THE CORPORATION CODE A. CORPORATION
Definition
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
i. An Artificial Being (“Capacity to Contract and Transact Business”)
A corporation exists by fiction of law. Hence, it can act only through its directors, officers, and employees.
ii. Created by Operation of Law (“Creature of the Law”)
Mere consent of the parties is not sufficient. The State must give its consent either through a special law (in case of government corporations) or a general law (i.e., Corporation Code in case of private corporations).
iii. Has the Right of Succession (“Strong Juridical Personality”)
A corporation has the capacity for continuous
existence despite changes in
stockholders/members or by any transfer of shares by a stockholder to a 3rd person.
iv. Has the Powers, Attributes, and Properties Expressly Authorized by Law or Incident to Its Existence (“A Creature of Limited Powers”)
As a mere creature of law, it can exercise only such powers as the law may choose to grant it, either expressly or impliedly.
Corporate Fiction: A corporation has a personality separate and distinct from the persons composing it. (Art. 44-47 of the Civil Code; PNB vs. Andrada Electric Engineering Co., 381 SCRA 244 (2002).
B. CLASSES OF CORPORATION IN RELATION TO STATE: a. Public Corporations
Formed or organized for the government of the portion of the state (e.g., barangay, municipality, city, and province).
Created for political purposes connected with the public good in the administration of the civil government.
Note: Ownership of the government of the majority of the shares of a corporation does not qualify such entity as a public corporation (National Coal Co., vs. CIR, 46 Phil 583, 1924).
b. Private – by private persons alone or with the State. A corporation is created by operation of law under
the Corporation Code.
Mainly governed by the Corporation Code.
A government-owned or –controlled corporation when organized under the Corporation Code is still a private corporation. But being a government-owned or –controlled corporation makes it liable for laws and provisions applicable to the Government of its entities and subject to the control of the Government (Cervantes vs. Auditor General, 91 Phil 359, 1952).
c. On GOCCs
i. Created under a special law or charter
ii. Treated as private corporations not as public corporations
Test to Determine Whether a Corporation is Government Owned or Controlled or Private in Nature:
Is it created by its own charter for the exercise of a public function, or by incorporation under the general corporation law?
d. Quasi-Public Corporations
A cross between private corporations and public corporations.
Usually cover school districts, water districts and the like (Villanueva, p. 75).
AS TO PLACE OF INCORPORATION: a. Domestic
One formed, organized, or existing under the laws of the Philippines.
b. Foreign
One formed, organized or existing under any law other than those of the Philippines
- Whose laws allow Filipino citizens and corporations to do business in its own country or State (principle of reciprocity).
- Licensed by SEC to do business in the Philippines after securing a certificate of authority from the Board of Investments and after complying with the conditions for issuance of license on application forms, structural organizations and capitalization.
AS TO GOVERNING LAW:
a. Public – Special Laws and Local Government Code b. Private – Corporation Code
c. Quasi-Public Corporations – seems to be a cross between private corporations and public corporations. AS TO LEGAL STATUS:
a. De Jure Corporation
A corporation organized in accordance with the requirements of law.
Every corporation is deemed de jure until proven otherwise.
b. De Facto Corporation (Sec. 20)
- A corporation claiming in good faith to be a corporation under the Corporation Code.
- Corporation where there exists a flaw in its incorporation, it falls short of the requirements of law.
- It is the result of an attempt to incorporate under an existing law coupled with the exercise of corporate powers.
- Under the Sec. 66 of the Rules of Court, inquiry must be done by the Solicitor General in a quo warranto proceeding - the main issue is the right to exist as a corporation.
- A de facto corporation will incur the same obligation, have the same powers and rights as a de jure corporation.
Elements:
1. A valid law under which incorporated;
2. Attempt in good faith to incorporate of “colorable compliance;”
3. Assumption of corporate powers; and
4. Issuance of certificate of incorporation. (Arnold Hall vs. Piccio, 86 Phil 634, 1950) A corporation which has failed to file its by-laws within the prescribed period does not ipso facto lose its powers as such (Sawadjaan vs. CA, 459 SCRA 516, 2004).
DE JURE DE FACTO Created in strict or
substantial conformity with the statutory requirements for incorporation
Actually exists for all practical purposes as a corporation but which has no legal right to corporate existence as against the State
Right to exist cannot be successfully attacked even in a direct proceeding by the State
Right to exercise powers cannot be inquired into collaterally in any private suit. But such inquiry may be made by the State in a proper court proceeding. c. Corporation by Estoppel
- All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof. - Where a group of persons misrepresent themselves
as a corporation (ostensible corporation), they are subsequently estopped from claiming lack of corporate life in order to avoid liability.
- A third party who assumes an obligation to an ostensible corporation cannot resist performance by alleging the ostensible corporation’s lack of personality.
-
DE FACTO BY ESTOPPEL
Existence in Law Yes None
Dealings among parties on a corporate basis
Not required Required Effect of lack of
requisites Could corporation be by a estoppel
Not a corporation in any shape or form
d. Corporation by Prescription
- The Roman Catholic Church is a corporation by prescription, with acknowledged juridical personality inasmuch as it is an institution which antedated by almost a thousand years any other personality in Europe (Barlin vs. Ramirez, 7 Phil. 41, 1906). AS TO EXISTENCE OF STOCKS:
a. Stock Corporation
- One which has a capital stock divided into shares and is authorized to distribute to the holders such shares, dividends or allotments of the surplus profits (i.e., retained earnings on the basis of the shares held (Sec. 3)
- It is organized for profit.
- The governing body is usually the Board of Directors (except in certain instances, e.g. close corporations) - Even if there is a statement of capital stock, the
corporation is still NOT a stock corporation if dividends are not supposed to be declared, that is, there is no distribution of retained earnings (CIR vs. Club Filipino de Cebu, 1962).
b. Non-Stock Corporation (See Sec. 87-88)
- A corporation where no part of its income is distributable as dividends to members, trustees or officers.
- Corporation that does not issue stocks and does not distribute dividends to their members.
- Not organized for profit.
- Profit obtained as incident to operation had to be used for the furtherance of the purpose/s for which the corporation was organized.
- The governing body is usually the Board of Trustees. AS TO RELATIONSHIP OF MANAGEMENT AND CONTROL: a. Holding Company – one that controls another as a
subsidiary or affiliate by the power to elect its management; one which holds in other companies for the purpose of control rather than for mere investment. b. Affiliate Company – one that is subject to common
control to a mother or holding company and operated as part of a system.
c. Parent and Subsidiary Companies – when a corporation has a controlling financial interest in one or more corporations, the one having in control is known as the “parent company” and the others are known as “subsidiary companies”.
