Corpo Code Outline

8/8/2019 Corpo Code Outline

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Corporation Code ( Batas Pambansa Bilang 68)Section 1 provides that the Code or the law governing private corporations in the Philippines is nowembodied in Batas Pambansa Bilang 68, which took effect on May 1, 1980.

Definition of Corporation.

A corporation is an artificial being created by operation of law, having the right of succession and thepowers, attributes and properties expressly authorized by law or incident to its existence. (Section 2).

Attributes of a corporation.

An analysis of the definition in Section 2 reveals the following attributes of a corporation:

1. It is an artificial being.2. It is created by operation of law.3. It has the right of succession, and4. It has only the powers, attributes and properties expressly authorized by law or incident to its

existence.

Attributes, explained.

1. It is an artificial being.

A corporation is legal or juridical person with a personality separate and apart from its individualmembers or stockholders who, as natural persons, are merged in the corporate body (Doctrine ofJuridical Personality or Corporate Entity). It is not in fact and in reality a person but the law treatsit as though it were a person by process of fiction. The stockholders or members compose thecorporation but they are not the corporation.

The Doctrine that a corporation is a legal entity or a person in law, distinct from the personscomposing it, is a legal theory introduced for the purposes of convenience and to subserve theends of justice.

Being a mere creature of the law, a corporation may be allowed to exist solely for lawful purposesbut where the fiction of corporate entity is being used as a cloak or cover for fraud or illegality, orto defeat public convenience, justify wrong, protect fraud, or defend crime, or for ends subversiveof the policy and purpose behind its creation, especially where the corporation is a closed familycorporation, this fiction will be disregarded and the individuals composing it will be treated asidentical.

2. It is created by operation of law.

This means that corporations cannot come into existence by mere agreement of the parties as inthe case of business partnerships. Corporations can only come into existence in the manner

prescribed by law. The general law which governs the creation of private corporations is BatasPambansa Bilang 68.

3. It has the right of succession.

A corporation has a capacity of continuous existence irrespective of the death, withdrawal,insolvency, or incapacity of the individual stockholders or members and regardless of the transferof their interest or shares of stocks.

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4. It has only the powers, attributes and properties expressly authorized by law or incident to its

existence.

A corporation, being purely a creation of law, any exercise only such powers as are granted bythe law of its creation. An express grant, however, is not necessary. All powers which may beimplied from those expressly provided by law and those which are incidental or essential tot ehcorporations existence may also be exercised.

Distinctions between a partnership and a corporation.

The following are the points of distinctions:

a. Manner of Creation

A partnership is created by mere agreement of the parties, while a corporation is created bylaw or by operation of law.

b. Number of Incorporators

A partnership may be organized by only two persons, while a corporation requires at leastfive (5) incorporators.

c. Commencement of juridical personality

A partnership commences to acquire juridical personality from the moment of the execution ofthe contract of partnership, while a corporation only from the date of the issuance of thecertificate of incorporation by the Securities and Exchange Commission under its official seal.

d. Powers

A partnership may exercise any power authorized by the partners provided it is not contrary

to law, morals, good customs, public order or public policy, while a corporation can exerciseonly the powers expressly granted by law or implied from those granted or incident to itsexistence.

e. Management

In a partnership, when the management is not agreed upon, every partner is an agent of thepartnership, while in a corporation, the power to do business is vested in the board ofdirectors or trustees.

f. Effect of mismanagement

In a partnership, a partner as such can sue a co-partner who mismanages, while in a

corporation, the suit against a member of the board of directors or trustees who mismanagesmust be in the name of the corporation.

g. Right of succession

A partnership has no right of succession, while a corporation has such right.

h. Extent of liability to third persons

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In a partnership, the partner (except limited partners) are liable personally and subsidiarily(sometimes solidarily) for partnership debts to third persons, while in corporation, thestockholders are liable only to the extent of the shares subscribed by them.

i. Transferability of interest

In a partnership, a partner cannot transfer his interest in the partnership so as to make thetransferee a partner without the consent of all the other partners because the partnership isbased on the principle ofdeletes personarum, while in a stock corporation, a stockholder hasthe right to transfer his shares without the prior consent of the other stockholders.

j. Term of existence

A partnership may be established for any period of time stipulated by the partners, while acorporation may not be formed for a term in excess of 50 years extendible to not more than50 years in any one instance.

k. Firm name

A limited partnership is required by the law to add the word Ltd. to its name, while a

corporation may adopt any firm name provided it is not identical or deceptively similar to anyregistered firm name, or contrary to existing law.

l. Dissolution

A partnership may be dissolved at any time by the will of any or all of the partners, while acorporation can only be dissolved with the consent of the State.

m. Law which govern

The governing law on partnership is the Civil Code of the Philippines while, Batas Pambansa

Bilang 68 is to the private corporation.

Classes of Corporations.

a. Stock and Non-stock

A Stock corporation is the ordinary business corporation created and operated for thepurpose of making a profit which may be distributed in the form of dividends to stockholderson the basis of their invested capital.

Non-stock corporations are created not for profit but for the public good and welfare of thesociety such as religious, social, literary, scientific, civic and others.

b. Aggregate and Sole

Corporation Aggregate is a corporation consisting of more than one (1) member orcorporator.

Corporation sole is a special form of corporation usually associated with the clergy.

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c. Ecclesiastical and Lay

Ecclesiastica corporation is one organized for religious purposes.

Lay corporation is one organized for a purpose other than for religion.

d. Eleemosynary and Civil

Eleemosynary is one established for or devoted to charitable purposes or those supported bycharity.

Civil corporation is one established for business or profit.

e. Domestic and Foreign

Domestic corporation is one incorporated under the laws of the Philippines.

Foreign corporation is one formed, organized or existing under any laws other than those ofthe Philippines.

f. De jure and De facto

De jure corporation is a corporation existing in fact and in law.

De facto is a corporation existing in fact but not in law.g. Close and Open

Close corporation is one which is limited to selected persons or members of a family.

Open corporation is one which is open to any person who may wish to become astockholders or member thereto.

h. Parent or Holding and Subsidiary and Affiliates

Parent or holding corporation is one which is so related to another corporation that it has thepower either, directly or indirectly, to elect the majority of the directors of such othercorporation.

Subsidiary corporation is one in which another corporation owns at least a majority of theshares and thus has control.

Affiliates corporation is one related to another by a owning or being owned by commonmanagement or other control device.i. Public, and Government owned or controlled corporations, and Private

Public corporations are those formed or organized for the government of a portion of theState, and have for their purpose, the general good and welfare.

Government owned or controlled corporations (GOCCs) are those created or organized bythe government or of which the government is the majority of the stockholder.

Private corporations are formed for some private purpose, benefit or end.

j. Corporation by prescription and Corporation by estoppels

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Corporation by prescription is one which has exercised corporate powers for an indefiniteperiod without interference on the part of the sovereign power and which by fiction of law isgiven the status of a corporation.

Corporation by estoppel is one which in reality is not a corporation, eitherde jure orde factobecause it is defectively formed, but is considered a corporation in relation to those only who,by reason of their acts or admissions, are precluded from asserting that it is not a corporation.

k. Quasi-corporations and Quasi-public corporations

Quasi-corporations are in a limited sense, public corporations but unlike the latter, they arenot organized for the government of a portion of the State.

Quasi-public corporations are private corporations which have accepted from the State thegrant of a franchise or contract involving the performance of public duties.

Incorporation of a private corporation by special act

A corporation created by special law or charter is primarily governed by such law and suppletorily,by the provisions of the Batas Pambansa Bilang 68.

Components of a corporation

The four (4) classes of persons composing a corporation are the following:

1. Corporators or those who compose the corporators, whether stockholders ormembers.

2. Incorporators or those corporators mentioned in the articles of incorporation asoriginally forming and composing the corporation and who executed and signed the

articles of incorporation and acknowledged the same before a notary public.

3. Stockholders or the owners of shares of stocks in a stock corporation. They arealso called shareholders. Stockholders may be natural or juridical persons but onlynatural persons can be incorporators.

4. Members or corporators of a corporation which has no capital stock.

Power to Classify SharesThe Corporation through its Board of Directors and stockholders has the power to classify the shares ofstock as the prospects and needs of its business may require.

