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San Beda College of Law85

MEMORYAIDIN COMMERCIAL LAW

CORPORATION CODE(B.P. Blg. 68, effective May 1, 1980)

I. GENERAL PROVISIONSCORPORATION An artificial being created by operationof law having the right of succession,and the powers, attributes andproperties expressly authorized by lawand incident to its existence. (Sec. 2)

ATTRIBUTES OF A CORPORATION1. It is an artificial being.2. It is created by operation of law.3. It enjoys the right of succession.

4. It has the powers, attributes andproperties expressly authorized bylaw or incident to its existence.

THEORIES ON THE FORMATION OF ACORPORATION:1. Concession Theory espouses that acorporation is an artificial creaturewithout any existence until it hasreceived the imprimatur of the stateacting according to law, through theSEC. (Tayag vs. Benguet Consolidated,Inc., 26 SCRA 242)

2. Theory of corporate enterprise oreconomic unit espouses that thecorporation is not merely an artificialbeing, but more of an aggregation ofpersons doing business, or an underlyingbusiness unit. (Philippine CorporateLaw, Cesar Villanueva, 2001 ed.)3. Genossenschaft Theory treats acorporation as the reality of the groupas a social and legal entity, independentof state recognition and concession.(Tayag vs. Benguet Consolidated, Inc.,26 SCRA 242)

DOCTRINE OF SEPARATE PERSONALITY A corporation has a juridicalpersonality separate and distinct fromthat of its stockholders or members. Used for purposes of convenience andto subserve the ends of justice. Consequences/significance:

1. Liability for acts or contracts obligations incurred by acorporation, acting through itsauthorized agents are its sole

liabilities. (Creese vs. CA, 93

SCRA 483)2. Right to bring actions may

bring civil and criminal actions inits own name in the samemanner as natural persons. (Art.46, Civil Code)

3. Right to acquire and possessproperty property conveyed toor acquired by the corporation isin law the property of thecorporation itself as a distinctlegal entity and not that of thestockholders or members. (Art.44(3), Civil Code)

4. Acquisition of court ofjurisdiction service of summonsmay be made on the president,general manager, corporatesecretary, treasurer or in-housecounsel. (Sec. 11, Rule 14, Rulesof Court).

5. Changes in individualmembership remainsunchanged and unaffected in itsidentity by changes in its

individual membership. (TheCorporation Code of thePhilippines Annotated, Hectorde Leon, 2002 ed.)

6. Entitlement to constitutionalguaranties:a. Due process (Albert vs.

University Publishing, 13SCRA 84)

b. Equal protection of the law(Smith, Bell & Co. vs.Natividad, 40 Phil. 136)

c. Protection against

unreasonable searches andseizures. (Stonehill vs.Diokno, 20 SCRA 383)

A corporation is notentitled to invoke the rightagainst self-incrimination.(Bataan Shipyard vs. PCGG)

7.Liability for torts a corporationis liable whenever a tortuous actis committed by an officer oragent under the expressdirection or authority of thestockholders or members acting

COMMERCIAL LAW COMMITTEECHAIRPERSON: Garny Luisa Alegre ASST. CHAIRPERSON:Jayson OS Ramos EDP: Beatrix I. Ramos SUBJECT HEADS:Marichelle De Vera (Negotiable Instruments Law); Jose Fernando Llave (Insurance); Aldrich Del Rosario(Transportation Laws);Shirley Mae Tabangcura, Bon Vincent Agustin (Corporation Law); Karl Steven Co (Special Laws); John LemuelGatdula (Banking Laws); Robespierre CU (Law on Intellectual Property)

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transaction had, at that time, noseparate mind, will or existenceof its own (control);

2. Such control must have been

used by the defendant to commitfraud or wrong, to perpetratethe violation of a statutory orother positive duty, or dishonestand unjust act in contraventionof plaintiffs legal rights (breachof duty); and

3. Such control and breach of dutymust proximately cause theinjury to the plaintiff. (ConceptBuilders, Inc. vs. NLRC, 257SCRA, 149)

Partnership Corporation1. Creation

Created by mereagreement of theparties

Created by law orby operation of law

2. Number of incorporatorsMay be organized byat least two persons

Requires at leastfive incorporators(except acorporation sole)

3. Commencement of juridicalpersonality

Acquires juridical

personality from themoment of executionof the contract ofpartnership

Acquires juridical

personality fromthe date ofissuance of thecertificate ofincorporation bythe Securities andExchangeCommission

4. PowersPartnershipmay exercise anypower authorized bythe partners(provided it is not

contrary to law,morals, goodcustoms, publicorder, public policy)

Corporation canexercise only thepowers expresslygranted by law orimplied from those

granted or incidentto its existence

5. ManagementWhen management isnot agreed upon,every partner is anagent of thepartnership

The power to dobusiness andmanage its affairsis vested in theboard of directorsor trustees

6. Effect of mismanagementA partner as such can The suit against a

sue a co-partner whomismanages

member of theboard of directorsor trustees whomismanages mustbe in the name of

the corporation

7. Right of successionPartnership has noright of succession

Corporation hasright of succession

8. Extent of liability to third personsPartners are liablepersonally andsubsidiarily(sometimessolidarily) forpartnership debts tothird persons

Stockholders areliable only to theextent of theshares subscribedby them

9. Transferability of interestPartner cannottransfer his interestin the partnership soas to make thetransferee a partnerwithout theunanimous consent ofall the existingpartners because thepartnership is basedon the principle ofdelectus personarum

Stockholder hasgenerally the rightto transfer hisshares withoutprior consent ofthe otherstockholdersbecausecorporation is notbased on thisprinciple

10. Term of existencepartnership may beestablished for anyperiod of timestipulated by thepartners

corporation maynot be formed for aterm in excess of50 years extendibleto not more than50 years in any oneinstance

11. Firm nameLimited partnershipis required by law toadd the word Ltd.To its name

corporation mayadopt any nameprovided it is notthe same as orsimilar to any

registered firmname

12. Dissolutionmay be dissolved atany time by any or allof the partners

can only bedissolved with theconsent of theState

13. Governing Lawgoverned by the CivilCode

governed by theCorporation Code


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88 2005 CENTRALIZED BAROPERATIONS

ADVANTAGES VIS--VISDISADVANTAGES OF A BUSINESSCORPORATION (The Corporation Codeof the Philippines Annotated, Hector deLeon, 2002 ed.)

ADVANTAGES DISADVANTAGES1. has a legalcapacity to act andcontract as a distinctunit in its own name2. continuity ofexistence3. its credit isstrengthened by itscontinuity of existence4. centralizedmanagement in theboard of directors.5. its creation,management,organization anddissolution arestandardized as theyare governed underone generalincorporation law.6. limited

liability7. shareholdersare not the generalagents of the business8. transferability ofshares

1. complica-ted in formationand management2. high costof formation andoperations3. its credit isweakened by thelimited liabilityfeature4. lack ofpersonal element.5. greaterdegree ofgovernmentalsupervision6. manage-ment and controlare separated fromownership.7. Stockhol-

ders have littlevoice in the conductof the business.

FRANCHISES OF CORPORATION1. Primary or corporate

franchise/General Franchise

The right or privilege granted by theState to individuals to exist and act as acorporation after its incorporation.

2.Secondary or special franchise The special right or privilege conferredupon an existing corporation to thebusiness for which it was created.Example, use of the streets of amunicipality to lay pipes or tracks, oroperation of a messenger and expressdelivery service.

PRIMARY SECONDARYRefers to thefranchise of being orexisting as acorporation

Refers to the exerciseof rights. Example:right of eminentdomain

Vested in theindividuals whocompose thecorporation

Vested in thecorporation after itsincorporation and notupon the individualswho compose thecorporation.

Cannot be sold ortransferred becauseit is inseparablefrom the corporationitself.

May be sold ortransferred; subjectto sale on execution,subject to levy.

CLASSES OF CORPORATION

1. AS TO ORGANIZERSa. public by State only; andb.private by private persons alone

jor with the State.

