CORPORATION LAWS

---------------------------------------------------------------------Contents: 1. Corporation Code 2. Revised Securities Code (PD 902-A) 3. Interim Rules of Procedure on Corporate Rehabilitation 4. Securities Regulation Code (RA 8799) 5. Interim Rules of Procedure on IntraCorporate Controversies under RA 8799

law that creates it. Consent of the state is needed. If not made by operation of law, it becomes a corporation by estoppel.

b.

Artificial being. It is not a natural person. It is not liable for the acts of its stockholders or members.

c.

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Powers, attributes and properties. Acquire real/personal properties. Powers: (a) Those expressly authorized by law. 1. Secs. 36-44 Corporation Code; 2. Articles of Incorporation/By laws; (b) Those incidental to its existence; 1. Those implied from its express powers; 2. Those fairly related or incidental to its existence, direct or immediate to the furtherance of the corporations business. Requirements so that a private corporation could hold real properties in the Philippines: 1. 60% shareholdings should at least belong to Filipinos. It is the extent of shareholdings and not the number of persons. 40% shareholdings for aliens; 2. Place of incorporation should be in the Philippines. If incorporated outside the Philippines even if 60% of the shareholdings is Filipino owned, it is a foreign corporation. If incorporated in the Philippines but less 60% stock is Filipino owned it is a Philippine (domestic) corporation, but it could not acquire real properties in the Philippines. Acquired properties belong to the corporation, not to the stockholders/members, because of its separate and distinct personality.

1. CORPORATION CODE of the Philippines

(BP Blg. 68, effective May 01, 1980)
I. II. III. IV. V. VI. VII. VIII. IX. X. XI. General Provisions Incorporation and Organization of Private Corporations Board of Directors/Trustees/Officers Powers of Corporation By-Laws Meetings Stocks and Stockholders Corporate Books and Records Merger and Consolidation Appraisal Right Non-Stock Corporations a. Members b. Trustees and Officers c. Distribution of Assets in Non-Stock Corporations Close Corporations Special Corporations a. Educational Corporations b. Religious Corporations Dissolution Foreign Corporations Miscellaneous Provisions

XII. XIII. XIV. XV. XVI.

d.

Right to succession. The corporation is not affected by anything that happens to its stockholders (insolvency, death, incapacity, etc). It continues to exist for the term stated in its articles of incorporation except when earlier dissolved.

-------------------------------------------------------I. GENERAL PROVISIONS A. CORPORATION DEFINED CORPORATION -It is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence (Sec. 2). Attributes of a Corporation: CAPS 1. Created by operation of law 2. Artificial being 3. Powers, attributes and properties expressly authorized by law or incident to its existence 4. Right to Succession

Right of Stockholders in Corporate Property a. There is no real interest in the corporate property. It is a mere expectancy inchoate in nature; b. It ripens into real right only upon dissolution of the corporation on the assumption that all debts are already paid; SUIT A corporation cannot represent its stockholders in a suit. Gen. Rule: A corporation is not entitled to a claim for moral damages. Reason: Being an artificial person, it cannot experience physical suffering or such sentiments as wounded feelings, serious anxiety, mental anguish or moral shock. Mental suffering can be experienced only by one having a nervous system. Exception: If the good reputation of a corporation is debased or besmirched resulting in social humiliation, this may be a ground for recovery of moral damages and attorneys fees. DOCTRINE OF SEPARATE PERSONALITY

a.

Created by operation of law. No Private Corporation could validly exist unless there is a

- A corporation has a juridical personality separate and distinct from that of its stockholders or members. - Used for purposes of convenience and to subserve the ends of justice. Consequences: 1. Ownership of property, capacity to sue and be sued in its own right (Art. 46, NCC); 2. Entitlement to constitutional rights; eg. Due process, equal protection; 3. Liability for crimes or torts; 4. Cannot always claim equal rights with natural persons; i.e. entitlement to moral damages. PIERCING THE VEIL OF CORPORATE FICTION - This doctrine allows the State to disregard the fiction of juridical personality of the corporation where the entity is formed or used for nonlegitimate purposes. GROUNDS: 1. Where corporate fiction is used to defeat public convenience; Corporate Fiction is a personality separate from the stockholders/members. Public Convenience: Instead of dealing with all the individual stockholders, it is for public convenience to deal with the corporation alone. 2. Where corporate fiction is used to justify a wrong, to protect fraud, or to defend a crime; 3. Where the corporation serves as a mere alter ego of another person; 4. Where the corporation serves merely as an instrument of another corporation. 5. Where the corporation is controlled by aliens, in violation of the law as where it was organized under Philippine laws but most of its stockholders are Germans (normally a Filipino corporation), the Supreme Court went beyond the corporate fiction during the war and considered it as an enemy corporation. Alter Ego or Instrumentality Rule Requisites: 1. There must be control, not merely majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; (control) 2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiffs legal right (breach of duty) ; and 3. Such control and breach of duty must proximately cause the injury to the plaintiff. In piercing the veil, the stockholders become liable instead of the corporation. >Dont immediately pierce the veil just because a ground exists. Determine first the facts and circumstance. STEPS: A. Determine first the following Items: 1. Common Ownership 2. Identity of directors; 3. Manner of keeping records;

4. business. B. fiction?

Manner

of

conducting

Is there a misuse of corporate

** The mere control by a single person of the majority shares is not a ground to pierce the veil [Sunio vs. NLRC, 127 SCRA 390
(1984)]

Evidence of fraud must be proven clearly and convincingly [Del Rosario vs. NLRC, 182
SCRA 777 (1990)]

Purpose of Piercing the Veil To seek satisfaction of an obligation directed against the stockholders; Umali case [182 SCRA 529 (1990)]: Direct always the action against the stockholders: If directed against the corporation, you cannot anymore pierce the veil. A suit cannot be brought against the corporation to satisfy the obligation of its stockholders. Net Effect of Piercing the Veil Only One Corporation: Liability attaches to its stockholders; Two or more Corporations: The court treats them as only one. B. CLASSES OF CORPORATIONS 1. As to existence of shares of stock a. Stock Corporation a corporation (1) which has capital stock divided into shares and (2) is authorized to distribute to the shareholders dividends or allotments of the surplus profits on the basis of the shares held. (Sec. 3) b. Non-Stock Corporation a corporation which does not issue stock and distribute dividends to its members. 2. As to number of persons composing the corporation a. Corporation Aggregate a corporation consisting of more than one member or corporator. b. Corporation Sole a religious corporation which consists of one member or corporator only and his successors, such as a bishop. (Sec. 110) 3. As to legal status a. De Jure Corporation organized in accordance with the requirements of law; existing both in fact and in law. b. De Facto Corporation organized with a colorable compliance with the requirements of a valid law; existing in fact but not in law. Its existence cannot be inquired collaterally. Such inquiry may be made by the Solicitor General in a quo warranto proceeding. (Sec. 20) Why quo warranto? -It is the States right and authority which are invaded and usurped; -It would produce endless confusion and hardship and probably destroy the corporation if the legality of its existence could be questioned in every suit; -The rule is in the interest of the public and is essential to the validity of business transactions with corporations. How can there be a de facto status? a. Defect in the acknowledgement; b. Incomplete requirements;

c.

Residency requirement is overlooked; But it was still issued a certificate of incorporation.

Requisites of a de facto corporation: 1. Existence of a valid law under which it may be incorporated; 2. A bona fide attempt in good faith to incorporate under such law; 3. Actual use or exercise in good faith of corporate powers; and 4. Issuance of a certificate of incorporation by the SEC as a minimum requirement of good faith. A de jure corporation can successfully resist a suit by the State brought to challenge its existence; a de facto cannot sustain its right to exist. c. Corporation by Estoppel - a group of persons that assumes to act as a corporation knowing it to be without authority to do so, and enters into a transaction with a third person on the strength of such appearance. It is precluded to deny its existence in an action under said transaction. It is neither a de jure or de facto corporation. (Sec. 21) Doctrinal Basis: It is founded on principles of equity and is designed to prevent injustice and unfairness. It applies when persons assume to form a corporation and exercise corporate functions and enter into business relations with third persons. d. Corporation by Prescription one which has exercised corporate powers for an indefinite period without interference on the part of the sovereign power and which by fiction of law is given the status of a corporation, e.g. Roman Catholic Church. 4. As to relationship of management and control a. Parent/Holding Corporation one which controls another as a subsidiary by the power, either directly or indirectly, to elect management. It is one that holds stocks in other companies for purposes of control rather than for mere investment. b. Subsidiary Corporation 1. Majority-owned Subsidiary its capital stock (51% to 94%) is owned by another corporation. 2. Wholly-Owned Subsidiary its capital stock (95% to 100%) is owned by another corporation. c. Affiliates companies subject to the common control of the Holding Corporation. d. Parent and Subsidiary Corporation separate entities with power to contract with each other. The BOD of the Parent Company determines its representatives to attend and vote in the stockholders meeting of its subsidiary. The stockholders of the Parent company demand representation in the Board meetings of its subsidiary. 5. As to place of incorporation a. Domestic Corporation a corporation formed, organized, or existing under Philippine laws. b. Foreign Corporation a corporation formed, organized or existing under any laws other than those of the Philippines. (Sec. 123) 6. As to Functions

a. Public Corporation one formed or organized for the government of a portion of the State for the general good and welfare. b. Private Corporation those formed for private purpose, usually for profit-making. Private corporation includes: 1. Government owned or controlled corporation one created or organized by the government or of which the government is the majority stockholder; it is not for the government of a portion of the State, e.g. GSIS, SSS, PNRC 2. Quasi-Public Corporation (a.k.a. public utility or public service corporation) a private corporation which have accepted from the State the grant of franchise or contract involving the performance of public duties but which are organized for profit. e.g. electric, water, telephone and transportation companies. Officers and employees of GOCCs with original Charter (created by special law) = under Civil Service Those incorporated under the Corporation Code , governed by the Labor Code. (Const., Art IX- B, Sec. 2 [1]) TESTS TO DETERMINE THE NATIONALITY OF CORPORATIONS 1. INCORPORATION TEST determined by the state of incorporation, regardless of the nationality of the stockholders. 2. DOMICILE TEST - determined by the State where it is domiciled. 3. CONTROL TEST or WAR-TIME TEST determined by the nationality of the controlling stockholders or members. It is applied in times of war. DOMICILE the domicile of a corporation is the place fixed by law creating or recognizing it, in the absence thereof, it shall be understood to be the place where its legal representation is established or where it exercises its principal functions (Art. 51, New Civil Code) Corporation as a PHILIPPINE NATIONAL (under RA 7042, Foreign Investment Act of 1991) 1. A corporation organized under the law of the Philippines of which at least 60% of the outstanding capital stock entitled to vote is owned by Filipino citizens; 2. A foreign corporation licensed as doing business in the Philippines of which 100% of the outstanding capital stock entitled to vote is wholly owned by Filipinos; and 3. Where a corporation and its non-Filipino stockholders own stocks in a SECregistered enterprise, at least 60% of the capital stock outstanding and entitled to vote of both corporations and at least 60 % of the members of the Board of Directors of both corporations must be Filipino citizens (Double 60% Rule) - The law applies the Control Test both with respect to the ownership of shares entitled to vote and the membership in the BOD. GRANDFATHER RULE the method by which the percentage of Filipino equity in a corporation engaged in nationalized and/or partly nationalized areas of activities, provided for under the

constitution and other nationalization laws, is computed, where there are corporate shareholders. -Shares belonging to corporations or partnerships at least 60 % of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality. - But if the percentage of Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as of Philippine nationality. NATIONALIZED CORPORATIONS: 1. 100% Filipino owned: a. Mass media (radio, TV, and printed) b. Rural Banks 100% of its capital stock c. Rice and corn industry d. Security, watchman, and detective agency 2. 70% Filipino owned a. Advertising Industry b. Banks other than rural banks and new banks established by consolidation of branches or agencies of foreign banks in the Philippines c. Private development Banks d. Savings and Loan associations 3. 60% Filipino owned a. Financing companies - 60 % of its capital stock b. Fishing and business activity relating to fishing Industry 60% of its capital stock c. Exploration, Development, and Utilization of Natural Resources d. Owners of lands e. Operation of Public Utility f. Educational institutions other than those established by religious groups g. Any business reserved by Congress 4. Majority Owned by Filipinos a. Investment House ADVANTAGES OF A CORPORATION OVER AN UNREGUISTERED ASSOCIATION 1. Enjoys perpetual succession under corporate name and in an artificial form; 2. Can take and grant property; 3. Can contract obligations; 4. Can sue and be sued in its corporate name as a juridical person; 5. Capacity to receive and enjoy common grants and privileges and immunities; 6. No personal liability beyond value of their shares. C. CLASSIFICATION OF SHARES 1. Common Shares the basic class of stock ordinarily and usually issued without extraordinary rights and privileges, and the owners thereof are entitled to a pro rata share in the profits of the corporation and in its assets upon dissolution and, likewise, in the management of its affairs without preference or advantage whatsoever. 2. Preferred Shares those issued wit par value, and preferences either with respect to (a) payment of dividends (b) distribution of assets after dissolution, or (c) such other preferences as may be stated in the Articles of Incorporation which are not violative of the Corporation Code. Kinds of Preferred Shares: a. Preferred share as to assets b. Preferred share as to Dividends i. Cumulative Preferred Share a share which entitles the holder thereof not only

to the payment of current dividends but also to dividends in arrears. If the stipulated dividend is not paid in a given year, it shall be added to the dividend which shall be due the following year and the accumulated dividends must be paid to the shareholder before any dividend may be paid to common stockholders. ii. Non-Cumulative Preferred Share It is a share which entitles the holder thereof to the payment of current dividends only in preference to common stockholders. iii. Participating Preferred share A share which gives the holder thereof not only the right to receive the stipulated dividends but also to participate with the holders of common shares in the remaining profits pro rata after the common shares have been paid the amount of the stipulated dividend at the same preferred rate. iv. Non-Participating Preferred Share It is a share which entitles the holder thereof to receive the stipulated preferred dividends and no more. The balance, if any, is given entirely to the common stocks. v. Cumulative Participating Preferred Share The holder is entitled not only to dividends in arrears but also, after receiving his preferred share of dividends, to participation with the holders of common stocks in the remaining profits. 3. Deferred Shares Those shares in which the payment of dividends upon them is expressly postponed until the preferred and common shares are paid. 4. Redeemable Shares those which permit the issuing corporation to redeem or purchase its own shares. Limitations: a. Redeemable shares may be issued only when expressly provided for in the Articles of Incorporation; b. The terms and conditions affecting such shares must be stated both in the articles of Incorporation and in the certificates of stock representing such shares; c. Redeemable shares may be deprived of voting rights in the Articles of Incorporation, unless otherwise provided in the Corporation Code. *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. -Redemption may not be made where the corporation is: a. insolvent; or b. if such redemption would cause insolvency or inability of the corporation to meet its debts as they mature. 5. Treasury Shares Shares which have been lawfully issued by the corporation and fully paid for and later reacquired it either by purchase, redemption, donation, forfeiture or other lawful means. * If purchased from stockholders: The transaction in effect is a return to the stockholders of the value

of their investment in the company and a reversion of the shares to the corporation. The corporation must have surplus profits with which to buy the shares so that the transaction will not cause impairment of the capital. * If acquired by donation from the stockholders: The act would amount to surrender of their stock without getting back their investments that are, instead voluntary given to the corporation. -Treasury shares need not be sold at par or issued value but may be sold at the best price obtainable, provided it is reasonable. When treasury shares are sold below their par or issued value, there can be no watering of stock because such watering contemplates an original issuance of shares. 6. Founders Shares shares issued to organizers and promoters of a corporation in consideration of some supposed right or property. - Shares classified as such in the AI which may be given special preference in voting rights and dividend payments. But if an exclusive right to vote and be voted for as director is granted, it needs the approval of the SEC, and cannot exceed 5 years from the date of approval. 7. Par Value Shares Shares with a value fixed in the certificates of stock and in the Articles of Incorporation. 8. No Par Value Shares Shares having no par value but have issued value stated in the certificate or AI. Limitations: a. No par value shares cannot have an issued price less than P5.00; b. The entire consideration for its issuance constitutes capital so that no part of it should be distributed as dividends; c. They cannot be issued as preferred stocks; d. They cannot be issued by banks, trust companies, insurance companies, public utilities and building and loan associations; e. The AI must state the fact that it issued no par value shares as well as the number of shares; f. Once issued, they are deemed fully paid and non-assessable. (Sec. 6) 9. Voting Shares shares with a right to vote. 10. Non-Voting Shares shares without right to vote. - The law only authorizes the denial of voting rights in the case of redeemable shares and preferred shares, provided there shall always be a class or series of shares which have complete voting rights. -These redeemable or preferred shares, when such voting rights are denied, are still entitled to vote on the following: a. Amendment of Articles of Incorporation; b. Adoption and amendment of by-laws; c. Sale or disposition of all or substantially all of corporate property; d. Incurring, creating or increasing bonded indebtedness; e. Increase or decrease of capital stock; f. Merger or consolidation or corporations; g. Investments of corporate funds in another corporation; h. Dissolution of corporation. (Sec. 6) 11. Watered Stock a stock issued not in exchange for its equivalent either in cash, property, share, stock dividends, or services. - Water in stock represents the difference between the fair market value at the time of the issuance of the stock and the par or issued value of

said stock. Both par and no par stocks can thus be watered stocks. 12. Escrow stock deposited with a third person to be delivered to a stockholder or his assign after complying wit certain conditions, usually payment of subscription price. 13. Convertible Shares shares that are changeable by the stockholder from one class to another at certain price and within a certain period. Convertibility of Shares a. Preferred to Common in the absence of an express provision in the AI as to that convertibility, preferred shares cannot be converted to common. b. No Par Value to Par Value allowed by SEC provided there would be no change in the stockholders percentage interest in the total assets of the corporation. 14. Street Certificate a stock certificate endorsed by the registered holder in blank and the transferee can command its transfer to his name from the issuing corporation. 15. Over-issued/Spurious Stock stock issued in excess of the authorized capital stock. Its issuance is null and void. 16. Fractional Share a share with a value less than one full share. DOCTRINE OF EQUALITY OF SHARES - Where the Articles of Incorporation do not provide for any distinction of the shares of stock, all shares issued by the corporation are presumed to be equal and enjoy the same rights and privileges and are also subject to the same liabilities (Sec. 6). ----------------------------------------------------------------II. INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS A. Theories on the Formation of a Corporation 1. Concession Theory espouses that a corporation is an artificial creature without any existence until it has received the imprimatur of the State acting according to law, through the SEC. 2. Theory of corporate enterprise or economic unit espouses that the corporation is not merely an artificial being, but more of an aggregation of persons doing business, or an underlying business unit. B. Steps in the Creation of a Corporation (Sec. 10) 1.Promotion - is a number of business operations peculiar to the business world by which the company is brought into existence. Procuring necessary legislation; Getting incorporations together; Procuring necessary subscribers to the articles of incorporation. >This can however be dispensed with if the persons promoting have sufficient capital

or funds; hence, there is no need to attract prospective investors to come in.

2.

Incorporation Proper (Sec. 10): Drafting and execution of the Articles of Incorporation Filing with the SEC of the Articles of Incorporation accompanied by an affidavit showing that at least 25% of the entire authorized shares has been subscribed and at least 25% of the entire subscription has been paid in cash. If governed by a special law, a favorable recommendation of the appropriate government agency is needed in filing the Articles of Incorporation. Payment of filing and publication fees. Issuance of Certificate of Incorporation by the SEC (within a period of two years).

except such franchises charged with a public use (e.g., to operate a messenger and express delivery service, to use the streets of a city to lay pipes or tracks). Primary Franchise vs. Secondary Franchise Primary Franchise Secondary Franchise 1. refers to the 1. refers to the franchise of being or exercise of rights. existing as a Example: eminent corporation domain 2. vested in the 2. deemed vested in individuals who the corporation compose the corporation 3. It cannot be sold or 3. It may be sold or transferred because it transferred,, subject to is inseparable from the sale on execution or corporation itself. levy D. Number & Qualifications of Incorporators 1.Not less than 5 but not more than 15 incorporators who must be natural persons (Exception to the number requirement: a corporation sole which is incorporated by only one person, e.g., bishop, priest, rabbi) Reason: Artificial persons, without brain or body and existing only on paper through legislative command, cannot create other artificial persons. Exception: Rural Banks Act of 1992 (Sec. 4, RA No. 7353). Duly established cooperatives and corporations primarily organized to hold equities in rural banks and/or subscribe shares of stocks of a rural bank can be incorporators of rural banks. A corporation may become a stock holder in another corporation by subscribing or purchasing the latters stocks for the power of one corporation to own a stock in another corporation is entirely different from its power to create or itself become one of the incorporators of another corporation. A Cooperative cannot be a corporation because a corporation must be formed under the Corporation Code, but it has a separate legal existence from its members. 2.Incorporators must have the capacity to enter into a valid contract. Reason: an act of forming a corporation is contractual in nature. It must be acknowledged before a notary public (its articles of incorporation). It is also to secure the State and all concerned individuals against the possibility of any fictitious name being subscribed to the articles and to furnish proof of the genuineness of the signatures. 3.Majority of the incorporators must be residents of the Philippines. A corporation composed of entirely aliens may be incorporated as long as a majority of the incorporators are residents of the Philippines, except in cases of nationalized corporations. Reason for Residence Requirement: a. Because they transact business in the Philippines.

3.

Formal Organization and Commencement of Business Operations (Sec.22): >Election of Board of Directors/Trustees, its corporate officers (President, Vice President, Secretary, Treasurer) within 2 years from date of incorporation. If it fails, then: a. corporate powers cease; b. corporation can be deemed dissolved. If it commenced transaction of business but subsequently becomes inoperative for a period of at least 5 years, the same shall be a ground for the suspension of its corporate franchise (Certificate of Incorporation).

>Promoter a person who, acting alone or with others, takes initiative in founding and organizing the business or enterprise of the issuer and receives consideration therefor. >Incorporators They are those mentioned in the article of Incorporation as originally forming and composing the corporation, having signed the AI and acknowledged the same before a notary public. They have no powers beyond those vested in them by the statute. >Stockholders/Shareholders owners of shares in a corporation which has a capital stock. >Members corporators of a corporation which has no capital stock. >Corporators those whose comprise the corporation whether as stockholders or members. C. Franchises of a Corporation 1. Primary Franchise -Right or privilege granted by the State to individuals to exist and act as a corporation after its incorporation. It is inalienable. It is a part of the corporation and cannot be sold or assigned; otherwise, a corporation would be created without the consent of the legislature. 2. Secondary Franchise -The special right or privilege conferred upon an existing corporation to the business for which it was created. May ordinarily be conveyed/mortgaged under the general power granted to a corporation to dispose of its property,

b.

So that they could be easily notified (as when there are special or regular meetings).

property. Its net worth or stockholders equity is its assets less liabilities. 2. CAPITAL STOCK The amount fixed in the articles of incorporation, to be subscribed and paid in or agreed to be paid in by the stockholders of a corporation, in money, property, services, or other means at the organization of the corporation or afterwards and upon which it is to conduct its business, such contribution being made either through directly through stock subscription or indirect through the declaration of stock dividends. 3. AUTHORIZED CAPITAL STOCK The capita stock divided into shares with par values. Par value stocks are required in the case of corporations issuing preferred shares, as well as in the case of banks, trust companies, insurance companies, building and loan associations, and public utilities. It is the total amount in the charter which may be raised by the corporation for its operations. 4. SUBSCRIBED CAPITAL STOCK The total amount of the capital stock subscribed whether fully paid or not. 5. PAID-UP CAPITAL STOCK The amount paid by the stockholders on subscriptions from unissued shares of the corporation. 6. OUTSTANDING CAPITAL STOCK The total amount of the capital stock issued to subscribers except treasury shares. 7. UNISSUED CAPITAL STOCK That portion of the capital stock that is not issued or subscribed. It does not vote and draws no dividends. 8. LEGAL CAPITAL The amount equal to the aggregate par value and/or issued value of the outstanding capital stock.

4.Citizenship Requirement. It is a necessary qualification for incorporators in corporations in which a certain percentage of the capital stock is required to be owned by Filipino Citizens. This rule applies to directors and trustees. Reason: Certain nationalized activities are exclusively reserved to Filipino Citizens like quasi-public corporations. 5.Each of the incorporators of a Stock Corporation must own or be a subscriber to at least one (1) share of the capital stock of the corporation. Reason: The presumption is that where an incorporator has a pecuniary interest in the corporation, he will be concerned with the management of its affairs. E. CORPORATE TERM (LIMITATIONS [Sec. 11]) 1. Shall not exceed 50 years at any given time. 2. Extension may be made by amendment of the Articles of Incorporation. When? Within the period of 5 years before the expiry date. Earlier than 5 years could be made if there is a justifiable reason as determined by the SEC. Procedure for Extension (Sec. 37) a. Amendment of the Articles of Incorporation to be approved by a majority vote of the Board of Directors/Trustees (board resolution) and ratified at a meeting of stockholders representing at least 2/3 of the capital stock (or 2/3 of the members). b. Written notice of the proposed action, time, place of the meeting must be addressed to each stockholder as shown in the corporate books; c. Delivery of the notice to the stockholder by depositing the same to the addressee in the post office with postage prepaid, or served personally d. Amendments (with appropriate markings) will be submitted to the SEC attached to the original copy. e. Amendment is effected before the corporate term of existence, for after dissolution by expiration of the corporate term, no more corporate life to extend: Doctrine of Relation: Where the delay in effecting the amendment is due to the neglect of the officer with whom the application is required to be filed or to a wrongful refusal on his part to receive it, the same will be treated as having been filed before the expiry date. But the occurrence of a fortuitous event or force majeure may justify the doctrine. The doctrine does not apply if the delay is attributable to the corporation. Appraisal Right of Dissenting Stockholders: He can demand payment for the full value of his share if he does not wish to join. F. Corporate Structure of a Stock Corporation Definition of Terms: 1. CAPITAL The value of the actual property or estate of the corporation whether in money or

(1) Minimum Capital Stock a. General Rule: No minimum capital stock is required for stock corporations incorporated under the Corporation Code as long as the paid-up capital is not less than P5,000.00 Exceptions: Filipino percentage ownership requirement regarding corporate capital in nationalized corporations. (2) Minimum Subscription and Paid-Up Capital for Incorporation a. Minimum Subscribed Capital At least 25% of the authorized capital stock as stated in the Articles of Incorporation must be subscribed at the time of incorporation; Computation of the 25% subscription requirement: 1. Where capital stock consists of par value shares: The minimum subscription should be 25% of the amount of the authorized capital stock or 25% of the aggregate value of all the shares of stock the corporation is authorized to issue. In par value stock corporations, the percentage subscription requirement shall always be based on the amount of the authorized capital stock irrespective of the class, number, and par value of the shares.

2.

3.

Where the capital stock consist of no par value shares: The 25% requirement shall be computed on the basis of the entire number of authorized shares. Corporations whose shares have no par value have no authorized capital stock the issued price of no par value shares need to be fixed in the articles of incorporation. Where the capital stock is divided into par value shares and no par value shares: The requirement as to par value shares is as indicated above and for the no par value shares, the 25% is based on the number of the said no par value shares.

6. 7.

b.

Minimum Paid-Up Capital At least 25% of the total subscription must be paid upon subscription but must not be less than P5,000.00. Reason: To give assurance to the investing public dealing with the new corporation that it is financially and actually able to operate and undertake to do business as they arise from the start of its operations. Exception: when special laws require higher minimum capitalization such as: a. Insurance Corporations P5 million b. Pawnshop established as a corporation P100,000.00 c. Financial Intermediary applying for authority to perform quasi-banking functions P50 million

8.

