CORPORATION LAW
Corporation is one of the types of business organizations. It is also the most important in economic development.
INTRODUCTION
Sole proprietorship
- One man form of business entity, personally answers all liabilities, but enjoys all the profits with the exclusion of others
- Limited shareholders responsibility
- Paid subscription in full, you are no longer liable
Partnership
- Based on mutual trust and confidence
Joint venture
- one time grouping of persons whether they be natural or juridical
- does not entail continuity because after the undertaking is completed it is already the end
-
particular partnership and joint venture would be similar, but there is already a decision of the Supreme Court declaring them as different- when they do not register, it does not exist
- Foreign corporations enters into an agreement with a domestic corporation, it must be registered. Generally they do not need to be registered.
Corporations
- They may enter into joint venture, but generally they cannot enter into a partnership, but there are exceptions allowed by the SEC: the 3 exceptions must go hand in hand
1. The articles of incorporation expressly authorized the corporation to enter into contracts of partnership;
2. The agreement or articles of partnership must provide that all the partners will manage the partnership; and
3. The articles of partnership must stipulate that all the partners are and shall be jointly and severally liable for all obligations of the partnership.
DEFINITION AND ATTRIBUTES 4 attributes of a corporation 1. Artificial being
2. Created by operation of law
3. Right of succession
4. Powers, attributes and properties expressly authorized by law or incident to its existence.
Doctrine of limited capacity
- Only such powers as are expressly granted to it by law and by its articles of incorporation including others which are incidental to such conferred powers, those reasonably necessary to accomplish its purpose and those which may be incidental to its existence
- Can do things as the law asks or allows it to do
- If it does anything beyond, it shall be considered as ULTRA VIRES
General rule: Moral damages cannot be granted to corporations
Exception: Filipinas Broadcasting Network Inc. vs. Ago Med- In cases of slander, libel and other forms of defamation (should not qualify because the code does not qualify whether natural or juridical) Art. 2219 of the civil code:
Art. 2219. Moral damages may be recovered in the following and analogous cases:
(1) A criminal offense resulting in physical injuries;
(2) Quasi-delicts causing physical injuries;
(3) Seduction, abduction, rape, or other lascivious acts;
(4) Adultery or concubinage;
(5) Illegal or arbitrary detention or arrest;
(6) Illegal search;
(7) Libel, slander or any other form of defamation;
(8) Malicious prosecution;
(9) Acts mentioned in Article 309;
(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.
The parents of the female seduced, abducted, raped, or abused, referred to in No. 3 of this article, may also recover moral damages.
The spouse, descendants, ascendants, and brothers and sisters may bring the action mentioned in No. 9 of this article, in the order named.
Advantages (SEE LADIA BOOK)
- No. 2 may also be a disadvantage
- No. 5 may also be a disadvantage
A corporation is a person, therefore protected by the due process clause and equal protection clause of the ConstitutionCLASSIFICATION OF CORPORATIONS Section 3 Stock and non-stock
- Importance of knowing, determining what provisions of the code or the law may be applicable
Section 3. Classes of corporations. - Corporations formed or organized under this Code may be stock or non-stock corporations. Corporations which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held are stock corporations. All other corporations are non-stock corporations. (3a)
Non-stock- title 10
Stock- section 51
Stockholders must generally cast their votes in the meeting; section 4 governed primarily by the law creating them
Section 4. Corporations created by special laws or charters. - Corporations created by special Notes on Corporation Law
laws or charters shall be governed primarily by the provisions of the special law or charter creating them or applicable to them, supplemented by the provisions of this Code, insofar as they are applicable. (n)
Section 3
- The two requisites must always concur
1. That they have a capital stock divided into shares; and,
2. That they are authorized to distribute dividends or allotments as surplus profits to its stockholders on the basis of the shares held by each of them.