2. AS TO FUNCTIONSa. public government of a portion

of the territory; andb. private usually for profit-

making3. AS TO GOVERNING LAW

a. public Special Laws; andb. private Law on Private

Corporations4. AS TO LEGAL STATUS

a. De jure corporation organizedin accordance with therequirements of law.

b. De facto corporation organizedwith a colorable compliance withthe requirements of a valid law.Its existence cannot be inquiredcollaterally. Such inquiry may bemade by the Solicitor General ina quo warranto proceeding.(Sec. 20) Requisites:1. The existence of a valid law

under which it may beincorporated;

2. A bona fide attempt in goodfaith to incorporate undersuch law;

3. Actual use or exercise ingood faith of corporatepowers; and

4. Issuance of a certificate ofincorporation by the SEC as

2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEEANDSUBJECT CHAIRPERSONS

Maricel Abarentos (Over-all Chairperson), Ronald Jalmanzar (Over-all Vice Chair), YolandaTolentino(VC-Acads), Jennifer Ang(VC- Secretariat),Joy Inductivo (VC-Finance), Elaine Masukat (VC-EDP), Anna Margarita Eres (VC-Logistics)Jonathan

Mangundayao (Political Law), Francis Benedict Reotutar (Labor Law), Romuald Padilla (Civil Law),Charmaine Torres (Taxation Law), Mark David Martinez (Criminal Law), Garny Luisa Alegre (CommercialLaw),Jinky Ann Uy (Remedial Law),Jackie Lou Bautista (Legal Ethics)

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a minimum requirement ofcontinued good faith. The only differencebetween a de facto

corporation and a de jurecorporation is that a de jurecorporation can successfullyresist a suit by a statebrought to challenge itsexistence; a de factocorporation cannot sustainits right to exist.

c. Corporation by estoppel groupof persons that assumes to act asa corporation knowing it to bewithout authority to do so, andenters into a transaction with a

third person on the strength ofsuch appearance. It cannot bepermitted to deny its existencein an action under saidtransaction. (Sec. 21) It isneither de jure nor de facto.

d. Corporation by prescription one which has exercisedcorporate powers for anindefinite period withoutinterference on the part of thesovereign power, e.g. RomanCatholic Church.

5. AS TO EXISTENCE OF SHARES OFSTOCKa. Stock corporation a corporation

(1) whose capital stock is dividedinto shares and (2) which isauthorized to distribute toshareholders dividends orallotments of the surplus profitson the basis of the shares held.(Sec. 3)

b. Non-stock corporation does notissue stocks nor distributedividends to their members.

6. AS TO RELATIONSHIP OFMANAGEMENT AND CONTROLa. Holding Corporation - it is one

which controls another as asubsidiary by the power to electmanagement. It is one that holdsstocks in other companies forpurposes of control rather thanfor mere investment.

b. Subsidiary Corporation - onewhich is so related to anothercorporation that the majority of

its directors can be elected

directly or indirectly by suchother corporation. (TheCorporation Code of thePhilippines Annotated, Hector

de Leon, 2002 ed.)c. Affiliates - company which issubject to common control of amother holding company andoperated as part of the system.

d. Parent and SubsidiaryCorporation - separate entitieswith power to contract witheach other. The board ofdirectors of the parent companydetermines its representatives toattend and vote in thestockholders meeting of its

subsidiary. The stockholders ofthe parent company demandrepresentation in the boardmeetings of its subsidiary.

7. AS TO PLACE OF INCORPORATIONa. Domestic corporation- a

corporation formed, organized,or existing under Philippine laws.

b. Foreign corporation acorporation formed, organized,or existing under any laws otherthan those of the Philippines.(Sec. 123)

ONE-MAN CORPORATION A corporation wherein all or

substantially all of the stocks is helddirectly or indirectly by one person.However, it should still follow theformal requirements of acorporation (e.g. number ofincorporators, board of directorscomposed of stockholders owningshares in a nominal capacity) inorder to validly enjoy the attributesof the corporation, so as to avoidthe application of the doctrine ofpiercing the veil of corporateentity.

TESTS TO DETERMINE NATIONALITY OFCORPORATIONS1. INCORPORATION TEST determinedby the state of incorporation, regardlessof the nationality of the stockholders.2. DOMICILE TEST determined by thestate where it is domiciled. The domicile of a corporation is the

place fixed by the law creating or


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recognizing it; in the absence thereof, itshall be understood to be the placewhere its legal representation isestablished or where it exercise its

principal functions.(Art. 51, NCC)3. CONTROL TEST determined by thenationality of the controllingstockholders or members. This test isapplied in times of war. Also known asthe WARTIME TEST.

PHILIPPINE NATIONAL UNDER THEFOREIGN INVESTMENT ACT OF 1991(R.A. No. 7042):1. A corporation organized under thelaws of the Philippines of which at least60% of the outstanding capital stock

entitled to vote is owned and held byFilipino citizens;2. A foreign corporation licensed asdoing business in the Philippines ofwhich 100% of the outstanding capitalstock entitled to vote is wholly owned byFilipinos; and However, it provides that where acorporation and its non-Filipinostockholders own stocks in a SEC-registered enterprise, at least 60% of thecapital stock outstanding and entitled tovote of both corporations and at least

60% of the members of the board ofdirectors of both corporations must beFilipino citizens (double 60% rule).NOTE: The law applies the control testboth with respect to the ownership ofshares entitled to vote and themembership in the board of directors.

COMPONENTS OF A CORPORATIONa. Corporators those who compose acorporation, whether as stockholders ormembersb. Incorporators - They are thosementioned in the Articles ofIncorporation as originally forming andcomposing the corporation, havingsigned the Articles and acknowledgedthe same before a notary public. Theyhave no powers beyond those vested inthem by the statute.Qualifications:

1. natural person;2. not less than 5 but not more

than 15;3. of legal age;

4. majority must be residents ofthe Philippines; and

5. each must own or subscribe to atleast one share. (Sec. 10)

GENERAL RULE: Only natural personscan be incorporators.EXCEPTION: When otherwise allowedby law, e.g., Rural Banks Act of 1992,where incorporated cooperatives areallowed to be incorporators of ruralbanks. Note: However, it is undeniablethat corporations can be corporators.c. Stockholders owners of shares ofstock in a stock corporationd. Members corporators of acorporation which has no capital stock

INCORPORATORS CORPORATORSsignatory to theArticles ofIncorporation

stockholder (stockcorporation) ormember (non-stockcorporation)

fait accompli;accomplished fact(the Articles ofIncorporation cannotbe amended toreplace them)

they may cease tobe such if theysubsequently losetheir qualifications

number is limited to5-15

no restriction as tonumber

must have contractualcapacity may be suchthrough a guardian

OTHER COMPONENTSa. Promoter - A person who, acting aloneor with others, takes initiative infounding and organizing the business orenterprise of the issuer and receivesconsideration therefor.He is an agent of the incorporators butnot of the corporation.Contracts by the promoter for and inbehalf of a proposed corporation

generally bind only him, subject to andto the extent of his representations, andnot the corporation, unless and untilafter these contracts are ratified,expressly or impliedly, by its Board ofDirectors/Trustees.b. Subscriber persons who have agreedto take and pay for original, unissuedshares of a corporation formed or to beformed.c. Underwriter a person whoguarantees on a firm commitment and/or declared best effort basis the




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distribution and sale of securities of anyking by another company. (Sec. 3 R.A.8799)

CLASSIFICATION OF SHARES1. COMMON SHARES The basic class of stock ordinarily andusually issued without extraordinaryrights and privileges, and the ownersthereof are entitled to a pro rata sharein the profits of the corporation and inits assets upon dissolution and, likewise,in the management of its affairs withoutpreference or advantage whatsoever.2. PREFERRED SHARES Those issued with par value, andpreferences either with respect to (a)

assets after dissolution, (b) distributionof dividends, or both, and otherpreferences.Limitations:a. If deprived of voting rights, it shallstill be entitled to vote on mattersenumerated in Section 6 paragraph 6.b. Preference must not be violative ofthe Code.c. May be issued only with a stated parvalue.d. The board of directors may fix theterms and conditions only when soauthorized by the articles ofincorporation and such terms andconditions shall be effective upon filinga certificate thereof with the SEC.3. REDEEMABLE SHARES Those which permit the issuingcorporation to redeem or purchase itsown shares.Limitations:

a. Redeemable shares may be issuedonly when expressly provided for inthe articles of incorporation;

b. The terms and conditionsaffecting said shares must be statedboth in the articles of incorporationand in the certificates of stockrepresenting such shares;c. Redeemable shares may be

deprived of voting rights in thearticles of incorporation, unlessotherwise provided in the Code.

