the principal office of the corporation, subject to the inspection of the SH
or members during office hours
3. A copy thereof must be duly certified by a majority of the directors or trustees, and it
must be countersigned by the secretary of the corporation
4. It shall be filed with the SEC, which shall be attached to the original AOI
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Board Resolution
- authorizing a corporate officer to execute a certification against FS
Rules on Summons
-Service may be made upon:
President
Managing Partner
General Manager
Corporate Secretary
Treasurer
In-House Counsel
POWER TO GR: BOD
SELL, LEASE,
DISPOSE, OR If done through an agent, BODs approval is still needed
ENCUMBER
ASSETS
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EXC:
1. In aid of a political party or candidate
2. Partisan political activity
CSR: posits that corporations, being creatures of the law and receiving the
protection of the State as well as profiting from society, must bear certain non-
profit and social responsibility toward the society
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- cannot prevail
over Sec. 37
POWER TO Temporary Stoppage
TEMPORARY (SEC Rules)
CEASE 1. 2/3 vote of the
CORPORATE OCS is required
OPERATIONS prior to the voting
of the BOD or by
subsequent
ratification in a
meeting called for
the purpose
If the temporary
cessation of operations
of the corporate powers
requires the ratificatory
vote of the SH, more so
would a permanent
ceasure of operations
which is not
accompanied by formal
dissolution of the
corporate entity
o
POWER TO Any increase or decrease in 2. Approved by a NO AR IN
INCREASE OR the CS requires prior approval majority vote of INCREASE OF
DECREASE of SEC BOD, and CS
CAPITAL 3. Ratified by SH - Increase in
STOCK SEC shall not accept for owning or CS does not
filing any certificate representing at prevent a
UNLESS: least 2/3 of the DSH from
1. Accompanied by the SS of OCS at a SH’s opting out of
the Treasurer showing at meeting duly the
least 25% of such called for the contractual
increased capital stock has purpose relationship
been subscribed and at by simply
least 25% of the amount WRITTEN NOTICE of selling his
subscribed has been paid, the proposed increase shares in the
either in actual cash to the or decrease of the corporation
corporation or that there capital stick must be to any
has been transferred to the addressed to each SH at interested
corporation property the his place of residence as buyer
valuation of which is equal shown on the books of - Grant of AR
to 25% of the subscription corporation and in case of
deposited to the increase in
addressee in the post CS would
NOT AN INHERENT POWER office with postage defeat the
receipt or served very purpose
The increase in capital stock personally for which the
does not constitute part of power is
the CS, until approved by the CERTIFICATE IN exercised
SEC. Prior approval, it is treated DUPLICATE must also
as deposits on future be signed by a majority NO AR IN
subscriptions of BOD and DECREASE OF
countersigned by the CS
SPECIAL RULES ON LISTED Chairman and Secretary - The
SHARES of the said meeting decrease
In case of corporations whose setting forth THAT: would result
securities are listed in the stock 1. Requirements of in returning
exchange or registered under the law have been part of the
the SEC Code, no complied with investment
announcement of the offer of 2. Amount of the of the SH,
rights to acquire share or to increase or including
issue stock dividends to SH shall diminution of CS those SH
be made after an increase of CS 3. Names, who
without a definite fixed date for nationalities of the dissented
the exercise of such right or persons
issuance of stock dividends. subscribing, the
amount of capital
stock etc.,
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4. Actual
indebtedness of
the corporation on
the day of the
meeting
5. Amount of stock
represented at the
meeting
6. Vote authorizing
increase or
diminution of
capital stock
POWER TO Falls within the business 4. Majority vote of
INCUR, judgment of the BOD under the BOD, and
CREATE, OR Doctrine of Centralized 5. SH Meeting duly
INCREASE Management, and would not called for purpose
BONDED require a ratificatory vote 6. 2/3 of the OCS
INDEBTEDNESS shall favor the
Any incurring, creating of incurring, creating
bonded indebtedness sall or increasing any
require prior approval from SEC bonded
indebtedness
SEC shall not accept for
filing any certificate RULES ON WRITTEN
UNLESS: NOTICE
4. Accompanied by the SS of
the Treasurer showing at
least 25% of such
increased capital stock has
been subscribed and at
least 25% 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 25% of the subscription
PARTICULAR
REQUIREMENTS OF SEC
Issuance of bonds may be filed
by the issuing corporation which
has:
1. Minimum net worth of 25M
at the time of the filing of
the application
2. It must have been in
operation for 3 years
3. It must fulfill the financial
ratios mandated by SEC
SUPPORTING DOCUMENTS
1. Issuing corporation must
submit a Trust Indenture
with a trustee bank
2. Underwriting Agreement,
together with the printed
prospectus and title
covering the securities for
bonded indebtedness
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- Qualitative,
rather than
Quantitative
Exception to the
requirement of approval
-Investment is reasonably
necessary to accomplish the
corporation’s primary purpose
as stated in the AOI
(Business Judgment na ng BOD)
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Investments should be
considered within primary
purpose
1. Investment as a means to
obtain best returns of their
investible funds
2. Place the corporation’s
funds in an investible fund
Investments outside of
Secondary Purpose
-requires ratificatory vote
WAYS TO EXPAND
BUSINESS
1. Public company with more
than 19 SH, but not
publicly listed
2. PC with more than 20SH,
with the option to become
publicly listed
3. PC with more than 20SH,
but with the option not to
become publicly listed, but
you can market your
shares through individual
public offer, registered at
SEC
POWER TO Exception: 2. Approved by the
ENTER INTO 1. Not be longer than 5 years BOD, and
MANAGEMENT for any term 3. SH owning at least
CONTRACT the majority of the
Coverage of Management OCS of both the
Contract managed and
1. Contracts whereby a managing
corporation undertakes to corporation
manage or operate all or 4. Meeting duly called
substantially all of the for purpose
business of another
corporation, whether such Ratification
contracts is called service Requirements when
contracts, operating there is common
contracts or otherwise control of involved
corporations
1. SH of both
managing and the
managed
corporations own
or control more
than 1/3 of the
total OCS entitled
to vote of the
managing
corporation
2. A majority of
members of the
BOD of the
managing
corporation also
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constitute a
majority of the
members of the
BOD of the
managed
corporations
3. Management
contract must be
approved by the
SH of the managed
corporations
owning at least 2/3
of the total OCS
entitled to vote, or
by at least 2/3 of
the members in
the case of NSC
Must state the causes or reasons for said action in the resolution
of SH or BOD, approving the same, which resolution must be signed
and attested by the President and Secretary of the Corporation
Corporation invests funds in any other corporation or
business or for any purpose other than the main purpose:
It shall file with SEC a copy of the RESOLUTION adopted
by the affirmative vote of the SH holding at least 2/3 of the
voting power authorizing the Board of Directors to invest
in another corporation or business.
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Theory of Corporation
- SH may have all the profits, but shall turn over the compete
management of the enterprise to their representatives and agents
called the Directors
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as the standing of, and relationship to, the SH, would be to consider the corporate set-up as
that based on the medium of business trust.
The essence of a business trust is having at nexus of such relationship a property whereby the
“trustor” conveys naked or legal title thereto to the trustee, for the benefit of another called
the “beneficiary” who thereby is deemed to hold beneficial or equitable ownership of the
property covered by the trust arrangement
In a corporate set-up, one must consider the corporation more as the trust medium set-up
by the State, whereby the corporate assets and business enterprise constitute the corpus, with
the BOD being designated by law as the collective trustee which exercise powers of control,
ownership, and management over the corpus, with the SH being the beneficiary thereof
Under such trust relationship, inherently the BOD owes fiduciary duty to
the beneficiaries-SH, and must run the affairs of the corporation for the
complete benefit of the beneficiaries-SH
- But, it does not mean that the BOD are mere agents of the SH, for
they hold title to the corporate assets and business enterprise in their
own right as naked title holders, and whose business discretion on
how to run the affairs of the corporation is essentially what will
prevail
- BOD
o Chosen based on their qualification, and are expected to
run the affairs of the corporation in the exercise of their
business judgment, and not as mere stooges of the SH
who do not possess as a group the managerial competence
to run the affairs of the corporation
RATIONALE:
- It promotes efficiency and prevents confusion arising from diffused
corporate powers. Investors and creditors of a corporation, as well
as those who deal with it, can rely upon the law-directed fact that
the corporation shall be bound only through its BOD, or
representatives duly authorized by the Board. In any organizational
set-up, the congruence of authority and responsibility in the same
person, committee, or board always promotes efficiency
- Board: sole authority to determine policy and conduct the ordinary
business of the corporation within the scope of its charter
STOCKHOLDERS’ AGREEMENT CANNOT WITHHOLD CORPORATE
POWERS FROM THE BOD
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- A business corporation exists solely for the benefit of those who had invested their capital
in it
- A business corporation is organized and carried on primarily for the benefit of the SH, and
that the directors cannot conduct the affairs of a corporation for the merely incidental
benefit of SH and for the primary purpose of benefiting others.
- Also known as the free enterprise system, which dictates that it is better for the State and
its organs to leave business to the businessmen; especially so, when courts are ill-
equipped to make business decisions, and more importantly, the social contract in the
corporate family to decide the course of the corporate business has been vested in the
BOD and not in courts
o Theoretical Basis
- BOD hold such office charged with the duty to act for the corporation
according to their best judgment, and in so doing they cannot be controlled
in the reasonable exercise and performance of such duty
- The Board is the business manager of the corporation, and so long as it acts
in good faith, its orders are not reviewable by the courts
- As an act of police power, the State has by statutory law vested directly all
corporate powers in the BOD of each corporation, and that SH invest in
corporations bound by the principle that all corporate powers and
management of the corporate business enterprise is with BOD, whose
decision they cannot overcome except in those specified instances embodied
in the CC where their ratificatory vite is mandated to be essential for the
validity of a corporate act
BRANCHES OF BJR
1. The business judgment rule is not only a substantial rule of law, but
also a rule on evidence. Whenever any action is brought to question
the validity of a board resolution or corporate transaction approved
by the Board, the general rule is once it has been entered into by the
Board by virtue of the exercise of its judgment, and it will be
presumed to be valid
2. Corporate officers cannot be held personally liable for corporate acts
or obligations incurred in the exercise of the business judgment.