Section 4
- Created by a special law, they have their own character
- They are not immune from suit unless provided by the law of their creation
- Primarily governed by the law creating them
- Their subsidiaries are entirely different or independent from that of the other
Close corporation
-
There is no exemption it is absolute Public corporation- Political or governmental purposes
- Those formed or organized for the government or a portion of the State or any of its political subdivision and which have for their purpose the general good and welfare
Private Corporation
- Immediate benefit, aim or advantage of private individuals
- Those formed for some private purpose, benefit, aim or end
- Distinction: public for governmental purpose
Corporation Sole
-
Exemption to the rule because it is composed only of one person-
An incorporator may also be a juridical person Close corporation- There is exclusivity of shares of stock
- Section 96-105
- Restrictions to transfer shares
- Only those indicated can own shares
- Article must provide that there will be no public offering
Open corporation
- openly admit investors
- example: stock exchange
Domestic/ Foreign
Test
- Incorporation test
- If incorporated under the laws of the Philippines it is a domestic corporation
• ME Gray vs. CA
- Parent or Holding/ subsidiaries and affiliates
- Affiliates- no majority vote
SMC 12%
HERSHEY CBPl 12% 12%
Affiliate is subject to common control by the 12 % owners De jure
- cannot be attached by the state even in a quo warranto proceeding
De facto
- exists by virtue of colorable compliance
- Attached directly only by the state in a quo warranto proceeding
Corporation by estoppel
- So defectively formed, but still considered corporation, but only in relation to those who cannot deny their existence section 20 and 21
FORMATION AND ORGANIZATION 3 stages
1. Creation
2. Re-organization or quasi-reorganization
3. Dissolution/winding-up
Purpose clause
- Defining the scope of authority of the corporate enterprise pr undertaking. Both confirmed and limited
4 limitations of purpose clause
1. Lawful
2. Specific or stated concisely
3. More than one, the primary and secondary must be specified
4. Lawfully combined
- Provision that states, cannot be issued less than par, exception is treasury shares because it can be issued less than par
A corporation commences only upon issuance of the certificate, prior thereto it has no being and cannot transact business. Promoters cannot act for a projected corporation
Metro Manila - paid up capital requirement is 10 M Non- stock- mere mention of the operating capital Mention the authorized capital
Restrictions
-
Mandatory in close - Not mandatory in ordinaryNotes on Corporation Law
Non-stock
- If value is not more than 100,000
A corporation cannot use any other name unless it has been amended Section 19
-
If confusingly similar it will not be allowed to be registered-
Verification slip from the records officerSection 19. Commencement of corporate existence. - A private corporation formed or organized under this Code commences to have corporate existence and juridical personality and is deemed incorporated from the date the Securities and Exchange Commission issues a certificate of incorporation under its official seal; and thereupon the incorporators, stockholders/members and their successors shall constitute a body politic and corporate under the name stated in the articles of incorporation for the period of time mentioned therein, unless said period is extended or the corporation is sooner dissolved in accordance with law. (n)
- Words corporation or inc. either in full or abbreviated form must be included
Section 18. Corporate name. - No corporate name may be allowed by the Securities and Exchange Commission if the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws. When a change in the corporate name is approved, the Commission shall issue an amended certificate of incorporation under the amended name. (n)
Doctrine of secondary meaning
- A word or phrase originally incapable of exclusive appropriation [usually generic] with reference to an article in the market, because of 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 and to that branch of the purchasing public, the word or phrase has become to mean that the article was his product.
Section 18
-
Lyceum of the Philippines case, the additional geographical name does not make it confusingly similar-
actual confusion is not necessary - Philips case “it is enough that there is probable confusion” 2 requisites must be proven
- that the complainant corporation acquired a prior right over the use of such corporate name
- identical, deceptively or confusingly, patently deceptive
principal office
- statement of principal office is required
- city and municipality not only province must be specified
- principal office NOT operations office
- necessary because it will establish the residence of corporations
- venue of actions for or against the corporations
- venue of meetings
- section 51 meetings may only be within the boundaries of the city where the principal office
- non-stock may be held anywhere in the Philippines, if provided in its by-laws
- where summons may be served
- registration of chattel mortgage must be registered in the register of deeds where the principal office is located
• Clavecilla Radio System vs. Antillon - action not upon a written contract
- city where the defendant resides
term of existence
- corporate term required
- determining what point in time the juridical personality will cease to exist
- enter into contract only when it has juridical personality
- once it ceases to exist, it no longer has personality
-
exist for another 3 years only for purposes of liquidation- Dissolution- it is automatic
When should extension be made?
- General rule: Not earlier than 5 years
- Exception: unless there are justifiable reasons
May it be extended after expiration?
-
Alhambra cigar vs. SEC once it ceases to exist it has no vested politic, exist only for a period of 3 years only for liquidation and for that purpose only Article 5 How many incorporators should there be?
- 5-15
May a corporation be an incorporator? - General rule: only natural persons
-
Exception: cooperatives and corporation primarily organized to hold equities in rural banks How about minors?
- NO, because they must be of legal age
May a corporation organized by incorporators consisting solely of foreigners
- Yes, there is no nationality requirement only residence, as long as majority are residents of the Phil
Define incorporators <sec.5>
- Those person mentioned in the articles as originally forming the corporation and who are signatories of the articles of incorporation.
- Must be signatories to be incorporators
Section 5. Corporators and incorporators, stockholders and members. - Corporators are those who compose a corporation, whether as stockholders Notes on Corporation Law
or as members. Incorporators are those stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof.
Corporators in a stock corporation are called stockholders or shareholders. Corporators in a non-stock corporation are called members. (4a)
Define corporators <sec.5>
- All persons who compose the corporation at any given time and need not be among those who execute the articles of incorporation at the start of its formation and organization.
- Originally or subsequently
- Section 5 provides:
Corporators in a stock corporation are called stockholders or shareholders. Corporators in a non-stock corporation are called members. (4a)
May a corporation be a corporator?
- YES. There is nothing to prevent a corporation from being a stockholder
Incorporator must subscribe to 1 share
There are those that are exclusively reserved to Filipinos
An incorporator maybe a corporator as long as he is a stockholder section 6
Section 6. Classification of shares. - The shares of stock of stock corporations may be divided into classes or series of shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation: Provided, That no share may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares, unless otherwise provided in this Code: Provided, further, That there shall always be a class or series of shares which have complete voting rights. Any or all of the shares or series of shares may have a par value or have no par value as may be provided for in the articles of incorporation: Provided, however, That banks, trust companies, insurance companies, public utilities, and building and loan associations shall not be permitted to issue no-par value shares of stock.
Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the corporation in case of liquidation and in the distribution of dividends, or such other preferences as may be stated in the articles of incorporation which are not violative of the provisions of this Code: Provided, That preferred shares of stock may be issued only with a stated par value. The board of directors, where authorized in the articles of incorporation, may fix the terms and conditions of preferred shares of stock or any series thereof: Provided, That such terms and conditions shall be effective upon the filing of a certificate thereof with the Securities and Exchange Commission.
Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto: Provided; That shares without par value may not be issued for a consideration less than the value of five (P5.00) pesos per share: Provided, further, That the entire consideration received by the corporation for its no-par value shares shall be treated as capital and shall not be available for distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be equal in all respects to every other share.
Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other corporations;
7. Investment of corporate funds in another corporation or business in accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights. (5a)
How many directors should there be?
- General rule: Not less than 5 not more than 15
- Exceptions:
1.
Educational corporations registered as non stock corporation whose number of trustees, though not less than five and not more than [15] should be divisible by five [5], meaning they must have either five, ten, or fifteen trustees and no other;2.
In close corporations where all the stockholders are considered as members of the board of directors thereby effectively allowing twenty members in the board.3.
The by-laws of a corporation may provide for additional qualifications and disqualifications of its members of the board of directors or trustees. However it may not do away with the minimum disqualifications lay down by the Code. Qualifications of the governing board - Requires mere residency <sec. 23>
Section 23. The board of directors or trustees. - Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified. (28a)
Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be members thereof. A majority of Notes on Corporation Law
the directors or trustees of all corporations organized under this Code must be residents of the Philippines.
May a domestic corporation have a governing board consisting solely of foreigners?
- YES, section 23 majority of them must be residents of the Philippines, no nationality requirement
Anti-dummy act <sec.2-A>
- If the business undertaking or activity is only partially nationalized, aliens can be elected as such directors, [unless the law provides otherwise] but their number shall only be in proportion to their equity or participation in the capital stock of the corporation.
Disqualifications <sec.27>
- The disqualifications provided for is absolute and may not be done away with. Corporate by-laws may, however, provide for additional qualifications and disqualifications.
Section 27. Disqualification of directors, trustees or officers. - No person convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or a violation of this Code committed within five (5) years prior to the date of his election or appointment, shall qualify as a director, trustee or officer of any corporation. (n)
Section 27 and 23 minimum disqualifications and qualifications
• Lee vs. CA
- By laws may provide for additional
Gov’t vs. El hogar Filipino, Gokongwei vs. SMC
Capital structure
Foundation- minimum paid-up capital 3M
Authorized capital 1 M No. of shares 1M shares par value 1.00
Amount of shares subscribed
50 K A 50 K B C 250K D E PAID UP =62,500
Corporation cannot exceed more than 1 M it is the maximum amount it cannot issue more unless amended
Maximum shares it can issue is 1M shares unless amended
How much shares should be subscribed?
- Must be at least 25% of the authorized capital stock
Paid- up must be at least 25%-minimum
Section 30
- Total subscription compliance with minimum 25% total
- Any combination would comply with the minimum required by section 30
Section 30. Compensation of directors. - In the absence of any provision in the by-laws fixing their compensation, the directors shall not receive any compensation, as such directors, except for
reasonable per diems: Provided, however, That any such compensation other than per diems may be granted to directors by the vote of the stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholders' meeting. In no case shall the total yearly compensation of directors, as such directors, exceed ten (10%) percent of the net income before income tax of the corporation during the preceding year. (n)
Minimum for a domestic corporation?
-
In no case shall the paid- up capital be less than 5k Is there a minimum authorized capital imposed by thecode?
- If there is minimum paid-up logically there should also be a minimum capital =5000
Minimum paid-up capital for a financing company metro manila 10 M if located in MM Shares of stock
Purpose of classification
- To specify and define the rights and privileges of the stockholders;
- For regulation and control of the issuance of sale of corporate securities for the protection of purchasers and stockholders.
- As a management control device.
- To comply with statutory requirements particularly those which provide for certain limitations on foreign ownership and shares like overseas employment agencies requiring to own at least 75% of the shares of stock thereof.
- To better insure return on investment which can be affected through the issuance of redeemable shares or preferred shares, i.e., granting the holders thereof, preference as to dividends and/or distribution of assets in case of liquidation; and,
- For flexibility in price, particularly, no par shares may be issued or sold from time to time at different price depending on the net worth of the company since they do not purport to represent an actual of fixed value.
Section 6
- Each shall be equal in all respects to every other share
Preferred shares
- Specific preference
- Dividends or during liquidation
No par
- Can sell it with the network of the corporation
Distinction between the subscribed and outstanding stocks?
- Section 137
Section 137. Outstanding capital stock defined. - The term "outstanding capital stock", as used in this Code, means the total shares of stock issued under binding subscription agreements to subscribers or stockholders, whether or not fully or partially paid, except treasury shares. (n)
- Voting and dividend rights, it refers to the outstanding capital stocks
- Only outstanding stocks are allowed to vote and receive dividends
- Actually the same
Treasury shares
- are also subscribed shares
-
while they remain in the treasury, no voting and dividend rights-
may be reissued by the corporation-
once reissued they become outstanding stocks again common shares- carry the right to vote
preferred shares
- grants the holder preference
- preference as to dividends
- preference as to distribution of the remaining assets upon dissolution or
- both
- YOU MUST STATE THE PREFERENCE BECAUSE IF NOT THEY ARE PRESUMED TO BE EQUAL
- It may include such other preferences not inconsistent with the Code. This is so because Section 6 of the said law allows a stock corporation to issue preferred shares subject only to the limitations imposed therein which are:
a. They can be issued only with sated par value; and,
b. The preferences must be stated in the articles of incorporation and in the certificate of stock, otherwise, each share shall be, in all respect, equal to every other share.