WAYS OF INCREASING CAPITAL STOCK: 1. By increasing the number of shares and retaining the par value; 2. By retaining the number of shares and increasing the par value; 3. By increasing the number of shares and increasing the par value; 4. By reinvesting retained earnings to the capital and issuing stock dividends. TOOLS AVAILABLE TO THE STOCKHOLDERS TO REPLENISH CAPITAL 1. Additional subscription to shares of stock of the corporation by the stockholders or by investors; 2. Advances by the stockholders to the corporation; 3. Payment of unpaid subscription by the stockholders. G. ARTICLES OF INCORPORATION (AI) Articles of Incorporation - The document prepared by the persons establishing a corporation and filed with the SEC containing the matters required by the Corporation Code. Significance: Its issuance signals the birth of the corporations juridical personality. Language Used: Any of the official languages duly signed and acknowledged by all of the incorporators. Contents: 1. Name of the corporation; 2. Specific purpose for which the corp. is being incorporated; 3. Location of principal office which must be within the Philippines; 4. Corporate term; 5. Incorporators names, nationalities and residences;

Number of Directors or trustees, which shall not be less than 5 nor more than 15; Names, nationalities and residences of persons acting as directors/trustees until the first regular directors/trustees are duly elected and qualified; IF STOCK CORP: a. Amount of its authorized capital stock in lawful money of the Philippines; b. Number of shares into which it is divided; c. If par value shares, the par value of each, names, nationalities and residences of the original subscriber, the amount subscribed and paid; d. If some or all of the shares are without par value. IF NON-STOCK CORP: a. The amount of its capital; b. Names, nationalities, and residences of the contributors; and c. The amount contributed by each. d. The articles of incorporation must state the amount of its capital or money contributed or donated by specified persons. Sworn statement of the treasurer elected by the subscribers showing A copy of the articles filed which is returned with the certificate of incorporation issued by the SEC under its official seal becomes its corporate charter. Corporation created by special law has no articles of incorporation. It draws its life not from a general law, but from a direct act of Congress. If that corporation is regulated by a government agency, submit also a favorable recommendation of that agency.

CORPORATE NAME Necessity of putting the Corporate Name: 1. The corporation acquires juridical personality under the name stated in the articles of Incorporation; 2. The corporation has the power to succession thru that name; 3. It identifies and distinguishes it from other corporations; 4. By its name it is authorized to transact business; 5. Corporate/trade name is a property right, a right in which it may assert and protect against the whole world. Guidelines for Corporate Name (Sec. 18) 1. Not identical or deceptively or confusingly similar to that of another existing corporation or to any other name already protected by law. 2. Not patiently deceptive or contrary to existing law; 3. The name of the corporation must end with word Incorporated or Inc. unless it includes the word corporation. 4. Prohibited Use of Certain Words: a. Emblem, official seal, and the name of the United Nations both in its full or abbreviated form for commercial purposes (RA No. 226); b. Unlawful to use the word Bonded, in part or in whole as business name of those maintaining any warehouse not licensed under the General Bonded Warehouse Act (Act No. 3893).

c.

Using the word bank, banking, banker, building and loan association, trust corporation, trust company, or words of similar import, when not conducting the business of commercial banking corporation, trust corporation, savings and mortgage bank, or building and loan association; d. Using the words Rural Bank, when not authorized under the Rural Banks Act (RA No. 7353); e. Using the term savings and loan association when not organized under the Savings and Loan Association Act (RA No. 3779), or the term development bank unless organized under the Private Development Banks Act (RA No. 4093); f. Using the word National as portion of their name or title, except the Philippines National Bank (PD 694), due to its connotation of being a government agency or a government-owned or controlled corporation; g. UN, Olympic, and Bureau in full or abbreviated form or business purposes; h. Financing Company, Finance Investment Company, unless organized as a financing company (RA No. 5980); i. Engineer, or Architect unless used by persons properly registered and licensed as civil engineers or architects (RA Nos. 544, 545); j. Geodetic Engineers is prohibited except when majority of the members of the partnership or corporation are properly registered and licensed as geodetic engineers (RA No. 4374); k. subsidiary corporation of a foreign firm may carry the name of the principal company with the word Phil. Or Philippines affixed to the firm name, with the written consent of the mother company. l. The name of an internationally known foreign corporation or one similar to it may not be used by a domestic corporation without the prior consent of the former; m. If the full name of a person forms part of the corporate name, the consent of such person or his heir must be obtained; and n. The word State, National, Maharlika and the Barangay cannot be used as part of the corporate name since these are reserved for the exclusive use of the government. Doctrine of Secondary Meaning - A word or phrase originally incapable of exclusive appropriation with reference to an article on the market, because geographically, or otherwise descriptive, might nevertheless have been used so long and so exclusively by one producer with reference to his article, that in that trade or to that branch of the purchasing public, the word or phrase has come to mean that the article was his product. Ex. Ang Tibay, merely descriptive, but its products are already associated with it. Test of infringement: Whether the similarity is such as to mislead a person using ordinary care and discrimination. The right to the exclusive use of a corporate name with freedom from infringement is determined by priority of adoption. Remedy in case of infringement: Injuction. CORPORATE PURPOSE: It must be specified with sufficient clarity to define with certainty the scope of its business. If more

than one purposes, state the primary and the secondary purpose. The law allows a corporation to have secondary purposes because the primary purpose may not turn out to be profitable, and in such case, all it has to do is to invest its funds in any such purposes instead of organizing a new corporation. Reason: a. A person who intends to invest his money in the business corporation will know where and in what kind of business or activity his money will be invested; b. The directors and officers of the corporation will know within what scope of business are they authorized to act; and c. A third person who has dealings with the corporation will know by perusal of the articles whether the transaction or dealing he has with the corporation is within the authority of the corporation or not. PRINCIPAL PLACE The articles of incorporation must state the principal place where the principal office of the corporation is to be established or located, in which place, must be within the Philippines. The place to be designated is the city or municipality where the principal office is to be located. Purpose of the requirement for definite place: For effective regulation and supervision of the corporation. AMENDMENTS OF THE ARTICLES OF INCORPORATION PROCEDURE: (Sec. 16) 1. Board of Directors convene to a meeting and make a proposal for amendments to be converted into a board resolution; 2. The resolution stating such amendments must be approved by a majority vote of the Board of Directors/Trustees; 3. The approved resolution must be submitted to the stockholders for ratification; 4. The required vote for ratification is the approval of stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of the members (for nonstock); a meeting to that effect may not be necessary since they can just submit their written assent representing at least 2/3 of the outstanding capital stock. Note: Written assent is not allowed in (a) extending or shortening the corporate term (Sec. 37); (b) decreasing or increasing the capital stock and (c) in close corporations (Sec. 103), a meeting of the stockholders is always necessary. 5. The articles, as amended, must be indicated by underscoring the change or changes made, a copy thereof must be certified under oath by the corporate secretary and the fact that it has been duly approved by the required vote of the stockholders/members. 6. Submission to the SEC; and 7. It takes effect upon approval by the SEC or from the date of filing if not acted upon within 6 months if the delay is not attributable to the corporation.

This rule does not apply if the amendment is intended to dissolve the corporation. You have to wait for the approval of the SEC. There can be no presumption that when 6 months have already lapsed, it is deemed approved. The reason being that dissolution must be made at the consent of the State.

Non-amendable Facts in the Articles of Incorporation: Those matters referring to facts existing as of the date of the incorporations such as: 1. Names of incorporators; 2. Names of original subscribers to the capital stock and their subscribed and paid-up capital; 3. Treasurer elected by the original subscribers; 4. Members who contributed to the initial capital of a non-stock corporation; 5. Date and place of execution of the AI; 6. Witnesses to the signing and acknowledgment of the AI. Grounds for the Disapproval of the Articles of Incorporation: a. Not substantially in compliance with the form prescribed by the Code; b. Purpose/purposes are patently unconstitutional, illegal, immoral or contrary to government rules and regulations; c. Treasurers affidavit concerning the amount of capital stock subscribed and/or paid is false; d. Required percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied with as required by existing laws or the Constitution. Ex. Monetary Board of the Central Bank for banking institutions. However, if the corporation is involved in a public utility the SEC may give such corporation a reasonable time to modify the objectionable portion.

fundamental law of the corporation; a contract between: a. the corporation and the stockholders/members ; b. between and among the stockholders/ members; and c. the corporation and the State 2. It is executed before incorporation

the corporation but has the force and effect of a contract between: a. the corporation and the stockholders /members; and b. between and among the stockholders/ members 2. It may be executed after incorporation; it may be filed simultaneously with the AI 3. It is a condition subsequent; its absence merely furnishes a ground for the revocation of the franchise. 4. It may be amended by a majority vote of the BOD/BOT, and majority vote of the outstanding capital stock, or a majority of members in case of non-stock corporations 5. The power to amend/repeal the bylaws or adopt new bylaws may be delegated by the 2/3 of the outstanding capital stock or 2/3 of the members incase of non-stock corporations.

3. It is a condition precedent in the acquisition of corporate existence 4. It is amended by a majority vote of the BOD/BOT, and stockholders representing at least 2/3 of the outstanding capital, or 2/3 of the members in case of non-stock corporations 5. The power to amend/repeal the AI cannot be delegated by the stockholders/ members to the BOD/BOT

Grounds for Suspension/Revocation of Certificate a. Fraud in procuring the certificate of incorporation (ex. Paid-up capital); b. Serious misrepresentation causing great damage and prejudice to the public; c. Refusal to comply with a lawful order of the SEC; d. Continuous inoperation for a period of at least 5 years; e. Failure to file by-laws within the required period; and f. Failure to file required reports in appropriate forms as determined by the SEC within the prescribed period. ARTICLES OF INCORPORATION vs. BY-LAWS ARTICLES OF BY-LAWS INCORPOTAION 1. It constitutes the 1. It is merely for the charter or internal government of

RULES ON CONVERSION: (SEC Opinion) 1. STOCK TO NON-STOCK CORPORATION may be made by mere amendment of the articles of Incorporation. 2. NON-STOCK TO STOCK CORPORATION The corporation must first be dissolved; mere amendment of the AI would not suffice because the conversion would change the corporate nature from non-profit to monetary gain. The conversion without dissolving it first would be tantamount to distribution of its assets or income to its members inasmuch as after its conversion, the asset of the non-stock corporation would now be treated as payment to the subscriptions of the members who will now become stockholders of the corporation. FORMAL ORGANIZATION AND COMMENCEMENT OF THE TRANSACTION OF THE BUSINESS (Sec. 22) -These are conditions subsequent which may be satisfied by substantial compliance in order that a corporation may legally continue as such. Acts of Constituting Formal Organization 1. Adoption of by-laws and filing of the same with the SEC; 2. Election of the Board of Directors and officers by the board pursuant to the by-laws; 3. Establishment of principal office;

4.

Subscription and capital stock, etc

payment

of

the

3.

Effects of Subsequent Continuous Inoperation 1. If the corporation does not formally organize and commence transaction within a period of 2 years, corporate powers cease and corporation is deemed dissolved; 2. If it commenced transaction but subsequently becomes continuously inoperative for a period of 5 years, it serves as a ground for the suspension or revocation of its corporate franchise (certificate of incorporation). *The rule that a corporation must formally organize and commence the transaction of its business or the construction of its works within 2 years from the date of its incorporation (the exercise of its secondary franchise) does not apply to: 1. Special Corporations, because the law creating them provides for the commencement of their juridical personality; 2. Corporation Sole, the person incorporating is not required to wait for the certificate of incorporation. Mere filing of the Articles of Incorporation makes it incorporated already. -----------------------------------------------------------------------III. BOARD OF DIRECTORS/TRUSTEES/OFFICERS SUBJECT STRUCTURE COMPONENTS OF A CORPORATION 1. Promoter 2. Incorporators 3. Corporators a. Stockholders b. Members 4. Governing Body (absolute control and direction) a. Board of Directors b. Board of Trustees 5. Managing and Administrative Body a. Executive committee b. Contracted Mangers 6. Corporate Officers A. Qualifications of Directors/Trustees 1. Every director (including incorporating director) must own at least one share of the capital stock, and if ceases to own at least one share in his own name, he automatically ceases to be a director (Sec 23). For non-stock corporation, only members of the corporation can be elected to seat in the Board of Trustees. -Person in whose name it has been issued is the one to be elected -If not actually owned but his name appears in the books? -Yes, legal title is important. Q. When is it necessary that he is the owner? A. At the time of assumption of office Note: Both husband and wife own share either can be elected at any given time. 2. A majority of the directors/trustees must be residents of the Philippines

4. 5.

He must not have been convicted by final judgment of an offense punishable by imprisonment for a period exceeding 6 years or a violation of the Corporation Code committed within 5 years from the date of his election (Sec. 27). Only natural persons can be elected directors/trustees. Other qualifications as may be prescribed in the by-laws of the corporation. e.g. must not be engaged in business in competition with the corporation (Gokongwei case, 89 SCRA 336)

B. BOD/BOT as REPOSITORY of CORPORATE POWERS Gen. Rule: The corporate powers of the corporation, all business conducted and all property of such corporation controlled and held by the BOD/BOT (Sec. 23) Exceptions: 1. In case of an Executive Committee duly authorized in the by-laws; 2. In case of a contracted manager which may be an individual, a partnership, or another corporation. (Note: In case the contracted manager is another corporation special rule: Sec. 44 applies) 3. In case of close corporations, the stockholders may manage the business of the corporation instead by a board of directors, if the Articles of Incorporation provide. C. Nature of Powers of the Board 1. They are Original and Undelegated Theory of Original Power the powers of the board are ORIGINAL And UNDELEGATED. The stockholders or members do not confer, nor can they revoke, those powers. 2. They are Derivative only in the sense of being received from the State in the act of incorporation 3. 3. They are directly conferred by statute; 4. 4. Can bind the corporation only by action taken at a board meeting. Reason: (a) A meeting is necessary in order that any action may be deliberately adopted, after opportunity for discussion and an interchange of views, and (b) As agents of the corporation managing its affairs, directors/trustees have no power to act other than as a board. BUSINESS JUDGMENT RULE: - The BOD/BOT is the body entrusted with the general control and management of the business of the corporation having plenary power and authority to transact the ordinary business of the corporation within the scope of its charter power. The SEC, court, and stockholders cannot overrule a pure business judgment. Three-Fold Duties of Directors 1. Duty of Obedience - To direct the affairs of the corporation only in accordance with the purposes for which it was organized 2. Duty of Diligence 3. Duty of Loyalty OBLIGATION AND LIABILITIES OF THE BOARD OF DIRECTORS, TRUSTEES AND OFFICERS (Sec. 31,) 1. Liability for Damages (director/trustee) (Solidary liability)

a. b. c. d.

e.

f. 2.

Willfully and knowingly votes or assents to patently unlawful acts of the corporation, Gross negligence or bad faith in directing the affairs of the corporation; Acquiring any personal or pecuniary interest in conflict with his duty as such director or trustee. Agreeing or stipulating in a contract to hold himself liable with the corporation Consenting to the issuance of a watered stocks, or, having knowledge thereof, failing to file objections with the corporate secretary (Sec.65) (Personal Liability) By virtue of specific provision of law.

by multiplying 100 by 5. He may give to the 5 candidates he wants to be elected 100 votes each. Under this method, the votes are distributed equally among the 5 candidates without preference. 2. Cumulative Voting a. Cumulative Voting for one candidate a stockholder gives to one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal. In the above example, X gives 500 votes to one candidate. b. Cumulative Voting by Distribution a stockholder cumulates his shares by multiplying also the number of his shares by the number of directors to be elected and distribute the same among as many candidates as he shall see fit. Also in the illustration above, with 100 shares, X is entitled to 500 votes if there are 5 directors to be elected. X may distribute his votes to candidates D= 100; E=100; F=100; G = 150; H = 250. Any combination is allowed provided the total of votes cast by him does not exceed 500 votes. Rationale: To enable stockholders to have representation in the board. minority adequate

Liability for Bad Faith or Gross Negligence (BOD/trustees/officers) (Personal Liability) a. Any wrongful disposition of corporate assets and for any loss or injury to the corporation arising from their gross negligence or unauthorized acts of violation of their duties; b. Termination of employees which are done with malice or in bad faith. Liability for secret profit (BOD/ Trustees/officers) a. Profits which otherwise would have accrued to the corporation; b. Profits derived from ultra vires transaction.

3.

NON STOCK CORP-as many votes as there are trustees to be elected but can give only 1 vote per trustee Note: if shares are delinquent-cant vote Q. Can a holder of preferred shares vote? A. No, not allowed to vote in the election of BOD Q. Can one vote by zones: A. No, implied from Sec. 24-election requires the majority of the capital stock or majority of the members entitled to vote. TERM: >shall hold office for 1 year until their successors are elected and qualified. HOLD-OVER PRINCIPLE - Upon failure of a quorum at any meeting of the stockholders or members called fro an election, the directorate naturally holds over and continuous to function until another directorate is chosen and qualified. The failure to elect does not terminate the terms of incumbent officers nor dissolve the corporation. Corporate Elections-only means by which stockholders can control the composition and the action of the Board. NUMBER Stock Corporation not less than 5 but not more than 15 (Sec. 14[6]) Non-Stock Corporation not less than 5 (or 3?) but may be more than 15 with the term of office of 1/3 of their number expiring every year (Sec. 92 [1]) Close Corporation no board (no limit) or can have if pass a resolution Corporation Sole =1 CORPORATE OFFICERS (Sec. 25) those whose offices are created by the Corporation Code or the corporations by-

REMEDIES IN CASE OF MISMANAGEMENT: 1. Derivative suit or complaint 2. Injunction, if the act has not yet been done 3. Receivership 4. Dissolution if the abuse amounts to a ground for quo warranto but the Solicitor general refuses to act SPECIAL FACT DOCTRINE Director takes advantage of an information by virtues of his office to the disadvantage of the corporation. INHERENT POWER OF AMOTION It is the power to remove directors, trustees or officers prior to the expiration of their term D. ELECTION OF DIRECTORS OR TRUSTEES (Sec. 24) Stock Corporation -directors elected among the holders of stocks Non-stock corporation -trustees elected from among the members of the corp. Requirements: 1. Presence of majority stockholders/members in person or by proxy (written/authorized) 2. By balloting if requested by any voting stockholders/members, otherwise by viva voice Methods of Voting : 1. Straight Voting every stockholder may vote such number of shares for as many persons as there are directors to be elected. Illustration: X owns 100 shares in ABC Corporation. If there are 5 directors to be chosen, X is entitled to 500 votes obtained

laws. They do not enjoy security of tenure, and their incumbency is within the business judgment discretion of the BOD/BOT. Their removal is considered an intra-corporate controversy and beyond the reach of labor tribunals. Immediately after their election, the directors must formally organize by the election a: 1. President must be a director 2. Treasurer may or may not be a director; as a matter of sound corporate practice, must be a resident of the Philippines 3. Secretary must be a resident and citizen of the Phils.; need not be a director unless required by the by-laws 4. Other officers provided for in the bylaws

residences of the directors, trustees and officers elected within 30 days after the election. -Director/trustee/officer dies, resigns or in any manner ceases to hold office his heir, the secretary or any other officer of corporation or the director, trustee or officer himself, to immediately report such fact to the SEC. (as the case may be!) REMOVAL OF DIRECTORS OR TRUSTEES (Sec. 28) How? Stock 1. Hold a meeting regular or special Regular meeting as provided in the by-laws/AI 2. Prior notice to stockholders of the intention to remove a director -by the SEC upon orders of the President or majority of members 3. Notice must contain the particular purposeremoval specified 4. Vote stockholders representing 2/3 of outstanding capital stock, or in non-stock corporations, by 2/3 of the members entitled to vote * A special meeting called for the removal of a director/trustee must be called 1. by the SECRETARY on order of the President, OR 2. on the written demand of stockholders holding or representing at least a MAJORITY of the outstanding capital stock (or on the written demand of at least MAJORITY members entitled to vote) *If the Secretary fails or refuses to call a special meeting upon such demand OR refuses to give the notice, OR if there is no Secretary = the call for the meeting may be addressed directly to the stockholders or members by ANY stockholder or member signing the demand. 1. 2. The vacancy resulting from the removal may be filled: by election at the same meeting without further notice, or at any regular or special meeting called for the purpose, after giving notice Removal may be with or without cause; BUT a MINORITY DIRECTOR can only be removed WITH CAUSE.

*Two or more position maybe held concurrently by the same person -President and Treasurer at the same time but not President and Secretary. *Officers elected by the Board in a valid meeting. QUORUM-such number of the membership of a collective body as is competent to transact its business or do any other corp. act. Gen. Rule: Simple majority can act on any matter Exception: in the election of corporate officers which shall require the vote of a majority of all the members of the Board (all of them are present) REQUISITES FOR A VALID BOARD MEETING 1. Meeting of the directors or trustees duly assembled as a board; 2. Presence of the required quorum; 3. Decision of the majority of quorum or, in other cases, a majority of the entire board; and 4. Meeting at the place, time and manner provided in the by-laws. NO PROXY IN A BOARD MEETING -directors or trustees cannot validly act by proxy on account of a) their responsibility to the corporation and b) their being voted into office presumably because of their personal qualifications. SPOUSES WHO OWN SAME SHARE JOINTLY-only one of them can be elected on the board. VALID CORPORATE ACTS Gen. Rule: All corporate acts to be valid must be from a board meeting. Exceptions: (Board meeting not required for validity) 1. Directors are the only stockholders 2. When a corporate act is undertaken by a person already authorized by the Board 3. If the necessity of a Board meeting is waived. 4. Act done or authorized by the BOD without a valid board meeting is ratified unanimously by the stockholders. 5. Management contract 6. Executive Committee acts within the power delegated to it. Report of election of BOD/BOT and Officers (Sec. 26) -Secretary or other officer of the corporation to submit with SEC the names, nationalities, and

VACANCIES IN THE OFFICE OF DIRECTOR/TRUSTEE (Sec. 29) >Vacancy other than removal by the SH/member (Death, Resignation, Abandonment, Disqualification, or Expiration of term) -filled by at least majority of the remaining directors/trustees, if still constituting a quorum. VACANCIES TO BE FILLED BY A VOTE OF STOCKHOLDERS OR MEMBERS: 1. In case of removal of a director or trustee; 2. If the remaining directors or trustees do not constitute a quorum and therefore could not fill the vacancies created by death, resignation, disqualification, abandonment or expiration of the term of a director or trustee; 3. If the vacancy is created because of increase in the number of directors/trustees at any tine of the year. COMPENSATION OF DIRECTORS (Sec. 30)

Gen. Rule: BOD/BOT are not entitled compensation except for reasonable per diems.

to

Exceptions (that they can receive compensation): 1. If provided for in the by-laws; or 2. By a vote of stockholders representing at least a majority of the outstanding capital stock. LIMITATION (in case they are compensated): The yearly compensation of directors shall in no case exceed 10% of the NET income before income tax of the corporation during the preceding year. * But a corporate officer who is not a director may be compensated as an employee of the corporation. * A corporate officer who is also a director may likewise be compensated, in addition to his per diems, the amount to be fixed by a board resolution in the absence of provision to the contrary in the by laws and subject to the limitation. LIABILITY OF DIRECTORS/TRUSTEES (Sec. 31) Nature of Directors/Trustees Position -they are agents of the corporation; they also occupy a fiduciary relation to the corporation. INSTANCES WHEN DIR/TRUSTEES MAYBE HELD LIABLE FOR DAMAGES. 1. He willfully and knowingly votes or assents to patent unlawful acts of the corporation 2. He is guilty of gross negligence or bad faith in directing the affairs of the corporationrefuse to make a decision/withholds the vote required. 3. He acquires any personal or pecuniary interest in conflict with his duty as such director/trustee. (investment in another corporation competing directly with the corporation.) *The erring board members shall be held jointly and severally liable for all the damages resulting therefrom suffered by the corporation, its SH/members or other persons. *Liability of a director/trustee, or officer AS A TRUSTEE for the corporation 1. When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation 2. in respect to any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf. -he must account for the profits which otherwise would have accrued to the corporation. SEC 31 -Violated is a specific trust reposed upon a director Note: The effects under Sec. 31 and 34 applies even if he uses his own money -If violated, no ratification SEC 34 -Violated is general trust reposed on all directors -Applies also if no specific instructions given (no decision made by Board) -Doctrine of Corporate opportunity will not apply if the director acted in good faith

-Acquisition is not vested to any activity of the corporation -If corporation is unable to acquire opportunity no prohibition imposed upon him SPECIAL RULES ON CONTRACTS ENTERED INTO BY DIRECTORS/TRUSTEES OR OFFICERS:

1.

Contracts of Self-Dealing Directors (Sec. 32) Contracts which are entered into by the corporation with one or more of its own directors/trustees, or officers = they are VOIDABLE, unless: a) The presence of such director/trustee in the board meeting approving the contract was not necessary to constitute a quorum for such meeting; b) The vote of such director/trustee in the board meeting approving the contract was not necessary for the approval of the contract; c) The contract is fair and reasonable under the circumstances; d) In case of an officer, there was previous authorization by the BOD/BOT. -If any of the first 2 conditions is absent, in the case of a contract with a director/trustee, the contract may be ratified by the vote of the stockholders representing at least 2/3 of the OCS or of 2/3 of the members in a meeting called for the purpose, PROVIDED: a. That full disclosure of the adverse interest of the dir/trustee involved is made at such meeting. b. That the contract is fair and reasonable under the circumstances - Although not all the said conditions are present, the corporation may elect NOT to attack or question the validity of the contract, without prejudice , however , to the liability of the director/trustee for damages under Sec. 31.

2. -

Contracts of Interlocking Directors (Sec. 33) Contracts entered into between corporations with interlocking directors (interest of said directors is substantial exceeding 20% of the outstanding capital stock) = They are VALID provided that: a. The contract is not fraudulent; and b. The contract is fair and reasonable under the circumstances.

-If interest in both corporation are nominal (less than 20% of OCS) = contract is valid -If both substantial= contract is valid -If one is nominal and the other is substantial contract is valid if all the conditions set in Sec 32 are present with respect to the corporation in which he has nominal interest

3.
-

Doctrine of Corporate Opportunity (Sec. 34) Disloyalty of a Director Unless his act is ratified, a director shall refund to the corporation all the profits he realizes on a business opportunity which: a) The corporation is financially able to undertake;

1. 2. 3. 4. 5.

b) from its nature, is in line with the corporations business and is of practical advantage to it; and c) the corporation has an interest or a reasonable expectancy. The rule shall apply notwithstanding the fact that the director risked his own funds in the venture. When Doctrine Not Applicable If the director acted in good faith Acquisition is not related to any activity of the corporation If the corporation is unable to acquire the opportunity If no prohibition is imposed upon him If the prohibition imposed upon him is related but theres ratification the

RATIONALE OF APPLYING SEC. 32-as if corporation is dealing with its own directors

SECTION 35: EXECUTIVE COMMITTEE-provided for in the by-laws Not less than 3 members of the board to be appointed by the board. Gen. Rule: An act by majority vote, all other matters delegated by the by-laws or on a majority vote of the board. Exceptions: 1. approval of any action for which shareholders approval is also required 2. the filling of vacancies in the board 3. the amendment or repeal of by-laws in the adoption of new by laws 4. the amendment or repeal of any resolution of the board or by its express terms is not so amendable or repealable 5. a distribution of cash dividends to the shareholders. PURPOSE OF CREATING EXEC COMMITTEE To assure prompt and speedy action and solution to important matters with the need for a board meeting especially where such meeting cannot readily be held EXEC. COM Body given corporate powers which is composed of not less than 3 as provided for in the by-laws to assume ----------------------------------------------------------------------

General Powers and Capacity (Sec 36) [ Express powers]: 1. To sue and be sued 2. Of succession 3. To adopt and use of corporate seal 4. To amend its Articles of Incorporation 5. To adopt its by-laws 6. For stock corporation to issue and sell stocks to subscribers and treasury stock, for non-stock corporations to admit members; 7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds; 8. To enter into merger or consolidation; 9. To make reasonable donations to a. public welfare b. hospital c. charitable d. cultural e. scientific f. civic g. similar purposes Provided NO donation is given to any: a. Political party b. Candidates c. Partisan political activity 10. To establish pension, retirement, and other plans for the benefit of directors, trustees, officers and employees 11. To exercise other powers essential or necessary to carry out its purposes. Two sources of express powers corporation: 1. Those enumerated in Sec. 36 2. Purpose clause of the AI of a

>THEORY OF SPECIAL CAPACITY - A corporation cannot exercise powers except those expressly or impliedly given (everything is prohibited except when allowed) SPECIAL POWERS (Secs. 37 44) 1. To extend or shorten corporate term 2. To increase or decrease capital stock; 3. To incur, create or increase bonded indebtedness 4. To deny pre-emptive right 5. To sell, dispose, lease, encumber all or substantially all of corporate assets; 6. To purchase or acquire own shares provided: a. there is an unrestricted retained earnings b. it is for a legitimate purpose 7. To invest corporate funds in another corporation or business for other purpose other than primary purpose; 8. To declare dividends out of unrestricted earnings 9. Enter into management contract with another corporation (not with an individual or a partnership within general powers) whereby one corporation undertakes to manage all or substantially all of the business of the other corporation for a period not longer than 5 years for any one term. Sec. 37 Power to extend corporate term requires: 1. Amendment of AI or shorten

IV. POWERS OF CORPORATION EXPRESS POWERS granted by law, Corporation Code, and its Articles of Incorporation INHERENT/INCIDENTAL POWERS not expressly stated but are deemed to be within the capacity of corporate entities. IMPLIED/NECESSARY POWERS exist as a necessary consequence of the exercise of the express powers of the corporation or the pursuit of its purposes as provided for in the Articles of Incorporation. >THEORY OF GENERAL CAPACITY A corporation is said to hold such powers as are not prohibited or withheld from it by general law (everything is allowed except when prohibited)

2. 3. 4.