The primary classification of shares is common and preferred each of which may be divided into otherclasses. The shares of stock usually differ with respect to voting rights, dividend rights, and, in case ofliquidation, rights to corporate assets.

When classification of shares may be made?1. During incorporation by the incorporators as stated in the articles of incorporation filed with the

Securities and Exchange Commission.

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2. After incorporation - by the board of directors and the stockholders through amendment of thearticles of incorporation pursuant to Section 16.

Classification to comply with constitutional or legal requirements.A corporation may classify its shares for the purpose of insuring compliance with constitutional or legalrequirements such as those prescribe the minimum percentage of capital stock ownership of Filipinocitizens in corporations engaged in any business or activity reserved for Filipino citizens.

Shares presumed to be equal in all respects.In the absence of any provisions in the articles of incorporation and in the certificate of stock, all stocksenjoy equal rights and privileges.

Definition of terms as to capitalization.

1. Capital stock is the amount fixed in the articles of incorporation, to be subscribed and paid inthe shareholders of a corporation. It represents the equity of the stockholders in the corporationassets. It limits the maximum amount or number of shares that may be issued by the corporationwithout formal amendment of the articles of incorporation.

2. Authorized capital stock is synonymous with capital stock where the shares of the corporationhave par value. If the shares of stock have no par value, the corporation has no authorizedcapital stock, but it has capital stock, the amount of which is not specified in the articles ofincorporation as it cannot determined until all the shares have been issued.

3. Subscribed capital stock is the amount of the capital stock subscribed whether fully paid or not.

4. Outstanding capital stock is the portion of the capital stock which is issued and held by personsother than the corporation itself.

5. Paid-up capital stock portion of the subscribed or outstanding capital stock that is paid.6. Unissued capital stock portion of the capital stock that is not issued or subscribed . It does not

vote and draws no dividends.

7. Legal capital - is the amount equal to the aggregate par value and or issued value of theoutstanding capital stock.

8. Capital is used broadly to indicate the entire property or assets of the corporation. it includesthe amount invested by the stockholders plus the undistributed earnings less losses andexpenses.

Example:

The articles of incorporation of L.A.Lakers Corp. stated that the authorized capital stock of saidcorporation is P1,000,000.00 divided into 1,000,000 shares with a par value of P1.00 per share.

At its incorporation, only P250,000.00 of the authorized capital stock was subscribed.

Under Section 13, 25% of the subscription is required to be paid by the incorporatingstockholders to the treasurer of the corporation thus, only P62,500.00 was paid.

Hence, the authorized capital stock of L.A.Lakers Corp. is P1,000,000.00, the subscribed,outstanding, or issued capital stock is P250,000.00, the paid-up capital stock is P62,500.00 andthe unissued capital stock is P750,000.00. The legal capital is P250,000.00.

Stock or Share of Stock.

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Stock or share of stock is one of the units into which the capital stock is divided. It represents the interestor right which the owner has in the management of the corporation in which he takes part through his rightof vote, in a portion of the corporate earnings in form of dividends, and upon dissolution and winding up,in the property and assets thereof remaining after payment of corporate debts and liabilities to creditors.

Certificate of Stock.

Certificate of stock is a written acknowledgment by the corporation of the interest, right, and participationof a person in the management, profits, and assets of a corporation.

Classes of Shares.

1. Par value share is one with specific money value fixed in the articles of incorporation andappearing in the certificate of stock for each share of stock of the same issue. The primarypurpose of par value is to fix the minimum issue price of the shares thus assuring creditors thatthe corporation would receive a minimum amount for its stock.

2. No par value share is one without any stated or par value on the face of the stock certificate. Ithas no par value but is has always an issued value the consideration fixed by the corporationfor its issuance.

3. Voting share is share with right to vote. It is generally customary to give the right to vote to thecommon stock and to withhold it from the preferred.

4. Non-voting share is share without right to vote. Under the Code, no share may be deprived ofvoting rights except those classified and issued and preferred or redeemable shares, unless tothose matters refer to Section 6 paragraph 6 (1 to 8) of B.P. Blg. 68. Please take note that thesaid enumeration does not include the election of directors or trustees.

5. Common share of stock is stock which entitles the holder thereof topro rata division of profits, ifthere are any, without any preference or advantage in that respect over other stockholder. It is thestock which private corporations ordinarily issue.

6. Preferred share of stock is stock which entitles the holder thereof to certain preferences overthe holders of common stock. The preferences may consist in the payment of dividends or thedistribution of assets in case of dissolution. It is rarely given the voting privileges.

7. Promotion stock issued to promoters, or those in some way interested in the company, forincorporating the company, or for services rendered in launching or promoting the welfare of thecompany.

8. Share in escrow share subject to an agreement by virtue of which the share is deposited by thegrantor or his agent with a third person t be kept by the depositary until the performance of acertain condition or the happening of certain event contained in the agreement.

9. Convertible stock - is changeable by the stockholder from one class to another class, such asfrom preferred to common, at the conversion ratio.

Nature of par value, book value and market value

1. Par value the value indicated in the certificate of stock represents the amount of money orproperty contributed by the shareholder to the capital stock of the corporation.

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2. Book value the true value which may be determined by dividing the net value of the totalcorporate assets by the number of shares issued or outstanding.

3. Market value the price a willing seller would sell and a willing buyer would buy neither beingunder abnormal pressure to sell or buy. It is affected by the law of supply and demand.

Example:

The Cleveland Corp. has an authorized capital stock of said corporation is P1,000,000.00 dividedinto 10,000 shares with a par value of P100.00 per share. The capital stock is fully paid up incash. At this stage, the par value is the same as its actual or book value. The book value isdetermined by dividing the P1,000,000.00, the net asset, by 10,000, the number of shares issuedor outstanding.

If the Cleveland Corp. makes a net profit of P100,000.00, the increased book value of each sharewould be P110.00. On the other hand, if it suffers loss of P100,000.00, its net assets would thenbe reduced to P900,000.00, thereby making the book value of each share at only P90,000.00.

The market value, however, of each share may not be P100.00 or P110.00 or P90.00. Thus, the

market value of each share of Cleveland Corp. may be P150.00 when the book value is P110.00or it may be P60.00 when the book value is P90.00. The market value of stocks may beinfluenced by the present and prospective net income of the corporation, attractive dividendpayment, and other factors.

Restrictions regarding issuance of no par value shares.

1. Banks, trust companies, insurance companies, and building and loan associations shall not bepermitted to issue no par value shares of stock.

2. Preferred shares of stock may be issued only with a stated par value.3. Shares issued without par value shall be deemed fully paid and non-assessable. This means that

the holder of such shall not be liable.4. Shares without par value may not be issued for a consideration less than the value of P5.00 per

share.5. 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.

Kinds of preferred shares

1. Preferred share as to assets which gives the holder thereof preference in the distribution of theassets of the corporation in case of liquidation.

2. Preferred share as to dividends the holder of which entitled to receive dividends on said shareat fixed rates before any dividends at all are paid to common stockholders.2.1.Cumulative preferred share entitles the holder thereof not only to the payment of current

dividends but also to dividends in arrears .2.2.Non-cumulative preferred share - entitles the holder to the payment of current dividends only

in preference to common stockholders.2.3. Participating preferred share share which gives the holder not only the right toreceive the stipulated dividends at the preferred rate but also to participate with the holders ofthe common shares in the remaining profitspro rata after the common shares have been paidthe amount of the stipulated dividend at the same preferred rate.

2.4.Non-participating preferred share share which entitles the holder thereof to receive thestipulated preferred dividends and no more. The balance, if any, is given entirely to thecommon stocks.

Founders shares

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Founders shares have been classified as shares issued to the organizers and promoters of a corporationin consideration of some supposed right or property. Such shares may be given special rights andprivileges not enjoyed by the owners of other stocks.

However, the exclusive right to vote and be voted for in the election of directors is granted, such rightmust be for a limited period not exceeding five (5) years and must be approved by the Securities andExchange Commission.

Redeemable shares

Redeemable or callable share is share, usually preferred, which by its terms is redeemable at a fixed dateor at the option of either the corporation or the stockholder at both at certain redemption price.