Participating
- Must be stated because the presumption is that it is participating
Cumulative
- Irrespective of whether or not they where earned
Preferred - May be denied
- Unless denied they are still entitled
What if hindi i-declare kahit na may dividends rights for the previous years? May they be denied dividend rights because they are non holders of non-cumulative? NOTE: YOU CANNOT COMPEL THE CORPORATION TO DECLARE DIVIDENDS UNLESS IT EXCEEDS 100 % PAID UP CAPITAL SEC. 43
Section 43. Power to declare dividends. - The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. (16a)
Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in capital stock, except:
(1) when justified by definite corporate expansion projects or programs approved by the board of directors; or (2) when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or (3) when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies. (n)
- It depends because there are three types of non-cumulative preferred shares
- Discretionary dividend type
- Mandatory if earned
- Earned cumulative or dividend credit type
Compare cumulative share from non-cumulative, earned cumulative or dividend credit type
-
Cumulative share –whether or not earned-
Non-cumulative earned cumulative or dividend credit type- only if earned Par
- stated par value; shall not be issued less than par
No par
- without stated par value
- once fully paid no longer liable
Corporations cannot use its capitals in declaring dividends; not all can issue no par value section 6
Voting
- entitled to vote at any motion brought up in writing
Non-voting
- not entitled to vote
What types of shares may be denied of the right to vote?
- Preferred and redeemable shares
Is it correct to state that common shares can never be denied the right to vote?
- Only preferred and redeemable shares are denied unless provided in this code
- PWEDENG MA-DENY YUNG COMMON SHARES, KASI YUNG FOUNDER’S SHARES MERON SILANG EXCLUSIVE RIGHTS NA SILA LANG ANG MERON, SO PWEDE SILANG BUMOTO WITH REGARDS TO SOMETHING NA HINDI NA SAKOP NG COMMON SHARE RIGHTS
- Example: founders shares- may be given certain rights and privileges
- Even common shares may be denied the right to vote of founders’ shares issued <sec.7>
Section 7. Founders' shares. - Founders' shares classified as such in the articles of incorporation may be given certain rights and privileges not enjoyed by the owners of other stocks, provided that where the exclusive right to vote and be voted for in the election of directors is granted, it must be for a limited period not to exceed five (5) years subject to the approval of the Securities and Exchange Commission. The five-year period shall commence from the date of the aforesaid approval by the Securities and Exchange Commission. (n)
Do you include non-voting shares in passing a valid corporate act?
- Even non-voting shares are entitled to vote under section 6
Redeemable shares
- Discretionary/optional
- Obligatory or mandatory
Generally a corporation can reacquire its own shares if it has unrestricted retained earnings Exception: redeemable shares may be reacquired irrespective of retained earnings
Treasury shares
- They are treasury while in the treasury account of the corporation
May they be reissued by the corporation?
- YES
If they are reissued will they be denied the right to vote?
- Once reissued they shall become outstanding stocks again and purchasers shall be entitled to all the rights and privileges as the other holders have
Section 57 treasury shares have no voting and dividend rights. Why not?
Section 57. Voting right for treasury shares. - Treasury shares shall have no voting right as long as such shares remain in the Treasury. (n)
-
Answer: commissioner vs. manning page 62 first par. “Although authorities may differ on the exact legal and accounting status of so-called treasury shares, they are more or less in agreement that treasury shares are stocks issued and fully paid for and reacquired by the corporation either by purchase, donation, forfeiture or other means. Treasury shares are therefore issued shares but being in the treasury they do not have the status of outstanding shares. Consequently, although a treasury share, not having been retired by the corporation re-acquiring it, may be re-issued or sold again, such shares, as long as it is held by the corporation as a treasury share, participates neither in dividends, because dividends cannot be declared by the corporation to itself, nor in meetings of the corporation as voting stock, for otherwise equal distribution of voting powers among stockholders will be effectively lost and the directors will be able to perpetrate their control of the corporation, though it still represents a paid for interest in the property of the corporation. The foregoing essential features of a treasury stocks are lacking in the questioned shares.In this case, and under the terms of the trust agreement, the shares of stock of Reese participated in dividends which the trustee received and the said shares were voted upon by the trustee in all corporation meetings. They were not, therefore, treasury shares.”
When the law speaks of outstanding rights it does not include treasury shares
Treasury shares may be reissued-
They are actually assets of the corporation-
Once re-issued they become outstanding stocks again-
The corporation may cancel them; in effect there will be a reduction in the outstanding capital stocks- The code does not require ordinary corporations to provide for restrictions, but it does not likewise prohibit restrictions
- Example: right of first refusal
- The restriction must be contained in the articles of incorporation
- If provided in by-laws but not in the articles of incorporation then it will not be binding
-
Restrictions and preferences are mandatorily required in close corporations-
If it does not provide restrictions it is not a close corporation- Specified persons- close corporations
- If not one of those specified you are not included because there is exclusivity in close corporations
- Should also be in the by-laws not only in the articles of incorporation
No transfer clause
Execution clause
Acknowledgment
Treasurer affidavit part of the articles of incorporation
Section 23-27 minimum qualifications, but there may be additional Grounds for disapproval
- Only substantial and not strict is required
May the SEC refuse or reject registration? - <Section 17>
Section 17. Grounds when articles of incorporation or amendment may be rejected or disapproved. - The Securities and Exchange Commission may reject the articles of incorporation or disapprove any amendment thereto if the same is not in compliance with the requirements of this Code: Provided, That the Commission shall give the incorporators a reasonable time within which to correct or modify the objectionable portions of the articles or amendment. The following are grounds for such rejection or disapproval:
1. That the articles of incorporation or any amendment thereto is not substantially in accordance with the form prescribed herein;
2. That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations;
3. That the Treasurer's Affidavit concerning the amount of capital stock subscribed and/or paid is false;
4. That the percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied with as required by existing laws or the Constitution.