Approval of the amendment by majority vote of the BOD/BOT Written notice of the proposed action and of the time and place of the meeting to each stockholder or member. Ratification in the meeting by stockholders representing at least 2/3 of OCS or at least 2/3 of members

2.

3. 4.

Shares issued in good faith with the approval of the SH representing 2/3 of the OCS, in exchange for property needed for corporate purposes Shares issued in payment of a previously contracted debt. In case the right is denied in the AI.

*Right of appraisal is available in case of extension (Sec. 37) and also available in shortening the corporate term (Sec. 81[1]). Sec. 38 Power to increase or decrease capital stock; incur, create or increase bonded indebtedness Requires: 1. Proposed action approved by a majority vote of the BOD 2. Written notice of the proposed action and of the time and place of the stockholders meeting to be addressed to each stockholder 3. Approved by stockholders representing 2/3 of OCS 4. A certificate in duplicate of said corporate act shall be signed by majority of the BOD and and countersigned by the Chairman and the Secretary of the stockholders meeting 5. A certificate of increase must be accompanied by the Treasurers affidavit showing that at least 25% of such increased capital stock has been subscribed and that at least 25% of the amount subscribed has been paid. *Corporate act to take effect from and after the approval of the SEC. *No decrease in capital stock shall be approved by SEC if it will prejudice corporate creditors *Bonds issued by the corporation shall be registered with the SEC which is given the power to determine the sufficiency of the terms of such bonds *Where a corporation increase capital stock. SH are entitled to a pre-emptive right to subscribe to a sufficient number of shares in order to maintain their previous relative voting power. The corporation must give the SH a reasonable period which to exercise such right. *Right of appraisal NOT available in this Sec. 38. Non-stock corporation may incur or create bonded indebtedness, or increase the same with the approval of: 1. majority vote of the BOT and 2. at least 2/3 vote of the members in a meeting duly called for the purpose. Sec. 39 Power to deny pre-emptive right All SH of a stock corporation shall enjoy preemptive right to subscribe to all issues or disposition of shares on any class, in proportion to their respective shareholdings. Pre-emptive right shall not extend to: 1. Shares to be issued in compliance with laws requiring stock offering or minimum stock ownership by the public;

*Pre-emptive right includes re-issuance of treasury shares. PRE-EMPTIVE RIGHT or RIGHT OF PREEMPTION the stockholders right to subscribe to all issues or disposition of shares of any class in proportion to his stockholdings, the purpose being to enable the shareholder to retain his proportionate control in the corporation and to retain his equity in the surplus. * Pre-emptive right granted in favor of the corporation only is null and void, because it unduly inhibits the SHs right to dispose of their shares in the manner they desire. However, if in the subscription agreement, the SH waives his preemptive right, this is valid because this has been individually and freely bargained for. Waiver of a right is valid and is not prohibited. What is prohibited is the blanket restriction in the bylaws. * A contract entered into between the two majority SH of the corporation providing for suspension of the right to dispose shareholding during the limited period provided for in the agreement and imposes a penalty if any of the parties should dispose of their shareholdings within the limited period, is a valid agreement and not violative of the policy against restraint of trade since it is reasonable in purpose (to ensure the stability of the corporation during the critical period of development) and is reasonable in period. * By-laws of a corporation cannot be the source of limit to restrict the right of the SH to transfer shares of stocks which are personal property. Restrictions on transfer of shares can be provided only in the law or the charter of the corporation, and would be invalid if provided for in the by-laws. * Pre-emptive right is not available in case of shares issued to obtain loans or to obtain the services of technical men. Sec. 40 Sale or other disposition of assets Requisites: 1. The sale or other disposition must be approved by a majority vote of the BOD/BOT; 2. The action of the board must be authorized by the vote of stockholders representing at least 2/3 of OCS including holders of nonvoting shares or 2/3 of the members; and 3. The authorization must be done at a stockholders or members meeting duly called for the purpose after written notice. *Appraisal right can be exercised *Despite approval by the SH or members, it is not mandatory for the board to continue with the disposition. Substantially all where the sale or other disposition would render the corporation incapable

of continuing the business or accomplishing the purpose for which it as incorporated. This section covers not only sale but also lease, exchange, mortgage or pledge. But disposition of properties in the course of business does not need approval by or authority of SH members. Stock Certificate written acknowledgement by the corporation of the stockholders interest in the corporation. It is personal property and be mortgaged or pledged. Sec. 41 Power to acquire own shares When may a corporation reacquire its own stocks? 1. To eliminate fractional shares arising out of stock dividends 2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and 3. To pay dissenting or withdrawing SH entitled to payment for their shares under the provisions of this Code. Other instances when the corporation may acquire its own shares: 4. Reacquisition of treasury shares (Sec. 9); 5. Purchase of redeemable shares by the corporation regardless of the existence of unrestricted retained earnings (URE) in its books (Sec. 8); 6. To effect a decrease in the capital stock of the corporation (Sec. 38); 7. In a close corporation, where there is deadlock respecting the management of its business, the SEC may order the purchase at their fair value of shares of any stockholder by the corporation regardless of the availability of URE in its books (Sec. 104, par. 1[4]). >TRUST FUND DOCTRINE< - the subscribed capital stock of the corporation is a trust fund for the payment of debts of the corporation which the creditors have the right to look up to satisfy their credits, and which the corporation may not dissipate. The creditors may sue the stockholders directly for the latters unpaid subscription. OR The capital stock, property and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors. HENCE dividends are declared only if there is an unrestricted retained earnings, and that no distribution of corporate property except upon dissolution and after payment of all its debts and liabilities. Application of the Trust Fund Doctrine: 1. Where the corporation has distributed its capital among the stockholders without providing for the payment of creditors; 2. Where the corporation has transferred its property in fraud of its creditors; 3. Where the corporation had released the subscribers to the capital stock from their subscriptions; and 4. Where the corporation is insolvent. Coverage of the Trust Fund Doctrine:

1. 2.

If the corporation is solvent, the TFD extends to the capital stock represented by the corporations legal capital. If the corporation is insolvent, the TFD extends to the capital stock of the corporation and to all of its property and assets.

Exceptions to the Trust Fund Doctrine: 1. Redemption of redeemable shares (Sec. 8) 2. In close corporation, when there is a deadlock and the SEC orders the payment of the appraised value of the stockholders share (Sec. 104). Sec. 42 Power to invest corporate funds in another corporation or business for any other purpose Requires majority vote of BOD, ratified by 2/3 OCS/members, to invest for purposes other than primary purpose. But where the investment (even in another corporation) is reasonably necessary to accomplish the primary purpose, a board resolution is sufficient. Example: A sugar company invests in another company engaged in the manufacture of sacks for sugar, this was done pursuant to its primary purpose so a Board resolution will do. BUT where the purchase of another corporations shares is done solely for investment and not to accomplish the purpose of its incorporation, the 2/3 vote of SH is required. Sec. 43 Power to declare dividends - The BOD 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 SH 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, 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 SH representing not less than 2/3 of the OCS at a regular or special meeting duly called for the purpose. Stock corporations prohibited from retaining surplus profit in excess of 100% of their paid-in capital stock, EXCEPT: 1. When justified by definite corporate expansion program or programs approved by the BOD 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. 3. When it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is a need for special reserve for probable contingencies. *It is mandatory to declare dividends. Cash dividends declared by the BOD only Stock dividends BOD, approved by 2/3 OCS >DIVIDENDS< - is that part of the profits or unrestricted returned earnings of a corporation set aside, declared and ordered by the

directors to be paid ratably to the stockholders on demand or at a fixed time, in the form of cash, property or stocks. Kinds of Dividends: 1. Cash Dividend payable in cash. 2. Property Dividend distributed to stockholders in the form of property, real or personal, such as warehouse receipts, or shares of stock of another corporation. 3. Stock dividend payable in unissued or increased or additional shares of the corporation. 4. Optional Dividend gives the stockholder an option to receive cash or stock dividend. 5. Composite Dividend partly in cash and partly in stocks. Here, there is no option involved. 6. Preferred or Preferential Dividend payable, by virtue of contract, to one class of stockholders in priority to that to be paid to another class. 7. Cumulative Dividend contracted to be paid at a certain rate at stated times and, if net earnings at any dividend period are insufficient to pay the contract dividend, it is to be made out of subsequent net earnings. 8. Scrip Dividend one in the form of a writing or certificate issued to a stockholder entitling him to the payment of money, stock or other benefit at some future time inasmuch as the corporation at the time such dividends are declared has profits not in cash or has no sufficient cash, or has the cash but wishes to reserve it for some corporate purposes. It is in the form of a promissory note or a promise to pay and may be issued to bear interest. 9. Bond Dividend A dividend distributed in bonds of the corporation to the stockholders. The bondholder becomes a creditor of the corporation to the extent of the amount of the bond. 10. Liquidating Dividends These are actually distributions of assets of the corporation upon dissolution or winding of the same. They are not paid on account of earnings or profits, but as a return of capital invested. *The right to dividends is based on duly recorded stockholdings; accordingly, the corporation is prohibited from entitling thereto to any one else. *Sources of Dividends: Gen. Rule: Dividends can only be declared and paid out of actual and bona fid unrestricted retained earnings. Special Rules: 1. Where a corporation sold its real property, which is not being used for business, at a gain, the income derived therefrom may be availed of for dividend distribution. 2. Increase in the value of a fixed asset as a result of its revaluation is NOT retained earning. However, increase in the value of fixed assets as a result of revaluation (revaluation surplus) may be declared as cash or stock dividends provided that the company: a) has sufficient income from operations from which the depreciation on the appraisal increase was charged;

3.

b) has no deficit at the time the depreciation on the appraisal increase was charged to operations; and c) such depreciation on appraisal increase previously charged to operations has not been impaired by losses. Dividends can be declared out of the amount received in excess of the par value of shares (paid-in surplus) when: a) They are declared only as stock dividends and not cash; b) No creditors are prejudiced; and c) There is no impairment of capital. *Note that unlike par value shares, when no par shares are sold at a premium, the entire consideration paid is considered capital, hence the same cannot be declared as dividends. Reduction surplus can be a source of dividends. Rule on paid-in surplus is applicable. Money cannot be borrowed for the payment of dividends because an indebtedness is not a retained earning o f the corporation. Corporate earnings which have not yet been received even though they consist in money which is due, cannot be included in the profits out of which dividends may be paid. Profits realized from sale of Treasury Shares are part of capital and cannot be declared as cash or stock dividend as purchase and sale of such shares are regarded as contractions and expansions of paid-in capital. No dividends can be declared out of capital except only in two instances: a) liquidating dividends; and b) dividends from investments in wasting asset corporation.

4. 5.

6.

7.

8.

Retained earnings = Assets liabilities and legal capital WASTING ASSETS DOCTRINE A wasting assets corporation, such as a mining or timbercutting company, the capital of which is necessarily exhausted in the carrying on of its operations, may rightfully declare and pay dividends out of net income without making up for the loss of its capital which is thus being constantly diminished. *A mining company, for example, is not formed for the purpose of permanently using the property in which its capital is invested, but for the purpose of investing in property which, in the nature of things, will be gradually consumed in making profits, and in estimating the profits of such company for the purpose of determining whether it may lawfully declare a dividend, no deduction is to be made for depreciation in the value of its mine by reason of its use and consumption in taking out the ore or other minerals. Dividends may be lawfully declared out of the net proceeds of its operations after deducting expenses and debts and a reasonable fund for contingencies. Sec. 44 Power to enter into management contract Requires: 1. Resolution of the BOD/Trustees, and 2. Majority vote of the OCS/members

1. 2.

Except: (2/3 vote shall be necessary if:) The SH represents the interest of both corporations owns 1/3 of the OCS of the managing corporation. Majority of the members of he board of the managing corporation compose also majority of the members of the board of the managed corporation.

property cannot be questioned on the ground that it was acquired through an ultra vires contract of transfer. RATIFICATION OF ULTRA VIRES ACTS 1. If act or contract is illegal per se, it is null and void = cannot be ratified. 2. If act or contract is bot illegal per se but merely beyond the power of a corporation, the same is merely VOIDABLE Requirements for the ratification of an ultra vires act: 1. The act must be consummated, not executory 2. The creditors are not prejudiced, or all of the creditors have given their consent 3. The rights of the public or the State are not involved 4. All the SH must give their consent * Corporations cannot validly enter into a partnership because in a partnership, all the other partners can bind the partnership and the other partners, which would be violative of the principle in Corporation Law that only the BOD can bind the corporation. Case: X company agreed to post a bond for a postmaster in case of malversation for the opening of a post office within X Companys compound to facilitate mail of the employees living therein, after conferring with the Postmaster General. The postmaster malversed public funds, so the Postmaster General sued on the bond posed by X Co. but X Co. raised the defense of ultra vires act, that it was not authorized to file a bond for a public officer such as the postmaster and, therefore, such act did not bind the corporation. Held: The filing of the surety bond is ultra vires, but not illegal per se, and which was ratified by the acceptance by X company of the benefits attendant to the opening of a post office in its compound, is binding on the corporation. Case: Y cannot pay her loan from the GSIS with her house as mortgage so she proposed a scheme to the GSIS Board by which she can liquidate her claim. It was rejected by the Board, but the secretary erroneously sent a message to Y that the proposal was accepted. Subsequently, Y received a summons for foreclosure. Y sued GSIS for damages. Held: The corporate secretary is the custodian of corporate records and if she certifies that a certain action had been taken by the board, such certification is binding upon the corporation although the same may have been erroneously made. The reason for this is that the corporate secretary is clothed with apparent authority. Derivative suit the principal defense of the minority SH against the abuses of the majority. It is a remedy designed by equity for those situations where the management, through fraud, neglect of duty, or other cause, declines to take the proper and necessary step to assert the corporations rights. Requisites for the proper filing of a derivative suit: 1. The party bringing suit should be a SH as of the time of the act or transaction complained of

* Management contract is a device for tax avoidance, resulting in splitting of income. But when the conditions set herein are complied with, then there is no legal basis to pierce the veil of corporate entity. >ULTRA VIRES ACTS< Types of Ultra Vires Cases: 1. Acts done beyond the powers of the corporation as provided in the law or its AI; 2. Acts or contracts entered into in behalf of a corporation by persons who have nor corporate authority (This is technically ultra vires acts of officers and not of the corporation); 3. Acts and contracts which are per se illegal as being contrary to law. An ultra vires act may be that of: 1. The corporation; 2. The Board of Directors; and 3. The corporate officers. Sec. 45 Ultra vires acts of corporations No corporation under this Code shall possess or exercise any corporate power except those conferred by this Code or by its AOI and except such as are necessary or incidental to the exercise of the powers so conferred. ULTRA VIRES ACT (beyond powers) an act which although not prohibited by law, the corporation cannot perform because it is not within its express, incidental or implied powers. It is not necessarily illegal although an illegal act is always ultra vires. TEST whether a corporation may perform an act: - Consider the logical and necessary relation between the act questioned and the corporate purpose expressed by law or in the charter. If the act is lawful in itself and not prohibited, and is done for the purpose of serving corporate ends, and reasonably contributes to the promotion of those ends in a substantial and not in a remote and fanciful sense (Montelibano Doctrine) Effects of Ultra Vires Act on: 1. Wholly Executed contract shall not be interfered with as between the parties or persons whose rights are derived therefrom, but the State can always question said contract or act. 2. Wholly Executory Contracts cannot be enforced, even at the suit of either party (void and unenforceable) nor can damages be recovered for its breach. 3. Part Executed and part executory principle of no unjust enrichment at the expense of another shall apply, and recovery can be had by one or whose part it was executed. 4. Executory contracts apparently authorized but ultra vires the principle of estoppel shall apply and the title of a corporation to

2.

3.

He has exhausted intra-corporate remedies (i.e., has made a demand on the BOD for the appropriate relief but the latter has failed or refused to heed his plead.) The cause of action actually devolves on the corporation, the wrongdoing or harm having been caused to the corporation and not the particular SH bringing the suit.

SEC not to accept for filing the by- laws of any special corporation governed by special laws unless accompanied by a certificate of the appropriate government agency to the effect that such are in accordance with law. Validity of By-Laws 1. They must not be contrary to law and not inconsistent with the Corporation Code; 2. Must not be contrary to morals and public policy; 3. Must not impair obligations of contracts; 4. Must be general and uniform in their operation and not directed against particular individuals; 5. Must be consistent with the charter or articles of incorporation; 6. Must be reasonable (capable of compliance). Jurisprudence: Grace Nat. High vs. CA 281 SCRA 133 Not contrary to law although allowed in the by-laws, a BOD must always be a natural person. He cannot be a representative of a juridical person. SEC. 47 CONTENTS OF BY-LAWS SEC. 48 AMENDMENTS TO BY LAWS How amended? By a vote of the majority of the BOD/BOT and the owners of at least a majority of the OCS/members, at a regular or special meeting DULY called for the purpose. May the voting right of the SH be delegated? Yes. The owners of 2/3 of the OCS or members may delegate to the BOD or trustees the power to amend or repeal any by-laws PROVIDED, the power delegated is deemed revoked whenever the stockholders owning or representing a majority of the OCS or a majority of the members in nonstock corporations, shall so vote at a regular or special meeting. Note: The power to revoke may happen at any time even if not among the agenda in a regular or special meeting. Notice that the rule did not specifically provide that the regular or special meeting must be duly called for the purpose. Effectivity of amended by-laws: The amended or new by-laws shall only be effective upon the issuance by the SEC of a Certification that the same are not inconsistent with the Code. --------------------------------------------------------------------VI. MEETINGS MEETING Regular SH/MEMBERS Held annually on a date fixed in the by- laws; if not so fixed, on any date in April of every year as determined by the Board Held at any time deemed necessary or as provided in the by- laws. BOD Held monthly or as provided in the by laws.

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V. BY-LAWS SECTION 46: ADOPTION OF BY LAWS BY LAWS -These are rules of action adopted by a corporation for its internal government and for the government of its stockholders or members and those having the direction, management and control of its affairs in their relation to the corporation and as among themselves. Binding Effect: 1. As to members and corporation They have the force of contract between the members themselves. They are binding only upon the corporation and on its members and those having direction, management and control of its affairs. 2. As to third persons Third persons are not bound to know the by-laws which are merely provisions for the government of a corporation and notice to them will not be presumed. -Why? By-laws have no extra-corporate force and are not in the nature of legislative enactments so far as third persons are concerned. When are by-laws adopted? It maybe before or after incorporation. Generally every corporation formed under this Code must, within one (1) month after receipt of official notice of the issuance of its Certificate of Incorporation by the SEC adopt a code of by-laws for its government not inconsistent with this Code. However, by-laws may be adopted and filed prior to incorporation; in such case, such by-laws shall be approved and signed by all the incorporators and submitted to the SEC, together with the Articles of Incorporation. When are by-laws effective? In all cases, by-laws shall be effective only upon the issuance by the SEC of a certification that the by-laws are not inconsistent with this Code. How are by-laws adopted? c. Affirmative vote of majority of the OCS/members d. Signed by stockholders/members voting for them and shall be kept in the principal office of the corporation, subject to inspection of the stockholders or members during office hours e. Duly certified to by a majority of the directors or trustees and countersigned by the secretary of the corporation. f. Filed with the SEC, which shall be attached to the original articles of incorporation. Special Corporations: B3TIPES

Special

Held at anytime upon the call of the President or as provided in the by- laws.

NOTICE Regular

1 day notice prior to the scheduled meeting unless otherwise provided in the by-laws. Special 1 week written 1 day notice notice, unless prior to the otherwise scheduled provided in the meeting by-laws. unless otherwise provided in the by-laws. (the same as in regular meeting) *Notice of any meeting, either SH/Members or BODs meeting, may be waived, expressly or impliedly by the SH/Member or BOD/trustee. Who shall preside at meetings? - the President Exceptions: 1. When the by -laws provide otherwise; 2. the petitioning stockholder/member When there is no person authorized to call a meeting, a SH/member may petition the SEC upon showing of good cause therefor. SEC to issue an order to the petitioning stockholder or member directing him to call a meeting of the corporation by giving proper notice required by the Corporation Code or the by-laws. The petitioning stockholder or member shall preside thereat until at least a majority of the SH/members present have chosen one of their number as presiding officer (Sec. 50(4)). Proper Person to Call the Meeting: 1. Person designated in the by-laws normally it is the Corporate Secretary 2. In the absence of the secretary, a director/trustee or by an officer with interest in the management of the corporation unless there is a prohibition in the by-laws. 3. A SH or member on order of the SEC whenever for any cause, no person authorized to call a meeting. 4. Special meeting for the removal of director/trustee may be called by the Secretary or by the SH/member as provided by Sec. 28. Place and Time of Meetings/Quorum: PLACE SH/MEMBER (Regular or special) -city or municipality where the principal office of the corporation is located, and if practicable in the principal office of the corporation BOD/BOT May be held anywhere in or outside of the Philippines, unless the by-laws provide otherwise

2 weeks prior to the meeting unless a different period is required by the by-laws.

QUORUM

(Sec. 51) Majority of the OCS or members in case of non-stock unless otherwise provided for in the Corporation Code or in the by-laws.

(Sec. 53) Majority of members the Board directors trustees.

all of of or

Requisites of Notice of Meeting 1. Issued by one who has authority to issue it; 2. Must be in writing; 3. Must state the time, date and place of the meeting, unless otherwise provided in the by-laws; 4. Must state the business to be transacted thereat; 5. Must be sent at a certain time before the scheduled meeting as fixed by law, unless a different period is required by the bylaws. 6. The notice must comply with any other requirements prescribed by the law or by the by-laws of the Corporation. May the BOD change or postpone the date of meetings fixed in the by-law? Yes but not the annual meeting. Exception: Annual meetings may be postponed if there are justifiable reasons for its postponement as when the annual meetings cannot be held in the date fixed by the by -laws for some valid or justifiable reasons. However, no postponement is allowed if the effect is to prolong the term of the directors. NOTE: Meetings held in the absence of some of the directors and without any notice to them is illegal and the action at such meeting is invalid, unless subsequently ratified or waived. Requisites for a valid meeting of Stockholders or members: 1. It must be held at the proper place; 2. It must be held on stated date and at the appointed time or at a reasonable time thereafter; 3. It must be called by the proper person; 4. There must be a previous notice of meeting; 5. There must be a quorum. When is a meeting not required? 1. Amendment of the AI (sec. 16) 2. Sec. 101 action by the directors of a close corporation without a meeting but ratified 3. When there is agreement. Right to vote = an inherent right of the stockholders or members in the management of the corporation. May a stockholder be compensated for his time in coming to the corporation to vote? No, because voting is a right hence one is not paid for exercising such right. Who are entitled to vote? The SH/Members (record date). Except the ff. 1. Delinquent 2. Treasury shares 3. Non -voting shares, except under those 8 instances enumerated under sec. 6 A2MI3DS The following persons are not stockholders or members but may vote.

1.

Pledgor or mortgagor under sec.

55 A pledgor or mortgagor of shares remain entitled to vote on shares given as security unless an express written authority to vote is given to pledgee or mortgagee this authority being required by law to be registered in corporate books at the instance of the pledgor or mortgagor. 2. Executors, administrators, receivers, and the other legal representatives duly appointed by the court (sec. 55) Legal representatives (like executors, receivers, etc.) vote by legal mandate (without need of proxy) on shares subject to their administration. 2 Ways of Voting By the Stockholder or member: 1. In person 2. By proxy PROXY Definition: Proxy is the formal authority given by the holder of the stock, who has a right to vote it, or by a member, to another person to exercise the voting rights of the former. Requisites/limitations of a valid Proxy: 1. It shall be in writing and signed by the SH or member; 2. It must be filed before the scheduled meeting with the corporate secretary; 3. Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended or valid only for the specified meeting; 4. A continuing proxy may be for a period not exceeding five (5) years at any one time, otherwise it shall not be a valid and effective after such period. *NOTE: Directors or trustees cannot attend or vote by proxy at Board meetings. (Sec. 25, last paragraph) Kinds of Proxy: 1. General Proxy -Confers a general discretionary power of attorney to attend and vote at an annual meeting with all the powers the undersigned would possess if personally present, to vote for directors and all ordinary matters that may properly come before a regular meeting. 2. Limited Proxy - The power has a limited. Rules: 1. 1 proxy is given to 2 or more persons: Gen. Rule: All must agree upon the vote. If they cannot agree, rule of the majority applies. Exception: if the proxies discriminate -This means that the proxies determined the manner on how they should vote. Note: The stockholders instruction, if any, prevails. 2. When several proxies are submitted: a. Where proxies are dated -Latest proxy revokes the earlier proxy. b. Where proxies are undated

-If proxy is mailed to the corporation the one having the latest time of day of postmark -If submitted in person one presented latest. *NOTE: Dated proxies prevail over undated proxies Right to appoint a proxy: The right to appoint a proxy cannot be denied in a stock corporation but maybe denied in a Non-Stock Corporation. Reason for the distinction: In a stock corporation, the stockholder has an investment that he is protecting; the same is not true in a non-stock corporation. Revocation of proxies: Gen. Rule: Revocation takes place at any time. Exception: When the proxy is coupled with an interest (Proxy has parted with value or incurred liability at the SHs request, looking to the exercise or the proxy as the means of reimbursement or indemnity. E.g. Where D borrows money from C and D pledges his certificates of stock to C for the debt, giving C a written continuing proxy to attend and vote the shares at meetings of stockholders until the debt is paid. It is clear that D cannot revoke the proxy unless he first pays C.) How to revoke a proxy agreement: (In any manner either expressly or impliedly, hence notice is not actually required as when it was orally revoked) 1. Formal notice/expressly; 2. Orally/impliedly; 3. By conduct, as when during the meeting the SH appears, in this case the proxy is deemed revoked; 4. Issuance of a subsequent proxy; OR 5. Sale of shares of stockholder. VOTING TRUST AGREEMENT (VTA) Definition: It is an agreement in writing whereby one or more stockholders of a stock corporation transfer his or their shares to any person or persons or to a corporation having authority to act as a trustee for the purpose of vesting or conferring upon a trustee or trustees the Right to Vote and other rights pertaining to the shares for a period not exceeding 5 years at any one time. Limitations of a VTA : 1. It shall be good for a period not exceeding five (5) years at any one time BUT if required by a loan agreement, the period may go beyond five (5) years but the trust shall automatically cease upon full payment of the loan; 2. It must be in writing and duly notarized; 3. It shall not be entered to circumvent laws against monopolies and illegal combinations in restraint of trade nor shall it be used for purposes of fraud; 4. A certified copy of such agreement shall be filed with the corporation and with the SEC, otherwise said agreement is ineffective and unenforceable; 5. It shall be subject to examination by any stockholder of the corporation in the same manner as any other corporate book or record: Provided that both the transferor and the trustee or trustees may exercise the right of inspection of all corporate

6.

books and records in accordance with the provision of the code; Unless expressly renewed, all rights granted in a VTA shall automatically expire at the end of the agreed period, and the voting trust certificates as well as the certificates of stock in the name of the trustees shall thereby be deemed cancelled and new certificates of stock shall be reissued in the name of the transferors.

4.