- A “subsidiary” of a specified person is an affiliate controlled by such person, directly or indirectly, though one or more intermediaries. AS TO FUNCTIONS:
a. Public – government of a portion of the State; and b. Private - usually for profit-making functions. AS TO PURPOSE OF INCORPORATION:
a. Municipal Corporation b. Religious Corporation c. Educational Corporation
d. Charitable, Scientific or Vocational Corporation e. Business Corporation
AS TO NUMBER OF MEMBERS:
a. Aggregate – a corporation which consists of many persons united to form a body politic and corporate (Quimson, p. 156)
b. Corporation Sole – may be formed by the chief archbishop, bishop, minister, rabbi, or other presiding elder of any religious denomination, sect or church.
- Purpose: formed for the purpose of administering and managing, as trustee, the affairs, properties, and temporalities of any religious denomination to which the holder of the office belongs and also to transmit the same to his successor in office (Sec. 110). Director of Land vs. IAC, 146 SCRA 509 (1986) held that a corporation sole has no nationality, overturned the previous doctrine (Republic vs. Villanueva, 114 SCRA 875 [1982] and Republic vs. Iglesia ni Cristo, 127 SCRA 687 [1984] that a corporation sole is disqualified to acquire or hold alienable lands of the public domain, because of the constitutional prohibition qualifying only individuals to acquire land of the public domain and the provision under the Public Land Act which applied only to Filipino citizens or natural persons. {Republic vs. Iglesia ni Cristo, 127 SCRA 687 (1984); Republic vs. IAC, 168 SCRA 165 (1988)}. OTHER CLASSIFICATION:
a. Close Corporation – the issued stock of all classes shall be held of record by not more than twenty persons; shall not list in any stock exchange or make any public offering any of its stocks.
- Any corporation may be incorporated as a close corporation, except mining or oil companies, stock exchanges, banks, insurance companies, public utilities, educational institutions and corporations declared to be vested with public interest (Sec. 96).
b. Eleemosynary Corporation – one organized for charitable purposes.
C. NATIONALITY OF CORPORATIONS
Serves as a legal basis for subjecting the enterprise or its activities to the laws, the economic and fiscal powers, and various social and financial policies of the state to which it is supposed to belong.
Tests:
1. Place of Incorporation
- Principal doctrine on the test of the nationality of a corporate identity in the Philippines - A corporation is a national of the country
under whose laws has been organized and registered
2. Control Test
A corporation shall be considered a Filipino corporation if the Filipino ownership of its capital stock is at least 60%, and where the 60-40 Filipino-Alien equity ownership is NOT in doubt (SEC opinion dated 6 November 1989; DOJ Opinion No. 18, s. 1989).
Therefore, its shareholdings in another corporation shall be considered to be Filipino nationality when computing the percentage of Filipino equity of the second corporation (SEC Opinion dated 23 November 1993).
Control test is applied in the following:
Exploitation of natural resources – “Only Filipino citizens or corporations whose capital stock are at least 60% owned by Filipinos can qualify to exploit natural resources.” (Sec. 2, Art. XII, Conti.)
Public Utilities – “xxx no franchise, certificate or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or corporations organized under the laws of the Philippines at least 60% of whose capital is owned by such citizens.” (Sec. 11, Art. XII, Consti.)
Mass Media – “Ownership of mass media shall be limited to the citizens of the Philippines, or to corporations, cooperatives, or associations, wholly-owned and managed by such citizens” (100% Filipino management of the entity)[Sec 11, Art. XVI, Consti.]
Cable Industry – CATV as “a form of mass media which must, therefore, be owned and managed by Filipino citizens, or corporations, cooperatives, or associations, wholly-owned and managed by such citizens pursuant to the mandate of the Constitution.” (DOJ Opinion No. 95, s. 1999) Advertising Industry – “xxx only Filipino citizens
or corporations or associations at least 70% of whose capital is owned by such citizens is allowed to engage in the advertising agency.” (Sec 11, Art. XVI, Constitution)
3. Grandfather Rule
It is a method of determining the nationality of a corporation which in turn is owned in part by another corporation by breaking down the equity structure of the shareholder corporation.
It involves the computation of Filipino ownership of a corporation in which another corporation of partly Filipino and partly foreign equity owns capital stock. The percentage of shares held by the second corporation in the first is multiplied by the latter’s own Filipino equity, and the product of these percentages is
determined to be the ultimate Filipino ownership of the subsidiary corporation (SEC Opinion re: Silahis) Ex. MV Corporation and AC Corporation have equal interest in XYZ Corporation. MV Corporation is 60% owned by Filipinos while AC Corporation is 50% owned by Filipinos. By the grandfather rule, MV Corporation would have a 30% Filipino interest in XYZ Company (60% 0f 50%), while AC Corporation would have a 25% Filipino interest in XYZ Company (50% of 50%). Hence, the total Filipino interest is only 55%.
Note: the application of the test is limited to the issues of investment. Only when the corporation is less than 60% owned shall the grandfather rule be applied. D. CORPORATE JURIDICAL PERSONALITY
1. Doctrine of Separate Juridical Personality
A corporation has personality separate and distinct from that of its stockholders and members and is not affected by the personal rights, obligations, and transactions of the latter.
The property of the corporation is not the property of its stockholders or members and may not be sold by them without express authorization from the Board of Directors (Woodchild Holdings, Inc. vs. Roxas Electric and Construction Co. 436 SCRA 235, 2004) Stockholders have no claim on corporate property as owners, but mere expectancy or inchoate right to the same upon dissolution of the corporation after all corporate creditors have been paid. Such right is limited only to their equity interest (doctrine of limited liability). Although a stockholder’s interest in the corporation may be attached by his personal creditor, corporate property cannot be used to satisfy his claim (Wise & Co. vs. Man Sun Lung, 1940)
a. Liability for Torts
As a separate juridical personality, a corporation can be held liable for torts committed by its officers for corporate purpose (PNB vs. CA, 1978).
“Corporate tort” consists in the violation of a right given or the omission of a duty imposed by law; a breach of legal duty.