However, when directors or trustees violate their duties, they can be
held personally liable, thus:
a. When the corporation wilfully and knowingly vote for patently
unlawful acts of the corporation
b. When he is guilty of gross negligence or bad faith in directing
the affairs of the corporation
c. When he acquires any personal or pecuniary interest in conflict
with his duty as such director
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EXECUTIVE COMMITTEE
• Sec. 35: The By-Laws of a corporation may create an Executive Committee, composed of not
less than 3 members of the Board, to be appointed by the Board.
• EC 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. Filling of vacancies in the Board
3. Amendment or repeal of by laws or the adoption of new by-laws
4. Amendment or repeal of any resolution of the Board which by its express terms is not so
amenable or repealable
5. Distribution of cash dividends to the shareholders
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• SEC Opinion: An executive committee can only be created by virtue of a provision in by-laws
and that in the absence of such by-law provision, the BOD cannot simply create or appoint an
executive committee to perform some of its functions.
• QUALIFICATIONS
Sec. 92: “He must own at least 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. No person
shall be elected as trustee unless he is a member of the corporation
Any director who ceases to be the owner of at least 1 share of the stock of the
corporation of which he is a director shall thereby cease to be a director. A majority of the
directors or trustees of all corporations organized under the CC are required to be residents of
the Philippines.”
o Rule on Corporate SH
- General Rule: They are not qualified to be elected as such to the
Board. They cannot also designate an individual representative to be
voted into the Board since the representative would not be a
stockholder of record nor member himself, which is the minimum
requirement to be qualified to be voted into the Board of the
corporation
- Their representation in the Board can be achieved by making their
individual representatives trustees of the shares or membership,
which would the make them SH or members of record, and thereby
qualified to be elected to the Board, but at the same time,
maintaining legal responsibility of trustees to the corporate SH or
members
• DISQUALIFICATIONS
Sec. 27: He must not have been convicted of an offense punishable by imprisonment of
exceeding 6 years, or has not committed any violation of Corporation Code within 5 years prior
to his election
Sec. 19 of the General Banking Law of 2000
“Except for rural banks, no appointive or elective public official, whether full time or part-time
shall at the same time serve as officer of any private bank, save in cases where such service
is incident to financial assistance provided by the government or a government owned or
controlled corporation to the bank or unless otherwise provided under existing laws.
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PHILIPPINE CORPORATE LAW by CESAR VILLANUEVA- SUMMARIZED
with the exercise of his independent judgment in carrying out his responsibilities
as a director
Requires that publicly-held companies that it covers “shall have at least 2
independent directors or such number of independent directors that constitutes
20% of the members of the Board, whichever is lesser, but in no case less than
2
All other companies are encouraged to have independent directors in their
board
SEC Code mandates that an Independent Director should:
1. Attend and actively participate in Board and Committee meetings, review
meeting materials and, if called for, ask questions or seek explanation
2. Be a member and the Chairman of the Audit Committee
3. Be a member of the Nominations Committee
4. Be a member of the Compensation/Remuneration Committee
- Section 38.1 of the SRC Rules: defines an independent director by detailing the rules
on disqualification, thus:
1. ID means a person who, apart from his fees and shareholdings, is independent
of management and free from any business or other relationship which could,
or could reasonably be perceived to, materially interfere with his exercise of
independent judgment in carrying out his responsibilities as a director in any
public company, and includes among others, any person who:
a. Is not a director or officer of the corporation or of its related companies
or any of its substantial shareholders (other than as an independent
director of any of the foregoing);
b. Is not a substantial shareholder of the corporation or of its related
companies or any of its substantial shareholders;
c. Is not a relative of any director, officer or substantial shareholder of the
corporation, any of its related companies or any of its substantial
shareholders. For this purpose, relatives includes spouse, parent, child,
brother, sister, and the spouse of such child, brother or sister;
d. Is not acting as a nominee or representative of any director or substantial
shareholder of the corporation, any of its related companies or any of its
substantial shareholders;
e. Has not been employed in any executive capacity by that public company,
any of its related companies or by any of its substantial shareholders
within the last five (5) years;
f. Is not retained as professional adviser by that public company, any of its
related companies or any of its substantial shareholders within the last five
(5) years;
g. Is not retained as professional adviser, by that public company, any of its
related companies or by any of its substantial shareholders, either
personally or through his firm; or
h. Has not engaged and does not engage in any transaction with the
corporation or with any of its related companies or with any of its
substantial shareholders, whether by himself or with other persons or
through a firm of which he is a partner or a company of which he is a
director or substantial shareholder, other than transactions which are
conducted at arm’s length and are immaterial.
• Independence of an Independent Director
- Comes from the utter lack of official, professional or business connection with the public
company (except that of being an independent director and holding qualifying shares)
which would interfere with the exercise of independent judgment in carrying out the
responsibilities of a director; he is one who must be completely independent from the
management of the company
• Qualifications of Independent Contractor
1. They must own at least 1 share of the capital stock of the corporation of which he is a
director, which shares shall stand in his name on the books of the corporation.
Such share shall remain nominal, since it is provided that he is automatically
disqualified when he holds securities in the company in excess of 10% of the
entire issue
10% beneficial interests: is not a nominal figure, and if an independent
directorship is allowed to have that much, then it really does not make sense
why such his office is instituted separately from directors who are elected by
minority of the SH
BOD of a Bank: shall have at least 2 independent contractors, which shall be
persons other than an officer or employee of the bank, its subsidiaries or
affiliates or related interests
• Western Institute of Technology vs Salas:
“There is no argument that directors or trustees, as the case may be, are not entitled to salary
or other compensation when they perform nothing more than the usual and ordinary duties of
their office. This rule is founded upon a presumption that the directors/trustees render service
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gratuitously, and that the return upon their shares adequately furnishes the motives for service,
without compensation”
• Issues Relating to the System of Independent Directors
- Issues relating to the viability of such system, with passionate advocates on both sides of
the debate
a. Diluting the Sense of Responsibility to the Corporations and its Various
Stakeholders
- It dilutes the system of Board responsibility towards the corporation,
the SH and other stakeholders
- With the formal adoption of the Stakeholder Theory for publicly held
companies in the original SEC Code of Corporate Governance, then
all directors, whether independent or not, are mandated to take into
consideration the interests of all stakeholders, and not just the
stockholders
b. Quasi-Public Role of the Independent Contractor
- The position of independent director is therefore equated to a quasi-
public office, equivalent to those occupied by independent auditors
and even credit rating companies, whose work of certification is
supposed to constitute independent work which can be relied upon
by the government and the public as disinterested source of gauging
the financial standing or credit worthiness of companies or securities,
as the case may be.
- The quasi-public characterization of the office of ID is contrary to the
very essence of the nature and function of the BOD: it is the agency
constituted by the CC to directly manage the corporate business
enterprise and to exercise all the corporation’s powerw
- By the very nature of their function, the BOD are held to be partisan
for the benefit of the corporation and their constituencies for whose
benefits directors have been imposed with fiduciary duties and
obligations
- Stockholder’s Theory: Directors are supposed to be die-hard
fiduciaries for the corporation and its SH to the exclusion of other
interests and to the extent they do not violate the law and contravene
public policy
- Stakeholder Theory: Directors owe their primary duties to all
parties who occupy the position being stakeholders to the corporate
affairs
c. Wrongly Presumes that only independent directors can exercise
independent judgment
- The system of ID presumes that only ID can exercise independent
judgment on corporate matters, and that the logical extension of
such reasoning is that all other directors are not pre-disposed to
exercise independent judgment
- If that were the case, it is rather strange that independent directors
are constituted always a minority of 20% in the boards of covered
companies, and therefore would always be out-voted by the majority
who are supposedly not capable of independent judgment, or who
would act for the benefit of, or to cover-up the shortcomings of
management
- ID is to protect the interest of the State (which created their office)
or to the greater public other than those members of the public who
already qualify as stakeholders
- Under such setting, ID are accountable only to themselves and
what they think is the greater good in the corporate world
d. Promotes culture of confrontation
- Presumption is that all other directors are unlikely to be in a
position to exercise independent judgment; that only independent
directors are above suspicion. Therefore, the ID’s primary duty is to
place other directors on the path of independent thinking and
decision making, or in essence, to be effective fiscalizers in the BOD
which acts under a supposedly constant threat of conflicts of interests
situations
e. Independent directors may come into corporate setting practically
ignorant of the industry
- ID is legally and practically excluded from their rank leading experts
and professionals in the field, business or industry engaged in by the
public company they serve; consequently, the only individuals who
would qualify to be nominated and elected into the BOD of a public
company are essentially strangers to the industry and who would
essentially be lightweights in the industry to which they are
supposed to exercise business judgment
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(INCOMPLETE PA ‘TO)
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1. Nature of Rights of SH
- ADDITIONAL RIGHTS:
e. Right to transfer or dispose of his fully paid SOS
f. Right to file derivative suit
Does not need for any express or enabling provisions in the AOI or BL
- Sec. 90
Gen. Rule: Membership in a non-stock corporation and all rights arising therefrom are
personal and non-transferable