Redeemable shares may be redeemed,regardless of the existence ofunrestricted retained earnings (Sec. 8),provided that the corporation has, after

such redemption, sufficient assets in itsbooks to cover debts and liabilitiesinclusive of capital stock.4. TREASURY SHARES

Shares that have been earlier issued asfully paid and have thereafter beenacquired by the corporation by purchase,donation, and redemption or throughsome lawful means.(Sec. 9) If purchased from stockholders: Thetransaction in effect is a return to thestockholders of the value of theirinvestment in the company and areversion of the shares to thecorporation. The corporation must havesurplus profits with which to buy theshares so that the transaction will not

cause an impairment of the capital.If acquired by donation from the

stockholders: The act would amount to asurrender of their stock without gettingback their investments that are instead,voluntarily given to the corporation. Treasury shares need not be sold at paror issued value but may be sold at thebest price obtainable, provided it isreasonable. When treasury shares aresold below its par or issued value, therecan be no watering of stock becausesuch watering contemplates an originalissuance of shares. Treasury shares have no voting rights aslong as they remain in treasury (uncalledand subject to reissue). Reason: Acorporation cannot in any proper sensebe a stockholder in itself and equaldistribution of voting rights will beeffectively lost. Neither are treasury shares entitled todividends or assets because dividendscannot be declared by a corporation toitself.

5. FOUNDERS' SHARE Shares issued to organizers andpromoters of a corporation inconsideration of some supposed right orproperty. Shares classified as such in the articlesof incorporation which may be givenspecial preference in voting rights anddividend payments. But if an exclusiveright to vote and be voted for as directoris granted, this privilege is subject toapproval by the SEC, and cannot exceed5 years from the date of approval.


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6. VOTING SHARES Shares with a right to vote.7. NON-VOTING SHARES Shares without right to vote.

The law only authorizes the denial ofvoting rights in the case of redeemableshares and preferred shares, providedthat there shall always be a class orseries of shares which have completevoting rights. These redeemable and preferredshares, when such voting rights aredenied, shall nevertheless be entitled tovote on the following fundamentalmatters: Key: A2 SI2 MID

a. a mendment of Articles ofIncorporation

b. a doption and amendment ofby-laws;

c. s ale or disposition of all orsubstantially all of corporateproperty;

d. incurring, creating orincreasing bondedindebtedness;

e. increase or decrease of capitalstock

f. m erger or consolidation ofcapital stock

g. investments of corporate fundsin another corporation oranother business purpose; and

h. c orporate dissolution

8. ESCROW STOCK Deposited with a third person to bedelivered to a stockholder or his assignafter complying with certain conditions,usually payment of full subscriptionprice.9. OVER-ISSUED STOCKStock issued in excess of the authorized

capital stock. It is also known asspurious stock. Its issuance is considerednull and void.10. WATERED STOCK A stock issued not in exchange for itsequivalent either in cash, property,share, stock dividends, or services. Water in the stock represents thedifference between the fair marketvalue at the time of the issuance of thestock and the par or issued value of saidstock. Both par and no par stocks canthus be watered stocks.

It includes stocks:a. Issued without consideration.b. Issued as fully paid when thecorporation has received a lesser sum of

money than its par or issued value.c. Issued for a consideration other thanactual cash, the fair valuation of whichis less than its par or issued value.d. Issued as stock dividend when thereare no sufficient retained earnings tojustify it.11. PAR VALUE SHARES Shares with a value fixed in thecertificates of stock and the articles ofincorporation.12. NO PAR VALUE SHARES Shares having no par value but have

issued value stated in the certificate orarticles of incorporation.Limitations:

a. No par value shares cannot havean issued price of less than P5.00;b. The entire consideration for its

issuance constitutes capital so that nopart of it should be distributed asdividends;c. They cannot be issued as

preferred stocks;d. They cannot be issued by banks,

trust companies, insurancecompanies, public utilities andbuilding and loan association;e. The articles of incorporation

must state the fact that it issued nopar value shares as well as thenumber of said shares;f. Once issued, they are deemed

fully paid and non-assessable. (Sec.6)

13. STREET CERTIFICATE A stock certificate endorsed by theregistered holder in blank and transferee

can command its transfer to his namefrom the issuing corporation.14. CONVERTIBLE SHARE A share that is changeable by thestockholder from one class to another ata certain price and within a certainperiod.15. FRACTIONAL SHARE A share with a value of less than onefull share.

DOCTRINE OF EQUALITY OF SHARES




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Where the articles of incorporation donot provide for any distinction of theshares of stock, all shares issued by thecorporation are presumed to be equal

and enjoy the same rights and privilegesand are also subject to the sameliabilities. (Sec. 6)

DEFINITION OF TERMS:1. CAPITAL STOCK OR LEGAL STOCK ORSTATED CAPITAL - The amount fixed inthe corporate charter to be subscribedand paid in cash, kind or property at theorganization of the corporation orafterwards and upon which thecorporation is to conduct its operation.2. CAPITAL The value of the actual

property or estate of the corporationwhether in money or property. Its networth (or stockholders equity) is itsassets less liabilities.3. AUTHORIZED CAPITAL STOCK - Thecapital stock divided into shares with parvalues. Par value stocks are required inthe case of corporations issuingpreferred shares, as well as in the caseof banks, trust companies, insurancecompanies, building and loanassociations, and public utilities. It is thetotal amount in the charter, which may

be raised by the corporation for itsoperations.4. SUBSCRIBED CAPITAL STOCK - Thetotal amount of the capital stocksubscribed whether fully paid or not.5. OUTSTANDING CAPITAL STOCK - Theportion of the capital stock issued tosubscribers except treasury stocks.6. STATED CAPITAL The capital stockdivided into no par value shares.7. PAID-UP CAPITAL The amount paidby the stockholders on subscriptionsfrom unissued shares of the corporation.

II. INCORPORATION AND ORGANIZATION

STEPS IN THE CREATION OF ACORPORATIONa. PROMOTION a number of businessoperations peculiar to the commercialworld by which a company is generallybrought into existence. (18 Am. Jur. 2d647, cited in de Leon p. 116)b. INCORPORATIONSteps:

1. Drafting and execution of Articles ofIncorporation by the incorporators andother documents required forregistration of the corporation

2. Filing with the SEC of the articles ofincorporation3. Payment of filing and publication fees4. Issuance by the SEC of the certificateof incorporationc. FORMAL ORGANIZATION ANDCOMMENCEMENT OF THE TRANSACTIONOF BUSINESS These are conditions subsequent, whichmay be satisfied by substantialcompliance in order that a corporationmay legally continue as such. Formal organization:

1. Adoption of By-Laws and filing of thesame with the SEC;2. Election of board ofdirectors/trustees, and officers;3. Establishment of principal office;4. Providing for subscription andpayment of capital stock.

TERM OF CORPORATE EXISTENCELimitations:a. The term shall not exceed 50 years inany one instance.b. The amendment is effected beforethe expiration of corporate term, forafter dissolution by expiration of thecorporate term there is no morecorporate life to extend.c. The extension cannot be made earlierthan 5 years prior to the expiration dateunless there are justifiable reasons asdetermined by the SEC.

CAPITAL STOCK REQUIREMENT General Rule: No minimum authorizedcapital stock as long as the paid-up

capital is not less than P5,000.00Except:a. as provided for by special law

1. Domestic InsuranceCorporations - P500T capitalstock; 50% subscribed and thebalance payable in 12 months.

2. Private Development Banks- P4M for class A- P2M for class B- P1M for class C

3. Investment Companies paid upat least P500T


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4. Savings and Loan Corporation to be fixed by the MonetaryBoard, but not less than P100T

5. Financing Companies

Paid up: - P2M for Metro Manila- P1M for Cities- P500T for others

b. provided that at least 25% of theauthorized capital stock has beensubscribed and at least 25% of the totalsubscription must be paid-up

FILIPINO PERCENTAGE OWNERSHIPREQUIREMENT

NO FOREIGN EQUITY

1. Mass Media except recording (Art.XVI, Sec. 11 of the Constitution;Presidential Memorandum dated 04May 1994)

2. Practice of all professionsa) Engineering

b) Medicine and Allied Professionsc) Accountancyd) Architecturee) Criminologyf) Chemistryg) Customs Brokerageh) Environmental Planning

i) Forestryj) Geologyk) Interior Designl) Landscape Architecturem) Lawn) Librarianshipo) Marine Deck Officersp) Marine Engine Officersq) Master Plumbingr) Sugar Technologys) Social Workt) Teachingu) Agriculturev) Fisheries

3. Retail trade enterprises with paid-upcapital of less thanUS$2,500,000(Sec. 5 of RA 8762)

4. Cooperatives (Ch. III, Art. 26 of RA6938)

5. Private Security Agencies (Sec. 4 ofRA 5487)6. Small-scale Mining (Sec. 3 of RA7076)

7. Utilization of Marine Resources inarchipelagic waters, territorial sea,

and exclusive economic zone as wellas small-scale utilization of naturalresources in rivers, lakes, bays, andlagoons (Art. XII, Sec. 2 of the