The failure of the corporate employer to comply with the law-imposed duty under the Labor Code to grant separation pay to employees in case of cessation of operations constitutes tort and its stockholder who was actively engaged in the management or operation of the business should be personally liable. (Sergio F. Naguiat vs. NLRC, 269 SCRA 564, 1997)
b. Liability for Crimes
Since a corporation is a mere legal fiction, it cannot be proceeded against criminally because it cannot commit a crime in which personal violence or malicious intent is required. Criminal action is limited to the corporate agents guilty of an act amounting to a crime and never against the corporation itself (West Coast Life Insurance Co. vs. Hurd [1914], Time Inc. vs. Reyes [1971]). General Rule: Corporations cannot commit felonies punishable under the RPC for it is incapable of the requisite intent to commit these crimes. Also, crimes are personal in nature requiring personal performance of overt acts. Finally, a corporation cannot be arrested and imprisoned; hence, cannot be penalized for a crime punishable by imprisonment.
Exceptions:
If the crime is committed by a corporation, the directors, officers, employees or other officers thereof responsible for the offense shall be charged and penalized for the crime, precisely because of the nature of the crime and the penalty therefore. A corporation cannot be arrested and imprisoned; hence, cannot be penalized for a crime punishable by imprisonment. However a corporation may be charged and prosecuted for a crime if the imposable penalty is fine (Ching vs. Secretary of Justice, GR NO. 164317, February 6, 2006) When express provisions of law are enacted specifically providing that a corporation may be proceeded against criminally, it is the responsible officer who will be held personally liable for the crimes committed by the corporation. (Sia vs. CA , GR No 111809, May 5, 1997)
Under the Anti-Money Laundering Act, juridical persons are also defined as offenders of criminal acts.
c. Recovery of Moral Damages General Rule:
Moral damages cannot be awarded in favor of corporations because they do not have feelings and mental state. They may not even claim moral damages for besmirched reputation (NAPOCOR vs. Philipp Brothers Oceanic, G.R. No. 126204. November 20, 2001).
Exceptions:
A corporation can recover moral damages under Art. 2219 (7) if it was the victim of defamation (Filipinas Broadcasting Network vs. Ago Medical and Educational Center 448 SCRA 413, 2005)
A corporation with a good reputation, if besmirched, is allowed to recover moral damages upon proof of existence of factual basis of damage (actual injury) and its causal relation (Crystal vs. BPI, 2008).
2. Doctrine of Piercing the Corporate Veil
This doctrine means that the court may disregard the separate and distinct personality of the corporation from its members or stockholders and treat the corporation as a mere collection of individuals or an aggregation of persons undertaking business as a group especially when the corporate legal entity is used as a cloak for fraud or illegality. (Kukan Internatl. Vs. Reyes, September 29, 2010).
It is merely an equitable remedy, and may be granted only in cases when the corporate fiction is used to defeat public convenience, justify a wrong, protect fraud defend crime or where the corporation is a mere alter ego of business conduit of a person.
a. Grounds for Application of Doctrine
i. If done to defraud the government of taxes due it.
ii. If done to evade payment of civil liability. iii. If done by a corporation which is merely a
conduit or alter ego of another corporation.
iv. If done to evade compliance with contractual obligations.
v. If done to evade compliance with financial obligation to its employees.
b. Test in Determining Applicability
General Rule: The mere fact that a corporation owns all or substantially all of the stocks of another
corporation is NOT sufficient to justify their being treated as one entity.
Exception: The subsidiary is a mere instrumentality of the parent corporation.
Circumstances rendering subsidiary an instrumentality (PNB vs. Ritratto Group, 2001):
i. The parent corporation owns all or most of the capital of the subsidiary.
ii. The parent and subsidiary corporations have common directors and officers. iii. The parent company finances the
subsidiary.
iv. The parent company subscribed to all the capital stock of the subsidiary or otherwise causes its incorporation.
v. The subsidiary has grossly inadequate capital.
vi. The parent corporation pays the salaries and other expenses or losses of the subsidiary.
vii. The subsidiary has substantially no business except with the parent corporation or no assets except those conveyed to or by the parent corporation. viii. The papers of the parent corporation or in
the statements of its officers, is subsidiary described as a department or subdivision of the parent corporation, or its business or financial responsibility is referred to as the parent corporation’s own.
ix. The parent corporation uses the property of the subsidiary as its own.
x. The directors or executives of the subsidiary do not act independently in the interest of the subsidiary but take their orders from the parent corporation. xi. The formal and legal requirements of the
subsidiary are not observed. E. INCORPORATION AND ORGANIZATION
1. Promoter
Promoters are persons who, acting alone or with others, take the initiative in founding and organizing the business or enterprise of the issuer and receives consideration therefore (RA 8799, Securities Regulation Code).
a. Liability of Promoter
General Rule: The promoter binds himself personally and assumes the responsibility of looking to the proposed corporation for reimbursement.
Exception:
Any express or implied agreement to the contrary, or novation of the contract.
The court ruled in Caram Jr. vs. CA that the investors who were not the “moving spirit” behind the organization of the corporation, but who were merely convinced to invest in the proposed corporate venture on the basis of the feasibility study undertaken, are NOT liable personally with the corporation for the cost of such feasibility study (Caram Jr. vs. CA 151 SCRA 372, 1987).
Exception to Exception: Where there was a showing that the corporation was fictitious and did not have a separate juridical personality, to justify the making the principal stockholders thereof, responsible for its stockholders.
b. Liability of Corporation for Promoter’s Contracts
General Rule: A corporation is not bound by the contract. Since the corporation did not yet exist at the time of the contract, it could not have an agent who could legally bind it.
Exceptions: A corporation may be bound by the contract if it makes the contract its own by: Adoption of ratification of the entire contract after
incorporation.
Acceptance of benefits under the contract with knowledge of the terms thereof.
Performance of its obligation under the contract. 2. Number and Qualifications of Incorporators
Incorporators are stockholders or members mentioned in the articles originally forming and composing the corporation and who are signatories thereof.
Natural persons Of legal age
Must own or subscribe at least one share of stock of the corporation (Genuine interest)
5 to 15 incorporators who must sign the articles of incorporation (AOI)
Majority of the incorporators must be residents of the Philippines
3. Corporate Name – Limitations on Use of Corporate Name
Must not be identical or deceptively or confusingly similar to that of any existing corporation including internationally known foreign corporation though not used in the Philippines;
Any other name already protected by law;
Name that is patently defective, confusing or contrary to existing laws, morals or public policy (Sec. 18).