Exception: unless otherwise provided by law
- Sec. 89:
a. Rights of members of any class or classes to vote may be limited, broadened or
denied to the extent specified in the AOI or BL
b. Rights of members to vote by proxy may be denied under the AOI or BL
- Sec. 91: membership shall be terminated in the manner and for causes provided under
the AOI or BL
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PRE-EMPTIVE RIGHTS
- Sec. 39: All SH of a stock corporation shall enjoy pre-emptive rights to subscribe to all
“issues or dispositions” of shares of any class, in proportion to their shareholdings
- Definition: a common law right of SH to be granted the first option to subscribe to any
opening of the corporation’s unissued CS, or to any increase of its ACS
- Reasons:
1. To protect both the propriety and voting rights of SH, since such proportionate
shares determines his proportionate power to vote in corporate affairs when the
law gives the SH a right to affirm or deny board actions
2. Determines his proportionate share in the dividends declared by the corporation,
as well as his proportionate share to its remaining assets upon dissolution
- Exceptions:
1. Subscription Deposits
o Deposits for additional subscriptions are payments received for future issuance
of stock which may or may not materialize
o While this may be allowed for balance sheet presentation as part of SH’s equity
account, the same cannot be considered as part of the capital of corporation
until shares are actually issued in consideration thereof
2. When such rights are denied by AOI or amendment thereto
3. SH has no PER to the issuance of shares of CS of the corporation
a. Issued in compliance with laws requiring stock offerings or minimum stock
ownership by the public
b. Issued in gf with approval of the SH, representing 2/3 of the OCS, in exchange
for property needed for corporate purposes
c. Issued in gf with the approval of the SH, representing 2/3 of OCS, in payment
of previously contracted debt
- Rule on Waiver of PER
o It should be given individually by SH to be valid or by SPA
o When it has been effectively waived:
a. It is not necessary that said shares should be again offered on a pro-rata
basis to the SH who took advantage of PER
b. Waived shares may be offered to non-SH of record on a first come serve
basis without violating the PER of SH
HOWEVER, SEC considers it a sound practice to offer always
the remaining shares to interested SH of record whenever
practical and feasible before offering them to 3rd parties
- Rule on Issue of Shares (When it is objectionable)
1. Directors acted in breach of trust and their primary purpose is to perpetuate or shift
the control of the corporation, or
2. To freeze out the minority interests
- Coverage
1. Sec. 39 provides that PER exists to all issues or dispositions of shares of any class
o Issues or Dispositions: provides that PER should now be available even
to issues from the existing unsubscribed portion of the ACS when the
Board decides to open them for subscription, and even to the re-issuance
or sale of treasury stocks in a corporation
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1. Restriction shall not be more onerous than granting the existing SH or the corporation the
option to purchase the shares of the transferring SH with such reasonable terms,
conditions or period stated therein
2. Restriction shall not be valid or enforceable if it absolutely prohibits the sale or transfer
of stock without the consent of the existing SH, as this would violate the general law on
free alienability of SoS
3. Reasonable option period may range from 30-60 days or even more, depending on the
circumstances surrounding the case
4. After the option has expired, the SH is free to sell his SoS to anyone
NON-COMPETITION CLAUSE
o It may be properly provided for as a condition for being a SH in the AOI or BL
o Valid and reasonable exercise of corporate authority since a corporation, under the principle of
self-preservation, has the inherent right to preserve and protect itself by excluding competitors
or hostile interests
RIGHT TO VOTE
o Tan vs Sycip: characterized the right to vote as “inherent and incidental to ownership of
corporate stocks, and as such is a property right and that consequently, only stock actually
issued and outstanding may be voted – neither the SH or the corporation can vote or represent
shares that have never passed to the ownership of SH, or having so passed, have again been
purchased by the corporation
o Castillo vs Balinghasay: The right of a SH to participate in the control and management of the
corporation that is exercised through his vote
Where the articles of incorporation provide for non-voting shares in the cases
allowed by the Corporation Code, the holders of such shares shall nevertheless be
entitled to vote on the ff matters:
a. Amendment of AOI
b. Adoption and amendment of BL
c. Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporate property
d. Incurring, creating or increasing bonded indebtedness
e. Increase or decrease of CS
f. Merger or consolidation
g. Investment of corporate funds in another corporation or business in
accordance with the Code
h. Dissolution of corporation
EXCEPT in the above cases, the vote necessary to approve a particular corporate
act as provided in the CC shall be deemed to refer only to stocks with right to vote.
The creation of a class of shares with multiple voting rights appears to be effective
where the purpose is to unequally distribute voting power so as to confer larger
participation in management on a SH or a class of SH
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RIGHT TO A PROXY
In the case of stock corporation, the right to vote by proxy cannot be taken away
In the case of non stock corporation, the right to vote by proxy may be taken
away by provisions in the AOI or BL
o General Rule: Members of non-stock corporation may cast as many votes as there are
trustees to be elected, but not cast more than one vote for one candidate. Candidates receiving
the highest number of votes shall be declared or elected
Exception: unless otherwise provided in the AOI or BL
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- without prejudice
to the appraisal rights of
dissenting SH when
granted by the Code, or
the vote or written
assent of 2/3 of the
members if it be a non-
stock corporation
Investment in Non- Sec. 42: A corporation may invest its funds in
Primary Purpose of any other corporation or business or for any
the Business purpose than the primary purpose for which it
was organized when:
1. approved by a majority of the
BOD/BOT
2. ratified by the 2/3 of the OCS or
members at stockholders meeting duly
called for the purpose
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PHILIPPINE CORPORATE LAW by CESAR VILLANUEVA- SUMMARIZED
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
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Nature
o Special form of agency and governed by the Law on Agency
o Being strictly a fiduciary relation, it is revocable in nature,
generally
o General Rule: Proxies, even those wit irrevocable terms, have
always been considered as revocable
o Exception: couple with an interest
Revocation may be made by:
1. Formal Notice
2. Orally
3. Conduct as by the appearance of the SH or member giving
the proxy
4. Issuance of a subsequent proxy
5. Sale of shares
Proxy Couple with an interest may be rended non-
revocable where:
1. Proxy has parted with value or incurred liability at the
SH’s request
Requisites
1. It must be in writing
2. Signed by SH or member of record, and
3. Filed before the meeting with CorSec
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PHILIPPINE CORPORATE LAW by CESAR VILLANUEVA- SUMMARIZED
a. Forms of Proxies
o SEC prescribes no particular form, as long as it
complies with Sec. 58
o If BL or AOI prescribes a form, follow such
c. Period of Effectivity
o General rule: It shall be valid only for the
meeting for which it is intended
Exception: unless otherwise provided in the
proxy
o If there is a stipulation for a longer period of
effectivity, no proxy shall be valid and effective
for a period longer than 5 years at any one time
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PHILIPPINE CORPORATE LAW by CESAR VILLANUEVA- SUMMARIZED
Sec. 59:
One or more stockholders of a stock corporation may create
a voting trust for the purpose of conferring upon a trustee or trustees the
right to vote and other rights pertaining to the shares for a period not
exceeding five (5) years at any time:
PROVIDED, That in the case of a voting trust specifically required
as a condition in a loan agreement, said voting trust may be for a
period exceeding five (5) years but shall automatically expire upon
full payment of the loan.
Any other stockholder may transfer his shares to the same trustee
or trustees upon the terms and conditions stated in the voting
trust agreement, and thereupon shall be bound by all the
provisions of said agreement.
REQUISITES:
1. It must be in writing and notarized
2. It must specify the terms and conditions thereof
3. A certified copy of such agreement shall be filed with the
corporation and with the SEC
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HIERARCHY OF ENFORCEABILITY
1. Voting Trust Agreement
2. Proxy
3. Pooling Agreement
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PHILIPPINE CORPORATE LAW by CESAR VILLANUEVA- SUMMARIZED
Special meetings of stockholders or members shall be held at any time deemed necessary
or as provided in the by-laws:
Provided, however, That at least one (1) week written notice shall be sent to all
stockholders or members, unless otherwise provided in the bylaws.
Whenever, for any cause, there is no person authorized to call a meeting, the Secretaries and
Exchange Commission, upon petition of a stockholder or member on a showing of good cause
therefor, may issue an order to the petitioning stockholder or member directing him to call a
meeting of the corporation by giving proper notice required by this Code or by the by-laws.
The petitioning stockholder or member shall preside thereat until at least a majority of the
stockholders or members present have been chosen one of their number as presiding officer
Notice of meetings shall be in writing, and the time and place thereof stated therein.
All proceedings had and any business transacted at any meeting of the stockholders or
members, if within the powers or authority of the corporation, shall be valid even if the meeting
be improperly held or called, provided all the stockholders or members of the corporation are
present or duly represented at the meeting
o Sec. 93: Place of meetings. - The by-laws may provide that the members of a non-stock
corporation may hold their regular or special meetings at any place even outside the place
where the principal office of the corporation is located: Provided, That proper notice is sent to
all members indicating the date, time and place of the meeting: and Provided, further, That
the place of meeting shall be within the Philippines
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For non-stock corporations, only those who are actual, living members with
voting rights shall be counted in determining the existence of quorum during
members’ meeting. Dead members shall not be counted
By Laws: may provide for the holding of meetings with the presence of any number
of SH or members, even less than a majority, provided that there are at least two
SEC Opinion, July 10, 1998: Where a corporation encounters several unsuccessful
attempts or if it would be impossible for the corporation to get the required number
of quorum of the SH necessary to transact business, it may, pursuant to the
provisions of P.D 902-A, petition the SEC for the appointment of a management
committee to undertake the management thereof
The records of all business transactions of the corporation and the minutes of any
meetings shall be open to inspection by any director, trustee, stockholder or member
of the corporation at reasonable hours on business days and he may demand,
writing, for a copy of excerpts from said records or minutes, at his expense.