Constitution)8. Ownership, operation andmanagement of cockpits (Sec. 5 ofPD 449)

9. Manufacture, repair, stockpilingand/or distribution of nuclearweapons (Art. II, Sec. 8 of theConstitution)

10. Manufacture, repair, stockpilingand/or distribution of biological,chemical and radiological weaponsand anti-personnel mines (Varioustreaties to which the Philippines is a

signatory and conventions supportedby the Philippines)

11. Manufacture of firecrackers andother pyrotechnic devices (Sec. 5 ofRA 7183)

Up to Twenty Percent (20%) ForeignEquity

12. Private radio communicationsnetwork (RA 3846)

Up to Twenty-Five Percent (25%)

Foreign Equity

13. Private recruitment, whether forlocal or overseas employment (Art.27 of PD 442)

14. Contracts for the construction andrepair of locally-funded public works(Sec. 1 of CA 541, LOI 630) except:a) infrastructure/development

projects covered in RA 7718; andb) projects which are foreign

funded or assisted and requiredto undergo internationalcompetitive bidding (Sec. 2a ofRA 7718)

15. Contracts for the construction ofdefense-related structures (Sec. 1 ofCA 541)

Up to Thirty Percent (30%) ForeignEquity

16. Advertising (Art. XVI, Sec. 11 of theConstitution)




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Up to Forty Percent (40%) ForeignEquity17. Exploration, development and

utilization of natural resources (Art.

XII, Sec. 2 of the Constitution)18. Ownership of private lands (Art. XII,Sec. 7 of the Constitution; Ch. 5,Sec. 22 of CA 141; Sec. 4 of RA 9182)

19. Operation and management of publicutilities (Art. XII, Sec. 11 of theConstitution; Sec. 16 of CA 146)

20. Ownership/establishment andadministration of educationalinstitutions (Art. XIV, Sec. 4 of theConstitution)

21. Culture, production, milling,processing, trading excepting

retailing, of rice and corn andacquiring, by barter, purchase orotherwise, rice and corn and the by-products thereof (Sec. 5 of PD194;Sec. 15 of RA 8762

22. Contracts for the supply of materials,goods and commodities togovernment-owned or controlledcorporation, company, agency ormunicipal corporation (Sec. 1 of RA5183)

23. Project Proponent and FacilityOperator of a BOT project requiring a

public utilities franchise (Art. XII,Sec. 11 of the Constitution; Sec. 2aof RA 7718)

24. Operation of deep sea commercialfishing vessels (Sec. 27 of RA 8550)

25. Adjustment Companies (Sec. 323 ofPD 612 as amended by PD 1814)

26. Ownership of condominium unitswhere the common areas in thecondominium project are co-ownedby the owners of the separate unitsor owned by a corporation (Sec. 5 ofRA 4726)

Up to Sixty Percent (60%) ForeignEquity

27. Financing companies regulated bythe Securities and ExchangeCommission (Sec. 6 of RA 5980 asamended by RA 8556)

28. Investment houses regulated by theSEC (Sec. 5 of PD 129 as amended byRA 8366)

ARTICLES OF INCORPORATION (AI) The document prepared by the personsestablishing a corporation and filed withthe SEC containing the matters required

by the Code.Significance:

1. The issuance of a certificate ofincorporation signals the birth of thecorporations juridical personality;2. It is an essential requirement forthe existence of a corporation, evena de facto one.

Contents: (Sec. 14)1. name of corporation;2. purpose/s, indicating the

primary and secondary purposes;3. place of principal office;4. term of existence;5. names, citizenship andresidences of incorporators;6. number, names, citizenship andresidences of directors or trustees;7. names, nationalities, andresidences of the persons who shallact as directors or trustees until thefirst regular ones are elected andqualified;8. if a stock corporation, theamount of its authorized capitalstock, number of shares and in casethe shares are par value shares, thepar value of each share;9. names, residences, number ofshares, and the amounts subscribedand paid by each of the originalsubscribers which shall not be lessthan 25% of authorized capital stock;10. if non-stock, the amount ofcapital, the names, residences, andamount paid by each contributor,

which shall not be less than 25% oftotal subscription;11. name of treasurer elected bysubscribers; and12. if the corporation engages in anationalized industry, a statementthat no transfer of stock will beallowed if it will reduce the stockownership of Filipinos to apercentage below the required legalminimum.

AMENDMENT OF ARTICLES OF

INCORPORATION


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Limitations:1. The amendment of any provision ormatters stated in the articles ofincorporation is not allowed when it will

be contrary to the provisions orrequirement prescribed by the Code orby special law or changes any provisionin the articles of incorporation stating anaccomplished fact2. It must be for legitimate purposes3. It must be approved by the requiredvote of the board of directors or trusteesand the stockholders or members4. The original articles and amendedarticles together must contain allprovisions required by law to be set outin the articles of incorporation

5. Such articles, as amended, must beindicated by underscoring the changesmade, and a copy thereof duly certifiedunder oath by the corporate secretaryand a majority of the directors ortrustees stating that the amendmentshave been duly approved by the requiredvote of the stockholders or membersmust be submitted to the SEC6. The amendments shall take effectonly upon their approval by the SEC7. If the corporation is governed byspecial law, the amendments must be

accompanied by a favorablerecommendation of the appropriategovernment agency.

NON-AMENDABLE FACTS IN THEARTICLES OF INCORPORATION Those matters referring to factsexisting as of the date of theincorporation such as:

1. Names of incorporators;2. Names of original subscribers to

the capital stock of thecorporation and their subscribedand paid up capital;

3. Treasurer elected by the originalsubscribers;

4. Members who contributed to theinitial capital of a non-stockcorporation;

5. Date and place of execution ofthe articles of incorporation;

6. Witnesses to the signing andacknowledgment of the articles.

GROUNDS FOR REJECTION OF ARTICLESOF INCORPORATION OR AMENDMENTTHERETO1. The articles or its amendment is not

substantially in accordance with theform prescribed2. The purposes of the corporation arepatently unconstitutional, illegal,immoral, or contrary to governmentrules and regulations3. The Treasurers Affidavit concerningthe amount of capital stock subscribedand/or paid is false4. The required percentage of ownershipof the capital stock to be owned byFilipino citizens has not been compliedwith

GROUNDS FOR SUSPENSION ORREVOCATION OF CERTIFICATE OFREGISTRATION (Pres. Decree No. 902-A)1. Fraud in procuring its certificate ofincorporation2. Serious misrepresentation as to whatthe corporation can do or is doing to thegreat prejudice of, or damage to, thegeneral public3. Refusal to comply with or defiance ofa lawful order of the SEC restraining thecommission of acts which would amount

to a grave violation of its franchise4. Continuous inoperation for a period ofat least 5 years5. Failure to file the by-laws within the

required period6. Failure to file required reports

III. BOARD OF DIRECTORS/TRUSTEESQualifications:1. For a stock corporation, ownership ofat least 1 share capital stock of thecorporation in his own name, and if heceases to own at least one share in hisown name, he automatically ceases tobe a director. (Sec. 23)For a non-stockcorporation, only members of thecorporation can be elected to seat in theBoard of Trustees. In order to be eligible as a director,what is material is the legal title to, notbeneficial ownership of the stocksappearing on the books of thecorporation




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2. A majority of the directors/trusteesmust be residents of the Philippines.(Sec. 23)3. He must not have been convicted by

final judgment of an offense punishableby imprisonment for a period exceeding6 years or a violation of the CorporationCode, committed within five years fromthe date of his election. (Sec. 27)4. Only natural persons can be electeddirectors/trustees. In case of corporate stockholders ormembers, their representation in theboard can be achieved by making theirindividual representatives trustees of theshares or membership to make themstockholders/members of record.

5. Other qualifications as may beprescribed in the by-laws of thecorporation.6. Must be of legal age

CORPORATE OFFICERS1. President must be a director;2. Treasurer may or may not be adirector; as a matter of sound corporatepractice, must be a resident3. Secretary need not be a directorunless required by the by-laws; must bea resident and citizen of the Philippines;

and4. Such other officers as may beprovided in the by-laws.