He is the legal title holder or owner of the shares so transferred under the agreement. Hence he can be voted. If so then he is also qualified to be a director (Sec. 23)

VTA-How does it work? 1. Certificate of stock covered by the VTA shall be cancelled and new ones shall be issued in the name of the trustee or trustees stating that they are issued pursuant to said agreement. NOTE: In the books of the corporation, it shall be noted that the transfer in the name of the trustee or trustees is made pursuant to said VTA. EFFECT: The trustor becomes the beneficial owner. A stockholder of a stock corporation parts with the voting power only but retains the beneficial ownership of the stock. A voting trustee therefore is only a share owner vested with apparent legal title for the sole purpose of voting upon stocks that he does not own. HOWEVER, the transferring stockholder, although he has ceased to be the stockholder of record, retains the right of inspection of corporate books, which he can exercise concurrently with the voting trustee.

Rationale of VTA: Such an agreement makes possible a unified control of the affairs of the corporation and consistent policy by binding the SH to vote as a unit. It also makes it possible for a majority group of shareholders to dispose of the beneficial interest in a large proportion of their shares and still retains control of the corporation through the voting trustee. Cancellation of the VTA: Unless expressly renewed, all rights granted in a voting trust agreement shall automatically expire at the end of the agreed period, and the voting trust certificates as well as the certificates of stock in the name of the trustee or trustees shall thereby be deemed cancelled and new certificates of stocks shall be reissued in the name of the transferors. VOTING TRUST vs. PROXY VOTING TRUST PROXY 1. Trustee acquires 1. Proxy has no legal legal title to the title to the shares of shares of the the principal transferring stockholder 2. Generally, the 2. Generally revocable agreement is except when coupled irrevocable for a with interest. definite and limited period of time. 3. Trustee can act in 3. Proxy can only act all meetings during at a specified meeting the lifetime of the unless otherwise VTA. provided (continuing) 4. Trustee can vote 4. Proxy can only vote and exercise all the if in the absence of rights of the the owner of the transferring stock. stockholder even Reason: Presence of when the latter is SH in a meeting is an present. implied revocation of the proxy. 5. A VTA must not 5. A proxy is usually exceed 5 years at any shorter in duration one time except when although it cannot the same is made a exceed 5 years at any condition of a loan. one time (Sec. 58) 6. There is transfer of 6. No transfer of share share 7. Filed with the SEC 7. Filed only with the otherwise it is Corporate secretary. ineffective and Filing with the SEC not unenforceable. needed. 8. The agreement 8. The proxy need not must be notarized be notarized 9. The voting right is 9. The right to vote is divorced from the inherent and ownership of stocks inseparable from the right to stock ownership. 10. The trustee votes 10. The proxy holder as owner rather than votes as agent as mere agent *The maximum duration of both cannot exceed five (5) years at any one time. ----------------------------------------------------------------------

2.

Trustee(s) shall execute and deliver to the transferor a voting trust certificates (VTC), which shall be transferable in the same manner and with the same effect as certificates of stock. EXPLANATION: In return for the certificates of stock, the voting trustee executes and delivers to the stockholders voting trust certificates to show that the latter are in reality the owners of the shares held by the voting trustee. The owners are thus enabled to claim the dividends when they are collected by the trustee and to recover their stocks at the expiration of the trust. Effects of the executing and delivering VTC to the Stockholder (transferor): 1. To show that the SH is in reality the owner of the shares held by the voting trustee 2. To enable him to claim the right to the dividend when they are collected by the trustee. 3. To inspect corporate books 4. To recover his shares of stock at the expiration of the trust. Rights of voting trustee: 1. The trustee(s) shall possess the right to vote and other rights pertaining to the shares so transferred and registered in his or their names subject to the terms and conditions of and for the period specified in the agreement. 2. When he votes, he may vote in person or by proxy unless the agreement provides otherwise. 3. They may exercise, like the transferor, the rights of inspection of all corporate booked and records.

VII. STOCKS AND STOCKHOLDERS Ways by which a person becomes a Stockholder 1. By Subscription 2. By Purchase/transfer Subscription contract - It is any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed. *Notice that subscription pertains only to unissued stocks. Kinds of Subscription 1. Pre-incorporation subscription contract (Sec. 61) One entered into before incorporation. It constitutes a binding contract among the subscribers. (Sec. 61) This is mandatory. (Sec. 13) [25%/25% requirement] Gen. Rule: A subscription for shares of stock of a corporation still to be formed shall be irrevocable for a period of at least 6 months from the date of subscription. Rationale of the GR: To ensure that the corporation shall have the capital to undertake the business of which it is established. Exceptions: a. When all of the other subscribers consent to the revocation; or b. The incorporation of the corporation fails to materialize within said period or within a longer period as may be stipulated in the contract of subscription. *Notice that the 6 months period as provided in the Gen. Rule applies only if no stipulation is made in the subscription contract. The 6 months may also be shortened if so stipulated in the subscription contract. When is the Pre-incorporation Subscription Contract absolutely irrevocable? -after the submission of the AI to the SEC. *In Ong Yong vs. CA (02/01/02), the SC allowed the rescission of a preincorporation subscription contract on the ground of substantial breach of obligations as provided in Art. 1191 of the NCC. The SC recognized the nature of a preincorporation subscription contract as a reciprocal obligation by the original subscribers with the corporation intended to be formed as a beneficiary of pour autri stipulation in such agreement. 2. Post-incorporation subscription contract One entered into after the incorporation for the acquisition of unissued stock. STOCK OPTION is a privilege granted to a party to subscribe to a certain portion of the unissued capital stock of a corporation within a certain period and under the terms and conditions of the

grant exercisable by the grantee at any time within the period granted. STOCK OPTION is a contract to buy or purchase whereas in SUBSCRIPTION, the contract is already executed. Purchase or transfer Buying issued shares from a stockholder or from the corporation itself. *Notice that this pertains to issued shares in contradistinction with subscription. Sources of Corporate Capital: 1. Funds furnished by shareholders 2. Borrowings 3. Profits and stock dividends WARRANT 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, evidenced by a Warrant Certificate, whether detachable or not, which may be soled or offered for sale to the public. SHARES OF STOCK - Interest or right which the owner has in the management of the corporation, and its surplus, profits, and, on dissolution, in all of its assets remaining after the payment of its debt. CONSIDERATION FOR STOCKS (Sec. 62) Rule: Stocks shall not be issued for a consideration less than the par or issued price thereof. -If less than its par or issued price watered stock Consideration for the issuance of stock may be any or a combination of any two or more of the following: 1. Actual cash; 2. Property, tangible or intangible, a. actually received by the corporation b. and necessary or convenient for its use and lawful purposes c. at a fair valuation equal to the par or issued value of the stock issued; 3. Labor performed for, or services actually rendered to, the corporation; 4. Previously incurred indebtedness by the corporation; 5. Amounts transferred from unrestricted retained earnings to stated capital; (increase of capital by declared stock dividends) 6. Outstanding shares exchanged for stocks in the event of reclassification or conversion, e.g. common shares of stock. NOTE: Promissory notes or future services cannot be made as payment for shares of stock. May postdated checks be accepted as payment? No. As a rule the corporation must actually receive the cash or property. *Who determines the valuation if the consideration is other than cash? Where the consideration is other than cash or consists of intangible property such as patents or copyrights, the valuation thereof

shall initially be determined by the incorporators or the board of directors, subject to approval by the SEC. Hence there must be a valuation fixed by the Board, approved by the SEC before the property is accepted as consideration. If accepted as consideration and no valuation, the stock is considered as watered. (sec. 65) *What about no par value shares, how are there issued price determined? The issued price of no-par value shares may be: a. fixed in the Articles of Incorporation; or b. by the BOD pursuant to authority conferred upon it by the AI or the by-laws or in the absence thereof, c. by the stockholders representing at least a majority of the OCS at a meeting duly called for the purpose Bonds The same consideration as provided for in this section (Sec. 62) insofar as they may be applicable, may be used for the issuance of bonds by the corporation. When one is supposed to pay? At the date fixed in the subscription contract or, if no date is fixed, upon CALL (demand to pay) by the board. What happens if there was failure to pay on the date fixed or upon call? 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 of interest as provided in the by-laws, computed from such date until full payment. Within 30 days after the call or after the date fixed in the by-laws, there was still failure to pay, the shares shall become delinquent shares. Purpose of a call: To fix the date of payment. Requisites of a valid call: 1. It must be made by the board through a resolution 2. It must operate uniformly either to all or a particular class or species of share. Is a call absolutely necessary? No, call is not necessary in the following instances: a. If corporation is already insolvent; b. Subscriber is insolvent; c. If there is a date fixed in the subscription contract. What one is supposed to pay? a. Amount of unpaid subscription b. The interest on all unpaid subscriptions from the date of subscription, if so required by, and at the rate of interest fixed in, the by-laws. If no rate of interest is fixed in the by-laws, such rate shall be deemed to be the legal rate. Now that one has paid, he is now entitled to shares of stocks and the corresponding certificate of stocks. STOCK CERTIFICATE -This is a written instrument signed by the proper officer (president or the vice president) of a

corporation stating or acknowledging that the person named thereon is the owner of a designated number of shares of its stock. Stockholder has the right to a certificate of stock Upon full payment of the amount of the subscription together with the interest and expenses (in case of delinquent shares) if any. What are the formal requisites of a certificate of stock? 1. Signed by the President or VP. 2. Countersigned by the Secretary or asst. secretary. 3. Issued in accordance with the bylaws. 4. It contains the corporate seal. Where the stock certificate reflects a greater volume of shares than the actual number of shares issued or to be issued, the following rules may be considered: 1. To the extent that there was an overissue, the excess issuance (over the authorized capital stock or stated capital) shall be void as being ultra vires. 2. If there is no overissue, but no payment has been made to cover the par or stated value of the excess shares, the latter would constitute watered stocks. 3. If there is no overissue and watering of stocks, the corporation may be bound to honor the certificate (if duly signed and released by its authorized officers) in the hands of a holder in good faith, reserving a right of recourse that an aggrieved party may pursue against the culpable or unjustly enriched party. How are partial payments treated? Partial payment must be applied on the number of shares covered by it BUT in the case of Baltazar (14 SCRA 522); Partial payment must be pro-rated among all the shares Eg. If A subscribed 500 shares at 100 peso per share and he paid only 25,000 pesos. He is deemed to have paid only 50 pesos of the 100 peso per share subscription price. This doctrine was however decided under the old laws but there may still be corporations existing that are governed by the old law. Once the stocks are issued in the name of the stockholder, the shares of stocks so issued become his personal property. Effect: It being his personal property, he may transfer the same if he wants to (remember that transfer or purchase is one of the modes by which one becomes a stockholder) Requisite of a valid transfer: It should be recorded in the books of the corporation. Exception: Sole Corporation Who should do the recording? The corporate secretary. Other than him the recording is ineffective. However, another person may do it provided it is done under his supervision. (278 SCRA 792) When may the corporate secretary refuse the recording? Corporate secretary may refuse or the corporation may oppose recording or transfer when

the corporation holds an unpaid claim against the shares of stocks. (sec. 63) In the Chinabank case (270 SCRA 503) the shares of stock against which the corporation holds an unpaid claim is defined as a delinquency. Is it not that under section 64 stock certificate shall be issued only when they are fully paid? Yes but the unpaid claims as hereto referred arises from instances where by honest mistake the corporation issued a stock certificate to a subscriber unknowingly that he has not yet fully paid his subscription. How is transfer made? Transfer is made by endorsement and delivery of the certificate. Reasons for Requiring Registration of Stock transfer: 1. To enable the corporation to know at all times who are its stockholders because mutual rights and obligations exist between the corporation and its stockholders. 2. To afford the corporation an opportunity to object or refuse to the transfer in case it has a claim against the stock sought to be transferred, or for any valid reason. 3. To avoid fictitious or fraudulent transfers. How about a subscription, can it be transferred? Yes, but with consent of the corporation. This is in effect a novation. Effects of Unregistered Transfer: 1. Valid only between transferor and transferee 2. Invalid as against the corporation until notice is given. 3. Invalid as against the corporate creditors. When do they come in? Under the doctrine of Piercing the Veil of Corporate Entity. Remember that the purpose of the same is to make the stockholders liable. 4. Invalid as against creditors of transferor 5. Transferor continues the right to vote and be voted until he is challenged. 6. Transferor continues to enjoy the right to receive the dividends until there is recording. SUBSCRIBER vs. STOCKHOLDER A subscriber is one who has not yet fully paid his subscription, whereas a stockholder is one who has paid his subscription. Holders of subscribed shares not fully paid which are not delinquent (CF) shall have all the rights of a stockholder (Sec. 72) In the case of First Phil. Holding, 253 SCRA, the SC said a stock certificate is not necessary to establish the relationship of a Stockholder with the corporation. The evidence is now the receipt of payment. If the stocks are fully paid but the certificate of stocks is not yet issued is one already considered a stockholder? Yes, because if section 72 considers one to be a stockholder even if he has not yet fully paid then with more reason that a person who has fully paid his subscription be considered a stockholder.

RIGHTS OF STOCKHOLDERS: 1. Managerial Rights a. Voting rights; and b. Right to remove directors 2. Appraisal Rights 3. Proprietary Rights a. Right to dividends; b. Right to issuance of certificate of stock for fully paid shares; c. Proportionate participation in the distribution of assets in liquidation; d. Right to transfer of stocks in corporate books; e. Pre-emptive right; f. Right to recover stocks unlawfully sold for delinquent payment of subscription; g. Right to be furnished of the most recent financial statement/ financial report.

4.

Inspection Right right to inspect books and records

5. Remedial rights a. Individual suit a suit instituted by a shareholder for his own behalf against the corporation; b. Representative suit a suit filed by a shareholder in his behalf and in behalf of other stockholders similarly situated and with a common cause against the corporation; and c. Derivative suit a suit filed in behalf of the corporation by its stockholders (not creditors whose remedies are merely subsidiary such as accion subrogatoria and accion pauliana) upon a cause of action belonging to the corporation, but not duly pursued by it, against any person, director, officer and/or controlling shareholders of the corporation. What is the presumption if one is issued his certificate of stock? The presumption is that he has fully paid his subscription. WATERED STOCKS These are stocks issued not in exchange for its equivalent. Watered stocks includes: 1. Stock issued without consideration 2. Issued as fully paid when the corporation has received a less sum of money than its par or issued value 3. Other than cash but valuation less than the par or issued value 4. Issued as stock dividend when there are no sufficient retained earning or surplus (as if not paid the full amount of subscription) Who are primarily liable? The holder of the watered stock shall be liable to the corporation and its creditors for the difference between the fair values received at the time of issuance of the stock and the par or issued value of the same. Are there instances when not only the SH is liable? Yes under the following instances:

1.

2.

When a director or officer of a corporation consented 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 (This is the remedy of a director or officer if he wants to avoid liability arising from the issuance of a watered stock of which he has knowledge.)

At public auction sale, M offers to pay P800 for 1,000 shares, L, P800 for 900 shares and T, P800 for 800 shares. T is the highest bidder and the remaining 200 shares shall go to X, the original subscriber. *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. When may the auction be cancelled? 1. If the delinquent SH pays to the corporation, on or before the date specified for the sale, the balance due on his subscription plus accrued interest, cost of advertisement plus expenses of the sale. 2. If the Board otherwise orders. What happens if there are no bidders? The corporation may purchase the delinquent stocks. The purchase must be made out of its net earnings in view of the trust fund doctrine (Sec. 41[2]). *** Advertisements for bidders are simply invitations to make proposals, and the advertiser is not bound to accept the highest or lowest bidder, unless the contrary appears (Art. 1326,NCC) When may the auction sale be questioned? When there is irregularity or defect in the notice of sale, or in the sale itself of the delinquent stock. Remedy: Recovery of the stocks Requisites before one may file an action to recover: a. The party seeking to maintain such action must first pay or tender to the party holding the stocks the sum for which the same was sold with interest from the date of sale at the legal rate. b. The action must be filed within 6 months from the date of sale. Can the corporation dispense with the auction sale as a remedy? Yes, by first filing a judicial action to collect the amount due in any unpaid subscription with accrued interest, costs and expenses. Call is still necessary. Rights of Unpaid Shares (Sec. 72) Holders of subscribed shares NOT FULLY PAID which are NOT DELINQUENT shall have all the rights of a stockholder. LOST, STOLEN OR DESTROYED CERTIFICATE OF STOCK (Sec. 73) PROCEDURE: 1. The registered owner of the certificate or his legal representative shall file with the corporation an affidavit in triplicate, setting forth if possible, the circumstances as to: a) how the certificates were lost, stolen or destroyed, b) the number of shares represented by each certificate,

What is the extent of liability in those instances? The director or officer 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. *Notice that Section 64 does not apply. *Notice likewise that section 65 does not also distinguish whether the issuance of a watered stock is deliberate or not. Coverage Only originally issued shares may be watered. Hence, it arises only in a transaction between the corporation and a subscriber. Note: Any subsequent appreciation in value of the shares will not cure the defect. Reason: The liability for watered stocks arises from the time the stocks are issued. DELINQUENT SHARES: Effects 1. 2. 3. of Declaration of Delinquency (Sec. 71) Delinquent stocks cannot be voted for Cannot vote in any election No representation at any stockholders meeting 4. Not entitled to any of the right of the stockholder except the right to receive dividends but subject to the rules under sec. 43.

Procedures for delinquency sale: (Sec 68) 1. There must be a board resolution ordering the sale stating the amount due on each subscription plus all accrued interest and the date, time and place of the sale which shall not be less than 30 days nor more than 60 days from the date the stocks became delinquent. 2. Notice of sale, with a copy of the resolution given to the delinquent SH personally or by registered mail. This must also be published once a week for 2 consecutive weeks in the province or city where the principal office of the corporation is located. 3. Auction sale whereby the stocks are sold to the highest bidder. Who is a highest bidder? He is the person offering at the sale to pay the full amount of the balance on the subscription together with the accrued interest if any, cost of advertising and expenses of the sale, for the smallest number of shares or fraction of a share (Why smallest number of share to give possibility for the subscriber to have something left for him). Illustration

2.

the name of the corporation which issued the same, and d) Such other information and evidence which he may deem necessary. The corporation shall publish a notice in a newspaper of general circulation once a week for 3 consecutive weeks at the expense of the registered owner.

c)

b.

c.

The person demanding the right has not improperly used any information obtained through any previous examination of the books and records of the corporation; and The demand is made in good faith or for a legitimate purpose.

When may the corp. issue a new certificate of stock? A: After the expiration of 1 year from the date of last publication. If no contest has been presented to said corp. after the expiration of 1 year the right to make the contest shall be barred. If contest has been presented to the corp. or an action is pending in court regarding the ownership, the issuance of a new certificate shall be suspended until final determination by the court regarding the ownership of the lost, stolen or destroyed certificate. Gen. Rule: No action may be brought against any corp. for the issuance of a new certificate Exceptions: in case of fraud, bad faith or negligence on the part of the corp. and officers. May the requirement of publication be dispensed with? Yes, if bond or surety is filed by shareholder running for a period of 1 year, in which case a new certificate may be issued even before the expiration of 1 year -----------------------------------------------------------------VIII. CORPORATE BOOKS AND RECORDS Books and Records to be Kept by the Corporation (Sec. 74): 1. A record of all business transactions; 2. Minutes of all meetings contents set forth in details the time and place of meeting whether regular or special those present and absent every act ordered at the meeting UPON DEMAND, time when director/shareholder/members entered or left, yes or no vote or protest 3. Stock and transfer books, in case of stock corporation records of all stocks and names of shareholder installments paid and unpaid in all stock for which subscription has been made - Kept in principal office of the corp. or office of the stock or transfer agent Non-stock corp. do not have stock and transfer books. Sole corp. may not have all these books

OFFICER/AGENT of corp. who refuses to allow examination and copying of excerpts liable for damages and guilty of violation of the Corporation Code; if acting based on a board resolution or order of directors, liability attaches to the directors who voted for the refusal. Mandamus available remedy of the stockholder or member if wrongfully refused to exercise the right. STOCKS AND TRANSFER AGENT - One engaged principally in the business of registering transfer of stocks in behalf of a stock corp. - allowed to operate in the Philippines if he secures a license from the SEC and pays a fee which shall be renewed annually. Stock corp is not precluded from making transfer of its own stocks A Corp. B Corp.: X shareholder of A Corp.; A Corp. is a shareholder of B Corp Gen Rule: No right of inspection by X to the books of B Corp. Except: If it is wholly owned subsidiary Conditions: (89 SCRA 336) 1. If owned entirely by the corp. of which he is a shareholder 2. Both corporations use the same office 3. Both corporations have identical directors Sec. 75: RIGHTS TO FINANCIAL STATEMENTS When is a corp. mandated to furnish its recent financial statement? Within 10 days from receipt of a written request of any shareholder or member What does the written statement include? 1. Balance sheet as of the end of the last taxable year 2. Profit or loss statement for said taxable year showing in reasonable details its assets and liabilities and result of its operation OBLIGATION OF THE BOARD financial report of the operations of the corp. for the preceding year, which shall include financial statement, duly signed and certified by an independent CPA PAID- UP CAPITAL OF CORP. less than 50T, financial statements may be certified under oath by the treasurer or any responsible officer of the corporation.

-------------------------------------------------------------------IX. MERGER AND CONSOLIDATION MERGER A union whereby one or more existing corporations are absorbed by another corporation which survives and continues the combined business. CONSOLIDATION

INSPECTION RIGHTS of a Stockholder Limitations: a. The right must be exercised during reasonable hours on business days;

 The union of two or more existing corporations to form a new corporation called the consolidated corporation. Reasons: (1) expansion, (2) profitability, (3) effective loss management, (4) lesser cost PROCEDURE Sec. 76-79 1. Board of each constituent corp. execute a plan of merger or consolidation contents of plan a. Names of the corporations proposing to merge/consolidate b. The terms of the merger or consolidation and the mode of carrying the same into effect c. A statement in the changes of AI of the surviving corp. in case of merger and with respect to the consolidated corp., in case of consolidation, all the statements required to be set forth in the AI d. Such other provisions with respect to the proposed merger or consolidation as are deemed necessary or desirable 2. Approval by majority of each of the board of the constituent corporations 3. Submitted for approval to shareholders/members of each of such corporations at separate meetings notice given at least 2 weeks prior to the date of the meeting / include a summary of the plan - Q: May the right of Appraisal be taken away? A: Yes when the board decided to abandon the plan after approval by the shareholder of such plan Amendment to the plan of merger or consolidation a. approval of majority vote of the boards of all constituent corps. b. ratified by the shareholder representing 2/3 of the OCS

1. The constituent corporations shall become a single corporation which, in case of merger shall be the surviving corporation, and in case of consolidation, shall be the consolidated corporation; 2. Separate existence of the constituent corporations shall cease, except that of the surviving or consolidated corporation; 3. The surviving or consolidated corporation shall possess all the rights, privileges, immunities and powers and shall be subjected to all the duties and liabilities of a corporation; 4. The surviving or consolidated corporation shall possess all the rights, privileges, immunities and franchise of each of the constituent corporations; 5. All property, real or personal, and all receivables due to, and all other interest of, each constituent corporation shall be deemed transferred to and vested in such surviving or consolidated corporation without further act or deed (transfer is automatic); 6. The surviving or consolidated corporation shall be responsible for all the liabilities and obligations of each of the constituent corporations. 7. Any claim, action or proceeding pending by or against any of such constituent corporations may be prosecuted by or against the surviving or consolidated corporation; 8. The rights of creditors or lien upon the property of any of each of the constituent corporations shall NOT be impaired by such merger or consolidation >SALE< Gen. Rule: When one corporation buys all the shares of another corporation, this will not operate to dissolve the other corporation and as the two corporations still maintaining their separate corporate entities, one will not answer for the debts of the other. Exceptions as to non-assumption of liabilities: 1. If there is an express assumption of liabilities; 2. If there is a consolidation or merger; 3. If the purchase was in fraud of creditors; and 4. If the purchaser is merely a continuation of the seller.

4.

5.

6.

Execution of articles of merger or consolidation by each of the constituent corp. signed by the President or VP and certified by the Secretary or Asst. Secretary by each corp. setting forth: b. the plan of merger or consolidation c. as to stock corp., the number of shares outstanding, in case of nonstock the number of members d. as to each corp. the number of shares or members voting for or against such plan Approval by the SEC (in quadruplicate) if banks or banking institutions, building and loan associations, trust co., insurance co,. public utilities, educational institutions and other special corps. governed by special laws, FAVORABLE recommendation of the appropriate government agency be obtained first. Issuance of the certificate of merger / consolidation - upon such time merger or consolidation shall be effective If SEC has reason to believe that the proposed merger or consolidation is contrary law: set a hearing for the corp. to be heard notice be given at least 2 weeks prior to the hearing

MERGER/CONSOLIDATION ASSETS Merger/Consolidatio n 1. Sale of assets is not always involved 2. There is automatic assumption by the surviving/ consolidated corp of the liabilities of the constituent corp. 3.There is a continuance of the enterprise and of the shareholders thereon though in an altered form 4.The title to the assets of the corp. is by operation of law transferred to the new corp. 5. Constituent corps. are automatically dissolved

vs.

SALE

OF

Sale of Assets 1. Sale of assets is always involved 2. The purchasing corp is not generally liable for the duties and liabilities of the selling corp 3. The selling corp. ordinarily contemplates a liquidation of the enterprise 4.Transfer of title is by virtue of contract

Effects of Merger or Consolidation (Sec. 80)

5. The selling corp is not dissolved by the mere transfer of its

property -----------------------------------------------------------------------IX. APPRAISAL RIGHT Sec. 81: APPRAISAL RIGHT - right of shareholder to demand payment of the fair value of his shares after dissenting from a proposed corporate action involving a fundamental change in the corporation in the cases provided by law. INSTANCES WHEN THE APPRAISAL RIGHT MAY BE EXERCISED 1. In case of any amendment to the AI which has the effect of changing or restricting the rights of any shareholder or class of shares, or authorizing preferences in any respect superior to those of outstanding shares of any class; 2. Amendment which has the effect 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 corporate property and assets; 4. In case of merger or consolidation; 5. Investment of corporate funds to another corporation or business for any purpose other than its primary purpose; 6. Shareholder of any close corporation may compel the corporation to allow him to exercise the right when the corporation has sufficient assets in the books to cover its debts and liabilities exclusive of capital stock. (Sec. 85) HOW TO EXERCISE APPRAISAL RIGHT (Sec. 82) 1. By voting against the proposed action 2. By making a written demand within 30 days after the vote was taken. 3. By surrendering the Certificate of Stock within 10 days from demand (for notation only that such is dissenting share, once noted, return to shareholder) - importance of surrender Sec. 86 so that shareholder rights will not be terminated 4. All rights accruing to the shares from demand for payment until either abandonment of the corporate action involved or the purchase of said shares by the corp. shall be suspended (30 days) including voting and dividend rights EXCEPT the right to receive the payment of fair value. - Note: Failure to make a written demand within 30 days shall be deemed a waiver of appraisal right - If the withdrawing shareholder and corp. cannot agree on the fair value of the shares within 60 days appraised by 3 disinterested persons (1 by shareholder, 1 by corp, 1 chosen by the 2) findings of the majority of the appraisers shall be final and the award be paid by the corp within 30 days after award is made.

6.

Upon payment, shareholder shall transfer his shares to the corp. effect if dissenting shareholder Is not paid the value of his shares within 30 days after the award His voting and dividend rights shall immediately be received (back as shareholder)

EXTINGUISHMENT OF RIGHT OF PAYMENT Gen Rule: No demand of payment of the FV of shares may be withdrawn Exceptions: 1. Such shareholder withdraws his demand for payment and the corporation consents thereto; 2. Proposed corporate action is abandoned or rescinded by the corporation; 3. The proposed corporate action is disapproved by SEC, where its approval is necessary; 4. The SEC determines that such shareholder is not entitled to appraisal right. Effects when right of Payment has ceased: 1. Restored as shareholder 2. All dividends which would have accrued in his shares shall be paid to him Sec. 85: WHO BEARS THE COST OF APPRAISAL 1. By the corporation a. Where the price offered by the stockholder is approximately the same as the FV ascertained by the appraisers; or b. In case of an action to recover such FV is filed by the dissenting shareholder and his refusal to accept payment is found by the court to be justified. By the Stockholder a. Where the price offered by the corporation is approximately the same as the FV ascertained by the appraisers; or b. In case of an action to recover such FV is filed by the dissenting shareholder and his refusal to accept payment is found by the court to be unjustified.