Must include the word “Corporation/Corp.”or “Incorporated/Inc”.
Change of Corporate Name
Requires amendment of the AOI: majority vote of the board and the vote or written assent of stockholders holding 2/3 of the outstanding capital stock (Sec 16). Doctrines Pertaining to Corporate Name
A corporation may change its name by the amendment of AOI, but the same is not effective until approved by the SEC (Philippine First Insurance Co. vs. Hartigan 34 SCRA 252, 1970).
A change in the corporate name does not make a new corporation, and whether affected by a special act or under a general law, has no effect on the identity of the corporation, or on its property, rights, or liabilities. Consequently, the “new” corporation is still liable for the debts and obligations of the “old” corporation (Republic Planters Bank vs. CA 216 SCRA 738, 1992).
Similarity on corporate names between two corporations would cause confusion to the public especially when the purposes stated in their charter are also the same type of business (Universal Mills Corp. vs. Universal Textile Mills Inc. 78 SCRA 62, 1977). A corporation has no right to intervene in a suit using a name other than its registered name; if a corporation legally and truly wants to intervene, it should have used its corporate name as the law requires and not another name which it had not registered (Laureano Investment and Development Corp. vs. CA 272 SCRA 253, 1997).
There would be no denial of due process when a corporation is sued and judgment is rendered against it in its unregistered trade name, holding that a corporation may be sued under the name by which it makes itself known to its workers (Pison-Arceo Agricultural Development Corp. vs. NLRC 279 SCRA 312, 1997).
4. Corporate Term
Not more than 50 years from date of incorporation subject to extension for periods not exceeding 50 years per extension unless:
Sooner dissolved, or Extended
Extensions:
Not earlier than 5 years prior to expiry
Unless earlier extension is for justifiable reasons as determined by SEC.
How to extend – amend the AOI during the life of the corporation before the expiry of its term. Any dissenting stockholder may exercise his appraisal right (Sec. 37).
5. Minimum Capital Stock and Subscription Requirements
At the time of incorporation:
At least 25% of authorized capital stock as stated in the AOI must be subscribed
At least 25% of the total subscription must be paid upon subscription, the balance to be payable on a date or dates fixed in the contract of subscription without need of call, or in the absence of a fixed date or dates, upon call for payment by the BOD.
Call – term used when the Board formally asks for payment of the balance of the subscription or a part thereof.
No minimum authorized capital stock is required except if required by special laws (Sec. 12 and 13)
Minimum paid-up capital is not less than P5,000. 6. Articles of Incorporation
a. Nature and Function of Articles
The AOI is a basic contract document in Corporation Law that defines the charter of the corporation. Section 14 of the Corporation Code provides that the AOI do not become binding as the charter of the corporation unless they have ben filed with the SEC.
b. Contents
i. Name of corporation;
ii. Purpose/s, indicating the primary and secondary purposes;
iii. Place of principal office;
iv. Term which shall not be more than 50 years; v. Names, citizenship and residences of
incorporators;
vi. Number, names, citizenships and residences of directors;
vii. If stock corporation, amount of authorized capital stock, number of shares;
viii. In par value stock corporations, the par value of each share;
ix. Number of shares and amounts of subscription of subscribers which shall not be less than 25% of authorized capital stock;
x. Amount paid by each subscriber on their subscription, which shall not be less than 25% of subscribed capital and shall not be less than P5,000.00;
xi. Name of treasurer elected by subscribers; and xii. If the corporation engages in a nationalized
industry, a statement that no transfer of stock will be allowed if it will reduce the stock ownership of Filipinos to a percentage below the required legal minimum.
c. Amendment Requirements:
i. A legitimate purpose for the amendment;
ii. by a majority vote of the board of directors or trustees;
iii. by a vote or written assent of the stockholders representing at least two thirds (2/3) of the outstanding capital stock, without prejudice to the appraisal right of dissenting stockholders in accordance with the provisions of the Corporation Code;
iv. by a vote or written assent of at least two thirds (2/3) of the members if it be a non-stock corporation.
v. The original and amended articles, together, shall contain all provisions required by law to be set out in the articles of incorporation. Such articles, as amended, shall be indicated by underscoring the change or changes made, and a copy thereof duly certified under oath by the corporate secretary and a majority of the directors or trustees stating the fact that the said amendment or amendments have been duly approved by the required vote of stockholders or members, shall be submitted to the Securities and Exchange Commission (SEC). When the SEC is satisfied that the amendment should be allowed, the SEC will issue a certificate indicating its approval. The amendments shall take effect upon approval by the SEC, or from the date of filing with the SEC if not acted upon within six (6) months from the date of filing for a cause not attributable to the corporation.
d. Non-amendable Items
i. Names of incorporators
ii. Names of incorporating directors/trustees iii. Names of original subscribers to capital stock
and subscribed and paid- up capital
iv. Treasurer-in-trust elected by original subscribers
v. Members who contributed to the initial capital of non-stock corporation
vi. Place and date of execution
vii. Witnesses and acknowledgments (De Leon, 2010)
7. Registration and Issuance of Certificate of Incorporation
Documents to be filed with the SEC: i. Articles of Incorporation
ii. Treasurer’s affidavit certifying that 25% of the total authorized capital stock has been subscribed and at least 25% of such has been fully paid in cash or property
iii. Bank certificate showing the paid-up capital iv. Letter authority authorizing the SEC to
examine the bank deposit and other corporate books and records to determine the existence of paid-up capital.
v. Undertaking to change the corporate name in case there is another person or entity with same or similar name that was previously registered.
vi. Certificate of authority from proper government agency whenever appropriate like BSP for banks and Insurance Commission for insurance corporation (Sundiang and Aquino). Issuance of Certificate of Incorporation by SEC The SEC shall give the incorporators reasonable time to correct or modify the objectionable portions of the articles or amendments (Sec. 17).
Grounds for Disapproving AOI:
i. AOI does not substantially comply with the form prescribed
ii. Purpose is patently unconstitutional, illegal, immoral, contrary to government rules and regulations
iii. Treasurer’s Affidavit concerning the amount of capital subscribed and or paid is false iv. Required percentage of ownership of Filipino
citizens has not been complied with.
Remedy in case of rejection of AOI – petition for review in accordance with the Rules of Court (Sec. 6, last par., PD 902-A).
Commencement of corporate existence and juridical personality – upon issuance of certificate of incorporation (Sec. 19)
Revocation of certificate of incorporation – if the incorporators are guilty of fraud in procuring the same after due notice and hearing (Sec. 6(i), PD 902-A).
8. Adoption of By-Laws (Sec. 46)
After Incorporation – within one month after receipt of official notice of the issuance of its certificate on incorporation by the SEC.
Before Incorporation – approved and signed by all the incorporators and submitted to SEC together with AOI. a) Nature and Functions
By-laws are mere internal rules among stockholders and cannot affect or prejudice third persons who deal with the corporation unless they have knowledge of the same (China Banking Corporation vs. CA, 1997).
Regulations, ordinances, rules or laws adopted by an association or corporation or the like for its internal governance, including rules for routine matters such as calling meetings and the like (SMC Vs. Mandaue Packing Products Plants Union-FFW, 467 SCRA 107, 2005).
b) Requisites of Valid By-Laws (Sec. 46)
i. Must be approved by the affirmative vote of the stockholders representing the majority of the outstanding capital stock or majority of members (if filed prior to incorporation, approved and signed by all incorporators).
ii. Must be kept in the principal office of the corporation; subject to inspection of stockholders or members during office hours (Sec. 64).
iii. It must be consistent with the Corporation Code, other pertinent laws and regulations.
iv. It must be consistent with the AOI. v. It must be reasonable and not arbitrary or
oppressive.
vi. It must not disturb vested rights, impair contracts or property rights of
stockholders or members or create obligations unknown to law.
c) Binding Effects
Only from the issuance of SEC certification that by-laws are not inconsistent with the Code.
Cannot bind stockholders or corporation pending approval.
As to the Corporation and its Components - Binding not only upon the corporation but also on its stockholders, members and those having direction, management and control of its affairs. They have the force of contract between stockholders/members.
As to Third Persons
- Not binding unless there is actual knowledge. Third persons are not even bound to investigate the content because they 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 (China Banking Corporation vs. CA, 1997).
d) Amendment or Revision (Sec. 48)
Majority vote of the members of the Board and majority vote of the owners of OCS or members, in a meeting duly called for the purpose; or
Delegation to the BOD of power to amend or repeal by-laws by vote of stockholders representing 2/3 of OCS or 2/3 of the members.
Such delegated power is considered revoked by majority vote only of stockholders representing 2/3 of OCS or 2/3 of the members.
F. CORPORATE POWERS 1. GENERAL POWERS
Every corporation has the power and capacity: i. To sue and be sued in its corporate name;
In the absence of a special authority from the Board of Directors to institute a derivative suit, the President or Managing Director is disqualified by law to sue in her own name or on behalf of the corporation. The power to sue and be sued in any court by a corporation even as a stockholder is lodged in the Board of Directors that exercises corporate powers and not in the President. (Bitong v. CA, 292 SCRA 304)
ii. Of succession by its corporate ;
A corporation has a capacity of continuous existence irrespective of the death, withdrawal, insolvency, or incapacity of the individual stockholders or members and regardless of the transfer of their interest or shares of stock.
iii. To adopt and use a corporate seal;
However, a corporation may exist without a seal. iv. To amend its articles of incorporation;
v. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same;
vi. In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury stocks, or admit members to the corporation if it be non-stock corporation;
vii. Purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and
personal property, including securities and bonds of other corporations;
While a corporation may appoint agents to negotiate for the purchase of real property needed by the corporation, the final say will have to be with the Board of Directors whose approval will finalize the transaction. (Firme v. Bukal Enterprises, 414 SCRA 190)
viii. To enter into merger or consolidation with other corporations;
ix. To make reasonable donations, provided, that no corporation shall give donations in aid of any political party or candidate or for purposes of partisan political activity;
x. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees; xi. To exercise other powers as may be essential or necessary to
carry out its purpose or purposes stated in the articles of incorporation.
2. SPECIFIC POWERS
i. Power to Extend or Shorten Corporate Terms Requirements:
- Majority vote of the Board of Directors or Trustees
- Ratification at a meeting by 2/3 of the outstanding capital stock or members
An extension of corporate term allows a dissenting stockholder to exercise his appraisal right.
ii. Power to Increase or Decrease Capital Stock or Incur, Create, Increase Bonded Indebtedness
Requirements:
- Majority vote of the board of directors
- Favored by 2/3 of the outstanding capital stock Ways to increase or decrease capital stock:
i. By increasing/decreasing the number of shares authorized to be issued without increasing/decreasing the par value thereof;
ii. By increasing/decreasing the par value of each share without increasing/decreasing the number thereof; iii. By increasing/decreasing both the number of shares
authorized to be issued and the par value thereof. A corporate bond is an obligation to pay a definite sum of money at a future time at fixed rate of interest.
A business corporation may borrow money whenever the necessity of its business so requires and issue security or customary evidence of debt such as notes, bonds or mortgages. This includes non-stock corporations as well.
iii. Power to deny pre-emptive right
Whenever the capital stock of a corporation is increased and new shares of stock are issued, the new issue must be offered first to the stockholders who are such at the time the increase was made in proportion to their existing shareholdings and on equal terms with other holders of the original stocks before subscriptions are received from the general public. This is called a Pre-emptive
right .
The pre-emptive right of stockholders of a stock corporation to subscribe to all issues or disposition of shares of any class in proportion to their respective shareholdings may be denied by the articles of incorporation.
EXCEPTIONS:
i. Stocks issued in compliance with laws requiring stock offerings or minimum stock ownership by the public
ii. Stocks issued in good faith with approval of stockholders representing 2/3 of the OSC:
-In exchange for property needed for corporate purposes -in payment of a previously contracted debt.
iv. Power to Sell or Dispose All or Substantially All of the Corporate Assets
Requirements:
- Majority vote of its board of directors
- Authorization by 2/3 of stockholders of the OSC or members. Provided, that in non-stock corporations, where there are no members with voting rights, the vote of at least a majority of the trustees will be sufficient for authorization.
- Authorization must be done at a stockholders’ or members’ meeting duly called for that purpose after written notice.
Any dissenting stockholder may exercise his appraisal rights. A sale or disposition shall be deemed to cover substantially all the corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated.
If the corporation can sell, it can also abandon the transaction through the board without further action or approval by the stockholders or members but subject to rights of third parties under any contract relating thereto. v. Power to Acquire Its Own Shares
A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose, provided that the corporation has unrestricted retained earnings. It includes the following cases:
i. To eliminate fractional shares arising out of stock dividends;
ii. 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;
iii. To pay dissenting or withdrawing stockholders entitled to payment for their shares. (Sec. 41, Corporation Code)
Conditions for the exercise of the power: i. The capital is not impaired;
ii. For a legitimate and proper corporate purpose; iii. There is unrestricted retained earnings to purchase
the same;
iv. The corporation acts in good faith without prejudicing the rights of creditors and stockholders;
v. The conditions of corporate affairs warrant it; (De Leon, Corporation Code of the Philippines, 2010) vi. Power to Invest Corporate Funds in Another Corporation
or Business
A private corporation may invest its funds in any other corporation or business or for any purpose other than the primary purpose for which it was organized.
Requirements:
- Majority vote of board of directors or trustees
- Ratification by the 2/3 stockholders representing the OSC or members. However, if the investment is reasonably necessary to accomplish the corporation’s primary purpose, the approval of the stockholders or members shall not be necessary.
Any dissenting stockholder may exercise his appraisal right. The other purposes for which the funds may be invested without amending the articles of incorporation must be those enumerated in the articles of incorporation. In order to engage in any of its secondary purposes, the corporation must comply with the above requirement. A corporation is not allowed to engage in a business distinct from those enumerated in the articles of incorporation without amending the purpose clause of said articles to include the desired business activity among its secondary purpose. (De Leon, Corporation Code of the Philippines, 2010)
vii. Power to Declare Dividends
The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held by them;
Provided, that any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stock holder until his unpaid subscription is fully paid; (Sec. 43)
Requirement:
- Approval of stockholders representing not less than 2/3 of the OSC
- In a regular or special meeting duly called for its purpose
- Existence of unrestricted retained earnings
A stock corporation is prohibited from retaining surplus profit in excess of 100% of their paid-in capital stock, except: - When justified by definite corporate expansion projects
or programs approved by the board of directors; - When prohibited under any loan agreement with any
financial institution or creditor without their his/her consent;
- 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. (Sec. 43, par 2)
Dividend, is that part or portion of the profits 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.
Stock Dividends, these dividends are payable in unissued additional shares of the corporation instead of cash or property out of the unrestricted retained earnings. These are issued by a resolution of the board and approval of stockholders. It must also require to have unissued shares for distribution to stockholders, otherwise, it must increase its capital stock to the extent of corporate earnings to be declared.
Cash Dividends, these are dividend payable in cash. These can be declared by mere board resolution from unrestricted retained earnings.
Property Dividends, these are dividends distributed to the stockholders in the form of property, real or personal, such as warehouse receipts, or shares of stock of another corporation. This is actually cash dividend since the stockholder may sell the property received and realize cash. These must be properties no longer intended to be used by the corporation for its business. However, no actual distribution of property dividend shall be made without approval by the Commission.
The participation of each stockholder in the earnings of the corporation is based on his total subscription and not on the amount paid by him in account thereof. Ex. A subscribes to 1,000 shares of the par value P10.00 per share and has paid P5,000 on his subscription, he will participate in dividends on the basis of 1,000 shares, not 500 shares. (De Leon, Corporation Code of the Philippines, 2010)
Dividends are usually declared generally quarterly. But the directors may declare dividends in advance for succeeding quarters when the business is in good shape and abundant with revenues.
viii. Power to enter into Management Contract
A management contract is one whereby the corporation undertakes to manage or operate all or substantially all of the business of another corporation. A management contracts must not be longer than 5 years for any one term. However, service contracts which relate to the exploitation, development, exploration or utilization of natural resources may be entered into for such periods provided by law or regulation. (De Leon, 2010)
Requirements:
- Resolution of a quorum of the Board of Directors/Trustees; and
- Ratified by a majority vote by the stockholders representing the outstanding capital stock or members, as the case may be, in a meeting called for the purpose; - In both cases, such votes must be made by both the
managing and managed corporation. EXCEPT: That 2/3 votes shall be necessary if:
- Stockholder who represents the interest of both corporations owns 1/3 of the outstanding capital stock of the managing corporation.
- Majority of the members of the Board of the managing corporation compose also majority of the members of the board of the managed corporation.
(Villanueva, Commercial Law Reviewer, 2009) ix. Ultra Vires Acts
These are acts not within the express, implied, and incidental powers of the corporation conferred by the Corporation Code or its articles of incorporation.
There are three types of ultra vires acts:
1. Those outside the express, implied or incidental powers of the corporation;
2. Those which are effected by corporate representatives who act without authority;
3. Those which are contrary to laws or public policy. Applicability of Ultra Vires Acts
The term ultra vires is distinguished from an illegal act since the former is merely voidable which may be enforced by
performance, ratification, or estoppels, while the latter is void and cannot be validated.
When a contract or act is illegal per se, it is wholly void or inexistent. But when a contract is not illegal per se but merely beyond thepower of a corporation, the same is merely voidable and may be enforced by performance, ratification, or estoppels or on equitable ground.
Consequences of Ultra Vires Acts
- If executor on both sides, it cannot be enforced by either party thereto.
- If fully performed on both sides, neither party can maintain an action to set aside the transaction or to recover what he has parted with.
- If performed on one side and the other has received benefits by reason of such performance, recovery is permitted on the ground that it would be unjust to sanction retention of benefits coupled with refusal to perform (De Leon, 2010)
3. HOW THESE POWERS ARE EXERCISED a. Stockholders
Stockholders have residual power of fundamental corporate changes in the exercise of their right to vote.
b. Board of Directors
Generally, the Board of Directors alone exercises the powers of the corporation. The board exercises their power through board meetings.
c. Officers
Corporate officers may exercise corporate powers via authority from:
1. Law
2. Corporate By-laws
3. Authorization from the board, either expressly or impliedly by habit, custom or acquiescence in the general course of business.
4. TRUST FUND DOCTRINE
The assets of a corporation of the corporation as represented by its capital stock are “trust funds” to be maintained unimpaired and to be used to pay corporate creditors in the sense that there can be no distribution of such assets among the stockholders without provision being first made for the payment of the corporate debts and that any such disposition of it is a fraud on the creditors of a corporation who extend credit on good faith of its outstanding capital stock and, therefore, void. (Philippine Trust Co. v. Rivera, 144 Phil 469)
Under the trust fund doctrine, the capital stock, property and other assets of a corporation are regarded as equity in trust for the payment of the corporate creditors. (CIR v. CA, 301 SCRA 152)
G. BOARD OF DIRECTORS AND TRUSTEES
1. DOCTRINE OF CENTRALIZED MANAGEMENT
Unless otherwise provided in the Corporation Code, the corporate powers of all corporations shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be
elected from among the holders of stocks, or where there is no stock, from among the members of the corporations, who shall hold office for one (1) year and until their successors are elected and qualified. (Sec. 23, Corporation Code) A corporation’s Board of Directors is understood to be that body which:
a. Exercises all powers provided for under the Corporation Code;
b. Conducts all business of the corporation; and c. Controls and holds all property of the corporation. (Hornilla v. Salunat, 405 SCRA 220)
2. BUSINESS JUDGMENT RULE
The courts cannot undertake to control the discretion of the board of directors about administrative matters as to which they have legitimate power of action, and contracts intra vires entered into by the board of directors are binding upon the corporation and courts will not interfere unless such contracts are so unconscionable and oppressive as to amount to a wanton destruction of the rights of the minority.
Exceptions:
a. When otherwise provided by the Corporation Code b. When the Directors or officers acted with fraud, gross
negligence or in bad faith; and
c. When directors or officers act against the corporation in conflict of interest situation.
3. Tenure, Qualifications and Disqualifications of Directors or Trustees
Tenure: Under section 23, the board of directors and trustees shall hold office for one (1) year and until their successors are elected and qualified. As a general rule, the directors or trustees of a corporation shall serve for a term as fixed in the by-laws.
Hold-over: Upon failure of a quorum at any meeting of the stockholders or members called for an election, the directorate naturally holds over and continues to function until another directorate is chosen and qualified.
Qualifications: Stock Corporations:
a. Own at least one (1) share;
b. Share of stock must be registered in his name;
c. Must continually own such share during his term; otherwise he automatically ceases to be a director; d. Majority must be residents of the Philippines; Non-stock Corporation:
a. He must be a member in good standing thereof; b. a majority of them must be residents of the Philippines; Only a natural person may be elected as directors or trustees. However, a corporation which owns shares of stocks or is a member in another corporation can designate by board resolution its officer or representative to sit in the latter’s board and thus qualifying him to be elected as director or trustee. (De Leon, 2010)
A trustee in a voting trust may be elected as director/trustee. (Villanueva, 2009)
Disqualifications:
No stockholder or member can be elected as director or trustee if he has been convicted by final judgment of an offense carrying an imprisonment exceeding 6 years, or an
offense constituting a violation of the Code, 5 years prior to his election or appointment.
Every Director requires at least one share of stock to be elected. If he transfers all his shares during his tenure, he automatically ceases to be a director. This applies to a Director who transfers all his shares to a trustee under a Voting Trust Agreement. (Lee v. CA, 205 SCRA 752) 4. ELECTIONS
In order for the election of the Directors or Trustees to take place, the presence of a majority of the capital stock or members, either personally or by written proxy is required. Elections must be held by secret ballot if requested by any voting stockholder or member, otherwise, it may be held in any form.
a. CUMULATIVE VOTING AND STRAIGHT VOTING Example: A owns 100 shares of stock in a corporation and 5 directors are to be elected. A is entitled to 500 votes (100 shares x 5 directors)
Straight Voting - every stockholder “may vote such number of shares for as many persons as there are directors” to be elected. In this case, A may distribute equally 100 shares to each of the 5 directors without preference. The same rule applies to elections of the board of trustees, whereby A has 1 vote for each trustee to be elected.
Cumulative Voting for one Candidate – a stockholder is allowed to concentrate his votes and “give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal.” In this case, A may vote all his 500 shares to a single director to be elected.
Cumulative Voting by Distribution – By this method, a stockholder may cumulate 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. Here, A may distribute his votes as he may desire among the directors to be elected, i.e., 200 shares to Director 1, 100 shares to director 2, and 200 shares to director 3, giving no favorable vote to Directors 4 and 5. However, the Corporation Code states that the total number of votes cast by a stockholder shall not exceed the number of shares owned by him. Lastly, no delinquent stock shall vote or be voted.
b. QUORUM
A majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of corporate business. Except, when it is otherwise provided in the articles of incorporation or the by-laws that a greater majority is required. (Sec. 25, Corporation Code)
Note: There is a difference between requiring “A majority vote of the directors or trustees” and “A vote of majority of the directors or trustees constituting a quorum.” In the former, you require a vote of majority plus one of all the directors. In contrast, the latter requires a majority plus one vote of directors enough to constitute a quorum (majority).
5. REMOVAL
Any director or trustee of a corporation may be removed from office:
a. By a vote of the stockholders representing 2/3 of the outstanding capital stock, or 2/3 vote of the members. b. At a regular meeting of the corporation or at a special
meeting called for such purpose,
c. Previous notice to stockholders or members
d. May be without just cause, except when it operates to deprive minority stockholders or members the right of representation (requires just cause).
The board of directors has no power to remove one of its members as director or trustee.
6. FILLING OF VACANCIES
Generally, if still constituting a quorum, at least a majority of the members are empowered to fill any vacancy occurring in the board other than by removal by the stockholders or members or by expiration of term.
Stockholders or members may fill the vacancy in the following cases:
a. Vacancy results from removal by the stockholders or members, or the expiration of term;
b. Vacancy occurs other than by removal or expiration of term, such as death, resignation, abandonment, or disqualification; provided that the remaining directors do not constitute a quorum;
c. When the board refers the matter to the stockholders; d. Increase in the number of the board;
A director or trustee so elected to fill a vacancy shall only be for the unexpired term of his predecessor in office.
7. COMPENSATION
Generally, the by-laws of a corporation fixes the compensation of the directors. However, if no compensation is provided for therein, then directors shall receive only reasonable per diems. Per diems are paid per attendance in board meetings.
The amount of compensation may also be fixed in a resolution of the stockholders by a majority vote representing the outstanding capital stock. Notwithstanding, the stockholders cannot delegate to the board of directors the authority to fix the amount of their own compensation. Where the compensation is granted either in the by-laws or by the vote of stockholders, the total yearly compensation of directors or trustees shall in no case exceed 10% of the net income before income tax of the compensation during the preceding year.
8. FIDUCIARIES DUTIES AND LIABILITY RULES
“A director is a fiduciary. Their powers are powers in trust. He who is in such fiduciary position cannot serve himself first and his cestuis second. He cannot manipulate the affairs of his corporation to their detriment and in disregard of the standards of common decency. He cannot by the intervention of a corporate entity violate the ancient precept against serving two masters.” (De Leon, The Corporation Code of the Philippines, 2010)
Duty of Obedience – The directors or trustees and officers to be elected shall perform the duties enjoined on them by law
and by the by-laws of the corporation. Any director, trustee or officer violating this duty is liable for ultra vires acts. Duty of Diligence – Directors or trustees who (1) willfully and knowingly vote for, or assent to patently unlawful acts of the corporation, (2) or who are guilty of gross negligence or bad faith in directing the affairs of the corporation, shall be liable jointly and severally for all the damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. (Sec. 31, Corporation Code)
Personal Liability of corporate director, trustee or officer shall attach only when:
a. He affirms an unlawful act, or acts with bad faith or gross negligence in directing its affairs, or for conflict of interest resulting in damage to the corporation, stockholders or other persons;
b. He consents to the issuance of watered stocks or does not file with the secretary his written objection thereto; c. He agrees to hold himself personally and solidarily
liable with the corporation;
d. Law makes him personally liable for his corporate action. (Tramat Mercantile v. Court of Appeals 238 SCRA 14)
Duty of Loyalty – When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation with 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 shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation. (Sec. 31, Corporation Code)
This liability shall attach despite the fact that the director risked his own funds in the venture. However, violation of this duty may be ratified by a vote of the stockholders owning or representing at least 2/3 of the outstanding capital stock. (Sec. 34, Corporation Code)
These two provisions are contained in the doctrine of corporate opportunity, which states that a corporate director cannot take advantage for his personal benefit a business opportunity which has an inherent aptitude of being integrated into the existing business of the corporation.
9. RESPONSIBILITY FOR CRIMES
Since a corporation is a mere legal fiction, it cannot be held liable for a crime committed by its officers, since it does not have the essential element of malice; in such case, the responsible officers would be criminally liable.
The performance of the act is an obligation directly imposed by the law on the corporation. Since it is a responsible officer or officers of the corporation who actually perform the act for the corporation, they must of necessity be the ones to assume the criminal liability (People v. Tan Boon Kong, 54 Phil 607)
10. INSIDE INFORMATION
The fiduciary position of insiders, directors, and officers prohibits them from using confidential information relating to the business of the corporation to benefit themselves or any competitor corporation in which they may have a mere substantial interest.
Since loss and prejudice to the corporation is not a requirement for liability, the corporation has a cause of action as long as there is unfair use of inside information. It is inside information if it is not generally available to others and is acquired because of the close relationship of the director or officer of the corporation. (Sec. 3.8, 27 Securities Regulation Code)
11. CONTRACTS
a. By Self-Dealing Directors with the Corporation A contract of the corporation with one ore more of its directors or trustees or officers is voidable, at the option of such corporation, unless the following conditions are present:
i. The presence of such director or trustee in the board meeting in which the contract was approved is not necessary to constitute a quorum for such meeting;
ii. The vote of such director or trustee was not necessary for the approval of the contract;
iii. That the contract is fair and reasonable under the circumstances;
iv. (In the case of an officer) The contract with the officer has been previously authorized by the board of directors.
In the absence of the first two conditions, a ratification may be made by a vote of the stockholders representing at least 2/3 of the outstanding capital stock or at least 2/3 vote of the members in a meeting called for the purpose. Full disclosure of the adverse interest of the directors or trustees must be made at such meeting. (Sec. 32, Corporation Code) b. Between Corporations with Inter-locking Directors General Rule: A contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone.
Exceptions: (1) There is Fraud and (2) The contract is not fair and reasonable under the circumstances.
Rule when the director’s interest is nominal in one corporation and substantial in the other: The requirements under Section 32, as stated above, must be complied with to make the contract between the corporation and interlocking directors valid.
Stockholdings exceeding 20% of the outstanding capital stock shall be considered substantial for the purposes of interlocking directors.
The By-Laws may prohibit a director of a corporation from serving at the same time a director of a competing corporation. (Gokongwei, Jr. v. SEC, 89 SCRA 336)
c. Management Contracts
Previously tackled under Corporate Powers.
A management contract cannot delegate entire supervision and control over the officers and business of a corporation to another as this will contravene the fundamental rule that the corporate powers of all corporations shall be exercised by the board. The board cannot surrender its power and duty of supervision and control for otherwise, it becomes a mere instrumentality of the managing company.
Where majority of the members of the members of the board of the managing corporation also constitute a majority of the members of the board of directors of the managed corporation, the management contract must be approved by the stockholders of the MANAGED Corporation owning 2/3 of the total outstanding stock or members.
Illustration: If A, B, C, D, and E constitute the majority of the members of the board of directors of X corporation and also of Y corporation, the bigger 2/3 vote by the stockholders of Y corporation is necessary. This is a case of a contract between two corporations with interlocking directorates. (De Leon, 2010)
16. EXECUTIVE COMMITTEE
The by-laws of a corporation may create an executive committee composed of not less than three members of the board to be appointed by the Board. Said committee may act, by majority vote of all its members, on such specific matters within the competence of the board, as may be delegated to in the by-laws, or on a majority vote of the board.
The purpose of the Executive Committee is to take off part of the work from the Board during the periods when the Board does not meet.
Matters they cannot act on:
a. Approval of any action for which shareholder’s approval is also required;
b. Filling of vacancies in the board;
c. Amendment or repeal of any resolution of the Board which by its express terms is not so amendable or repeatable;
d. Distribution of cash dividends. 17. MEETINGS
a. Regular or Special Meetings
Regular meetings of directors or trustees are those held by the board monthly, unless the by-laws provide otherwise. Special meetings of directors or trustees are those held by the board at any time upon the call of the president or as provided in the by-laws.
These meetings maybe held anywhere in or outside the Philippines, unless provided otherwise in the by-laws. Notice must be sent to every director or trustee at least 1 day prior to the scheduled meeting.
b. Who Presides
Section 54 provides, the president shall preside at all meetings of the directors or trustees as well as of the stockholders or members, unless the by-laws provide otherwise.
The by-laws may provide that the chairman, instead of the president, shall preside at board meetings. Where there is a vice-chairman provided in the by-laws, he presides in the absence of the chairman.
Where the officer entitled to preside is not present at the time of the meeting, a stockholder or member who takes the floor may temporarily preside at the meeting pending the selection of the presiding officer.