CORPORATEOFFICER

CORPORATEEMPLOYEE

Position is providedfor in the by-laws orunder theCorporation Code

Employed by theaction of themanaging officer ofthe corporation

RTC has jurisdictionin case of labordispute

NLRC has jurisdictionin case of labordisputes

BOARD OF DIRECTORS/TRUSTEES ASREPOSITORY OF CORPORATE POWERSGENERAL RULE: The corporate powersof the corporation shall be exercised, allbusiness conducted and all property ofsuch corporation controlled and held bythe board of directors or trustees. (Sec.23)EXCEPTIONS:

1. In case of an ExecutiveCommittee duly authorized in theby-laws;

2. In case of a contracted managerwhich may be an individual, apartnership, or another corporation.Note: In case the contracted

manager is another corporation, thespecial rule in Sec. 44 applies.3. In case of close corporations, thestockholders may manage thebusiness of the corporation insteadby a board of directors, if thearticles of incorporation so provide.

The power to purchase real propertyis vested in the board of directors ortrustees. While a corporation mayappoint agents to negotiate for thepurchase of real property needed by

the corporation, the final say willhave to be with the board, whoseapproval will finalize thetransaction. A corporation can onlyexercise its powers and transact itsbusiness through its board ofdirectors and through its officers andagents when authorized by a boardresolution or by its by-laws. (SpousesConstantine Firme vs. BukalEnterprises and DevelopmentCorporation, G.R. No. 146608,October, 23, 2003)

LIMITATIONS ON POWERS OF BOARD ORDIRECTORS/TRUSTEES1. Limitations imposed by theConstitution, statutes, articles ofincorporation or by-laws.2. Cannot perform constituent or thoseinvolving fundamental changes in thecorporation requiring the approval ofstockholders or members.3.Cannot exercise powers not possessedby the corporation. (The Corporation

Code of the Philippines Annotated,Hector de Leon, 2002 ed.)

NATURE OF POWERS OF BOARD OFDIRECTORS/TRUSTEES (The CorporationCode of the Philippines Annotated,Hector de Leon, 2002 ed.)a. Under the Theory of Original Power,the powers of the board of directors ortrustees are ORIGINAL andUNDELEGATED. The stockholders ormembers do not confer, nor can theyrevoke those powers.


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b. They are DERIVATIVE only in the senseof being received from the State in theact of incorporation.

BUSINESS JUDGMENT RULEA resolution or transaction pursuedwithin the corporate powers andbusiness operations of the corporation,and passed in good faith by the board ofdirectors, is valid and binding, andgenerally the courts have no authority toreview the same and substitute theirown judgment, even when the exerciseof such power may cause losses to thecorporation or decrease the profits of adepartment. (Philippine Corporate Law,Cesar Villanueva, 2001 ed.)

Consequences:a. Resolutions and transactions enteredinto by the Board within the powers ofthe corporation cannot be reversed bythe courts not even on the behest of thestockholders.b. Directors and officers acting withinsuch business judgment cannot be heldpersonally liable for such acts.(Philippine Corporate Law, CesarVillanueva, 2001 ed.)

THREE-FOLD DUTIES OF DIRECTORS:(Philippine Corporate Law, CesarVillanueva, 2001 ed.)1. Duty of Obedience To direct the affairs of the corporationonly in accordance with the purposes forwhich it was organized. Legal Basis: The directors or trusteesand officers to be elected shall performthe duties enjoined on them by law andthe by-laws (Sec. 25)2. Duty of Diligence

Legal Basis: Directors or trustees whowillfully and knowingly vote for or assentto patently unlawful acts of thecorporation or who are guilty of grossnegligence or bad faith in directing theaffairs of the corporation shall be liablejointly and severally for all damagesresulting therefrom suffered by thecorporation, its stockholders or membersand other persons (Sec. 31)3. Duty of Loyalty Legal Basis: Directors or trustees whoacquire any pecuniary or personal

interest in conflict with their duty assuch directors or trustees shall be liablejointly and severally for all damagesresulting therefrom. (Sec. 31)

When a director or trusteeattempts to acquire or acquires inviolation of his duty, any interestadverse to the corporation in respect ofany matter which has been reposed inhim in confidence as to which equityimposes a liability upon him to deal inhis own behalf, he shall be liable astrustee for the corporation and mustaccount for all the profits whichotherwise would have accrued to thecorporation (Sec. 31, 2nd par.)

Where a director, by virtue of

his office, acquires for himself a businessopportunity which should belong to thecorporation, thereby obtaining profitswhich should belong to the corporation,he must account to the latter for all suchprofits by refunding the same (Sec. 34)

ELECTION OF DIRECTORS/TRUSTEESLimitations:a. At any meeting of stockholder ormembers called for the election ofdirectors or trustees, there must bepresent either in person or by

representative authorized to act bywritten proxy, the owners of themajority of the outstanding capital stockor majority of the members entitled tovote.b. The election must be by ballot ifrequested by any voting member orstockholder.c. A stockholder cannot be deprived inthe articles of incorporation or in the by-laws of his statutory right to use any ofthe methods of voting in the election ofdirectors.d. No delinquent stock shall be voted.e. The candidates receiving the highestnumber of votes shall be declaredelected.

METHODS OF VOTINGa. Straight Voting every stockholdermay vote such number of shares for asmany persons as there are directors tobe elected.b. Cumulative voting for one candidate a stockholder is allowed to concentrate




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his votes and give one candidate, asmany votes as the number of directors tobe elected multiplied by the number ofhis shares shall equal.

c. Cumulative voting by distribution - astockholder may cumulate his shares bymultiplying the number of his shares bythe number of directors to be electedand distribute the same among as manycandidates as he shall see fit.

LIMITATIONS ON THE STOCKHOLDERSRIGHT TO VOTE1. Where the articles of incorporationprovides for classification of sharespursuant to Sec. 6, non-voting shares arenot entitled to vote except as provided

for in the last paragraph of Sec. 6.2. Preferred or redeemable shares maybe deprived of the right to vote unlessotherwise provided in the Code.3. Fractional shares of stock cannot bevoted.4. Treasury shares have no voting rightsas long as they remain in the treasury.5. Holders of stock declared delinquentby the board of directors for unpaidsubscription are not entitled to vote orto a representation at any stockholdersmeeting.

6. A transferee of stock cannot vote ifhis transfer is not registered in the stockand transfer book of the corporation.

REMOVAL OF DIRECTORS/TRUSTEESLimitations:a. Vote of the stockholders representingat least 2/3 of the outstanding capitalstock 2/3 of the members entitled tovoteb. At a regular or special meeting afterproper notice is givenc. Removal may be with or withoutcause.d. A minority director elected throughcumulative voting cannot be removedwithout cause. (Sec. 28)

EXTENT OF POWERS OR AUTHORITY OFCORPORATE OFFICERS1. The authority which he has by virtueof his office;2. The authority which is expresslyconferred upon him or is incidental tothe effectualness of such express

authority;

3. As to third persons dealing with himwithout notice of any restrictionthereof, the authority which thecorporation holds the officer out as

possessing or is estopped to deny.4. The nature of the corporate businessmust also be taken into consideration;and5. The nature act of an officer thoughoriginally unauthorized, may becomeupon the corporation by a subsequentratification. (The Corporation Code ofthe Philippines Annotated, Hector deLeon, 2002 ed.)

It is a familiar doctrine that if acorporation knowingly permits one of it

officers, or any other agent, to actwithin the scope of an apparentauthority, it holds him out to the publicas possessing the power to do those acts;and thus, the corporation will, as againstanyone who has in good faith dealt withit through such agent, be estopped fromdenying the agents authority. (LapuLapuFoundation Inc., vs. Court of Appeals, etal., G.R. No. 126006, January 29, 2004,Callejo, J.)

PERSONAL LIABILITY OF DIRECTORS1. Willfully and knowingly voting for

and assenting to patently unlawfulacts of the corporation; (Sec. 31)

2. Gross negligence or bad faith indirecting the affairs of thecorporation; (Sec. 31)

3. Acquiring any personal or pecuniaryinterest in conflict of duty; (Sec. 31)

4. Consenting to the issuance ofwatered stocks, or, havingknowledge thereof, failing to fileobjections with the secretary;(Sec.65)

5. Agreeing or stipulating in a contractto hold himself liable with thecorporation; or

6. By virtue of a specific provision oflaw

DOCTRINE OFLIMITED LIABILITY

DOCTRINE OFIMMUNITY


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Shields thecorporators fromcorporate liabilitybeyond their agreedcontribution to thecapital or shareholdingin the corporation.

Protects a personacting for and inbehalf of thecorporation frombeing himselfpersonally liable forhis authorizedactions

REMEDIES IN CASE OF MISMANAGEMENT1. Receivership;2. Injunction, if the act has not yet

been done;3. Dissolution if the abuse amounts to a

ground for quo warranto but theSolicitor General refuses to act; and

4. Derivative suit or complaint filedwith SEC.

SPECIAL RULES ON CONTRACTSENTERED INTO BYDIRECTORS/TRUSTEES OR OFFICERS:1. Doctrine of Corporate Opportunity Unless his act is ratified, a directorshall refund to the corporation all theprofits he realizes on a businessopportunity which:1. The corporation is financially able to

undertake;

2. From its nature, is in line withcorporations business and is ofpractical advantage to it; and

3. The corporation has an interest or areasonable expectancy.

The rule shall be appliednotwithstanding the fact that thedirector risked his own funds in theventure. (Sec. 34)

2. Contracts of self-dealing directors Contracts which are entered into bythe corporation with one or more of its

own directors/trustees, or officers.(Sec.32) They are voidable, unless:a) The presence of such

director/trustee in the boardmeeting approving the contract wasnot necessary to constitute a quorumfor such meeting;

b) The vote of such director/trustee inthe board meeting approving thecontract was not necessary for theapproval of the contract;

c) The contract is fair and reasonableunder the circumstances;

d) In the case of an officer, there wasprevious authorization by the board

of directors. Although not all said conditions arepresent, the corporation may elect notto attack or question the validity of thecontract, without prejudice, however, tothe liability of the director/trustee fordamages under Sec. 31. Where any of the first two conditionsis absent, said contract must be ratifiedby the vote of the stockholdersrepresenting at least 2/3 of theoutstanding capital stock or 2/3 of themembers in a meeting called for the

purpose, provided that full disclosure ofthe adverse interest of the director/trustee involved is made at suchmeeting.(Sec. 32)3. Contracts of interlocking directors Contracts entered into betweencorporations with interlocking directors(interest of said directors issubstantial, i.e. exceeding 20% of theoutstanding capital stock). They are valid, provided that:

a. The contract is not fraudulent;andb. The contract is fair andreasonable under the circumstances.

If the interlocking directors interestin one corporation or corporations isnominal (not exceeding 20% of theoutstanding capital stock), then all theconditions prescribed in Sec. 32 on self-dealing directors must be present withrespect to the corporation in which hehas nominal interest. (Sec. 33)

COMPENSATION OF DIRECTORS ORTRUSTEESGeneral Rule: They shall be entitled to

reasonable per diems onlyExcept:a. when their compensation is fixed inthe by-lawsb. when granted by the vote ofstockholders representing at least amajority of the outstanding capital stockat a regular or special meetingc. when they are also officers of thecorporation




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EXECUTIVE COMMITTEE A body created by the by-laws andcomposed of some members of the board

which, subject to the statutorylimitations, has all the authority of theboard to the extent provided in theboard resolution or by-laws. (TheCorporation Code of the Philippines

Annotated, Hector de Leon, 2002 ed.)

Must be provided for in the by laws andcomposed of not less than 3 members ofthe board appointed by the board. May act by a majority vote of all of itsmembers.

Limitations on the Powers of theExecutive Committee (Sec. 35) It cannot act on the following:1. Matters needing stockholder

approval;2. Filling up of board vacancies;3. Amendment, repeal or adoption of

by-laws;4. Amendment or repeal of any

resolution of the Board which by itsexpress terms is not amendable orrepealable; and

5. Cash dividend declaration.

IV. POWERS OF THE CORPORATION1. Express Powers - granted by law,Corporation Code, and its Articles ofIncorporation or Charter2. Inherent/Incidental Powers notexpressly stated but are deemed to bewithin the capacity of corporate entities3. Implied/Necessary Powers exists

as a necessary consequence of theexercise of the express powers of thecorporation or the pursuit of its purposesas provided for in the CharterClassification:1. Acts in the usual course of business2. Acts to protect debts owing to thecorporation3. Acts which involve embarking in adifferent business usually to collectdebts out of profits4. Acts to protect or aid employees

5. Acts to increase business (TheCorporation Code of the Philippines

Annotated, Hector de Leon, 2002 ed.)

GENERAL POWERS AND CAPACITY (Sec.36)1. To sue and be sued;2. Of succession;3. To adopt and use of corporate seal;4. To amend its Articles of

Incorporation;5. To adopt its by-laws;6. For stock corporations: issue and sell

stocks to subscribers and treasurystocks; for non-stock corporations:admit members;

7. To purchase, receive, take or grant,

hold, convey, sell, lease, pledge,mortgage and deal with real andpersonal property, securities andbonds

8. To enter into merger orconsolidation;

9. To make reasonable donations forpublic welfare, hospital, charitable,cultural, scientific, civic or similarpurposes, provided that nodonationis given to any (i) political party, (ii)candidate and (iii) partisan politicalactivity.

10. To establish pension, retirement,and other plans for the benefit of itsdirectors, trustees, officers andemployees.

11. To exercise other powers essential ornecessary to carry out its purposes.

SPECIAL/SPECIFIC POWERS (Secs. 37-44)1. Power to extend or shorten

corporate term;2. Increase or decrease corporate

stock;3. Incur, create, or increase bonded

indebtedness;4. Sell, dispose, lease, encumber all or

substantially all of corporate assets;5. Purchase or acquire own shares

provided:a.there is an unrestrictedretained earnings, andb. it is for a legitimate purpose.

6. Invest corporate funds in anothercorporation or business for otherpurpose other than primary purpose;


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7. Power to declare dividends out ofunrestricted retained earnings;

8. Enter into management contractwith another corporation (not with

an individual or a partnership-withingeneral powers) whereby onecorporation undertakes to manageall or substantially all of the businessof the other corporation for a periodnot longer than 5 years for any oneterm.

CORPORATE ACTS (see ANNEX forprocedure and requisites)1. Power to extend or shorten corporateterm May be used as means to voluntarily

dissolve a corporation2. Power to increase or decrease capitalstock

WAYS OF INCREASING/DECREASING THECAPITAL STOCKa. By increasing/decreasing the numberof shares and retaining the par value;b. By increasing/decreasing the parvalue of existing shares withoutincreasing/decreasing the number ofshares;c. By increasing/decreasing the numberof shares and increasing/decreasing thepar value.TOOLS AVAILABLE TO THESTOCKHOLDERS TO REPLENISH CAPITALa. Additional subscription to shares ofstock of the corporation by stockholdersor by investors;b. Advances by the stockholders to thecorporation;c. Payment of unpaid subscription by thestockholders; andd. Loans from third persons.

3.Incur, create or increase bondedindebtedness Corporate bond an obligation to pay adefinite sum of money at a future timeat fixed rate of interest

BONDEDINDEBTEDNESS

DEBENTURE

Secured by amortgage oncorporate property. .(PhilippineCorporate Law,Cesar Villanueva,

Serial obligations ornotes issued on thebasis of the generalcredit of thecorporation. Hence,they are not bonded

2001 ed.) indebtedness

4. Sell, dispose, lease, encumber all orsubstantially all of corporate assets;

No ratificatory vote needed:a. If it is necessary in the usual andregular course of businessb. if the proceeds of the sale or otherdisposition of such property and assetsbe appropriated for the conduct of theremaining business5. Power to acquire own shares Instances:a. To eliminate fractional shares out ofstock dividendsb. To collect or compromise anindebtedness to the corporation, arising

out of unpaid subscription, in adelinquency sale and to purchasedelinquent shares sold during said salec. To pay dissenting stockholdersd. To acquire treasury sharese. Redeemable shares regardless ofexistence of retained earningsf. To effect a decrease of capital stockg. In close corporations, when there is adeadlock in the management of thebusinessNote: In letters a-c, there must beunrestricted retained earnings

6. Invest corporate funds in anothercorporation or business for other purposeother than primary purpose The other purposes for which the fundsmay be invested must be among thoseenumerated as secondary purposes andmust further comply with therequirements of Section 42.7. Power to declare dividends out ofunrestricted retained earnings RETAINED EARNINGS = ASSETS LIABILITIES AND LEGAL CAPITAL

UNRESTRICTED if the retainedearnings have not been reserved or setaside by the board of directors for somecorporate purposeDIVIDENDS Corporate profits set aside, declared,and ordered to be paid by the directorsfor distribution among shareholders at afixed time. Forms:

a. Cashb. Propertyc. Stock




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While cash dividends due on delinquentshares can be applied to the payment ofthe unpaid balance, stock dividendscannot be applied as payment for unpaid

subscription. The right to dividends is based on duly

recorded stockholdings;accordingly, the corporation isprohibited from entitling theretoanyone else.

General Rule: Stock corporations areprohibited from retaining surplus profitsin excess of 100% of their paid-in capitalstockExcept:a. When justified by definite corporateexpansion projects approved by the

board of directorsb. When the corporation is prohibitedunder any loan agreement with anyfinancial institution or creditor fromdeclaring dividends without its/hisconsent and such consent has not yetbeen securedc. When it can be clearly shown thatsuch retention is necessary under specialcircumstances obtaining in thecorporation, such as when there is aneed for special reserve for probablecontingencies. Sources of dividends:GENERAL RULE: Dividends can only bedeclared and paid out of actual and bonafide unrestricted retained earnings.SPECIAL RULES:a. Where a corporation sold its real

property, which is not being used forbusiness, at a gain, the income derivedtherefrom may be availed of fordividend distribution.

b. Increase in the value of a fixed assetas a result of its revaluation is not

retained earning. However, increase inthe value of fixed assets as a result ofrevaluation (Revaluation surplus)may be declared as cash or stockdividends provided that the company:

(i) Has sufficient income fromoperations from which thedepreciation on the appraisal increasewas charged

(ii) Has no deficit at the time thedepreciation on the appraisal increasewas charged to operations; and

(iii) Such depreciation on appraisalincrease previously charged tooperations has not been impaired bylosses.

c. Dividends can be declared out of theamount received in excess of the parvalue of shares (paid-in surplus)when:

(i) That they be declared only asstock dividends and not cash;

(ii) No creditors are prejudiced; and(iii) There is no impairment of

capital. Note that unlike par value shares,when no par value shares are soldat a premium, the entireconsideration paid is considered

capital; hence the same cannot bedeclared as dividends.

d. Reduction surplus can be a source ofdividends. Rule on paid-in surplus isapplicable.

e. No dividends can be declared out ofcapital except only in two instances:1) liquidating dividends; and 2)dividends from investments in wastingassetcorporation. It permits corporations solely or

principally engaged in the exploitationof wasting assets to distribute the

net proceeds derived fromexploitation of their holdings such asmines, oil wells, patents andleaseholds, without allowance ordeduction for depletion.

f. Profits realized from sale of treasuryshares are part of capital and cannotbe declared as cash or stock dividendas purchase and sale of such shares areregarded as contractions andexpansions of paid-in capital.

g. Money cannot be borrowed for thepayment of dividends becauseindebtedness is not a retained earningof the corporation.

h. Corporate earnings which have not yetbeen received even though theyconsist in money which is due, cannotbe included in the profits out of whichdividends may be paid.

CASH DIVIDENDS STOCK DIVIDENDS

1. Involves adisbursement to thestockholders of

1. Does not involveany disbursement


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accumulated earnings2. When declared andpaid becomes theabsolute property ofthe stockholder and

cannot be reached bycreditors of thecorporation in theabsence of fraud

2. Since it is stillpart of corporateproperty, may bereached by

corporate creditors

3. Declared only bythe board of directorsat its discretion

3. Declared by theboard with theconcurrence of thestockholdersrepresenting atleast 2/3 of theoutstanding capitalstock at aregular/specialmeeting

4. Does not increasethe corporate capital

4. Corporatecapital is increased

5. Its declarationcreates a debt fromthe corporation toeach of itsstockholders

5. No debt iscreated by itsdeclaration

TRUST FUND DOCTRINE (TFD) The subscribed capital stock of thecorporation is a trust fund for thepayment of debts of the corporationwhich the creditors have the right to

look up to satisfy their credits, andwhich the corporation may not dissipate.The creditors may sue the stockholdersdirectly for the latters unpaidsubscription.Application of the TFD:1. Where the corporation has

distributed its capital among thestockholders without providing forthe payment of creditors;

2. Where it had released thesubscribers to the capital stock fromtheir subscriptions;

3. Where it has transferred thecorporate property in fraud of itscreditors; and

4. Where the corporation is insolvent.Coverage of the TFD:1. If the corporation is solvent, the TFDextends to the capital stock representedby the corporations legal capital.2. If the corporation is insolvent, theTFD extends to the capital stock of thecorporation as well as all of its propertyand assets. Exceptions to the TFD:

1. Redemption of redeemable shares(Sec. 8)

2. In close corporation, when thereshould be a deadlock and the SEC orders

the payment of the appraised value ofthe stockholders share. (Sec. 104)

8. Power to enter into managementcontract

EXECUTIVECOMMITTEE

MANAGEMENTCONTRACT

1. Its creation mustbe provided for inthe by-laws

1. Express power ofa corporation

2. A governing bodywhich functions asthe board itself.(The CorporationCode of thePhilippines

Annotated, Hectorde Leon, 2002 ed.)

2. Managementcompany mustalways be subject tothe superior powerof the board to givespecific directionsfrom time to time orto recall thedelegation ofmanagerial power.(The CorporationCode of thePhilippines

Annotated, Hectorde Leon, 2002 ed.)

ULTRA VIRES (beyond powers) ACT An act which is beyond the conferredpowers of a corporation or the purposesor objects for which it is created asdefined by the law of its organization.(Republic vs. Acoje Mining Co., Inc. 7SCRAS 361) An act done by a corporation outside ofthe express and implied powers vested init by its charter and by the law. (Bar

Review Materials in Commercial Law,Jorge Miravite, 2002 ed.) Types: (Philippine Corporate Law,Cesar Villanueva, 2001 ed.)

1. Acts done beyond the powers ofthe corporation as providedin the law or its articles ofincorporation;

2. Acts or contracts entered into inbehalf of a corporation bypersons who have no corporateauthority (Note: This istechnically ultra vires acts of




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officers and not of thecorporation); and

3. Acts or contracts, which are perse illegal as being contrary to

law. An ultra vires act may be that of:

a. The corporation;b. The Board of Directors; andc. The corporate officers.

Effects of ultra vires act on:a. Executed contract courts willnot set aside or interfere with suchcontracts;b. Executory contracts noenforcement even at the suit ofeither party (void andunenforceable);c. Part executed and part executory principle of no unjust enrichmentat expense of another shall apply;andd. Executory contracts apparentlyauthorized but ultra vires theprinciple of estoppel shall apply.

ULTRA VIRES ACTS AND ILLEGAL ACTS Ultra vires (beyond powers) refersonly to an act outside or beyondcorporate powers, including those thatmay ostensibly be within such powers

but are, by general or special laws,either prohibited or declared illegal. Itis in this context that the Code has usedthe term.

ULTRA VIRES ACTS ILLEGAL ACTSNot necessarilyunlawful, but outsidethe powers of thecorporation

Unlawful; againstlaw, morals, publicpolicy, and publicorder

Can be ratified Cannot be ratifiedCan bind the partiesif wholly or partlyexecuted

Cannot bind theparties

TEST whether or not a corporationmay perform an act: consider thelogical and necessary relation betweenthe act questioned and the corporatepurpose expressed by law or in thecharter. If the act is lawful in itself andnot prohibited, and is done for thepurpose of serving corporate ends, andreasonably contributes to the promotionof those ends in a substantial and not ina remote and fanciful sense.

(Montelibano vs. Bacolod-Murcia MillingCo., Inc., 5 SCRA 36)

REMEDIES IN CASE OF ULTRA VIRES

ACTS1. Statea. Obtain a judgment of forfeiture; orb. The SEC may suspend or revoke thecertificate of registration2. Stockholdersa. Injunction; orb. Derivative suit3. Creditorsa. Nullification of contract in fraud ofcreditors

V. BY-LAWS

Rules of action adopted by acorporation for its internal governmentand for the regulation of conduct andprescribe the rights and duties of itsstockholders or members towards itselfand among themselves in reference tothe management of its affairs.

Functions:a. Supplement the articles ofincorporationb. Provide for details not importantenough to be stated in the articles ofincorporationc. Continuing rule for the government ofthe corporation and the individualscomposing itd. Define the rights and duties ofcorporate officers and directors/trusteesand of stockholders/members towardsthe corporation and among themselvese. Source of authority for corporateofficers and agents of the corporation Requisites for validity:

a. Must not be contrary to law nor

with the Corporation Codeb. Must not be contrary to moralsand public policy;c. Must not impair obligations andcontracts;d. Must be general and uniform;e. Must be consistent with thecharter or articles of incorporation;andf. Must be reasonable, not arbitraryor oppressive.

Binding effect:a.As to members and corporation


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They have the force of contractbetween the members themselves. They are binding only upon thecorporation and on its members and

those having direction, management andcontrol of its affairs.b. As to third persons They are not bound to know the by-laws which are merely provisions for thegovernment of a corporation and noticeto them will not be presumed. Reason: By-laws have no extra-corporate force and are not in thenature of legislative enactments so faras third persons are concerned.

CONTENTS OF BY-LAWSa. Time, place and manner of calling andconducting regular or special meetings ofdirectors or trusteesb. Time and manner of calling andconducting regular or special meetings ofthe stockholder or membersc. The required quorum in meeting ofstockholders or members and themanner of voting thereind. The form for proxies of stockholdersand members and the manner of votingtheme. The qualification, duties andcompensation of directors or trustees,officers and employeesf. Time for holding the annual electionof directors or trustees and the mode ormanner of giving notice thereofg. Manner of election or appointmentand the term of office of all officersother than directors or trusteesh. Penalties for violation of the by-lawsi. In case of stock corporations, themanner of issuing certificatesj. Such other matters as may be

necessary for the proper or convenienttransaction of its corporate business andaffairs

ARTICLES OFINCORPORATION

BY-LAWS

Condition precedent inthe acquisition ofcorporate existence;

Conditionsubsequent; itsabsence merelyfurnishes a groundfor the revocation ofthe franchise

Essentially a contractbetween thecorporation and thestockholders/members; betweenthe stockholders/member inter se, andbetween thecorporation and theState;

For the internalgovernment of thecorporation but hasthe force of acontract betweenthe corporation andthe stockholders/members, andbetween thestockholders andmembers;

Executed beforeincorporation

May be executedafter incorporation.Sec. 46 allows thefiling of the by-lawssimultaneously withthe Articles ofIncorporation

Amended by a

majority of thedirectors/ trusteesand stockholdersrepresenting 2/3 ofthe outstandingcapital stock, or 2/3of the members incase of non-stockcorporations

May be amended by

a majority vote ofthe BOD andmajority vote ofoutstanding capitalstock or a majorityof the member innon-stockcorporation

Power toamend/repeal articlescannot be delegatedby the stockholders/members to the board

of directors/ trustees

Power to amend orrepeal by-laws oradopt new by-lawsmay be delegatedby the 2/3 of the

outstanding capitalstock or 2/3 of themembers in thecase of non-stockcorporation

VI. MEETINGS

STOCKHOLDERS/MEMBERS MEETING

WHEN:1. REGULAR - held on the date fixedin the by-laws or if not fixed on any

date in April;and2. SPECIAL - held at any timedeemed necessary or as so providedin the by-laws.

WHERE:

In the city or municipality where theprincipal office of the corporation islocated, and if practicable, in theprincipal office of the corporation.




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However, in the case of non-stockcorporations, the by-laws mayprovide that meetings may be heldat any place even outside the

principal place of the corporation.(Sec. 93)

BOARD MEETING (Sec. 53)WHEN:

1. REGULAR - held monthly, unlessotherwise provided in the by-laws;and2. SPECIAL - held at any time uponthe call of the president.

WHERE:

May be held anywhere in or outside ofthe Philippines.

PROXYLimitations:a. It must be in writing and signed bythe stockholder or member (as principal)and filed before the scheduled meetingwith the corporate secretary, and givento another person (as agent) authorizingsuch person to exercise the voting rightsof the former.b. Unless otherwise provided in theproxy, it shall be valid only for themeeting for which it is intended.c. No proxy shall be valid and effectivefor a longer period than five years at anyone time. (Sec. 58) The right to vote by proxy may beexercised in any of the followinginstances:1. Election of the board of directors or

trustees;2. Voting in case of joint ownership of

stock;3. Voting by trustee under voting trust

agreement;

4. Pledge or mortgage of shares;5. As provided for in its by-laws.Note: Stockholders or members mayattend and vote in their meetings byproxy (Sec. 58); directors cannot do so.Directors must always act in person.(Sec. 25). EXTENT OF AUTHORITYa. GENERAL PROXY confers a generaldiscretionary power to attend and voteat annual meeting.b. LIMITED PROXY restrict the authorityto vote to specified matters only and

may direct the manner in which the voteshall be cast

VOTING TRUST

An agreement whereby one or morestockholders transfer their shares ofstocks to a trustee, who therebyacquires for a period of time the votingrights (and/or any other rights) over suchshares; and in return, trust certificatesare given to the stockholder/s, whichare transferable like stock certificates,subject, however, to the trustagreement.Limitations:a. Cannot be entered into for a periodexceeding 5 years at any one time

except when it is a condition in a loanagreement or for the purpose ofcircumventing the law againstmonopolies and illegal combinationsb. The agreement must not be used forpurposes of fraudc. It must be in writing and notarizedand specify the terms and conditionsthereofd. A certified copy of the agreementmust be filed with the corporation andwith the SECe. The agreement shall be subject toexamination by any stockholder of thecorporationf. Unless expressly renewed, all rightsgranted in the agreement shallautomatically expire at the end of theagreed period

VOTING TRUSTS PROXYThe trustee votes asowner rather than asmere agent

The proxy holdervotes as agent

The trust may vote inperson or by proxy

unless the agreementprovides otherwise

The proxy must votein person

Trustee acquireslegal title to theshares of thetransferringstockholder

Proxy has no legaltitle to the shares ofthe principal

The agreement mustbe notarized

Proxy need not benotarized

The agreement isirrevocable

Revocable anytimeexcept one withinterest


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Trustee is not limitedto act at anyparticular meeting

Proxy can only act ata specifiedstockholdersmeeting (if notcontinuing)

A trustee can voteand exercise all therights of thestockholder evenwhen the latter ispresent

A proxy can only votein the absence of theowners of the stock

An agreement mustnot exceed 5 years atany one time exceptwhen the same ismade a condition ofa loan.

A proxy is usually ofshorter durationalthough under Sec.58 it cannot exceed 5years at any one time

The voting right isdivorced from the

ownership of stocks

The right to vote isinherent in or

inseparable from theright to ownership ofstock

VII. STOCKS AND STOCKHOLDERS

SUBSCRIPTION CONTRACT - anycontract for the acquisition of unissuedstock in an existing corporation or acorporation still to be formed shall bedeemed a subscription. (Sec. 60) The subscribed shares need not bepaid in full in order that the subscriptionmay be valid. The subscription contractis a consensual contract that isperfected upon the meeting of the mindsof the parties. The name of thesubscriber is recorded in the stock andtransfer book, and from that time, suchsubscriber becomes a stockholder ofrecord entitled to all the rights of astockholder. Until the stocks are fullypaid, it continues to be a subsistingliability that is legally enforceable.

In Ong Yong, et.al, vs. David Tiu,theCourt did not allow the rescission of thePre-Subscription agreement since theaction was filed by the Tius in theirpersonal capacities. It ruled that it wasthe corporation who had the legalpersonality to file the suit, it being thereal party in interest.

UNDERWRITING AGREEMENT An agreement between a corporationand a third person, termed theunderwriter, by which the latter

agrees, for a certain compensation, totake a stipulated amount of stocks orbonds, specified in the underwritingagreement, if such securities are not

taken by those to whom they are firstoffered.

UNDERWRITINGAGREEMENT

STOCKSUBSCRIPTIONAGREEMENT

The signers obligatethemselves to takethe shares of stockwhich cannot besold.

The obligation of thesigner to thepurchasers and tothe public isabsolute.

Underwriters aregiven commission.

There is nocommission.

The signer canrefuse to become astockholder/member of thecompany.

He becomes astockholder of thecompany and is liableto pay the amountdue on the stock.

STOCK OPTION A privilege granted to a party tosubscribe to a certain portion of theunissued capital stock of a corporationwithin a certain period and under theterms and conditions of the grantexercisable by the grantee at any timewithin the period granted.WARRANT A type of security which entitles theholder the right to subscribe to, theunissued capital stock of a corporationor to purchase issued shares in thefuture, evidenced by a WarrantCertificate, whether detachable or not,which may be sold or offered for sale tothe public.

PRE-INCORPORATION SUBSCRIPTION

AGREEMENTS (PISA) Subscription of shares of stock of acorporation still to be formed shall beirrevocable for a period of at least 6months from date of subscription,unless:

1. All of the other subscribersconsent to the revocation;

2. The incorporation of saidcorporation fails to materializewith said period or within alonger period as may bestipulated in the contract of




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subscription; provided that nopre-incorporation subscriptionmay be revoked after thesubmission of the articles of

incorporation to the SEC. (Sec.61)

MODES OF ISSUANCE OF SHARESa. By subscripti

Documents

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