2.

Effects of Transfer of Shares/COS 1. The rights of transferor as dissenting shareholder shall cease and transferee shall have all the rights of a regular shareholder. 2. All dividends which or would have accrued to such shares shall be paid to transferee. purchasing the dissenting shares is an indication on the part of the transferee to become a shareholder which is in contrast to the right of appraisal. ---------------------------------------------------------------------XI. NON-STOCK CORPORATIONS NON-STOCK CORPORATION (Sec. 87) -one where no part of its income is distributable as dividends to its members, trustees, or officers, subject to the provisions of the Corporation Code on dissolution

5.

Corp. pays the shareholder the fair market value of the share fair value as of the day prior to the date on which the vote was taken, excluding any appreciation or depreciation in anticipation of such corporate action

- Any profit obtained as an incident to its operations shall be used for the furtherance of the purpose(s) for which it was organized. Purposes (Sec. 88): charitable, religious, educational, professional, cultural, recreational, fraternal, literary, scientific, social, civil service, or similar purposes, like trade, industry, agricultural and like chambers or combination thereof. *NSCs are governed by the same rules established for stock corporations, whenever pertinent, subject, however, to a number of special features. STOCK CORPORATION CORPORATION SC 1. Has capital stock divided into shares and with authority to distribute to its stockholders 2. Stockholders may transfer their shares vs. NON-STOCK

- Members meeting In or out of the place where the principal office of the corporation is located, so long as it is within the Philippines - notice be sent to all members indicating the date, time and place of meeting. Sec. 93: DISTRIBUTION OF ASSETS -Dissolution execute a plan of distribution of assets Procedure: 1. Adoption of a resolution recommending a plan of distribution by or majority vote of the BOT. 2. Submission for voting at a regular or special meeting. 3. Written notice to each member entitled to vote, set forth the proposed plan or summary thereof; date, time and place of meeting. 4. Adoption of the plan upon approval of at least 2/3 of the members having voting rights present or by proxy. Conversion of NSC to SC: - Dissolution of NSC before organizing a stock corporation. (SC to NSC : Mere amendment of AI) Sec. 94: RULES ON DISTRIBUTION 1. 2. 3. All liabilities shall be paid or satisfied for adequate provisions. Assets held subject to return upon dissolution shall be delivered back to their respective transferors; Assets held for charitable, religious, etc, without a condition for their return on dissolution shall be conveyed to one or more organizations engaged in similar activities as the dissolved corporation; Other assets shall be distributed to members as provided for in the AI or bylaws; In any other case, assets may be distributed as provided in the plan of distribution.

NSC 1. Does not have shares and may not distribute profits to its members 2. Members cannot transfer their membership unless allowed by the AI or by-laws 3. cumulative voting not available unless otherwise provided in the AI or by-laws 4. Trustees may exceed 15 in number 5. The term of a trustee is 3 years; 1/3 of the Board shall be elected annually 6. Members may be deprived of the right to vote by proxy in the AI or by-laws 7. Officers may be directly elected by the members unless otherwise provided in the AI or by-laws 8. Members may be allowed by the by-laws to vote by mail or other similar means. 9. Members meeting in or out of the place where the principal office is located.

3. Cumulative voting is available in the election of directors 4. Directors cannot exceed 15 in number 5. The term of a director is 1 year 6. Stockholders vote by proxy may

4. 5.

7. Officers are elected by the Board of Directors 8. Stockholders and directors must act in a meeting, except where a mere written assent is sufficient or a formal meeting unnecessary 9. Stockholders meeting to be held at the place where the principal office is located

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XII. CLOSE CORPORATIONS CLOSE CORPORATION (Sec. 96) - A special kind of stock corporation: 1. whose Articles of Incorporation provide that: a) all shares except treasury shares are held on record by persons not exceeding 20; b) issued stock s are subject to one or more restrictions, with a right of preemption in favor of the stockholders or the corporation; and c) the corporation shall not be listed in the stock exchange or its stocks should not be publicly offered; AND 2. whose 2/3 of the voting stocks or voting rights is NOT owned or controlled by another corporation which is not a close corporation.

Sec. 89: RIGHT TO VOTE Gen Rule: Each member regardless of class, shall be entitled to 1 vote Except: If limited, broadened or denied by the AI or by-laws Power of Courts: - Courts have no power to strip a member of his membership therein without cause. -Who can be trustees? Any member of the NSC - Vacancy filled by election only for unexpired term Sec. 93: PLACE OF MEETINGS

What kind of restrictions can the corporation put? -Any restriction provided it does not violate Sec. 98: 1. Restrictions on the right to transfer shares must appear in the AI or By-Laws and in the Certificate of Stock, otherwise not binding upon a purchaser in good faith. 2. Restrictions shall not be more onerous than granting the existing shareholder or the corporation the option to purchase the shares of the transferring shareholder with such reasonable terms, conditions or period stated thereon. e.g. a) FMV of shares = 100 if sold less 10% ( cant because it is more burdensome) b) Transferring without prior consent of the board If corp. fails to exercise the option Shareholder may now transfer to third person who wishes to buy. 3. Close Corp. may not list in a stock exchange or make any public offering of its shares. - Corp. must be listed in the Phil Stock Exchange (reason: shares may be held by anybody who is unknown/not denied) Public Offering offering ones share for the unknown public Can a corp. be part of a close corp.? Yes provided it does not own or control 2/3 of OCS of a close corporation or control 2/3 of stocks having voting rights.

6. 7. 8.

Preemptive right extends to all stock issues; Deadlocks in board are settled by the SEC, on the written petition by any stockholder; and A stockholder may withdraw and avail of his right of appraisal.

Articles of Incorporation (Sec. 97): -Aside from the general matters of Art. 14, the AI of a close corporation may provide: 1. For a a) classification of shares or rights b) prescribe qualification for owning/holding shares c) restrictions on their transfer 2. For a classification of directors into one or more classes, each of which may be voted for and elected solely by a particular class of stocks; 3. For a greater quorum or voting requirements in meetings of stockholders or directors 4. That the business of the corporation shall be managed by the stockholders rather than the BOD so long as this provision continues in effect: a) No meeting of stockholders need be called to elect directors; b) Unless the context clearly requires otherwise, the stockholders shall be deemed to be directors for all intents c) The stockholders and the corporation shall be subject to all liabilities of directors. 5. That all officers or employees or that specified officers or employees shall be elected or appointed by the stockholders instead of the BOD. Terms of directors: 1 year Issuance or Transfer of Stock of a Close Corporation in Breach of Qualifying Conditions (Sec. 99): 1. A person holding stocks - if the qualification for ownership is conspicuously stated in the certificate of stock, the person holding such certificate is conclusively presumed to have knowledge of such qualification. - Effect: Corp at its option may refuse the transfer in its favor 2. If the AI states the number of persons not in excess of 20 to be entitled to be holders on record of its stock and the certificate conspicuously states such numbers, the person to whom such stock is issued in excess of the nos. required is conclusively presumed to have knowledge of the fact. - Effect: Corp. may refuse to record the transfer to its books 3. If a stock certificate conspicuously shows a restriction on transfer of stocks, transferee is conclusively presumed to have notice of the fact that he has acquired stock in violation of the restriction, if such acquisition violates the restriction. If transfer actually violates the restriction without prejudice to the right of transferee to proceed against transferor Effect of Violation of the Presumption Gen. Rule:- The corporation may at its option, refuse to register the transfer of the stock in the name of the transferee Except: 1. if the transfer of the stock has been consented to by all shareholders of the close corporation; or

Right of First Refusal - The shareholder who wants to sell his shares must first offer it either to the corporation or to the other existing shareholders. If the corporation or existing shareholders fail to exercise the option to purchase within the period stated (1 month) the transferring shareholder may sell his shares to any third person. Gen Rule: Any corporation may be incorporated as a close corporation Exceptions: 1. mining companies; 2. oil companies; 3. stock exchanges; 4. banks; 5. insurance companies; 6. public utilities; 7. education institutions; 8. other corporations declared to be vested with public interest CHARACTERISTICS OF CLOSE CORPORATIONS: 1. Stockholders may act as directors without need of election and therefore are liable as directors; 2. Stockholder who are involved in the management of the corporation are liable in the same manner as directors are; 3. Quorum may be greater than mere majority; 4. Transfers of stocks to others, which would increase the number of stockholders to more than the maximum, are invalid; 5. Corporate actuations may be binding even without a formal board meeting, if the stockholder had knowledge or ratified the informal action of the others;

2. if the corporation has amended its AI. Transfer not limited to a transfer for value Note: Better to dissolve the corp. and incorporate again if it wants to convert it into another kind Amendment that may terminate the status of a close corp. 2 kinds: 1. To delete/remove any of the provisions under the title; 2. To reduce the quorum or voting requirement reduction of what is required by law to ordinary shareholder 2/3 to effect amendment include all shareholder with or without voting rights Rights of transferee not impaired by the provisions of this section: 1. Right to rescind the transaction; or 2. Right to recover under any applicable warranty, express or implied. Rules on Agreements By Stockholders (Sec. 100) 1. Agreements by and among shareholders before the formation and organization of a close corporation signed by all stockholders: survive the incorporation of such corporation and valid and binding, if not inconsistent with the AI, irrespective if embodied in AI or not, except those required by the Corporation Code to be embodied in the AI. *Prior to incorp. Shareholder can enter into any agreement as long as it is legal. *After incorp. agreement continues to subsist/ valid and binding 2. Shareholders agreement, in writing and signed by the parties thereto, may provide that in exercising any voting rights, the shares held by them shall be voted: a) as therein provided; b) as they may agree; or c) as determined in accordance with a procedure agreed upon by them How shares will be voted? Agree at the time of voting how to vote Procedure to determine how they will vote Voting trust / voting by proxy as equivalent in ordinary situation 3. No provision in any written agreement signed by stockholders, relating to any phase of the corporate affairs, shall be invalidated between the parties on the ground that its effect is to make them partners among themselves. must be consistent with the AI 4. Shareholders agreement restricting interfering with the discretion and powers of BOD it will not be invalidated but stockholders who are parties thereto shall liable for managerial acts imposed by Corporation Code on directors or the the be the

affairs of the corporation shall be held to strict fiduciary duties to each other and among themselves - Corporate torts shareholders are personally liable UNLESS the corporation has obtained reasonably adequate liability insurance Sec. 101: When Board Meeting Is Unnecessary Or Improperly Held Gen Rule: Any action by the director without a meeting shall be valid if the following conditions are present: 1. Before or after such action is taken, written consent thereto is signed by all the directors; or 2. All the stockholders have actual or implied knowledge of the action and make no prompt objection thereto in writing; or 3. The directors are accustomed to take informal action with the express or implied acquiescence of all stockholders; or 4. All the directors have express or implied knowledge of the action in question and none of them makes prompt objection thereto in writing. Exception: If by- laws provide otherwise Note: Ordinary corp. without / meeting question of impropriety improper

*If a directors meeting is held without a proper call or notice, an action taken therein within the corporate powers is deemed ratified by a director who failed to attend UNLESS he promptly files his written objection with the Secretary of the corporation after having knowledge thereof. Sec. 102: Preemptive Right In Close Corporation - extend to all kinds of stock, including reissuance of treasury shares, unless the AI provide otherwise (ordinary corp. extend only to new issuances) Sec. 104: DEADLOCKS (RBQ) - If the directors or stockholders are so divided respecting the management of the corporations business and affairs that the votes required for any corporate action cannot be obtained with the consequence that the business and affairs of the corporation can no longer be conducted to the advantage of the shareholders generally. the SEC, with the power to arbitrate, upon written petition of any shareholder shall have authority to make such orders as it deems appropriate, including an order: 1. Cancelling or altering any provision contained in AI or By-Laws or any stockholders agreement; 2. Cancelling, altering, or enjoining any resolution, or other act of the corporation or its BOD, officers or stockholders; 3. Directing or prohibiting any act of the corporation or its BOD, stockholders, officers or other persons party to the action; 4. Requiring the purchase at their fair value of shares of any stockholder, either by the corporation regardless of the availability of unrestricted retained earnings in its books, or by other stockholders; 5. Appointing a provisional director; 6. Dissolving the corporation; OR 7. Granting such other relief as the circumstances may warrant.

5. Stockholders who actively engage in the management or operation of the business and

PROVISIONAL DIRECTOR (Sec. 104) An impartial person who is neither a stockholder nor a creditor of the corporation, and whose further qualifications, if any, may be determined by the SEC. He is NOT a receiver of the corporation and does not have the title and powers of a custodian or receiver. He shall have all the rights and powers of a duly elected director, including the right to notice of and to vote at meetings of directors, until such time as he shall be removed by order of the SEC or by all the stockholders. REMEDIES IN CASE OF DEADLOCKS 1. Written petition with SEC for it to arbitrate 2. Withdrawal Shareholder may for any reason compel the corporation to purchase his shares at the FMV provided the close corp. has sufficient assets in its books to cover its debts and liabilities exclusive of capital stocks (Sec 105) 3. Written petition with SEC to compel dissolution on grounds of the acts of the directors, officers or those in control of the corporation is : a) Illegal, b) fraudulent, c) dishonest, d) oppressive or unfairly prejudicial to the corporation or any stockholder, or e) whenever corporate assets are being misappropriated or wasted. Ordinary Stock Corporation Corporation vs. Close

may be exercised by a stockholder only in the case provided in Secs. 81 and 42 of the Corporation Code 8. Except as regards redeemable shares, the purchase of the corporation of its own stock must always be made from the unrestricted retained earnings

9. Arbitration of intracorporate deadlock by the SEC is not a remedy in case the directors or stockholders are so divided respecting management of the corporation

may be exercised and compelled against the corporation by a stockholder for any reason 8. In case of an arbitration of an intracorporate deadlock by the SEC, the corporation may be ordered to purchase its own shares from the stockholders regardless of the availability of unrestricted retained earnings 9. Arbitration of intracorporate deadlock by the SEC is an available remedy in case the directors or stockholders are so divided respecting the management of the corporation

----------------------------------------------------------------------XIII. SPECIAL CORPORATIONS 1. EDUCATIONAL CORPORATION (Sec. 106) A stock or non-stock corporation organized to provide facilities for teaching or instructions must obtain favorable recommendation from DECS for the approval of its AI and By-Laws by SEC. [DepEd = Elementary and High School; CHED = Tertiary] it is primarily governed by special laws and, suppletorily, by the provisions of the Corporation Code Board of Trustees (NSEC) not less than 5 members and not more than 15 the term of office is 5 years It is different from an ordinary non-stock corporation organized for educational purposes. 2.RELIGIOUS CORPORATION (Sec. 109) - A corporation composed entirely of spiritual persons which is organized for the furtherance of a religion or for perpetuating the rights of the church or for the administration of church or religious work or property * It is different from an ordinary non-stock corporation organized for religious purposes, like the Knights of Columbus, Opus Dei etc. Kinds: a. Corporation Sole incorporated by one person and consist of one member or corporator only and his successors, such as a bishop can sell, acquire, encumber property to dissolve, file a declaration to that effect b. Religious Society a non-stock corporation governed by a board but with religious purposes. It is incorporated by an aggregate of persons, e.g. religious order, diocese, synod, sect, etc. AI - submit to SEC with affidavit of affirmations

ORDINARY STOCK CORPORATION 1. Its AI need only contain the general matters enumerated in Sec. 14 of the Corporation Code

2. Its status as an ordinary stock corporation is not affected by the ownership of its voting stock or voting rights 3. Its AI cannot classify its directors 4. Business of the corporation is managed by the BOD

5. The corporate officers and employees are elected by a majority vote of all the directors 6. The pre-emptive right is subject to the exceptions found in Sec. 39 7. The appraisal right

CLOSE CORPORATION 1. Aside from the general matters in Sec. 14, its AI must contain the special matters prescribed by Sec. 97. Failure to do so precludes a de jure close corporation status 2. The 2/3 of its voting stock or voting rights must not be owned or controlled by another corporation which is not a close corporation 3. Its AI may classify its directors 4. Business of the corporation may be managed by the stockholders if the AI so provide, but they are liable as directors 5. Its AI may provide that any or all of the corporate officers or employees may be elected or appointed by the stockholders 6. The pre-emptive right is subject to no exceptions unless denied in the AI 7. The appraisal right

----------------------------------------------------------------------XIV. DISSOLUTION Dissolution refers to the extinguishment of its franchise to be a corp. and the termination of its corporate existence Corp ceases its operation altogether, BUT it continues to exist for 3 years for purposes of winding up of its affairs

consecutive weeks in 3 public places, in the municipality or city where the principal office of the corporation is situated; 4. Five days after the expiration of the date set for filing objections, the SEC shall hear the petition and try any issue made by objections filed; 5. Dissolution takes effect upon judgment by SEC ordering distribution of assets of corp. c) by amending the AI to shorten the corporate term (Sec. 120) Procedure: 1. Amendment of the AI approved by the Board and ratified by stockholders owning at least 2/3 of OCS or 2/3 of the members 2. Submit the amended AI to the SEC Note: The Rule that when the SEC does not take action in 6 months from the date of filing for a cause not attributable to the corporation the amendment is deemed effective, is not applicable in this case. Submit also an affidavit of publication setting forth that the corporation has amended its articles to shorten the term to effect dissolution upon arrival of date stated 3. Dissolution takes effect upon approval of the amendment or expiration of the shortened term. If there are creditors what is the proper way of dissolving? - Any of the 3 ways so long as creditors are not prejudiced In case of corporation sole, dissolution is effected by submitting to the SEC a verified declaration of dissolution for approval. 2. INVOLUNTARY DISSOLUTION - Brought about by filing of a verified complaint with SEC and after proper notice and hearing on the grounds provided for by existing laws, rules and regulations. Grounds: 1. Violation of the corporation code 2. When there is a deadlock in a close corp. 3. When a close corp. is mismanaged 4. When the certificate of registration is suspended or revoked in ff. instances: a. when there is fraud in processing its certificate of registration b. when there is serious misrepresentation as to what the corp. can do or is doing to the great prejudice of or damage to the general public c. refusal to comply or defiance of any lawful order of the commission restraining the commission of an act which would amount to a grave violation of its franchise d. continuous inoperation for 5 years e. failure to file BL within the required period f. failure to file reports in appropriate form within the presented period Kinds of Involuntary Dissolution

Steps: 1. Termination 2. Winding up 3. Liquidation KINDS : 1. VOLUNTARY DISSOLUTION by the act of the corporation. a) If there are no creditors who are prejudiced, dissolution may be effected: i. by the majority vote of BOD/BOT, and by a resolution duly adopted by the affirmative vote of the stockholders owning at least 2/3 of the OCS or of at least 2/3 members at a meeting duly called for the purpose after notice of the meeting was published in a newspaper of general circulation. Procedure 1. File with the SEC the resolution duly certified by the Board and countersigned by the Secretary 2. Issuance by the SEC of a certificate of dissolution dissolution takes effect b) If there are creditors affected, by judgment of the SEC after hearing of the petition for voluntary dissolution. (Sec. 119) Procedure: 1. Petition filed with SEC Petition must: Be signed by a majority of its board or other officers, having the management of its affairs, verified by its president or secretary or any of its directors or trustees; Set forth all claims and demands against it; That the dissolution was resolved upon by affirmative vote of stockholders owning at least 2/3 of the OCS or at least 2/3 o f the members, at a meeting duly called for the purpose 2. If petition is sufficient in form and substance, the SEC, by an order reciting the purpose of the petition, shall fix a date on or before which objections thereto may be filed, but which shall not be less than 30 days nor more than 60 days after the entry of the order; 3. Publication of the SEC order at least once a week in 3 consecutive weeks in a newspaper of general circulation, and a similar copy shall be posted for 3

1.

Expiration of the corporate term corp. continues to operate for a period of 3 years for purposes of winding up its affairs 2. Legislative enactment except: it must not impair any right or remedy 3. Failure to organize and commence transaction within 2 years from incorporation (However, the SEC has opined that the dissolution in this case is not automatic. The corporation continues to exist as such, notwithstanding its nonoperational status until the SEC orders its dissolution after notice and hearing) 4. Dissolution by judicial decree forfeiture of its privilege or franchise as non user 5. Quo warranto suit against a de facto corporation 6. Minority stockholders suit for dissolution on justifiable grounds 7. SEC dissolution, upon complaint and after notice and hearing, on the following grounds: a) The corporation was illegally organized; b) Continuous inactivity (subsequent to incorporation, organization and commencement of business) for at least 5 years; c) Serious dissension in the corporation; or d) Commission by the corporation of illegal or ultra vires acts or violations of the Corporation Code. EFFECTS OF DISSOLUTION 1. Legal title to corporate assets is vested in the shareholder, who become co-owners thereof 2. The corporation ceases as a body politic or to continue the business for which it was established 3. Can no longer be revived (but may reincorporated by filing a new AI and BL) 4. The dissolution does not by itself imply the extinction of rights demandable against the corporation 5. Ceases to have any personality whatsoever after the expiration of the 3-year winding period and as a general rule it can no longer sue or be sued as such LIQUIDATION The winding up of the affairs of the corporation by reducing its assets in money, settling with creditors and debtors, and apportioning the amount of profit and loss. Methods of Liquidation 1. Liquidation by the corporation itself - converts assets with cash, settle with creditors, apportion profit and loss 2. Liquidation by a duly appointed trustee - transfer assets in the name of the trustee, has responsibility to liquidate the corporation. 3. Liquidation by a management committee or rehabilitation receiver appointed by the SEC. The 3-year period of liquidation does not apply to Methods 2 and 3 as long as the trustee or receiver is appointed within the said period. If corp. cannot wind up its affairs within 3 years a. It is best to appoint a trustee or receiver because he can act as

b.

such even beyond 3 years, (the corp. can only act for 3 years) If the property liquidation is transmitted to a trustee or a receiver, the corporation ceases, legal interest vests in the trustee and beneficial interest in the stockholders, members, or creditors.

* The termination of the life of a juridical entity does not by itself cause the extinction or diminution of the rights and liabilities of such entity nor those of its owners and creditors alike (Sec. 145). * Where, in the case of a corporation, the 3-year extended life has expired without a trustee or receiver having been expressly designated within the said period, those who have been charged to wind up its affairs or, in their absence, the BOD/BOT should be permitted to continue as trustees by legal implication to complete the corporate liquidation. How to Distribute Assets -In the following order: 1. Creditors 2. Shareholders/members who are likewise creditors 3. Shareholders in proportion to their shareholding preference What amount shareholder is entitled to: Fair Market Value of the shares of stock. If there is a loss below FMV. If there are profits in proportion to their shareholdings Upon winding up of the corporate affairs, any asset distributable to any creditor of shareholder or member who is unknown or cannot be found shall be escheated to the city or municipality where such asset is located. Gen Rule: Dissolution authority given to the corporation to distribute assets to shareholders or members Except: (even if no dissolution, the corp. can distribute assets) 1. Decrease of capital stock (Sec. 38) 2. When corp. is redeemed by redeemable shares 3. When corporation is purchasing treasury shares (Sec. 42) 4. When the corporation is acquiring its own shares, converting it into treasury shares (Sec. 42) 5. When declared as dividends (Sec 43) 6. When there is withdrawal from a close corp (Sec 105) *These are the exceptions to the TRUST FUND DOCTRINE -----------------------------------------------------------------------XV. FOREIGN CORPORATION FOREIGN CORPORATION is one formed, organized or existing under any laws other than those of the Philippines, and whose laws allow Filipino citizens and corporations to do business in its own country or State. (Sec. 123) *This definition espouses the incorporation test and the reciprocity rule and is significant for licensing purposes. It does not say that it is required that the

laws under which foreign corporations are formed give Philippine national reciprocal rights. - A foreign corporation shall have the right to transact business in the Phil. after obtaining a license to transact business in this country and a certificate of authority from the appropriate government agency concerned. (Sec. 123) - Test: Incorporation Test (Place of incorporation), regardless of the nationality of the shareholders -During wartime, the control test will apply, that is, a domestic corp. controlled by enemy aliens shall be deemed a foreign corporation with a nationality identical with that of its controlling shareholder Foreign Corporation becomes a Philippine resident the moment it is granted a license to transact business in the Philippines. Corporate residence is where its business is transacted OBJECTIVES OF REGULATION OF FOREIGN CORPORATION 1. To place them in equal footing with domestic corporation; 2. To subject them to inspection so that their condition may be known; 3. To protect the residents of the State doing business with them by subjecting them to the courts of the State. FOREIGN INVESTMENT ACT OF 1991 (RA 7092) A foreign corporation may now acquire and own 100% Filipino corporation. Except when limited by Constitution (owning land) Problem: Corporation A with Shareholder = 31% Filipino and 69% owned by Corporation B ( 47% Fil and 53% Alien) Engaged in partially nationalized industry Q: Is the 60% requirement met? A: Yes, requirement met * Because a FC cannot extend its jurisdiction beyond its limits, it exist only in contemplation of law and by the consent of such state or country APPLICATION FOR A LICENSE (Sec. 125) Procedure for the Issuance of License I. Submit application with SEC which shall be under oath and specifically set forth the following unless stated in its AI: 1. The date and term of incorporation; 2. The address including the street number of the principal office of the corporation in the country or state of incorporation; 3. Name and address of its resident agent authorized to accept summons and process in all legal proceedings and, pending the establishment of a local office, all notices affecting the corporation; 4. The place in the Philippines where the corporation intends to operate; 5. The specific purposes of the corporation which it intends to pursue in the transactions of its business in the Philippines. Provided that said purpose are those specifically stated

in the certificate of authority issued by the appropriate government agency; 6. The names and addresses of the present directors and officers of the corporation; 7. A statement of its authorized capital stock and the aggregate number of shares which the corporation has authority to issue; 8. A statement of its OCS and the aggregate number of shares which the corp. has issued; 9. A statement of the amount actually paid in; and 10. Such additional information as may be necessary in order to enable the SEC to determine whether such corp. is entitled to a license to transact business in the Philippines and to determine and assess the fees payable. II. Submit AI and BL, duly certified and their translation to an official language in the Phil. III. Submit and attach a certificate under oath by an authorized official of the jurisdiction of its incorporation attesting to the fact that the laws of the country or state of the applicant allow Filipino citizens and corporation to do business therein and the applicant is an existing corp. of good standing with a translation of the certificate in English under oath of the translator if it is in foreign language IV. A statement under oath of the President or any authorized officer of the corp. showing to the satisfaction of the SEC and other government agency in proper cases that the applicant is solvent and in sound financial condition and setting forth its assets and liabilities for the previous year V. Other requirement provided by law a certificate of Authority from the appropriate government agency whenever required by law VI. Power (written) of Attorney designating a resident agent on whom summons and other legal processes against the corp. may be served and a written agreement and stipulation consenting that such services may be made upon the SEC, if anytime, it shall cease to transact business in the Phils. or shall be without resident agent (Rule XIV, Sec 13). RESIDENT AGENT - An individual, who must be of good moral character and of sound financial standing, residing in the Philippines, or a domestic corporation lawfully transacting business in the Philippines, designated by a written power of attorney by a foreign corporation authorized to do business in the Philippines, on whom any summons and other legal processes may be served in all actions or other legal proceedings against the foreign corporation. (Secs. 127 -128) *When a corporation has designated a person to receive service of summons pursuant to the Corporation Code, that designation is exclusive and service of summons on any other person is inefficacious. - Service of summons to a corp. with license (In the ff. order) 1. Resident agent exclusive 2. SEC ( If no resident agent and the corp ceases to transact business SEC transmit within 10 days from receipt a copy of such summons to the corp. at

3.

its home or principal office (act of mailing within 10 days complete the service expenses born by the party on whose instance the service is made) Officers or agent in the Philippines.

continues to exist as a corporation under the laws of its State of incorporation EXCEPT when the license is surrendered, revoked, suspended, or annulled. TESTS OF DOING OR TRANSACTING BUSINESS IN THE PHILIPPINES: A. JURSIPRUDENTIAL TESTS: 1. Twin Characterization Test a) Whether the foreign corporation is maintaining or continuing in the Philippines the body or substance of the business for which it was organized or whether it has substantially retired from it and turned it over to another (Substance Test); and b) Whether there is continuity of commercial dealings and arrangements, contemplating to some extent the performance of acts or works or the exercise of some functions normally incident to and in progressive prosecution of the purpose and object of its organization (Continuity Test). 2. Contract Test - Whether the contracts entered into by the foreign corporation, or by an agent acting under the control and direction of the foreign corporation, are consummated in the Philippines. B. STATUTORY TESTS 1. Foreign Investment Act of 1991 (RA 7042) Acts constituting doing business: a) Soliciting orders, service contracts, opening offices, whether called liaison offices or branches; b) Appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totaling to 180 days or more; c) Participating in the management, supervision or control of any domestic business, firm or entity or corporation in the Philippines; d) Any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purposes of the business organization. 2. Implementing Rules of RA 7042 - Acts NOT constituting doing business: a) Mere investment as a shareholder in a domestic corporation and/or the exercise of the rights of such investor; b) Appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account; c) Publication of a general advertisement through any print or broadcast media; d) Maintaining a stock of goods in the Philippines solely for the purpose of having the same processed by another entity in the Philippines; e) Consignment by the foreign corporation of equipment with a local company to be used in the processing of products for export; f) Collecting information in the Philippines; and g) Performing services auxiliary to an existing isolated contract of sale which are not on a continuing basis. Law Applicable (Sec 129) Gen. Rule: Any FC lawfully doing business in the Phils. shall be bound by all laws, rules and regulations applicable to domestic corporation. Except: (Governed by the state of Incorp.)