Any officer or agent of the corporation who shall refuse to allow any director,
trustees, stockholder or member of the corporation to examine and copy excerpts
from its records or minutes, in accordance with the provisions of this Code,
1. shall be liable to such director, trustee, stockholder or member for damages,
and
2. in addition, shall be guilty of an offense which shall be punishable under Section
144 of this Code:
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- Reasonable Hours: business days through the year, and not merely during an arbitrary
period of few days chosen by the director
Mandamus Proceeding
a. Mandates that within 2 days from the filing of
the complaint, the court, upon a consideration
of the allegations of the complaint to either
dismiss it outright if it is not sufficient in form
and substances, or otherwise order the issuance
of summons, which shall be served on the
defendant within 2 days from its issuance, and
who has 10 days to file an answer
b. If no answer is filed within due date, the court
may motu propio or upon motion, shall render
judgment as warranted by the allegations of the
complaint, as well as the affidavits, document
and other evidence on record
c. If the answer is filed, the court is mandated to
render a decision based on the pleadings,
affidavits and documentary evidence and other
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APPRAISAL RIGHTS
o Nature/ Who is Entitled/ Instances when it may be exerices
Sec. 81
Instances of appraisal right. - Any stockholder of a corporation shall have the right
to dissent and demand payment of the fair value of his shares in the following
instances:
1. In case any amendment to the articles of incorporation has the effect
of changing or restricting the rights of any stockholder or class of
shares, or of authorizing preferences in any respect superior to those
of outstanding shares of any class, or
2. of extending or shortening the term of corporate existence;
3. In case of sale, lease, exchange, transfer, mortgage, pledge or other
disposition of all or substantially all of the corporate property and assets
as provided in the Code; and
4. In case of merger or consolidation
5. In case the corporation decides to invest its funds in another
corporation or business outside of its primary purpose
o How is it exercised
Sec. 82
The appraisal right may be exercised by any stockholder who shall have voted
against the proposed corporate action, by making:
1. a written demand on the corporation within thirty (30) days after the date
on which the vote was taken for payment of the fair value of his shares:
Sec. 83
Effect of demand and termination of right. - From the time of demand for
payment of the fair value of a stockholder's shares until either the abandonment
of the corporate action involved or the purchase of the said shares by the
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PHILIPPINE CORPORATE LAW by CESAR VILLANUEVA- SUMMARIZED
corporation, all rights accruing to such shares, including voting and dividend
rights, shall be suspended in accordance with the provisions of this Code,
except the right of such stockholder to receive payment of the fair value
thereof:
Provided, That if the dissenting stockholder is not paid the value of his
shares within 30 days after the award, his voting and dividend rights shall
immediately be restored
If within a period of sixty (60) days from the date the corporate action
was approved by the stockholders, the withdrawing stockholder and the
corporation cannot agree on the fair value of the shares,
- it shall be determined and appraised by three (3) disinterested
persons, one of whom shall be named by the stockholder, another
by the corporation, and the third by the two thus chosen.
The findings of the majority of the appraisers shall be final, and their
award shall be paid by the corporation within thirty (30) days after such
award is made:
Provided, That if the dissenting stockholder is not paid the value of his
shares within 30 days after the award, his voting and dividend rights shall
immediately be restored
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PHILIPPINE CORPORATE LAW by CESAR VILLANUEVA- SUMMARIZED
1. If, however, such demand for payment is withdrawn with the consent
of the corporation,
2. or if the proposed corporate action is abandoned or rescinded by the
corporation or
3. disapproved by the Securities and Exchange Commission where such
approval is necessary,
4. or if the Securities and Exchange Commission determines that such
stockholder is not entitled to the appraisal right,
In the case of an action to recover such fair value, all costs and
expenses shall be assessed against the corporation, unless the
refusal of the stockholder to receive payment was unjustified
DERIVATIVE SUITS
o An individual SH is permitted to institute a derivative suit on behalf of the corporation wherein
he held stock in order to protect or vindicate corporate rights, whenever the officers of the
corporation refuse to sue, or are the ones to be sued or hold control of the corporation, in such
actions, the suing SH is regarded as a nominal party, with the corporation as the real party in
interest
o SH are liable for damages
- GROUNDS:
1. Breach of Trust
2. Redress of wrong inflicted directly upon the SH
3. Violation of fiduciary duties
o Nature
- Conditioned upon a situation where BOD are not in a position to exercise business judgment
for the benefit of the corporation
- To enable the SH to enforce a corporate cause of action
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Exception:
1. Exhaustion would be futile or useless because the Board itself would not bring the
suit for the reason that they are also guilty or part of the fraud committed against
the corporation
2. Corporation itself is under the complete control of the person against whom it is
being filed
o Grounds for Derivative Suit: Express allegation that suit filed is derivative in nature
1. Wastage and Diversion of Funds
2. Violation of the Laws
o Appointment of Receiver (Chase Doctrine): In addition to the right to file DS, a SH, in
order to ensure that during the pendency of the derivative suit, the corporation is ran properly,
he can also ask for the appointment of receiver to take management away from the Board and
instead place it in the hands of the receiver
o Venue:
a. Sec. 5(b) of PD 902-A: SEC
b. Sec. 5.2 of SRC: RTC Special Commercial Courts
c. Interim Rules of Procedure: RTC which has jurisdiction over the principal office of the
corporation
o Nuisance Suits
- Failure to allege categorically that the suit was not a nuisance or harassment of suit
was fatal to the filing of the derivative suit
- Examples:
1. Collection of personal debt
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1. Subscription Agreement
- Underpins the relationship between the SH and the corporation, and therefore is a special
contract in Corporate Law
- Although governed by the Law on Contracts, it has special features that go beyond such
discipline, and delve into the heart of Corporate Law
- Sec. 72: Holders of subscribed shares not fully-paid which are not delinquent shall have
all the rights of a SH
- Therefore, it is the subscription to the SoS that creates the legal relationship between
the SH and the corporation, and it is such that grants to the SH the statutory and common
rights granted to the SH, and further, it is one which creates ownership over such shares
in the person of the subscriber
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Where the consideration is other than actual cash, or consists of intangible property
such as patents of copyrights, the valuation thereof shall initially be determined by the
incorporators or the board of directors, subject to approval by the Securities and Exchange
Commission.
Shares of stock shall not be issued in exchange for promissory notes or future service.
The same considerations provided for in this section, insofar as they may be
applicable, may be used for the issuance of bonds by the corporation.
The issued price of no-par value shares may be fixed in the articles of incorporation
or by the board of directors pursuant to authority conferred upon it by the articles of
incorporation or the by-laws, or in the absence thereof, by the stockholders representing
at least a majority of the outstanding capital stock at a meeting duly called for the
purpose. (5 and 16)
Section 65:
Liability of directors for watered stocks. - Any director or officer of a corporation
consenting to the issuance of stocks for a consideration less than its par or issued value
or for a consideration in any form other than cash, valued in excess of its fair value, or
who, having knowledge thereof, does not forthwith express his objection in writing and
file the same with the corporate secretary, shall be solidarily, liable with the stockholder
concerned to the corporation and its creditors for the difference between the fair value
received at the time of issuance of the stock and the par or issued value of the same
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b) Property Consideration
o The property which a corporation may accept in change for its stock
must be of a kind which it may lawfully acquire and hold in carrying
out the purposes of its incorporation, and which is necessary or
proper for it to own in carrying on its business
o it cannot lawfully issue stock for property which its charter does not
authorize it to acquire, or for property acquired for an unauthorized
purpose
o Property must be of substantial nature, having a pecuniary value
capable of being ascertained, and must be something real and
tangible as distinguished from something constructive or
speculative; and it must be of such character that it can be delivered
to the corporation, instead of being merely communicated to its
officers or employees. It must also be such as is capable of being
applied to the payment of debts and of distribution among the SH
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WATERED STOCKS
These are shares issued as fully paid when in truth the consideration received is known to be less
than the par value or issued value of the shares
Also used to include bonus shares, under an agreement that nothing shall be paid to the
corporation for them; and discount shares issued at a discount under an agreement to pay less
than the par value in money
Stock watering is prohibited because of the injuries caused to:
1. The corporation, which is deprived of needed capital and the opportunity to market is
securities to its own advantage, thus, hurting its business prospects and financial
responsibility
2. Existing and future SH, who are also injured by the dilution of the proportionate interests
in the corporation and who pay full value for their shares
3. Present and future creditors, who are injured as the corporation is deprived of the assets
or capital required by law to be contributed by all SH as substitute for individual liability
of corporate debts; and
4. Persons who deal with the company or purchase its securities who are deceived because
stock watering which are invariably accompanied with misleading corporate accounts and
financial statements, particularly by an overstatement of the value of assets received for
the shares to cover up a capital deficit resulting from overvaluation and underpayment of
purported capital contributions
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Sec. 67. Payment of balance of subscription. - Subject to the provisions of the contract
of subscription, the board of directors of any stock corporation may at any time declare due
and payable to the corporation unpaid subscriptions to the capital stock and may collect the
same or such percentage thereof, in either case with accrued interest, if any, as it may deem
necessary.
Payment of any unpaid subscription or any percentage thereof, together with the interest
accrued, if any, shall be made on the date specified in the contract of subscription or on the
date stated in the call made by the board. Failure to pay on such date shall render the entire
balance due and payable and shall make the stockholder liable for interest at the legal rate on
such balance, unless a different rate of interest is provided in the by-laws, computed from such
date until full payment. If within thirty (30) days from the said date no payment is made, all
stocks covered by said subscription shall thereupon become delinquent and shall be subject to
sale as hereinafter provided, unless the board of directors orders otherwise.
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DELINQUENCY SALE
Section 68:
Delinquency sale. - The board of directors may, by resolution, order the sale of delinquent
stock and shall specifically state:
a. the amount due on each subscription plus
b. all accrued interest,
c. and the date, time and place of the sale which shall not be less than thirty (30)
days nor more than sixty (60) days from the date the stocks become delinquent.
Unless the delinquent stockholder pays to the corporation, on or before the date specified for
the sale of the delinquent stock, the balance due on his subscription, plus accrued interest,
costs of advertisement and expenses of sale, or unless the board of directors otherwise orders,
said delinquent stock shall be sold at public auction to such bidder who shall offer to pay the
full amount of the balance on the subscription together with accrued interest, costs of
advertisement and expenses of sale, for the smallest number of shares or fraction of a share.
The stock so purchased shall be transferred to such purchaser in the books of the corporation
and a certificate for such stock shall be issued in his favor. The remaining shares, if any, shall
be credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance
of a certificate of stock covering such shares.