Treasury Shares

Treasury share is share which has been lawfully issued by the corporation and fully paid for and laterreacquired by either purchase, redemption, donation, forfeiture or other lawful means. Only surplusearnings of the corporation may be used for purchase of treasury shares.

Treasury shares are issued shares but being in the treasury they do not have the status of outstanding

shares. They may be resold by the corporation at any price the board of directors sees fit to accept,even at less than par, having once been legally issued as fully paid.

Treasury shares have no voting rights neither entitled to dividends or assets.

Incorporation, a mere privilege

The right to be and act as a corporation doe snot belong to any person as a natural and civil right, but asa special privilege conferred upon a group of persons by the special privilege conferred upon to a groupof persons by the sovereign power of the State. Until there is a grant of such right, therefore, whether byspecial act of the legislature or under a general law, there can be no corporation.

1. Promotion formation and organization of a corporation by bringing together the incorporators or

the persons interested in the business.

2. Incorporation act by which the corporation is created.

Steps in incorporation:

a. Drafting and execution of the articles of incorporation by the incorporators.b. Filing with the Securities of Exchange Commission of the articles of incorporation together

with the Treasurers Affidavit.c. Payment of the filing and publication fees.d. The issuance of the certificate of registration Securities of Exchange Commission.e.

3. Formal organization and commencement of business operations

IncorporatorsThe incorporators must be natural persons and not be less than five (5) but not more than fifteen (15), allof legal age, and majority of whom are residents of the Philippines.

Corporate termThe corporation shall exist for the term specified in the article of incorporation not exceeding fifty (50)years.

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Extension of the term can be made five (5) years prior to the expiration of the corporate term unless thereare justifiable reasons for an earlier extension as may be determined by the Securities of ExchangeCommission.

Minimum capital stock requirement

The Code does not set a minimum authorized capital stock except as otherwise provided by special lawas long as the paid-up capital, as required by Section 13, is not less than P5,000.00.

Take note that special laws may require a higher paid up capital, as in the case of commercial banks,insurance companies and investment houses.

Filipino ownership requirement regarding corporate capital

By specific constitutional and legal provisions, Filipino ownership of a certain percentage of the capitalstock or capital is required in certain cases, such as:

1. Corporation for exploration, development and utilization of natural resources at least 60% of thecapital which is owned by citizens of the Philippines.

2. Public service corporations - at least 60% of the capital which is owned by citizens of the

Philippines.3. Educational corporations other than those established by religious orders and mission boards,

at least 60% of the capital which is owned by citizens of the Philippines.4. Banking corporations - at least 60% of the capital which is owned by citizens of the Philippines.5. Rural banks - at least 60% of the capital which is owned by citizens of the Philippines.6. Corporations engaged in coastwise shipping - at least 60% of the capital which is owned by

citizens of the Philippines.7. Corporations engaged in pawnshop business - at least 70% of the voting capital stock shall be

owned by citizens of the Philippines.

Minimum subscription and paid-up capital1. Pre-incorporation Section 13 requires that at least 25% of the amount of capital stock has been

actually subscribed and that at least 25% of such subscription paid.

2. Post incorporation The 25% subscription and 25% paid-up capital is required not only duringthe incorporation period but also in case of increase of the authorized capital stock.

Example:

Piezo Corp. authorized capital stock is P1,000,000.00 to be divided in 1,000,000 shares with a parvalue of P1.00 per share.

In such case, there must be subscribed 250,000 shares of the total par value of P250,000 whichrepresent 25% of the authorized capital stock and from the said subscription, there must be paid tothe corporation at least 25% thereof or P62,500 in actual cash and/or property the fair valuation ofwhich equals to P62,500.00.

Take note that it is not required for purposes of incorporation that each and every subscriber shall pay25% of his subscription. The paid-up requirement is met as long as the 25% of the total subscriptionis paid although some subscribers have paid less than 25%, or even have not paid any amount.

Meaning of articles of incorporation

The articles of incorporation is the document prepared by the persons establishing a corporation and filedwith the Securities and Exchange Commission containing the matters required by the Code.

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A copy of the articles filed which is returned with the certificate of incorporation issued by the Securitiesand Exchange Commission under its official seal becomes it corporate charterenabling the corporation toexist and function as such.

Contents and form of articles of incorporation

1. Name of the corporation to identify and distinguish it from other corporations. By that name it isauthorized to transact business. The name of the corporation is essential to its existence.

2. Purpose or purposes of the corporation which must be lawful, definitely stated, and the primaryand secondary purposes must be capable of being lawfully combined.The law requires the statement of the purpose or purposes in order that (i) a person who intendsto invest his money in the business corporation will know where and what kind of business activityhis money will be invested; (ii) the directors and officers of the corporation will know within whatscope of business they are authorized to act; and (iii) a third person who has dealings with thecorporation may know whether the transaction or dealing he has with the corporation is within theauthority of the corporation or not.In other words, the main reason for stating the purpose of the corporation is to determine whetherthe acts performed by the corporation are authorized or beyond its powers. If beyond its powers

it is an ultra vires act.3. Principal office of the corporation the place where the principal office of the corporation is to be

established or located, which place must be within the Philippines. It is also where the corporatebooks are ordinarily kept and its officers met.

4. The incorporating directors or trustees are those chosen by the incorporators and named in thearticles of incorporation and must specify the names, nationalities, residences and at leastmajority of them are residents of the Philippines. They shall hold office until their successors areduly elected and qualified.The incorporating directors must be a subscriber to at least one (1) share of the capital stock ofthe corporation.

5. Authorized capital stock, subscription and paid up capital. In non-stock corporation the amountcontributed or donated by its members.

Limitation on power of corporation to amend the articles of incorporation:

1. The amendment of any provision or matters should be in conformity with law.2. It must be for legitimate purpose.3. The amended articles should contain all provisions required by law, and shall be indicated by

underscoring the change or changes made. A copy thereof should be duly certified under oath bythe Corporate Secretary and majority of the board of directors or trustees and by the requiredvotes of the stockholders or members and shall be submitted by the SEC.

4. The amendments shall take effect upon approval by SEC. However, it is deemed approved fromdate of filing if not acted upon by SEC within 6 months from said date for a cause not attributableto the corporation.

5. If the corporation is governed by special law such as banks (Bangko Sentral ng Pilipinas),insurance companies (Insurance Commission) educational institutions (Department ofEducation), the amendments must be accompanied by a favorable recommendation of theappropriate government agency.

Grounds when articles of incorporation or amendment may be rejected or disapproved:

1. It is not substantially in accordance with the form prescribed.2. Its provisions are unconstitutional, illegal, immoral, or contrary to government rules and

regulations.3. The Treasurers Affidavit is false.4. The required percentage of the capital stock to be owned by citizens of the Philippines has

not been complied with as required by existing laws.

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The SEC will give reasonable time to correct or modify the objectionable portions. Pleasetake note that the said grounds are not exclusive.

Grounds for suspension or revocation of the certificate of registration:

1. Fraud in procuring the Certificate of Registration.2. Serious misrepresentation as to what the corporation can do or is doing to the great prejudice of

the public.3. Refusal to comply with or defiance of a lawful order of the SEC .4. Continuous inoperation for a period of at least 5 years.5. Failure to file by-laws within the required period.6. Failure to file required reports within the prescribed period.

Limitation upon use if corporate name:

The incorporators may choose and use any name they want provided it is one not identical with or similarto a name which was previously registered and used by another corporation, or is contrary to existing law.

Commencement of corporate existence:

A corporate commences to have juridical personality and legal existence only from the moment the SECissues a certificate of registration under its official seal.The corporation must formally organize and commence the transaction of its business within 2 years fromthe date of its incorporation.

De Jure Corp. vs. De Facto Corp.

A de jure corporation is one created in strict or substantial conformity with the mandatory statutoryrequirements for incorporation and whose right to exist as a corporation cannot be successfullyquestioned by any party even in a direct proceeding for that purpose except by the State.

A de facto corporation is one which actually exists for all practical purposes as a corporation but whichhas no right to corporate existence as against the State. It is a corporation from the fact of its acting as

such, though not in law or of right a corporation. It is one which had not complied with all therequirements necessary to be a de jure corporation but has complied sufficiently to be accorded corporatestatus as against third parties although not against the State.Requirements of a de facto corporation:

1. A valid law under which a corporation with powers assumed might be incorporated.

2. A bona fide attempt to organize a corporation under such law.Examples: The incorporator or a certain number of them are not residents of thePhilippines; The acknowledgement in the articles of incorporation is insufficient ordefective in form; or it was acknowledged before a person without authority.