- Note: the above order of examination is to be followed only if a foreign corp. is transacting business in the Phils. with a license (Wang Labora vs. Mendoza) - If without license service be made upon any agent of the corp. - If domestic corp. Rules of Court will apply CONDITIONS IMPOSED SUBSEQUENT TO THE ISSUANCE OF LICENSE: 1. The FC shall transact business and for the purpose/s for which it is authorized under its license; 2. Within 60 days after the issuance of its license, it shall deposit with SEC satisfactorily securities in the actual market value of at least P100k consists of: a. bonds or other evidence of indebtedness of the government of the Phils, its political subdivisions and instrumentalities or of government owned or controlled corporation; b. shares of stock in Registered Enterprises (registered under Omnibus Investment Code) c. Shares of stock in domestic corporation registered in the stock exchange d. Shares of stock in domestic insurance co. and banks e. Any combination of these kinds of securities EXCEPT foreign banking or insurance corp. 3. Within 6 months after the end of each fiscal year of the license a. additional deposit of securities equivalent in actual market value of 2% of the amount by which the licenses gross income for that fiscal year exceeds 5M if less than 5M no additional b. If the market value of the deposit decreased by at least 10% of such value at the time they were deposited , the deposit shall be increased; if the deposit increased by 10% - allowed to withdraw Can you exchange the deposits with another one? Yes, substitution can be allowed provided the corp. is solvent. c. If there are dividends/interest due on the deposited securities, the license shall be entitled to collect d. Deposits be returned when the license ceases to do business in the Phils. provided it is able to show the absence of any liability to Phil residents including the Government of the Pgils. 4. It must comply with the provisions of existing laws, rules and regulations otherwise its license may be revoked, suspended or annulled by SEC EFFECT OF ISSUANCE OF LICENSE: -FC may now commence to transact its business in the Philippines for as long the corporation

1. 2.

Matters relative to formation, creation, organization or dissolution of corporation The relations, liabilities, responsibilities or duties of shareholders, members or officers of corp. to each other or to the corp. (Citibank vs. Chilia) By laws of a FC can be given application without approval by the SEC since the SEC grants a license only when the FC has complied with all the requirements of law, it follows that when it decides to issue such license, it is deemed to have approved its foreign enacted by laws

6.

7. 8.

9.

documents submitted by such corporation pursuant to this title; Failure to pay any and all taxes imposed, penalties and assessments, if any, lawfully due to the Philippine government or any of its agencies or political subdivisions; Transacting business in the Philippines outside of the purpose/s for which such corp. is authorized under its license; Transacting business in the Philippines as agent of or acting for and in behalf of any foreign corp. or entity not duly licensed to do business in the Philippines; Any other ground as would render it unfit to transact business in the Philippines.

AMENDMENTS TO AI OR BY-LAWS OF FOREIGN CORPORATIONS (Sec. 130) -Note: The law that governs the amendment of AI of the FC is the law of State of its incorporation Limitation in the amendments of AI/BL of FC: it shall not of itself enlarge or alter the purpose/s for which such corporation is authorized to transact business in the Philippines. AMENDED LICENSE (Sec 131) Q: When required? A: 1. The FC changes its corporate name 2. The FC desires to pursue in the Phils. other or additional purposes How by submitting an application thereof to the SEC favorably endorsed by the appropriate government agency in the proper cases Merger/Consolidation involving a FC licensed in the Phils. FC merged/consolidated with a domestic corp laws of the Phils will be followed as to requirements or merger or consolidation - If FC with another FC such FC licensed to do business in the Phil. within 60 days after such merger/consolidation becomes effective, file with the SEC and in appropriate cases, with the proper government agency, a copy of the articles of merger or consolidation duly authenticated by the proper official of the State under the laws of which such merger or consolidation was effected. If FC with another FC if the one absorbed is the corp. licensed to do business in the Phils. it shall file a petition for the withdrawal of its license.

What happens when there is revocation of license? The SEC will issue a certificate of revocation, furnishing a copy thereof to the appropriate government agency in the proper cases. SEC shall mail to the corp. at its registered office in the Phils. a notice of such revocation accompanied by a copy of the certificate of revocation EFFECTS OF LACK OF LICENSE: A. ON SUITS 1. Foreign corporation doing business in the Philippines: a) may not sue in any action in any court or administrative agency of the Philippines; and b) may be sued on any valid cause of action recognized in the Philippines (under the doctrine of quasi-estoppel by acceptance of benefits). (Sec. 133) 2. Foreign corporation NOT doing business in the Philippines: a) Generally, it may not sue and be sued in any court or administrative agency of the Philippines; b) However, it may sue and be sued on isolated transactions, as well as for those which are casual or incidental thereto. Doctrine of Isolated Transactions -Foreign corporations, even unlicensed ones, can sue or be sued on a transaction or series of transactions set apart from their common business in the sense that there is no intention to engage in a progressive pursuit of the purpose and object of business transaction. - However, it is not the lack of the prescribed license to do business in the Philippines but the doing of business without license which bars a foreign corporation from access to Philippine courts. An unlicensed foreign corporation is not ipso facto barred from bringing an action. The legal prohibition is confined to cases relating to its business activity in the country. Instances when a foreign corporation may sue in the Philippines whether or not licensed to do business thereat: 1. To seek redress for isolated business transaction; 2. To protect its corporate name, reputation or goodwill; 3. To enforce a right not arising out of a business transaction in the Philippines; 4. When the parties have contractually stipulated that the Philippines is the venue of actions; and 5. When the party sued is barred by the principle of estoppel and/or principle of

REVOCATION OF LICENSE (Sec. 135) Grounds: 1. Failure to file annual report or pay any fees required by this Code. 2. Failure to appoint and maintain a resident agent in the Philippines; 3. Failure after change of its resident agent or of his address to submit to the SEC a statement of such change; 4. Failure to submit to the SEC an authenticated copy of any amendments to its AIC or BL or any articles of merger or consolidation; 5. A misrepresentation of any material matter in any application, report, affidavit or other

unjust enrichment from questioning the capacity of the foreign corporation. B. ON CONTRACTS - The contracts contemplated are those that satisfy the contract test or those that make a foreign corporation as one doing business in the Philippines. General Rule: The contracts are unenforceable. They are enforceable only upon securing a license. Exception: However, the contracts are null and void if they are contrary to law, morals, good customs, public policy and public order.
I.

WITHDARWAL OF FOREIGN CORPORATIONS (Sec. 136) How to effect surrender/ withdrawal -by filing a petition for withdrawal of license Essential Requirements for Withdrawal: 1. All claims which have accrued in the Philippines have been paid, compromised or settled; 2. All taxes, imposts, assessments and penalties, if any, lawfully due the Phil. government or any of its agencies or political subdivisions have been paid; 3. The petition for withdrawal of license has been published once a week for 3 consecutive weeks in a newspaper of general circulation in the Phil; Formal Requirements to Legally Effect the Withdrawal of Foreign Corporations License: The following must be submitted to the SEC: 1. The letter petition of the Resident Agent requesting the withdrawal of the license to do business 2. Filing fee of P10.00 3. A copy of the resolution of the BOD authorizing the closing of the Phil. branch and empowering the RA to effectuate the withdrawal thereof, duly authenticated in accordance with law to be submitted in triplicate 4. Latest balance sheet and sworn statement that no creditors will be prejudiced by the withdrawal also to be submitted in triplicate 5. Proof of publication of the Notice of withdrawal once a week for 3 consecutive weeks in a newspaper of general circulation in the Phil. 6. The license issued by the commission to the corp. which shall be surrendered

business, then doing business (Microwe____ case) c. When a single act is not merely incidental or casual but such but of such character as to distinctly indicate its intention to perform other business in the Phils (Way lab) d. The volume of the business does not matter, it is the performance of acts for which the corp. was created that determines whether it was transacting business (Granger) e. The continuity of conduct of which an intention can be inferred of establishing a business in the Phils (JAL) 4 Exceptions when FC Without license can sue Isolated business transaction single transaction solicited by domestic corp., entity or person Note: If FC who solicits the transaction then it is already transacting business in the Phils. Rationale for the exceptions: not the intention of law to favor domestic corp. 3 Requisites (to file an action based on this) 1. FC must disclose that it is not doing business in the Phils. And it is suing under the isolated business transaction disclose in complaint 2. Suing entity must be a FC 3. Name its duly authorized representative or RA for purposes of action, it must appoint a resident agent to whom notice upon the FC must be served for the purpose of pre trial

II. To protect corporate name, reputation and goodwill ( Puma vs. IAC) - Rule NOW, foreign trademarks/ trade names 1. owner of the same is domiciled in the country of which it is a member of the treaty agreement on trademarks 2. widely known in the Phils. 2 Requirements BEFORE ( no longer applied) 1. Trade name/trademark registered in the Phils. 2. Country of the FC allows or gives Filipino Corp/citizen reciprocal rights III. To enforce a right not arising out of Business Transaction Bulakhidas and Universal Shopping transaction between 2 foreign entities IV. Intends to hold person/entity for actionable acts or omission Rule on equity allows Filipino to sue FC Lack of license is not an excuse for its non-suability (FBA) RULES 1. Burden of proof that it is FC transacting business without a license suing under the 4 exceptions is on the FC 2. The defendant must specifically deny the allegation of FC capacity to sue 3. Proof of doing business is not necessary to confer jurisdiction on th FC (Marubers case and Signetics vs, CA) ++++++++++++++++++++++++++++++++++ +++++++

=============================== =====
2 Things to Consider to Determine Whether a FC has Access to Phil Courts 1. Does it have license 2. Is it transacting business in the Phil. - How to determine no hard and fast rule but there are guidelines provided a. If the FC is continuing the business for which it was created in the Phil. then it is transacting business (Menthrelatura case) b. If acts of the corp. indicates a purpose by the corp. to engage in some parts of its regular

XVI. MISCELLANEOUS PROVISIONS Sec 137: - OCS all shares of stock issued to subscribers or shareholders of a stock corp. whether or nor fully paid or partially as long as there is a bonding subscription agreement, except treasury shares. - All OCS are issued because not outstanding if not issued but not all issued shares of stocks are

outstanding (e.g. treasury shares issued bu not OCS)

1. 2. 3.
4.

OCS Not all OCS are considered subscribed

Subscribed All subscribed capital stocks are considered outstanding

between the corp. and the public; between the corp. and shareholders, members and officers; between the corp. and the state in so far as its permits, franchise, or license to operate is concerned right to exist between and among shareholders

3.
4.

Reason: Because it is possible that shares of stock are fully paid. If fully paid, no longer considered as subscribed. Sec. 138: Q: Is it possible for a corp. to have its affairs managed by Board of Governors? A: Yes, but only limited to non-stock and special corp. who may designate another name for its BOT Sec 142: Gen Rule: Examination results of the operation, books and records of any corp are strictly confidential Except: When a law requires disclosure

Controversies in election or appointment of directors, trustees, officers and managers Petitions declaring corp. suspension of payments in a state of

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2. Revised Securities Act

PD 902-A SEC agency entrusted with the enforcement of all laws affecting corps., partnership and association Composition: 5 Commissioner 1 chair (7 years) 4 Associate Com 2 (3 years) 2 (5 years) Quorum the presence of 3 Comm is sufficient to constitute quorum. In the absence of the chairman presiding officer will the most Senior Officer Q: Can the SEC form a committee to hear a dispute? A: Yes, because in the exercise of its authority, it shall have the power to unlist the aid and support of and to deputize any and all enforcement agencies of the govt, civil or military as well as any private institution, corp., form, association or person If there is dispute = heard by SEC/SEC division within 30 days appealable with the commission en banc within 20 days to the CA on Petition for Review (BP 129 does not apply) Can the RTC issue an injunction directed to the SEC? No, because they are of co-equal rank.

2 Situations that will allow the filing of petition for suspension of payments: 1. Corp. has sufficient assets to cover liabilities but foresees the impossibility, when they fall due simple suspension 2. No asset or insufficient asset but under the management of a rehabilitation receiver or management committee When may a receiver be appointed for a corporation? -Whenever necessary in order to preserve the rights of party litigants and/or protect the interest of the investing public and creditor. If the corp. is regulated by another government agency, a receiver can still be appointed but a request coming from an appropriate government agency if necessary When can there be a management committee? Two instances: 1. When there is imminent danger of dissipation, loss or wastage or destruction of assets or other properties; 2. When there is paralyzation of business operation which may be prejudicial to the interest of minority shareholders, any of the party litigants or the general public.

Gen. Rule: Petition is necessary before SEC can appoint management committee Except: If in SECs opinion there is imminent danger of dissipation, loss or wastage or destruction of assets, or other properties or paralyzation of business corp. POWERS OF REHABILITATION COMMITTEE OR REHABILITATION RECEIVER (Sec. 6[d]): 1. To take custody of, and control over, all existing assets and properties of such entities under management; 2. To evaluate the existing assets and liabilities, earnings and operations of such corporations, partnerships or other associations; 3. To determine the best way to salvage and protect the interest of the investors and creditors; 4. To study, review and evaluate the feasibility of continuing operation and restructure and rehabilitate such entities if determined to be feasible by the RTC; 5. To report and be responsible to the RTC until dissolved; and 6. May overrule or revoke the actions of the previous management and board of directors

ORIGINAL AND EXCLUSIVE JURISDICTION OF THE REGIONAL TRIAL COURTS (Sec. 5 of PD 902-A in relation to Sec. 5.2 of RA 8799): 1. Fraudulent devices and schemes employed by directors detrimental to the public interest and to other firms; 2. Intra-corporate controversies and with the state in relation to their franchise and right to exist as such; 4 Kinds of Relationship that will constitute an intra-corporate relationship (Union Cola vs. SEC):

of the entity under management, notwithstanding any provision of law, articles of incorporation or by-laws to the contrary. REHABILITATION RECEIVER/ MANAGEMENT COMMITTEE not subject to any action, claim or demand for or in connection with any act done or omitted to be done by it in good faith in the exercise of its function. 3 KINDS OF SUSPENSION OF PAYMENTS 1. SIMPLE/ORDINARY Procedure a. Petition filed with SEC containing the following: verified schedule of credits verified schedule of remaining assets corp.s proposal of payment b. SEC will issue an order calling a meeting of creditors held no less than 2 weeks from date of order nor more than 8 weeks notice of meeting to creditor is published pending petition, corp. to dispose assets except those necessary for its ordinary operations c. Meeting of Creditors creditors supposed to approve proposal for payment as many as 3/5 of the liabilities are presented approval of the creditors earned by 2/3 earned by 2/3 of creditors or 3/5 of debts if do not approve deemed rejected creditors are free to enforce their claims against the corp. If approved payment is suspended date of suspension retroacts to the date of filing of petition Note: suspension is not absolute: Simple suspension lapses after 3 months but not approval by members NOT COVERED BY SUSPENSION 1. Legal or contractual mortgages 2. Claims for personal labor 3. Maintenance expenses, benefits 2. SUSPENSION OF PAYMENTS WITH PROPOSAL OF REHABILITATION Procedure a. Petition with SEC b. SEC set the case for initial hearing with proper notice to creditors c. SEC will determine feasibility. During hearing, if SEC determined that it is feasible appoint a receiver or management committee by SEC d. Upon the creation or appointment of rehabilitation receiver/ management committee, all claims against the corp. are suspended SUSPENSION OF PAYMENT WHEN THE CORP. IS UNDER A REHABILITATION RECEIVER OR MANAGEMENT COMMITTEE Procedure a. File a petition SEC will want for a recommendation from the rehabilitation committee

b. c.

SEC acting on the recommendation of rehabilitation receiver/ management receiver will determine feasibility Claim suspended all

Effect of suspension of payments: claims are suspended Except: 1. legal or contractual 2. 3.

Cases: Philinvest, Bagumbayan, Jimenez, PCIB, Acemar, RCBC, BPI ----------------------------------------------------------------

3. Interim Rules of Procedure on Corporate Rehabilitation

(Effective December 15, 2000) Steps: 1. Filing of a verified petition with the appropriate RTC by: a) corporate debtor who foresees the impossibility of meeting its debts when they respectively fall due, or b) creditors holding at least 25% of the debtors total liabilities; 2. The following shall be annexed to the petition: a) audited financial statement at the end of its last fiscal year; b) interim financial statement; c) schedule of debts and liabilities; d) inventory of assets; e) rehabilitation plan; f) schedule of payments and disposition of assets effected within 3 months preceding the filing of the petition; g) schedule of cash flow for the last 3 months; h) statement of possible claims; i) affidavit of general financial condition; j) at least 3 nominations for rehabilitation receiver; k) certificate under oath that directors and stockholders have irrevocably approved/consented to all actions/matters necessary under the rehabilitation plan. 3. The court shall issue the stay order not later than 5 days from the filing of the petition, which among others, shall: 4. Publication of the stay order in a newspaper of a general circulation once a week for 2 consecutive weeks; 5. Referral of rehabilitation plan to rehabilitation receiver; 6. Meetings between corporate debtor with creditors and discussions on the rehabilitation plan; 7. Submission of final rehabilitation plan to the RTC for approval; 8. The petition shall be dismissed (which results into the automatic lifting of the stay order unless RTC ordered otherwise) if no rehabilitation plan is approved after 180 days from initial hearing; 9. Approval or disapproval of the rehabilitation plan by the RTC.

3.

What is the scope of the rules? (Rule 1, Sec. 2) The rules apply to petitions for rehabilitation filed by corporations, partnerships and associations pursuant to PD 902-A, as amended. How should the rules be construed? (Rule 2, Sec. 2) The rules are to be liberally construed in order to carry out the objectives of Sections 5(d) and 6(c) and (d) of PD 902-A, and to assist the parties in obtaining a just, expeditious and inexpensive determination of cases. What is the nature of the proceedings under the rules? (Rule 3) The proceedings under the rules shall be in rem. Jurisdiction over all those affected by the proceedings shall be considered as acquired upon publication of the notice of the commencement of the proceedings in a newspaper of a general circulation in the Philippines. The proceedings shall also be summary and non-adversarial in nature. For example(a) motions to dismiss, for bills of particulars, for new trail or for reconsideration, among others, are prohibited (Rule 3,Sec. 1); (b) the court may decide matters on the basis of affidavits and other documentary evidence ( Rule 3, Sec. 1); (c) pleadings and documents may be filed with the court or served on the other parties, when so authorized by the court, by facsimile transmission (fax) or electronic mail (email) (Rule 3, Sec. 3); (d) incase of voluminous pleading or document, the court may, motu proprio or upon motion, waive the requirement of service, provided that a copy thereof, together with all its attachments, is duly filed with the court and made available for examination and reproduction by any party, and provided, further that a notice of such filing and availability is duly served on the parties (Rule 3, Sec. 5); and (e) any orders issued by the court under the rules is immediately executory, and a petition for review or appeal therefrom shall not stay the execution of the order unless restrained or enjoined by the appellate court (Rule 3, Sec. 5). Who may petition for rehabilitation? (Rule 4, Sec. 1) (a) any debtor who foresees the impossibility of meeting its debts when they respectively fall due; or (b) any creditor or creditors holding at least 25% of the debtors total liabilities. Where should a petition for rehabilitation be filed? (Rule 3 Sec. 2) Petitions for rehabilitation shall be filed in the appropriate Regional Trial Court having

jurisdiction over the territory where debtors principal office is located.

the

Are the Rules of Court applicable to the proceedings? (Rule 2, Sec. 2) Yes, the Rules of Court, where appropriate, shall apply suppletorily to proceedings under the rules. What are the contents of the petition filed by the debtor? (Rule 4, Sec. 2) (a) name and business of the debtor; (b) nature of debtors business; (c) history of the debtor; (d) cause of the debtors inability to pay its debts; (e) all the pending actions or proceedings known to the debtor and the courts or tribunals where they are pending; (f) threats or demands to enforce claims or liens against the debtor; (g) the manner by which the debtor may be rehabilitated and how such rehabilitation may benefit the general body of creditors, employees and stockholders. What should be attached to the petition filed by the debtor?(Rule 4, Sec.4) (a) audited financial statements as of the end of the debtors last fiscal year; (b) interim financial statements as of the end of the month prior to the filing of the petition; (c) schedule of debts and liabilities; (d) inventory of assets; (e) rehabilitation plan; (f) schedule of the debtors cash flow; (g) affidavit of general financial condition; (h) names of at least three nominees for the position of rehabilitation receiver, including their qualifications and contact information; (i) certificate under oath attesting to the fact that (i) the filing has been duly authorized, and (ii) the directors and stockholders have irrevocably approved and/or consented to all actions or matters necessary and desirable to rehabilitate the debtor including, but not limited to, amendments to the articles of incorporation and by-laws (or articles of partnership); increase or decrease in the authorized capital stock; issuance of bonded indebtedness; alienation, transfer or encumbrance of assets of the debtor, and modification of shareholders rights. What are the attachments to the petition filed by creditor(s)? (Rule 4 Sec. 4) (a) rehabilitation plan; (b) list of nominees to the position of rehabilitation receiver; Under what circumstance could the petition be dismissed? (Rule 4, Sec. 11) The petition shall be dismissed if no rehabilitation plan is approved by the court upon the lapse of 180 days from the date of initial hearing. The court may grant an extension beyond this period if it appears by

convincing and compelling evidence that the debtor may be rehabilitated. In no instance, however, shall the period for approving or disapproving a rehabilitation plan exceed 18 months from the date of filing of the petition. What are the contents of the order that the court shall issue if it finds the petition for rehabilitation to be sufficient in form and substance? (Rule 4, Sec. 6 and 11) If the court finds the petition to be sufficient in form and substance, it shall, not later than 5 days from the filing of the petition issue an order which shall, among others: (a) appoint a rehabilitation receiver and fix his bond; (b) stay enforcement of all claims, whether for money or otherwise and whether such enforcement is by court action or otherwise, against the debtor, its guarantors and sureties not solidarily liable with the debtor; (c) prohibit the debtor from selling, encumbering, transferring or disposing in any manner any of its properties except in the ordinary course of business; (d) prohibit the debtor from making any payment of its outstanding liabilities as of the date of filing of the petition; (e) prohibit the debtors suppliers of goods or services from withholding supply of goods or services in the ordinary course or business for as long as the debtor makes payments from the services and goods supplied after the issuance of the stay order; (f) fix the initial hearing on the petition not earlier than 45 days but not later than 60 days from the filing thereof; (g) direct the petitioner to publish the order in a newspaper of general circulation in the Philippines once a week for two consecutive weeks; (h) direct all creditors and interested parties (including the SEC) to file and serve on the debtor a verified comment or opposition to the petition, with supporting affidavits and documents, not later than 10 days before the date of the initial hearing and putting them on notice that their failure to do so will bar them from participating in the proceedings. For how long the stay holder to be effective?(Rule 4, Sec. 11) The stay order shall be effective from the date of its issuance until the dismissal of the petition or termination of the rehabilitation proceedings. Could the stay order be modified or terminated? Could conditions be set for its continuance? Could a claim be relieved from the coverage of the order? (Rule 4, Sec 12) Yes, to all the questions. The court may, on motion or motu proprio, terminate, modify, or set conditions for the continuance

of the stay order, or relieve a claim from the coverage thereof, upon showing that(a) any of the allegations of the petition, or any of the contents of any attachment, or the verification thereof, has ceased to be true; (b) a creditor does not have adequate protection over property securing its claim; or (c) the debtors secured obligation is more than the fair market value of the property subject of the stay and such property is not necessary for the rehabilitation of the debtor. What is the concept of adequate protection over property?(Rule 4, Sec 12) A creditor does not have adequate protection over property securing its claim if it can be shown that(a) the debtor fails or refuses to honor a preexisting agreement with the creditor to keep the property insured; (b) the debtor fails or refuses to take commercially reasonable steps to maintain the property; or (c) the property has depreciated to the extent that the creditor is undersecured. What are the contents of the rehabilitation plan? (Rule 4, Sec 5) (a) the desired business targets or goal, and the duration and coverage of the rehabilitation; (b) the terms and conditions of such rehabilitation; (c) the material financial commitments to support the rehabilitation plan; (d) the means for the execution of the rehabilitation plan, e.g. conversion of debts into equity, restructuring the debts, dacion en pago, sale of assets or controlling interest; (e) liquidation analysis, i.e. an estimate of the proportion of the claims that the creditors and stockholders would receive if the debtors properties were liquidated; (f) other relevant information to enable a reasonable investor to make an informed decision on the feasibility of the rehabilitation plan. What is the power of the court to cram down a rehabilitation plan?(Rule 4, Sec. 23) The power of the court to cram down a rehabilitation plan refers to its authority to approve a rehabilitation plan even over the opposition of the creditors holding a majority of the total liabilities of the debtor if, in its judgment, the rehabilitation of the debtor is feasible and the opposition of the creditors is manifestly unreasonable. In determining whether or not the opposition of the creditor is manifestly unreasonable, the court shall consider the following: (a) the plan would likely provide the objecting class of the creditors with compensation greater than that which they would have received if the assets of the debtor were

sold by the liquidator within a three-month period; (b) that the shareholders or owners of the debtor lost at least their controlling interest as a result of the plan; and (c) that the rehabilitation receiver has recommended approval of the plan. What is the effect of the approval of the court of the rehabilitation plan on the debtor and creditors?(Rule 4, Sec. 24) The approval of the rehabilitation plan by the court shall result, among other effects, in the said plan and its provisions being binding upon the debtor and all the persons who may be affected by it, including the creditors, whether or not such persons have participated in the proceedings or opposed the plan or whether or not their claims have been scheduled. What is the primary task of the rehabilitation receiver? Does he take over the management and control of the debtor? (Rule 4, Sec 14) The rehabilitation receiver implements the rehabilitation plan after its approval by the court. His primary task is to study the best way to rehabilitate the debtor and to ensure that the value of the debtors property is reasonably maintained pending the determination of whether or not the debtor should be rehabilitated. He does not take over the management and control of the debtor but simply oversees and monitors closely the operations of the debtor during the pendency of the proceedings. This reflects the concept of debtor-in-place. For this purpose, he has been granted the powers, duties and functions of a receiver under PD 1402-A, as amended, and the Rules of Court.