No articles of incorporation or amendment to articles of incorporation of banks, banking and quasi-banking institutions, building and loan associations, trust companies and other financial intermediaries, insurance companies, public utilities, educational institutions, and other corporations governed by special laws shall be accepted or approved by the Commission unless accompanied by a Notes on Corporation Law
favorable recommendation of the appropriate government agency to the effect that such articles or amendment is in accordance with law. (n)
-
But the grounds in section 17 are not exclusive When will the corporation commence to exist? - Section 19Section 19. Commencement of corporate existence. - A private corporation formed or organized under this Code commences to have corporate existence and juridical personality and is deemed incorporated from the date the Securities and Exchange Commission issues a certificate of incorporation under its official seal; and thereupon the incorporators, stockholders/members and their successors shall constitute a body politic and corporate under the name stated in the articles of incorporation for the period of time mentioned therein, unless said period is extended or the corporation is sooner dissolved in accordance with law. (n)
A corporation de jure can come into existence only upon the issuance of the certificate of registration by the SEC? TRUE OR FALSE?
- TRUE
-
EXCEPTION: CORPORATION SOLE <sec. 112>Section 112. Submission of the articles of incorporation. - The articles of incorporation must be verified, before filing, by affidavit or affirmation of the chief archbishop, bishop, priest, minister, rabbi or presiding elder, as the case may be, and accompanied by a copy of the commission, certificate of election or letter of appointment of such chief archbishop, bishop, priest, minister, rabbi or presiding elder, duly certified to be correct by any notary public.
From and after the filing with the Securities and Exchange Commission of the said articles of incorporation, verified by affidavit or affirmation, and accompanied by the documents mentioned in the preceding paragraph, such chief archbishop, bishop, priest, minister, rabbi or presiding elder shall become a corporation sole and all temporalities, estate and properties of the religious denomination, sect or church theretofore administered or managed by him as such chief archbishop, bishop, priest, minister, rabbi or presiding elder shall be held in trust by him as a corporation sole, for the use, purpose, behalf and sole benefit of his religious denomination, sect or church, including hospitals, schools, colleges, orphan asylums, parsonages and cemeteries thereof. (n)
- CORPORATION SOLE- upon filing of the verified articles of incorporation, once filed it is vested with a judicial capacity
General rule section 19
- Vested with judicial capacity upon issuance of the certificate by the SEC
o
However it is not accurate according to atty. Ladia because there are those that can issue for example cooperatives- BUREAU OF COOPERATIVES which register, home insurance guaranty corporation- HOME OWNERS• Cagayan Fishing vs. Sandika - Corporations are created by law
- Commence to exist upon issuance by the CONCERNED government corporation or agency
- Prior there to it has no being
- The transfer of the property was not valid, it likewise did not have the right to transfer
De jure
- Strict or substantial compliance
De facto
- 4 requisites must go hand in hand take out anyone of them there can be no de facto corporation
1. There is a valid statute under which the corporation could have been created as a de jure corporation.
2. An attempt, in good faith, to form a corporation according to the requirements of law, which goes far enough to amount to a “colorable compliance” with the law;
3. A user of corporate powers, the transaction of business in some way as if it were a corporation; and,
4. Good faith in claiming to be and doing business as a corporation.
Are the rights and obligations between officers and directors of a de jure and de facto the same?
- YES. Governed by the same law, rules and regulations
Only important in determining, is for the purpose of applying the rules with regards to the direct and collateral attack
The existence of a de jure cannot be questioned even by the State, either directly or indirectly
Existence of a de facto can be questioned only by the State directly in a quo warranto proceeding only
• Municipality of Malabang vs. Benito
-
What is the missing link so as to consider it a de facto? A law, because the executive order is unconditional- An unconditional act affords no rights, creates no office
-
Legal contemplation it was never passed at all - It can therefore be questioned by any person If the certificate of registration has not been issued, may a corporation de facto exist?
- NO!
- Number 4 requirement, good faith in claiming to be and doing business as a corporation
• Hall vs. Piccio
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Missing link is good faith- The certificate was not yet issued by the SEC, the members knew and therefore they were not acting in good faith, therefore anybody can question its existence
Corporation by estoppel
- So defectively formed so that they are not to be considered a de jure or de facto
- General partners- liable even beyond his promise even his personal properties are prone to attachment
• Lozano vs. Delos Santos - Founded on principle of equity
- Exercise corporate powers
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Enters with business with 3rd parties-
When there is no 3rd persons involved and the problemarises between there members, therefore they themselves know that there is no corporation by estoppel
• Albert vs. University - 1965 case, no section 21 yet
- Applied where the rules governing agency
- A person purporting in behalf of a non existing corporation
- Section 21, you arrive at the same decision
• Chiang Kai Siek vs. CA
- SC based its decision from the provision of the education act
- It cannot immune itself by virtue of its non compliance with the law
Assuming there was no law?
- YES, it may still be sued as a school for the past 32 years the school represented itself as possessed of juridical personality
General rule: a 3rd party transacting with a nonexistent corporation shall be estopped to deny
• Asia banking vs. standard products
- General rule: absence of fraud a person who has dealt with a non incorporated corporation shall be stopped to deny from actions in which it had benefited
- Exemptions: when there is fraud the general rule shall not apply
• Salvatierra vs. Garlitos
- As a general rule a person who has contracted it a corporation lacking personality
- Doctrine is not applicable where fraud takes part in the transaction
Another exemption
• International express travel and tours vs. CA - No fraud in this case
- How come Kahn was made liable?
- Doctrine of incorporation
- Applies only if that person is trying to escape from a contract where he is benefited
- In this case petitioner is not trying to escape liability, but rather the one claiming from the contract
Would this apply to foreign corporation?
- YES, it may apply
- Georg Grotjahn vs. Isnami
A foreign corporation cannot gain access to our courts unless they attain a license to engage in business in the Philippines but applying corporation by estoppels, the court allowed
Municipality of Malabang case- No law, hence may be questioned by any person
- An unconstitutional act is not a law, t confers no rights, it imposes no duties, it affords no protections, it crates
o office, it is in legal contemplation, as inoperative as though it had never been passes
Hall vs. Piccio
- No good faith
Corporation by estoppel
- Admission, conduct or agreement
-
Will not apply among members themselves there must be a 3rd party- Cannot escape when benefited
- General rule: you deal with a corporation, as to estop it
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Exceptions: 1. fraudulently misrepresents the third person may file an action directly to those members, 2. 3rd party will not be estopped if he is not trying toescape liability
2 possible remedies - Chiang kai siek case
- Albert case
What would be the effect if the corporation failed to commence transaction?
- Automatic
Operated but becomes subsequently inoperative for 5 years only a ground for suspension, proper notice and hearing
Commencement
- Example realty company
CORPORATE CHARTER AND ITS AMENDMENTS
What do you understand by the word charter? Is it the same as articles of incorporation?
- Corporate charter is broader
Franchise
- Primary power granted by the state to be and act as a corporation
- Secondary franchise is the right or privilege that the corporation may exercise
You cannot issue investment contracts without a secondary franchise, kailangan primary muna hindi pwede mauna secondary kasi sa section 19 it does not exist until issued with a certificate of registration or incorporation
Corporate entity
- Corporation exist separately and independently from the stockholders
- Stockholders cannot bring an action, to bring back the properties of a corporation
- Corporation has no interest in the individual properties of its members
• Sulo ng Bayan vs. Araneta
- Corporation cannot bring an action for the recovery of the properties of its members
• Caram vs. CA
- Stockholders cannot be held liable for the legitimate obligations of the corporation, they exist separately and independently from one another
• Cruz vs. Dalisay
- Final judgment against a corporation cannot be enforced against stockholders
• Rustan Pulp vs. CA
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Corporation exist separately and independently - Corporation are juridical entities, they exist only inlegal contemplation, can act only through its authorized representatives
• Soriano vs. CA
- They are not personally liable
- They where signed for and in behalf of the corporation
• Palay inc. vs. Clave
- Liabilities incurred by the corporation cannot be enforced against stockholders, etc., even if stockholders, etc. happens to own a substantial interest in the corporation, mere ownership does not disregard the corporate entity theory
Corporate entity for legal or legitimate purposes only
Two or more corporations, one of them will be treated as a mere alter-ego
You cannot pierce the veil of corporate fiction when there are no facts attendant in the case Corporate Entity Theory
- The corporation is possessed with a personality separate and distinct from the individual stockholders or members and is not affected by the personal rights, obligations or transactions of the latter
Instrumentality rule
- Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the “instrumentality” may be disregarded
- Courts are concerned with reality and not form
- Mere ownership of all or substantially all of the shares of stock of a corporation is not, in itself, insufficient ground for disregarding the separate corporate personality. And for the separate personality of the corporation to be disregarded, the wrong doing must be clearly and convincingly established
- Fraud must be proven by clear and convincingly evidence amounting to more than preponderance. It cannot be justified by speculation and can never be presumed. And only if it sought to hold the stockholders liable directly for corporate debt
• Palacio vs. Fely
- Piercing the veil of corporate fiction
- Fely trans and the other corporation is one and the same
• Marvel bldg. vs. David
- There must be facts before the court will be justified in piercing the veil of corporate fiction
- Corporation was a mere extension of the personality of the person
• Yutivo and sons vs. Court of Tax Appeals
- What where the facts or circumstances arrived by the court here?
- Subscribed capital where all advanced by Yutivo, the board where the same as Yutivo
• Commissioner of Internal Revenue vs. Norton and Harrison
- Court applied the general rule
- Mere substantial ownership does not mean that it has a same corporate entity
• La Campana Coffee Factory, Inc. vs. KKM
- Two corporations managed by the same family, workers were made interchangeably
• Emilio Cano vs. CIR
- Sued in there official capacity
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Reverse of Soriano vs. CA (signed in their official capacity)• Tesco vs. WCC
- The two corporations where located in the same office
• Claparols vs. CIR
- Same as NAFLU and A.C. Ransom
• Concept builders vs. NLRC
- Instrumentality rule. What is the instrumentality rule? “where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the “instrumentality” may be disregarded.”
- Has no separate mind of its own. What is the degree of control?
1. Control, not mere 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.
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 plaintiff’s legal rights; and,
3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.
- The absence of one of the elements prevents “piercing the corporate veil.” In applying the “instrumentality” or “alter ego” doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendant’s relationship to that operation.
There must facts and circumstances before warrant piercing the veil of corporate fiction
The control necessary does not mean stock ownership• MCConnel vs. CA
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were located in the same floor- “while the mere ownership of all or nearly all of the capital stock of a corporation does not necessary Notes on Corporation Law
mean that it is a mere business conduit of the stockholder, that conclusion is amply justified where it is shown, as in the case before us, that the operations of the corporation were so merged with the stockholders as to be practically indistinguishable from them. To hold the latter liable for the corporation’s obligations is not to ignore the corporation’s separate entity, but merely to apple the established principle that such entity cannot be invoked or used for purposes that could not have been intended by the law that created that separate personality.”
• Tan boon bee vs. Jarencio
- Why would a drug company need a printing machine
-
The property must be in pursuance of a company business• Cease vs. CA
- Alter-ego or the extension of the person of forest ware does the court pierced the veil of corporate fiction
-
As to not deprive the holders of their successional rights- Mere ownership of all or substantially all is not a justification of piercing the veil of corporate fiction
Fraud must be proven by clear and convincing evidence cannot presume or speculate, there must be facts and circumstances
Fraud must be clear and convincing evidence more than preponderance
• Remo Jr. vs. IAC
- The resolution was not entered to defraud anyone
• Del Rosario vs. National Labor Commission - The wrongdoing must be clearly established
- There must be facts to support
- Payment of claims cannot thus be presumed
• Indophil Textile Mill vs. CALICA
-
How do you distinguish this ruling to La Campana, having the same issues:-
La campana, one payroll, employees were made interchangeable. Acrylic had its own standards• PNB vs. Ritratto Group - Control test
- Not mere majority but rather complete
- Twin ace was only a subsequent interested party
- Assets and machineries
Amendment of the articles of incorporation
- Express power granted to a corporation
Section 16
- Appraisal right
- Section 81 to object on certain acts and transactions
Section 81. Instances of appraisal right. - Any stockholder of a corporation shall have the right to dissent and demand payment of the fair value of his shares in the following instances:
1. In case any amendment to the articles of incorporation has the effect of changing or restricting the rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class, or of extending or shortening the term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets as provided in the Code; and
3. In case of merger or consolidation. (n)
- Right granted only in specified instances
Are non-voting shares included in amending the articles of incorporation 1 100/s XYZ---ABC 2 100/s To 10 100/s =1M/S what would be the 2/3?
Section 6 last paragraph
Voting shares are excluded except the foregoing instances
1 1 2 2 3 3 4 4 5 5 6 6 1 & 2=absent
1&2=absent but gave their written assent
3 & 4= objected 3&4=objected
5 & 6= approved the amendment 5&6=approved
Would there be a valid amendment
Special amendments 37 & 38 shortening that would result to dissolution require prior approval by the SEC
Section 37. Power to extend or shorten corporate term. - A private corporation may extend or shorten its term as stated in the articles of incorporation when approved by a majority vote of the board of directors or trustees and ratified at a meeting by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members in case of non-stock corporations. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That in case of extension of corporate term, any dissenting stockholder may exercise his appraisal right under the conditions provided in this code. (n)
Section 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness. - No corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority vote of the board of directors and, at a stockholder's meeting duly called for the purpose, two-thirds (2/3) of the outstanding capital stock shall favor Notes on Corporation Law
the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Written notice of the proposed increase or diminution of the capital stock or of the incurring, creating, or increasing of any bonded indebtedness and of the time and place of the stockholder's meeting at which the proposed increase or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be considered, must be addressed to each stockholder at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally.
A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by the chairman and the secretary of the stockholders' meeting, setting forth:
(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock thereof actually subscribed, the names, nationalities and residences of the persons subscribing, the amount of capital stock or number of no-par stock subscribed by each, and the amount paid by each on his subscription in cash or property, or the amount of capital stock or number of shares of no-par stock allotted to each stock-holder if such increase is for the purpose of making effective stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of the meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness.
Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded indebtedness shall require prior approval of the Securities and Exchange Commission.
One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed with the Securities and Exchange Commission and attached to the original articles of incorporation. From and after approval by the Securities and Exchange Commission and the issuance by the Commission of its certificate of filing, the capital stock shall stand increased or decreased and the incurring, creating or increasing of any bonded indebtedness authorized, as the certificate of filing may declare: Provided, That the Securities and Exchange Commission shall not accept for filing any certificate of increase of capital stock unless accompanied by the sworn statement of the treasurer of the corporation lawfully holding office at the time of the filing of the certificate, showing that at least twenty-five (25%) percent of such increased capital stock has been subscribed and that at least twenty-five (25%) percent of the amount subscribed has been paid either in actual cash to the corporation or that there has been transferred to the corporation property the valuation of which is equal to twenty-five (25%) percent of the subscription: Provided, further, That no decrease of the capital stock shall be approved by the Commission if its effect shall prejudice the rights of corporate creditors.
Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the approval by a majority vote of the board of trustees and of at least two-thirds (2/3) of the members in a meeting duly called for the purpose.
Bonds issued by a corporation shall be registered with the Securities and Exchange
Commission, which shall have the authority to determine the sufficiency of the terms thereof. (17a)
The vote must be cast at the meeting called for that purpose
Written assent would not suffice
When do amendments become valid and effective? - Only upon the approval of the SEC TRUE OR FALSE?
-
FALSE because it can be valid upon the date of filing if not acted upon within 6 months without fault attributable to the corporation Why is it retroactive?
What provision may be amended, altered or repealed
Can you change name, address for example she married or changed address?
- NO. you cannot change that
Fait accompli, are beyond the powers or authority of the corporation to change, alter or modify. These would include the following:- Names of the incorporators and
- The incorporating directors or trustees,
- The name of the treasurer originally or first elected by the subscribers or members to act as such until his successor has been duly elected and qualified,
- The number of shares and amount originally subscribed and paid out of the original authorized capital stock of the corporation,
- The date and place of execution of the articles of incorporation,
- The signatories and acknowledgment thereof.
- All other provisions or matters stated or contained in the articles are subject to amendment.
Founder’s or signatories hindi pwede palitan
Names, nationalities- you cannot
Capital- right granted by law to all corporation
Paid up capital- NO
Restriction and transfer of shares in ordinary stock corporations
- You can, but close corporation cannot
- Section 96, otherwise it will not be a close corporation
Section 96. Definition and applicability of Title. - A close corporation, within the meaning of this Code, is one whose articles of incorporation provide that: (1) All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); (2) all the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code.
Any corporation may be incorporated as a close corporation, except mining or oil companies, stock exchanges, banks, insurance companies, public Notes on Corporation Law
utilities, educational institutions and corporations declared to be vested with public interest in accordance with the provisions of this Code.
The provisions of this Title shall primarily govern close corporations: Provided, That the provisions of other Titles of this Code shall apply suppletorily except insofar as this Title otherwise provides.
Transfer clause, executor clause, acknowledgment, treasury affidavit-NO
• Philippine First Insurance case
- Mere change in the name of a corporation or by merely complying with the law is general amendment
- It does not change its personality. It is the same person in a different name. the charter is the same
Amendment of a corporate term
- Extending the same can never be made 7 years prior? TRUE or FALSE
- FALSE. It can be if there are justifiable reasons for earlier extension as may be determined by the SEC
Can you extend the corporate term if it has already expired?
- Once the term expires without an amendment having happen it ceases to exist as a body politic. It is dissolved automatically on the day it expires.
Alhambra cigar and PNB case
Instances when the SEC allowed extension whose term has already expired
-
All of them involved are institutions of learning, it was the case in order to avoid confusion that would arise later on.BOARD OF DIRECTORS/TRUSTEES Section 23
Section 23. The board of directors or trustees. - Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified. (28a)
Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be members thereof. A majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines.
- Controlled by the board of directors
- Authority are however restricted to the day to day
- Stockholders may have all the profit but will turn over the management to the governing board
- But unless the law provides the power may be delegated
General rule
-
Corporations must sit and act as a body- Will be bound by corporate officers if they acted within the 5 classification page 150
• Ramirez vs. Orientalist co.
-
What was the position of Fernandez in this case? TREASURER- Why did the court rule that actions of Fernandez bound the corporation when he is not even a board of director?
“if a man is found acting for a corporation with the external indicia of authority, any person not having notice of want of authority, may usually rely upon those appearances; and if it be found that the directors had permitted the agent to exercise that authority and thereby held him out as a person competent to bind the corporation, or had acquiesced in a contract and retained the benefit supposed to have been conferred by it, the corporation will be bound, notwithstanding the actual authority may never have been granted.”
-
Contracts must be made by the director and not the stockholders- Actions of the stockholders in such matters is only advisory and not in any way binding in the corporation
• Barreto vs. La previsora Filipina
- Everything emanates from the board of directors
- Stockholders action is merely advisory except their approval or vote is necessary to prove a valid corporate act
Qualifications:
-
No citizenship requirement, at least majority must be residents- Can have a governing board consisting solely of foreigners
- But we have to take into consideration partly nationalized industries and other laws which prohibits or limits foreign ownership
- Anti-dummy act
- Utilization development of natural resources 60% must be owned by Filipino citizens, therefore they only own 40%---10 members they can only have 4 seats, but not entirely correct because the law may provide otherwise; educational institutions restricted to Filipinos, but there are exceptions when created by religious and charitable institutions.
- By-laws may provide additional qualifications and disqualifications
- To qualify as a director he must own at least 1 share
Should the stockholder be the equitable or beneficial owner in order to qualify as a director?
- NO, it is not necessary, as long as you are listed in the books as owner of one share
• Lee vs. CA
- As long as you are listed in the books as owner of one share
- Under the old law he must be the beneficial owner and legal owner thereof but in the new law it is not required as long as it stands in his name he is qualifies
1 A-100t/S B (own in the trust of X) is B qualified to be a director?
2 Notes on Corporation Law