3. Actual user or exercise in good Faith of corporate powers conferred upon it by law.Note: Stockholders of a de facto corp. enjoy exemption from personal liability for corporate

obligations as same as the stockholders of a de jure corp.

Corporation by Estoppel

Estoppel aims to bring justice between the parties, through the operation of the principle that anadmission or representation is rendered conclusive upon the person making it and cannot be denied nordisproved as against the person relying thereon.

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Note: All persons who assume to act as a corporation knowing it to be without authority to do shall beliable as general partners for all debts, liabilities and damages incurred or arising as a result of theirpretension.

Formal organization and commencement of business:

Formal organization requires the adoption of by laws and the election of board of directors/trustees andofficers, and other steps necessary to enable the corporation to transact business.

A corporation shall be considered to have commenced the transaction of its business when it performedacts toward the fulfillment of the purpose for which it was established.Where the corporation has commenced the transaction of its business but subsequently becomescontinuously inoperative for a period of at least 5 years, such inoperation be a ground for the suspensionor revocation of its corporate franchise or certificate of incorporation but notice and hearing are requiredunless the it is due to causes beyond its control as found by the SEC.

Board of DirectorsThe board of directors or trustees is the governing body of the corporation chosen by the stockholders ormembers. The stockholders/members elect a board of directors or trustees to oversee the managementand operation of the corporation.

Limitations on powers of board of directors or trustees:

1. It must observe the provisions of the Constitution, laws, rules and regulations including thearticles of incorporation and by laws.

2. It cannot perform acts that will result into fundamental changes in the corporation.3. It cannot exercise powers not possessed by the corporation.

Note: Directors or trustees hold a fiduciary relation which means position involving trust andconfidence to the corporation and the stockholders/members they represent, as such they arerequired to discharge their duties in good faith and with diligence, care and skill. They are liable ifthey breach their fiduciary duty.

Rule: The board of directors or trustees must act together as a body in order to bind the corporationby their acts.

Exceptions:

1. Where the directors happened to be the sole stockholders.2. When the particular transaction was ratified in a subsequent board meeting.3. When the corporation has an executive committee (ExCom) with authority to act on such specific

matters within the competence of the board. ExCom is composed of not less than 3 boardmembers appointed by the board.

4. Execution of management contract which it delegates the management of its affairs to anothercorporation for a period not longer than 5 years for any 1 term.

5. Subject to certain requirements, any action by the directors of a close corporation without a

meeting shall be deemed valid unless the by laws otherwise provide.

The Board may delegate to corporate officers or agents of the corporation purely ministerial duties.

Term of office:The Board of Directors or trustees shall hold office for one (1) year and until their successors areelected and qualified.

Hold Over doctrine

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Upon failure of a quorum at any meeting of the stockholders or members called for an election, thedirectorate naturally holds over and continues to function as such until other members of the boardare elected and qualified.

Qualifications of directors or trustees:

1. Every director must own at least 1 share of the capital stock.2. The share of stock held by the director must be registered in his name on the books of the

corporation.3. Every director must continuously own at least a share of stock during his term.4. A majority of the directors must be residents of the Philippines.5. The by laws may provide additional qualifications.

Election of directors or trustees:

1. At the stockholders or members meeting, there must be present in person or byrepresentative authorized to act by written proxy, the owners of the majority of theoutstanding capital stock or majority of the members entitled to vote.

2. The election must be by ballot if requested by any voting stockholder or member. Voting byviva voces or roll call is also allowed.

3. A stockholder cannot be deprived of his right to use any of the methods of voting in theelection of directors.

4. No delinquent stock shall be voted.5. If a quorum is present, the candidates receiving the highest number of votes shall be

declared elected.6. In case of failure to hold an election for any reason, the meeting may be adjourned from day

to day or from time to time but it cannot be adjourned sine die or indefinitely.7. The requisite notice must be given.

Methods of voting:

1. Straight voting every stockholder may vote such number of shares for as many persons as

there are directors to be elected.

Example:

Kobe owns 100 shares of stock in L.A. Lakers Corp. If there are 5 directors to be chosen,Kobe is entitled to 500 votes obtained by multiplying 100 shares by 5 (number of directors tobe elected). He may give to the five candidates he wants to be elected 100 votes each.

Under the straight voting, the votes are distributed equally among the 5 candidates withoutpreference.

2. Cumulative voting for one candidate a stockholder is allowed to concentrate his votes andgive 1 candidate as many votes as the number of directors to be elected multiplied by the

number of his shares shall equal.

Example:

Lebron owns 100 shares of stock in Clevaland Corp. If there are 5 directors to be chosen,Kobe is entitled to 500 votes obtained by multiplying 100 shares by 5 (number of directors tobe elected). He may give to one candidate, to Shaq the entire 500 votes.

Or

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Suppose that out of a total of 500 shares, Ronald and Jay-jay own 200 shares each or a totalof 400 shares while Sandy, Paul, Noel and Menk own 25 shares each or a total of 100shares.If there are 5 directors to be elected, Ronald and Jay-jay are entitled to 2,000 votes andSandy, Paul, Noel and Menk to 500 votes. The highest number of votes that Ronald and Jay-

jay can give each of their 4 candidates is 500 each. Hence, by cumulating their 500 votes infavor of a candidate, Sandy, Paul, Noel and Menk would be able to secure representation inthe board of directors.

Note: Cumulative voting is permitted for the purpose of giving the minority stockholdersrepresentation in the board of directors.

3. Cumulative voting by distribution a stockholder may cumulate his shares by the number ofdirectors to be elected and distribute the same among many candidates as he shall see fit.

Example:

With 100 shares of stock, Kobe is entitled to 500 votes if there are five directors to be elected.A may distribute his votes to candidates Michael, Larry, Earvin as follows: 100 votes toMichael; 150 votes to Larry; and 250 votes to Earvin. Kobe may cast his votes in any

combination desired by him provided that the total number of votes casted does not exceed500.

Corporate officers and agents.

The directors or trustees of the corporation are elected to their office by the stockholders or members atthe stockholders or members meeting.The election of administrative officers, such as the president, treasurer, secretary, and such other officersmay be provided for in the by - laws is, in turn, entrusted to the board of directors or trustees. Thedirectors may elect a president, vice president, treasurer, secretary, general manager and such otherofficers as the needs and nature of the business may demand.

Officers are agents of the corporation and they can bind the corporation as long as their actions are within

the actual, apparent, or inherent authority conferred by law, articles of incorporations, by laws or by theresolution of the board of directors.

Compensation and terms of office of the corporate officers.

It is within the power of the board to fix the salaries of the officers whom it appoints.

Positions concurrently held by the same person.

Rule: Any 2 or more positions may be held concurrently by the same person.

Exception: The positions of president and secretary or treasurer are considered by law as incompatiblewith each other due to the very nature appertaining to each office.

Quorum:

Quorum is such number of the membership of a collective body as is competent to transact business ordo any other corporate act.

Under the Corporation Code, unless the articles of incorporation or by laws provide for a greatermajority, a majority of the number of directors or trustees as fixed in the articles or by laws shallconstitute a quorum for the transaction of corporate business. As a general rule, majority vote of the

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directors or trustees present at a meeting at which there is a quorum is sufficient to authorize corporateaction.

Proxy not allowed.

Directors or Trustees cannot validly act by proxy. They must attend the meeting of the board and act as abody.

Requirements for Board meeting:

1. Meeting duly assembled or convened as a board as a body in lawful meeting.2. Presence of a quorum.3. Decision of the majority of the quorum or, in other cases, a majority of the entire board4. Meeting at the place, time and in the manner provided for in the by laws.

Disqualification of directors/trustees or officersConviction of a final judgment of an offense punishable by imprisonment for a period exceeding 6 years ora violation of the Corporation Code committed within 5 years prior to the date of his election orappointment.

Removal of directors, requisites:

1. The removal must take place at a regular meeting of the corporation or at a special meeting dulycalled for the purpose.

2. There must be previous notice tot eh stockholders or members of the corporation of the intentionto propose such removal at the meeting.

3. The removal must be by vote of the stockholders holding or representing 2/3 of the outstandingcapital stock, or if the corporation be a non-stock corporation, by 2/3 votes of the membersentitled to vote.

Filling of vacancies in the office of director or trustee.

A vacancy may be filled up as follows:

1. By the stockholders or membersa. If the vacancy results from the removal by the stockholders or the expiration of the termb. If vacancy occurs such as death, resignation, abandonment, or disqualification, if the

remaining directors or trustees do not constitute a quorum for the purpose of filling thevacancy.

c. If the Board refers the matter to stockholders or membersd. If the vacancy is created by reason of an increase in the number of directors or trustees.

2. By the members of the Board if still constituting a quorum. The Board has no power to fill anydirectorship or trusteeship by reason of an increase in the number of directors or trustees.

Compensation of directors

In the absence of any provision in the by laws fixing their compensation, the directors, as such, shall notreceive any compensation, unless authorized by a vote of the stockholders representing at least amajority of the outstanding capital stock.

The directors have no authority to grant compensation to themselves.

Where compensation is granted either in the by laws or by the vote of stockholders, the total yearlycompensation of directors shall not exceed 10% of the net income before income tax of the corporationduring the preceding year.

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Directors are authorized to receive reasonableper diems an allowance given for each day while he wasaway from his home or permanent station.

Compensation of corporate officers and employeesOfficers and employees who perform valuable services for the corporation are entitled a reasonablecompensation even in the absence of express contract.

Liability of directors, trustees or officers

In the performance of their official duties, they are under obligations of trust and confidence to thecorporation and its stockholders must act in good faith and for the interest of the corporation or itsstockholders with due care and diligence and within the scope of their authority.

There are personally liable for any wrongful disposition of corporate asset and for any loss or injury to thecorporation arising from gross negligence or unauthorized acts or violation of their duties.

Directors are not liable, however, for business losses incurred because of honest bad judgment notamounting to bad faith or gross negligence.

Liabilities of directors/trustees for damages

The Code enumerates the occasions when a director or trustee may be held liable for damages, asfollows:

1. He willfully and knowingly votes or assess to patently unlawful acts of the corporation.2. He is guilty of gross negligence or bad faith in directing the affairs of the corporation.3. He acquires any personal or pecuniary interest in conflict with his duty as such director or trustee.

Liability of directors/trustees or officers for secret profitsDirector shall be held accountable for the profits which otherwise have accrued to the corporation.Also, a director guilty of disloyal act against the corporation is required to account for the profits obtainedby him from a business opportunity which should belong to the corporation.

Self-dealing directors/trustees or officers

A contract of the corporation with one or more of its directors or trustees or officers is voidable, at theoption of the corporation, unless all the following conditions are present:

1. That the presence of such director or trustee in the board meeting in which the contract wasapproved was not necessary to constitute a quorum for such meeting.

2. The vote of such director or trustee was not necessary for the approval of the contract.3. The contract is fair and reasonable under the circumstances4. That in case of an officer, the contract with the officer has been previously authorized by the

board of directors.

If not all the conditions set forth are present but the corporation elects not to question the validity ofthe contract without prejudice to the liability of the directors or trustees for damages.

In case the contract has only the third condition is present, but it was ratified by 2/3 vote of thestockholders or members, and provided that full disclosure of the adverse interest of the directors ortrustees involved is made at such meeting.

Contracts between corporations with interlocking directors

The Code recognizes a valid contract between two (2) or more corporations which have interlockingdirector (meaning one, or all of the directors in one corporation is/are also director/directors in anothercorporation) as long as there is no fraud and the contract is fair and reasonable under thecircumstances.

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However, if the interest of the interlocking director in one corporation is substantial, that is hisstockholdings exceed 20% of the outstanding capital stock and in the other merely nominal, the ruleson self-dealing director shall apply in so far as the latter corporation is concerned.

Disloyalty of a director

Under the theory of corporate opportunity theory, a director who, by virtue of his office, acquires forhimself a business opportunity which should belong to the corporation, is guilty of disloyalty and,should, therefore, account to the latter for all such profits by refunding the same, notwithstanding thathe risked his funds in the venture.

Under the Code, the guilty director will only be exempted from liability to the corporation if his disloyalact is ratified by the vote of the stockholders owning or representing at least 2/3 of the outstandingcapital stock.

Executive Committee

1. Reason: to expedite action on important matters without need for a board meeting especiallywhen such meeting cannot be held.

The Code requires that the Executive Committee (ExCom) must be provided for in the by-lawsand composed of not less than three (3) members of the board.The ExCom may act on specific matters within the competence of the Board, as may bedelegated to it except on the following matters:

a. approval of any action for which shareholders approval is also required.b. The filling of vacancies in the board.c. The amendment or repeal of the by laws or the adoption of new by laws.d. The amendment or repeal of any resolution of the board which by its express

terms is not so amenable or repealable; ande. Distribution of cash dividends to the shareholders.

2. Quorum and voting A majority of the ExCom members constitute a quorum.

Relative powers of corporations and natural persons / partnerships

1. Any act not prohibited An individual has absolute right fully to use, enjoy and dispose of hisproperties, to perform all acts and to make all contracts without any restriction except when theyare forbidden by the law. The same is true of an ordinary partnership.

2. Only powers those granted On the other hand, the civil rights of a corporation are widelydifferent. Under the doctrine of limited capacity adopted by our corporation law, a corporation hasonly such powers as are expressly granted and those that are necessarily implied from thoseexpressly granted or those which are incident to its existence. It is, therefore, not correct to saythat a corporation has the power to do all acts not expressly or impliedly prohibited.

Classification of corporate powers

The three classes of powers of a corporation are:

1. Those expressly granted or authorized by law2. Those that are necessary to the exercise of the express or incidental powers3. Those incidental to its existence.

The powers of a corporation, however, frequently cut across lines of the above classification.

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Acts or contracts of a corporation outside the scope of its express, implied, and incidental powers areultra vires.

Express powers explained

Express powers are the powers expressly conferred upon the corporation by law. These powers can beascertained from the special law creating the corporation, or from the general incorporation law underwhich it is created, the general laws of the land applicable to corporations, and its articles of incorporation.

Implied powers explained

Implied powers are those powers which are reasonably necessary to exercise the express powers and toaccomplish or carry out the purpose for which the corporation was formed.

Sometimes it is difficult to determine whether a certain activity is an implied power or not. However, thefollowing rough classification embraces most of the implied powers:

1. Acts in the usual course of business This includes such acts as borrowing money; makingordinary contracts; executing promissory notes, checks or bills of exchange; taking notes or othersecurities; acquiring personal property for the use in connection with the business; acquiring

lands and buildings to be used as places of business or in connection therewith; and selling,leasing, mortgaging or other transfers of property of the corporation in connection with therunning of the business. It is evident that all of such acts, under ordinary circumstances, arenecessary in order to run a business.

2. Acts to protect debts owing to a corporation if a corporation is a creditor, it may do such acts asmay be necessary to protect its right as such creditor. Thus, a corporation may purchaseproperty, act as a guarantor or sometimes even run a business temporarily to collect a debt;

3. Embarking in different business a corporation may not engage in a business different from thatfor which it was created as a regular and a permanent part of its business. This is especially truewith respect to those particular kinds of corporate activities which are governed by special laws.Thus a corporation not organized for the purpose cannot go into the banking or insurancebusiness but it may do any isolated act of banking or insurance in connection with some expresspower. So, it is generally held that a corporation may temporarily conduct an outside business to

collect a debt out of its profits;4. Acts in part or wholly to protect or aid employees while the cases are divided, the better view

favors such acts as building homes, places of amusement, hospitals, etc., for employees, aswithin the corporate powers;

5. Acts to increase business thus, a corporation may conduct contests or sponsor radio ortelevision programs, or promote fairs and other gatherings to advertise and increase its business.

Incidental or Inherent powers explained

Incidental or inherent powers are powers which a corporation can exercise by the mere fact of its being acorporation or powers which are necessary to corporate existence and are, therefore, impliedly granted.As powers inherent in the corporation as a legal entity, they exist independently of the express powers.

Examples of incidental powers are:

1. The power of succession; to sue and be sued;2. To have a corporate name;3. To purchase and hold real and personal property;4. To adopt and use a corporate seal;5. To contract6. To make by-laws

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Power to sue and be sued

This power is an incident to corporate existence. Suits are to be brought by or against the corporation inits own name:

1. Corporations de facto2. A corporation which has been dissolved after the expiration of the three-(3) year winding-up

period ceases to exist de jure or de facto and, therefore, it cannot sue not be sued.3. A corporation not duly registered in accordance with law has no legal capacity to sue as such.4. Neither can a foreign corporation which transacts business in the Philippines without the

necessary license from the Securities and Exchange Commission sue in the Philippine courts.5. Obviously, an artificial person like a corporation cannot experience physical suffering, mental

anguish, besmirched reputation, wounded feelings, moral shock, social humiliation and similarinjury. Nevertheless, a corporation may have a good reputation or business standing which, ifbesmirched, may be a ground for the award of moral damages under the Civil Code.

Power to adopt and use a corporate seal

A seal is a device used to identify or replace the signature of an individual or organization and toauthenticate written matter purportedly emanating from such individual or organization. It may refer also

to the impression of such a device on document like certificate of stock.

Certificates of stock issued by corporations are required to be sealed with the seal of the corporation.Nevertheless, the use of a corporate seal in certificates of stock must be deemed merely directory ratherthan mandatory. A corporation may exist even without a seal. Any seal adopted and used by thecorporation may be altered by it at its pleasure.

Power to acquire and convey property

1. Inherent in every corporation This power which is also expressly conferred under the law hasalways been regarded as an incident to every corporation. A corporation needs properties orassets to carry on its business. It has been held by the Supreme Court that a corporation whosebusiness may properly be conducted in a populous center may acquire an appropriate lot and

construct thereon an edifice with facilities in excess of its own immediate requirement. If it has thepower to acquire such lot, construct an edifice, and hold it beneficially, the beneficialadministration by the corporation of such parts of the building as shared to others mustnecessarily be lawful.

2. Subject to constitutional and statutory limitations The right or power of private corporations todeal in real as well as personal property are subject to limitations or restrictions prescribed byspecial laws and the Constitution. Under the Constitution, a private corporation or associationmay not hold alienable lands of the public domain except by lease for a period not exceeding 25years, renewable for not more than 25 years, and not to exceed 1,000 hectares in area. Naturalresources such as coal, petroleum and other mineral oils belong to the State and cannot bealienated to corporations. Their exploration, development and utilization shall be under the fullcontrol and supervision of the State.

Power to acquire shares or securities

1. Shares of other corporations authorizes a corporation to acquire shares or securities of othercorporations. Such an act does not need the approval of the stockholders if done in pursuance ofthe purpose or purposes of the corporation as stated in its articles of incorporation but when thepurpose is done solely for investment; the approval of the stockholders is necessary.

In any case, the power to acquire shares in other corporations is subject to specific limitationsestablished by the Code, special laws, and the Constitution. The shares must be limited to shares

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of existing corporations. Under the Civil Code, the pledgee may appropriate may the thingpledged if after the second auction the pledged is not sold.

2. Shares of the acquiring corporation Our corporation law expressly authorizes a corporationsubject to limitations stated therein to acquire its own stocks. A corporation may purchase its ownstock, however, only when it has unrestricted retained earnings to cover the shares to bepurchased or acquired.

Power to contribute to charity

1. Public responsibility of corporations expressly vests in business corporations the authorityto contribute to purely charitable purposes. It gives recognition to the growing tendency toregard charitable gifts as within the scope of corporate authority. It is based on the view thatbusiness corporations are not organized solely as profit-making enterprises but also aseconomic and social institutions with corresponding public responsibility to aid in thebetterment of economic and social conditions in the community in which such corporationsare doing business.

2. Limitations on power Under the Code, the only limitations imposed on the authority of acorporation to make donations are:

a. The amount thereof must be reasonable

b. The donations must not be in aid of any political party or candidate or for purpose ofpartisan political activity

Power to establish pension, retirement and other plans

The authority granted to every corporation to establish pension, retirement and other plans for the benefitof its officers and employees is a statutory recognition that disbursement of corporate funds in pursuanceof such plans likewise promotes the purpose or purposes for which the corporation was formed.

Power to extend or shorten corporate term

The corporate term of a private corporation may be extended or shortened by an amendment of thearticles of incorporation approved by the majority vote of the board of directors or trustees and ratified at a

meeting of the stockholders representing at least 2/3 of the outstanding capital stock or by at least 2/3 ofthe members in case of non-stock corporations.

1. The amendment in general of articles of incorporation must be taken at a meeting of thestockholders or members and upon a vote. Mere written assent would not be sufficient.

2. A voluntary dissolution of a corporation may be effected by amending the articles ofincorporation to shorten the corporate term.

3. The extension of the corporate term as originally stated in the articles of incorporation issubject to the limitations provided.

Appraisal right of dissenting stockholders

Right of such stockholder in the cases provided by law to demand payment of the fair value of his shares

in case of an extension of corporate term.

Power to increase or decrease capital stock

An increase or reduction in the capital stock of the corporation involves a fundamental change in thecorporation. The authority of the corporation to take such action exists only when expressly conferred bylaw.

Limitations on the power

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They are as follows:

1. As a general rule, a corporation cannot lawfully decrease its capital stock if such decreasewill have the effect of relieving existing subscribers from the obligation of paying for theirunpaid subscriptions without a valuable consideration for such release as such an act of thecorporation constitutes an attempted withdrawal of so much capital of the corporation uponwhich corporate creditors are entitled to rely.

2. A corporation cannot issue stock in excess of the amount limited by its articles ofincorporation; such issue is ultra vires and the stock so issued is void even in the hands of abona fide purchaser for value.

3. A reduction or increase of the capital stock can take place only in the manner and under theconditions prescribed by law.

The Corporation Code contains no prohibition for a corporation to increase its authorized capital stockseven if the same has not yet been fully subscribed.

Necessity for increasing capital stock

1. Increase of corporate assets An increase of the amount of the stated capital may be for the

purpose of effecting an increase in the corporate assets. It may be effected:a. By authorizing the creation of news shares to be offered and issued at a fixed valuationb. Without any corresponding increase in the corporate assets, by the issuance of stock

dividends

2. Issuance of stock dividends The capital stock may also be increased without anycorresponding increase in the corporate assets by the issuance of stock dividends.

Subscription requirement in case of increase of capital stock

The law requires that at least 25% of the increased capital stock has been subscribed and that at least25% of the amount subscribed has been paid in actual cash or property.

Thus, if the corporation has an authorized capital stock of P80,000.00 and it is proposed to increase it toP100,000.00, an increased of P20,000.00, subscriptions must be obtained for not less than P5,000.00and payment in cash or in property amounting to not less than P1,250.00 must be made on account ofsuch subscriptions.

Ways of increasing (decreasing) authorized capital stock

There are at least three (3) ways by which the authorized capital stock may be increased (decreased):

1. By increasing (decreasing) the number of shares authorized to be issued without increasing(decreasing) the par value thereof;

2. By increasing (decreasing) the par value of each share without increasing (decreasing) the

number thereof;3. By increasing (decreasing) both the number of shares authorized to be issued and the parvalue thereof.

Illustration:

Assume that the authorized capital stock of X Corporation is fixed at P1,000,000 divided into100,000 shares with par value of P10.00 per share. The capital stock may be increased (or decreased) asfollows:

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The number of shares is increased (decreased) to 150,000 (75,000) shares with the samepar value of P10.00 each share; or the par value per share is increased (decreased) to P15.00 (P5.00)without increasing (decreasing) the number of the authorized shares; or the number of shares isincreased (decreased) to 150,000 (75,000) and at the same time increasing (decreasing the par value ofeach share to P15.00 (P5.00)

Effect of reduction of capital stock on liability for unpaid subscription

A corporation has no power to release an original subscriber to its capital stock from the obligation ofpaying for his shares without a valuable consideration for such release.

Distribution of surplus on reduction

1. Where there is no impairment of capital Upon a reduction of capital stock, if capital has notbeen impaired by losses, there necessarily occurs a surplus of assets to the extent of thereduction. Unless the rights of creditors will be affected or the capital impaired, the directorsmay make an equitable distribution of such surplus or so much thereof as may not berequired in carrying on the business for the best interests of the stockholders.

2. Where reduction is made to meet impairment there can be a distribution of only thoseassets over and above the amount equal to the par value of the outstanding reduced capital

and the amount necessary to discharge the existing corporate indebtedness. Thus, as ageneral rule, where capital stock is impaired and a reduction is made merely to meet thatimpairment, there will be no distribution of assets among the shareholders.

3. Distribution not mandatory The distribution to stockholders of surplus remaining after areduction of capital stock is authorized by the Code but cannot be compelled. It must beborne in mind that the funds resulting from such reduction represent capital and not profits.

Illustrations:

a. X Corporation has an authorized capital stock of P1,000,000.00 divided into 100,000 shares withpar value of P10.00 each. Only 60,000 shares with a par value of P600,000.00 were subscribedand fully paid.

X Corporation can reduce its authorized capital stock only after complying with the formalitiesprescribed. If X Corporation reduces its authorized capital stock to P600,000.00, the unissued40,000 shares are considered retired no longer exist for any purpose. Hence there is noreduction of legal capital of P600,000.00

Power to incur bonded indebtedness

A corporate bond is an obligation to pay a definite sum of money at a future date at fixed rate of interest.

1. Stock and non-stock corporation The power of a corporation to incur bonded indebtedness.But it is also a power implied from the powers expressed. A business corporation, in theabsence of restriction, may borrow money whenever the necessity of its business so requiresand issue security or customary evidence of debt such as notes, bonds, or mortgages.

2. Procedure for incurring bonded indebtedness is the same as the procedure for increasingor decreasing the capital stock except that the certificate need not state the matters set forthin Nos (2) & (3)

3. Prior approval of, and registration of bonds with SEC Any incurring, creating or increasingby the corporation of any bonded indebtedness is subject to prior approval of the Securitiesand Exchange Commission. The bonds issued by the Corporation have to be registered withthe Commission which is given the authority to determine the sufficiency of the terms thereof.

Right to pre-emption of stockholders

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Whenever the capital stock of a corporation is increased and new shares of stock are issued,the new issue must be offered first to the stockholders whoa re such at the time the increase was made inproportion to their existing shareholdings and on equal terms with other holders of the original stocksbefore subscriptions are received from the general public.

Reason for the grant of right.

The rule aims to safeguard the right of a stockholder to preserve his proportionate influence and interestin the corporation and the relative value of his holdings.

The purpose of the right is to protect from impairment and dilution the basic rights of the stockholder inthe corporation.

Example:a. To Voting controlb. To Dividend paymentsc. To the net assets of the corporation.

However, the stockholders may waive such right.

Illustration:

Corporation x has an original capital stock of P100,000.00 divided into 1,000 shares with a par value ofP100.00 A owns 500 shares. Subsequently, the capital stock is increased to P200,000.00 (to 1,000 moreshares). Both the old and new shares are voting shares.

1. Right to vote A must be given a right to subscribe to 500 of the new shares before they areoffered to others. If A is allowed to subscribed to only 100 shares of the increased stock, hisvoting control would be reduced from 50% (500/1,000) to only 30% (600/2,000).

2. Right too net earnings as dividends Suppose the corporation made a net earnings ofP50,000.00 Had this entire amount been distributed as cash dividends before the increase,each stockholders, including A, would have received P50.00 (P50,000/1,000) per share. Afterthe increase, the dividend would be reduced to P25.00 (P50,000.00/2,000) per share.

3. Right to net corporate assets after liquidation Assume that the total assets of thecorporation amount to P170,000.00, with liabilities of P20,000.00 and surplus of P50,000.00.Thus, its net assets or net worth is P150,000.00. Therefore, the actual value per share isP150.00 (P150,000.00/1,000). If the new shares were to be issued at their par value ofP100.00, the actual value of the original shares would be reduced to P125.00(P250,000.00/2,000).

If the rule of pre-emption will not be observed, it is evident that existing stockholders who are allowed tosubscribe to more than their pro rata shares in the increase of the capital stock and new stockholders willunjustly benefit by P25.00 per share at the expense of the stockholders whose pre-emptive right isviolated. In the event the liquidation, each stockholders, old and new, will participate in the net assets ofthe corporation at the rate of P125.00 per share.

Power to deny pre-emptive right

The pre-emptive right of stockholders of a stock corporation to subscribe to all issues or disposition ofshares of any class in proportion to their respective share-holdings may be denied by the articles ofincorporation or an amendment thereto. Unless so denied, the right should be granted to a holder ofshares although they are of a class different from the those issued or disposed of.

Example:

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Holders of common A shares are entitled to subscribe to common B shares in proportion to theirinterest, but they cannot be compelled to subscribed to the common B shares especially since the latterare of a class different from the class they are holding.

A stockholders whose pre-emptive right is violated may maintain an action to compel the corporation togive him that right. If the denial is by an amendment to the articles of incorporation, he may exercise hisappraisal right.

Shares to which right not available

1. Shares specified by law the pre-emptive right of stockholders extends to all issued ordisposition of shares of any class unless denied by the articles of incorporation or anamendment thereto, and except to the following:a. Shares to be issued in compliance with laws requiring stock offerings or minimum stock

ownership by the public;b. Shares to be issued in good faith with the approval of the stockholders representing 2/3

of the outstanding capital stock in exchange for property needed for corporate purposes;c. Shares to be issued in good faith with the approval of the stockholders representing 2/3

of the outstanding capital stock in payment of previously contracted debt.

2. Remaining unsubscribed shares if the shares corresponding to one stockholder are notsubscribed or purchased by him within the period fixed for the exercise of his pre-emptiveright, it does not follow that said shares should again be offered on a pro rata basis toostockholders who took advantage of their right of pre-emption. This is because as long asthey exercise their pre-emptive rights, their relative and proportionate voting strength in thecorporation will not be affected adversely.

Illustration:

A owns 20% of the capital stock of Corporation X. He exercised his pre-emptive right to newshares issued by the corporation. B, another stockholder, did not exercise his right with respect to theshares corresponding to him. His shares were offered to and purchased by stockholders C.

In this case, A still maintains his 20% interest in the corporation although Cs proportionateholdings increased. A has no cause for complaint as long as his 20% interest is not reduced.

Pre-emptive right as to treasury share

1. In close corporations, the pre-emptive right of stockholders extends to all stock to beissued, including reissuance of treasury shares, whether for money or for property orpersonal services, or in payment of corporate debts, unless the articles of incorporationprovides otherwise.

2. In widely held corporations, it would seem that existing stockholders have also a pre-emptive right as to treasury shares in view of the use of the phrase disposition of sharesof any class.

Availability of right to issue of originally authorized shares.

A shareholders pre-emptive right is his option to subscribe to allotment ofshares, in proportion to his holdings of outstanding shares, before new shares are offered to others. Thisdoctrine applies when a corporation increases its capital stock by declaring a stock dividend in which caseit cannot discriminate between stockholders.

1. All originally authorized shares initially offered for subscription The shareholders pre-emptive rights do not generally apply where the shares belong to the original stock of the

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corporation unsubscribe or undisposed of, inasmuch as such shares constitute a part of theassets, and may be sold either to stockholders or to strangers as the corporation may deembest even without notice to stockholders. When one subscribes fro shares in a corporation,he realized that his position is fixed on the basis of the proportion between the number ofshares subscribed by him and the total number of shares subscribed by him and the totalnumber of shares which the corporation is authorized to issue. This presupposes, however,that the corporation at its inception offered all its originally authorized shares, although suchshould be the presumption.

2. Number of such shares initially offered specified Where the number of shares initiallyoffered for subscription was specified, such that the original subscribers could not haveinsisted on subscribing for more, the corporation must first offer the additional issue of sharesfrom the unsubscribed portion of the authorized capital stock pre-emptively to stockholdersbefore the same is offered to third parties. In this case, the original subscriber is deemed tohave taken his shares in relation to the number of shares then initially allotted for subscriptionrather than to the total number of authorized shares at the time of his subscription.

Illustration:

X Corporation has an original capital stock of P1,000,000.00 divided into 100,000 shares

with a par value of P10.00 each.At its inception, X Corporation offered for subscription all the 100,000 shares but only 40,000

shares were subscribed and fully paid. As subscription covers 4,000 shares.In this case, A is not entitled to pre-emption with respect to the remaining unissued 60,000

shares. But where the number of shares initially offered for subscription was only 40,000, then A mayexercise his pre-emptive right, in case the remaining 60,000 shares are subsequently offered tosubscription, to the extent of 1/10, or 6,000 shares.

Power to sell, lease, etc. all or substantially all corporate assets

A corporation, by the action of its board of directors or trustees supported by the vote ofshareholders or members, may sell, lease, exchange, mortgage, pledge, or otherwise dispose of allsubstantially all of its property and assets including its goodwill.

The requisites for the validity of such sale, etc. are as follows:

1. The sale etc., must be approved by the board of directors or trustees;2. The action of the board of directors or trustees must be authorized by the vote of

stockholders representing 2/3 of the outstanding capital stock or 2/3 of the members, as thecase may be;

3. The authorization must be done at a stockholders or members meeting duly called for thatpurpose after written notice;

The sale, etc., shall be subject to the provisions of existing laws in illegal combinations andmonopolies.

Authority of the board

1. Stock corporations covers not only sale, but also lease, exchange, mortgage, pledge orother disposition of its properties.a. The board is given the right to decide upon the terms and conditions of the sale including

the consideration for the property sold, for at any rate, the sale is still subject to approval,by the stockholders or members.

b. After such approval, the board may nevertheless, in its direction, abandon thetransaction, without further action or approval by the stockholders or members butsubject to the right of third parties under any contract relating thereto.

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2. Non-stock corporations the vote of the majority of the trustees in office will be sufficientauthorization for the corporation to enter into any transaction authorized in the case of non-stock corporation where there are no members with voting rights.

Appraisal right of dissenting stockholder

It is to be noted that the exercise of the appraisal right of any dissenting stockholder is predicated on thesale or other assets, the phrase being defined as such which would render the corporation incapable ofcontinuing the business or accomplishing the purpose for which it was incorporated.

Conversely, any disposition which does not involve all or substantially all of the corporate assets made inthe ordinary course of business does not require the approval of the stockholders or members and wouldnot entitle any dissenting stockholder to exercise his appraisal right.

Power to acquire own shares

1. Elimination of fractional shares A fractional share is a share which is less than one (1)share. Thus, if a stockholder own 250 shares and the corporation declares 25% stockdividend, his total shares will be 312 and shares. Inasmuch as fractional shares cannot berepresented at corporate meetings, the corporation may purchase the same from thestockholders concerned or issue fractional scrip certificates to such stockholders who maynegotiate for the sale thereof with other stockholders also owning fractional shares so as toconvert them into full shares.

2. Satisfaction of indebtedness to corporation does not authorize a corporation to arbitrarilypurchase the shares it issued to any of its stockholders indebted to it, whether at theprevailing market price or at par value for the purpose of applying the proceeds thereof to thesatisfaction of its claim against them, and this is particularly true where the consent of suchstockholders has not been secured. And even where their consent has been secured, thecorporation can buy their shares only if the conditions for the purchase.

3. Payment of shares of dissenting or withdrawing stockholders refers to the instances when adissenting stockholder is given appraisal right and the right to withdraw from the corporation.

4. Other cases This power of the corporation to acquire its own shares is not limited to thecases enumerated in Section 41. Thus, it may also be exercised under treasury shares. Withrespect to redeemable shares, they may be purchased by the corporation regardless of theexistence of unrestricted retained earnings in the book of the corporation.

Conditions for the exercise of the power

Briefly, a corporations right to purchase its shares according to the weight of authority is subject to thefollowing limitations:

1. That its capital is not thereby impaired;

2. That it be for a legitimate and proper corporate purpose;3. That there shall be unrestricted retained earning s to purchase the same and its capital is notthereby impaired;

4. That the corporation acts in good faith and without prejudice to the rights of creditors andstockholders;

5. That the conditions of corporate affairs warrant it.

Thus, if the aforementioned conditions are obtained, a corporation may acquire the shares of alienstockholders to comply with constitutional or legal requirements prescribing the minimum percentage ofcapital stock ownership of Filipino citizens in certain corporations.

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Trust fund doctrine

1. Corporation generally without power to purchase its own shares A corporation has nogeneral power to purchase its own shares of stock. This rule is dictated by the necessity ofprotecting the interests of existing creditors who might be adversely affected by the stockpurchase which, in effect, may operate to reduce its capital stock to the extent of the sharespurchased without complying with the formalities.

2. Repayment to stockholders a fraud on corporate creditors The foregoing is in consonancewith the trust fund doctrine. This doctrine holds that the assets of the corporation asrepresented by its capital stock are trust funds to be maintained unimpaired and to be usedto pay corporate creditors in the sense that there can be no distribution of such assets amongthe stockholders without provision being first made for the payment of corporate debts andthat any such disposition of it is a fraud on the creditors of the corporation and, therefore,void. The purchase, in effect, amounts to repayment to the stockholder of his proportionateshare from the corporate assets and hence, an impairment of the capital available for thebenefit and protection of creditors who are preferred over the stockholders in the distributionof corporate assets.

Power to invest funds in other corporations or for other purposes

A corporation may be organized with multiple lawful purposes so long as the primary purpose is indicatedin the articles of incorporation. However, the investment of its funds is limited to the primary purpose. Inorder that if may invest its funds in any other corporation or business or for any purpose other than theprimary purpose, compliance with the requirements and subject to the prohibition against certaincorporations from having more than one purpose.

But a corporation may invest its fund in another business which is incident or auxiliary to its primarypurpose as stated in its articles of incorporation without the approval of the stockholders or members asrequired. In such case, a dissenting stockholder shall have no appraisal right.

Concept of dividends

A dividends is that part or portion of the profits of a corporation set aside, declared and ordered by thedirectors to be paid ratably to the stockholders on demand or at a fixed time.

It is a payment to the stockholders of a corporation as a return upon their investment. It is a characteristicof a dividend that all stockholders of the same class share in it in proportion to the respective amounts ofstock which they hold.

Dividend distinguished from profits or earnings

1. A dividend, as applied to corporate stock, is that portion of the profit or net earnings which thecorporation has ser aside for ratable distribution among the stockholders. Thus, dividends

come from profits, while profits are a source of dividends.2. Profits are not dividends until so declared or set aside by the corporation. In the meantime, allprofits are a part of the assets of the corporation and do not belong to the stockholdersindividually.

Power to declare dividends.

The board of directors pf a stock corporation has the power to declare dividends out of the of theunrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholderson the basis of outstanding stock held by them.

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1. Stock dividends it shall not be issued without the approval of stockholders representing atleast 2/3 of the capital stock then outstanding at a regular meeting of the corporation or at aspecial meeting duly called for the purpose.

2. Other dividends A mere majority of the quorum of the board of directors is sufficient todeclare other dividends. The board may declare dividends other than stock without need ofstockholders approval.

The dividend is paid to the registered owner of stocks as of a record date usually a date different from thedate of declaration. It is stated either at a given percent or a fixed amount for each share. The record datedetermines the time when the stockholders of record shall be ascertained.

Dividends payable out of unrestricted retained earnings

Under the law, dividends other than liquidating dividends may be declared and paid out of theunrestricted retained earnings of the corporation. A corporation cannot make a valid contract to paydividends other than from retained earnings or profits and an agreement to pay such dividends out ofcapital is unlawful and void.

The power of corporation to acquire its own shares is likewise subject to the condition that there be

unrestricted retained earnings in its books to cover the shares to be purchased.

Existence of actual profits or earnings

To justify the declaration of dividends, there must be an actual bona fide surplus profits or earnings overand above all debts and liabilities of the corporation.

1. Earnings of the corporation which have not yet been received even though they consist inmoney which is due cannot be included in the profits out of which dividends may be paid.

2. Dividends cannot be declared out of the borrowed money, for the borrowed money is notprofits; but money may be borrowed temporarily for the purpose of paying dividends, if thecorporation has used its surplus assets to make improvements for which it might haveborrowed money.

3. A corporation may properly pay dividends from accumulated surplus out of previous year

Documents

Corpo Code Outline