(v) certificates of assignments, certificates of participation, trust certificates, voting trust certificates or similar instruments; (vi) proprietary or nonproprietary membership certificates in corporation; and (vii)Other instruments as may in be future be determined by the Commission. (Sec. 3.1) 2. ISSUER it is the originator, maker, obligor, or creator of the security. Securities statures have been enacted principally to protect the investing public from unscrupulous issuers. (Sec. 3.2) 3. BROKER any person engaged in the business of buying and selling securities for the account of others. (Sec. 3.3) 4. DEALER any person who buys and sells securities for his own account in then ordinary course of business. Compare with a broker. (Sec. 3.4) 5. CLEARING AGENCY any person who acts as intermediary in making deliveries upon payment to effect settlement in securities transactions. Just like an exchange, it is the desire of the SEC that a clearing agency could develop into a selfregulatory organization. (Sec. 3.6) 6. EXCHANGE an organized market place or facility that brings together buyers and sellers and executes trades of securities and/ or commodities. Unlike the usual over-the-counter market, an exchange has a physical facility. (Sec. 3.7) 7. INSIDER an insider may be: (i) The issuer; (ii) A director or office (or a person performing similar functions) of, or a person controlling the issuer; (iii) a person whose relationship or former relationship to the issuer gives or gave him access to material information about the issuer or the security that is not generally available to the public; (iv) a government employee, or director, or office of an exchange, clearing agency and/ or self-regulatory organization who has access to a material information about an issuer or a security that is not generally available to the public; or (v) A person who learn such information by a communication from any of the foregoing insiders. (Sec. 3.8) One is not prohibited form being an insider. It is not a crime. It is a status. An insider starts to get into trouble when he acts upon the material nonpublic information he has and busy or sells shares or, under Section 27.3, communicates such information to another knowing or having reason to believe that such person will likely buy or sell a security. 8. PRE-NEED PLANS these are contracts which provide for the information of future services or the payment of future monetary considerations at the time of actual need, for which plan holders pay in cash or installment at stated prices, with or without interest or insurance coverage and includes life, pension, education, interments and other plans which the commission may from time to time approve. (Sec. 3.9) 9. PROMOTER a person who, acting alone or with others, takes initiative in founding and organizing the business or enterprise of the issuer and receives consideration thereof. (Sec. 3.10) 10. PROSPECTUS it is the document made by or on behalf of an issuer, underwriter or dealer to sell

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4. Securities Regulation Code

RA 8799
Definition of Terms: 1. SECURITIES these are shares, participation or interests in a corporation or in a commercial enterprise or profit making venture and evidenced by a certificate, contract, instrument, whether written or electronic in character. It includes: (i) shares of stock, bonds, debentures, notes, evidences, of indebtedness, asstbacked securities; (ii) investments contracts, certificates of interest or participation in a profit sharing agreement, certificates of deposit for a future subscription; (iii) fractional undivided interests in oil, gas or other mineral rights; (iv) derivates like options or warrants;

or offer securities for sale to the public through a registration statement filed with the SEC. it is a selling document that contains most of the information set out in the registration statement. If a potential investor wants information about a new issue, his broker will hand him a prospectus of the issue, not the registration statement of the particular security. (Sec. 3.11) 11. REGISTRATION STATEMENT it is the application for the registration of securities required or be filed with the SEC. the protection of the investing public starts with an examination and review by the SEC of an issuers registration statement. (Sec. 3.12) 12. UNCERTIFICATED SECURITY it is a security evidenced by electronic or similar records. The increased difficulty in the issuance and cancellation of shares after every transaction in the exchange, brought about by increase in the volume of transactions, has led to the development and adoption of the concept of uncertificated securities. (Sec. 3.13) 13. UNDERWRITER a person who guarantees on a firm commitment and/ or declared beat efforts basis the distribution and sale of securities of any kind by another company. The firm underwriter takes to buy the unsold portion of the issue it handles and gets paid a higher- fee for its effort than the best efforts underwriter who does no make the same commitment. (Sec. 3.14) REGISTRATION OF SECURITIES GEN. RULE: A registration statement duly filed and approved by the Sec is necessary before securities may be sold and offered for sale or distribution within the Philippines. Prior to any sale, information on the securities, in such form and substance prescribed by the SEC, shall be made available to each prospective purchaser. (Sec. 8) EXCEPTIONS: 1. Exempt securities; and 2. Exempt transactions. EXEMPT SECURITIES (Sec. 9): 1. Any security issued or guaranteed by the government of the Philippines, or by any political subdivision or agency thereof, or by any person controlled or supervised by, and acting as instrumentality of said government; 2. Any security issued or guaranteed by the government of any country of which the Philippines maintains diplomatic relations, or by any state, province or political subdivision thereof on the basis of reciprocity; provided, that the commission may require compliance with the form and content of disclosures the Commission may prescribed; 3. Certificates issued by the receiver or by the trustee in bankruptcy duly approved by the proper adjudicatory body; 4. Any security or its derivates the sale or transfer of which, by law, is under the supervision and regulation of the office of the Insurance Commission, Housing and Land Used Regulatory Board, or the Bureau of Internal Revenue; 5. Any security issued by the bank except its own shares of stock. EXEMPT TRANSACTIONS (Sec. 10): 1. Judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in insolvency or bankruptcy; 2. Sale of pledged or foreclosed property to liquidate debts;

3.

Sale on isolated transactions by owner or by his representative for the owners account; 4. Distribution by a corporation, actively engaged in the business authorized by its articles of incorporation, of securities to its stockholders or other security holders as a stock dividend or other distribution out of surplus; 5. Sale of capital stock of a corporation to its own stockholders exclusively, where no commission or other remuneration is paid or given directly or indirectly in connection with the sale of such capital stock ( e.g. the additional issuance of shares by a corporation out of its authorized but unissued capital stock); 6. Issuance of bonds or notes secured by mortgage upon real state or tangible personal property, where the entire mortgage together with all the bonds or notes secured thereby are sold to a single purchaser at a single sale; 7. Issuance and delivery of any security in exchange for any other security of the same issuer pursuant to a right of conversion (Provided, that the security so surrendered has been registered under the SRC or was, when sold, exempt from the provisions of the SRC, and that the security issued and delivered in exchange, if sold at the conversion price, would at the time of such conversion fall within the class of securities entitled to registration under the SRC. Upon such conversion, the par value of the security surrendered in such and delivered in such exchanged and sold); 8. Brokers transactions, executed upon consumers orders, on any registered exchange or other trading market; 9. Pre-incorporation subscriptions and subscription to an increase in its authorized capital stock under the Corporation Code; 10. Exchange of securities by the issuer with its existing security holders exclusively; 11. Sale of securities by an issuer to fewer than 20 persons in the Philippines during any 12 month period; 12. Sale of securities to any number of the following qualified buyers: (i) ban k (ii) registered investment house; (iii) insurance company; (iv) pension fund or retirement plan maintained by the government of the Philippines or any political subdivision thereof or manage by a bank or other persons authorized by the BankoSentral to engage in trust functions; (v) investment company; or (vi) such other person as the commission may by rule determine as qualified buyers, on the basis of such factors as financial sophistication, net worth, knowledge, or amount of assets under management. What is the initial procedure for the registration of securities? (Sec. 12) All securities required to be registered under section 8.1 of the SRC shall be registered through the filing by the issuer in the main office of the SEC of the sworn registration statement with respect to such securities. Unlike the Revised Securities Act, the SRC does not specify in great detail the information which must be provided and the documents which must be submitted by the applicant issuer, leaving such matters, including the form of the application, for the SEC to prescribe.

Who are required to sign the registration statement? (Sec. 12.4) The registration statement shall be signed by the issuers principal executive officer, its principal operating officer, its principal financial officer, its comptroller, its principal accounting officer, its corporate secretary or persons performing similar functions accompanied by a duly verified resolution of the board of directors of the issuer corporation. What action may the SEC take on a registration statement? (Sec. 12.6) Within 45 days after the date of filing of the registration statement, or by such later date to which the issuer has consented, the SEC shall declare the registration statement effective or rejected, unless the applicant is allowed to amend the registration statement as provided in Section 14 of the SRC. The SEC shall enter an order declaring the registration statement to be effective if it finds that the registration statement together with all the other papers and documents attached thereto is on its face complete and that the requirements have been complied with. The SEC may impose such terms and conditions as may be necessary or appropriate for the protection of the investors. Note that the SEC does not approve the registration statement (although Secs. 8.1 and 8.2 refer to the registration statement being approved by the SEC) but simply declares it effective. The non-use of he word approve is more probably designed to avoid any suggestion that the SEC is endorsing the particular issue.

performing similar functions, or any underwriter has been convicted, by a competent judicial or administrative body, upon plea of guilty, or otherwise, of an offense involving moral turpitude and/or fraud or is enjoined or restrained by the commission or other competent judicial or administrative body for violations of securities, commodities, and other related laws.

TENDER OFFER

A tender offer is a publicly announced intention by a person acting alone or in concert with other persons to acquire equity securities of a public company (Sec. 19). It has also been described as an imprecise term widely used in securities law, generally referring to a quick, enticing proposal to the shareholders of a corporation that they tender their shares for purchase by the offeror at a specified price. Tender offer is an upside-down term; I make the offer, you make the tender. It is usually, not always, part of an attempt by the offeror to buy enough stock to control the corporation, i.e., a takeover (also spelled take-over and take over). Accordingly, tender offer is sometimes called takeover offer or takeover bid. (Mellinkoffs Dictionary of American
Legal Usage, p. 64)

Tender offers are regulated to prevent he stockholders of the target company from being misled by the offeror or the targets management. Thus, a principal requirement of the SEC rules on tender offer is the disclosure by the offeror of certain information about the offer, with a copy of such information being given or sent to the stockholders (Rule 19.1, par. 7). UNDER WHAT CIRCUMSTANCES IS A TENDER OFFER MANDATORY? (Sec. 19.1 (a); SRC Rule 19.1, par. 2) Except when relief from the mandatory tender offer requirement is granted under SRC Rule 19.1, paragraph 3, a person is required under the following circumstances to make a tender offer for equity shares of a public company in an amount equal to the number of shares that the person intends to acquire: (a) where the person intends to acquire 15% or more of the equity shares of a public company pursuant to an agreement made between or among the person or one or more sellers; (b) where the person intends to acquire 30% or more of the equity shares of a public company within a period of 12 months; and, (c) where the person intends to acquire shares that would result in the ownership of more than 50% of the equity shares of a public company. WHEN WOULD A PERSON BE PRESUMED TO BE MAKING A VOLUNTARY TENDER OFFER? (SRC Rule 19.1, par. 4) A person may make a voluntary tender offer. He will be presumed to be doing so when some or all of the following factors are present: (a) there is active and widespread solicitation of public shareholders fort he shares of a public company; (b) the solicitation is made for a substantial percentage of the issuers stock; (c) the offer to purchase is made at a premium over the prevailing market price, at firm rather than negotiable terms; (d) the offer is contingent on the tender of a fixed number of shares; and

Grounds for Rejecting a Registration Statement (Sec. 13.1) The SEC may reject a registration statement and refuse registration of the security thereunder, or revoke the affectivity of a registration statement and the registration of the security thereunder, after due notice and hearing, by issuing an order to such effect, setting forth its findings in respect thereto, if it finds that:

(a) the issuer-

(i) has been judicially declared insolvent; (ii) has violated any of the provisions of this code; the rules promulgated pursuant thereto, or any order of the commission of which the issuer has notice in connection with the offering for which the registration statement has been filed; (iii) has been or is engaged or is about to engage in fraudulent transactions; (iv) has made any false or misleading representation of material facts in any prospectus concerning the issuer or its securities; (v) has failed to comply with any requirement that the commission may impose as a condition for the registration of the security for which the registration has been filed.

(b) the registration statement is on its face incomplete or inaccurate in any material respect or includes any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading or, (c) the issuer, any officer, director or controlling person of the issuer, or person

(e) the offer is only open for a limited period of time. The foregoing list of factors reflects the socalled weight-factor Wellman Vs. Dickinson Test enunciated in an American Case of the same name (475F. Supp. 783, 823-824 [S>D>N>Y>, 1979] involving the coordinated private solicitations of 30 institutions and 9 individuals, with a premium price offered and no individualized negotiations
(Fundamentals of Securities Regulation by Louis Loss and Joel Seligman, Little Brown and Company, 3rd edition, 1995).

(iii)

adopts a general fraud rule prohibiting the making of any materially false or misleading statements (SRC Rule 20, par. 7).

No solicitation of proxy shall be made unless each person solicited is furnished, concurrently or earlier, with a written proxy statement containing the information required by the SEC (SRC Rule 20, par. 3). The form of proxy, shall be made unless each person solicited or given to stockholders at least 15 business days prior to the meeting date (SRC Rule 20, par. 4.f). RECOVERY OF PROFITS When could the profits made by a stockholder, director or officer in a purchase and sale, or a sale and purchase, of any equity security be recovered? (Sec. 23.2) For the purpose of preventing the unfair use of information which may have been obtained by a beneficial owner of equity securities, director or officer, or officer of the issuer by reason of his relationship top the issuer, any profit realized by him from any purchase and sale, o any sale and purchase, of any equity security of such issuer with in any period of less than 6 months, unless such security was acquired in good faith in connection with a debt previously contracted, shall inure to and be recoverable by the issuer, irrespective of any intention of holding the security purchased or of not purchasing the security sold for a period exceeding 6 months. A suit to recover such profit may be instituted before the regional trial court by the issuer, or by the owner of any security of the issuer in the name and I behalf of the issuer if the issuer shall fail or refuse to bring such suit within 60 days after request or shall be brought more than 2 years after the date such profit was realized. MANIPULATION OF SECURITY PRICES What are the various ways by which security prices may be manipulated? (Sec. 24; SRC Rule 24.1(b)-1, par. 5) The following are some examples of the ways by which security prices may be manipulated: (a) Painting the tape- engaging in a series of transactions in securities that are reported publicly to give the impression of activity or price movement in a security; (b) Marking the close- buying and selling securities at the close of the market in an effort to alter the closing price of the security; (c) Improper matched orders- engaging in the transaction where both the buy and sell orders are entered at the same time with the same price and quantity by different but colluding parties; (d) Hype and dump- engaging in buying activity at increasingly higher prices and then selling securities in the market at higher prices; (e) Wash sales- engaging in transactions in which there is no genuine change in actual ownership of a security; (f) Squeezing the float- taking advantage of a shortage of securities in the market by controlling the demand side and exploiting market congestion during such shortages in a way as to create artificial prices ; (g) Boiler room sales- the use of highpressure sales tactics to promote purchases and sales of securities;

WHAT IS A PROXY AND WHY IS ITS SOLICITATION REGULATED? (Sec. 20; SRC Rule 20) A proxy is a formal authorization from a stockholder that empowers someone to vote in his or her behalf; the term also refers to the person who is sop authorized to vote on behalf of a stockholder The SRC regulates the issuance and solicitation of proxies. Indeed, it expressly requires that proxies must be issued and proxy solicitation must be made in accordance with SEC rules ( Sec. 20.1). thus, proxies must be in writing, signed by the stockholder or his duly authorized representative and filed with the corporate secretary before the scheduled meeting (Sec. 20.2); unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended; no proxy shall be valid and effective for a period longer than 5 years at one time (Sec. 20.3); and a broker or dealer can not give a proxy in respect of any security it carries fort he account of a customer without the express written authorization of such customer(Sec. 20.4). The issuance and solicitation of proxies are regulated to minimize, if not avoid, the abuse and misuse of the proxy device that may lead to the self-perpetuation and irresponsibility of management. Management has innate advantages in the solicitation of proxies; it has the stockholders list; it benefits from the usual inertia of stockholders; and it has access to corporate funds for the normally substantial costs of solicitation. The terms solicit and solicitation means(a) any request for a proxy whether or not accompanied by or included in a form of proxy; (b) any request to execute or not to execute, or to revoke a, a proxy; or (c) the furnishing of a form of proxy or other communication to security holders under circumstance reasonably calculated to result in the procurement, withholding or revocation of a proxy. The approach of the SEC Rules on proxy solicitation follows the traditional three-way approach which (i) calls for a brief description of the matters to be considered, together with the action proposed to be taken by the holder of the proxy
(SRC Rule 20, pars. 3 and 4);

(ii)

requires the registrant (i.e. the insurer of the securities in respect of which proxies are to be solicited), as a condition of its own solicitation, to mail to record owners the proxy material of any stockholder upon his or her request at his or her expense (SRC Rule 2o, par. 6); and

(h) Daisy chain- a series of purchases and

sales of the same at successively higher (or lower) prices, by the same group of people with the purpose of manipulating prices and drawing unsuspecting investors into the market, leaving them defrauded of their money or securities.

determining his course of action whether to buy, sell or hold a security. REGISTRATION OF MARKET PROFESSIONALS AND ENTITIES Who are the market professionals and entities required to register with SEC? (a) Brokers, dealers, salesman and associated person (Sec. 28.1) no person shall engage in the business of buying or selling securities in the Philippines as a broker or dealer, or act as a salesman, or an associated person of any broker or dealer unless registered as such with the SEC. (b) Exchanges (Secs. 3.7 and 33.2) the applicant fort he registration must be organized as a stock corporation and engaged solely in the business of operating an exchange. No person may beneficially own or control, directly or indirectly, more than 5% of the voting rights of the exchange. Industry and business group are similarly limited to not more than 29% of the voting rights of the exchange. Brokers shall constitute no more than 49% of the Board of Directors of the exchange, while the remaining 51% shall be composed of three independent directors and person who represent the interests of issuers, investors and other market participants who are not associated with any broker or dealer or member of the exchange for period of 2 years prior to his appointment. (c) Other securities trading markets the SEC is authorized to determine the number, size and location of stock exchanges, other trading markets and commodity exchanges, and other similar organizations in the light of national or regional requirements for such activities with the view to promote, enhance, protect, conserve or rationalize investment (Sec. 36.3). The Sec is also authorized to register and license innovative and other trading markets or exchanges covering the issuance of innovative securities, securities of small, medium, growth and venture enterprises, and technology-based ventures. (d) Self-regulatory organizations (Sec. 39) a self-regulatory organization is any securities exchange, clearing or depository agency or other securities-related organization or association which is organized and has the capacity to be able to carry out he purposes of the SRC and to comply with, and to enforce compliance by its members, with the provisions of the SRC, the rules and regulations thereunder, and the rules of the association (Sec. 39.3[a]). Those entities which the SEC may register as self=regulatory organizations include associations of brokers and dealers, transfer agents, custodians, fiscal and paying agents, computer services, news disseminating services, proxy solicitors, statistical agencies, security rating agencies, and securities information processors. (e) Clearing agencies (Secs. 3.6 and 42) In Nicolas Vs. CA, G.R. 122857, March 27, 1998

THE INSIDER Prohibited acts of an insider: (Secs. 3.8 and 27) While to be an insider in not prohibited, it shall, however, be unlawful for an insider to sell or buy a security of the issuer while in possession of material nonpublic information with respect to the issuer or the security unless(a) the insider is able to prove that the information was not gained from such relationship, or (b) if the other party selling to or buying from the insider (or his agent) is identified, the insider is able to prove (i) the he disclosed the nonpublic information to the other party, or (ii) that he had reason to believe that the other party otherwise is also in possession of the nonpublic information. The duty of the insider when trading is to disclose the material nonpublic information to the other party. Could an insider be liable even if he does not trade? (Sec. 27. 3) Yes. It shall be unlawful for any insider to communicate material nonpublic information about the issuer or security to any person who, by virtue of the communication, becomes an insider as defined in Section 3.8 of the SRC, where the insider communicating the information knows or has reason to believe that such person will likely buy or sell a security of the issuer while in possession of such information. Is there a presumption of insider trading? (Sec. 27.1) Yes. A purchase or sale of a security of the issuer made by an insider or such insiders spouse or relatives by affinity or consanguinity within the second degree, legitimate or common-law, shall be presumed to have been effected while in possession of material nonpublic information if transacted after such information came into existence but prior to dissemination of such information to the public and the lapse of a reasonable time fort he market to absorb such information; provided, however, that this presumption shall be rebutted upon a showing by the purchaser or seller that he was no aware of the material nonpublic information at the time of the purchase or sale. MATERIAL NONPUBLIC INFORMATION (Sec. 27. 2) Material nonpublic information is information that 1. has not being generally disclosed to the public and would likely affect the market price of the security after being disseminated to the public and the lapse of a reasonable time for the market to absorb the information, or 2. would be considered by a reasonable person important under the circumstances in

The Supreme Court ruled that the suit of Nicolas must fail because the traded securities fort he account of others without securing the necessary license therefore from the SEC. the failure to obtain such a license is a violation of Section 19 of the Revised Securities Act which provides that no brokers shall sell any securities unless he is registered with the SEC. stock market trading, a technical and highly specialized institution in the Philippines, must be entrusted to individuals with proven integrity, competence and knowledge and who has due regard fort he requirements of the law. INDEPENDENT DIRECTOR Who is an independent director? And independent director is a person other than an officer or employee of the corporation, its parent or subsidiaries, or any other individual having a relationship with the corporation, which would interfere in the exercise of independent judgment in carrying out the responsibilities of a director (Sec. 38). More expansively, SRC rule 38.1 defines an independent director as 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 the corporation. For example, a person may not qualify as an independent director under SRC rule 38.1 if (a) he is a substantial shareholder (i.e. a beneficial owner, directly or indirectly, of more than 10% of any class of equity security) of the corporation or of its related companies (i.e., its holding company, its subsidiary, or subsidiary of its holding company) or any of its substantial shareholders; or (b) he is a relative (i.e., the spouse, parent, child, brother and sister of such person, and the spouse of such child, brother or sister) of any director, officer or substantial shareholder of the corporation, any of its related companies or any of its substantial shareholders; or (c) he has been employed in any executive capacity by the public company, any of its related companies or by any of its substantial shareholders within the last 5 years; or (d) he is retained as professional adviser by the public company, any of its related companies or by any of its substantial shareholders, either personally or through his firm. Who are required to have independent directors? (Sec. 38) Apart from exchange, any corporation with a class of equity securities listed for trading in an exchange, or with assets in excess of P50 million and having 200 or more holders, at least 200 of which are holding at least 100 shares of a class of its equity securities or which has sold a class of equity securities to the public pursuant to an effective registration statement in compliance with Section 12 of the SRC, shall have at least 2 independent directors or such independent directors shall constitute at least 20% of the members of such board, whichever is the lesser. PROHIBITED TRANSACTIONS AND DEALERS (Sec. 30.1) OF BROKERS

No broker or dealer shall deal in or otherwise buy or sell, for its own account or for the account of customers, securities listed on an exchange issued by any corporation where any stockholder, director, associated person or salesman, or authorized clerk of said broker or dealer and all the relatives of the foregoing within the fourth civil degree of consanguinity or affinity, is at the time holding office in said issuer corporation as a director, president, vice president, manager, treasurer, comptroller, secretary or any office of trust and responsibility, or is controlling person oft eh issuer. SUITABILITY RULE (SRC Rule 30.2-4) The suitability rule states that, in recommending to a customer the purchase, sale or exchange of any security, a broker, dealer or an associated person or salesman of a broker or dealer shall have reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts disclosed by such customer as to his security holdings and as to his financial situation and needs. SUSPENSION OF TRADINGS Can the SEC suspend trading in a security or all trading on any securities exchange? (Sec. 36.1) Yes. The SEC is authorize, if in its opinion such action is necessary or appropriate for the protection of investors and the public interest so requires, summarily to suspend trading in any listed security on any exchange or other trading market for a period not exceeding 30 days or, with the approval of the President of the Philippines, summarily to suspend all trading on any securities exchange or other trading market for a period of more than 30 but not exceeding 90 days; provided, however, that the SEC, promptly following the issuance of the order of suspension, shall notify the affected issuer of the reasons for such suspension and provides such issuer with an opportunity for hearing to determine whether the suspension should be lifted. MARGIN TRADING What is margin trading and why is it regulated? (Secs. 48, et seq.) Margin trading refers to the purchase of securities by an investor using the credit of the broker to pay for part of the said securities. It is regulated for the purpose of the excessive use of credit or carrying of securities. The margin is the amount of money or securities that an investor must deposit with a broker to secure a loan with from the broker. When a broker makes a demand on the investor to deposit money or securities with a broker when the purchase is made or when the investors equity in a margin account declines below a minimum standard set by the exchange or broker, the broker is said to have made a margin call. VIOLATONS OF THE SRC, PENALTIES AND SANCTIONS What administrative sanctions may the SEC impose? (Sec. 4) If there is violation of the SRC, the SCR rules or the orders of the SEC, the SEC shall, in its discretion and after due notice and hearing, impose any or all the following sanctions as may be appropriate in light of the facts and circumstances:

(a) suspension, or revocation of any registration for the offering of securities; (b) a fine of no less than P10,000 nor more than P1,000,000 plus not more than P2,000 for each day of continuing violation; (c) in the case of violations of Sections 19.2(the making of untrue statement, etc. in connection with a tender offer), 20 (proxy solicitations), 24 (manipulation of security prices, etc.), 26 (fraudulent transactions) and 27 (insider trading), disqualification from being an officer, member of the board of directors, or person performing similar functions, of an issuer required to file reports under Section 17 of the SRC or any other act, rule or regulation administered by the SEC; (d) in the case of f\violation of Section 34 (re segregation and limitation of functions of members, brokers, dealers), a fine of no more than 3 times the profit gained or loss avoided as a result of the purchase, sale or communication proscribed by such section; and (e) other penalties within the power of the SEC to impose. SETTLEMENT OFFER What is settlement offer? (Sec. 55) A settlement offer is a written proposal made to the SEC by a party being investigated or charged, during an investigation or proceeding under the SRC, in order that such investigation or proceeding against the said party could be terminated or dismissed. Upon receipt of such offer of settlement, the SEC may consider the offer based on timing, the nature of the investigation or proceeding, and the public interest. The SEC may only agree to settlement offer based on its findings that such settlement is in the public interest. Any agreement to settle shall have no legal effect until publicly disclosed. Such decision may be made with out a determination of guilt on the part of the person making the offer. FALSE REGISTRATION STATEMENT Who may sue on account of a false registration statement? (Sec. 56.1) Any person (i) acquiring a security, the registration statement of which or any part thereof contains on its effectivity an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make such statement not misleading, (ii) who suffers damage, and (iii) who did not know of such untrue statement or omission at the time of such acquisition, may sue and recover damages. Who may be sued on account of a false registration statement? ( Sec. 56.1) (a) the issuer and every person who signed the registration statement; (b) every person who was a director of, or any other person performing similar functions, or a partner in, the issuer at the time of the filing of the registration statement or any part, supplement or amendment thereof with respect to which his liability is asserted; (c) every person who is named in the registration statement as being or about to become a director of, or person performing similar functions, or a partner in, the issuer and whose written consent thereto is filed with the registration statement.