Should there be no bidder at the public auction who offers to pay the full amount of the balance
on the subscription together with accrued interest, costs of advertisement and expenses of
sale, for the smallest number of shares or fraction of a share, the corporation may, subject to
the provisions of this Code, bid for the same, and the total amount due shall be credited as
paid in full in the books of the corporation. Title to all the shares of stock covered by the
subscription shall be vested in the corporation as treasury shares and may be disposed of by
said corporation in accordance with the provisions of this Code
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Section 67:
Payment of any unpaid subscription or any percentage thereof, together with the interest
accrued, if any, shall be made on the date specified in the contract of subscription or on the
date stated in the call made by the board.
Failure to pay on such date shall render the entire balance due and payable and shall make
the stockholder liable for interest at the legal rate on such balance, unless a different rate of
interest is provided in the by-laws, computed from such date until full payment.
If within thirty (30) days from the said date no payment is made, all stocks covered by said
subscription shall thereupon become delinquent and shall be subject to sale as hereinafter
provided, unless the board of directors orders otherwise
Highest Bidder
- Such bidder who shall offer to pay the full amount of the balance on the
subscription together with the accrued interests, costs of advertisements and
expenses of sale, for the smallest number of shares or a fraction of share (Sec.
68)
- The stock so purchased shall be transferred to such purchaser in the books of
the corporation and a certificate of stock shall be issued in his favor
- Remaining shares, if any, shall be credited in favor of the delinquent SH who
shall likewise be entitled to the issuance of a certificate of stock covering such
shares
Reason: Sec. 68 protects the delinquent SH, and that
corporations are not supposed to make money out of
sale, but should only collect in full the subscription due,
plus accrued interest and expenses incurrerd
- Should there be no bidder at the public auction who offers to pay the full
amount of the balance on the subscription together with accrued interest,
costs of advertisement and expenses of sale, for the smallest number of
shares or fraction of a share, the corporation may, subject to the provisions
of this Code, bid for the same, and the total amount due shall be credited as
paid in full in the books of the corporation. Title to all the shares of stock
covered by the subscription shall be vested in the corporation as treasury
shares and may be disposed of by said corporation in accordance with the
provisions of this Code.
Effects of Delinquency
- Sec. 71
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CERTIFICATE OF STOCK
Nature
Definition:
o It is an instrument formally by the corporation, with intention that the same
constitute the best evidence of the issuance of shares of stock that are fully paid and
no longer assessable
o It is an evidence of a holder’s interest and status in corporation, signed by the proper
officer of a corporation stating or acknowledging that the person named in the
document is the owner of a designated number of shares of its stock. It is a prima
facie evidence that the holder is a shareholder of a corporation
Section 64:
Issuance of stock certificates. - No certificate of stock shall be issued to a subscriber until
the full amount of his subscription together with interest and expenses (in case of delinquent
shares), if any is due, has been paid
Institution of CoS constitute the basis under Corporate Law to realize and promote:
1. Free Transferability of Units of Ownership
2 Levels at which the Doctrine operates:
a. Intra-Corporate Level: covers the relationship between the corporation as
the issuer of the SoS, and the original subscriber thereof
b. Extra-Corporate Level: covers the nature and effect of the issuance or
non-issuance of the shares of stock to parties who are not within the intra-
corporate relationship, such as the buyer of the shares issued from the
registered SH, and those who take the shares as security from the principal
obligations of the registered SH
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Sec. 63. Certificate of stock and transfer of shares. - The capital stock of
stock corporations shall be divided into shares for which certificates signed:
1. by the president or vice president,
2. countersigned by the secretary or assistant secretary,
3. and sealed with the seal of the corporation shall be issued in accordance
with the by-laws.
No shares of stock against which the corporation holds any unpaid claim shall
be transferable in the books of the corporation
CoS are the prime facility under the PH Corporate Law by which to evidence
ownership in, and undertake dealings with, shares of stocks, the state of
statutory provisions do not make certificate of stocks the exclusive facility by
which to deal with the “free transferability” features of the SoS
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registration in the name of the registered SH and effect the transfer thereof un
the name of the assignee/transferee
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.
SEC Opinion, January 6, 1999: While the issuance of a stock certificate is not a condition
precedent to render one a SH, under Sec. 63, every SH has a right to have a proper certificate
issued to him by the corporation upon demand, as soon as he complied with the conditions
under Sec. 64 which requires full payment of the subscription
Pacific Basin vs Oriental Petroleum: characterized the right of a transferee to have stocks
transferred in his name as “an inherent right flowing from his ownership of stocks – the only
limitation imposed by Sec. 63 of the CC is when the corporation holds any unpaid claim against
the shares intended to be transferred.”
Purpose of the Prohibition:
1. To prevent partial disposition of a subscribed share which is not fully paid,
because if it is permited, and the subscriber subsequently becomes delinquent
in the payment of his subscription, the corporation may not be able to sell as
many of the subscribed shares as would be necessary to cover the total amount
due from him, which is authorized under Sec. 68 of the CC
Sec. 64: does not provides for any prohibition on the part of the corporation to divide the
subscription of a subscriber by considering portion thereof as fully paid and issuing a
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corresponding certificate over the paid-up shares, but pursuant to Section 64, such option is
available to the corporation
Subscription is one, entire and indivisible whole contract. This indivisibility is
absolute, and speaks of no exception
In the absence of contrary by-law provisions, a corporation may apply
payments made by subscribers on account of their subscriptions either as:
a. Full payment for the corresponding number of shares, the par value
of which is covered by such payment, or
b. Payment pro rata to each and the entire number of shares subscribed
for
o Alternative
o Once chosen, it must be applied uniformly to all SH
similarly situated, and therefore, it cannot be changed
without the consent of all SH who might be affected
No inherent right to be issued certificate to one who merely bought shares from a registered
stockholder
General Rule: SH has a right to be issued the Certificate of Stock covering his fully paid
subscription
Said right does not extend to a third party who has bought the registered
shares of a selling SH, even when the shares are fully paid
Reason: A third party is a stranger to the corporation, and it is the obligation of
the corporation, to deal with the SoS of a registered SH only in accordance with
the instructions of a registered SH
Third Party Buyer of Shares must first establish, by clear evidence his rightful purchase
of the entire title and interests of the registered SH to the shares before the corporation may
be compelled to cancel the covering certificates and issue new ones in his own name as new
owner thereof
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A transfer under this subsection has the effect of the delivery of a security in bearer form or
duly indorsed in blank representing the quantity or amount of security or right transferred,
including the unrestricted negotiability of that security by reason of such delivery.
- However, transfer of uncertificated shares shall only be valid, so far
as the corporation is concerned, when a transfer is recorded in the
books of the corporation so as to show the names of the parties to
the transfer and the number of shares transferred.
However, nothing in this Code shall compliance by banking and other institutions under the
supervision of the Bangko Sentral ng Pilipinas and their stockholders with the applicable
ceilings on shareholding prescribed under pertinent banking laws and regulations.
44. Evidentiary Value of Clearing Agency Record. – The official records and book entries
of a clearing agency shall constitute the best evidence of such transactions between clearing
agency and its participants and memebrs, without prejudice to the rights of participants’ or
members’ clients to prove their rights, title and entitlement with respect to the book-entry
security holdings of the participants or members held on behalf of the clients.
However, the corporation shall not be bound by the foregoing transactions unless
the corporate secretary is duly notified in such manner as the Commission may
provide.
A pledge under this subsection has the effect of the delivery of a security in bearer form or
duly indorsed in blank representing the quantity or amount of such security or right pledged.
In the case of a registered clearing agency, the procedures by which, and the exact time at
which, such bookentries are created shall be governed by the registered clearing agency’s
rules. However, the corporation shall not be bound by the foregoing transactions unless the
corporate secretary is duly notified in such manner as the Commission may provide.
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Section 47. Power of the Commission With Respect to Securities Ownership. – The Commission
is authorize, having due regard to the public interest and the protection of investors, to promulgate rules
and regulations which:
1. Validate the transfer of securities by book-entries rather than the delivery of physical
certificates;
2. Establish when a person acquires a security or an interest therein and when delivery of a
security to a purchaser occurs;
3. Establish which records constitute the best evidence of a person’s interests in a security and
the effect of any errors in electronic records of ownership;
4. Codify the rights of investors who choose to hold their securities indirectly through a registered
clearing agency and/ or other securities intermediaries;
5. Codify the duties of securities intermediaries (including clearing agencies) who hold securities
on behalf of investors; and
6. Give first priority to any claims of a registered clearing agency against a participant arising
from a failure by the participant to meet its obligations under the clearing agency’s rules in
respect of the clearing and settlement of transactions in securities, in a dissolution of the
participant, and any such rules and regulation shall bind the issuers of the securities, investors
in the securities, any third parties with interests in the securities, and the creditors of a
participant of a registered clearing agency.
Where Kept
- Principal office of the corporation or in the office of its stock
transfer agent and shall be open for inspection to any
director or SH of the corporation at reasonable hours on
business days
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STB GIS
Submitted with SEC, included
certain individuals as SH of the
company
GIS alone does not conclusively
prove that they are SH
Information in this document will
still have to be correlated with the
corporate books
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REMEDIES
1. Mandamus: to compel the
corporations that wrongfully or
unjustifiably refuse to record the
transfer or to issue new CoS. It is
available even upon the instance of a
bona fide transferee who is able to
establish a clear legal right to the
registration of the transfer
PRESCRIPION ON CAUSE OF
ACTION
Begins to run only upon
demand for registration
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o Investment
- whether it be equity or debt, is an expenditure to acquire property or other assets in order
to produce revenue
- it is the placing of capital or laying out money in a way intended to secure income or profit
from its employment
o To invest
- To purchase securities of a more or less permanent nature, or to place money or property
in business ventures or real estate, or otherwise lay it out, so that it may produce a revenue
or income
o Sources of Investment
1. Equity
2. Debt Placements
The choice between equity sourcing and debt sourcing for the working funds
represents to the corporation the “cost burden” it has to carry in its operations
Both can be viewed as investment schemes by which the investor expects a return,
nevertheless, the motivation or impetus involved in each case is different
CAPITAL STOCK
o Outstanding Capital Stock
- means the total shares of stock issued under binding subscription agreements to
subscribers or stockholders, whether or not fully or partially paid, except treasury
shares (Sec. 137 of the CC)
o Capital Stock or ACS (SEC)
- amount fixed in the AOI that may be subscribed and paid by the SH of the
corporation. When shares are subscribed out of the ACS, that portion of the paid-up
capital arising from the subscriptions becomes the legal capital of the corporation
which cannot be returned to the SH in any form during the lifetime of the corporation
unless otherwise allowed by law
o Capital Stock
- It represents the interest and it is the property of the SH in the corporation, who can
only be deprived thereof in the manner provided by law
- it represents the legal and proportionate standing of the SH with respect to the
corporation and corporate matters, such as their rights to receive votes and to
receive dividends
- It represents the total financial or propriety claim of the SH to the net assets of the
corporation upon dissolution (financial aspect)
- It represents the totality of the portion of the corporation’s assets and receivables
which are covered by the trust fund doctrine and provide for the amount of assets
and receivables of the corporation which are deemed protected for the benefit of the
corporate creditors and from which the corporation cannot declare any dividends
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-Composed of 2 items:
1. The portion which have been paid by the SH, represented by the account “Paid-
Up Capital”
2. The portion which is to be paid on the subscriptions, represented by the
account “subscription receivables”
o Capital (PLDT vs NTC)
- Refers to the value of the property or assets of the corporation
o Capital Subscribed (PLDT vs NTC)
- Total amount of the capital that persons have agreed to take and pay for, which
need not necessarily be, and can be more than, the par value of the shares
- It is the amount that the corporation receives, inclusive of the premiums, if any, in
consideration of the original issuance of shares
- In case of stock dividends, it is the amount that the corporation transfers from its
surplus profits account to its capital account. It is the same amount that can be
loosely termed as the “trust fund” of the doctrine
o Paid-Up Capital
- Portion of the ACS which has been both subscribed and paid
- It forms part of he ACS, subscribed and then actually paid up
CLASSIFICATION OF SHARES
Section 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 nonassessable
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.
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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.
Kinds of Shares
1. COMMON
- They generally represent the greatest proportion of the corporation’s capital
structure and bear the greatest risk of loss in the event of the failure of the enterprise
- The residual ownership interest in the corporation, a basic class of stock ordinarily
and usually issued without extraordinary rights or privileges and entitles the
shareholder to a pro rata division of profits
2. PREFERRED
- One which entitles the holder thereof to certain preferences over the holders of
common stock, designed to induce persons to subscribe for shares of a corporation
- It may be issued only with a stated par value
- It is given with preference in the distribution of assets of the corporation in case of
liquidation and in the distribution of dividends, or such other preferences as may be
stated in the AOI which do not violate the provisions of the Corporation Code
COMMON PREFERRED
Both represents a contribution to the capital of the corporation
A PS is no more a debt than common stock,
and until a dividend is declares the holder of
PS is not a creditor of the corporation
The rights of Preferred SH are still subordinate
to the rights of the creditors of the corporation
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- Entitlement to Preferences
The preference lawfully granted to preferred shares must be interpreted
and construed in accordance with applicable Corporate Law doctrines, and
cannot be deemed absolute
3. REDEEMABLE SHARES
- 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.
- Republic Planters Bank vs Agana: When the Certificate of Stock recognizes
redemption, but the option to do so is clearly vested in the corporation, the
redemption is clearly the type known as “optional” and rest entirely with the
corporation, and that the SH is without right to either compel or refuse the
redemption of his shares of stock
- SEC Rules Governing Redeemable and Treasury Shares: defined redeemable
shares as those which the corporation can purchase or take up from their holders as
expressly provided for in its AOI and CoS representing said shares
o All corporations which have issued redeemable shares with mandatory
redemption features are required to set up and maintain a sinking fund,
which shall be deposited with a trustee bank and not be invested in risky
or speculative ventures
o Redeemable shares may be redeemed, regardless of the existence of
unrestricted retained earnings, provided that the corporation has, after
such redemption, sufficient assets in its books to cover debts and liabilities
inclusive of capital stock.
o Redeemable shares reaquired shall be considered retired and no longer
issuable unless otherwise provided in the AOI of the redeeming
corporation
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4. FOUNDERS’ SHARE
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.
- They are issued basically to the founders or initial organizers of the corporation
- What makes the shares as founders’ shares would be that they are given the
exclusive rights not given to other SH, and specially the right to vote and be voted
for in the election of the directors. The existence of founders’ shares must necessarily
include the fact that there are other shares that do not enjoy such rights, and would
necessarily include the existence of common shares, which ordinarily would have the
right to vote and be voted in the BOD. That would have been the rational basis for
the restriction under Sec. 7 that such exclusive rights shall not exceed 5 years and
subject to the approval of SEC
6. TREASURY 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.
- SEC has opined that:
a. TS have no effect on the stated capital of the corporation unless and until they
are cancelled or retired, in which event the stated capital is reduced by the
amount then representing the shares
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- Features of TS
a. TS are stocks issued and fully paid doe and re-acquired by the corporation
either by purchase, donation, forfeiture and other means
b. TS are issued shares, but being treasury, they do not have the status of
outstanding shares
c. It may be re-issued or sold again, as long as it is held by the corporation as
treasury shares, participates neither in dividends, bc such cannot be declared
by the corporation to itself, nor in the meetings of the corporation as voting
stock, for otherwise, equal distribution of voting powers among SH will be
effectively lost and the directors will be able to perpetuate their control of the
corporation, though it still represents a paid-for interest in the property of the
corporation
7. ESCROW
o Those held by a third person to be released only upon the performance of a condition or
the happening of a certain event contained in the agreement
o SEC opined:
- Holders of escrow shares are not entitled to the rights of a SH until the conditions
set forth for the release of such shares are fully met
- Holders thereof have no right to vote or to have notice of the SH meeting
- Reason: The shares he is supposed to be entitled to are not yet actually issued to
him, thus, he is not yet the owner of said shares and consequently, he cannot be
accorded the rights belonging to a regular SH
- It does not form part of the issued SoS or the OCS of the corporation, as to be within
the operative coverage of the trust fund doctrine
- Not only are escrow shares not considered issued shares, but they are deemed to
be not covered by a subscription agreement
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HYBRID SECURITIES
o Sources of Capital Formation
1. Debt
2. Equity Investment Securities
Equity Securities
Represent an ownership interest in the corporation and include both common
and preferred stock. In addition, corporations finance much of their continued
operations through debt securities
ift
G.R: Equity securities payments, being dividends are not tax
deductible to the corporation
Exc: Equity securities usually grant a voting right to the holder,
allowing participation in certain management aspects of the
corporation. Also, dividends are subject to zero-rate of income tax;
while interest paid on debt securities are generally taxable to the
holder thereof.
Debt Securities
Bonds
Do not represent an ownership interest in the corporation, but rather create
a debtor-creditor relationship between the corporation and bondholder
Advantages:
1. Allows a return to the investor whether or not the corporation has
unrestricted retained earnings.
2. Interest paid on the debt securities is deductible to the corporation for
income tax purposes
Historical Background
The capital stock of banks is to be deemed a pledge or trust fund for the
payment of the debts contracted by the bank (Wood vs Drummer)
The capital stock of the corporation, especially its unpaid subscription, is a
trust fund for the benefit of the general creditors of the corporation (New
Albany vs Burke)
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The proper scope of the trust fund doctrine is that the capital stock of
a corporation, as well as its other property and assets are generally regarded
in equity as a trust fund for the payment of corporate debts, the creditors of
the corporation have the right to priority payment over any SH thereof
Lumahan vs Cura
“The capital stock of a corporation, or the assets of an insolvent corporation
representing its capital, is a trust fund for the benefit of the company’s creditors.”
Sec 122, CC
Sec. 122. Corporate liquidation. - Every corporation whose charter expires
by its own limitation or is annulled by forfeiture or otherwise, or whose corporate
existence for other purposes is terminated in any other manner, shall
nevertheless be continued as a body corporate for three (3) years after the time
when it would have been so dissolved, for the purpose of prosecuting and
defending suits by or against it and enabling it to settle and close its affairs, to
dispose of and convey its property and to distribute its assets, but not for the
purpose of continuing the business for which it was established.
At any time during said three (3) years, the corporation is authorized and
empowered to convey all of its property to trustees for the benefit of
stockholders, members, creditors, and other persons in interest. From and after
any such conveyance by the corporation of its property in trust for the benefit of
its stockholders, members, creditors and others in interest, all interest which the
corporation had in the property terminates, the legal interest vests in the
trustees, and the beneficial interest in the stockholders, members, creditors or
other persons in interest.
Upon the winding up of the corporate affairs, any asset distributable to any
creditor or stockholder or member who is unknown or cannot be found shall be
escheated to the city or municipality where such assets are located.
Except by decrease of capital stock and as otherwise allowed by this Code, no
corporation shall distribute any of its assets or property except upon lawful
dissolution and after payment of all its debts and liabilities
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Halley vs Printwell
Under the trust fund doctrine, a corporation has no legal capacity to
release an original subscriber to its capital stock from the obligation of
paying for his shares, in whole or in part, without a valuable
consideration, or fraudulently, to the prejudice of creditors.
Capital Stock
The protective reach of the TFD, when the
corporation is not in a state of insolvency, would only
be up to the extent of the capital stock of the
corporation
Since retained earnings, although part of the SH’s
equity, do not constitute part of the capital stock, it is
not covered by the doctrine, and the corporation is at
liberty to declare and pay assets to the SH by way of
dividends up to the extent of its URE
(Corporation Code) Sec. 137. Outstanding
capital stock defined. - The term "outstanding
capital stock", as used in this Code, means the total
shares of stock issued under binding subscription
agreements to subscribers or stockholders, whether
or not fully or partially paid, except treasury shares
SEC: The amount fixed in AOI to be subscribed and
paid up by the SH of the corporation
In Accounting: CS is deemed to cover only legal
capital
a. Par Value Stock, CS, or LC
- Represented by the aggregate par
value of all shares issued and
subscribed
- If the par value shares are sold at a
premium, the excess is not treated as
legal capital; but, it can only be
declared as stock dividends and not
any other form of dividends
b. No-Par Value Stock
- The legal capital is the total
consideration received for the shares
of stock
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FRAUD THEORY
o The actionable wrong is the fraud or misrepresentation by directors, officers or SH in falsely
representing that the capital stock has been fully paid or covered by binding subscription
contracts
o Only creditors who may have been defrauded are entitled to relief; creditors who had notice
are not protected
o The directors of a corporation are personally liable to reimburse to the corporate officers the
amounts of dividends wrongfully declared and paid to the SH, when they failed to consider
that the recorded retained earnings in the books of the corporation was illusory considering
that the various accounts receivables should have considered as non-collectible bad debts that
their writing off would have resulted in the corporate finances sustaining a deficit. ( Steinberg
vs Velasco)
o The personal liability adjudged each of the directors was based on the theory that fraud was
exercised against the corporate creditors who had the right to assume that so long as there
are outstanding debts and liabilities, the BOD will not use the assets of the corporation to
purchase its own stocks, and that it will not declare dividends to SH when the corporation is
insolvent
DIVIDENDS
o 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
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c. Report to SEC
Be it enacted by the Senate and House of Representatives of the Philippines in Congress assembled:
SECTION 1. Declaration of Policy. – It is hereby declared the policy of the State that in order for the
National Government to realize additional revenues, government-owned or -controlled corporations,
without impairing their viability and the purposes for which they have been established, shall share a
substantial amount of their net earnings to the National Government.
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(a) “National Government” refers to the entire machinery of the central government, as distinguished from
the different forms of local governments.
(c) “Acquired asset corporation” refers to a corporation: (1) which is under private ownership, the voting
or outstanding shares of which were: (i) conveyed to the Government or to a government agency,
instrumentality or corporation in satisfaction of debts whether by foreclosure of otherwise, or (ii) duly
acquired by the Government through final judgment in a sequestration proceeding; or (2) which is a
subsidiary of a government corporation organized exclusively to own and manage, or lease, or operate
specific physical assets acquired by a government financial institution in satisfaction of debts incurred
therewith, and which in any case by law or by enunciated policy is required to be disposed of to private
ownership within a specified period of time.
(d) “Net earnings” shall mean income derived from whatever source, whether exempt or subject to tax,
net of deductions allowed under Section 29 of the National Internal Revenue Code, as amended, and
income tax and other taxes paid thereon, but in no case shall any reserve for whatever purpose be
allowed as a deduction from net earnings.
SEC. 3. Dividends. – All government-owned or -controlled corporations shall declare and remit at least
fifty percent (50%) of their annual net earnings as cash, stock or property dividends to the National
Government. This section shall also apply to those government-owned or -controlled corporations whose
profit distribution is provided by their respective charters or by special law, but shall exclude those
enumerated in Section 4 hereof: Provided, That such dividends accruing to the National Government
shall be received by the National Treasury and recorded as income of the General Fund.
SEC. 5. Flexible Clause. – In the interest of national economy and general welfare, the percentage of
annual net earnings that shall be declared by a government-owned or -controlled corporation may be
adjusted by the President of the Philippines upon recommendation by the Secretary of Finance.
SEC. 6. Penalty. – Any member of the governing board, the chief executive officer and the chief financial
officer of a government-owned or -controlled corporation who violates any provision of this Act or any of
the implementing rules and regulations promulgated thereunder, in addition to other sanctions provided
by law, upon conviction thereof, shall suffer the penalty of a fine not less than Ten thousand pesos
(P10,000.00) but not more than Fifty thousand pesos (P50,000.00) or imprisonment of not less than one
(1) year but not more than three (3) years, or both, at the discretion of the court.
SEC. 7. Implementing Rules and Regulations. – The Department of Finance shall formulate and issue
the necessary rules and regulations within sixty (60) days from the effectivity of this Act and shall exercise
primary jurisdiction in its implementation.
SEC. 8. Separability Clause. – If for any reason or reasons any part of the provision of this Act shall be
deemed to be unconstitutional or invalid, the other parts or provisions hereof which are not affected
thereby shall continue to be in force and effect.
SEC. 9. Repealing Clause. – Executive Order No. 399, dated April 29, 1990, and other laws, decrees,
executive orders, letters of instruction, rules and regulations, and portions thereof inconsistent with the
provisions of this Act are hereby repealed or modified accordingly.
SEC. 10. Effectivity Clause. – This Act shall take effect fifteen (15) days after its publication in the Official
Gazette or in at least two (2) national newspapers of general circulation, whichever comes earlier.
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NATURE OF DIVIDENDS
o Stock Corporation
- Exists to make profits and to distribute a portion of the profits to its SH
- X
Dividends:
portion of the profits of a corporation set aside, declared and ordered by
the directors to be paid ratably to the SH on demand or at a fixed time
It is a payment to the SH of a corporation as a return upon their investment
Cojuangco vs Sandiganbayan: part of portion of the profits of the
enterprise which the corporation, by its governing agents, sets apart for
ratable division among the holders of a capital stock. It is a payment to the
SH of a corporation as a return upon their investment, and the right thereto
is an incident of ownership of stock”
o Dividends vs Profits
DIVIDENDS PROFITS
Dividend is that portion of the profits or net Profits include benefits of any kind, the
earnings which the stock corporation has set excess of the value over cost, acquisition
aside for ratable distribution among the beyond expenditures, gain, or advance
stockholders.
It comes from profits It is not a dividend until so declared or set
aside by the corporation
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KINDS OF DIVIDENDS
CASH Cash Dividends may be declared by the BOD under a formal resolution and does
not require the approval or ratification of the SHs
Any cash dividends due on delinquent stock shall first be applied to the unpaid
balance on the subscription plus costs and expenses
As soon as cash dividends are publicly declared, the SH have the rights to their pro
rata shares
In the absence of a record date, the dividend belongs to the SH at the time of the
declaration. When such declaration is made, the corporation becomes a debtor and
the right of the SH to distribution unless a record date is specified becomes fixed by
the declaration.
When cash dividend is duly declared, the amount due to the SH belongs to him and
it cannot, without his consent, be reverted to the surplus account of the corporation.
STOCK Stock Dividends are of issuance by the corporation of shares from the unissued
portion of the ACS, the consideration for which is the amount of unrestricted retained
earnings converted into equity in the corporation’s books
- SC is a dividend paid in shares of stocks, instead of cash, and is properly
out of surplus profit
- SC is actually of 2 things:
a. Dividend
b. The enforced used of the dividend money to purchase additional shares
of stock at par
Any stock dividends on delinquent stocks shall be withheld from delinquent SH untl
his unpaid subscription is fully paid
Stock dividends may be revoked prior to the actual issuance thereof. In the case
of scrip dividend declaration, they are just like stock dividends, revocable before
actual issuance.
RATIONALE
- TS may be availed of to perpetuate control of the enterprise without the expensive
requisite of a majority of voting stock. Since TS cannot be voted upon, by using
corporate funds to purchase the majority shares and retire them from the voting
arena, what was before a majority in the controlling group can be converted into
a majority and their control may thereby be continued indefinitely.
o Methods of Quasi-Reorganization
1. The use of appraisal surplus of a corporation’s assets to wipe-out its deficit or negative
retained earnings, and
2. By the reduction of a corporation’s capital stock through the formal filing of an application
for amendment of its articles of incorporation with the SEC
WARRANTS Definition: a type of security which entitles the holder the right to subscribe to the
unissued capital stock of a corporation or to purchase issued shares in the future,
as evidenced by the Warrant Certificate, whether detachable or not, which may be
sold or offered for sale to the public, but does not apply to a right granted under an
Option Plan duly approved by the SEC for the benefit of employees, officers and/or
directors of the issuing corporation
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Warrant Certificate
It is a certificate representing the right to a warrant which may be
detachable or not, duly issued by the issuer to the warrantholder
Warrant Holder
He may exercise their right granted under a warrant within the period
approved by SEC which shall not be less than 1 year, nor more than 5
years from the date of the issue of the warrants
The exercise of price of warrants shall be the price per share at which the issuer
is required to sell the underlying shares, upon the exercise of the rights granted in
the warrant, which shall be at a price fixed at the time of the application for
registration of the warrant or computed using the stated formula approved by the
SEC
Exercise price must be paid in full upon exercise, and shall not be less than the
par value of the Underlying Shares, or not less than 5.00 per share, if the
Underlying shares are without par value
All warrants authorized for issuance by the SEC shall be transferable without need
of approval from SEC
Issuer of Warrants must provide for a Warrants Registry Book, maintained by the
warrants registrar independent of the issuer. Any sale, transfer, assignment or a
warrant must be duly recorded in the WRB, and unless recorded therein, the
transfer of warrants shall not be binding upon the issuer
Stock Options Definition: privilege granted to a party to subscribe to a certain portion of the
unissued capital stock of a corporation within a specified period and under the
terms and conditions of the grant, exercisable by the grantee at any time within the
period granted
Requirements:
1. Formal Board Reso, authorizing the grant of option
2. Application with SEC should contain a detailed statement as to the plan
or scheme by which the option shall be exercised
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Stock Splits
Stock
Consolidation
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Stock
Reclassification
and Exchange
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INTRODUCTION
Contractual Relationships Governed by the Law on Sales
1. Acquisitions
2. Sales and Transfers
3 Levels by which the acquisitions or transfers may be affected
a. Assets-Only
b. Business-Enterprise
c. Equity
Liabilities-succession effect
of business enterprise
transfers are contrary to the
rules on the primary
doctrine of separate
juridical personalities under
Corporate Law: that the
liabilities and obligations of
one juridical entity do not
pertain to another separate
entity
Where the transaction Pertains to succession
amounts to a consolidation rules
or merger of the
corporation
The following rules apply to the enforceability of liabilities against the transferee
regardless of the separate juridical personalities of the transferor and the transferee,
thus:
1. In a pure ASSETS-ONLY TRANSFER, the transferee shall not be liable for the liabilities of
the transferor, except where the transferee expressly or impliedly agrees to assume such
debts or when it is effected in fraud of creditors
3. In an EQUITY TRANSFER, the transferee is not liable for the debts and liabilities of the
transferor, except where the transferee expressly or impliedly agrees to assume such debt.
Governing Law
- Law on Sales
- Law on Contracts
o No contractual privity
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Business enterprise
- Has a separate accountability of its own, although not in the concept of being
a juridical person
- It comprises more than just the properties of the business, but it included a
“going concern”
o Concern covers:
Employees
Good will
List of clientele and suppliers
o These concerns which give it value separate and distinct from its
owners or the juridical entity under which it operates. This is termed
as the economic unit, or the enterprise or the going concern or the
financial unit, recognized in both Accounting and Economics
Accounting
1. Although a business enterprise is carried on in
the form of a single proprietorship, it is
considered and accounted for as a separate
accounting unit apart from the other assets
and businesses of the proprietor
- It is by itself a going concern that has a separate economic or selling value
from its owners’ other assets; and that the businessmen evaluating whether
to purchase such business enterprise do not only look at the properties of the
business, but many other intangibles that really have no definite monetary
value, except when expressed as good will and assigned a value under the
principles of accounting, such as moral and technical competence of the
employees and middle-management, the list of its valued clientele, location
of the business, etc
- Villa Rey Transit vs Ferrer recognized that when a purchaser buys the business
of another as a going concern, he usually wishes to keep it going; he wishes
to get the location, the building, the stock in trade and the customers; he
wishes to step into the seller’s shoes and to enjoy the same business relations
with another men. The buyer is willing to pay much more if he can get the
good will of the business, meaning by this good will of the customers, that
they may continue to tread the old footpath to his door and maintain with him
the business relations enjoyed by the seller.
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“It is pointed out that under the common law, if one corporation
sells or otherwise transfers all its assets to another corporation, the
latter is not liable for the debts and liabilities of the transferor if it
has acted in good faith and has paid adequate consideration for the
assets, except:
1. Where the purchaser expressly or impliedly agrees to assume
such debts
2. Where the transaction amounts to a consolidation or merger
of the corporations
3. Where the purchasing corporation is merely a continuation of
the selling corporation
4. Where the transaction is entered into fraudulently in order to
escape liability for such debts
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EQUITY Essence
TRANSFERS - Equity acquisition or transfer constitutes of looking at the entirety of the
business enterprise as it is owned and operated by the corporation
- The purchaser takes control and ownership of the business by purchasing
the controlling shareholdings of the corporate owner
- The control of the business enterprise is therefore indirect, since the
corporate owner remains the direct owner of the business, and what the
purchaser has actually purchased is the ability to elect the members of the
BOD of the corporation which runs the business
- Motive of the Transaction: ability to take control of the underlying business
enterprise
Rationale:
- By purchasing the shares in a corporation that owns a business, the SH does
not by that reason alone become the owner directly of the business assets
and does not become personally liable for the debts and liabilities of the
business
- Buyer of the controlling equity in the corporation may take advantage of he
limited liability feature of the corporate set-up
Application
- GR: Transferee is not liable for the liabilities of the transferor
- EXC: The transferee expressly or impliedly agreed to it, or there is a basis
for piercing the veil
2. Comparison
CONSOLIDATION MERGER
It is the union of 2 or more existing
It is a union whereby one or more existing
corporations to form a new corporation corporations are absorbed by another
called the consolidated corporation. corporation which survives and continues
It is a combination by agreement between the combined business
2 or more corporation by which their In the merger of 2 or more existing
rights, franchises, privileges and corporations, one of the corporation
properties are united and become those survives and continues the combined
of a single, new corporation, composed business, while the rest are dissolved and
generally, although not necessarily, of the all their rights, properties and liabilities are
SH of the original corporations acquired by the surviving corporation
Merger is the reorganization of 2 or more
corporations that results in their
consolidating into a single corporation,
which is one of the constitutent
corporations, one disappearing or
dissolving and other surviving
It is the absorption of one or more
corporations by another existing
corporations, which retains its identity and
takes over the rights, privileges, franchises,
properties, claims, liabilities and
obligations of the absorbed corporations.
The absorbing corporation continues its
existence while the lives of others are
terminated
Parties: Constituent Corporations
All constituent corporations are dissolved and All constituent corporations, except the
absorbed by the new consolidated enterprise surviving corporation, are dissolved
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There is no liquidation of the dissolved corporations, and the surviving corporation assumes
ipso jure the liabilities of the dissolve corporation, regardless of whether the creditors have
consented or not to such merger or consolidation
b. SH or Members’ approval
- Reqs:
1. Upon approval by majority of vote of each of the BOD of the constituent
corporations of the plan of merger or consolidation, the same shall be
submitted for approval by the SH or members of each of such corporations at
separate corporate meetings duly called for the purpose
2. Notice of such meetings shall be given to all SH or members of the respective
corporations, at least 2 weeks prior to the date of the meetings, either
personally or by registered mail. Said notice shall state the purpose of the
meeting and shall include a copy or a summary of the plan or merger or
consolidation, as the case may be.
3. Affirmative vote of the SH representing at least 2/3 of the OCS of each
corporation in the case of stock corporations, or at least 2/3 of the members
in the case of the non-stock corporations, shall be necessary for the approval
of such plan
4. In stock corporations, SEC has opined that the vote for the approval of the
merger cannot be made by mail or similar means.
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SPIN-OFFS
- A spin-off exists when a parent corporation organizes a subsidiary, to which the parent corporation
transfers parts of its assets to a new corporation and stock of transferee is distributed to
shareholders of transferors without surrender by them of stock in transferor
- It is one whereby a department, division or portions of the corporate business enterprise is sold
off or assigned into a new corporation that will arise by the process which may constitute it into a
subsidiary of the original corporation
- It is one where part of assets of corporation is transferred to a new corporation and stock of
transferee is distributed to SHs of transferor without surrender by them of stock in the transferor
- Not regulated by the CC
Compulsory Notification
Section 17. Compulsory Notification. – Parties to the merger or acquisition agreement referred to in the
preceding section wherein the value of the transaction exceeds one billion pesos (P1,000,000,000.00)
are prohibited from consummating their agreement until thirty (30) days after providing notification to the
Commission in the form and containing the information specified in the regulations issued by the
Commission:
Provided, That the Commission shall promulgate other criteria, such as
increased market share in the relevant market in excess of minimum thresholds,
that may be applied specifically to a sector, or across some or all sectors, in
determining whether parties to a merger or acquisition shall notify the
Commission under this Chapter.
An agreement consummated in violation of this requirement to notify the Commission shall be considered
void and subject the parties to an administrative fine of one percent (1%) to five percent (5%) of the value
of the transaction.
Should the Commission deem it necessary, it may request further information that are reasonably
necessary and directly relevant to the prohibition under Section 20 hereof from the parties to the
agreement before the expiration of the thirty (30)-day period referred. The issuance of such a request
has the effect of extending the period within which the agreement may not be consummated for an
additional sixty (60) days, beginning on the day after the request for information is received by the parties:
Provided, That, in no case shall the total period for review by the Commission
of the subject agreement exceed ninety (90) days from initial notification by the
parties.
When the above periods have expired and no decision has been promulgated for whatever reason, the
merger or acquisition shall be deemed approved and the parties may proceed to implement or
consummate it. All notices, documents and information provided to or emanating from the Commission
under this section shall be subject to confidentiality rule under Section 34 of this Act except when the
release of information contained therein is with the consent of the notifying entity or is mandatorily
required to be disclosed by law or by a valid order of a court of competent jurisdiction, or of a government
or regulatory agency, including an exchange.
In the case of the merger or acquisition of banks, banking institutions, building and loan associations,
trust companies, insurance companies, public utilities, educational institutions and other special
corporations governed by special laws, a favorable or no-objection ruling by the Commission shall not be
construed as dispensing of the requirement for a favorable recommendation by the appropriate
government agency under Section 79 of the Corporation Code of the Philippines.
A favorable recommendation by a governmental agency with a competition mandate shall give rise to a
disputable presumption that the proposed merger or acquisition is not violative of this Act.
Section 20. Prohibited. Mergers and Acquisitions. – Merger or acquisition agreements that substantially
prevent, restrict or lessen competition in the relevant market or in the market for goods or services as
may be determined by the Commission shall be prohibited.
If within he relevant periods under the Act, PCC determines that such
agreements if a Prohibited Merger or Acquisition, and does not qualify for
Exemption from Prohibited Mergers and Acquisition, it may prohibit the:
1. Implementation of the agreement
2. Implementation of the agreement, unless and until it is modified by
changes specified by PCC
3. Implementation of the agreement, unless and until the pertinent party or
parties enter into legally enforceable agreements specified by PCA
Section 21. Exemptions from Prohibited. Mergers and Acquisitions. – Merger or acquisition agreement
prohibited under Section 20 of this Chapter may, nonetheless, be exempt from prohibition by the
Commission when the parties establish either of the following:
(a) The concentration has brought about or is likely to bring about gains in efficiencies that are
greater than the effects of any limitation on competition that result or likely to result from the
merger or acquisition agreement; or
(b) A party to the merger or acquisition agreement is faced with actual or imminent financial
failure, and the agreement represents the least anti-competitive arrangement among the known
alternative uses for the failing entity’s assets:
Provided, That an entity shall not be prohibited from continuing to own and hold the stock or other share
capital or assets of another corporation which it acquired prior to the approval of this Act or acquiring or
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maintaining its market share in a relevant market through such means without violating the provisions of
this Act:
Provided, further, That the acquisition of the stock or other share capital of one or more corporations
solely for investment and not used for voting or exercising control and not to otherwise bring about, or
attempt to bring about the prevention, restriction, or lessening of competition in the relevant market shall
not be prohibited.
Dadeco Case
- There is no law requiring that the purchaser should absorb the
employees of the selling company
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employees and the existing CBA, if any, would have to be absorbed by the
surviving or consolidated corporation.
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