(d) Every auditor or auditing firm named as having certified any financial statements used in connection with the registration statement or prospectus; (e) Every person who, with his written consent, which shall be filed with the registration statement, or as having prepared or certified any report or valuation which is used in connection with the registration statement, with respect to the statement, report or evaluation, which purports to have been prepared or certified, by him; (f) Every selling shareholder who contributed to and certified as to the accuracy of the portion of the registration statement, with respect to that portion of the registration statement which purports to have been contributed by him; and (g) Every underwriter with respect to such security. What is the prescriptive period for the enforcement of actions under Sections 56 (re civil liabilities on account of false registration statement) and 57 (Re civil liabilities arising in connection with prospectus, communications and reports)? Sec. 62) No action shall be maintained to enforce any liability created under Sections 56 or 57 of the SRC unless brought within 2 years after the discovery of the untrue statement or the omission, or, if the action is to enforce a liability created under Section 57.1(a) (re offering to sell or selling an unregistered security), unless brought within 2 years after the violation upon which it is based. In no event shall any such action be brought to enforce liability crated under Section 56 or 57.1(a) more than 5 years after the security was bona fide offered to the public, or under Section 57.1 (b) ( re offering to sell or selling a security by means of a prospectus, etc. containing an untrue statement, etc.) more than 5 years after the sale. What are the damages that may be awarded in suits to recover damages under Sections 56-60? (Sec. 63) (a) actual damages; (b) treble damages, i.e., damages in an amount not exceeding triple the amount of the transaction; (c) exemplary damages in cases of bad faith, fraud, malevolence or wantonness in the violation of the SRC or the SRC rules; (d) Attorneys fees not exceeding 30% of the award. May compliance with any provision of the SRC be waived and would such waiver be valid? (Sec. 71.1) Any condition, stipulation, or provision binding any person to waive compliance with any provision of the SRC or of any rule or regulation thereunder, or of any rule of an Exchange required thereby, as well as the waiver itself, shall be void. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxx

5. Interim Rules of Procedure for Intra-Corporate Controversies Under R.A. 8799

A.M. No. 01-2-04-SC Effective: April 01, 2001
RULE I

GENERAL PROVISIONS SECTION 1. (a) Cases covered. - These Rules shall govern the procedure to be observed in civil cases involving the following: (1) Devices or schemes employed by, or any act of, the board of directors, business associates, officers or partners, amounting to fraud or misrepresentation which may be detrimental to the interest of the public and/or of the stockholders, partners, or members of any corporation, partnership, or association; (2) Controversies arising out of intra-corporate, partnership, or association relations, between and among stockholders, members, or associates; and between, any or all of them and the corporation, partnership, or association of which they are stockholders, members, or associates, respectively; (3) Controversies in the election or appointment of directors, trustees, officers, or managers of corporations, partnerships, or associations; (4) Derivative suits; and (5) Inspection of corporate books. (b) Prohibition against nuisance and harassment suits. - Nuisance and harassment suits are prohibited. In determining whether a suit is a nuisance or harassment suit, the court shall consider, among others, the following: (1) The extent of the shareholding or interest of the initiating stockholder or member; (2) Subject matter of the suit; (3) Legal and factual basis of the complaint; (4) Availability of appraisal rights for the act or acts complained of; and (5) Prejudice or damage to the corporation, partnership, or association in relation to the relief sought. In case of nuisance or harassment suits, the court may, motu proprio or upon motion, forthwith dismiss the case. SEC. 2. Suppletory application of the Rules of Court. - The Rules of Court, in so far as they may be applicable and are not inconsistent with these Rules, are hereby adopted to form an integral part of these Rules. SEC. 3. Construction. - These Rules shall be liberally construed in order to promote their objective of securing a just, summary, speedy and inexpensive determination of every action or proceeding. SEC. 4. Executory nature of decisions and orders. All decisions and orders issued under these Rules shall immediately be executory. No appeal or petition taken therefrom shall stay the enforcement or implementation of the decision or order, unless restrained by an appellate court. Interlocutory orders shall not be subject to appeal. SEC. 5. Venue. - All actions covered by these Rules shall be commenced and tried in the Regional Trial Court which has jurisdiction over the principal office of the corporation, partnership, or association concerned. Where the principal office of the corporation, partnership or association is registered in the Securities and Exchange Commission as Metro Manila, the action must be filed in the city or municipality where the head office is located. SEC. 6. Service of pleadings. - When so authorized by the court, any pleading and/or document required by these Rules may be filed with the court and/or served upon the other parties by facsimile transmission (fax) or electronic mail (e-mail). In such cases, the date of transmission shall be deemed to be prima facie the date of service. SEC. 7. Signing of pleadings, motions and other papers. - Every pleading, motion, and other paper of a party represented by an attorney shall be signed by at least one attorney of record in the attorneys individual name, whose address shall be stated. A party who is not represented by an attorney shall sign the pleading, motion, or other paper and state his address. The signature of an attorney or party constitutes a certification by the signer that he has read the pleading,

motion, or other paper; that to the best of his knowledge, information, and belief formed after reasonable inquiry, it is well grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing jurisprudence; and that it is not interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation. If a pleading, motion, or other paper is not signed, it shall be stricken off the record unless it is promptly signed by the pleader or movant, after he is notified of the omission. SEC. 8. Prohibited pleadings. - The following pleadings are prohibited: (1) Motion to dismiss; (2) Motion for a bill of particulars; (3) Motion for new trial, or for reconsideration of judgment or order, or for re-opening of trial; (4) Motion for extension of time to file pleadings, affidavits or any other paper, except those filed due to clearly compelling reasons. Such motion must be verified and under oath; and (5) Motion for postponement and other motions of similar intent, except those filed due to clearly compelling reasons. Such motion must be verified and under oath. SEC. 9. Assignment of cases. - All cases filed under these Rules shall be tried by judges designated by the Supreme Court to hear and decide cases transferred from the Securities and Exchange Commission to the Regional Trial Courts and filed directly with said courts pursuant to Republic Act No. 8799, otherwise known as the Securities and Regulation Code.

RULE 2 COMMENCEMENT OF ACTION AND PLEADINGS SECTION 1. Commencement of action. - An action under these Rules is commenced by the filing of a verified complaint with the proper Regional Trial Court. SEC. 2. Pleadings allowed. - The only pleadings allowed to be filed under these Rules are the complaint, answer, compulsory counterclaims or cross-claims pleaded in the answer, and the answer to the counterclaims or cross-claims. SEC. 3. Verification. - The complaint and the answer shall be verified by an affidavit stating that the affiant has read the pleading and the allegations therein are true and correct based on his own personal knowledge or on authentic records. SEC. 4. contain: Complaint. - The complaint shall state or

(1) the names, addresses, and other relevant personal or juridical circumstances of the parties; (2) all facts material and relevant to the plaintiffs cause or causes of action, which shall be supported by affidavits of the plaintiff or his witnesses and copies of documentary and other evidence supportive of such cause or causes of action; (3) the law, rule, or regulation relied upon, violated, or sought to be enforced; (4) a certification that (a) the plaintiff has not theretofore commenced any action or filed any claim involving the same issues in any court, tribunal or quasi-judicial agency, and, to the best of his knowledge, no such other action or claim is pending therein; (b) if there is such other action or claim, a complete statement of the present status thereof; and (c) if he should thereafter learn that the same or similar action or claim has been filed or is pending, he shall report that fact within five (5) days therefrom to the court; and (5) the relief sought. SEC. 5. Summons. - The summons and the complaint

shall be served together not later than five (5) days from the date of filing of the complaint. (a) Service upon domestic private juridical entities. If the defendant is a domestic corporation, service shall be deemed adequate if made upon any of the statutory or corporate officers as fixed by the by-laws or their respective secretaries. If the defendant is a partnership, service shall be deemed adequate if made upon any of the managing or general partners or upon their respective secretaries. If the defendant is an association, service shall be deemed adequate if made upon any of its officers or their respective secretaries. (b) Service upon foreign private juridical entity. When the defendant is a foreign private juridical entity which is transacting or has transacted business in the Philippines, service may be made on its resident agent designated in accordance with law for that purpose, or, if there be no such agent, on the government official designated by law to that effect, or on any of its officers or agents within the Philippines. SEC. 6. Answer. - The defendant shall file his answer to the complaint, serving a copy thereof on the plaintiff, within fifteen (15) days from service of summons. In the answer, the defendant shall: (1) Specify each material allegation of fact the truth of which he admits; (2) Specify each material allegation of fact the truth of which he does not admit. Where the defendant desires to deny only a part of an averment, he shall specify so much of it as true and material and shall deny only the remainder; (3) Specify each material allegation of fact as to which truth he has no knowledge or information sufficient to form a belief, and this shall have the effect of a denial; (4) State the defenses, including grounds for a motion to dismiss under the Rules of Court; (5) State the law, rule, or regulation relied upon; (6) Address each of the causes of action stated in the complaint; (7) State the facts upon which he relies for his defense, including affidavits of witnesses and copies of documentary and other evidence supportive of such cause or causes of action; (8) State any compulsory counterclaim/s and crossclaim/s; and (9) State the relief sought. The answer to counterclaims or cross-claims shall be filed within ten (10) days from service of the answer in which they are pleaded. SEC. 7. Effect of failure to answer. - If the defendant fails to answer within the period above provided, he shall be considered in default. Upon motion or motu proprio, the court shall render judgment either dismissing the complaint or granting the relief prayed for as the records may warrant. In no case shall the court award a relief beyond or different from that prayed for. SEC. 8. Affidavits, documentary and other evidence. - Affidavits shall be based on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify on the matters stated therein. The affidavits shall be in question and answer form, and shall comply with the rules on admissibility of evidence. Affidavits of witnesses as well as documentary and other evidence shall be attached to the appropriate pleading; Provided, however, that affidavits, documentary and other evidence not so submitted may be attached to the pre-trial brief required under these Rules. Affidavits and other evidence not so submitted shall not be admitted in evidence, except in the following cases: (1) Testimony of unwilling, hostile, or adverse party witnesses. A witness is presumed prima facie hostile if he fails or refuses to execute an affidavit after a written request therefor; (2) If the failure to submit the evidence is for meritorious and compelling reasons; and (3) Newly discovered evidence. In case of (2) and (3) above, the affidavit and evidence must be submitted not later than five (5) days prior to its introduction in evidence.

RULE 3 MODES OF DISCOVERY SECTION 1. In general. - A party can only avail of any of the modes of discovery not later than fifteen (15) days from the joinder of issues. SEC. 2. Objections. - Any mode of discovery such as interrogatories, request for admission, production or inspection of documents or things, may be objected to within ten (10) days from receipt of the discovery device and only on the ground that the matter requested is patently incompetent, immaterial, irrelevant or privileged in nature. The court shall rule on the objections not later than fifteen (15) days from the filing thereof. SEC. 3. Compliance. - Compliance with any mode of discovery shall be made within ten (10) days from receipt of the discovery device, or if there are objections, from receipt of the ruling of the court. SEC. 4. Sanctions. - The sanctions prescribed in the Rules of Court for failure to avail of, or refusal to comply with, the modes of discovery shall apply. In addition, the court may, upon motion, declare a party non-suited or as in default, as the case may be, if the refusal to comply with a mode of discovery is patently unjustified.

RULE 4 PRE-TRIAL SECTION 1. Pre-trial conference; mandatory nature. Within five (5) days after the period for availment of, and compliance with, the modes of discovery prescribed in Rule 3 hereof, whichever comes later, the court shall issue and serve an order immediately setting the case for pre-trial conference and directing the parties to submit their respective pre-trial briefs. The parties shall file with the court and furnish each other copies of their respective pre-trial brief in such manner as to ensure its receipt by the court and the other party at least five (5) days before the date set for the pre-trial. The parties shall set forth in their pre-trial briefs, among other matters, the following: (1) Brief statement of the nature of the case, which shall summarize the theory or theories of the party in clear and concise language; (2) Allegations expressly admitted by either or both parties; (3) Allegations deemed admitted by either or both parties; (4) Documents not specifically denied under oath by either or both parties; (5) Amendments to the pleadings; (6) Statement of the issues, which shall separately summarize the factual and legal issues involved in the case; (7) Names of witnesses to be presented and the summary of their testimony as contained in their affidavits supporting their positions on each of the issues; (8) All other pieces of evidence, whether documentary or otherwise and their respective purposes; (9) Specific proposals for an amicable settlement; (10) Possibility of referral to mediation or other alternative modes of dispute resolution; (11) Proposed schedule of hearings; and (12) Such other matters as may aid in the just and speedy disposition of the case. SEC. 2. Nature and purpose of pre-trial conference. During the pre-trial conference, the court shall, with its active participation, ensure that the parties consider in detail all of the following: (1) The possibility of an amicable settlement; (2) Referral of the dispute to mediation or other forms of dispute resolution; (3) Facts that need not be proven, either because they are matters of judicial notice or expressly or deemed admitted; (4) Amendments to the pleadings;

(5) The possibility of obtaining stipulations and admissions of facts and documents; (6) Objections to the admissibility of testimonial, documentary and other evidence; (7) Objections to the form or substance of any affidavit, or part thereof; (8) Simplification of the issues; (9) The possibility of submitting the case for decision on the basis of position papers, affidavits, documentary and real evidence; (10) A complete schedule of hearing dates; and (11) Such other matters as may aid in the speedy and summary disposition of the case. SEC. 3. Termination. - The preliminary conference shall be terminated not later than ten (10) days after its commencement, whether or not the parties have agreed to settle amicably. SEC. 4. Judgment before pre-trial. - If, after submission of the pre-trial briefs, the court determines that, upon consideration of the pleadings, the affidavits and other evidence submitted by the parties, a judgment may be rendered, the court may order the parties to file simultaneously their respective memoranda within a nonextendible period of twenty (20) days from receipt of the order. Thereafter, the court shall render judgment, either full or otherwise, not later than ninety (90) days from the expiration of the period to file the memoranda. SEC. 5. Pre-trial order; judgment after pre-trial. - The proceedings in the pre-trial shall be recorded. Within ten (10) days after the termination of the pre-trial, the court shall issue an order which shall recite in detail the matters taken up in the conference, the actions taken thereon, the amendments allowed in the pleadings, and the agreements or admissions made by the parties as to any of the matters considered. The court shall rule on all objections to or comments on the admissibility of any documentary or other evidence, including any affidavit or any part thereof. Should the action proceed to trial, the order shall explicitly define and limit the issues to be tried and shall strictly follow the form set forth in Annex A of these Rules. The contents of the order shall control the subsequent course of the action, unless modified before trial to prevent manifest injustice. After the pre-trial, the court may render judgment, either full or partial, as the evidence presented during the pre-trial may warrant. RULE 5 TRIAL SECTION 1. Witnesses. - If the court deems necessary to hold hearings to determine specific factual matters before rendering judgment, it shall, in the pretrial order, set the case for trial on the dates agreed upon by the parties. Only persons whose affidavits were submitted may be presented as witnesses, except in cases specified in section 8, Rule 2 of these Rules. The affidavits of the witnesses shall serve as their direct testimonies, subject to cross-examination in accordance with existing rules on evidence. SEC. 2. Trial schedule. - Unless judgment is rendered pursuant to Rule 4 of these Rules, the initial hearing shall be held not later than thirty (30) days from the date of the pre-trial order. The hearings shall be completed not later than sixty (60) days from the date of the initial hearing, thirty (30) days of which shall be allotted to the plaintiffs and thirty (30) days to the defendants in the manner prescribed in the pre-trial order. The failure of a party to present a witness on a scheduled hearing date shall be deemed a waiver of such hearing date. However, a party may present such witness or witnesses within his remaining allotted hearing dates. SEC. 3. Written offer of evidence. - Evidence not otherwise admitted by the parties or ruled upon by the court during the pre-trial conference shall be offered in writing not later than five (5) days from the completion of the presentation of evidence of the party concerned. The opposing party shall have five (5) days from receipt of the offer to file his comments or objections. The court shall

make its ruling on the offer within five (5) days from the expiration of the period to file comments or objections. SEC. 4. Memoranda. - Immediately after ruling on the last offer of evidence, the court shall order the parties to simultaneously file, within thirty (30) days from receipt of the order, their respective memoranda. The memoranda shall contain the following: (1) A Statement of the Case, which is a clear and concise statement of the nature of the action and a summary of the proceedings; (2) A Statement of the Facts, which is a clear and concise statement in narrative form of the established facts, with reference to the testimonial, documentary or other evidence in support thereof; (3) A Statement of the Issues, which is a clear and concise statement of the issues presented to the court for resolution; (4) The Arguments, which is a clear and concise presentation of the argument in support of each issue; and (5) The Relief, which is a specification of the order or judgment which the party seeks to obtain. No reply memorandum shall be allowed. SEC. 5. Decision after trial. - The court shall render a decision not later than (90) days from the lapse of the period to file the memoranda, with or without said pleading having been filed. RULE 6 ELECTION CONTESTS SECTION 1. Cases covered. - The provisions of this rule shall apply to election contests in stock and nonstock corporations. SEC. 2. Definition. - An election contest refers to any controversy or dispute involving title or claim to any elective office in a stock or non-stock corporation, the validation of proxies, the manner and validity of elections, and the qualifications of candidates, including the proclamation of winners, to the office of director, trustee or other officer directly elected by the stockholders in a close corporation or by members of a non-stock corporation where the articles of incorporation or by-laws so provide. SEC. 3. Complaint. - In addition to the requirements in section 4, Rule 2 of these Rules, the complaint in an election contest must state the following: (1) The case was filed within fifteen (15) days from the date of the election if the by-laws of the corporation do not provide for a procedure for resolution of the controversy, or within fifteen (15) days from the resolution of the controversy by the corporation as provided in its by-laws; and (2) The plaintiff has exhausted all intra-corporate remedies in election cases as provided for in the by-laws of the corporation. SEC. 4. Duty of the court upon the filing of the complaint. - Within two (2) days from the filing of the complaint, the court, upon a consideration of the allegations thereof, may dismiss the complaint outright if it is not sufficient in form and substance, or, if it is sufficient, order the issuance of summons which shall be served, together with a copy of the complaint, on the defendant within two (2) days from its issuance. SEC. 5. Answer. - The defendant shall file his answer to the complaint, serving a copy thereof on the plaintiff, within ten (10) days from service of summons and the complaint. The answer shall contain the matters required in section 6, Rule 2 of these Rules. SEC. 6. Affidavits, documentary and other evidence. - The parties shall attach to the complaint and answer the affidavits of witnesses, documentary and other evidence in support thereof, if any. SEC. 7. Effect of failure to answer. - If the defendant fails to file an answer within the period above provided, the court shall, within ten (10) days from the lapse of said period, motu proprio or on motion, render judgment as may be warranted by the allegations of the complaint, as well as the affidavits, documentary and other evidence on

record. In no case shall the court award a relief beyond or different from that prayed for. SEC. 8. Trial. - If the court deems it necessary to hold a hearing to clarify specific factual matters before rendering judgment, it shall, within ten (10) days from the filing of the last pleading, issue an order setting the case for hearing for the purpose. The order shall, in clear and concise terms, specify the factual matters the court desires to be clarified and the witnesses, whose affidavits have been submitted, who will give the necessary clarification. The hearing shall be set on a date not later than ten (10) days from the date of the order, and shall be completed not later than fifteen (15) days from the date of the first hearing. The affidavit of a witness who fails to appear for clarificatory questions of the court shall be ordered stricken off the record. SEC. 9. Decision. - The Court shall render a decision within fifteen (15) days from receipt of the last pleading, or from the date of the last hearing as the case may be. The decision shall be based on the pleadings, affidavits, documentary and other evidence attached thereto and the answers of the witnesses to the clarificatory questions of the court given during the hearings. RULE 7 INSPECTION OF CORPORATE BOOKS AND RECORDS SECTION 1. Cases covered. - The provisions of this Rule shall apply to disputes exclusively involving the rights of stockholders or members to inspect the books and records and/or to be furnished with the financial statements of a corporation, under sections 74 and 75 of Batas Pambansa Blg. 68, otherwise known as the Corporation Code of the Philippines. SEC. 2. Complaint. In addition to the requirements in section 4, Rule 2 of these Rules, the complaint must state the following: (1) The case is for the enforcement of plaintiffs right of inspection of corporate orders or records and/or to be furnished with financial statements under sections 74 and 75 of the Corporation Code of the Philippines; (2) A demand for inspection and copying of books and records and/or to be furnished with financial statements made by the plaintiff upon defendant; (3) The refusal of defendant to grant the demands of the plaintiff and the reasons given for such refusal, if any; and (4) The reasons why the refusal of defendant to grant the demands of the plaintiff is unjustified and illegal, stating the law and jurisprudence in support thereof. SEC. 3. Duty of the court upon the filing of the complaint. - Within two (2) days from the filing of the complaint, the court, upon a consideration of the allegations thereof, may dismiss the complaint outright if it is not sufficient in form and substance, or, if it is sufficient, order the issuance of summons which shall be served, together with a copy of the complaint, on the defendant within two (2) days from its issuance. SEC. 4. Answer. The defendant shall file his answer to the complaint, serving a copy thereof on the plaintiff, within ten (10) days from service of summons and the complaint. In addition to the requirements in section 6, Rule 2 of these Rules, the answer must state the following: (1) The grounds for the refusal of defendant to grant the demands of the plaintiff, stating the law and jurisprudence in support thereof; (2) The conditions or limitations on the exercise of the right to inspect which should be imposed by the court; and (3) The cost of inspection, including manpower and photocopying expenses, if the right to inspect is granted. SEC. 5. Affidavits, documentary and other evidence. The parties shall attach to the complaint and answer

the affidavits of witnesses, documentary and other evidence in support thereof, if any. SEC. 6. Effect of failure to answer. If the defendant fails to file an answer within the period above provided, the court, within ten (10) days from the lapse of the said period, motu proprio or upon motion, shall render judgment as warranted by the allegations of the complaint, as well as the affidavits, documentary and other evidence on record. In no case shall the court award a relief beyond or different from that prayed for. SEC. 7. Decision. The court shall render a decision based on the pleadings, affidavits and documentary and other evidence attached thereto within fifteen (15) days from receipt of the last pleading. A decision ordering defendants to allow the inspection of books and records and/or to furnish copies thereof shall also order the plaintiff to deposit the estimated cost of the manpower necessary to produce the books and records and the cost of copying, and state, in clear and categorical terms, the limitations and conditions to the exercise of the right allowed or enforced. RULE 8 DERIVATIVE SUITS SECTION 1. Derivative action. - A stockholder or member may bring an action in the name of a corporation or association, as the case may be, provided, that: (1) He was a stockholder or member at the time the acts or transactions subject of the action occurred and at the time the action was filed; (2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires; (3) No appraisal rights are available for the act or acts complained of; and (4) The suit is not a nuisance or harassment suit. In case of nuisance or harassment suit, the court shall forthwith dismiss the case. SEC. 2. Discontinuance. - A derivative action shall not be discontinued, compromised or settled without approval of the court. During the pendency of the action, any sale of shares of the complaining stockholder shall be approved by the court. If the court determines that the interest of the stockholders or members will be substantially affected by the discontinuance, compromise or settlement, the court may direct that notice, by publication or otherwise, be given to the stockholders or members whose interests it determines will be so affected.

RULE 9 MANAGEMENT COMMITTEE SECTION 1. Creation of a management committee. - As an incident to any of the cases filed under these Rules or the Interim Rules on Corporate Rehabilitation, a party may apply for the appointment of a management committee for the corporation, partnership or association, when there is imminent danger of: (1) Dissipation, loss, wastage or destruction of assets or other properties; and (2) Paralyzation of its business operations which may be prejudicial to the interest of the minority stockholders, parties-litigants or the general public. SEC. 2. Receiver. - In the event the court finds the application to be sufficient in form and substance, the court shall issue an order:

(a) appointing a receiver of known probity, integrity and competence and without any conflict of interest as hereunder defined to immediately take over the corporation, partnership or association, specifying such powers as it may deem appropriate under the circumstances, including any of the powers specified in section 5 of this Rule; (b) fixing the bond of the receiver; (c) directing the receiver to make a report as to the affairs of the entity under receivership and on other relevant matters within sixty (60) days from the time he assumes office; (d) prohibiting the incumbent management of the company, partnership or association from selling, encumbering, transferring or disposing in any manner any of its properties except in the ordinary course of business; and (e) directing the payment in full of all administrative expenses incurred after the issuance of the order. SEC. 3. Receiver and management committee as officers of the court. - The receiver and the members of the management committee in the exercise of their powers and performance of their duties are considered officers of the court and shall be under its control and supervision. SEC. 4. Composition of the management committee. - After due notice and hearing, the court may appoint a management committee composed of three (3) members chosen by the court. In the appointment of the members of the management committee, the following qualifications shall be taken into consideration by the court: (1) Expertise and acumen to manage and operate a business similar in size and complexity as that of the corporation, association or partnership sought to be put under management committee; (2) Knowledge in management and finance; (3) Good moral character, independence and integrity; (4) A lack of a conflict of interest as defined in these Rules; and (5) Willingness and ability to file a bond in such amount as may be determined by the court. Without limiting the generality of the following, a member of a management committee may be deemed to have a conflict of interest if: (1) He is engaged in a line of business which competes with the corporation, association or partnership sought to be placed under management; (2) He is a director, officer or stockholder charged with mismanagement, dissipation or wastage of the properties of the entity under management; or (3) He is related by consanguinity or affinity within the fourth civil degree to any director, officer or stockholder charged with mismanagement,

dissipation or properties of management.

wastage of the the entity under

SEC. 5. Powers and functions of the management committee. - Upon assumption to office of the management committee, the receiver shall immediately render a report and turn over the management and control of the entity under his receivership to the management committee. The management committee shall have the power to take custody of and control all assets and properties owned or possessed by the entity under management. It shall take the place of the management and board of directors of the entity under management, assume their rights and responsibilities, and preserve the entitys assets and properties in its possession. Without limiting the generality of the foregoing, the management committee shall exercise the following powers and functions: (1) To investigate the acts, conduct, properties, liabilities, and financial condition of the corporation, association or partnership under management; (2) To examine under oath the directors and officers of the entity and any other witnesses that it may deem appropriate; (3) To report to the court any fact ascertained by it pertaining to the causes of the problems, fraud, misconduct, mismanagement and irregularities committed by the stockholders, directors, management or any other person; (4) To employ such person or persons such as lawyers, accountants, auditors, appraisers and staff as are necessary in performing its functions and duties as management committee; (5) To report to the court any material adverse change in the business of the corporation, association or partnership under management; (6) To evaluate the existing assets and liabilities, earnings and operations of the corporation, association or partnership under management; (7) To determine and recommend to the court the best way to salvage and protect the interest of the creditors, stockholders and the general public, including the rehabilitation of the corporation, association or partnership under management; (8) To prohibit and report to the court any encumbrance, transfer, or disposition of the debtors property outside of the ordinary course of business or what is allowed by the court; (9) To prohibit and report to the court any payments made outside of the ordinary course of business; (10) To have unlimited access to the employees, premises, books, records

and financial documents during business hours; (11) To inspect, copy, photocopy or photograph any document, paper, book, account or letter, whether in the possession of the corporation, association or partnership or other persons; (12) To gain entry into any property for the purposes of inspecting, measuring, surveying, or photographing it or any designated relevant object or operation thereon; (13) To bring to the attention of the court any material change affecting the entitys ability to meet its obligations; (14) To revoke resolutions passed by the Executive Committee or Board of Directors/Trustees or any governing body of the entity under management and pass resolution in substitution of the same to enable it to more effectively exercise its powers and functions; (15) To modify, nullify or revoke transactions coming to its knowledge which it deems detrimental or prejudicial to the interest of the entity under management; (16) To recommend the termination of the proceedings and the dissolution of the entity if it determines that the continuance in business of such entity is no longer feasible or profitable or no longer works to the best interest of the stockholders, parties-litigants, creditors or the general public; (17) To apply to the court for any order or directive that it may deem necessary or desirable to aid it in the exercise of its powers and performance of its duties and functions; and (18) To exercise such other powers as may, from time to time, be conferred upon it by the court. SEC. 6. Action by management committee. - A majority of its members shall be necessary for the management committee to act or make a decision. The chairman of the management committee shall be chosen by the members from among themselves. The committee may delegate its management functions as may be necessary to operate the business of the entity under management and preserve its assets. SEC. 7. Transactions deemed to be in bad faith. - All transactions made by the previous management and directors shall be deemed fraudulent and are rescissible if made within thirty (30) days prior to the appointment of the receiver or management committee or during their incumbency as receiver or management committee. SEC. 8. Fees and expenses. - The receiver or the management committee and the persons hired by it shall be entitled to

reasonable professional fees and reimbursement of expenses which shall be considered as administrative expenses. SEC. 9. Immunity from suit. - The receiver and members of the management committee and the persons employed by them shall not be subject to any action, claim or demand in connection with any act done or omitted by them in good faith in the exercise of their functions and powers. All official acts and transactions of the receiver or management committee duly approved or ratified by the court shall render them immune from any suit in connection with such act or transaction. SEC. 10. Reports. - Within a period of sixty (60) days from the appointment of its members, the management committee shall make a report to the court on the state of the corporation, partnership or association under management. Thereafter, the management committee shall report every three (3) months to the court or as often as the court may require on the general condition of the entity under management. SEC. 11. Removal and replacement of a member of the management committee. - A member of the management committee is deemed removed upon appointment by the court of his replacement chosen in accordance with section 4 of this Rule. SEC. 12. Discharge of the management committee. - The management committee shall be discharged and dissolved under the following circumstances: (1) Whenever the court, on motion or motu proprio, has determined that the necessity for the management committee no longer exists; (2) By agreement of the parties; and (3) Upon termination of the proceedings. Upon its discharge and dissolution, the management committee shall submit its final report and render an accounting of its management within such reasonable time as the court may allow.
RULE 10 PROVISIONAL REMEDIES SECTION 1. Provisional remedies. - A party may apply for any of the provisional remedies provided in the Rules of Court as may be available for the purposes. However, no temporary restraining order or status quo order shall be issued save in exceptional cases and only after hearing the parties and the posting of a bond. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx