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BUSINESS ORGANIZATION II TRANSCRIPTFrom the lectures of Father Gus Nazareno

Corporations Law |

Ateneo de Davao College of Law | Tres Manresa SY 2015 2016

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Nov. 12, 2015 KBF

BUSINESS ORG II: CORPORATIONS LAW

The laws that are covered by this course are as follows:

1.

Corporation Code of the PHL (BP 68)

2.

Securities Regulation Code (RA 8799)

3.

PD 902-A, and

4.

The Financial Rehabilitation and Insolvency Act of2010 which lapsed into law on July 18, 2010 (RA10142).

I think Rex Bookstore has a compilation of commercial laws,I don‘t know if all of them are there… but make sure youhave a copy of this.

Not only this, but last Nov. 6, the SEC put out:

5.

The latest amendment of the IR of the SRCode (RA8799) and the 2015 amendments of RA 8799Implementing Rules is 200+ pages; it will beeffective 15 days after its publication in November6.

You can download it from the SEC website, so you don‘thave to buy it.

In 2010 there are already this many amendments.

The SEC has been super industrious running after so-calledpyramiding schemes. Just last week, they *** 3 entities.They are in fact already filing fraud cases against theofficers, at least, that is what the notices in the SEC websitesays. How are they running after them? For unauthorized

selling of securities. Before you can sell any security, youhave to register the security. So you have them prosecutedfor pyramiding scheme.

Kabalo man mo sa pyramiding no? Some people will offeryou fantastic returns on investment. ―Legacy,‖ that used tobe breaking here in DVO, just beside the Metrobank office inRoxas. The office is still closed. That used to be Legacy‘s.They offered 2% a month, so in 1yr, you have 24%. In 4yrs,you double your money. Can you imagine?

When you have a scheme like that, it‘s too good to be true – and true enough, it‘s a scam. They really have no business!That‘s supposed to be an investment that is outlawed - not inthe SRC - but in PD 902-A, these pyramiding schemes.

Introduction

I don‘t know what your outlook in life is, but corporations area necessary fact of life. A more than average knowledge of acorporation is expected of an educated man such as acollege graduate and more importantly, if you‘ re a lawyer.

You have to have a more than average knowledge of acorporation because as a lawyer, the public expects that ofyou; and your knowledge of a corporation, all of it will not begotten from the law. In fact, the law presupposes your

knowledge or corporations, so you have to do a goodamount of reading on your own. This is one part of the lawwhere the practice exceeds, or is ahead of the law, and thelaw comes around and legalizes (puts legal structure andlimits) to a practice.

The idea of a corporation is one of the most creative ideas ofman, which made possible the industrial revolution. Youmight think that the industrial revolution was propelled byinnovations in technology. It was! But without thesophistication of the corporation, it could not have beenpushed that fast and that effectively.

Can you imagine if you have a project like the building of theSuez Canal. That 100km of artificial sea that makesunnecessary the rounding of the ship through Africa becauseit can cross straight to the Mediterranean. Very elaborate! Ittook 15 years. 75 million stones, earth, and sand had to beremoved to build the Suez Canal. You cannot do that bysingle proprietorship; you cannot do that by partnership. It

was a very sophisticated project.

Q: What is the difference between our study of thecorporation here and the juridical person (as used incivil law)? What is the difference between our study ofthe juridical person and a corporation under BusOrg?

A: In the Civil Code, you study the juridical person as acontract. You study it as the subject of rights andobligations.

But when you study corporations in Corp. Law, you study itas a vehicle. In other words, as a platform for succeedingtransactions; and that is very close to taxation. You should,as much as possible, coordinate this subject with Taxation,

another subject which is close to your heart I suggest, when I studied law, my background wasPhilosophy, so very far from Commercial law. So the subjectsI studied were so foreign, like Taxation, like Corporations. Idid not study Labor at all because I knew I would bestudying labor for the rest of my life. Study that of whichyou have very little background. Get yourself to fall in lovewith this subject because you will not study a subject whichis of no value to you. [Mainlab tayo at masaktan! Fatherapproves!]

You will not know taxation if you will not know Corporations,and you will not know the value of Corporations if you willnot know taxation.

2 years ago, the SC came out with a decision, Petronversus this foreign airline. The airline was asking for arefund of VAT, which it paid for fuel that it bought and isexempt under the NIRC if you do not use the fuel in the PHL,that is under the Protocol Treaty of xxx. 1

1TSNer’s note: di clear kung ano yung treaty, sounded like “kyata” but it may

be ICAO, the International Civil Aviation Organization, which has thisprovision in its main articles:

Article 24: Aircraft flying to, from or across, the territory of a state shall be

admitted temporarily free of duty. Fuel, Oil, spare parts, regular equipment

and aircraft stores retained on board are also exempt custom duty,




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The petition was disallowed by the NIR Chief, boygirlHenares. And Henares was upheld by the SC.

The SC said: there is no refund even if you are tax-exemptbecause are not the obligor of the tax. The tax is just passed

on to you. The one taxed is the oil company who is sellingyou the fuel. You cannot ask for a refund because are notthe taxpayer. The taxpayer is the company.

2 weeks ago the SC came out with Chevron vs. Subic(G.R. No. 210836). The same ruling. Subic Authority isexempt from VAT and oil products.

This time it was Subic that asked for a refund, the BIRdisallows; they go to the SC after they are denied by theCTA, and this time the SC said, ―yes, you can get therefund.‖ En Banc decision, why is that? Very interesting case,still fresh, you read it. It is in the lousy databank of the SC.

Historical basis of CORPORATIONSSo the idea of the corporation, this was an invention madenecessary by risk aversion.

They have this expression, ―it is as English as drinking tea.‖Tea originally came from China, and they transferred it toIndia. You would have individuals buying ships, and fromtheir ship, they would try to get a loan, and their ship is theircollateral. You know what this is from your Transpo: loans onbottomry. Your guarantee is your bottom! Not the softposterior with which your Creator has endowed you, but thebottom of the ship.

What if the ship does not come back? What happened toyour debt? They will execute on your personal property.

[Father discusses the concept of jettison, kinsa ba dawmagbayad sa losses sa jettison, etc] Those were just thelegal concepts and constructs that saved you if there is nototal loss. The real salvation came when they said, ―thisventure is just one person and the liability is contained withinthis particular venture,‖ it cuts off the venture fromextending to your personal property. So those who put theirmoney here is not involved in a partnership. They areinvolved in a company, and they are called the East IndiaCompany.

How did it become a company? The Crown issues a decreethat ―you are a company and the Crown recognizes you as aperson.‖

You are now responsible for the bringing of the finances,those officials to the destination where you are, and you alsobring your business with you. If anything happens, theobligation dies with this particular ***; but you needed acrown decree to recognize you.

That is the origin of the corporation. It needed a decree, alaw! Now if you did not know the King, or were not in theking‘s favor, you could not form a corporation. The moment

inspection fees or similar charges.

you are in favor with the King, the king can give you adecree and you are now a corporation. So you can imaginethe anomalies that entered these transactions, so much sothat all modern constitutions now prohibit the corporation bydecree! That is found in our Constitution:

Article 12, SECTION 16. The Congress shall NOT, exceptby general law, provide for the formation, organization, orregulation of private corporations. Government-owned orcontrolled corporations may be created or established byspecial charters in the interest of the common good andsubject to the test of economic viability.

A private corporation for a private purpose cannot be formedby law. Only a corporation for a public purpose can beformed by direct *** and that is called an original charter. Soeveryone now has an equal chance to form a corporation.

How is that possible? The legislature passes a general

enabling act: The Corporation Code. Anyone who cancomply with the requirements of the general enabling lawcan be registered as a corporation and act and transactbusiness as such.

From the old old practice 17, 18th century. We are now finallyin this era of a corporation; so universal that it is foundeverywhere, even in the People‘s Republic of China who byits Constitution allocated unto the State all the means ofproduction.

You should have listened to Mr. Ma [founder and charmain of Ali Baba] and yesterday he completed his brainchild, Singles‘Day – November 11. Why is it Singles‘ Day? BecauseNovember is 11, it‘s all single digits, so he‘s trying to entice

the singles people to ―be good to yourself! Celebrate yoursingleness! Buy all these products!‖ and he broke the record.

Last year, in a single day, Ali Baba sold 13B USD worth ofmerchandise. 13 billion dollars! One single day!

Today when he was interviewed in Bloomberg, Ma said: ―weovershot, we made 14 billion instead of 13 bi llion!‖ And thenhe was asked, ―nobody believes your accounting! You are inChina!‖ He was not at all disturbed. ―You don‘t believeme….that‘s your right, but the price of our stock is all right,you don‘t believe me; no corporation can make everybodybelieve it, so we just try to improve our efficiency, increaseour sales. I like you, you don‘t like me, I hope later on youwill like me.‖

You look at him, he looks like a retard Tan-awa ra gud! He‘s not a geek, he‘s not a techie, he‘s an ordinary Englishteacher. And he‘s operating in a country that has professedphilosophically to be against private capital. He‘s sellingshares of stock in NY. I don‘t know why his consultants nevertold him: ―at least fix your teeth!‖

You laugh at him, but he is laughing his way to the bank,he‘s laughing at us. This slit-eyed guy who beats all retailestablishments in the US. 80% is sold through the internet,the rest face to face in a store. In the US, 20% is sold




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online, 80% face to face. China leapfrogged the internetsales.

Codal provisions proper (BP Blg. 68)

This is my codal book of the Corporation Code. Right after

the passage of the law in 1980, this was the first printing. You did not sit under dean Estrellado. The Civil Code waspassed August 1950, he had the original print from theBureau of Printing.

Section 1.Title of the Code. This Code shall be known as"The Corporation Code of the Philippines." (n)

I would just like to point out that in Section 1 it says that thecorrect name of the law, includes the article ‗the.‘ ―THECorporation Code of the PHL.‖

It replaced the old corporation law, which the Americansbrought with them and which was by act of the Congress of

the US. The old corp. law, Act 1459 became effective April 1,1906. This Corporation Code became effective May 1, 1980.

Section 2 has this definition, practically copied the oldSection 1 of the old law.

Section 2. Corporation defined. A corporation is anartificial being x x x

I would like to point out that it is NOT an artificial person.The personhood of the corporation is just as real as you ormy person. It is the being that is artificial. It is not theperson.

Q: What you mean by artificial being? A: The being is artificial because there is no physicalreferent.2 A natural person has a physical referent.

If you file a complaint against a corp. and you do not knowthe name of the corporation, there is no way you can file acomplaint.

For a natural person, if you don‘t know the name of theperpetrator, you can still file a case against that person. Atlarge na sya, file-an nimo kaso, butngan nimo ―John Doe orMary Doe.‖ Madakpan na sya, move to amend the complaint/information. That is just a formal change, not a substantialchange.

You cannot do that with a corporation. Material man na sacorporation, because it has no physical referent. Masayopgani ka ‘ g ngalan sa corporation , i-serve nimo sya summons.Mag-move sya to dismiss ―for lack of cause of action.‖ Hepresents his Articles of Incorporation.

Ang akong ng‘an, ―Estrella Brothers Corporation.‖ Dili akonang ―Estrella Bro Corp.‖ Wala kay cause of action nako.

2Referent –a referent is what a word or symbol stands for. The referent isthe concrete thing that’s being referred to, so an actual chair would be the

referent of the word chair.

So it‘s the being that is artificial. It is not the personhoodthat is artificial.

Section 2. Corporation defined. A corporation is an artificialbeing created by operation of law x x x

This is NOT THE SAME as ―created by law.‖

If you were created by law, then the law was passed byCongress, and gave birth to this corporation for a publicpurpose.

If ―created by OPERATION OF law‖ , first, there is a generalenabling act, by virtue of compliance of the requirementsthat are demanded of the Act, you are now issued aCertificate of Incorporation. Now, the law is operativebecause its purpose, which to allow all sundry to create acorporation, is now operative. That is the difference between

―by operation of law‖ and ―by law.‖

Section 2. Corporation defined. A corporation is an artificialbeing created by operation of law having the right ofsuccession x x x

This is not the succession in your Wills and Succession.

You know only a natural person can write a will. Acorporation cannot write a will. First of all, a corporation hasno hands and feet. For a corporation to act, it needs anotherperson – who is a natural person – who can act for and in itsbehalf.

So, the succession here means that it could be changed in itsname, it could become non-stock or a stock; it is still the

same corporation that succeeds to itself.

It has already existed for 50 years, it is renewed, it is still thesame corporation.

It is capable, theoretically, of perpetual succession. It doesnot die.

Sec. 2. Corporation defined. A corporation is an artificialbeing created by operation of law, having the right ofsuccession and the powers, attributes and propertiesexpressly authorized by law or incident to its existence.

That is more difficult to understand.

Q: What are the powers incident to its existence?

A: Those are the powers that define the corporation, not thecorporation defining the powers. If the corporation does nothave that power, then it is not a corporation.

Q: What is the definition of a person?

A: A person is a subject of rights and obligations. If you donot have rights, you are not a person. Because you haverights you are a person.

Naay iro dira, musayaw ug maingon ko ―1+1? Makatubagman! ‖ Person ba na sya? Bunalan nimo, makakiat na sya,




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physical injuries? Dili! Wa man na sya ‘y rights and obligationsunder the law.

A corporation, by becoming a corporation, precisely becauseit‘s a corporation, it has rights and obligations. Remove the

rights and obligations, it is not a person, it is not acorporation.

So what is important about that particular notion of acorporation? Even if the law does not state the rights, it hasthose rights because it is a person. It can sue and be sued.

―Rights, obligations!‖ Even if the law is silent as to WON itcan sue, it has the right to sue – because it is a person. Itbelongs in the definition of its personhood, therefore itcannot be taken away from it.

Sige nakog balik- balik: ‖ kanang ulan, raiiin, what is thatproperty of rain that is incident and part and parcel of itsnature? Incident to being rain is to wet. Ma-igo gani kagulan, mabasa ka. O kung mag- raincoat ka, ang imong

raincoat mabasa. Now, kay nag-ulan, unsa ‘ y resulta, ―diliman nabasa ang akong ulo, na- (bisaya word for bukol)‖ Ah ,HAIL na! Dili na ulan, ice na. That is definitive of rain, that itwets.

[Father then jokes that ihi poured from an arinola fromabove is also not rain, even though it wets.]

So that is powers that are ―incidental‖ . The term incidentalshould be translated as inherent . It inheres in thecorporation. The right that inheres, that defines thecorporation.

November 13, 2015 NBD

Basic types of Business Organizations

We said that we are studying corporations, not so much as acontract but as a vehicle or platform for succeeding legalcontracts or acts.

So, in order to set our minds as to vehicles, or transactions,or contracts subsequent to the formation, let us take a lookat the basic types of business organizations. There are atleast 6 other vehicles or platforms for succeeding businesstransactions.

I. SOLE PROPRIETORSHIP

This is a person, an individual who personally

conducts business under his name or a businessname. The business is an organization composed ofthe proprietor himself and his employees and ithas no personality separate and distinct from theproprietor. A sole proprietorship does not possess a

juridical personality and has no legal personality tofile and defend an action in court.

Simple na na ha, muingon ka, ―Klaro man kaayo na ,basic.‖ Basic bitaw .

You read the case of Anita Mangila vs. CA (387SCRA 162, G.R. No. G.R. No. 125027, August

12, 2002, Carpio J.)

What happened there? Naay tindahan , singleproprietorship. Anita transacted business, she wasnot satisfied, reklamo sya, wala man siya tagda .

Ipakiha nya ang single proprietor. Pa-summonanniya . Ang address sa summon,sa tindahan .

Valid ba ang summon? Cannot be, it should havebeen addressed to the residence of the singleproprietor.

NBDNote: There is deviation from the actual factsand ruling in the case vs. Fr.‘s facts and ruling.

Anita Mangila vs. CA August 12, 2002

FACTS: Mangila is an exporter of sea foods, singleproprietor. Private respondent Loreta Guina is also asingle proprietor engaged in the freight forwardingbusiness.

Mangila contracted Guina‘s services and theagreement was to pay cash on delivery. However, inthe succeeding shipments, Mangila failed to payGuina the shipping charges despite several demands.Thus, Guina filed a collection case. Several defenseswere raised by Mangila but the relevant discussionrested on the propriety of the venue where Guinafiled the case.Guina filed the case in RTC Pasaybecause that waas where Guina‘s office/business isfound.

HELD: A sole proprietorship does not possess a juridical personality separate and distinct from thepersonality of the owner of the enterprise. The lawmerely recognizes the existence of a soleproprietorship as a form of business organizationconducted for profit by a single individual andrequires its proprietor or owner to secure licensesand permits, register its business name, and paytaxes to the national government. The law does notvest a separate legal personality on the soleproprietorship or empower it to file or defend anaction in court.

Thus, not being vested with legal personality to filethis case, the sole proprietorship is not theplaintiff in this case but rather Loreta Guina in

her personal capacity. In fact, the complaint in thelower court acknowledges in its caption that theplaintiff and defendant are Loreta Guina and AnitaMangila, respectively. The title of the petition beforeus does not state, and rightly so, Anita Mangila v. AirSwift International , but rather Anita Mangila v. LoretaGuina . Logically then, it is the residence of Guina,the proprietor with the juridical personality, whichshould be considered as one of the proper venues forthis case.

All these considered, Guina should have filed thiscase either in San Fernando, Pampanga (Mangila‘s




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residence) or Parañaque (Guina‘s residence). SinceGuina filed this case in Pasay, we hold that the caseshould be dismissed on the ground of impropervenue.

So, palit ka ug bukag sa Bohol Trading diha saUyanguren, unya ang bukag nabuslot ma ‘ g kalit.

Anha ka mu -serve sa imong summon dinha? Adtosa home address kay single proprietorship man na.Dili man na partnership/corporation. Muingon ka‘g, ―Syaro, d ugay na gud na nga naa dinha saUyanguren.‖Pero h a-in man na nagpuyo ang singleproprietor? Pangitaon na nimo ! You cannot servesummons there. That is the lesson of AnitaMangila vs. CA.

Q: What is the significance of a proprietor, thebusiness and the name?

A: A proprietor‘s true name is registered with the

civil registrar upon birth. A proprietor is required toregister his business name other than his truename, with the Bureau of International Trade andIndustry and then the firm name or style is alsorequired to be registered.

Local register na, kanang sa mayor‘s office. Now ifnot registered, the proprietor cannot use or signusing the business name in connection with hisbusiness on any written or printed receipts or anyevidence of agreement or other documents. Andthen, it also cannot exhibit the business name orstyle thereof in plainview. You mustfirst register. Pagrehistro nimo ana, kinsa man mu-collect para anang

karatola nimo ? That‘s one of thefew taxes that a barangay can levy under the Local GovernmentCode. Kanang signage naga -collect sila ug fee. It‘s afew of the taxes that they can collect.

Now, juridical persons or corporations are not underthe same obligation to register their names. No

juridical person need register the names that areregistered with the SEC. However, if a corporationuses a different name for its business, then it mustregister the name.

I‘ ll give you these samples of Articles ofIncorporation so that you will be familiar… Readthese Articles of Incorporation. I have here the

Articles of Incorporation of BDO, Ayala Corporation,Megaworld, Tan-awa ninyo! Universal Corn ProductsIncorporated, before its amendment. Unsa man ni ?Robina ni Gokongwei. Get a copy, I will hold youresponsible for this because I can ask anything herein the examination. Read it so that you‘ll be familiar.

And, you ask questions! BDO, why is the name ofHenry Sy or any Sy not present? What happened?Why are theirnames not there, yet how can theycontrol BDO? Later on we‘ll find out.

Let‘s say, Banco de Oro articles of incorporation.

Section 1. The name of this corporation shall beBanco de Oro, Incorporated/Corporation.

Required naman ron nga magbutang ka ‘ g either of

those two words (“Corporation” or“Incorporated” ). Wa gani nang 2 words, thatmeans you must be incorporated very very early.But that is a requirement now by the implementingrules of the Corporation Code that you must include

―Incorporated‖ or ―Corporation‖.

Now here, you can include all the other names thatyou have registered to do business. So, Articles ofIncorporation of BDO has several names:

BDO UNIBANK, INC.

Doing business under any of the followingnames and styles:

BDO, BDO Unibank, Banco de Oro, Banco deOro Unibank, BDO Banco de Oro

Now, these names that were formerly registered indifferent registries —in local government, under thebusiness name registered.

This is one of the maladies of doing business in thePhilippines. Roxas was asked about this. If you area foreigner, you come here and you do business,mag incorporate ka sa SEC. if you use anothername, you have to register it with the Departmentof Trade [DTI], register it with the business Bureauof the Local Government, and then Roxas says, ―If

I‘ m elected as president, you will only go to oneplace and you will register only once.‖

Tan-awa ra gud nang tinunto . Why did you not doit? You have been there for close to six years now,why did you not do it? Maghuwat pa man ka ngama-presidente ka, nganong wa man na nimobuhata?

There are persons, individuals that cannot bebusiness proprietors, BUT you cannot prevent themfrom being stockholders of publicly tradedcorporations because that is not part of theprohibition in the Constitution.

So, if you are a senator, congressman,president, VP, members of the cabinet, theirdeputies or assistants, members of theconstitutional commissions, you CANNOT besole proprietor.

Let us say you are an optometrist. Then you gotelected to Congress.

Can you still continue to exercise your profession asan optometrist? No more. You cannot exercise yourprofession because that is prohibited by theConstitution.




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BUT if you are an actor, you can continue to shootmovies because being an actor is not aprofession. Kana, tinunto nasad na.

You are a boxer, you can continue. Boxing daw is a

profession where you allow yourself to be beaten upin the sight of millions of people that‘s why theyshould be paid in millions. Kulatado man ka .

Are you going to vote for Pacquiao as senator?Pagka dakong tinunto. The most absenot congressman. Mu-absent pa sa session kaynagbasketball sa PBA . Maayo ra ba gyu ‘ g sinaligansya sa PBA, usahay di gani ka -shoot.

Why? Because sports is not considered aprofession. So there is no prohibition on his part.

If you are a lawyer, doctor, optometrist, or engagedin any undertaking which requires a licensure foryou to practice, you cannot practice! That is covered

by the prohibition.

Later on we will find out that a corporation cannotexercise a profession. There can be nocorporation that can be formed for thepurpose of exercising a profession. A group ofprofessionals can only come together as apartnership but there can be no corporation that itengaged in the practice of profession.

Why? Because the exercise of a profession, likelawyering, practice of medicine, accounting, thereare personal liabilities. There are criminal and civilliabilities. And you might escape liability byincorporating. So the law does not allow professions

to be incorporated.

Q: Be that as it may, can a doctor beincorporated for purposes of the filing ofincome tax?

A: YES. You can incorporate yourself. In yourpractice, you are single proprietor. But ifincorporated, you are actually an employee of ―JuanDela Cruz M.D., Incorporated‖ .

Q: What is the purpose of Juan Dela CruzM.D., Incorporated?

A: The purpose is not to practice medicine; it is tomanage the practice of medicine of oneindividual, Dr. Juan dela Cruz.

So, Juan dela Cruz M.D., Inc. has one and only oneemployee. Who is that? Juan dela Cruz! He is, Iwould say not so much the employee, but theasset. He is to be protected by the corporation, thecorporation manages him.

Q: What is the benefit of that?

A: The benefit is, kanang iyahang gi-kaon , chargedto the corporation.Kanang iyang mga expenses kaygi-manage man siya sa corporation, charged to the

corporation. Kanang iyahang transportation,charged to the corporation.

You cannot do that if you are an individual,if youare a single proprietorship. You cannot charge your

food to your business.TRIVIA: Did you not know that Aga Muhlach isincorporated? Aga Muhlach, Incorporated . Atthe time when he was 20 years old, he incorporatedhimself. And the purpose of the corporation is tomanage Aga Muhlach, so as to maximize hisincome. So ang iyang gi-kaon , charged to thecorporation. Kung magpa -doctor siya , corporationexpensena . Otherwise, his expenses will not becharged and deducted from gross income. It couldbe done because he was incorporated. Take noteha! Sucha corporation is not for the purpose of thepractice of a profession. It is to manage the mainasset of the corporation.

That‘s what many of the doctors in the U .S. did.That‘s why they are so much against the ObamaMedicare because fees become standardized. Thereare many doctors there that are incorporated,especially surgeons.

II. PARTNERSHIP

You know the definition from the Civil Code, ―Two ormore people, individuals, contribute money orproperty and whatever profits are derived from suchpurpose, is divided in proportion to one‘scontribution.‖

Art. 1767. By the contract of partnership two ormore persons bind themselves to contributemoney, property, or industry to a common fund,with the intention of dividing the profits amongthemselves.

Now if you have no contribution of property but justefforts, you are an industrial partner. Your effortmust be quantified and in accordance with the valueof your contribution, then you will receive a shareaccording to the value of your contribution asproportion to the entire corpus .

As to purpose the difference between a corporationand a partnership is, a corporation must have aspecific purpose; a partnership is more thecoming together which is based on trust andconfidence.

So if today the partners will agree, ― Abri ta ‘gsari2x store.‖ Ugma, magsabot nasad sila, muingonnasad sila ‘ g ,―A h, mamaligya ta ‘ g tae sa kabayo,‖ mahimona! Sunod ugma, muingon nasad sila,―M amalit ta ug tae sa manok kay magsugod taug organic vegetable garden.‖ Mahimo! Every daythey can change their business because it ‘ s on thebasis of agreement. Remember,the moment there is




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an agreement even without registration withthe SEC, there is a partnership because the basisof this entity called partnership is consent ofthe parties.

But in a corporation, it draws up the corporationarticles, everybody signs, it‘ s supposed to be anagreement, BUT UNLESS it is registered andapproved by the SEC, there is no corporation.

You should have the approval of the SEC.

Now, if you are a LIMITED PARTNERSHIP, thatmeans there is at least one general partner andhis liability extends not only as far as hiscontribution is concerned but also as to his personalproperty. If you are a limited partnership, you haveto be registered with the SEC and there has to be adistinction who are the general partners and whoare the partners with l imited liability. Ilista na!

Why is that necessary? It is necessary for all andsundry. It is an announcement to the world! So thatyou know whom to sue, to claim, because thegeneral partner is listed in the registration list.

TRIVIA: What is the biggest partnership in theworld? Until 5 years ago, the biggest partnership inthe world, was Lloyd‘ s of London. It is a reinsurancecorporation —that is the biggest reinsurancecorporation, and it‘s a partnership. It was made upof over a hundred partners, who hold office in aninn in downtown London. There were 100 generalpartners, and then there are several limitedpartners. Reinsurance na ha. Insurance companieswho accept the obligations of an insurer beyond

their capital capabilities, reinsure with Lloyd‘ s ofLondon. Mu- insure ka ug Boeing 777/787ngaeroplano . Ang capital dirisa Pilipinas for aninsurance company , pila man? Minimum capitalisP20 million ra ! Dilina kapalit tingali ugusa ka makinasa 777/787 . That‘s why you reinsure and thereinsurer is mostly Lloyd‘ s of London. When Lloyd‘ sof London reinsures, it reinsures only if theinsurance policy has an arbitration clause. It willnot accept if there is none. Dugay man kaayo ugmag kaso2x pa . There is an arbitration tribunalfor marine insurance, arbitration tribunal foraircraft insurance, all sorts of arbitration tribunalsdepending on the kinds of insurance contracts.

Daghan man gyud ta ‘g bapor dinhi sa P ilipinas, naaba ta ‘ y arbitration [tribunal for] marine insurancedinhi sa Pilipinas ? WALA . Wa‘y musalig nato. Angkinaduolan na arbitration [tribunal for] marineinsurance is Hongkong or Singapore. Naa gani kaybarko, dako2x ang kinahanglan nimo i-reinsure,andyou must include there an arbitration clause forreinsurance. Otherwise, Lloyd‘ s of London will notreinsure.

Q: What are the distinctions betweenpartnership and a corporation?

[FGN: You memorize what the authors put therebecause what the authors put there is adifferentiation of a corporation and a partnership ascontracts.]

A: Here is the distinction between a partnership anda corporation when it comes to being a vehicle orplatform for further business transactions:

PARTNERSHIP CORPORATION

There is no distinctionbetween the ownershipof business and themanagement ofbusiness.

There is a distinctionbetween ownershipand management.

There can be a complete division betweenownership and management in a corporation. The

board of directors (BOD) representsmanagement, the stockholders representownership.

Now, it‘s natural to assume that the majority ownerwill sit on the board because it‘s the owner whodetermines who should manage once a year whenthey elect the members of the BOD. But he doesnot necessarily sit in the management. He couldhave his own representative.

You will say, ―What the heck, sya gud ang tag-iya! ‖

Q: What is the inherent advantage of thatseparating ownership and management?

A: JUDGMENT.

Is the business of the corporation optimized bymanagement? Who judges that? It‘s supposed to bethe owners. But if the owner himself is managing it,he will be passing judgment on himself! If thebusiness is going to buy some additionalbusinesses, merge with another, that‘s very difficultto do if the principal owners are really involved inmanagement because if you‘re the owner, yourvaluation of the assets is different from thevaluation of management who are not owners. Sohow do you solve that? Suppose there is somethingradically wrong in the way you administer your

business, can you correct yourself? That is whythere are so-called consultants.

Consultants are hired by corporations that aremired in the non-distinction between managementand ownership. Consultants are there to be able totell the majority of controlling owners, ―Y ou arewrong, this is what you should do, because I amhired by the corporation,which is a separate anddistinct entity from you, the majority owner.‖ Nag- away na nang mga owners dinha, ang consultantmao ‘ y muingon.




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Tan-awa na, naa gani mergers (acquirer or thetarget corporation). The target corporation isadvised by third party consultants, the buyingcorporation is also advised by third partyconsultants. If they are not, then what happens?

They are not believable in the stock market, and theprice of shares of stock will suffer because they donot have objectivity. It‘s very important! Theseparation between ownership and management.

And that is what the corporate vehicle, new thingwhich they injected which propelled the industrialrevolution, and the development of the world. Thatconcept alone!

Very difficult for an owner to part with or to changehis business. Diba? Kinsa ‘ y kinalisuran tudloan ugmaayong pamaagi? Kanang farmer!

Ang farmer muingon , ― Mao na ni among buhat

sukad pa sa among mga katigulangan. Ingon animan ning magtanom ka ug humay.‖

Muingon ka ‘ g, ―D ili ka ingon ana mutanom ngamagsubang pa ang adlaw.‖

Kanang mutanom sila ‘ g humay kana namangmamatay na kuno ang bulan. Kanang pagsugbangsa bulan mao na ‘ y imong pagtanom. Bisan unsaonsila ug ingon sa Agri-scientists o sa mga technologists ba diha , mao na ‘ y pagdaghan kanangmusugbang na, di gyud sila mupatuo, mao na nangnahitabo .

They are proprietors, and they are the managers oftheir own business, very difficult to teach them new

technology. That is what corporation teaches.

III. JOINT ACCOUNTS

Joint accounts are otherwise called in civil law as ACCIDENTAL PARTNERSHIPS.

Q: There‘s only one case where a joint account isnot accidental but permanent. What is that?

A: A joint account in a bank between husband andwife. That is permanent, ha . Only death can breakthat account. That is not accidental, that isintentional. In fact, even if you are not namedthere, you open a secret account from your wife oryour husband, and he dies and the money comesfrom the income of the husband, right away it‘spresumed that the wife or spouse owns ½ of that.

And only ½ is the estate of the deceased. Conjugalman na .

Q: If joint accounts are so called accidentalpartnership, how is it distinguished frompartnerships?

A: They have the following features:

As to JOINT ACCOUNTS

PARTNERSHIP

juridical

personality

A joint account has

no juridicalpersonality.

A partnership could

be separate anddistinct fromthepartners forpurposes of thelimited partnership.

They haveregistration with theSEC.

businessname

There is nocommercial nameof all participants

that can beadopted in a jointaccount.

A partnership canadopt a partnershipname.

itsmanagement

Only the ostensiblepartner managesand transactsbusiness in his ownname, and underhis individualliability.

General partners areall managers in thepartnership.

parties incases

Only the ostensiblepartner — the

person carrying onthe joint accountcan be sued by andis liable to personstransacting with theformer.

All general partnersmay be liable even

up to the extent oftheir personalproperties andtherefore be sued bythird parties.

So, joint accounts, ostensibly, kay usa ra na, unyamu-ambit ka, muapil ka. Partner ka, pero valid ra naamong you as parties to the joint account. As tothird persons, that‘s not binding.

In actual parlance, joint accounts in the Philippines,muingon gani kag ―corpo‖ , joint account na!

Muingon gani ka ‘ g ―corpo,‖ dili na corporation.

Pananglitan, naa mo ‘ y tunnel, kinsa man nanggakawot dinha? Si Tata! Naa na siya ‘ y mga partners.Kaila ka sa mga partners?Wa!Pero muingon na sya― Corpo mi, dili ko maka -decide kay mu-konsulta pako.‖ Ha-in man nang imong mga ka-corpo? Corporation bana? Dili na, joint account na. Aronmatanom na sa inyong mga ulo ba unsa nang jointaccount. Dili na partnership! Valid betweenparties.

Another example: Naa ka ‘y negosyo. Unsa man




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nang negosyo nimo? Ukay2x, daghan mo ana ga- kompetensiya balhin2x mo ‘g mga pista dinha, sa delSur, naa mo ‘ y usa nga dako ug capital. Mao nasiya ‘ y munganhi sa Davao mupalit kay naa siya ‘ y contact sa Manila, sya ‘ y musugat sa bulto nga

daghan kaayo.Trak2x kanunay dalhon niya . Muingonka niya,―Pa -apil ko.‖ Mulunod ka niya dinha ug capital. Kung ang trak gi- hijack na, tua na kinsama ‘ y makig kaso ana? Makig kaso ka,nga wala mankay personality ana, kamo ra ma‘y nagsabot. As tothird parties, wa ‘ kay labot.Kadto gyung nipirma ngamukumpra ana, mao na siya ‘ y ostensible party-in-interest.Ikaw, lunod ka lang! Joint account kalang.

IV. BUSINESS TRUST

It is a legal relation composed of 3 parties:

1. Trustor - the one who creates the trust;

2.

Trustee - the one who manages the corpus or property or money.

3. Beneficiary - for the benefit of whom thiscorpus is managed.

The trustee has legal and physical possession of all that is composed by the corpus . In fact, thetrustor executes a deed of conveyance to thetrustee because the trustee makes the necessarytransactions. He is answerable though, to thebeneficiary. That is why to the trustee is reposedthe confidence and trust of the trustor.

In the Philippines, you cannot engage in this

business and offer your services to the public unlessyou are a licensed trustee.

Q: Who issues the license to become a trustee?

A: It is the Bangko Sentral ng Pilipinas .

That is when you can act as a trustee vis-à-vis thewhole world.

We are not talking about an implied trust ha!

Q: When does an implied trust occur?

A: There are many instances that implied trustoccurs. Nipalit ka, nibayad ka, unya sobra diay tongimong gibayad, naa sa resibo, pagdawat nimo, ―O

mao ra man diay ning presyo sobra pa man tongakong na hatag.‖ An implied trust is created. As tothe excess, the seller becomes the trusteewith the obligation to return to you, thebuyer, the excess of the money that you paidout as consideration for the goods that you buy.

Q: Ug wala nimo gi-uli ang kwarta, unsa may kasonga ma- file nimo?

A: You can file civil or criminal.

Q: Kung mu -file ka ‘ g criminal, unsa may kaso

imongi- file, theft or estafa?

A: Theft.

Balik dayon sa street kid nga naa dinha papalitonnimo ug sigarilyo siya, tagaan nimo ug 50 pesos. 20

pesos ra man nang sigarilyo. Tagaan nimo siyagkwarta. Ingon siya‘g , ―OK , boss!‖ Dagan siya unya dina sya mubalik. Unsa may i-file nimo nga kasodiha? Theft rana because he has no legal title to themoney. He just has physical possession of themoney.

Ang teller nga mukupit sa kwarta nga gideposito sausa ka depositor sa bangko , estafa na ! Kuhaon niya,di niya ibutang sa kahon , ibutang niya sa iyahang bag. Kay ngano man? He accepts it for andbehalf of the bank! He has a right to receive it.He acts for the bank. He has the legal title.Estafana.

So, kanang sobra sa imong pagpalit dinha, he hasno right to it! He has physical possession, theft na,dili na estafa because the title has not transferred tothe seller. Only that amount of the price.

You‘d realize that there are certain differencebetween Continental law and American law.

1.

Continental Law [Civil Law? Not sure ]

2.

American Law

Kanang mga termino: NAKED TITLE. Naghubo banang title? Nganong naked man na?

Q: What is theopposite of naked title?

A: BENEFICIAL TITLE.

Kanang nahisuwat dinha nga tag-iya, sa ngalan rana nga tag-iya siya. Ang tinuod magpahimulos ana,is the owner of the usufruct. Kana siya maoymagpahimulos .

So sa Civil law, you have naked owner. And thenyou have the usufruct who is held by another.

Whereas in American law, you have the titularowner —owner by title and then you have thebeneficial owner.

Kanang muingo ‘ g, ―naked title,‖―beneficial owner,‖ gi-

sagol na niya wala na siya kabalo asa na siya, tu-aba siya sa continental law, o ni-a ba siya sa Americanlaw wa ‘ na siya makahibaw ug hain na siyangdapita. Later on this is very important because thePhilippine Stock Exchange does not assumethat just because you are the owner named inthe stock certificate, that you are thebeneficial owner. Because the moment that

you own 5% of the outstanding capital stockof a corporation traded in the stock market,

you must declare the true beneficial ownerunder oath.




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Dili man musugot ang stock exchange ana nga dilika mu -declare. For purposes of determination.Daghan man kaayo nang determinates. There arelimits to ownership in certain corporations: as tonationality, etc. So, they will require you, if you are

the buyer of at least 5% or more of the outstandingcapital stock of a corporation of shares traded in thestock market, you must declare who the beneficialowner is. If the titular owner is the same as thebeneficial owner, then you declare such.

If you are a trustor, you really want to gointo theformalities, there is what you call as the Articles ofTrust – The trustor, puts down what he will place,the corpus of the trust: real properties, shares ofstock, securities, intellectual property, whatever! Heputs down there. Then he names it. In the Articlesof Trust also, he designates the trustee. And then,he puts down the term of the relationship and

obligation of the trustee.For how long is this? And then the authority of thetrustee. What can he do with the corpus ? If it‘smoney, can he invest it on any business venture oris he limited just to fixed income securities issuedby the government, or just to fixed incomesecurities issued by other than the government? Ishe allowed to buy shares of stock listed in the stockmarket or even those which are not listed, etc.? Theextent of the authority of the trustee, because lateron the beneficiary who is given a copy of the

Articles of Trust can measure whether or not thistrustee is faithful to his or her obligations.

Complain ka kung beneficiary ka. Imong lolo, datoman kaayo, nag put up ug trust account nimo . Theobjective of the trust account is to secure hisgrandchild‘s education. The trust account is to bemanaged by a trustee. Who is thetrustee?Chinabank,because it is qualified. Chinabank andTrust Company.

So the trust department of the Chinabank, managesit.

Q: What happens if the bank folds up, goesbankrupt? What happens to the corpus ? Is that partof the corpus of the bank?

A: NO, that‘s separate. That‘s why there‘s supposed

tobe a Chinese wall dividing the trust business of abank and the banking business of a bank.

That is the meaning of a business trust. Theaccomplishment of the purpose of a businesstrust means that the trust contract is nowextinguished. And the trustee gives everythinginto the beneficiary.

The grandfather who sets up this trust account forthe education of his grandson,he sets the limit: 33years old.[That‘s the age at which our Lord wascrucified.] He‘s supposed to have finished his

education. Pag-abot sa 33, ihatag na ngadto sa beneficiary, all that is contained in, they call that theCORPUS of the trust. What is contained in the trustislimited ha. Limited purpose. The trustee cannotchange!

Remember: For purposes of income tax, the trusthas a TIN because itpays its own income tax. It is already separate from the income of the trustor.

Q: When can you avail of that privilege, that thiscorpus of properties, funds, securities that comefrom the trustor is now separate,that the income isno longer the income of the trustor?

A: According to the NIRC, the trust contract or the Articles of Trust must indicate that it is already anIRREVOCABLE TRUST.

Sa America , ang terminology sa irrevocable trust, ‗BLIND TRUST‟ ! Nabuta nasad ang trust. Wala na

siya ‘y kapadulngag balik. Permanent ang trust! It‘salready on its way to the beneficiary.

TRIVIA: You know Warren Buffett? Warren Buffettis supposed to be the third richest man according toForbes (2015). He expected to die ahead of hiswife. Most of his wealth is in shares of stock of thisholding corporation called Berkshire Hathaway. Sohe already put in trust half of his shares in BerkshireHathaway to his wife. The wife was already thebeneficiary, and as he grew older, his idea was totransfer slowly, portion of it to the trust account infavor of his wife. Halfway na gud siya , gibalhinniya.Unya kana si Warren Buffett, allergic kaayo

na ‘ g tax. So much so, that his corporation has neverdeclared any cash dividend,has never declared anystock dividend.Kay dili lagi siya gusto mubayad ug income tax sa gobyerno . So, iyana nang gi-huna2xnga ing-ana na, sugod na siya. Karon nga kini mangiyang beneficiary mao ma ‘ y unang namatay, na -heart attack. Igo nuon siya!Katunga gi- tax. Conjugalman sila. Together with the children, sila man ang heirs. Bayad siya ug tax. In dollars par value saiyang shares of stock,pila naman ron mupalit ka? The last time I looked at it, it was more than US$100,000=1 share. Accumulated naman, wa ‘ mansiya mu- declare ug profits, cash or stock.So,nagpundo na! Unrestricted retained earnings

niya dako na kaayo . What is the price now? US$199,000+ per share.Gilaliman mo ana, usaraka share.Mao nang the authorities of the New YorkStock Exchange hate him. He is the only share thatis 6 digits! Most shares of stock traded in NYSE, areone-digit, or 3-digits. 225 or 525 dollars per share.Si Warren Buffett ang iyang price 199,000 plus howmany cents? Muabot ug 8 digits. Nahimong veryexpensive ang program nga ilang gipalit tungod sa number of digits sa usa lang ka share of stock, kanilang Berkshire Hathaway. The expense is so muchmore.




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V. JOINT VENTURE

Q: What is the difference between a business trustand a joint venture?

A: A joint venture is an association of persons or

companies jointly undertaking some commercialenterprise. The applicable provisions for a jointventure is partnership laws.

That's pronounced by the SC in:

Aurbach vs. SanitaryWares Manufacturing Corporation

Dec. 15, 1989 | G.R. No. 75875 |Gutierrez, Jr. J

The legal concept of a joint venture is of commonlaw origin. It has no precise legal definition but ithas been generally understood to mean anorganization formed for some temporarypurpose. It is in fact hardly distinguishable fromthe partnership, since their elements are similarcommunity of interest in the business, sharing ofprofits and losses, and a mutual right of control.The main distinction cited by most opinions incommon law jurisdictions is that the partnershipcontemplates a general business with some degreeof continuity, while the joint venture is formed forthe execution of a single transaction, and is thus ofa temporary nature.

This observation is not entirely accurate in this jurisdiction, since under the Civil Code, apartnership may be particular or universal, and aparticular partnership may have for its object a

specific undertaking. (Art. 1783, Civil Code). Itwould seem therefore that under Philippinelaw, a joint venture is a form of partnershipand should thus be governed by the law ofpartnerships. The Supreme Court has howeverrecognized a distinction between these twobusiness forms, and has held that although acorporation cannot enter into a partnershipcontract, it may however engage in a jointventure with others.

Corporations can enter into joint ventureagreements. This is in contrast to the old pre-wardoctrine that corporations are disallowed from

entering into partnerships.

Q: Why was it not allowed?

A: Because the highest governing body of acorporation according to Section 23 of theCorporation Code, is the Board of Directors or theBoard of Trustees. You enter into a joint venture,then you will be governed by the association ofinvestors in that venture, a deciding body higherthan the board. So, they were thinking that that is aviolation of the old Corporation Law.

Now, the SC has changed its mind. 1989 it said, ―Corporations can now enter a joint venture agreement.‖

This is very common in oils, gas, mines, very

expensive! Because many of the oil companieswould like to diffuse their capital. If they use alltheir capital, they can enter into only one venture.They can just dig in Alaska. Dili na sila maka -dig dirisa South pole. Dili sila maka- dig diri sa Siberia, oroff the coast of Brazil or off the coast of Ghana,kanang very deep well. So what they do is they splittheir capital, they form a joint venture. So that theyhave multiple exposures. They divide their eggs intodifferent baskets. That is why there are jointventures. That is common practice in oil, in naturalgas,in mining, in many other big ventures.

Corporations that engage in joint ventures mayresult in the formation of a JOINT VENTURE

CORPORATION. In such a case, it must complywith the applicable nationalization laws.

So, if you have a foreigner corporation, it cannothave more than 40% of the entire venture. It islimited to 40% because the requirement under theConstitution is, 60% of the capital must be ownedby Filipinos or Philippine Corporations. That is thepronouncement of the court in:

JG Summit Holdings, Inc. vs. CANov. 20, 2000 | G.R. No. 124293 | Ynares-Santiago

J.

A joint venture is an association of persons orcompanies jointly undertaking some commercialenterprise with all of them generally contributingassets and sharing risks. It requires a communityof interest in the performance of the subjectmatter, a right to direct and govern the policy inconnection therewith, and duty, which may bealtered by agreement to share both in profit andlosses. Persons and business enterprises usuallyenter into a joint venture because it is exemptfrom corporate income tax. Considered more of apartnership, a joint venture is governed by thelaws on contracts and on partnership.

The joint venture created between NIDC and

Kawasaki falls within the purview of an"association" pursuant to Section 5 of Article XIVof the 1973 Constitution and Section 11 of ArticleXII of the 1987 Constitution. Consequently, a jointventure that would engage in the business ofoperating a public utility, such as a shipyard, mustobserve the proportion of 60%-40% Filipino-foreign capitalization.

VI.

COOPERATIVE

A cooperative is a duly registered association ofpersons with common bond of interest who have




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voluntarily joined together to achieve lawfulcommon social, or economic end, making equitablecontributions to the capital required and accepting afairshare of the risks and benefits of theundertaking, in accordance with universally

accepted cooperative principles. That‘ s the definitionof a cooperative, Article 3 of RA 6938,

“Cooperative Code of the Philippines” .

Art. 3. General Concepts . – A cooperative is aduly registered association of persons, with acommon bond of interest, who have voluntarily

joined together to achieve a lawful common socialor economic end, making equitable contributionsto the capital required and accepting a fair shareof the risks and benefits of the undertaking inaccordance with universally accepted cooperativeprinciples.

Q: What is the difference between a cooperativeand a corporation?

A: The difference is, the highest policy making bodyof the corporation is the board (BOD). The highestpolicy making body of the cooperative is theGeneral Assembly of members of thecooperative.

And, there is an emphasis on uniform equality. One member, one vote regardless of the number ofshares that you have in the cooperative. Thenumber of shareholdings does not dictate thenumber of votes that a member can cast in decidingpolicies of the cooperative. They follow the rule ofone member, one vote.

Ang kadaot dinhi sa Davao, most people have hadexperience of cooperative before corporation. By thetime they form a corporation, the corporation has abad name. ―Padaghanay diay ni ‘ g shares sacorporation! Unsa man diay ni, kwartahay diay ning corporation?!‖ Mao na, kwartahay. ―Dili, equal langdapat !‖ That‘s a mortal sin in a corporation. Youcreate a corporation and there is no controllingowner. If nobody is in control, then what do youhave? You have chaos. Corporation, there mustbe somebody in control.

You will later on see, in the structuring of the capitalthat control is possible in many ways. Muingonka ‘ g ,―G amay ra man akong kwarta mas dagko manna sila.‖ You can structure a corporation even if youare the smallest stockholder, that you are thecontrolling shares.

Remember the overall purpose of a cooperative isNOT profit. That is not the purpose of acooperative. It is common social or economicend according to the cooperative principles.

As a GR: Foreigners are not allowed to joincooperatives.

Q: Why do I say it‘s a general rule?

A: Because when it is a cooperative bank, with thelatest laws now on foreign ownership of banks, Ithink the particular law, is superior to a general law,

like a Cooperative Code. A foreigner can nowcontrol a bank even if it is a cooperative rural bank.

Alright, I will leave you to go over the distinctions ofa partnership and a corporation as a contract. Letus go to the definition of a corporation and itsimportant legal significance.

CORPORATION

There are 5 legal significance to the definition of acorporation:

It is an artificial being.

It has a legal personality or judicial capacity that isseparate and distinct from its stockholders or members.

It is created by operation of law.

It has the right of succession

It has powers that are express, implied or inherent orincident to its existence.

Those are the 5 significant fundamental legal truths about acorporation.

FIRST ATTRIBUTE: It is an artificial being.

Q: What is the consequence of a corporation‘s being anartificial being?

A: Because its being is artificial, it cannot act without anagent. If a corporation enters into a contract, it has noarm by which it will sign a contract. There must be anatural person who must sign the contract for andbehalf of a corporation.

Sometimes, the articles of the incorporation designateswho should sign the contract for and in behalf of thecorporation. Maybe it will say therethe chairman, or thepresident. If there is no such provision, then it must bethe person designated by the BOD in a Resolutionapproved by the majority of the board in a meeting dulycalled for the purpose. That is why formalities arevery important.

If you should become legal counsel/in-house counsel ofa corporation, or should you become normally they hirepeople to be the Corporate Secretary, you must knowthe formalities. Kining mga gipangsulti diri, timan-an nanimo. Because the formalities are more importantthan the truth. Wala mag- meeting ang mga BODperogipapirma nimo tanan nga nag meeting, approve sila .Naa na ‘ y meeting. Unya muingon ka ‘ g imposible mannangnag- meeting sila nga didto man na sila sa London.Dili naman na impossible ron! Meetings are now allowedby teleconference or video conference there is now a




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memorandum by the SEC. So even if you are notphysically there, there can be a meeting.

So, ikaw nga in-house counsel ka, wa ‘ pa gani meeting,papirmaha na na sila tanan,human! Now, ug nisalig gani

na sila nimo, blangko pa napapirma na nimo daan andthen you already produce it as the need arises. Dili manna sila maka -question ana . Very important! Muingonkag,―M ao nang bakakon gyud ning abogado.‖ Dili! It isrequired by the need of formalities. You need the formalauthority because you are dealing with a contract thatdoes not exist. It exists only in contemplation of law,that‘s what a corporation is. It exists only in thecontemplation of the law so you make it legal.

The corporation can only act by observing the formalitiesrequired by law through its directors and/or itsofficers. And it can only act in accordance with thetriple kinds of powers that it has: express, implied,inherent . Outside of that, it has no powers.

Do you have the power, the authority to pick your nose? YES,you have! Society might frown on you, you might bethe subject of criticism, but you have the power. You donot go to jail by picking your nose, unless you are inSingapore probably. Mangluwa ka, mukaon ka ‘ g chewinggum didto, mahimo mang prisohon ka . There are manythings that you do.

Why? Because as a natural person, unless it is prohibitedby law you have the power to do it. You can do it!

With the corporation, because it is an artificialbeing, if it is traceable to the law, then thecorporation can do it. Without tracing it back to the

law, if you cannot trace it back to the law, you cannot doit as corporation.

Criminal Liability; Not having a physical existence, a corporation cannot be imprisoned. It is incapable ofintent hence it cannot commit felonies under the RPC. Itmay be fined, but such fine is a consequence of theofficers being prosecuted for violation of the law.

Example of that is a Trust Receipts Law. This law, P.D.No. 115, expressly provides that if a violation or offenseis committed by a corporation, partnership orassociation, or other juridical entity, the penalty providedfor shall be imposed upon the directors, officers,employees or other officials or persons therein

responsible for the offense, without prejudice to the civilliability arising from the criminal liability.

So the Trust Receipts Law recognizes the impossibility ofimposing the penalty of imprisonment on thecorporation. Hence, if the entity is a corporation, the lawmakes the officers, the employers or other personsresponsible for the offense liable to suffer the penalty ofimprisonment. (Ong vs. CA, 401 SCRA 648, 2008).

Example: Corporation ka , you are engaged in a printingpress. Mu- import ka ining bag-ong printing pressmachine gikan sa Italy. They say Italy has the best

printing machines in the world. Tu-o ka ana? Tan-awailang mga magazine, nipis kaayo pero wala ‘ y blot2x.Gwapo kaayo,kung sa video pa, HD. Karon import ka,naa kay unconditional letter of credit padala sa Italy,pero niutang ka sa bangko. Bangko ga -supply ana ! Pag

abot dinhi , ikaw mao ‘ y tag iya pero sa ngalan sa bangkodiay ang printing press assigned to you and then you areobligated under the trust receiptscontract that the jobsthat the printing press undertakes, the proceeds youmust turn over to the bank until you pay up the loanthat you incurred to import that machine. Ug wala nimogihatag ang proceeds, kiha ka sa banko.Naa man dinhagipangsuwat man daan sa trust receipts contract angmga officers: president, treasurer, controller. Naa dinhatanan. Igo mo tanan, kamo mao ‘y prisohon forviolationof Trust Receipts Law, because violation of this law is aform of estafa. Fraudna!

But the real nature of Trust Receipts Law is, the creation

of this, is people want to make the prosecution office ofthe DOJ as their collecting agent. Utang man gyudna,pero ilang gihimo nga ang penalty is criminal. So, filedayon sila ‘ g kaso, unya ang prosecutor‘ s office mao ‘ymu-kolekta sa wala nimogi- turn over. Mao na .

Kasuway na gani ka ‘ g Avon, nakaila na ka ‘ g unsay TrustReceipts Law. Dili man ka tagaan anang mga produktoug dili ka mupirma anang trust receipts. Kay ang imongutang ana, kinahanglan pagabayran sa halin nimo saimong gikuha. Trust Receipts Law! That is an abuse.Mao bitaw na nga wala na ‘ y ma-priso ron ug bouncingchecks! Naa na na ‘ y directive, diba sa SC? Fine nalang!Read that memorandum.

So, what is the exception?When the law itself penalizes the corporation, fines, etc.but the one who will be imprisoned are the officers ofthe corporation that are named in the law or in thecontract.

Nov. 20, 2015 LJQ

[Father recommends book] Guide to Money & Investingby: Virginia Morris and Kenneth Morris.

The rights has been bought by Asian Wallstreet Journal butnow it has been bought by ***house. Winner of severalawards. It has been bought by Standards and Poors, anexchange and also a rating agency. It is 2009 edition. Myedition is 2011 so you are behind by 3 years. Not muchchanged because there is already been financial crisis on2008. Take a look at the table of contents. What is it?

Money & market.

It would explain to you the whole concept of money whichbegan with exchange, barter. Barter became difficult becausethere is no medium. Now there is a medium that everyoneagrees & therefore exchange can be faster.

Stocks.




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I told you corporation is one of the significant inventions ofman. Read it.

Then you will be able to understand the different provisionsin the corporation code.

Public & private companies.

Private companies, they are traded openly in the stockmarket.

You have Initial Public Offering (IPO). Where acorporation sells shares, that is the primary market. First,shareholders that buys shares of the corporation that is aprimary market. When they start selling to each other orsell to other persons, that is the secondary market.

Then the price there changes and money is to be made justin those exchanges. They don‘t have to wait for thecorporation to gain dividend. You can already sell the sharesprobably at a profit if you can sell the shares at a price

higher than when you bought it.Trading on an electronic market.

When you start trading on an electronic market, ang kalabannimo makina. There are certain funds, they programed thesell levels & their buy levels and that will be triggeredautomatically depending on how the price is in the openmarket.

This, they say is… electronic trading hastens or alsoaccelerates the price rise or the price fall of the share-of-stock. Paspas kuno kaayo which is worse now they haveprograms that enable the portfolio manager to trade long ortrade short.

When did that money is only to be made when the market isgoing up. You can also make money when the market isgoing down. That is when you short the shares. Paingonnaman na sa ubos, sugaton nimu diri.

What do you mean ngasugatondri? Wa pa kai sharesdrisataasnagbaligyakanaunya in the course of the day, adtonaka mupalit kung dirinasauboskatona sad ang imo ihatag sa broker. Kato imo gipalit 5 hours later. That is what is calledshorting. Nag baligyakanadri, wa pa kai shares of stock. 3days man na to settle accounts in the market (at least in thePhilippines)

So you sell, let us say PLDT 2000 in the first hour in openingthe market then you close down to P1,800/share adto pa ka

mopalit. Mao to imo ihatag sa imong gibaligya nga on thefirst hour. Ang problema lng niana imo gibaligya 2000, wa pamu naog sa ubos misaka man. Then you lost your fundsbecause you have to buy the shares that you have alreadysold at a much higher price than the price you sold it.

Bonds.

Then you have bonds. The Language of bonds. What is the… index, it has also its own index. How much does a bondworth?

2 kinds of Bonds

a) Zero Interest Bond

When you say zero interest bond, you just have aface value. Say 100K, it‘s a 10-yr bond. 100k, 10-yrbond sold at P40k.

What is the effect in the interest rate?

So it is shown a zero-interest bond it is always soldat a discount and the difference is your interest.That is a zero-interest bond.

b) Interest Bond

When you have an interest bond it can be an

- Interest bond or

- Coupon interest bond.

Coupon bond – they are coupons detachablenormally attached to the bonds. Normally a bondgets interest once a year, so you have as manycoupons as there are interest payments. So forevery year, you have 2 coupons. If it is a 5-yr bond,interbond, you will have 10 coupons.

Pagabot ng himatyon mo, i-detach nimo, ngadtonimo sa trustee, bayran ka sa interest. Huwat nasad ka, gisi-on na sad nimo. That is a coupon bond.

Then many interesting things here like mutual funds.Gamay ra ang investor, you cannot participate in the marketat discount so you put your money in a mutual fund.

There are many kinds of mutual funds.

Funds that are organized in the present stock market.

Funds that are organized just to invest in gov‘t security.

Funds that are organized just to invest in private fixedincome security.

So it depends in what is your risk appetite. Gusto ka bagmasdako ug ginansya, mas dakosadrisgo. Kusto kag steadylang ang ginansya, wala kayorisgo , gov‟t bonds.

Now the mutual funds are a little bit complicated. Becausethere are now mutual funds that are ETF (Exchange TradedFunds).

The mutual fund is divided into shares. Then these sharesare even traded in the stock market according to how themutual fund is performed. Price goes up, __ goes down.

They have options, they are now in the area of derivatives.

Derivatives.

Securities, investment instruments created in the 70‘s. Theunderlying asset of which is not a physical asset but anothersecurity.

Ang mga nakaimbento ana kato mga PHD sa NASA, nawad- an na og trabaho gikuha sa mga wallstreet funds. Nya ilangingnan oh you design bonds, securities that we can useduring ****.




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So they come to design this hypha luting securities whichhardly anyone knew what they are all about.

The general *****of derivatives is it is a security theunderlying asset of which is another security.

Stocks are security, shares of stock. What is the underlyingsecurity? The corporations assets. Those are the underlyingassets of the shares of stock. And in law you are told you donot own the corporation. Your right in the assets of thecorporation is inchoate.

Inchoatewhich means that it is still a question mark.

When a corporation dissolves, and when it does, will it stillhave money left after paying its just obligations to be dividedamongst stock owners to be divided in proportion with theirstock ownership. That is the condition.

So you have an indirect interest in the physical asset thatunderlie the certificate of stock but when you have CDS

(Collateralized Default Swaps) you have several mortgages,you ***** them together, and out of that they produce asecurity CDS.

What is the asset that is being sold? Also another securitymortgages.

Ang banko nga nipagawas niining mortgage, let us say hehas 2M worth of mortgages, average 10yrs. mortgage, iyangtigumon, nya iyang ibaligya.

Ngano man? Aron maka cash siya.

Let‘ s say out of 10B mudawat lng siya og 3B or 4B.makadawat siyag 3 or 4B, nadispatsa na tong assets niyanga mga mortgage nga wlay hinungdan, natangtang na saiya

libro, makasugod na sad siya sa sinogdanan, naa nasad siyakwarta.

That is the whole point in that, di kamatanggong sa ****.

Mao man nangnahitabo sa 2008. Nahinog tong mgasubprime mortgages that were aggregated. Sold to themarket. So many people bought it because they say that ― amortgage is a very saf e investement‖ diba?

Wa tingali kai savings pero nag sige man kag bayad parasaimong balay. Ang equity saimong balay nag ana mogkadako. Kung ang imong balay anaa sa pang-pang, naa ranadiha sa yuta sa *** , naasadalan…

Mu ingon ta ngano man mutubo man? Simple ang tao ng

anam kadaghan ang yuta mao ra gihapon. Supply anddemand.

Mao nangmutubo gyud ang value sa …

Mao nag gitawag nga ninja loans. They call it ninja loans.Why? Because they are giving it to somebody who had noincome & no job. That is why it is called ninja . Ang mupalit,mukuha nya gipahuwam, walay trabaho, walay income.

Mu ingon ka nganong gi ***? Kai gidusok man na didto sataas. Ang ila mother institution sigeg dawat og kwrta gikansa mga Arabo, Insik nga daghan ayo gidawat nga proceeds.

Asa man diay naibutang ang kwarta nga di na man silamakabayad interest, buhii na ky ng daghan ang kwarta ari .So pagsugo nila sa ila mga ahente, pangitaa na si Juan,Pedro, kinsay gusto mu hulam, pahuwama. Unya kung dinakabayad? Ah di na ta ma abtan ana kay ato ning-

aggregate unya ato ning ibaligya sa lain.

Kana sasi Pedro walay trabaho, nganong musugal man siyaanang mortgage, wa man siyay ikabayad ipaimbargo gihaponniya. Why? The same reason of why so many people of lowcost housing even if they cannot pay.

I tell you if there is a village here, low-cost housing where30% of the village are paying regularly the amortization.Daghan kaayog rason — sira ang bungbung, poor quality,etc. Di sila mobayad. Ngano man? Wala pa silay kita.

Unya nganong nikuha man sila ana? The price of housing isalways going up. By the time hapit na embargohon,ibaligyananila or ipa- assume sa lain . Kanangtaonga mu-

assume, mubayad sa ila, mao pay musagubang sa ilang arrears. Kai gasige man og saka ang presyo. That is theaggregated subprime mortgages.

There are FUTURES here:

1.

Future contracts

2.

Derivative products.

3.

Hedgers and Speculators

4.

How Futures Trading Works

That is a very important chapter. Because I have _a case where the SC does not know how it works. Itis a case SC is very ashamed that it made.

Like this, you buy a futures contract, pork belliessubject to futures contract which is _.

Pork bellies is used for mga bacon. Since you arePurefoods, you make bacon, you‘d like for the priceto be uniform.

How do you guard the price despite of itsdifference? You guard it by hedging. If you thinkthat 6mos. from now mag-ilog na ni sa baboy angmga tao , you hedge it, say you look for somebodythat is willing to supply you the pork bellies thatyou‘ll need 6mos. from now at the given price.

Let us say the price is P300/kilo, pork belly. So you

buy at P300 6mos. from now that is the price thatwilling to guarantee. 6mos. from now, if the price ofbelly, instead of P300 is P290 in the open market,what do you do with the contract that you have?Is*** ra na nimo. Because mubayad diay kag 300nga sa gawas makapalit man kag 290, di na nimopaliton na. So panalipod ra na, HEDGE.

But suppose, 6mos. from now the price is 350/kiloof pork belly, naa kay contract nga gigunitan nimonga 300, unsa man imongbuhaton? Lipayka,magpamisa ka nga naa kay dipensa. Kanang




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nagkagidlay di pa mn na ang dipensa kay adtuon pmn nimo ang biktima.‖hoy! hainnaman tong porkbelly‖ [Ka-busy ba sa pork belly! Lol]

While he will settle that particular security, he just

say, what‘s the difference? Today the price at whichthe security matures is 350 outside in the openmarket, I promised to sell to you at 300 so I‘ll justgive you P50.

That is the way that it is settled. Kuhaon nimo ang 50, nya nibayd pa tag 300 , tagaan ka niya 50,mupalit ka nlng sa palengke.

Niingon ang SC : That is a gaining contract. Maoman tong nasirahan ang futures , gamay ra kayoang futures diri kay niingon man ang SC that isgaining. Well that is how futures are settled w/ thecommodities market Chicago, Amsterdam, Odesa,that is how it is settled.

Ulaw kayo ang Pilipinas aning desisyona. That isfutures market.

There are futures on oil, basic metals, grains(rice,corn, barley), basic commodities (cocoa, chocolatedon‘t you think Hershey‘ s does not have futurescontract)

Who is the biggest supplier of cocoa? The biggestsupplier of one-half of the entire supply in the worldis Cote d‘Ivoire (Ivory Coast).

November 25, 2015 KDC

We said the other week that the entity and the corporation isa person.

Then you have to ask:

1)

Does it have a nationality if it is a person?

2)

Does it have a domicile?

You heard of the latest news now? There‘s a merger that isoccurring between Pfizer, the makers of Viagra, and Allergan,the makers of Botox. So, Botox and Viagra are comingtogether in a merger that is valued at $160 billion. Mind-boggling. What is the whole purpose? Allergan is based inIreland where the rate of taxation is 17%. Pfizer is based inNew York, the rate of taxation is 25%. By merging the two,

they change the domicile and residence and it is now inIreland and the whole seals the reduction of tax with thedifference between 17% and 25%. That is the consequenceof (a change in) domicile. It‘s a big problem. It‘s going to beconsidered by the United Nations.

Burger King, it‘s based in the US, and Tim Horton‘s, thebiggest coffee chain in Canada, they are going to merge.Why? They want to change the domicile of Burger King fromUS to Canada because of the lower tax rate in the latter.That is done by natural persons and so are corporations.

For natural persons, the most notorious are the tennisplayers. If your rate of income tax for tax earned outside ofyour jurisdiction, it‘s higher in your native country, you willrelocate. You are Federer, your winnings are Swiss-basedincome tax, it‘s very high! It‘s 35%. So what do you do? You

change domicile and you are now a resident of Moroccowhere the tax rate of foreign income is just 16%. Now if youget to transfer to British Virgin Islands, it‘s zero-rate income.That is why many contrived foreign corporations are locatedin the British Virgin islands and are domiciled there.

Makatawa ka and you say, ah, para ra na sa mga dagko. Dili .Philippine Del Monte has a corporation in British VirginIslands and so is TADECO and JVA. Why? Because when theyexport the bananas, on paper, that is exported to thatcorporation, zero income earnings outside. They can controlit for that purpose. First, export it to BVI, so the price atwhich you sell it to that corporation, that is the basis for thePhilippine tax. When you sell it finally to Japan, the exportee,

BVI no longer taxes that.Can you believe, as it is listed in Bloomberg, that the totalnumber of exports of Philippine bananas is just valued at$115 million? Pagka-gamay. Tuo ka mao ra na ? Coconutproducts are even higher than bananas. Why is that?Because of transfer pricing. That is why you have to knowthe residence, domicile and nationality. Lahi-lahi man na .

Q: What is the nationality of Philippine corporations?How is it determined?

A: The tests are as follows:

1)

Nationality of Philippine corporations is firstdetermined by what is called the Incorporation

Test, Sec 123 of the Corporation Code.

Sec.123. Definition and rights of foreigncorporations. For the purposes of this Code, aforeign corporation is one formed, organized orexisting under any laws other than those of thePhilippines and whose laws allow Filipino citizensand corporations to do business in its own countryor state. It shall have the right to transact businessin the Philippines after it shall have obtained alicense to transact business in this country inaccordance with this Code and a certificate ofauthority from the appropriate government agency.

If you are incorporated under Philippine laws, youare a Philippine corporation. When the Constitutionsays you are a Filipino corporation if 60% of thecapital is owned by Filipinos and 40% is owned byforeigners, the presumption is, that corporation isincorporated in the Philippines. Because that is theunderlying common test. You‘re incorporated underPhilippine laws, you are a Filipino Corporation. Thatis the Corporation Code Test (Incorporation Testsiguro pasabot ni Father).

2)

Now, there is the Domicile Test.




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Sec 14. Contents of the articles ofincorporation . x x x

3. The place where the principal office of thecorporation is to be located, which must be within

the Philippines; x x x

That is the domicile. You are incorporated in thePhilippines but your domicile, your principal office isnot here, then you are not a Philippine corporation.Ordinarily speaking, that‘s the second test.

3)

The third test is the so-called Wartime Test.

It means that a corporation‘s citizenship ornationality during wartime is subjected to anothermeasurement and that is the Wartime Test ofFilipinas Compana de Seguros vs ChristernHuenefeld and Co., Inc. (G.R. No L-2294, May25, 1951, 89 Phil 54). You have taken this underInsurance, isn‘t that?

If the majority of the stockholders of thecorporation are classified as enemies, in otherwords, the country of their nationality is at war withthe Philippines, then, the corporation itself shall beclassified as an enemy. Now enemies, under theInsurance Code, cannot be insured.

Why? Because of they were allowed to be insured,then, we will be subsidizing their wherewithal to dowar with us. Ipa -insure nila ng mga tangke nila,kanang mga eroplano nila, magbayad lang sila‘g premium unya bombahan nato na ilang mga tangkediha, pagkaguba, kubra sila sa atong insurancedinhi unya magbayad ta nila. Ang tawag ana dinhisa ato, giluto nato atong kaugalingon sa atongmantika. That is why it is not allowed. That‘s whathappened to Christern Huenefeld.

4)

Finally, there is this Control Test for InvestmentPurposes under the Foreign investments Act.

The control test, for purposes of the Constitutionalso, is when a corporation, 60% of whose capital isowned by Filipinos, incorporated within the laws ofthe Philippines, the maximum foreign ownership ofthe capital is 40% foreign, is a Filipino corporation.60-40, that‘s the ratio. Now, the issue is what is themeaning of capital? That is where the famous caseof Gamboa vs Teves (G.R. No. 176579, June28, 2011).

What is this is so-called ―Grandfather Rule‖?

It began with DOJ Opinion No. 18, s. 1989. Got anapproval from the SC in Palting vs San Jose PetroleumIncorporated (18 SCRA 924, Dec 17, 1966).

Also in the latest case which I gave you, Gamboa vs Teves.That‘s the first en banc ruling, followed by the resolution ofOct. 09, 2012, the title of the case has been changedbecause Gamboa died, so it is now, Heirs of Winston P.

Gamboa vs Teves (682 SCRA 397, Oct 9, 2012). Boththe en banc decision and en banc resolution on Motion forReconsideration were penned by Justice Carpio.

There is this decision, Ridon, et al. vs AXN Networks

Philippines, Inc., et al. (G.R. No. 210885, August 26,2014). This is an en banc resolution. It is just a declarationfrom the Clerk of Court, Enriqueta P. Vidal, who says there issuch a resolution dated August 26, 2014. I trust you that youhave a copy of the case.

The general resolution is: The court cannot entertain a directcase filed against it questioning the nationality of thecorporation. That‘s the basic gist of the ruling and there arethree reasons.

What are those reasons? Those same reasons are whatshould have been contained in the petition of Gamboa whenhe filed the same directly to the SC, questioning the sale ofPLDT shares to PTIC because the latter is a foreign

corporation. It should have been the same argument.Ridon (a congressman) questions why the SEC issued aCertificate of Incorporation of Fox TV Channel Inc. Kung naaka‘y cable, daghan man ng Fox channels. You have FoxNews, Fox Movies, Fox Entertainment. US man ang tag-iyaana unya nganong gi-incorporate man ? Nisaka sya derechosa SC. Ngano man ? Kay si Gamboa niderecho man ug sakasa SC unya gi-entertain man nila . Now the SC says, in an enbanc ruling, which the Clerk of Court says, is really a productof the SC en banc:

i.

When the SEC issued a Certificate of Incorporation, thatact is a purely ministerial act and a purely ministerialact cannot be a subject of a certiorari.

What can be a subject of a certiorari? QJ act of a boardor an officer. That is not a QJ act but merely aministerial act. So, kung mu-file ka ug incorporationpapers, deny ka sa SEC, what is your remedy?Mandamus because it is a purely ministerial act.

Asa man ka musaka anang mandamus? Wa na man nahearing-hearing sa SEC. the SEC has been deprived 10years ago of that power with the passage of theSecurities and Exchange Regulation Code. They got ridof all the hearing officers because they no longer have

jurisdiction of the 6 classes of cases that are listed in PD902-A during the Marcos regime. Their powers havebeen reduced to ministerial functions. Instead, they

have created an intra-corporate court which has jurisdiction with respect to controversies arising for theenforcement of the Corporation Code, SecuritiesRegulation Code and other laws related to corporations.That is where you go, the intra-corporate court. ask foran order to compel the SEC to issue your Certificate ofIncorporation.

ii.

The next argument is that the petition is in thenature of cancellation of registration.

When you go into cancellation, you have to go to thegrounds for cancellation. What is that? Is that a legal




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issue or a factual issue? That is factual and the SC is nota court of facts but a court of law so they cannotentertain it.

iii. The petition is a collateral attack .

What is a collateral attack as opposed to a direct attack?One of the consequences of the issuance of a Certificateof Incorporation is that you cannot attack the legality ofthe incorporation collaterally. You have to attack itdirectly.

Illustration of collateral attack:

Nangutang ko sa Lending Brothers Inc. Unya grabekaayo ilang kubra sa interes. Karon, kubrahan ko, ipa- summon ko . Ang itubag nako, dili man na sila tinuodnga corporation. Nagbutang ra man na sila ug Inc.dinha, wala man na silay Incorporation papers. That is acollateral attack.

That is not allowed. If you attack their being acorporation, you must make it a direct attack.

How do you do a direct attack?

Either you follow the procedure of PD 902-A, there is aproceeding for cancellation of registration or you go andask the Sol Gen. Present your case before the Sol Genand if he is convinced, he will bring up the case for you.

What will the case be? It will be Quo Warranto. Diba ,you‘re studying SCA already? There is permissive andmandatory QW. This is permissive because it is a privateperson. So, you must file a bond to convince the SolGen. What is the bond for? To answer for whateverdamages that may be answerable by the Sol Gen if thefiling of the QW is without basis and the other party filesa counterclaim due to the damages he sustains becauseof the suit. That is direct attack.

Remember, even if the corporation is fatally defective, ifit already has a Certificate of Incorporation, it is nowwhat is called, a de facto corporation and you cannotattack it collaterally. You must file a direct action.

Look at the dispositive portion of the decision of the SC inGamboa vs Teves. They cannot enforce their decision.Their decision is conditional.

“WHEREFORE, we PARTLY GRANT the petition and rule

that the term capital in Section 11, Article XII of the 1987Constitution refers only to shares of stock entitled to vote inthe election of directors, and thus in the present case only tocommon shares, and not to the total outstanding capitalstock (common and non-voting preferred shares).Respondent Chairperson of the Securities and ExchangeCommission is DIRECTED to apply this definition of theterm capital in determining the extent of allowable foreignownership in respondent Philippine Long Distance TelephoneCompany, and if there is a violation of Section 11, Article XIIof the Constitution, to impose the appropriate sanctionsunder the law.”

It did not even have the facts. It really did the opposite whatRidon says.

60% Filipino 40% foreign

60%Filipino

40%foreign

60%Filipino

40%foreign

Assuming, this is incorporated in the Philippines, 40%foreign, 60% Filipino. Supposed the 60% Filipino is againowned by a 40-60 corporation. What is the nature of the

shares here? Filipino or foreign? Under the Grandfather Rule,it is Filipino in its entirety if the owning corporation is at least60% Filipino. But notice, this is 40% foreign. The owningcorporation of the 60% is also the same 40% foreign. So40% of 60% is 24%. Technically speaking, the foreign isalready more than the majority (40% + 20% = 64%). Andthat is still allowed.

Mao ng naay foreigner muduol nimo magbuhat ug corporation, mangita ka pa ug Pilipino, apilon pa nimong ngmga maid dinha . Polpol ka ng abogado! Wa ka kahibaw!

If you look at this, wa na! Mawagtang na ang Pilipino .

Now, what is the magic number that you should achieve in

order to have a full control of a corporation?The magic number that you have to achieve is 66.66% ofthe outstanding shares because if you have control of that,you have a complete control of the corporation. Even in theamending of its articles and by-laws, you can do that.50%+1 ka lang , ordinary business of the Board, you canpass it because you elect the majority of the Board. But youneed allies in order to pass amendments. That‘s why, forpurposes of that vehicle, we do it this way, when you sayyou have the minority, there are categories of minority.

a)

The highest form of minority is the blocking minority.

It is 34% of outstanding capital stocks. You can preventamendments in the Articles of Incorporation. If the 34%

make a vote, you cannot get 2/3, you cannot get the66.66%. You are a blocking minority. Minority ra tuodka, pero naa ka‘y gahom .

b)

Next is swing minority.

Makagagahom ng swing minority. (Talks about WinstonDamarillo, a graduate of Oxford, Stanford, Harvard; hecreates corporations then sells them. His newestcorporation is Big Data. They take all the transactions ofdepartment stores like SM, depositors of BDO,homeowners of SM Realty and find the patterns. Formthe big data, comes the pattern).




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Karon, nagform sya ug corporation, he goes to Thailand,Indonesia, wa man syay dako kaayo nga capital,manguha sya ug mga tao nga di gyud magkaila orkontra gyud kaayo.

Lucio Tan 33%

Henry Sy 33%

Winston Damarillo 20%

Blocking minority ba sya ? Dili sya blocking pero swingsya . Ug mudapig sya kang Lucio Tan, daog si Lucio Tan.Ug mudapig sya kang Henry Sy, daog si Henry Sy.Gamay ra tuod sya, pero wherever he swings, he wins.

You see, kabalo ka lang anang balaod nimo, maski minority ka, ikaw ga-control kay kung asa ka muadto,mao man ang mudaog. Sultian ta mo ana kay di mo ana

sultian sa inyong mga libro . Next time , naay muduolninyo gusto magbuhat ug corporation pero gamay raiyang capital, mao na ang solution. Make him a swingminority.

Nov. 26, 2015 JT

Yesterday we saw the Grandfather Rule and this rule hasbeen reiterated in the latest case of Narra Nickel MiningCorp. et. al. vs. Redmont Consolidated MinesIncorporated, GR 195580, Third Division, penned byJustice Velasco, April 21, 2014.

This is where the SC said that there is Corporate Layering.corpo layering is a baker‘s terminology, a cake with manylayers. Daghan man patong . So the SC said that corpolayering is admittedly allowed but when it is used tocircumvent the Constitution and pertinent laws then itbecomes illegal. Further the announcement of the petitionersthat the grandfather rule has already been abandoned mustbe discredited for lack of basis. So the grandfather rule is stillin effect. That is by the explicit pronouncement itself of theSC. There is no limit to its application. It can go as far as thecorpo layering takes it.

I have here with me more literature on corporate inversions.This is my only copy so give it back to me.

Father lists Pfizer and Allergan which makes botox and Viagra. This is only 1/3 the size of Pfizer. For tax purposeswhat is crucial is that Pfizer being domiciled in the US, it istaxed not only for the business in the US but also for itsbusiness outside of the US. The tax for its business outsideof the US is 35%. Whereas if you are a corpo in Ireland thetax for your business outside of Ireland is only 17%.

The business of Pfizer is already a little bit more than ½coming from outside the US. So it is paying a heavy load oftaxes compared to the 17% in Ireland. There‘s almost 50%difference. Now, how come this (Pfizer) will be resident ofIreland if they merge and (Pfizer) is bigger than Allergan?

1/3 ra gud ang size sa Allergan compared to Pfizer. How doyou transfer the residence to Ireland? That is corporateimagination. Mao na ang hunahunaon sa mga tao, mao naybayran sa ila. Ang mga abogado aning mga corpo who aresubject to a congressional investigation. What did they do?

The merger consists in exchange of shares. So Allergan willexchange its shares for shares of Pfizer and vice versa. Bayloba sila ug shares. Ngano ing-ana man ? So there‘s no cashout. Nobody needs cash to buy what. Ilisay ra ta sa libro .Because Allergan is 1/3 size ang tulo niya ka shares equals 1share kay Pfizer and vice versa. Does that make (Allergan)transfer to the US because it has more shares being given?So what do they do? They just go to the 3 biggest stockowners of Pfizer. They just say give your shares to Allerganin exchange for more shares in Allergan.

Why do they allow that? So they‘ll create a new class ofshares in Allergan that are preferred and yet voting andparticipating. Human nimo kadawat sa preferential rate of

return nimo makakuha pa ka additional dividends when you join the common shares kaduha ka mukuha . So whathappens? The bulk of the shares (Pfizer) transfers to Allerganand it becomes all of a sudden bigger than Pfizer and nowthe residency can be transferred. The business of Pfizer inthe US is still taxed at 35% but the business outside of theUS is now only 17% because of the transfer of residence.That is called inversion. Kay ang gamay as the poet said, thechild shall be father to the man. What poem is that? Nobodyanswers.

So, that is nationality ha . This is very important.

What do you think about this case, a corpo which is 60%Filipino owned and 40% foreign. When they founded the

corpo they entered into a mutual contract which later onstructuralized in the articles of incorporation that the 60%owner and the 40% owner cannot sell their shares withoutgranting to the other the right of first refusal. The 60%owner is NIDC (National Investment and Development Corp.)which used to be the investment arm of PNB. The 40%owner is Kawasaki. How did NIDC became owner? Becausethe borrower from NIDC went bankrupt and the borrowerwas the Romualdez clan. After the EDSA revolution wanaman sila, wa na sila mubayad sa ilang utang . It wasforeclosed by PNB then NIDC took over. But the shares ofstock are covered by the right of first refusal agreement.Because that agreement is annotated on the certificate ofstock and it is recorded in the books of the corpo, the stock

and transfer book.

Now NIDC says it is time for us to get out of this business.So NIDC conducts an auction for the 60% of the corpo. Bythe way, what is this corpo? This is Bataan Shipyard. Pag auction kinsa may nadaog ? The slit-eyed guy by the name ofJohn Gokongwei, JG Summit. He won the bidding. This thecase of JG Summit vs. CA. before JG Summit couldconsolidate its ownership after the auctioneers gavel hadstruck, Kawasaki exercised its right of first refusal. It saidwait a minute I have a right of first refusal which means I




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can just equal your prize and I will pay NIDC and I will bethe consolidated owner.

This is when JG Summit went to court. It says that thatagreement is invalid because if you go over that agreement

the whole corpo will become 100% foreign and that corpohappens to own land. Because ships are not built in theclouds. Ships are built on land. But the court says No, theagreement is valid. Then the CA says it‘s an honest togoodness transaction. Precisely that‘ s how Kawasaki agreedbecause of that condition. That condition was approved by

Asian Development Bank. Approved by both governments,Tokyo and Malacanang. It‘s valid.

JG Summit says if it is valid then it is illegal. What does theSC say? The SC says it‘s valid. Just because the result couldturn out to be against the law doesn‘t mean that it is invalid.Why? Because according to the SC, the right of first refusal isa separate and distinct right which can be renegotiated. Inother words, Kawasaki that has the right of first refusal can

sell that right to a Filipino corpo. And it will be the Filipinocorpo who will match the bid prize. Then there will no longerbe a violation of the Constitutional prohibition.

If Kawasaki insists on holding on to that right and exercisingit then the result is simply that the corpo can no longer holdreal property. In which case they can assign the realproperty to another corpo that is qualified and they will leasethe property from that qualified corpo who is now the newowner. Read this case: JG Summit vs. CA, 450 S 169.

You read also La Bugal-B‟laan Tribal Association, Inc.vs. Ramos, 445 S 1, 2004. Have you read that from yourNat Res? It is 471 pages. Is there a saying in law that says,

‗The longer the decision, the quality of the decision is

inversely proportionate to the length of the decision. Longdecisions make bad law. This is the decision that says that itis only the State can exploit natural resources and that‘swhat the Constitution says. the SC now says that is still truebut what the State can do by itself it can make another corpoor person do for it. If it is legal for you to sell your propertythen you can also sell your property by another. That iscalled SPA. Ngano di man ka gusto na ikaw mamaligyadinha? Kay kapoy? That is a flimsy excuse. Pero kung muingon ka na hadlok ko kidnapon ko. Di ko gusto magpakitadinha sa buyer kay mahibaw-an kung kinsa ko ug ang akonghitsura. Naa man koy abogado, pirma lang ko SPA siyaakong papirmahon sa sale. Siya pay mamakak dinha kung gi- undervalue ang property. Mao nay tinood na rason. Mao na

kasagaran di sila mupirma sa deed of sale.

This B‘laan Inc. case, is a decision longer than the recordholder decision which was also en banc. What was that case?The case of Javellana vs. Executive Secretary. Talks aboutthe Javellana case and his favorite Justice, Concepcion.

So valid? You are a corpo, you mine and you put up a dam. You dig the ground and put up pipes for geothermal energy.But you have a service contract with a foreign corpo whodoes the work for you, who collects the proceeds for you.There is an agreement, service contract and technicalcontract. Valid.

These are the decisions that make the issue of nationalityand domicile important in a corporation.

SECOND ATTRIBUTE: Separate and distinctpersonality.

Bautista vs. Auto Plus Traders, BP 22 case.

The landmark case is of course Stonehill vs. Diokno.That is most famous case that distinguishes thepersonality as separate.

There‘s a warrant against Mr. Stonehill. But the warrantis addressed to American Tobacco Corp. the corpo ofStonehill. What is the address of Stonehill? The addressonly has a number, a dash and an A. you searched theaddress that has only the number and the warrant has –

A. Kinsa nagpuyo ato ? Si Stonehill. Pero ang imung warrant sa corpo na -addressed. You cannot do that. Thecorpo is protected from unreasonable searches andseizures. The important ruling according the SC here,

the one who must assert the right must be the board ofdirectors of the corpo because the board is the properspokesperson of the corpo and not just Stonehill.

Now we come to this doctrine: Piercing the veil ofcorporate entity.

This is an old doctrine, very bad English but it remainsfrozen in jurisprudence. It is not even true. Piercing theveil. Kinsa may mu-pierce sa veil ? Here is a corpo with aseparate personality unya imu dawn a tuslukon kungkinsa man person dinha sa sulod who dominates andcontrols the corpo. So the separate personality of thecorpo is disregarded and the natural person thatdominates it is now held responsible and liable for the

transgression. That is piercing the veil.

Di na tinood, di man nimo tusukon. Unsao may imunghimoon? Kuhaon na nimo ang veil unya tan-awon nimokung hain man nang tawhana. Aron makit-an nimo. Sothey say decisions do not make the best literature.Judges and Justices are like journalists with deadlines.

Read those cases (no mention of citations) becausethere are 2 rules regarding piercing the veil ofcorporate entity.

i. The rules that are applicable to pierce the veil andgo straight to the natural person who is takingadvantage of the separate personality of the corpo.

ii.

And also piercing the veil when it comes to 2corporations, a holding corpo and a subsidiarycorpo. When do you disregard the separate anddistinct personality of the subsidiary corpo and yougo straight to the parent corpo. This is a separatecriteria.

The SC says that there is no such thing as one criterion.There are several criteria. The only pronouncement thatthe SC keeps repeating is this: Just because a personowns 90% of the outstanding capital stock of the corpodoes not automatically warrant the piercing the veil of




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that corpo. Even if it 99%. There must an anomaly.There must be an attempt to circumvent the law, todefeat the valid enforcement of an obligation.

If a holding corpo owns less than 50% plus 1 of the

outstanding shares of the subsidiary the subsidiary iscalled an affiliate (1st category) corpo. If you ownmore that 50% of the outstanding capital stocks of acorpo then that corpo is called a subsidiary (2nd category) corpo. Subsidiary means that its financialstatements can be consolidated with that of the motherholding company. Affiliates cannot be consolidated themother corpo just has an equity of the profits or theoperations of that affiliate. It cannot be consolidated.

The 3rd category you have to remember is a whollyowned corpo. When do you become a wholly ownedcorpo? The corporate convention is if you own 95%, thecorpo owns 95% of the subsidiary then this subsidiary isknown to be wholly owned by the mother corpo. Why is

it not 100%? 95% and above is already wholly owned.Why is it? Because of the requirement of the CorporationCode that you cannot form a corpo unless there are atleast 5 incorporators. It cannot be just one.

So if you have 100 shares there must be 5 who at leastowns a share. You cannot be a director of a corpo if youdo not own at least one share standing in your name inthe books of the corpo. So naay minimum na 4 shareswhich does not belong to the single controllingstockholder. At least in the books of the corpo becauseyou can be a stockholder but the moment you become astockholder the dominant owner will say sign at the backof the certificate of stock. So now you endorse it in

blank and he holds it. That transaction is bindingbetween the parties but in the books you are still astockholder. You cannot be prevented from voting. Butyou are already under the complete control of thedominant stockholder.

It is endorsed in blank, all the dominant stockholder hasto do is to pass it on to someone whom he trusts. Hewill replace you as a stockholder.

Does a change of medium of holding the same businessenterprise authorize piercing to enforce obligations? Apartnership that becomes a corpo, can you say that thecorpo now is liable? It becomes the successor in interestof the liabilities of the partnership? Or a corpo, the

stockholders completely sell their shares of stock to anew set of stockholders, is there a change in thecorporate personality?

In the first, it cannot be. The general partner of thepartnership is the one who is liable. But when it comesto a corpo and there is a complete change in thestockholders there is no change because it is the samepersonality. That‘s precisely the reason why corporateshares of stock are transferrable. And the SC has saidborne out by the circulars sent out by the SEC that thetransferability of shares can only be regulated it cannotbe prohibited because that is the essence of a

corporation. You cannot create a corpo whose sharescannot be transferred. You can regulate the transfersuch an agreement of a right of first refusal or you setqualifications for the holder but you cannot eliminate thetransfer of shares.

THIRD ATTRIBUTE: Corporation created by operationof law and a corporation created by law.

The landmark case here is National DevelopmentCorp. vs. PNB 192 S 257.

Then the Charter Test and the case I gave you withrespect to the charter test, Liban vs. Gordon and

Veteran‟s Federation of the Phils. vs. Reyes, I gavethat to you already in Labor. You have to go throughthose cases because those are the cases with respect tothe creation of a corpo by law and creation of a corpo byoperation of law.

November 27, 2015 AC

I am giving to you this data about the size of stockexchanges. How is it measured? One way of measuring is themarket capitalization of stock exchanges. What is marketcapitalization? Market capitalization is the price of shares ofstock at the last closing rate of a given date.

Let us say December 31. San Miguel Corporation. That is theprice that is bidded. You multiply that price with all thisyear's (that is available in the market) outstanding capitalstocks. That is the market capitalization of that particularcompany. You add up all the different issues traded indifferent stock exchange. That is the market capitalization of

the stock exchange.Market cut. If you will look at this chart, kini mga gagmay ni.The third biggest is Japan — about 4T market cut. The nextis London stock exchange — slightly lower than 4T Dollars.(Father continues to mention the different stock exchanges inthe given data.)

Like BNB — Bead and Breakfast. Mura na silag Uber. Theyhave more rooms than the biggest chain of Hotels in theworld! And their valuations are in billions. Mao naynagpasaka sa New York stock exchange.

So if you can see visually how big it is. Kaning NASDAQ,where is it located? It is located in your computer. You canclaim it at any time. Di na musibat!

That is why when you say that the stock exchange is a place,it is a place where the stockholders meet. NO! It is no longera place where they can meet. Because NASDAQ is 24 hours.Kining gagmay diri, kung i-add na nimo, mga 4Tril ra na. (Father continues to mention the things in the given data.)

That is why, many go to New York because it is easier toraise *** through so much trading. That is equity ha. Stocks.

Pag-abot nimo sa bond, the bond — is it bigger or smallerthan the equities property? 48 + 27 = 75. Mas dako diay angbond. So, read about the 9 useful facts about the Global




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Bond ***.

Now, ang kamaguwangan sa tanan — the biggest market ofall — is the derivatives market. Wa intawn kalibutan ang mgataga Tagum, mga taga Mati, kaning derivatives market. It is

the biggest. $1.2quadrillon. Perting dakua. It exceeds byseveral times the total world gross domestic product.Derivatives.

So I'm giving you this aron dili ka maignorante. Pagbasa- basa niini kay nagatuon ta ani.

So the GDP of the world, you add up all the GDPs of thecountries, the GDP of the world is smaller than the equitiesmarket. All the stock exchanges in the world and add up,lupigon ang GDP sa world. It certainly is smaller than bondmarket. And with all the more, it is smaller compared to thederivatives matter. There is no exchange ha in thisderivatives market. They call it OTC —Over the counter. It isunregulated. Mao nay dako kaayong problema nila.

Unregulated!Kung investor ka, unya dili na ka gusto maghunahuna,mopalit kag shares sa fund that is an index fund — an indexfund is the whole stock market of Aeon (?). That is its fund.Musaka gani na ang market, alang ka gullible anang imong share sa fund. Muubos nang stock market, muubos angvalue sa imong share nga fund. Wa man kay problema kaywala man ka maghunahuna, diba? Kay imong latagan ba.Naay mopalit, naay portfolio, naay unggoy dira na magsigiglabay og dart sa kung asa maigo nga corporation, unyamubayad sila sa shares didto sa gilabayan sa unggoy. Kinsamay nakadaog? Way nakadaog. Tabla na sila. What's that?That is where index bonds were formed. Mubuhat man nasilag index.

Alright. We will also tackle about the decision of the SupremeCourt about Piercing the Veil of Corporate Entity (2013decision). Naa kay corporation. Nahapay. Unya napasa didtosa asset privatization. Unya napasa nasad sa laingcorporation na nagcreate niini ni Gloria Macapagal-Arroyo.Gusto sila nga mubalik nasad ni sa PNB-DBP na nagproducesa assets ani. ―I-pierce na nato ni! Tuhugon na nato ni.Pwede ba? ‖

[Father did not continue discussing the case and did not tellwhat case was that. He gave a hand-out to the classpresident. So please check the hand-out.]

So, we have seen the nationality. We have seen control test.

We have seen Grandfather Rule. We have also seen theDoctrine of Legal Entity — because this to do with thesecond attribute, namely: the corporation has a separatepersonality on its own and separate from the personalities ofthe stock holders. In other words, all the stock holders canoriginally sell the shares and there will be a different set ofstockholders owning the shares of stock, but it will be stillthe same corporation. And its personality is separate anddistinct from the stockholers. That is the Doctrine of LegalEntity.

The Doctrine of Legal Entity is disregarded when you piercethe veil of corporate fiction. When you disregard the separate

and distinct personality and go straight to the stockholdersand say ―This is the real person‖, the personality of legalfiction is disregarded. The stockholder that is dominant is theone liable and is an exception to the doctrine of Legal entity.

Fatal example of the Doctrine of Legal Entity. The presidentof the corporation was impleaded in his official capacity assuch, and no specific charge of claim against him was madein his personal capacity was allegend in the complaint filedwith the NLRC. But the Labor Arbiter's decision made thepresident of the corporation jointly and solidarily liable withthe corporation because of the manner in which he dismissedthe employee. He then became a real party in interest whosestate became distinct from those of the corporation.

The trouble is, when the appeal was made, he signed theappeal for the corporation, but he did not sign the appeal inhis personal capacity. So what is the effect of that? Theeffect is that the judgment as to him personally — that hewas liable for the dismissal — became final and executory.

This is because the period to appeal lapsed. So niana syanga ―Ni- appeal naman ko. Nipirma man gani ko ana .‖ That isfor the corporation. Isn't that substantial compliance becausethat is also my signature? Can you not count my signingthere as also signing for my own behalf?

The Supreme Court says NO. You have to sign separately onappeal. That is the case of Petplans Inc. vs CA 443 scra510 (2004). Nasipyat sya. Sa ato na, kinsa man jud angnisipyat? Ang abogado niya ang nisipyat! Absent saCorporation Law. Pag gawas sa decision nga jointly andsolidarily liable, impleaded ka na. Pag appeal nimo kay maoman gihapon ang title sa case, wa na sya muappeal. Nafinalna nuon ang decision sa iyaha. That is the meaning of the

Doctrine of Legal Entity.

From the full text:

In the present case, a reading of the subject resolutionissued by the Board of Directors of PET PLANS, shows that itauthorizes Espino to represent only PET PLANS, not its co-petitioner, Ocampo. Nothing in the records at hand indicatesthat Espino is clothed with special authority to representOcampo. Hence, Espino does not represent Ocampo, in thefiling of CA-G.R. SP No. 62410. As such, Ocampo, being apetitioner in his own right, should have also signed theverification and certificate of non-forum shopping attached tothe petition of CA-G.R. SP No. 62410. Ordinarily, Ocamposhould have been considered a nominal party as he was

merely impleaded by complainant in his capacity as thepresident of PET PLANS and no specific claim or chargeagainst him, in his personal capacity, was alleged in thecomplaint filed with the NLRC, Regional Arbitration Branch.However, considering that the Labor Arbiter's decision madehim jointly and solidarily liable with PET PLANS, he hasbecome a real party-in-interest whose stake, subsequent tothe Labor Arbiter's decision, have become distinct from thoseof petitioner corporation. As such, it becomes inevitable forhim to sign the verification and certificate of non-forumshopping.




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The exception to that is Piercing the Veil of CorporateEntity.

Remember the 2 kinds of rules ha.

When you pierce the veil of the corporation, and you can say

that this person is just using the corporation as a conduit inorder to hide from the obligation of the law.

OR you pierce the legal personality of the subsidiary andyou'd say that the real personality is the holding company.Why? Because the holding company runs from ***. Thiscorporation is just its division. There is no separate account.There are even no board meetings with the board. Ang mga board members na gibutang diha kay wala gani kaybaw ngaboard members na sila! The clients of the subsidiary are alsoclients of the holding corporation. What's the point there?Nganong nag separate pa man jud sila? Because probably,the law requires. Tan-awa ra gud karon, kung mu- engage ka in real property development, unya high end subdivison ka,

the law now requires that when you enter into a realproperty development 20% of your projects must be low-costhousing. Bisan si Ayala has to have 20% low cost housingaron dili lang mga dato ang magsubdivision dira. Somagcreate kag corporation aron mapakita na pero wala gud!

Ang nagapadagan kay mao ra gihaon — ang parentcorporation. What's the reason? Nganong magcreate mankag ana? If it's losing, kana ray ma -lose. Kana ray iforeclose.Dili man mahilabtan ang mother corporation which is runninga profittable business. That is the whole idea. Separate theliabilities. The law does not care on whether you will create aseparate corporation or not for as long as you can prove that20% of your project aggregate is low-cost housing. Pero tan-awa ra gud nang valuation karon sa low-cost. P1Mil! Unsa na

kadak-a? Wala pay 100sqm. Ang uban kay 60sqm. Unsa maytawag ana? Sa layo pa na mura nag kasilyas! Pero ang tawagnila ana kay core house. :)

So, when a corporation is a mere alter-ego of its chiefdominant stockholder, and he is using the corporatepersonality to commit fraud, perpetuate a statutory provisionor the breach of duty or a dishonest practice, then thatcorporation's personality can be disregarded and itsobligations will be imputed. The SC says that the mere factthat a corporation is overwhelmingly — its controlling stocks

— is owned by one stockholder, that is not enough ground tonullify and pierce the veil. There must be some serious,nefarious use of the separate legal entity of the corporation.

Now, what is the extent of the legal effect of piercing theveil. When you pierce the veil, patay na na. Gi-pierce mannimo. Pag pierce nimo, patay diba? (haha) Wa na. Wa nasyay personality. Pero, dili man diay na Piercing! Mao bitawna , this is very poor english. In Kettle Philippines vs

Yatco (1946), the Supreme Court says that theapplicationof the piercing doctrine to a particular case does not denythe corporation of legal personality for any and all purposes,but only for a particular transaction or instance for which thedoctrine was applied.

So wala gyud diay nimo gi -pierce. You only disregarded it forthat particular transaction. Diba?

Yutivo vs Commissioner. That is the No. 1 in the tax case. You must have been reading that. Yutivo began making cashfor GM. Then he had a marketing arm. Laing corporation.Upon their finish product came, nobody bought from Yutivo.Wa na. Because this Yutivo Marketing Corporation is the

exclusive distributor of Yutivo Automotives. Nganongmagbuhat-buhat pa man kag laing corporation? Because thatthat time, there was a sales tax. Sales tax was the ___ onthe fist sale of a commodity or product that wasmanufactured or imported. Karon, kung imo sad ning corporation ang marketing arm, ang presyo nga imongiihatag kay barato ra. Kay ana man gyud na icharge angsales tax. Pero pagbaligya niya ngadto sa consumer, lain naang presyo. Madoble. Kay diri sa first tax, ikaw maymubayad. So kinahanglan ka nga ubuhat niini.

Now, Yutivo started importing from Japan. Unsa man naiyahang giimport? Nissan. Kanus-a man na nagsugod ang Nissan? 1960s. Pag import niya, iyaha nasad gipasa sa

ihayang Yutivo Marketing. Karon kay nisulod na ang BIR.Ingon sa BIR, ―That is not the true sale sa gi-import.‖ Thetrue sale is from Yutivo Marketing to the original consumer.That is where it should be taxed. So kaning distributor isdisregarded.

Ingon si Yutivo, ―I have no motive to lie or to cheat. Why?Because this Yutivo Marketing already existed. Di man natikas akong gihimo. So nag-buhat mig GM para ipasa niini.Karon nag- import na mig Nissan, gipasa gihapon namo. Diman na sala. I have no criminal intent. So the separate andlegal personality should not be pierced.‖ What did the SCsay? It said that kana imong giingon nga pre-existingcorporation, that proves your bona fide intent of good faith,that only saves you from penalties and surcharges. But that

does not save you from the imposition of the real sales tax.That does not save you from piercing the veil of corporateentity. You are still taking advantage by using thatcorporation. The true sale should be from the importer to theconsumer. And that should be where the sales tax shouldstart.

What is the 3rd attribute? The corporation is created byoperation of law. The leading CASE: NDC vs. Phil.

Veterans Bank (192 S 257; 1990). Created by law, thatis a public corporation. Created by operation of law, that is aprivate corporation.

In the said case, Agrix Corporation was created by a UPProfessor who was an assistant dean in the School of

Business. He was a very good sales man. He managed toconvinced many professors in UP, including those who retire,to invest their money to the corporation. Agrix was apyramiding scam. They were so enamoured by the healthyreturns monthly equivalent to 2% a month.

Gi-salbar ni Marcos ang UP. How did he do it? He issued aPresidential Decree commanding the Veterans Bank to lendmoney for the formation of a new Agrix Corporation and thestockholders will be those who lost money in the old AgrixCorporation. Dili naman mauli tong kwarta sa mga nalugi kaynawagtang naman tong former UP professor. Now, somebody




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filed a case to nullify the Presidential Decree because youcannot create by law corporation for a private purpose. Youcan only create a corporation by law for a public purpose.

It took the Supreme Court twelve years, 1990 na gud ni na-

decide, unya 70s pa nahitabo ang Agrix. If basahon nimoang decision sa SC, magkatawa ka kay pirting isuga sa SC sailang decision. Wala na si Marcos ani na time kay 1990 nagud. You read this case.

From the FT of the case:

The new corporation is neither owned nor controlled by thegovernment. The National Development Corporation wasmerely required to extend a loan of not more thanP10,000,000.00 to New Agrix, Inc. Pending payment thereof,NDC would undertake the management of the corporation,but with the obligation of making periodic reports to the

Agrix board of directors. After payment of the loan, the saidboard can then appoint its own management. The stocks of

the new corporation are to be issued to the old investors andstockholders of AGRIX upon proof of their claims against theabolished corporation. They shall then be the owners of thenew corporation. New Agrix, Inc. is entirely private and soshould have been organized under the Corporation Law inaccordance with the above-cited constitutional provision.

Creation of Corporations

GENERAL RULE: You comply with the requirements ofthe general enabling law and then you are acorporation.

What happens if you comply with the documentaryrequirements but then the documents that you submit, let ussay the Articles of Incorporation which is a must, you submitthe By-Laws together with the Articles of Incorporation oryou submit it within 30 days after your certificate ofincorporation is issued. If you do that after it is issued, theBy-Laws must be approved by the stockholders but if yousubmit the By-Laws together with your Articles, it isapproved only by the incorporators.

Supposed your documents are fatally defective and still theSEC issues you a certificate of incorporation, what happens?The law says that you are a de facto corporation. A de factocorporation cannot be attacked collaterally even if there is adefect.

1st exception: De Facto Corporation

Section 20. De facto corporations. – The dueincorporation of any corporation claiming in good faith to bea corporation under this Code, and its right to exercisecorporate powers, shall not be inquired into collaterally inany private suit to which such corporation may be a party.Such inquiry may be made by the Solicitor General in a quowarranto proceeding. (n)

An example of a de facto corporation is a corporation thathas existed for 25 years without By-Laws. The corporation

forgot to submit By-Laws. What corporation is that? Thecorporation of the subdivision where PGMA lives - LoyalaGrand Villas. They forgot to submit.

BAR EXAM QUESTION:

The municipality of Sto. Tomas was issued a charter. It is apublic corporation. Subsequently, the SC nullified the charter.It was created by a special law and yet later, the law creatingit was declared invalid.

Q: Can it claim to be a de facto corporation? That it cannotbe attacked collaterally? That all those who have obligationswith that municipality cannot renege of their obligationsbecause they are a de facto corporation?

Dili man na mahimo na gipautang ka unya naa kay bayronontapos muana ka na ―dili nako mubayad kay dili man diay na corporation.‖ That is a collateral attack. You have to file aseparate action which is a direct action. The only issue onthat action is to nullify the corporate personality. That was

asked in the bar examination.

A: The answer is that the corporation is not a de factocorporation because all the requisites for its existence arecancelled. There is no valid law or general enabling act. Itwas not created by operation of law but by law. Even if itassumed corporate powers, it was not created by operationof law. That is an example of an exception to the generalrule that private corporation should be organized inaccordance with a general enabling law.

2nd exception: Corporation by Estoppel

Section 21. Corporation by estoppel. – All persons who

assume to act as a corporation knowing it to be withoutauthority to do so shall be liable as general partners for alldebts, liabilities and damages incurred or arising as a resultthereof: Provided, however, That when any such ostensiblecorporation is sued on any transaction entered by it as acorporation or on any tort committed by it as such, it shallnot be allowed to use as a defense its lack of corporatepersonality.

On who assumes an obligation to an ostensible corporationas such, cannot resist performance thereof on the groundthat there was in fact no corporation. (n)

Where persons assume to act as a corporation knowing it tobe withouth authority to do so, such ostensible corporation

shall not be allowed to deny its corporate personality andsuch persons shall be liable as general partners for all debts,liabilities and damages incurred or arising as a result thereof.That is a corporation by estoppel.

It is different from a de facto corporation. In a de factocorporation, there is a certificate of incorporation but thecorporation is fatally defective. Here in corporation byestoppel, there is no certificate of incorporation. How does ithappen? Imagine, sa Manila, daghan kaayo mga tao. Palit kaug Manila Bulletin, 3/4s of that is classified ads. You areadvertising your place for rent. 6AM pa lang, tua na ka sa




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area for rent. Naay muadto didto tapos magkasinabot mo,magpirma mo ug contract. Mag- issue siya ug check for 1month deposit and 2 months advance. Mulakaw dayon siyatapos ikaw mag-lingkod2 ra ka didto. Unya naa na pudmuabot, mag -issue na pud sa imo ug check for 1 month

advance and 2 months deposit. Mulakaw na pud siya kaytaga- Bulacan man siya so ugma na daw mubalhin sagiparentahan. Unya naa pud ika-tulo, same gihapon, mag -issue ug check sa imo. Hutdon nimo na hangtud muabot kaug 10. Tapos pagka- 12 mulakaw dayon ka. Magtagbo tong 10 kabuok, mag-away to sila kung kinsa nakauna kaynagbayad man sila.

Corporation ang payee sa checks tapos dili diay to corporation. Wala kay corporation pero since suod man ka sabanko, muingon lang ka na ang papers sa corporation nimokay to-follow na. Ma -deposit dayon nimo sa banks. Localcheck – 1 day nalang ang clearing tapos iwithdraw dayonnimo. Unya, this is the age of selfie-selfie unya nakuhaan ka

ug picture sa isa sa mga nag -issue. Nasakpan ka. Unyamuingon ka na ―dili man ko corporation‖. Well, under Section21, corporation by estoppel ka, you are liable as a generalpartner. Ostensible corporation – you perform thecorporate functions knowing it to be without authority to doso. Scam na. Klaro kaayo. Section 21 was created to answerthe situations involving scams.

What are the instances when the principle of corporation byestoppel cannot be invoked?

1.

It cannot be invoked by the person who misrepresentedthe corporation as duly organized as against his victim.The principle of estoppel can be invoked against theperson who made the misrepresentation and not in favor

of such person.2.

It cannot be used against a person who takes no partexcept to subscribe for stock in the proposedcorporation which was never legally formed. Hence, hecannot be liable as a partner to those who engaged inbusiness under the name of the pretended corporation.

Many corporation law theorists say that a corporation defacto or corporation by estoppel ang leading against thebasic theory of corporation. Because they say ―our basictheory of corporation is governmental act.‖ You have acorporation because the government, the law, says so. Here,the effects of the corporation are yours even if thegovernment has not said so or the government cannot say so

because it is defective.These are the two theories:

governmental act; or

business entity.

As long as there is an entity, there is a corporation even ifthe government has acted on it or it has not acted torecognize your personality. Later on, we will see that thereare many theories.

Pangutan-on gani mo sa bar exam kung unsa ang theorybehind corporate personality, then you enumerate. Tan-awa

kung pila ka points ang ihatag sa question. If butangan ganiug taas na points, taas pud na answer ang gusto ana. Mga give-away ang uban questions sa bar.

Classes of Corporations

Section 3. Classes of corporations. – Corporationsformed or organized under this Code may be stock or non-stock corporations. Corporations which have capital stockdivided into shares and are authorized to distribute to theholders of such shares dividends or allotments of the surplusprofits on the basis of the shares held are stock corporations.

All other corporations are non-stock corporations. (3a)

What are the different kinds of classes of the corporation?The classification under the Corporation Code is stock ornon-stock, non-stock non-profit or stock profit.

The problem with this classification is that it does not meanthat a corporation that is non-stock cannot make profits. Arethey going to be de-classified by the BIR if it does not payincome tax? That is the issue in the CASE: San Juan DeDios Hospital vs. Commissioner of Internal Revenue(5 S 371; 1962). Kaluoy sa mga madre. Naa silay non-stock, non-profit corporation. Unya niginansya man na sila.Sa ilang financial statements, nisobra ang ilang receipts kesaila gasto so the BIR collected income tax. They claim thatthey are a non-stock non-profit corporation. Tapos niana ang BIR, if non-stock non-profit mo, nganong naa man moy profit?

This is where the SC said that the difference between non-

stock non-profit and stock profit corporations is NOT profit. Itis the provisory article which says that “none of theaccumulated surplus of the corporation may bedistributed to the stockholders as dividend.” If youhave that, you are non-stock, non-profit. You do not pay anincome tax. Basic ni. Intawon, hinumdumi ni kay kapilanagsige ug balik balik ang BIR ani. Sige lang na sila ug collect ani maong daghan kaayo cases involving this.

Corporate sole and corporation aggregate is also aclassification.

When we say stock and profit corporation, there arestockholders.

In non-stock non-profit, there are members.

But when we say corporation sole, it is necessarilyreligious. It is a corporation made out of a bishop. Naaycontradiction ba – it is like square circle. How can youbecome a corporation kung isa lang ka? How did thishappen? This was put about by Napoleon Bonaparte. Asaristocratic as he was, he knew he could not go against thechurch. So he created this category in the Napoleon Codewhich was transferred to the Spanish Civil Code. The officeitself of the bishop, the elder, the imam – corporation solena.

In the Corporation Code, there is this classification of




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foreign corporation and domestic corporation. Underthe code, if it is not a foreign corporation, then it is adomestic corporation. If you are a foreign corporation,regardless of whether the stockholders are all Filipinos, ifthey are incorporated not within the laws of the Philippines,

it is a foreign corporation under the Corporation Code. But ifyou are incorporated in the Philippines, the incorporatorsmust be majority residents of the Philippines so it canincluded foreigners. Even if there are foreigners there, it isstill considered as a domestic corporation under theCorporation Code. Kanang Filipino-foreign corporation, that isthe classification under the Constitution and not under theCorporation Code. The classification there is according tocontrol test: 60-40%.

Now, we also have public and private. Public corporation – created by law; private corporation – created by operationof law. If there is original charter, it is public. If it has nooriginal charter, it is private.

This is the charter test which is prospective in nature. Itcannot be applied resprospectively. CASE: SPCA vs. CA.

We also have close corporation and open corporation.

A close corporation – that is provided for under Section 96of the Corporation Code. You cannot have more than 20stockholders in a close corporation and it cannot list itsstocks in the stock market.

In an open corporation, there are no such restrictions.

What is a quasi-public corporation? It is a privatecorporation that is engaged in the performance of publicservices like bus service, transporation service, publicutilities, etc. When we say ―quasi‖, mura mura ug public pero

private diay. The objective of this corporation is publicservice.

What is a quasi corporation? It is a public corporation butit has no personality because it derives its personality fromthe Republic of the Philippines. It possesses corporatefunctions and attributes but they are primarily agencies inthe administration of civil government and their corporatefunctions are granted in order to enable them more readily toperform their public duties.

They are distinguished from municipal corporationsproper, in that the creation of the latter is the voluntary actof the members, whereas the formation of the quasicorporation is, as a rule, not voluntary.

Example: Armed Forces of the Philippines. Kung mabanggaanka ug truck sa army, kinsa man imong claiman? Republicimong adtuan. They share in the personality of the Republic.Wala man na silay original charter. They partake of thepersonality of the Republic so they are a quasi-corporation.

Section 4. Corporations created by special laws orcharters. – Corporations created by special laws or chartersshall be governed primarily by the provisions of the speciallaw or charter creating them or applicable to them,supplemented by the provisions of this Code, insofar as they

are applicable. (n)

Those are the classifications of the corporations. We haveseen Section 3 and 4.

Section 5. Corporators and incorporators,stockholders and members. – Corporators are those whocompose a corporation, whether as stockholders or asmembers. Incorporators are those stockholders or membersmentioned in the articles of incorporation as originallyforming and composing the corporation and who aresignatories thereof.

Corporators in a stock corporation are called stockholders orshareholders. Corporators in a non-stock corporation arecalled members. (4a)

Now, in Section 5, basic categories ni ha. I just want to pointout na the Corporation Code says that compliance with thecode that is required by law is simply substantial, not literal.But these categories listed in Section 5 (stockholders,members, incorporators), you have to be literal with them.

When you file your Articles of Incorporation, you can file it inFilipino because the law says ―in any official languages.‖ Butma -approve kaya na imong articles in Filipino? Suwayi ra gudna ug file. Under:

Section 14. ―All corporations organized under this code shallfile with the Securities and Exchange Commission articles ofincorporation in any of the official languages duly signed andacknowledged by all of the incorporators, containingsubstantially the following matters x x x.‖

So substantial compliance lang jud but again, sa Section 5,literal jud ni ha.

For example, in your Articles of Incorporation, instead ofsaying ―5 directors‖, you place there ―5 elders‖, substantialcompliance na? Ma -approve na? Dili. Why? Literal ang Section 5 – incorporators, directors, stockholders. Literal ni.

The way to memorize Section 5 is like sa mathematics , mag- sub set ka.

Sa non-stock corporation, members ang tawag.

Pag- stock and profit corporation, the corporators arecalled as stockholders or as the Corporation Codesays, shareholders.

Ang incorporators are stockholders or members whose nameappear in the Articles of Incorporation and signed at the saiddocument.

Are all incorporators corporators? Yes.

Are all corporators incorporators? No.

Do you have to be a member to be an incorporator? No.

Puro na corporators ang mga members and stockholders. You can also be an incorporator but you cannot be an




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incorporator without being a member or a stockholder.

Suppose your name appears in the Articles of Incorporationbut you did not sign it?

Nganong bawal man musobra ug 15 ang incorporators?

Nganong naa may limit? Kung masobra sa 15, dawaton pa nasa SEC? Yes kung dili kaayo baga but only the first 15 areconsidered as incorporators because the law says ―not lessthan 5 and not more than 15.‖ That is the GR.

There are certain exceptions. One is for banks which requires21 stockholders.

Again, almost anything in the Articles of Incorporation, youcan amend. You can change the name, extend the term orshorten it, the principal office or address.

There is only one thing that you cannot change – theincorporators. The incorporators is a historical act. Mao ngkung mupili ka ug incorporators, isure jud na.

What if mangawat na siya unya mapriso? So isa sa imo mga incorporators kay kawatan. Again, you cannot change itbecause that is historical.

Classifications of Shares

Section 6 is ½ the Corporation Code. If you can master this,you already know ½ of the Code. Taas kaayo siya.

December 2, 2015 DMS

[FGN talking about double entry accounting and its inventor]

Two Theories of Corporation

(According to Dean Cesar Villanueva) 1)

Concession Theory

2)

Theory of business entity

All right, we are now in Section 6 which, I must say, is closeto one-half if not one-half of the Corporation Code – Classification of shares of stock. Remember this provisionis applicable only to stock and profit corporation .Nevermind non-stock and non-profit corporations.

Section 6. Classification of shares.

The shares of stock of stock corporations may be divided intoclasses or series of shares, or both, any of which classes or

series of sharesx x x

Class of shares, these are common shares or preferredshares.

Series means it could be the same class but the issuance isof different date. So, it could be ―Series 1995‖ or it could be

―Series 1998‖ but both may have the same class of shares,both could be common shares. That is what differentiates it

– the time of issuance.

Why does the time make a difference? It is because theprice at which it is issued could be different just because thevalue of the shares of stock changes with time. That is why itis important that you know, you understand, financialstatements. You know, the moment financial statements are

already printed, it is already false. That is why all financialstatements are always ―Balance Sheet of San MiguelCorporation as of [insert date].‖ It means that it is only trueas of that particular date. It is a snapshot of SMC becauseSMC is an on-going corporation, so the transactions changethe value of the shares. A profitable statement is true onlyupto that date which is stated in the balance sheet. Allexpenses, receipts, sales recorded, the difference is not theprofit yet. After deducting all the expenses, you have NETINCOME BEFORE TAX, then you deduct then you have NETINCOME AFTER TAX (NIAT). Mao na na ang bahin-bahinonsa mga stockholders if the corporation decides to issuedividends ha.

So, take a look at the financial statement of PLDT. They havepreferred shares – Series A, Series B, Series C, nahurot nalang ng alphabet, abot na Series Z, sugod napud sila Series

AA. They continue to issue preferred shares. Now, theclassification of shares are the same, they are preferredshares but the series are different because they are issued atvarious time or year.

Now, under the rules of the Philippine Stock Exchange, inorder to be approved to issue shares, you must state thepurpose. What are these shares for? Either for capitalexpansion of this project, or sometimes in order to retire (?)previously contracted debts. So they are issuing new sharesto get more money to pay debts. What is the likelihood of afriend of yours who will come to you and say, ―Pautanga ko

beh kay ibayad nako sa ako utang.‖? Ganahan ba kamagpahulam ana? Ha? It is highly unlikely. However, if youare a corporation that is involved in public utilities, where theincoming stream of cash is almost predictable, you canborrow in order to pay previously debts.

I am making you understand why there are different seriesof shares and different classes of shares. Classes of sharesare common shares and preferred shares. But mind you, theword ―common shares‖ is not all common in the Corporation Code. It is not even found in the Corporation Code, what isfound in the Code is ―preferred shares.‖ Where did it comefrom? It came from the business world. You go to thedecisions of the SC, the SC uses the term (common shares)

as if it is common, but it is not.So, these are the terminologies that you must understand.

classes or series of shares, or both, any of which classes orseries of shares may have such rights, privileges orrestrictions as may be stated in the articles of incorporation.

x x x

Where is the classification of the shares of stock ofthe corporation found? It is found in the Articles ofIncorporation (AOI). How about the series? It is also found inthe AOI.




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Here comes the different limitations provided by the Code.

Provided, No share may be deprived of voting rights exceptthose classified and issued as ―preferred‖ or ―redeemable‖shares, unless otherwise provided in this Code.

x x x

General Rule: So, right away you know that ‗no votingshares‘ can only be either preferred or redeemable shares.

Exception: Unless this Code otherwise provide. Votingshares, at some point, are not allowed to vote. If you are adelinquent share, you are not allowed to vote. If you arereacquired, the corporation buys you back from theshareholder, you become treasury shares and for as long asyou are part of the treasury, you cannot vote. That is themeaning of ―unless otherwise provided in this Code‖. Thereare many of those instances.

Provided, further, That there shall always be a class or seriesof shares which have complete voting rights.

x x x

You cannot classify shares and say, ―The following are theclassification of shares of XYZ Corporation: Class A, Class B,and Class C. Class A can only vote for the election of theBoard of Directors. Class B can only vote as to increase ordecrease of capital stock. Class C can only vote as toincurring bonded interest.‖

Any or all of the shares or series of shares may have a parvalue or have no par value as may be provided for in thearticles of incorporation: Provided, however , That banks,

trust companies, insurance companies, public utilities, andbuilding and loan associations shall not be permitted to issueno-par value shares of stock.

Preferred shares of stock issued by any corporation may begiven preference in the distribution of the assets of thecorporation in case of liquidation and in the distribution ofdividends, or such other preferences as may be stated in thearticles of incorporation which are not violative of theprovisions of this Code: Provided , That preferred shares ofstock may be issued only with a stated par value. The boardof directors, where authorized in the articles of incorporation,may fix the terms and conditions of preferred shares of stockor any series thereof: Provided, That such terms andconditions shall be effective upon the filing of a certificate

thereof with the Securities and Exchange Commission.

Shares of capital stock issued without par value shall bedeemed fully paid and non-assessable and the holder of suchshares shall not be liable to the corporation or to its creditorsin respect thereto: Provided; That shares without par valuemay not be issued for a consideration less than the value ofP5.00 per share: Provided, further, That the entireconsideration received by the corporation for its no-par valueshares shall be treated as capital and shall not be availablefor distribution as dividends.

x x x

So, par value and no par value.

What is par value? Par value is stated value. It is really thevalue. So there are many values. There is „par value‟ whichis the starting value or the nominal value. Then there is the

market value as listed in the stock exchange. We also havebook value.

In accounting, there is this ―assets less liabilities excludingcapital accounts, divided by the number of shares‖, what is itcalled? That is called book value.

Book Value = [Assets – Liabilities (excludingcapital accounts)]/number of shares

What does capital account contain? If we only have commonshares? Ha? It shall contain common stock. Unsa man na? Number of shares outstanding, you multiply it with the parvalue.

Common stock = Outstanding shares x Par value

Now, if it is issued for more than par value, what happens?The excess amount, you multiply it with the number ofshares issued, that is the premium on stock .

Premium on stock = Excess amount x Number ofshares

If you add common stock, premiums on stock andunrestricted retained earnings, divided by the outstandingnumber of shares, then you have the book value. That iswhy, the value of stock changes everyday kay nagasaka,naganaug ang imong transactions everyday. Technicallyspeaking, you can have a balance sheet and profit and lossstatement everyday. It is now possible because of electronicaccounting. Niadto, naa ka ana kay magbuhat ka,magpagawas ka per accounting period and it is audited andsomebody else certifies na kaning gibuhat sa corporation nabalance sheet and profit and loss statement is true andcorrect, and reflects accurately the financial picture of thiscorporation in accordance with GAAP (Generally Accepted

Accounting Principle). It varies ha, because the employer kay IFRS (International Financial Reporting Standard). Nganoman na? Ang US dili man IFRS. Europe is IFRS, as well asHong Kong but China mainland is not.

Par value is the value of the shares of stock that is issuedby the corporation in the stock certificate, it is made known.The rule in the Philippine Stock Exchange now, if you are anon-financial institution, the standard par value they require

is one peso (P1). It is the starting par value. If you issue parvalue shares, you cannot issue it for a price lower than parvalue. Your issued price, that is the consideration you receivefor issuing those shares, must be P1 or more but you cannotreceive 90 cents for a one peso par value share. That wouldbe issuing watered stock.

Now, if you have ‗no par value shares‘ that means that theshares of stock is issued to the subscriber and it has nobeginning value, what does it have? It only has theconsideration value.




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The corporation code says, you cannot issue “no parvalue shares” on a consideration less than P5.

Unsa man diay ning par value? I told you that par value isstated value. Now kining P50, that is equivalent to par value.

P50 ni karon, makapaniudto tingali ka ani karon, 3 yearsfrom now ambot lang if makapaniudto ba ka ining P50.There are still some old people in Davao who will tell youthat the old PNB of Recto, the old name is Uyanguren. Kinsaman na si Uyanguren? Unggoy na sya? He was an oldSpaniard who lead the expedition to found Davao, gikan tosila sa Butuan. Ang una nila gidevelop kay Samal unyanitabok sila dri. The old PNB, before WWII, naa dra ang general merchandising store ni Juna. Siya tong sige lang ugpigtail, intsik na sya, pikot na sya ug mata, unya gipugos syakadtong pag -issue ug charter sa Davao na sya magbayad sabuwis sa tibuok yuta. Naa to didto stall na gamay, unyamuorder ka ug puso, dinuguan, saging, pila man value ana? 5 cents, you can have a decent meal with just 5 cents

before. Kaniadto, 100 ka paniudto imong mapalit with P50.Then, P50 was really a good value. Karon? Lugos namakapalit ug paniudto. So, what is P50? It is just thenominal value. The real value is its purchasing power andit changes in time. That is why, it is the meaning of par value

– it is the beginning value, it is the nominal value.

If it does not have par value, does it mean that the shares ofstock has no value? It is still the same, you still apply theformula for arriving at book value.

Remember, only par value shares can be classified aspreferred or redeemable shares. It tells you that onlycommon shares may be classified as no par value shares.

Q: Can a corporation fix the value of a no par value shares?

A: YES. In fact it should do that if it is a pre-incorporationsubscription. Yes, it has no par value but you have to state inthe articles of incorporation the compensation that you askfor from the subscribers.

If 5 years later and the corporation wants to issue moreshares, can it issue no par value shares? If there are still nopar value unissued shares in the capital stock, thecorporation can still issue. For how much? Can it still be P5?Most likely, no. If the corporation is big in money, the valueof the no par value shares would definitely be higher thanP5. Do you think the existing stockholders will allow you tocome in at a lower price? Ma- diluted sila, dili gyud silamanugot. They would insist that the issued price will not be

lower than book value, otherwise alkansi sila.

It is the same with par value shares. If later on, acorporation wants to issue more par value shares, theycannot issue it at the original par value.

You did not hear the news about Mark Zuckerberg? Theletter that he wrote is really for the public, it is not for hisfirst-born. There, he made a promise that 99% of his totalstockholdings in FB, he will give away to charity. But he willstill control it because it will be given to the Priscilla-MarkInitiative Foundation. [FGN continued talking about MarkZuckerberg and his wife.]

Dec. 3, 2015 DMS

Yesterday, we were in section 6, classification of shares.What do you have to remember? If the shares are par value

or no par value. There are certain corporations that cannotissue no par value shares. That‘s important! And they arelisted in Section 6:

banks

trust companies

insurance companies

public utilities,

building and loan associations

They shall not be permitted to issue no par value shares ofstock. What is the reason? Because by its very nature thesecorporations are engaged in a broad ownership that involvesthe public so there must be a point of reference when youbegin. So these corporations, they intimately tied with thepublic up to have a starting point that is easily understood byall namely the nominal value.

Naay canteen sa eskwelahan dili mudawat ug kwarta . Unsamay dawaton ana? Chits! Maisdan mu man ug kwarta ug chits. Unsa man nabutangan asa chits? One chit, two cheats,ana butang niha dira. What is the whole purpose? Becausethe canteen is exclusive for students. Non-students shouldnot be able to buy. Otherwise, since it‘s in the middle of thecity, the only supplies will be consumed. Alright! Would thatbe allowed? Is there any violation of the law? Is the schoolissuing its own currency now? That can be done because its

public is small and controlled.

You cannot do it when you are a department store. Althougha department store can issue gift certificate. Isn‘t that? Butthe medium of exchange is the basic currency. There is anominal value attached to the currency that is the same tothe shares of stock. When the shares of stock involved was apublic corporation. That is corporations, publicutilities.Insurance companies that is also very good. Banks,loans and savings association. That is why no par valueshares are not allowed to be issued by them. Now, can issuepar value shares, you are the corporation.

Q: Can you issue several classes of par value shares withdifferent values? Wa ninyo basaha ang Articles Of

Incorporation na gihatag.

A: You can with different par values. What is the example?Example is Ayala Corporation. Classification of shares of

Ayala corporation. That the authorized capital stock of thecorporation is 56,200,000,000 Pesos consisting of 900 millioncommon shares with par value of 50. Pili man na 45 Billionnana. And 300 million preferred shares classified into 12million Preferred A-shares with the par value of 100 pershare and 58 million Preferred B-shares with the par value of100 pesos per share, 40 million Preferred C-shares with thepar value of 100 per share and 200 million voting preferredshares with the par value of 1 peso per share. So you can




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see how many preferred shares are there in Ayala? A, B, Cand 200 million voting preferred shares with the par value of1 peso per share. You can issue with different par values.

According to Section 6, only preferred or redeemable shares

or only ―par value shares‖ can be made preferred shares. ―No par value shares‖ cannot be allowed to be classsified aspreferred shares. What is the reason? Huna huna lang gudkung walay par value, how will you express preference interms of percentage of dividend. You cannot.

You are preferred if you have preference as to dividends thatis on-going dividends or so-called ―liquidating dividends‖ .When the corporation is dissolved, you have the senior rightto be paid the residue of the corporation after the paymentof debts and obligation, the remainder, from that remainderyou have the senior rights to be paid ahead of the commonshareholders.

If you are preferred as to dividends, how do you express

your preference? Ingon ka 12 percent, 12% of what? Of parvalue, if you have 10 pesos par value, you preferred dividendrate of 12%. You will be paid one peso and twenty centavosevery year if the corporation makes money. How will youexpress preferred rate if you have no par value.

In the several kinds of preferred, there is:

preferred voting and

there is preferred non-voting.

In fact according to Section 6, only preferred andredeemable shares can be deprived of voting rights. If theyare not preferred or not redeemable, then they cannot bedeprived of.

Now, does it mean that every preferred or redeemable shareis non-voting? Restriction as to non-voting must be explicitand cannot be implied. Why? Because it is derogatory of theright of shares to vote so it must be specific. If theclassification is just preferred or redeemable shares, it meansthat it has voting right? Because shares of stock arepresumed to have the full capacity of all rights granted bythe Corporation Code unless the Articles of Incorporationsays otherwise. So you are preferred as to dividends.

There can be:

preferred cumulative or

preferred non-cumulative.

If preference of this year is not paid because the corporationis not making money; there is no profit to speak of is carriedover the next year, it‘s cumulative. So the next year from theprofit of the corporation should be paid of the preferred rateof that year and year in arrears. That‘s the meaning ofcumulative.

May a corporation issue a guaranteed preferred share? If thecorporation can do that then Ginoo na ang corporationbecause it is guaranteeing that every year you will haveprofits. Remember the GR according to SC, no corporationcan issue dividends unless it makes profits. It must be

taken from unrestricted retained earnings, profit that isalready made. That‘s why normally a corporation can issueprofits if it made money the year before. If it makes moneynow, very difficult for it to issue a dividend. Very difficult. Waman syay panagang, wa man syay reserve. And a

corporation must have reserve.

Exo-mobile nareduce ilang profit by one half, the share ofstock has only gone down from the stock market by less than10%. Why? Because it continues to grant dividends just likein the previous years. Dako man kayo unrestricted retainedearnings, cumulative profits from the past.

Aramco, which is said to be five times bigger thanExomobile, second to the biggest corporation in market cuttraded in the New York Stock Exchange. Mao na niadtongnga gitag-iya sa mga Amerikano sa share, unsa man na, gi- expropriate sa mga Arabo.Kinsay ma stockholder ana? TheSovereign Government, the family of Saud, Saudi Arabia.[Stories about King Sud] And it is the Kingdom of Saud that

is the only stockholder of Aramco. Duha na katuig migbasakang price sa oil. Wa gihapon mureduce sa iyang budget. Sigelang gihapon, kay ngano man? Kanang gitawag ugunrestricted retained earnings. Na igoba. Ang mga profits na -consume na because Armco produces oil, the cheapestproduction of oil. Pila man iyang price? Per barrel? 5 dollars.Duha ka *** nagbaligya 100 dollars per barrel kadako ugginansya sa Saudi Arabia. That‘s why their country does nothave an income tax. Half of its citizens are all pensioned.Lami kag didto kapuyo no? Half of its citizens have no skills.[Father talks about how rich Saudi Arabia is and how itscitizens benefit from it.] Grabe more than one year bagsakug presyo one half, more than one half the price before. ***mo nlng ug 120 dollars per barrel karon. Pag magpresyo ako

depende sa sulfur contents sa oil, cost of ***.

Ang benchmark sa Europe is the sweet brent crude tua sa offshore. Kinagamyan ug *** ang benchmark sa US, WestTexas, sweet crude. Unsay abilidad sa Pilipinas?Kinahugawang oil kita ra lang ang maka refine. Kay wa manayuha atong refinery. Dawat ta kahit unsa pa kahugaw. Sa Singapore di na sila mudawat kanang nga hugaw oil.

Accumulated Unrestricted Retained earnings – That iswhere you get your dividends. You are preferred, pangutanaka dayon is it cumulative? Where do you find out whether itis cumulative or not? Where do you know? Articles OfIncorporation. What is the benefit of the doubt? Cumulativeor non-cumulative? The benefit of the doubt is non-

cumulative because it detracts from the rights of the otherstockholders. When in doubt, it is non-cumulative.

Preferred Cumulative Participating – It means you areentitled to a preferred dividend if the company makes moneyat the rate that it is posted in the Articles plus after you getthat you join with the common stock in dividing the profits.Kaduha ka muigo, preferred ka den common saka. Kinsa baybuang na corporation namuhatag ana? Kanang corporationna walay mupautang na kinahanglan ug kwarta nadesperado unya dunay na sya ug history of huge profits likeoil companies. Then their shares of stock will be forfeited.




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Preferred Cumulative Participating and Convertible shares,what‘s the meaning of convertible? Convertible to what?Convertible to common shares. If it is convertible it dependsif it is convertible at the option of the holder or is itconvertible at the option of the issuer, the corporation? Tan-

awa ninyo ang Ayala naa syay convertible preferred pero itwill be convertible only after five years. What is theconversion ratio? To be decided by the Board of Directors.Unsa man ng preferred shares nila na convertible? Kana nabang kina mub-an na valuation na par value piso ra ba na par value.

Q: Suppose the Corporation guarantees issues guaranteedshares? Is that allowed? In other words, if it does not makeprofits, what will it do to with the dividends? Are you allowedto borrow money to pay for the preferred rate of return ofshares of stock?

A: As I told you. A corporation cannot issue shares of stockthat are guaranteed in its preferred return. But it can issue

these shares of stock and another corporation, a mothercorporation will guarantee its preferred return in which caseif it does not produce profit, the mother corporation will paythe preferred rate. Is that allowed? That is allowed becausethat is an expense of another corporation. The othercorporation is not issuing dividends. The mother corporationhas list above expense.

Q: So can a guaranteed preferred shares be issued?

A: Yes, it can be issued but the guarantee is not by theissuing corporation but by another corporation because nocorporation can guarantee profits.

Warren Buffet began his Berkshire Hattawayin 1960s. Early

60s.Up to now, it‘s long list, ang returns nya . He has neverfailed. All these years up to now, positive return but hispolicy is that it does not issue cash or stock dividends. Paanosila makaginansya? Ibaligya ang imung shares, diha kamakaganansya . Because his 5 dollars par value has nowbeen 200,000 per share in the stock market. Tungod na saaccumulated dividends, accumulated profits in arrears whichhe has not issued. What is the reasoning why he is notissuing dividends? Because he doesn‘t want to pay taxes.When you issue dividends, you pay income taxes. So allthese years, can you do that in the Philippines? You cannot.Why? It‘s prohibited by law. The moment you reach 100% ofpaid-up capital in terms of accumulated profits unrestrictedretained earnings you must issue dividends whether stocks

or cash unless there are contingencies in the industry thatyou have to abide by to protect yourself from unless it is arequirement of a validly incurred debt. What they callnegative covenants. So preferred, according to section 6,only preferred or redeemable shares maybe deprived ofvoting rights.

What is a redeemable share? When you come to think of itredeemable share is really a hybrid share. It is bothequity and at the same time it is loan.

Sec. 8. Redeemable shares. – Redeemable shares may beissued by the corporation when expressly so provided in the

articles of incorporation. They may be purchased or taken upby the corporation upon the expiration of a fixed period,regardless of the existence of unrestricted retained earningsin the books of the corporation, and upon such other termsand conditions as may be stated in the articles of

incorporation, which terms and conditions must also bestated in the certificate of stock representing said shares.

Redeemable shares may be issued by corporation when it isexpressly so provided in the AOI.

Who redeem the shares? It is the corporation. Who issuedthe share? It is the corporation. That transaction is alreadyquestionable why? Gi- contribute sya sa corporation. For thatcontribution, it issued shares of stock. Kamo na lang. Perokining uban redeemable shares man sila ulian sila sa ilanggi contribute. And the law says you can do that regardless ofthe existence of unrestricted retained earnings in the booksof the corporation. Technically speaking, corporations can

only redeem its shares only if it makes profits. Why is that?Because if you are allowed to redeem it with your capitalcontribution, gibinuangan nimo ang public. Nag-ingon kadinhi here is the authorized capital stock, here is thesubscribed capital, here is the paid-up capital. Unya gikuhaannimo ang paid-up capital gi-uli nimo ato sa mga shareholders. How can the public rely into your Articles ofincorporation kung gi-uli di ay nimo. That is why if it is aredeemable share, it must be clearly stated in the Articles ofincorporation. So the public is forwarned. Pagkwenta nya sacapital stock sa corporation, kit-an nya na this portion di aykaylangan bayran. Mura mura nig shares of stock utang di ayni. Pag-abot sa redemption period, kinahanglan bayran syasa corporation regardless of whether the corporation is

making money. That is the Trust Fund Doctrine which wasasked in the last bar examination.

What is the trust fund doctrine? A trust fund doctrine is theconsideration for the issuance of shares by the corporation,is held by the corporation in trust for the creditors and thepublic has a right to rely upon the corporation‘s possession ofthat entire amount to answer for its just contribution.

Pagsinauli a ibang shareholders ang capital na kanilangkinontribute makulangan ang capital stock , kinahanglan nakung mupalit ka shares sa imung stockholders, you buy backthe shares it must be accumulated profits, that is the reason.Kung nay accumulated profits walay problema because thecapital is not impaired. But if you have no capital you cannot

redeem except if redeemable shares why? Because thepublic is already forwarned in the Articles of Incorporation.Redeemable shares.

[Father is illustrating]

This is the issuing corporation. It issues redeemable shares.When it redeems it, balik na diri. Redeemable shares becometreasury shares. If what you used to redeem these shares isnot unrestricted retained earnings, not profits, what are youusing? Capital stock. If you do that these treasury sharesshould be retired, tantangon sa Articles of Incorporation. Andyou can only retire these shares if you decrease authorized




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capital stock, subscribed capital stock, and paid-up capitalstock. Why do you have to do that? Because the capital stockis in fact reduced, ang gigamit nimo katu mang originalcontribution, wa may ginansya. Ug naa kay ginansya mabilinnalang ang treasury shares. Then you can reissue it or resell

it at any price even lower than the par value because thecapital is not impaired. But if what you use is not profits,then your shares is niubos , then you have to amend AOIbecause sa authorized , diha man kuhaon ang subscribed,reduce sad nimo ang subscribed, finally you have to reducepaid-up kay niubos ang imong capital stock. So youunderstand now when do you retire shares?

Suppose you use unrestricted retained earnings to redeemredeemable shares, ganansya ba accumulated not capitalstock consideration for the issuance of the original capitalshares. That is what you used and you still retire the shares.

You cancel it. Are you allowed to do that? Yes you can do it.So there will be less shares than originally issued. Then what

happens? Your book value per shares of stock will increase.Isn‘t that? Ang divisor sa capital accounts mugamay man ang outstanding number of shares mugamay man gipalit mannimo, gitreasury man nimo. To that extent, mugamay angnumber of shares. Now, you can even amend the AOI toraise the par value of shares. Kasabot? Ang par valuemahimo kag pasakaun, ilisdan mo, mugamay na man na ang units. Pareho ra daw kung lugi ang kompanya, sige kag lugi,sige kag lugi, hantod ang par value gani, nakatunga nalangkay lugi man, lugi. I retire nalang ang shares, the lessnumber of shares. Retire it to raise back the book value ofthe shares of stock. Retire it. Now, of course, what is reallygood is there is infusion of new capital. If you cannot dothat, that is when you amend the articles to lower the parvalue and then, the market price of share of stocks will alsoadjust accordingly.

I am telling you this so that you can see the reason behindthe categorization. Shares of stock that increase in marketvalue because it is very profitable might be out of reach ofyour retail investor. Like the Microsoft kapila man nasya mug split sa iyang shares of stock tungod sa kadako sa iyangginansya, mahalang iyang shares. Tan-awa gud na nag PLDT, niabot man sa tres mil ang PLDT per share, ikawmaestro ka naa kay bonus sa pasko. Muambisyon ka namakapalit kag dako sa PLDT kay dako muhatag ugdibidendo . Sa tres mil ba ang imong 13th month pay diyes milpila ra man imong mapalit na shares? Tulo tingali tulo rakabuok. Makatawag ka ba ug broker paliti ako ug tulo? Ingon

ng broker,‖ Sir the minimum lot for trading is 10 shares kaymugasto ka ug papel, mugasto ka ug commissionary. That iswhy some companies split their share to make it affordableto their retail investors. But PLDT is not interested in retailinvestors. It is interested to institutional investors mostlyforeign investors. It means bigger amounts. So it will notsplit its stocks. [Father proceeds to discuss the work of an in-house counsel in a corporation and advices the class tomaster these topics as these will help us a lot when we willbe hired by a corporation as its counsel particularly when itcomes to decision making such as whether to split the stockor not.]

December 4, 2015 NBD

Sec. 6. Classification of shares.

x x x

A corporation may, furthermore, classify its shares for thepurpose of insuring compliance with constitutional or legalrequirements.

Except as otherwise provided in the articles of incorporationand stated in the certificate of stock, each share shall beequal in all respects to every other share.

Where the articles of incorporation provide for non-votingshares in the cases allowed by this Code, the holders ofsuch shares shall nevertheless be entitled to vote on thefollowing matters:

1.

Amendment of the articles of incorporation;

2.

Adoption and amendment of by-laws;3.

Sale, lease, exchange, mortgage, pledge or otherdisposition of all or substantially all of thecorporate property;

4.

Incurring, creating or increasing bondedindebtedness;

5.

Increase or decrease of capital stock;

6.

Merger or consolidation of the corporation withanother corporation or other corporations;

7.

Investment of corporate funds in anothercorporation or business in accordance with thisCode; and

8.

Dissolution of the corporation.

Except as provided in the immediately preceding paragraph,the vote necessary to approve a particular corporate act asprovided in this Code shall be deemed to refer only tostocks with voting rights.

Remember, practical purposes, Section 6 deals with whatyou can put in the Articles of Incorporation. That is theextent of your creative power to put in the Articles ofIncorporation. Yet, the law dictates certain classifications ofshares. Like, treasury shares.

Sec. 9. Treasury shares. – Treasury shares are shares ofstock which have been issued and fully paid for, butsubsequently reacquired by the issuing corporation bypurchase, redemption, donation or through some otherlawful means. Such shares may again be disposed of for areasonable price fixed by the board of directors.

Makabutang ba ka ana sa imong Articles of Incorporation, ―There shall be in, out of this number of shares, 1 Milliontreasury shares‖? You cannot! These shares are treasuryshares because of what happens to them. You know verywell that the moment a share is classified as




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redeemable shares its destiny is to become treasuryshares. Dili mahimo na siya nga dili mudunggo pagkatreasury shares because it‘ s going to be bought back by thecorporation regardless of whether or not the corporation hasunrestricted retained earnings. The corporation must

redeem if it is at the option of the holder.

The only exception is, if it is a redeemable share ofthe bank because the BSP has the final authority as towhether or not the bank can redeem its share by virtue ofboth the New Central Bank Act and the GeneralBanking Law. Bisan ang holder sa redeemable shares hasthe right to be redeemed, he cannot file a case against thebank to compel the bank to redeem by virtue of the contract.The bank would say, ―BSP is not giving me the authority toredeem the shares.‖

Now, I‘m talking about the issuance of shares. Issuance ofshares is the first transaction of the shares of stock. It comesfrom the corporation. The first time that the share goes out,

the corporation cannot give it out for free. There isconsideration. Later on, when the stockholder also sells it toanother, there is also consideration normally, unless hedonates it. That is also called consideration.

But I‘m talking about the consideration of the initial issuanceof the shares of stock. What do you have to remember? Thebig thing to remember is:

PAR VALUE SHARES(PV)

Now, if it is par value shares, you can sell it:

(a) at par, [that is the consideration] or,

(b) above par. But never, below par.

NO-PAR VALUE SHARES (NPV)

If it is no par value shares, you cannot talk about par value! You can only talk of issued value . The corporation cannever issue NPV shares for a consideration less thanissued value.

Q: Where do you find issued value?

A: You find the issued value, first in the pre-incorporationsubscription — in a corporation still to be formed, they sellshares as written in the articles of incorporation.

Q: Now, if it is already post incorporation, what happens?Where do you find the issued value?

A: You find it from a Resolution of the Board ofDirectors (BOD) setting the issued price.

Can it be lower than the previous issued value? YES.

Can it be higher? YES it can be!

Q: Who determines the issued value?

A: It is the BOD. The moment the BOD passes the Resolutionstating, ―This is the issued value P xxx.xx.‖

Q: Is there a limitation as to the power of the board to pegthe issued value?

A: YES. What is that limitation? The board can never decidethat the issued value is lower than P5.00 because that‘s whatSection 6 says. So,never lower than P5.00.

But besides that, what else do you have to remember?

The issuance of shares of stock that are par valueshares can be issued on installment.

NPV shares, can never be issued on installment.

The consideration received is all of it, becauseSection 6 says, ― Shares of capital stock issuedwithout par value shall be deemed fully paidand non-assessable.xxx‖ Kausa raka mubayadbasta NPV shares. Why? Because there is noreference, there is no nominal stated value.Simplekaayo !

You know right away if it is preferred shares or redeemableshares, it can only be PV shares. It can never be, NPV

shares. You know right away if it is a public utility that is the issuer,it is never NPV shares because of Section 6, it says there.

Sec. 6. x x x

Provided, however, That banks, trust companies, insurancecompanies, public utilities, and building and loanassociations shall NOT be permitted to issue no-par valueshares of stock.

x x x

Mao nang kaning Section 6, memoryaha gyud na! Kung

mahimo gani pagbuhat ug imong guide. Unsa man nang mgagipanulti dinha, tuhog tuhoga, balik balika!Kay anhi dinhimagdaog sa Section 6.

Then you will know, only shares that are PV shares canbe non-voting shares. If it is NPV shares it must bevoting!

Why would you arrive at that conclusion? Because the lawsays, only preferred or redeemable shares may bedeprived of the right to vote.

Sec. 6. x x x

Provided, That no share may be deprived of voting rights

except those classified and issued as ―preferred‖ or ―redeemable‖ shares, unless otherwise provided in thisCode:

x x x

Q: What kind of share can become preferred or redeemable?

A: Only par value! So therefore, only PV shares may be non-voting shares. Once you have NPV shares, they are always voting shares.




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But, even if you are non-voting, there are 8 instances whereyou cannot be prevented from voting!

Q: What are those 8 instances?

A: They are listed again in Section 6.

Sec. 6. x x x

Where the articles of incorporation provide for non-votingshares in the cases allowed by this Code, the holders of suchshares shall nevertheless be entitled to vote on the followingmatters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;

3. Sale, lease, exchange, mortgage, pledge or otherdisposition of all or substantially all of the corporateproperty;

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

6. Merger or consolidation of the corporation with anothercorporation or other corporations;

7. Investment of corporate funds in another corporation orbusiness in accordance with this Code; and

8. Dissolution of the corporation.

x x x

Memoryaha na ! Those 8 instances, even non-voting sharescan vote! [Gibawi ni Fr. ang phrasing niya ] ―Can vote‖ is

wrong! Cannot be prevented from voting because these havethe right to vote in those instances even if they are non-voting shares.

The Corporation Code sections which are applicable says,that the Articles of Incorporation must state the authorizedcapital. And then, the subscribed capital must be at least25% of the authorized capital. Then it also says, paid upcapital must be 25% of the subscribed capital. That‘s aparameter for you to follow when you draw up the Articles ofIncorporation.

Authorized Capital = Php X Million

Subscribed Capital = 25% of AC

Paid up Capital = 25% of SC

Q: When is this not followed?

A: This is not followed if the corporation issues only NPVshares.

Once the corporation issues NPV shares only, there are noother classes of shares there that are par value, whathappens? The Articles of Incorporation only containsauthorized capital and paid up capital. There is nosubscribed, because the subscribed and paid up areidentical!

They cannot subscribe by installment. Kini naay deperensiyaang subscribed, ug paid up kay ang imonggi- subscribe —answered for shares man ang subscribed. Ni- commit namanka ana . Palit ka ‘ g 1,000 shares, nga tag P5 par value, theentire subscription is P 5,000.

Now, let us say, you pay ½. Bayad ka ug ½, pila may balance nimo ? 2,500 pesos. 500 shares imong balance! Youcan do that if it is par value. Kung no-par value? Non-assessable! So the moment you subscribe to 1,000 shares,kuot gyud ka sa imohang pitaka, bayad ka gyud sa imong P5,000. So the entire subscription is completely paid up andthere are only 2 categories: authorized capital and paidup capital. Wala na ‘ y subscribed na . Paid up nalang kay no-par value man .

Q: What is the consequence if a corporation issues shareslower than par value/for a consideration lower than parvalue?

A: There is a violation of the Trust Fund Doctrine.

Under the doctrine, the capital stock, property, and otherassets of a corporation are regarded as equity in trust forthe payment of corporate creditors, who are preferred inthe distribution of corporate assets. The creditors of acorporation have the right to assume that the board ofdirectors will not use the assets of the corporation topurchase its own stock for as long as the corporation hasoutstanding debts and liabilities. There can be nodistribution of assets among the stockholders without firstpaying corporate debts. Thus, any disposition of corporatefunds and assets to the prejudice of creditors is null andvoid.

The trust fund doctrine is a rule that the property of acorporation is a trust fund for the payment of creditors, butsuch property can be called a trust fund only by way ofanalogy or metaphor. As between the corporation itself andits creditors it is a simple debtor, and as between itscreditors and stockholders its assets are in equity a fund forthe payment of its debts.

~ Turner vs. Lorenzo Shipping Corp.Promulgated: November 2010

Q: What is the implication of that violation?

A: You are telling the public that you have this number ofshares, and they have this par value, aggregate, and yet,what you actually have in hand is lower than that allowed,which you say in your Articles of Incorporation. Namakak ka!So the law says, we will find out later on, that that is one ofthe liabilities of directors of a corporation. They will have tomake up for the difference between what was actually paidand the par value of the shares of stock.

Q: What happens if a corporation issues shares at aprice above par value?




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A: Namakak gihapon siya sa publiko kay , P5.00 parvalueman dapat, humanang baligya niyakay P7.00. Ohah?!

Pero kanang klasehang pamakak, is good for the public. Kaymas daghan na nuon siya‘g kwarta ikabayad sa iyahang

utang! Besides that, in the financial statement, the entiretruth will be told! Because common stock, par value timesoutstanding capital stock, no. of shares outstanding and thenyou have another line entry, premium on stock, which is theamount in excess of par value that you have received pershare. You put that there.

One thing you have to remember on premium stock —muingon ka, ―N akaginansiya ang corporation!Mas taas gudsa par value.‖

Q: Can the corporation declare dividends out ofpremium stocks?

A: In the old law, it was allowed. In the new law, it is nolonger allowed. You cannot issue dividends,[cash

dividends] out of premium on stock. In certain instance, theSEC will allow you to issue stock dividend, not cash dividendout of the premium stocks.

Allowed man kaha to issue stock dividend, not cash dividend.Stock dividend gud wa ‘ man na‘y cash out! No money goesout of the corporation back to the shareholders. Maka ingonlang gud ka ‘ g mas nidaghan imong shares pero magpabilinnang kwarta dinha sa sulod.Ang premium on stock musakalang ug balik ngadto sa common stock. Saka lang, muincrease ang shares outstanding and then the premium,musaka didto , mag ipon sa common stock. [Guys, aboutaccounting entries ata sa F.S. gina illustrate ni Fr.]

ISSUED VALUE – Butang nato , P5 Million authorized

capital, no-par value (?) shares. P5 Million, divided into P1Million shares. Pag -issue nimo ana, pila ma‘y price kinamub- an? P5.00. Sokung paliton na tanang shares nimo, P5 Millionna nang sulod [illustrating a F.S.]. That is the limit, thelowest issued price. That is what is in your Articles ofIncorporation.

Let us say the corporation now continues to do business.Because its business is doing very well, it wants to expand.Let us say ang iyahang business, nasa Tagum, 3 kabuok restaurant, ang iyahang specialty kanang sinabawan ngapalaka, kanang gikan sa humayan sa Tagum. Pila na dinhinaka higop na ug sabaw sa palaka? Panitan na! [istorya aboutpalaka pa more + mga ilaga stories sa Pampanga dike...

Pasintabi sa mga kumakain while reading this. Eeeeek! ] Now let us say gusto niya mu abreug another three (3) dirisa Davao.PV shares gihapon ang iyahang ibaligya . Napalitnaman ‗to tanan, unsa ma‘ y buhaton niya ana to sell shares?

Amend siya ug Articles! Amend the Articles. Inig amend niyasa Articles, release napud siya .

Q: Can he sell it at P5 issued price?

A: Legally speaking, there is no prohibition that he canissue, because that is the minimum! BUT, the BOD will notissue it for just P5 because by now, the value of the sharesof stock is more than P5!

Ginansiyado man.Naa pa man na sila‘y unrestricted retainedearnings. So, the book value of the shares of stock, has goneup! So in the very least, the issued price is at leastbookvalue. If you do not make that the value, ang imonggibuhat, unsa man? Nagpapurdoy ka sa imong kaugalingon

unya imo nang gipasulod ang mga tao . There must be somegood reason nganong gipa sulod na nimo! Dako naman naang value sa imohang shares unya mudaghan pa mo ngamagbahin sa ginansiya edi mu-upos ang value sa imongshares. In the very least it must be book value aron dili ma- impair ang value sa imong stock.

Note: Dili gani ka kabayad sa imong installment dinhi sa parvalue, the corporation can resort to the ordinary remediesof an unpaid seller. File siya‘g kaso . But there is a specialremedy that is provided for in the Corporation Code, whichis a delinquency sale. You have to declare the shares ofstock as delinquent. But, there is never a delinquentshare that is no-par value.

Why? Because it is not sold on installment. Kas-a ra man!Pagbuhi nimo, kabig ka sa consideration bayad man dayon,wala nama ‘ y installment. So, NPV shares, CAN NEVER bedelinquent.Mao nang advantage aning NPV shares.

Q: Kinsa mang corporation mu- issue ani ?

A: Kabalo ba mo ‘ g kinsang naay paborito ani ? Miningcompanies. Because, the price of their assets keep onfluctuating. Ang price kaniadto sa gold, it reached 3,000dollars per troy ounce, then it went as low as 1,000 per troyounce. Karon, saka2x gamay kay nahadlok na sila.

Pananglitanmagsugod ka ug mining venture, naa kayproduction, several ounces a day, so imongi -estimatesa

imong production. So, you issue shares of stock that are parvalue according to the price of gold.Pagbagsak sa gold,unsa may nahitabo nimo?Muingon ka , ―Unsa manni?!‖ Mapugos ka ug amend sa imong Articles ofIncorporation. I- lower nimo ang imong par value. Unyausahayra bama- zero na nang value sa imong mina .

That is why NPV shares is the favorite of mining companies.

What you have to remember with respect to the limitationsof voting: There must always be a class with completevoting rights. You cannot organize a corporation, buwagbuwagon nimo ang voting rights.You cannot do that!Mahimong buwag buwagon nimo , but there must be a classwith complete voting rights!

Now, I‘ll give an example—the so-called founders‟ shares.

Sec. 7. Founders‟ shares . — Founders‘ shares classifiedas such in the articles of incorporation may be given certainrights and privileges not enjoyed by the owners of otherstocks, provided that where the exclusive right to vote andbe voted for in the election of directors is granted, it mustbe for a limited period not to exceed 5 years subject tothe approval of the Securities and Exchange Commission.The five-year period shall commence from the date of theaforesaid approval by the Securities and Exchange




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Commission.

Articles of incorporation may classify shares of stock asfounders‘ shares and they shall have exclusive right to voteand be voted for in the election of directors, but suchprivilege/power, cannot last for more than 5 years. Gihatagna sa imo , because you are founder.

That restriction is not found in the state of Delaware. What isfamous about Delaware? The State of Delaware is wheremost of the Dow Jones corporations have now beenregistered. It‘s a corporation-friendly state. So all those oilcorporations, Standard Oil, Caltex. Then you have Coca-Cola,Bethlehem Steel, Dow Chemical Company. They are allincorporated in Delaware.

Ford Motor Company: When was Ford founded? Ford isalready 100 years! 1903, in the midst of WW1. Kanang Ford,nagsugod ang ilang Model T, 1908. 100 years and yet it isstill under control by the Fords. How did that happen? Angtanan nangawagtang na, wala na dinha! Kadtong mga Rothschild, Vanderbilt, wagtang na . Ang Ford,naa ragihapon . Ford Motor Company is controlled by FordFoundation.Kanang manghatag ug grant. Ngano man na? Because Mr. Henry Ford, just before they went public,created founders‘ shares. And this special owners‘ shares,come with a special feature. What is this special feature? Ithas 10 votes per share instead of just 1 vote per share! So,control niya tanan ! Times 10 gud ang iyang vote. Now,pagkamatay diay niya, wala diay ‗to mabaligya?Ah, wa !Gibutang man ug foundation. Now, if you are one of theFords, and you want to sell your shares, kay gusto ka namuwaldas sa imong kwarta, magwala ka na. Mao ra mangyud na ‘ y hinungdan. Because you are covered na man.Health, insurance, etc. Didto ka na mu- ― let loose.‖ Imongbuhaton, you let the foundation know, and the foundationwill take from its store of ordinary shares and give you theequivalent in ordinary shares. Kung 100 na kabuok angimong founders‘ share diha, tagaan ka ‘ g x 10! Tagaan ka ug 1,000 shares na ordinary. Ngano mang naa ‘ y ordinary sharesang Ford Foundation? Kay sa ginansiya, kuhaan ug 10%,mamalit sila ug shares. Kay kung naa na ‘ y mubuwag,mao na ilahang ihatag. Intact lang gihapon ang founders‘ shares sa Ford. Siyagihapon mao ‘ y in control, wa ‘ mailisdinang ngalan dinha , Ford Motor Company lang gihapon, kayug mawagtangan pa sila sa control , di na na Ford. Lain na.

In the Philippines, you cannot do that. Why? Because

founders‘ shares according to Section 7, cannot exceed 5years subject to the approval of the SEC.

Sec. 8. Redeemable shares. – Redeemable shares maybe issued by the corporation when expressly so provided inthe articles of incorporation. They may be purchased ortaken up by the corporation upon the expiration of a fixedperiod, regardless of the existence of unrestricted retainedearnings in the books of the corporation, and upon suchother terms and conditions as may be stated in the articlesof incorporation, which terms and conditions must also be

stated in the certificate of stock representing said shares.

Hybrid! It has equity features, ownership features. And ithas creditor features.

If I provide these kind of shares, I would say: ―Issued, withthe redeemed, by the issuer, on or before the 5 th year of itsissuance.‖ Or sometimes it would say, ―R edeemable at theoption of the issuer/holder.‖ It may also be,

―Redeemable/convertible shares.‖ If it is not redeemed, atthe option of the holder, the holder may be given theoption to convert this shares to common shares.So,from redeemable to common shares.

Ingon ka‘g , ngano man ning daghan man ning klaseng mga shares? What is the use of that? [Nag drawing si Fr.]

Ani ha, taga Malaysia ni siya. Naa siya‘y gipalit didto sa Australia nga corporation , gitawag ug Goodman Fielder.Thiscorporation, is the owner of so many original brands that aredairy based. Keso, gatas, butter, mao na.It is losing! Why isit losing? Kay pildihon man na sa mga brands sa Walmart, saKmart , sa mga groceries nila. Kay kini siya, nakahibalo manni siya nga kanang China karon, dili musalig sa ilahang localbrands kay daghan man mangasakit nila. Mga bata ni butodnang tiyan, gatas nga butangan ug semento, unsa pa nadiha. So, nakaingon siya, ―P aliton nako ning Goodman kay foreign brand, naa pa ‘ y source sa dairy, NZ man. Mao ni dad- on nako karon sa China.‖ Kay usa sa mga problema karon sa China, ang mga tao muadto lang sa Hongkong aron mamalitanang mga gatas , baby formula kay dili lagi sila musalig sailahang kaugalingong brand. So mao na iyahang vision. Unya losing man ni,unya siya traded man ni sya sa stock market.Pag announce palang niya nga nipalit siya niini , wa na ! 5% saiyahang shares, niubos na . Ingon siya,―M upalit pa ko ‘ g shares dinhi, unya controlling kay 50% ra ba ko. Ugmudugangko ‘ g kwarta ngari kay gakinahanglan man sila ‘gkwarta, ug magipit ni tanan didto sa China, edi mag over50% ko! Once it is over 50%, then this becomes my

subsidiary, the financial statement will be consolidated withme, edi mubagsak kog samot! So,unsa man akong buhaton? ‖

Mao ning imohang buhaton. Hatag ka ug kwarta dinha unyabutangan lang na ‘ g ADVANCES [pina conyo napagpronounce ni FGN ] – sophisticated name for “utang.” Unya later on, maayo na gani, i- convert! Convert nimo intoshares of stock.Pero kung mubagsak gani na diha, ikawunang mabayran kay nagpautang man ka, creditor manka.Una ka bayran kay Senior ka man kaysa stockholder.Okay?

Wilmar(MY)

GoodmanFielder(AU)




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Maayo unta nang istoryaha ug wala pa makabantay ang Malaysian government anang advances. Kay karon , the newrule on accounting of advances, charge-annaman ka ‘ g docstamps anang imong gi -advance kay ang tinoodanapangitaan man ka ana ug promissory note (PN) so that it is

ang arms-length transaction. Pangitaan ka ‘ g PN! Tagpila mannang docstamp? Pareha na sa Pilipinas tag P10 man na, per10,000. Dako kaayo! Ug ang imong gi- advance 1 billion,dakokaayo.Mao nang muingon nalang na sila , ―Ah! Shares ofstock nalang ang akong kuhaon — redeemableshares.‖ Murag naa ka sa sulod, pero makagawas ra kagihapon.Mao ra na.

So you see, these different classes, applies in a particularsituation. So ikaw, kung Corporate Secretary ka, unyamangutana ang board,―Sulod ba ta? M ugawas ba ta? ‖ Classification of shares, ikaw man mu- suggest ana . Sige ka ‘ g memorizeniini, kinahanglan muantigo ka ‘ g asa mao ‘ ysapotanan niining mga klase of shares. So you must know

the classes of shares.Let‘s go back to this voting.

There has to be a class of shares with completevoting rights. There can be a specialized share/class whichis transitory, and which lasts only for 5 years, in which case itreverts to becoming an ordinary share. That is the founders ‘ shares. Founders‘ shares can be given the privilege of beingexclusively empowered to vote and be voted for in the BODelection. But you cannot renew it after 5 years, even if thearticles does not say that its only good for 5 years. It is onlygood for 5 years because that is what the Corporation Codesays.

Q: If the articles are silent, what is the assumption?

A: The assumption is VOTING. There is voting right. Theassumption in the Articles of Incorporation, unless there is aprovision to the contrary, is that all classes of shares areequal, that‘s the assumption.

Only preferred or redeemable shares may be deprivedof voting rights; may be non-voting shares. In other wordsyou cannot classify non-voting shares! They must be eitherpreferred or redeemable. And only then that you say thatthey are non-voting shares.

But then, there are shares that are deprived of votingrights by law! What are those shares?

1.

Treasury shares – For as long as they remain inthe treasury.

Sec. 9. Treasury shares. – Treasury shares areshares of stock which have been issued and fullypaid for, but subsequently reacquired by theissuing corporation by purchase, redemption,donation or through some other lawful means.Such shares may again be disposed of for areasonable price fixed by the board of directors.

2. Delinquent shares.

These are shares subject to subscription byinstallment.

In other words, they are PV shares.

If they failed to pay within thirty (30) days from

the date that they should pay despite repeatednotification, then the board can declare them tobe delinquent.

And, for as long as they are delinquent, thenthey cannot vote.

They cannot exercise their vote even in thoseeight (8) instances where Section 6 says thatthey have a right to vote if you are non-votingshares.

Penalty man ning delinquent shares.

3. Shares of which, a person exercises appraisalright.

Q: What is appraisal right?

A: [See Section 81 ] There are instances in the CorporationCode where a stockholder, if he disagrees with this particularaction taken by the board and proposed to the corporation atlarge, then he can exercise his appraisal right, which is,

―A ppraise me and buy me out.‖ Now when you validlyexercise your appraisal right, you surrender your stockcertificate, and you have no voting rights from then on. Whatis the right left to you? The only right you have is to be paidthe fair and reasonable value of your shares, the momentyou exercise your appraisal right. Kay proseso man na.

Sec. 81. Instances of appraisal right. – Anystockholder of a corporation shall have the right todissent and demand payment of the fair value of hisshares in the following instances:

1. In case any amendment to the articles ofincorporation has the effect of changing orrestricting the rights of any stockholder or class ofshares, or of authorizing preferences in any respectsuperior to those of outstanding shares of any class,or of extending or shortening the term of corporateexistence;

2. In case of sale, lease, exchange, transfer,mortgage, pledge or other disposition of all or

substantially all of the corporate property andassets as provided in the Code; and

3. In case of merger or consolidation. (n)

And then there is also something which you have toremember about a voting right.

A voting right is a right that is negotiable.

In other words, you can sell your voting right. And one of thevehicles allowed for the selling of the voting right is what iscalled a voting trust agreement. We will see what that is,




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later on. Know that these are what you have to rememberwith respect to voting rights of a share.

Problem: Your shares of stock that you have subscribed to,1,000 shares, P5 per share and you have only paid ½, so

P2,500.00ra imong gibayran . How many votes do you havein an election of the corporation? Can you fully exercise yourvote, or ½ kay ½ ra man ang imong gibayad?

A: As long as your shares and subscription are notdelinquent, you can exercise the vote of the entiresubscription. The moment you are delinquent, you cannotexercise even one (1) vote. The entire subscription is nolonger allowed to vote, if you are delinquent. Why? Becausethere is this principle in the corporation law that asubscription is an indivisible contract. You cannot ask for acertificate of stock covering only the equivalent number ofshares that your payment can answer for. Your subscriptionis indivisible.

If you want to know about voting trust agreement,there is afamous case of San Miguel Corporation by Eduardo delos Angeles vs. Ernest Khan, et al. Mao nang istorya sa SanMiguel Corporation, coco levy shares. Naa dinha, basahadinha ang gibuhat ni Andres Soriano III.

San Miguel Corp. vs. Ernest Kahn, et. AlG.R. No. 85339 August 11, 1989, 1st Division Narvasa, J

FACTS: In 1983, 33+Million shares of the outstandingcapital stock of San Miguel were acquired by 14 othercorporations, and were placed under a Voting Trust

Agreement in favor of the late Andres Soriano, Jr. Whenthe latter died, Eduardo Cojuangco, Jr. was electedSubstitute Trustee with power to delegate the trusteeship inwriting to Andres Soriano III. Shortly after Edsa IRevolution, Cojuangco left the country.

On March 1986, an "Agreement" was executed between Andres Soriano III, as "Buyer," and the 14 corporations, as"Sellers," for the purchase by Soriano, "for himself and asagent of several persons," of the 33+Million shares of stockat the price of P100.00 per share, (for P3.31Billion) payablein specified installments.

[Actually, according to Soriano and the other privaterespondents, the buyer of the shares was a foreigncompany, Neptunia Corporation Limited (of Hongkong, awholly owned subsidiary of San Miguel International whichis, in turn, a wholly owned subsidiary of SMC; and it wasNeptunia which had made the 500M DP, "from the proceedsof certain loans".]

At this point, the 33+Million shares were sequestered byPCGG on the ground that the stock belonged to EduardoCojuanco, Jr., allegedly Marcos‘s dummy.

San Miguel promptly suspended payment of the otherinstallments of the price to the 14 seller corporations. Thelatter sued for rescission and damages.

Later, PCGG directed SMC "to issue qualifying shares" in thecorporation to 7 individuals, including Eduardo de los

Angeles, "from the sequestered shares registered as streetcertificates under the control of Anscor- HagedornSecurities, Inc.," to "be held in trust by .. (said 7 persons)for the benefit of Anscor-Hagedom Securities, Inc. and/orwhoever shall finally be determined to be the owner/owners

of said shares.

Thereafter, the SMC Board, by Resolution No. 86-122,"decided to assume the loans incurred by Neptunia for theDP ((P500M)) on the 33+Million shares."

However, at the meeting of the SMC Board on January1987, Eduardo de los Angeles, one of the PCGGrepresentatives in the SMC board, impugned said ResolutionNo. 86-12-2, denying that it was ever adopted, and statingthat what in truth was agreed upon at that meeting wasmerely a "further study" by Director Ramon del Rosario of aplan presented by him for the assumption of the loan. De

los Angeles also pointed out certain "deleterious effects"thereof. He was however overruled by private respondents.When his efforts to obtain relief within the corporation andlater the PCGG proved futile, he filed with the SEC what hedescribes as a derivative suit in behalf of SMC, against 10 ofthe 15-member BOD who had "either voted to approveand/or refused to reconsider and revoke Board ResolutionNo. 86-12-2."

Eduardo de los Angeles‘ personality to sue was questionedbefore SC.

RULING: The theory that de los Angeles has no personalityto bring suit in behalf of the corporation — because hisstockholding is minuscule, and there is a "conflict of

interest" between him and the PCGG — cannot besustained.

No. of shares does notdetermine right to file suit

It is claimed that since de los Angeles 20 shares (owned byhim since 1977) represent only. 00001644% of the totalnumber of outstanding shares (121,645,860), he cannot bedeemed to fairly and adequately represent the interests ofthe minority stockholders.

The implicit argument — that a stockholder, to beconsidered as qualified to bring a derivative suit, must holda substantial or significant block of stock — finds no supportwhatever in the law. The requisites for a derivative suit areas follows:

a)

the party bringing suit should be a shareholder as ofthe time of the act or transaction complained of, thenumber of his shares not being material;

b)

he has tried to exhaust intra-corporate remedies, i.e.,has made a demand on the board of directors for theappropriate relief but the latter has failed or refused toheed his plea; and

c)

the cause of action actually devolves on thecorporation, the wrongdoing or harm having been, or




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being caused to the corporation and not to theparticular stockholder bringing the suit.

The bona fide ownership by a stockholder of stock in hisown right suffices to invest him with standing to bring a

derivative action for the benefit of the corporation. Thenumber of his shares is immaterial since he is not suing inhis own behalf, or for the protection or vindication of hisown particular right, or the redress of a wrong committedagainst him, individually, but in behalf and for the benefit ofthe corporation.

No Conflict of Interest

Neither can the "conflict-of-interest" theory be upheld. Fromthe conceded premise that de los Angeles now sits in theSMC BOD by the grace of the PCGG, it does not follow thathe is legally obliged to vote as the PCGG would have himdo, that he cannot legitimately take a position inconsistentwith that of the PCGG, or that, not having been elected by

the minority stockholders, his vote would necessarily neverconsider the latter's interests. The proposition is not onlylogically indefensible, non sequitur , but also constitutes anerroneous conception of a director's role and function, itbeing plainly a director's duty to vote according to his ownindependent judgment and his own conscience as to what isin the best interests of the company. Moreover, it isundisputed that apart from the qualifying shares given tohim by the PCGG, he owns 20 shares in his own right,as regards which he cannot from any aspect be deemed tobe "beholden" to the PCGG, his ownership of these sharesbeing precisely what he invokes as the source of hisauthority to bring the derivative suit.

Other discussions

It is also theorized that the PCGG has no power to votesequestered shares of stock as an act of dominion but onlyin pursuance — to its power of administration. Theinference is that the PCGG's act of voting the stock to electde los Angeles to the SMC BOD was unauthorized and void;hence, the latter could not bring suit in the corporation'sbehalf. The argument is strained and obviously of no merit.

As already more than plainly indicated, it was not necessaryfor de los Angeles to be a director in order to bring aderivative action; all he had to be was a stockholder, andthat he was owning in his own right 20 shares of stock, afact not disputed by the respondents.

Q: Can you have shares of stock without votingrights?

A: YES. Corporation law, nag-una ang reality, musunod angbalaod. This 60%-40% Filipino ownership has to becircumvented because the Philippines cannot afford with it.

All the 100% so-called Filipino ownership, they are engagedin circumvention. They make up a share of stock. Aronmakahibaw mo , there is such a thing as shares of stock ni .[Nagdrawing nasad si Fr.]

ABS-CBN. Kinahanglan man gyud na 100% Filipino kay media man na . K insa ma‘y nag lobby ana? Ang Lopez kayaron wala sila ‘ y kompetensiya. So, all these ―Filipinized ‖ laws,protect the inefficient Filipino. Not the Filipino you and me,no! It protects the inefficient oligopoly.

But what do they do, kay kinahanglan man sila ug kwarta ?More than 40% of ABS CBN is put in PCP Corporation. PCP isa corporation whose job is to hold the basic intangible/ non-physical assets. And they issue another security called an

ADR (Asian Depositary Receipts). 1 ADR = 1 share of ABS-CBN. What are the terms and conditions of the ADR?The terms and conditions is, they cannot vote/exercise thevote of this. Who exercises the vote? This FilipinoCorporation [PCP]. Now, this Filipino Corporation [PCP], nolonger has the right to the dividends of its shares. Wheredoes the dividends of itsshares go? It goes already to theowner of the ADR. Where is this ADR? This ADR is traded inthe New York Stock Exchange (NYSE). It ‘ s owned byforeigners! They receive the dividends. It is not a violation ofthe 60%-40% law. Ingna nga violationna ,nga tanangcountries gabuhat man ana. Diba, kataw-an ka!

Why would a foreigner buy this? Because there in N.Y., it istraded at a discount than what ABS-CBN trades here in thePhilippine Stock Exchange (PSE). Wala man kay voting power

di, mas barato didto!Unya, ug mas barato didto, dili bakamakapalit dinhi, o palit ka didto, unya ibaligya nalang nimodinhi?

Dili man na nimo mabaligyadinhi kay it‘ s not traded here, it‘ straded in the NYSE.

[Transcriber‘s Note: I researched about what Fr. discussed, lahi baya ang facts, paki- verify nalang:

ABS-CBN Holdings Corporation (ABSP) is a special purposevehicle. The Company was formed for the purpose of issuingPhilippine deposit receipts to allow foreigners to participate ina media enterprise whose ownership is constitutionallylimited to Filipinos.

Source: Bloomberg]

Dili man na pareho sa San Miguel Class A, Class B:

Class A, may be sold to Filipinos only.

Class B, may be sold to foreigners and Filipinos.

They are essentially the same — COMMON STOCK. But thereis a difference in price in the PSE. Ngano man? Kay dinhi saB, makabaligya man ka sa foreigner that is why from nowon, the PSE no longer allows a classification of this nature.

You cannot issue shares, Class A Filipinos ra . Class B,…

ABS-CBN(PH)

PCP Corpo

(PH)AD




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because it gives a premium to this [B] when essentially it ‘ sstill the same class of shares.Gi- dilute na ni ron !

Q: How do you keep track and make sure that it is 60%-40% Filipino?

A: The PSE says, problema na na nimo ! Hire a stock andtransfer agent. It‘s the stock and transfer agent‘s lookoutto make sure that there is no excess foreign share.

Q: What are these instances where even non-votingshares cannot be prevented from voting, they havevoting rights?

A: There are 8 instances [Section 6]. They go in pairs. Theway to memorize them, it‘s in pairs.



No. 1 and No. 2 is articles and by-laws.

Q: Why is there no adoption of articles of incorporation? It‘sonly amendment.

A: Because like most articles of incorporation, the one whoadopts the articles are the incorporators. All othersubsequent changes are amendments. Mao na . Whereas theby-laws, you can adopt the by-laws and together with thearticles, submit it for registration with the SEC or you canadopt the by-laws within 30 days from the issuance of theCertificate of Incorporation by the SEC if you did not includeyour by-laws in the submission of your articles ofincorporation with SEC. Two (2) ways you can adopt the by-laws.

3. Sale, lease, exchange, mortgage, pledge or otherdisposition of all or substantially all of the corporateproperty;

4. Incurring, creating or increasing bonded indebtedness;

3 & 4 pertain to changes in the corporation.

That‘s why even the non-voting shares are allowed to vote.When you change the fundamental constitution of thecorporation, that is the articles, when you change the by-laws, registration of the corporation, you are allowed to voteeven if you do not have voting rights. When you sell all or

substantially all of corporate property, you are allowed tovote.

In #4 This is a very long discussion. Manghuwam na ganiang corporation through a bond, then all the stockholdersvote on it, even the non-voting stockholders. Muingonka ‘ g,―T inonto, kada muhuwam ang Meralco tawgon ug mag stockholders meeting?!‖ Mu- float sila ug bond, stockholdersmeeting,unya ug naa ‘y mga buang2x nga stockholdersmuingo ‘ g ,―A y dili na ta, pagka daghan na ning utang nato.‖ Unsa ma ‘ y mahitabo sa bonded indebtedness? Is that withinthe head, understanding of an ordinary stockholder ngamanghuwam sa bond?

That is why Meralco never borrows directly by bond. That iswhy PLDT never borrows. What do they do when they wantto borrow by a bond? They create another corporation, aspecial vehicle. That corporation is the one who floats thebond. And, that bond is guaranteed by the mother

corporation because that is issued for its benefit. So, theyget around this requirement of making the stockholders ofMeralco decide by vote as to whether or not to incur thisbonded indebtedness. Kinsa ra mang stockholder angmuboto? Katong subsidiary. Kinsa mang mga stockholdersatong subsidiary? Mga officers ini . O, edi fulfilled ang requirement. Tan awa ra gud, basaha sa newspaper.Muhuwam ba nang Meralco? It is Meralco SecuritiesCorporation that issues the bond, guaranteed by Meralco.


Again, increase or decrease of capital stock. That isfundamental! When you increase or decrease capital stockthat is actually an amendment of the articles ofincorporation. Ilisdan man nimo ang authorized capital.Ilisdan nimo ang authorized capital kung gusto kapadaghanon ang capital. I- decrease imong capital, in thoseinstances like redeeming redeemable shares not with the useof unrestricted retained earnings. That is, when you decreasecapital stock. You need the vote of the stockholders or themembers of the corporation.

6. Merger or consolidation of the corporation with anothercorporation or other corporations;

7.Investment of corporate funds in another corporation orbusiness in accordance with this Code; and

8.Dissolution of the corporation.

In #8 They should have added a qualifier to thisdissolution. It should be voluntary dissolution of thecorporation, because the corporation can be dissolvedagainst its will. That is when the government files a case todissolve the corporation either with the SEC —there iscancellation of registration proceeding, or through theSolicitor General in a quo warranto proceeding(What righthave you to exist, you are a foreign corporation and you areengaged in acquiring agricultural lands in excess of arealimits of the Constitution, so therefore you should bedissolved for violation of the law). That is what the

government would do, to cancel your registration. Dissolve!

We have covered Sections 6, 7 8, and 9.

These are classes of shares: founders, redeemable, treasury.Only that, treasury is not a classification that you putin the articles of incorporation.

Yahoo! Kadungog mo sa Yahoo!? Yahoo! is supposed to spinoff its email business. Ang Head ron sa Yahoo!, kanang first employee sa Google. Ang iya gung I.D. is 0001. Gi- pirate siyasa Yahoo!gikan sa Google. She comes from Wisconsin.Scholarship in Stanford, masters in computer science. Three




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(3) years na siyaron wala pa gihapon maka resurrect sa Yahoo!. Gi- pirate siya mabdos siya sa ha.Unya, Yahoo!stocks, squared down, even lower than book value. Whatgives Yahoo! its value? Yahoo! has a very high value becauseit is a substantial owner of Alibaba. Alibaba is the biggest

website shopping company in mostly China. 25% gud na siyanga owner ana. Mao na iyahang dako kaayo nga maka valueniya. Sige ug saka nang value sa Alibaba. Sige‘g kaubos ang

Yahoo!kay bati man ilahang email. Now they say,―Becauseour shares price in the market does not reflect our truevalue,‖ Mayer (Yahoo! CEO) says, ―The best investment is ourshares.‖ Paliton na nato sa public because the public ismisinformed. So what is she doing? Since Yahoo! still hasextra cash, mamalit sila sa ilang kaugalingong shares.Pagpalit nila, unsa ma‘y nahitabo atong shares nila? Treasury! Diba?

Q: What is the effect when you start buying your ownshares?

A: The number of outstanding capital stock is reduced. Thenumber of shares nga magbahin bahin sa inyongprofitmugamay.

Q: So what happens to earnings per share?

A: Earnings per share increases, because there are fewershares now nga magbahin bahin sa net profit. Pagsaka sa earnings per share namatikdan na sa public, musaka nasabang imong price sa market at which your shares are boughtand sold.

So, if you have extra cash and your share price is notcorrectly valued by the public from your computation, it‘swise for you to buy your own shares.Kay pagpalit nimo sa

imong shares, musaka ang earninigs per share. Ang katongmga nahibilin, musaka ang ilang dividends , diba?Ang publicsad makabantay ana, musaka sad ang price which it istraded. So therefore kaduha ka muginansiya. That is one ofthe reasons why companies buy their own shares. Treasuryshares, are not just a fate that you are resigned to becauseyou cannot do anything about it. It is also a matter of overallwelfare of the corporation if the buying investing public is notgiving you your due.Mubo ra ang ilang price nga gihatagnimo.

Let us go to incorporation and organization of privatecorporations.

Sec. 10. Number and qualifications of incorporators.– Any number of natural persons not less than 5 but notmore than 15, all of legal age and a majority of whom areresidents of the Philippines, may form a private corporationfor any lawful purpose or purposes. Each of theincorporators of s stock corporation must own or be asubscriber to at least 1 share of the capital stock of thecorporation.

No. of Incorporators: 5, not more than 15.

Qualifications:

Legal age

Majority of them residents of the Philippines

Each of the incorporators of a stock corporationmust own or be a subscriber to at least 1 share of

the capital stock.

What is very important in this provision is what it does notsay.

Q: Is it required that an incorporator be a citizen of thePhilippines?

A: NO, it is not. There is no requirement of citizenship. Whatis required? Residence.

Q: Why is residence required, not citizenship?

A: Residence, so you are within reach of the legal processesof the Philippines.

You may be a citizen, but you are a resident of California.Magbinuang ka dinhi unya mudagan ka sa California dili kana maabtan sa subpoena, dili naka magukod. What isimportant is you must be a resident of the Philippines.

Kung resident ka, most likely you are a citizen.

Dado Banatao. Pilipino na si Banatao, resident of California.[Transcriber‘s note: Sa web kay American baya citizenshipnya, so baka for illustration purposes lang ito ]. Daghankaayo na ‘ g corporation. He is a Mapua engineering graduate.[Motherboards, chip set, ang products niya ]. Everybody ispaying royalties to him, even Microsoft. Kabuhat nana siyaug pila ka corporation. 3 na ka corporation iyang gibuhatunya gipamaligya niya. Ang usa, $130Million, ang duha $100million. Filipino citizen gihapon na siya pero resident na siyadidto sa California. Ma- incorporator ba n a siya? Kung wa‘ylain, siya ra ‘ y usa, and all other four (4) are residents,pwede. Because it requires only majority of the incorporatorsmust be resident.

Winston Damarillo. Usa pa ni siya, pangitaa na ninyo, Bul- anon taga Tagbilaran.De La Salle graduate, also a big namein Silicon Valley. Daghan na ug corporationdiri sa Pilipinasbut he is still a resident of California.

Now, I told you that you cannot change theincorporators. You cannot amend the articles ofincorporation to change the incorporators. That‘s why if youlook at the Articles of Incorporation of BDO, kinsa ma‘y

incorporators? Tan awa. Nestor De Castro, Faustina DeCastro, Alicia Drice, etc.Hain na man na ‘ y Sy? Wala ma‘y Henry Sy, Hans Sy, Teresita Sy-Coson. Unsa man ningnahitabo sa BDO,wala ba diay na sugdi gyud? What was theoriginal corporation? Adto basaha sa Acknowledgment,makit-an ninyo unsa gyud ang original na corporation. Unsaman nakabutang? ACME SAVINGS BANK! Gipalit sa mga Sy ang Acme nga listed in the stock market. Paghuma ‘ g palitnila, gi -amend nila ang articles, gibutanagan nila ug dugangkwarta. That‘s why if you look at the articles of incorporation,pila ma‘y paid up capital? S8:3 Million Pesos ra! Ang authorized capital, pila man? S7: 65 Billion Pesos! Diba thelowest is 25% of this authorized must be subscribed?Unsa




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ma ‘ y dipirensiya anang 3 Million ug 65 billion, layo ra kaayo. Violation na unta na, diba? Gi -amend nila ni, dugang sila ‘ gkwarta.

Mao na ‘ y gitawag , remember this terminology because this

might come out in the bar examination. This is what is calledBACKDOOR LISTING. Gusto ka musulod sa StockExchange.Dugay man kaayo ka makasulod. You have toprove 3 years of profitability. You have to have at least 100stockholders, owning at least 100 shares or more. Daghanman kaayo gipang butang ana nga requirements. Dugaykaayo ka maka tuman ana. Unsa ma‘y imohang buhaton?Mangita ka nalang ug nagkagidlay nga corporation. Unsama‘y imong buhaton?Paliton na nimo tanang shares of stock.Pagpalit nimo, naa ka na, makasulod ka naman. Nalistanaman ka. Amend dayon nimo ang ngalan ini , BDOna!Butangan nimo ‘ g kwarta dinha, naglahi na. Mas dali pa nakaysa mag apply ka nga daghan ug requirements.

A back door listing, sometimes referred to as a reversetakeover, reverse merger, or reverse IPO, occurs when aprivately-held company that may not qualify for the publicoffering process purchases a publicly-traded company.

It is a strategy of going public used by a company that failsto meet the criteria for listing on a stock exchange. To getonto the exchange, the company desiring to go publicacquires an already listed company. ~web

Basaha na ninyo ang Ayala Corporation. Kinsa ma‘y kinadak - an nga stockholder sa Ayala, mahibong mo, kay wala dinhasi Jaime Zobel de Ayala. Tan awa iyang ngalannaa ba.Kinsaman ni siya nga naay 810,873 shares? Ang sunod ngadako,208,953 shares. Si Mercedes Z. McMicking. Bag-o ra ninamatay kani si Mercedes. Mao ning tiguwang na kaayo na

Ayala naminyo ni ug G.I.nga kanopanahon sa war, si Col.McMicking. Mao na siya ‘ y nagplano sa Makati,si Col.Mckmicking. Unya,kwarentanaman ‗ to si Mercedes, si Col.McMicking, guwang2xnasad, wala sila ‘ y anak.Pagkamataynila,per stirpesra man na sa iyang mga collateral relatives.Di, ang dako kaayo ‘ g bahin ang mga anak ni Enrique Zobelde Ayala, duha kabuok.Kato si Enrique Zobel, gipugos pagasawa sa iyahang first cousin aron di mabahin angkatigayunan. Di, ang iyahang duhaka anak, usa retarded! Angusa nahimo nang adik!Mao kana si Iñigo Zobel de Ayala,member of the BOD of San Miguel. Cousins man na sila ,

Ayala and Soriano. Karon, the biggest stockholder of Ayala isIñigo Zobel de Ayala. Nagkupot siya sa iyang shares,nagkupot sad siya sa shares sa iyang retarded nga sister. Rehabilitated drug addict na! Mao sad na siya ‘ y usa sa controlling ron sa San Miguel. That‘s why for a long time thebiggest corporation income tax payer was Mermac, Inc.Mermac was the holding corporation of Mercedes Mcmicking.Dinhi namakit an ang tinuod na istorya.Basaha ninyo, unya i- Google dayon.

Universal Corn Products, Inc. is Robina. Mao nang cash cowni Gokongwei. Mao nang nagsugod sa tananniyang corporation. Iyang cash cow, kanang mga chichiria .Dinha siya mukuha ‘ g kwarta pagpamalit sa rubber

corporations niya. Nagsugod na siya sa cornstarch. Gawgaw!Mao na iyang sinugdanan. Tan awa.

Dec. 9, 2010 ELG

A director of a corporation or a trustee if it is a non-

stock, non-profit corporation must be a naturalperson. Why? Because a corporation is the only person thatneeds another person in order to act being an artificial beingit does not have a mouth, hand nor feet to enter into acontract how does it signify its consent if there is no physicalreference to that person. So, it means another person. If itwere a corporation then it will be a case of a blindleading theblind, so when you form you have to have a natural person.

But then again there is an exception: There is acorporation where the directors are by law can becorporations also. What is that corporation? That is acondominium corporation.

A condominium was designed such that foreigners could own

real properties. So the usual set-up is you buy a unit andownership of the unit contains a condition sine qua non thatyou must be either a member or an owner of shares in acondominium corporation. Depending on the originalfounders or creators of this corporation, the condominiumcorporation can either be stock and profit corporation or anon-stock, non-profit corporation.

The purpose of a condominium corporation is the ownershipof the land and the ownership and administration of thecommon spaces of the condominium because the unit owneris just the owner of one unit.

Why is it necessary that there be a land owner? Let‘s justtake insurance, who buys the insurance for the

condominium? You are a unit owner do you have insurancefor your unit? You must have, it‘ s also a condition that youbuy insurance for your unit. Ug ang imong unit mabungkag, pareha atong mga reporters sa Al Jazeereh nasuko ang mgaamerikano gibungkag ilahang mga unit patay tong mga reporters sa seoul ang una nga nag pa-abang nila nikubra uginsurance, nakakuhasiya kay nawagtang naman iyahang unit.Kana kungimohang unit ramaoymabungkag. The sum total ofthe insurance of the unit is not equivalent to the insurance ofthe entire building because if the entire building is destroyedwhat happens? Each unit owner whose unit is destroyedtotally beyond repair can collect the entirety for his/herinsurance but then the condominium owner can also collectfor the entire unit.

Now, if the condominium owner bids another condominiumout of the proceeds are you automatically because you areonce unit owner, do you have a unit in that building? No, youdo not have, he is free to sell it again. Now, because youhave proceeds of your unit you can go back to him and buythe equivalent of your unit.

The stairs, the elevator, the lobby are many column areasthe party walls between units these are all the condominiumowners look out and responsibility.




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Since most of the owners if not all the owners arecorporations, if you require that for the condominiumcorporation must be a natural person that must be thedirector of the corporation then you might end up withoutany directors. That is why explicitly in the corporation law it

says that as long as you are the owner of the unit, if you area corporation you can be a director of the condominiumcorporation provided that you name beforehand the officersof the corporation that has sit in the condominiumcorporations board of directors.So the corporation itself iserected after there is a designated natural person officer ofthat corporation that will sit in the condominium board ofdirectors. Most of those corporation units they are alreadycorporation owners.

There is another secret why it is owned by corporationsespecially if it is an office condominium? If it is a corporationthat owns the office condominium, if you want to dispose ofit instead of selling the unit, you sell the corporation. When

you sell the corporation the capital gains tax is not directlywithin the purview of the BIR. If you have one corporationand the entire asset of that corporation is just this unit, youfound it as a holding corporation then you sell thecorporation instead selling the unit you don‘t even have to goto the register of deeds to change the title. All you have todo is hand-over, indorse the tax certificates then there wouldbe new owners.

That is the same situation of South Forbes Park. The size ofthe land is 200,500 sqm. Per sqm is 200,000 pesos and yousell that then what is the CGT, doc. stamps, transfer fee?Muabot na ug 7%. That would be 500M, the tax would be35M kinsa man malipayon ana. Mag buhat ka ug corporationinstead of selling the unit, you sell the corporation instead,

change of stock ra, non-listed, sunod reporting nimo changena ug stockholder.

All those pieces of property are already owned bycorporation by sheer tax avoidance necessity. Most of theoffice buildings they precisely create a corporation to ownthe real property so when they sell it they sell thecorporation.

When you see the articles of incorporation the number ofdirectors and trustees of the corporation shall be specifiedand the names, nationalities and residences of the firstdirectors or trustees of the corporation are as follows, thenyou put down the names. The law requires that they benatural persons they cannot be corporations also unless it is

a condominium corporation which is exempt by law and thenthe majority of the directors must be residents of thePhilippines.

The law does not say that the directors must be sui juris ,must be of legal age. The law does not require but directorsshould be of legal age. Why? Because directors act with legaleffect and if you are not of age you cannot act with legaleffect, you cannot be held liable for the things that you signand directors have responsibility as to what they sign, forwhat they do, you will later on see that there are liabilitiescivil and sometimes criminal for the act of directors.

I‘m bringing this out, why? Because stockholders neednot be of legal age. In fact you can be a stockholder evenbefore you are born. If your wealthy grandfather hasdonated to you while you are still in the womb of yourmother. You can be a stockholder even if you are in the

womb of your mother because somebody can donate to you,in your person and family relations you can be the donee. Ofcourse under the condition that you will be born later on, soyou do not have to be of legal age to be a stockholder.

To purchase stocks you do not even have to be of legal age,you will need assistance from your guardian or your parentto purchase stocks but you can be a stockholder even if youare a minor but being a stockholder which qualifiesalmost everybody, to be elected to the board ofdirectors you are disqualified because of yourminority, you cannot be elected to the board ofdirectors even if you own atleast one share of stock inthe books of corporation standing in your own name.

It says in the articles of incorporation the names,nationalities and residences of the first directors or trusteesof the corporation. They are actually directors or trustees ofa corporation not yet formed, wala pa may corporation. So,what happens? Upon the issuance of the certificate ofincorporation, the first act that the corporation constituentsis to again elect a new board of directors, it could be thesame people that are listed here or it could be another setbecause the first directors here are not yet the directors ofthe corporation because there is still no corporation. Thesedirectors listed here are merely chosen by the incorporatorsand normally it‘s just the incorporators elect themselves andput themselves as the directors or trustees of thecorporation.

If you take a look at the treasurer‘s affidavit in section 15:

TREASURER'S AFFIDAVIT

REPUBLIC OF THE PHILIPPINES)

CITY/MUNICIPALITY OF ) S.S.

PROVINCE OF )

I,............................., being duly sworn, depose and say:

That I have been elected by the subscribers of thecorporation as Treasurer thereof, to act as such until mysuccessor has been duly elected and qualified in accordancewith the by-laws of the corporation, and that as such

Treasurer, I hereby certify under oath that at least 25% ofthe authorized capital stock of the corporation has beensubscribed and at least 25% of the total subscription hasbeen paid, and received by me, in cash or property, in theamount of not less than P5,000.00, in accordance with theCorporation Code.

.................................

(Signature of Treasurer)

This treasurer is not the treasurer of the corporation. This isthe interim treasurer, he holds the money in trust for the




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corporation that is why he will turn it over to the treasurerwho shall have been elected after the issuance of thecertificate of incorporation. There is need for somebody tovouch for it that there is this money being held because if itis not true, he is the guy who should go to jail. This is his

responsibility and this is a public document, the article ofincorporation is a public document and it is available to thepublic who may have an interest in this particularcorporation. So if he does not tell the truth what is that?Under the RPC that is falsification of a public document.

You have the incorporators, then you have the directors andthen here we have the authorized capital stock, subscribedcapital stock and paid-up capital, you must clearly state that.

Authorized capital stock of a corporation is you put it inwords and then in figures in lawful money of the Philippinesdivided into and then you put the number of shares and thepar value, if there is no par value you just say divided intothis number of shares and declare that there is no par value.

An explanation of authorized capital stock [FGN writes on theboard]:

Authorized capital stock: P1,000,000

Subscribed capital: P500,000

Paid-up: P250,000

Par value: one peso

Now, your commentators will tell you, authorized capitalstock is fixed, it is the limit that the corporation can raise byway of capital. That is not true. The more accurate way tosay is that this is the limit as to the number of shares that

you can issue and the amount equivalent to the shares thatyou can raise from the public or from the subscribers. It isnot the amount that is the limit, it is the number of shares inrelation to this amount [don‘t know what amount father wasreferring to]

What do I mean by that? Let us say this is the beginning inthe organizing of the corporation, 500k was raised becausethe shares of stock equivalent to 500k was sold at par value[1 peso as stated above]. The issued value for those sharesis the same as the par value therefore the number of sharesis also 500k and therefore the amount of consideration isalso 500k.

The subscribers can subscribe in instalments because it is par

value shares. Let us say 250k is paid-up does it comply withthe requirements of the corporation code? Subscribe must beat least 25% of the authorized, here it is 50% (that‘s 500k)so it complied and then the paid-up must be atleast 25% ofthe subscribed (that‘s 250k) so it complied.

Assume now that the corporation has been doing businessfor 3 years and then the corporation says since business isdoing very well maybe we should expand so let us raisemore money and then they say let us now sell the remaining500k shares out of the 1M capital stock. Now, let us assumethat the unrestricted retained earnings, the accumulatedprofits for 3 years, net of tax is already 500k pesos. That

means if it is 500k that the book value per share is already 2pesos. When you sell this 500k (subscribed capital) the next500k share by way of subscription mosugot kaya kana 1peso par value gihapon imong baligya? If you sell at 1 pesopar value pagsulod adtong bag-o na stockholder the value of

your shares will now be less than 2 pesos kay bahinonnaman to sya. So muingon dyud ka na at the very least itshould be sold 2 pesos or more para dili ka lugi . So price it at2 pesos once you issue shares of stock. [sorry medyo confusing si Fr. ]

Now, when you issue 2 pesos per share of the 500k. Pila bamakuha nimo sa 500k issued 2 pesos per value? 1M. So ifyou add the 1M from the second issue and 500k that is 1.5Mthat is over the 1M authorized capital stated above, are youviolating the law? You are not. Why? Because you did notissue more shares than what you‘re authorized capital (sinceonly 500k + another 500k was sold, it is not over 1Mauthorized capital stock).

When you say authorized capital is the limit of capital thatyou can raise it must always be reckoned in terms of thenumber share that as to the 1M (above stated) it is notabsolute. It is in relation to the number of shares that youcan sell. Certainly you cannot sell more than 500k shares at2 pesos per share. Why? Because you would be issuingshares to the extent of the excess which you no longer haveand now that is a violation of your authorized capital stock.That is the meaning of authorized capital

Subscribed capital is that portion of the authorized capitalthat is already answered for. If in the 3 years of operation ofthe corporation its losing money and finally goes intobankruptcy what happens? The creditors have the right to

look at the books of the corporation and say ―ha-in man nikining 500k shares asa man ang consideration ana unya250k lang man ang nasulod, ikiha nato ning mga subscribersnawala pa nakaimpas sa ilahang subscription‖ then muingonka ―is it not that in a corporation your liability is limited onlyas to the amount that you have put in the corporation? Yes.But when you say you‘ve subscribed nisaad naka that youwill put in the entirety of your subscription. So the subscribedcapital is the extent of your liability not what you actually putin the corporation, remember that. Subscription is the extentof your liability not your actual contribution to thecorporation

Paid-up capital is the amount of pesos or propertyequivalent to the pesos of the issued shares that is already in

the hands of the corporation and upon demand can be madeto pay the just and valid obligations of the corporation.

Remember if it is only no par value (NPV) shares are issuedwithout issuing par value (PV) shares together with the NPVshares then, technically speaking there will only be two kindof these capital (Authorized and Paid-up) because thesubscribed will be identical to Paid-up. You cannot subscribedto NPV share on an instalment basis. So only two categoriessubscribed and paid-up is one and the same and authorizedcapital is the other separate category.




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Treasurer, when you file an application with the SEC thetreasurer has another affidavit to fill-up and that is anaffidavit by which he waives the right to secrecy of bankdeposits. Normally the consideration received from a pre-incorporation subscription is gathered by the interim

treasurer and deposited in the bank. How is it deposited inthe bank? It will not be in the name of the corporation why?Because there is still no corporation. In whose name will it bedeposited? It will be deposited in the name of the interimtreasurer.

From there you will ask the manager of the bank where youdeposited the money to issue a certification as to the amountthat was deposited. Manager will issue that certification andyou put that together with the treasurer‘s affidavit. The SEChas the prerogative to call up the manager; technicallyspeaking the manager cannot divulge how much is actuallythere. That is why the interim treasurer has to execute awaiver, he is waiving the right of secrecy and allowing the

SEC to verify from the bank manager as to whether or notthere is this amount held in trust for the corporation.

Q: What happens if the SEC finds out that there is adiscrepancy between what is put down in the paperssubmitted to the SEC and the actual money that is there inthe actual verification of the bank manager?

A: In the very least the SEC will not issue a certificate ofincorporation because that is dishonesty. The articles ofincorporation that there is more money but there is actuallyless, so what will happen? In the worst case scenario kungkugihan ang SEC they will file a case for falsification. Sotechnically who is liable? It is the treasurer who is liable.

The same thing will happen if the corporation is already

formed and the corporation applies for an increase in capitalstock. Is it necessary that a corporation has fully issued itsshare of stocks and depleted the authorized capital before itcan apply for admittance? No, does not have to be soaccording to the opinion of the SEC, you can apply even ifthere are still unissued shares. If the amount that remains isgreater than what would the (?) by the issuance of theunissued shares.

The only requirement is that you must produce subscribersthat will cover at least 25% of the increase and at least 25%of the subscribed increased capital must be paid-up.

Suppose after 3 years of operation you decide that you willreally go all out now, we will increase double our capital

instead of 1M will put 2M so what happens? Muingon sya atleast there is no more need for subscription why? Because2M subscribe 500k that‘s more than 25%. Is that 25% of2M? Yes 500k is 25% of 2M so don‘t need to havesubscription. Is 250k 25% of the subscribed 500k? It is.

So do you need a new subscription to increase the stock?The SEC says you still need new subscription because the25% subscribed is as to the increase, the increase is 1M soyou have to get 25% subscribe of the increase and then25% of that subscribed must be paid-up in order to complywith the requirements of the law. It is as to the increase not

the increase capital aggregate. It is the increase that youhave to comply with the 25% subscription and 25% of thepaid-up.

December 10, 2015 ELG

The old rule was if you file articles of incorporation with theSEC, you sign an undertaking for and in behalf of all theincorporators that you are willing to change the name.

Articles of incorporation of _________.

Muingon kag wala pa may ngalan nga naapprove, so walasah. Para kay kinsa man nah? Pareha ra nah ug niapply kaug marriage license nga way ngalan diha, mahimo ba nah? Blank marriage license, unsa man nah iring ug iro ngamagminyo? So you have to put a name. Before, the age ofpre-electronic data, you sign an undertaking. You are thetreasurer or the president of the corporation that is still to be

formed, interim officer, you sign an undertaking that shouldit later be discovered by the Securities and ExchangeCommission that there is already another corporation withthe same protected name as the one you chose or closelysimilar to it, then you are willing to change the name of thecorporation. That was the old practice.

Now, with the electronic age, you pay a fee after you submita name. Then, SEC Manila will go through its database, isthis name already owned by another registered corporation?If it is not, then they will give back to you a receipt acceptingyour reservation fee. I think the reservation fee now is P200or P300. (Student: P40 for 1 month, maximum P120 for 3months). If it is not found in their database, they approve it,so you have 30 days to submit your articles of incorporation

with the SEC using that name.

If at the end of the 30 days, you still have not submitted,then you can ask for an extension, pay another P40 for thesecond month. Kung dili pa gihapon ka kay pulpol ang imongabogado, tapulan, another month, 3 months maximum. Thatis the way to register now with respect to the name of thecorporation. That is the first thing in the articles ofincorporation.

Articles of incorporation of, and then you put the name. Howmany names can you put there? Technically speaking, onlyone name; but if you have several registered names in otherregistry, for instance in trade names, you have a registrythere, you can include it. If you have in the Bureau ofPatents, also a name that is registered therewith tied withyour product, then you can also include it, just like what BDOdid, amended articles of incorporation. This is amendedarticles of incorporation of BDO Unibank Inc., that is thename they registered with the SEC and then, underneaththat they put down, doing business under any of thefollowing names and styles: BDO, BDO Unibank, Banco deOro, Banco de Oro Unibank, BDO Banco de Oro. So you haveall those names, but you know BDO cannot register inCanada, in the US, in Europe, only in the Philippines. Why?

You type in Google, BDO. Tan.awa kung unsay mugawas dinha kung Banco de Oro ba. Kay kung naa ka diri sa




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Pilipinas, Banco de Oro. But in actuality, it is BDO beinginternational accounting firm. It is the second-tier accountingfirm. There are four. There are big four accounting firms(international accounting). Who are they? PricewaterhouseCooper, Ernst & Young, Deloitte & Touche, and KPMG. Those

are the big four. Below that, then you have BDO,all thosedifferent accounting firms. International man nah sila, silamay nakauna sa ngalan nga BDO. Dili karehistro ang BDO sagawas. Dinhi lang sa Pilipinas, naunahan na man sila. Parehara nah sa PNB (Philippine National Bank) diri sa Pilipinas, tan.awa dira sa Martin Hall first floor, naa dira PNB. Pag-abotana sa Malaysia, wala nah , Penham Nasional Berhad (PNB)that is the sovereign corporation of Malaysia. Mao dilikarehistro ang PNB sa gawas kay they are confusing thepublic.

Naming a corporation is a science. Mugawas gyud ka ngaikaw lang ang naay ngalan nga ingon niana. You cannotalso use a name that is similarly confusing or

confusingly similar. That is the rule. You have studiedtrade names and trademarks, have you? In intellectualproperty.

You know in Philadelphia where used to be this FilipinoRestaurant, Sony Ramirez Restaurant Filipino Cuisine, gifilanman nah siya ug kaso sa Sony and Sony AmericaIncorporated is registered with the SEC, si Sony Ramirez kaysingle proprietorship man lang, wala man siya narehistro sa SEC. Ang iyang katarungan, kining ngalan nako sa akong restaurant, ako ni, sukad pa gibunyagan ko, natawo ko saPilipinas mao ni akong ngalan. Kinsa may daog? Kayipatangtang man siya sa Sony. Pildi si Sony Ramirez. SonyCorporation is associated with quality sound, not quality eats.Natangtang si Sony Ramirez.

The name is also the basis of succession. Corporation isone that exercises perpetual succession, the right ofsuccession. It is the name where the bill of the corporation isfocused. Why? Because there is no physical reference. Yourname as a corporation practically represents your being. Ifyou change the name of the corporation, that is afundamental change, it needs an amendment of the articles.It means that the entire corpus of the stockholders, even thenon-voting stocks vote and it must be approved by qualifiedmajority which is 2/3, not just a simple majority, 2/3 of theoutstanding capital stock, voting and non-voting. The nameof the corporation, that is the first thing that appears in thearticles of incorporation.

Then, the second thing that appears is the purpose orpurposes for which such corporation is incorporated.What are the rules of the SEC with respect to the purpose?

The purpose must be specific, particular. You cannot just say that the purpose of this corporation is to makemoney, lots of it. It must be specific. How are you going tomake your money?

If it is a non-stock, non-profit corporation, the second rule isthat you must distinguish the primary purpose from thesecondary purpose. Why? Because the rule is if thecorporation engages in a business that is secondary purpose,

then, the stockholders again must vote, qualified majorityand it must be qualified, even the non-voting shares can votebecause that is one of the instances mentioned in Section 6of the Corporation Code. To invest in any other corporationother than the primary purpose of the corporation. So, the

rule is specify the primary purpose.

What is your primary purpose? To establish, operate, andmaintain a hospital. That is the primary purpose of ClinicaHilario Incorporated. Where is Clinica Hilario Incorporated? Itis the corporate name of Davao Doctors Hospital. DavaoDoctors Hospital is the style or trade name. It is the nameunder which they operate. It is also registered, but it is notthe corporate name. The corporate name is Clinica HilarioIncorporated.

Now, that is your primary purpose. Suppose your secondarypurpose is to establish, operate, and maintain a funeralparlor? Ang imong primary purpose is to establish, operate,and maintain a hospital. That will not be allowed because the

third rule is the primary and the secondary purposemust be legally combinable. Legally combinable ba nahang hospital ug funeral parlor? Delikado nah, magduda angmga tao ana. Musulod ka sa hospital, naglakaw pa, unya horizontal ang gawas nimo kay ang secondary purpose kaynaa man silay funeral parlor, buhi ka or patay, masakop kagihapon nila. That is the third rule. That is the third rule, theprimary and the secondary purpose must be legallycombinable. There must be no conflict of interest. Youcannot be a recruiting and manning agency and at the sametime be a travel agency, prohibited under the Labor Code.Bisag wala pay trabaho didto, lukatan na dayon nimo ugticket , pasakyon na dayon nimo ug eroplano, pag.abot didto,wala may trabaho naghulat nila. Balik na sad, palit na sad ug

lain nga ticket. Dili nah mahimo . That is not legallycombinable.

The name and purpose must not be against morals. Now, the Securities and Exchange Commission hasdetermined that the purpose of facilitating foreigners fromobtaining Filipina bridesis contrary to the morals of theFilipinos. If you are a website, that is your purpose, toconnect foreign males who want to marry Filipinas and theFilipinas are matched with the foreigners, the SEC hasdetermined that that is contrary to morals and that has beendisallowed. Corporations with that purpose are disallowed,that is contrary to morals. I am not too sure whether that iscontrary to morals, to facilitate; but, that is what the SEC

says. Another purpose that the SEC has found to be contrary tolaw, there was this Philippine Movement for Philippinestowards being the 52nd state of the United States. When Iarrived here in Davao in 1980, the headquarters of thatmovement was here is Recto. It was founded by retiredCongressman Cabangbang of Bohol. That was his cry, tomake the Philippines the 52nd state of the United States. Hetried to registered it to SEC and the SEC said that that iscontrary to law. You want the Philippines to be under aforeign sovereign? So this incorporation was disallowed. Henow said that the purpose is to conduct a research on the




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Philippines being a 52nd state of the United States. Thepurpose was research, not the actual political purpose ofannexing the Philippines to the United States.

You cannot form a corporation for the purpose of practicing

a profession.You cannot form a corporation for the practiceof public accounting. You can only form a partnership. E.g.Sycip, Gorres, &Velayo.

Why is it that you cannot form a corporation for the practiceof law, for the practice of public accounting? Why is it notallowed? When you engage the services of an externalindependent accountant or engage the services of anylawyer, the relationship is personal and there areboth civiland criminal liabilities involved. If you are a corporation andyou do services like public accounting, you may be able toanswer for the civil liabilities but you cannot answer for thecriminal liability, so you might be used as a vehicle to commitcrimes. You cannot go to jail. But if it is a partnership, thenthere are personalities, actual and natural persons who are

assuming the obligations and therefore, they can be held tobe not only civilly liable, but also criminally liable. So theycannot constitute as a purpose in the corporation. Thepractice of a profession cannot be the legitimate allowablepurpose of the corporation. The decided case here is

Acebedo vs. Philippine Optometric Society.

Who is Acebedo? Kaning Acebedo Optical. What is that? Isthat a corporation or a partnership? You read the case. It is acorporation and it has been the subject of a case by thePhilippine Optometric Society. Philippine Optometric Societycomplained that Acebedo is engaged in the practice of aprofession and it is a corporation. It should not be allowed.Kinsa man ang daog? Basaha ninyo ang kaso because that is

the leading case.What is the difference between an optometrist and anoculist? An oculist is an MD. An optometrist is not an MD(Medical Doctor). He cannot prescribe medicines and cannotoperate on your eye. An oculist can prescribe you yourmedicine and can operate in your eye if he is an oculistsurgeon. An optometrist is somebody who can prescribe youlenses for your vision. Both are engaged in the practice of aprofession and both professions cannot be a purpose of acorporation.

Then the next item in the articles of incorporation isthe principal office of the corporation . Now, therequirement of the SEC is that you must place the actual

number and street where your corporation is to have itsoffice. Before, it was enough to just put down the city. Infact, if you are located in the National Capital Region, it isenough to put down NCR. Why was that allowed before?Because if you are a small corporation, niabang ka lang,unya mahupos nah imong abang, mubalhin ka? Does thatmean that you have to amend the articles of incorporation?Because what you write down in the articles of incorporationis fixed and to change or amend it is a very cumbersomeprocess. So that is the reason before. But now, so that acorporation will not hide themselves, they are nowrequired to put down their actual address.

Why is the office of a corporation important? The office ofa corporation is important because that is theirdomicile and domicile is very important for thepurposes of taxation. Principal office of the corporation islocated in and you put down the number, the street and the

city. If you are incorporated under the laws of thePhilippines, it must be within the Philippines. You cannot putit outside the Philippine because later on you will find outthat the rules of the SEC is such that if you holdstockholdersmeeting or members meeting in a non-stock non-profitcorporation, as much as possible it should be held in theoffice of the corporation or at least in the city where theoffice is located. Board of directors or board of trusteesmeeting does not require that specificity. You can hold boardof directors meeting outside of the Philippines. You can holdboard of trustees meeting outside of the Philippines.

Why is it that when it comes to the stockholders andmembers of a corporation it must be held within the

Philippines, preferably in the office of the corporation or atleast in the city where the office is located? Because thatmight be used as a way of disenfranchising the stockholdersor members of the corporation by holding it outside. If PLDTall of a sudden will say that the meeting of the stockholderswill be held in Hongkong, if you are just an ordinary holderof 10 shares of PLDT, makagasto kaha ka ug kwarta aronmakaattend ug meeting flying to Hongkong, magstay pa kaug hotel didto. Nia gani ka sa Mindanao, murag dili na manka ganahan muadto sa Manila aron muattend ug meetingkay dako na ug gasto bah. So that is the purpose of the law,so that it cannot be used to disenfranchise stockholders andmembers, then, they are forced by the regulations of theSEC to hold their meetings as much as possible in theprincipal office of the corporation or at least in the city wherethe principal office is located.

But, there are certain corporations where the number ofstockholders is such that they cannot hold it anymore in theoffice. MERALCO, MERALCO has already over a millionstockholders. Aha may opisina nga naay conference roomnga makaigo ug 1 million? Bisag muadto pa ka sa Mall of

Asia maglisod kag butang ana. Ang meeting ninyo ana adtosa Luneta. PLDT has over 2 million listed stockholders. Kanatanan they have the right to attend the meeting. Where doyou hold it? You cannot hold it certainly in the principal officeand yet they just rent a function room of Mandarin Hotel orShangri-La Hotel or Manila Hotel. They know fromexperience how many will show up. The rest, normally a

stockholder will give their proxy to another stockholder. But,those are the rules.

Fourth, the term of the corporation. You cannot putdown a term longer than 50 years. Then you can renewthe term if it is within 5 years from the expiry of theterm. That is the rule. Earlier than that, you cannotunless you have a good reason. And what can be a goodreason?

Let us say your corporation is to expire in 2020 because yourcorporation was formed in 1970 and it says there that thecorporation is to exist for 50 years from and after the




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issuance of the certificate of incorporation. The certificate ofincorporation was issued in 1970, so how many years? 50years. 2020 expired. So karon, 2015 na man , can yourenew? It is not yet within 5 years from the expiry. Not yet.

So you will not be allowed as a general rule, except if thereis a good reason. What is a good reason? You want to float abond, a 10-year bond. They will not allow you to float a 10-year bond when you are going to die as a corporation within5 years. So you go to the SEC, saying that can you allow usto renew the articles of incorporation and extend the term ofthe corporation to another 50 years because we now want tofloat a bond that is a 10-year bond.

What happens if you want to float a 90-year bond? Naa bay 90-year bond? There are 99-year bonds. What is thetreatment of a 99-year bond? The accounting rules in theUnited States, they think that the treatment of a 99-yearbond is an equity. It is no longer a receivable and payable.The treatment is like it is ****

The Supreme Court 5 years ago issued a ruling and theSupreme Court said that no corporation can enter into acontract of usufruct on its properties longer than its term ofexistence. If the corporation has 50 years in the articles or40 years left and it enters into a usufruct agreement withanother corporation of its property for at least 50 years, theSupreme Court said that it is null and void because that isbeyond your powers, mamatay na man ka within 40 years,tapos musulod kag kontrata nga 50 years. To me, that is toocivil codish. When there is a recognition in the corporationlaw that a corporation has perpetual succession. Mao bitawsa America, Europe, they allow 99-year bonds. That can beissued because technically speaking, a corporation exist

perpetually.Now, is there any precedent in the Philippines? Yes. This hasnot been contradicted by the Supreme Court, the SEC says areligious corporation is presumed to exist perpetually, so ifthere is a religious corporation in the society that fails torenew its term and it is already expired, it does not cease toexist because it is presumed to exist perpetually. Religiouscorporations ha. But if you are non-religious and you ran outof your term, what happens? When your term runs out, youare still given a number of years to wind up your businessand liquidate your properties and divide the same if there isa remainder to the stockholders. Sec. 122 says you are stillgiven 3 years.

Section 122. Corporate liquidation. – Every corporationwhose charter expires by its own limitation or is annulled byforfeiture or otherwise, or whose corporate existence forother purposes is terminated in any other manner, shallnevertheless be continued as a body corporate for three (3)years after the time when it would have been so dissolved,for the purpose of prosecuting and defending suits by oragainst it and enabling it to settle and close its affairs, todispose of and convey its property and to distribute itsassets, but not for the purpose of continuing the business forwhich it was established. x x x

Now, nakalimot ang mga officers sa corporation to extendthe term. Pagmeeting nila, pagbasa nila, uie patay na mandiay ta, so nagsugod na ang atong liquidation term karon, 3-year period. Naa pa man moy 3 years nga buhi mo pa,pwede ba nah?

The Supreme Court says no more because in this 3-yearperiod where you liquidate, there is no more board ofdirectors because you are no longer functioning as acorporation, you are just ran by a receiver in dissolution. Maolang nah siyay manghipos. Wala na dinhay manager, wala nadinhay cashier. Ug sa restaurant pa, unsa na lang angnahibilin? Janitor na lang, ang nanilhig, nanghipos, naghulatsa mupick up kay gipalit na diay tanan gamit sa corporation.Except religious corporations, even if the term is expired,religious corporation is presumed to exist, to continue itsexistence because its existence is supposed to be presumedto be perpetual.

December 11, 2015 LJS

Section 14. Contents of the articles of incorporation. – Allcorporations organized under this code shall file with theSecurities and Exchange Commission articles ofincorporation in any of the official languages duly signedand acknowledged by all of the incorporators, containingsubstantially the following matters, except as otherwiseprescribed by this Code or by special law:

1. The name of the corporation;

2. The specific purpose or purposes for which thecorporation is being incorporated. Where a

corporation has more than one stated purpose, thearticles of incorporation shall state which is theprimary purpose and which is/are the secondarypurpose or purposes: Provided , That a non-stockcorporation may not include a purpose whichwould change or contradict its nature as such;

3. The place where the principal office of thecorporation is to be located, which must be withinthe Philippines;

4. The term for which the corporation is to exist;

5. The names, nationalities and residences of theincorporators;

6. The number of directors or trustees, which shallnot be less than 5 nor more than 15;

7. The names, nationalities and residences ofpersons who shall act as directors or trustees untilthe first regular directors or trustees are dulyelected and qualified in accordance with this Code;

8. If it be a stock corporation, the amount of itsauthorized capital stock in lawful money of thePhilippines, the number of shares into which it isdivided, and in case the share are par valueshares, the par value of each, the names,




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nationalities and residences of the originalsubscribers, and the amount subscribed and paidby each on his subscription, and if some or all ofthe shares are without par value, such fact must bestated;

9. If it be a non-stock corporation, the amount ofits capital, the names, nationalities and residencesof the contributors and the amount contributed byeach; and

10. Such other matters as are not inconsistent withlaw and which the incorporators may deemnecessary and convenient.

The Securities and Exchange Commission shall not acceptthe articles of incorporation of any stock corporation unlessaccompanied by a sworn statement of the Treasurer electedby the subscribers showing that at least 25% of theauthorized capital stock of the corporation has been

subscribed, and at least 25% of the total subscription hasbeen fully paid to him in actual cash and/or in property thefair valuation of which is equal to at least 25% of the saidsubscription, such paid-up capital being not less thanP5,000.00 pesos.

According to Section 14, contents of the articles ofincorporation, it states that it may be in any of the officiallanguages duly signed and acknowledged by all of theincorporators, containing substantially the following matters.So, compliance is merely substantial. And the languages canbe any of the official languages. What are the officiallanguages of the Philippines? English, Filipino and until thosearchives can be translated, it can be Spanish. Have the

archives been translated already? I challenge you to make anarticles of incorporation in Filipino or Spanish and submit it to

Atty. Francisco of the SEC, let‘s see if you can get to firstbase. Patatakan mana ug receive, see if that will bestamped. You would just be blown in the face. So you cannotfile an articles of incorporation other than English. [Rantsabout Filipino as a cause for Ignorance. Language hasnothing to do with nationality. ]

Q: Is the treasurer‘s affidavit part of the articles ofincorporation? Is it part?

A: That is answered by #10 of Sec. 14.

It says: The SEC shall not accept the articles of incorporation

of any stock corporation unless accompanied by a swornstatement of the Treasurer elected by the subscribersshowing at least 25% of the authorized capital stock of thecorporation… So it is not part. Why the necessary distinctionbetween treasurer‘s affidavit and the articles ofincorporation? Why distinguish? [Ceriales! Why?!! – Pusta tothe rescue!] You know from that statement that thetreasurer‘s certificate is a necessary appendix to the articlesof incorporation but it is not part, because the law says so,

―The SEC shall not accept the articles of incorporation of anystock corporation unless accompanied by a sworn statementof the Treasurer‖ .

What is the significance? Because, a defect in the treasurer‘scertificate is not fatal. It is only formal.

A defect in the articles of incorporation would be fatal.

If you filed a defective treasurer‘s affidavit, the SEC would

just return it to you, and allow you to correct the defect. Say,you certified that 25% of authorized capital was subscribed,and that 25% of that subscribed has been paid, but youfailed to certify that it was not less that P5,000, the SECwould just ask you to add that.

If the defect would be the articles of incorporation, youcannot correct it. Why? Because it is a contract. It is adecision of the incorporators. The one who will file thearticles of incorporation in the SEC cannot make anyamendments or additions to the articles of incorporation. Hecannot do that. See that, ―Know all men by these presents:The undersigned incorporators…‖ meaning all theincorporators! You have to include the whole thing. Rewrite

the whole thing and allow it again to be notarized. Becauseagain, it is a contract.

Affidavit? The treasurer can just alter or remedy the defect inthe SEC.

Q: Be that as it may that it is a contract, suppose, thatcontract is not approved by the SEC. The SEC returned yourarticles of incorporation. Is there a partnership because allthe incorporators agreed? What if the pre-incorporationsubscription included a property handed over to thecorporation in lieu of cash? ―paid to him in actual cash and/orin property the fair valuation of which is equal to at least25% of the subscription..‖ So there has been a donationor a deed of exchange. So what happens if the

articles of incorporation is not approved? Whathappens to that donation or the deed of assignment? Is there a proper partnership that receives these propertiesin lieu of the corporation that was not allowed by the SEC?What does your commentators say? [Ms. Guiritan! Nopartnership] Do you need registration in a partnership? No, itis by mere agreement. So why is there no partnership herewhere the incorporators have already agreed?

A: [Ms. Gonzales, why? Mutuality of interest and fiduciaryrelationship in a partnership, but not in a corporation]Correct! There is no delictus personae . It means that youchose each other because you have trust and confidence ineach other. That is not present in an articles of incorporation.In other words, to form a partnership is not included in the

intent to form a corporation. Because you can have anyoneto contribute any sum, and that is enough because sharesare transferrable. There is no delectus personae . But in apartnership, the partners cannot be substituted. You arechosen because of your person that is acceptable to theother partners.

Q: So, going back, supposing that in the pre-incorporation stage, what you contributed, instead ofcash as consideration of the shares of stock, it isproperty, do you need to execute a deed to transferthe property to a corporation still not formed? For you




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to be able to file the articles of incorporation and for thetreasurer to attest the receipt of the property which is in hispossession in trust for the corporation?

A: Yes! You do need to execute the deed. Because

otherwise the treasurer would be telling a lie. So whathappens if the articles of incorporation is not approved, whathappens to the deed of exchange? [3rd year namo hah..obligations and contracts!] Ineffectual! There is no donation,there is no deed of exchange because the party to whom it isdeeded does not exist, is not allowed. It is like donationpropter nuptias . Because there is no wedding, there is nodonation. What if the donor was hit by lightning and died,and the corporation did not exist. Where will the propertygo? To the other incorporators? Will they divide it amongthemselves? They will be given to the heirs of the donorbecause there is no donation or deed of transfer to beginwith.

Q: How do you value property when you give it to a

corporation in exchange for shares of stock?

A: The rule is the organizers of the corporation, if it is a pre-incorporation subscription are given the privilege first tomake the valuation. They are given the first chance to valuethe property.

Now if you undervalue the property, is it alright? If youovervalue the property, is it alright? If you put the value ofthe city assessor as the value of the property, is thatvaluation alright? If you put the zonal valuation of the BIRfor that property, is that alright? [Wala na sa inyong mga commentaries!] What does the law want? Does the law wantan accurate valuation? Or does the law want to exclude falseand overvaluation? The idea is you are telling the public that

there is this sum in the hands of the interim treasurer that isanswerable for the debts and obligations of this corporationand the measure of this sum are the shares of stock thatwere issued. How many shares were issued? 1M shares.What is the par value? P1 per share. So is there P1 millioncash and property in the hands of the interim treasurer? Thetreasurer says yes, ½ is in cash, and ½ is in property. Howwas this real property valued, that is the issue. If theproperty is overvalued the value of the property, then youissued watered stock. You gave more shares for the valuethat you received. If you undervalue the property received,then the corporation gains. The corporation gains more valuethan the shares that it issued.

Now, which is higher? The assessor‘s value that they put inthe tax declaration, or the zonal value that is listed in theBIR? The assessor is the lowest value. The BIR is muchhigher. And yet, that is not the market value. So if you putdown the assessor, you are undervaluing the property. Thatis good for the corporation. Who will be better of with that?The other stockholders because the value that is put there,will be divided among the stockholders. The value per sharewould increase. So that is one form of valuation.

Another form of valuation, a conservative form of valuationthat is higher than the zonal value of the BIR is the valueused when you use your real property as collateral for a loan

in the bank. You know the bank would always put a safetymargin for the property. The bank will not accept theproperty according to its optimum market value. Marketvalue is determined in many ways. Comparable sale value – you look for property that was sold similarly situated to the

property you are valuing, and ask how much was it sold for. Allowing for differences, what is the frontage of this propertyas compared to you. After you accounted for the differenceswith your property, then that is the market value of yourproperty based on comparative sale.

Another form of valuation is comparative earnings. Here isthis property, this size and is rented out for this much. Yourproperty is located in the same street and in the same block.

You have no income but that property can be rented out justlike this one and it could earn this much. So, cost of money,that is as the principal equivalent in money of this property.That is comparative earnings.

The SC has recognized that, both comparative sale and

comparative earnings. And the landmark case forcomparative earnings is the case of JBL Reyes. Property ofJBL Reyes in Tondo. The valuation of the properties besidehim are already high because they were earning very high,and his property, it was only him and his son living therewho was taking care of him. And then they were chargedwith a high real property tax. So he went to the SCquestioning it. Comparative earnings method of valuatingproperty, according to the thesis of JBL Reyes, is good only ifyour property has a realistic probability of being rented out.If it is not rented out, then it remains in the speculativerealm, because if this property would be rented out, then JBLReyes would be living in the sidewalks. So his property hasno realistic probability of being rented out so the valuation is

wrong. So is JBL Reyes correct? Of course correct, justicegud na! Read that case. Valuation.

If the SEC does not agree with your valuation? You are givena first shot to value the property received by yourcorporation in exchange for shares of stock, what will theSEC do? Will the SEC say that ‗I will value you property.‘? No!The SEC will say, hire an appraiser to appraise your property.

If the SEC still disagrees, hire a second appraiser! Thatwould cost you so much. Appraisers does not render theirservices out of the goodness of their hearts. Many of themhave no heart. They say, if you have a heart, you cannotvalue objectively. So that would cost you a lot.

So you would not feel that you have wasted your afternoon,I will give you a free advice for property valuation. Youapply, bona fide, for a loan in the bank. The bank will thenmake an inspection, they will investigate whether theproperty. They will then make an offer. ‗We are willing toaccept the property after appraisal and valuation of ourcredit department, this much‘ Once you receive that, you say

‗sorry, your terms are not acceptable‘ Then go to the SECand attach the offer of the bank. That is now your valuationof your property, then the SEC will accept that. Your propertyis now neither undervalued nor overvalued. Don‘t tell thebank about this.




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Section 15. Forms of Articles of Incorporation. – Unlessotherwise prescribed by special law, articles of incorporationof all domestic corporations shall comply substantially withthe following for:

x x x

ELEVENTH: (Corporations which will engage in any businessor activity reserved for Filipino citizens shall provide thefollowing):

"No transfer of stock or interest which shall reduce theownership of Filipino citizens to less than the requiredpercentage of the capital stock as provided by existing lawsshall be allowed or permitted to be recorded in the properbooks of the corporation and this restriction shall beindicated in all stock certificates issued by the corporation."

x x x

There is this particular provision [above] under Forms ofarticles of incorporation. This is a commitment. This isrequired for instance, you are a real property company, 60%should be owned by Filipinos. If you are a corporationengaged in public utilities, then 60%. If you are aneducational corporation, must be 100%. If engaged in mediaor recruitment and placement of workers, must be 70%. Soyou must have this provision.

Section 16. Amendment of Articles of Incorporation. – Unless otherwise prescribed by this Code or by special law,and for legitimate purposes, any provision or matter stated inthe articles of incorporation may be amended by a majorityvote of the board of directors or trustees and the vote orwritten assent of the stockholders representing at least 2/3of the outstanding capital stock, without prejudice to theappraisal right of dissenting stockholders in accordance withthe provisions of this Code, or the vote or written assent ofat least 2/3 of the members if it be a non-stock corporation.

The original and amended articles together shall contain allprovisions required by law to be set out in the articles ofincorporation. Such articles, as amended shall be indicatedby underscoring the change or changes made, and a copythereof duly certified under oath by the corporate secretaryand a majority of the directors or trustees stating the factthat said amendment or amendments have been dulyapproved by the required vote of the stockholders or

members, shall be submitted to the Securities and ExchangeCommission.

x x x

How is an articles of incorporation amended? Sec. 16. Thereare 2 ways to amend an articles of incorporation.

FIRST WAY TO AMEND, that part that says „whereamended by a majority vote of the board of directorsor trustees‟, that is absolute majority. Not just amajority in a quorum. Normally, you transact business, theBOD will just have a majority. Let‘s say, you have 11

directors, quorum is 6. The majority of 6 is 4. So if you have5, will pass an ordinary transaction. But if you want toamend the articles of incorporation, you have to at least 6.

Absolute majority of all the directors, not merely majority ofa quorum.

And there shall be a meeting called for the stockholders ormembers, if the amendments in the articles of incorporationis anyone those instances mentioned in Sec. 6. Give anexample of the amendment of those 8 mentioned under Sec.6. [Sec. 6 last 2-3 par.] Increase or decrease of capital stock,then you should call a meeting. And the notice of themeeting the stockholders is a qualified notice. What is aqualified notice? Qualified notice is you are not informing thestockholders only of the date, place and time of the meeting,but also as to the principal item in the agenda to amend thearticles. If you did not put that in the notice, that thismeeting is called in order to amend the articles, then thenotice is defective and it could lead to the undoing of the

amendment if there are more than 1/3 supporting theopposition. So make sure your notice is a qualified notice.

Section 6. Classification of shares. – x x x

Where the articles of incorporation provide for non-votingshares in the cases allowed by this Code, the holders of suchshares shall nevertheless be entitled to vote on the followingmatters:



3. Sale, lease, exchange, mortgage, pledge or otherdisposition of all or substantially all of the corporate

property;

4. Incurring, creating or increasing bondedindebtedness;


6. Merger or consolidation of the corporation withanother corporation or other corporations;

7. Investment of corporate funds in anothercorporation or business in accordance with thisCode; and

8. Dissolution of the corporation.

x x x

So the meeting is called. Then they vote by way of secretballot. Is it the stockholders only that have voting power, oralso those stockholders with non-voting shares? Voting andnon-voting, because it is one of the instances mentionedunder Sec. 6. Then you vote by secret ballot. Now if there issecret ballot, 2/3 vote, then the amendment is approved bythe corporation and that is now submitted to the SEC.

And the last paragraph under Sec. 16 provides that theamendments shall take effect upon their approval by the SECor the date of filing with the said Commission if not acted




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upon 6 months from the date of filing for a cause notattributable to the corporation.

Section 16. x x x

The amendments shall take effect upon their approval by theSecurities and Exchange Commission or from the date offiling with the said Commission if not acted upon within 6months from the date of filing for a cause not attributable tothe corporation.

So, it can be within 6 months after the filing if it is not actedupon by the SEC for a cause not attributable to thecorporation.

An exception to that rule is Sec. 18, as to the corporatename.

Sec. 18. Corporate name. – No corporate name may be

allowed by the Securities and Exchange Commission if theproposed name is identical or deceptively or confusinglysimilar to that of any existing corporation or to any othername already protected by law or is patently deceptive,confusing or contrary to existing laws. When a change in thecorporate name is approved, the Commission shall issue anamended certificate of incorporation under the amendedname.

When you change the name, you amend the articles ofincorporation, and it says explicitly under Sec. 18, when achange in the corporate name is approved, an amendedarticles of incorporation is issued upon the amended name.So new articles is given because you have a new name. That

is an exception to Sec. 16 last paragraph, that if the SECdoes not act on your filing of an amendment, then it iseffective from the date of filing if not acted upon within 6months.

Now, what is the SECOND WAY TO AMEND the articles ofincorporation? It is by way of written assent. Where isthat found? 1st paragraph of Sec. 16. The written assent ofat least 2/3 of the members. You are just given a letter, foreach stockholder or member, are you in favor or not of thisamendment? Check! Then mail it back. That is writtenassent. You do not call anymore for a meeting.

When does that happen? When it is not one of the instancesmentioned under Sec. 6, the 8 instances. If it is not, then

you can do it by written assent.

[5min break] Alright let us resume.

For your further information, I suggest you take a look atwhat is happening in the mining industry. The big threemines in the world. The biggest is BHP (BrokenHillProprietary). The second one is ****. The third is Glencore.The shares of stock has gone down by more than 70%.

So they are forced to reduce capital stock because they -.What‘s the reason for that? China just keep buying minerals.China is the number one purchaser of iron ore.

Increase and decrease of capital stocks must be approved bythe stockholders, 2/3 of the stockholders.

Now, absolute control, you must have 2/3 of the outstandingcapital stock. Wa nay makapugong nimo ana if you have 2/3

of the outstanding capital stock. Ordinary control if you have50% plus one of the outstanding capital stock. If you haveless than that, let us say 40% of the outstanding capitalstock and nobody else has 50% plus one, what is that? Youhave significant inputs over the management of thecorporation. You have no control, not ordinary control butabsolute control.

Now, if your holdings is less than 33.33%? What is that?That is less than 1/3. So you are an insignificant minority. Ifyou have 33.33% at least, then you have a blockingminority. You can prevent majority from increasing capitalstock. Makaboto ka kay 1/3 kana man. You are a blockingminority. So those are the different configurations ofstockholdings for purposes of control.

Now, let me ask you, those configurations are basically rulesin Asia in Africa and USA. Let me ask you, how much doesMark Zuckerberg own in the outstanding capital stock offacebook? Diba 10% lang? 10% ra na xa pero siya‘y magbuot2, ga t-shirt ra, way ligo2. Why is it like that? Becausethe rest of the ownership of the outstanding capital stock isso diffused that they have no chance to ***. Buy and sell,sige‘g baligya, gamay kaayo.

What is the rule in Europe? The rule in Europe is oppositebecause the significant corporations like telecommunications,electricity, mga dagkong bangko , oil, gas, naa man sila‘y golden shares. Kinsay maka tag-iya sa golden shares?Gobyerno. Then the holder of that golden shares has

comprehensive and universal veto power. Mu- veto na ganisiya, walay makapasar maski pila pa naka-boto. Mu-ingonang gobyerno, my interest transcends the stockholders. Maona they say, Europe is not a free market. [Stories aboutchina, US and African banks]

Alright, commencement of corporate existence.

Section 19. Commencement of corporate existence. – Aprivate corporation formed or organized under this Codecommences to have corporate existence and juridicalpersonality and is deemed incorporated from the date theSecurities and Exchange Commission issues a certificate ofincorporation under its official seal; and thereupon the

incorporators, stockholders/members and their successorsshall constitute a body politic and corporate under the namestated in the articles of incorporation for the period of timementioned therein, unless said period is extended or thecorporation is sooner dissolved in accordance with law. (n)

Q: So when does a corporation become acorporation?

A: FROM THE TIME OF THE ISSUANCE OF THECERTIFICATE.




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The SC has said that what is written in the Certificate ofIncorporation as the date of issuance is presumed to be thedate of issuance.

Pero pagkadawat nako, later pa man, 2 months from the

date pa man, eh di 2 months after pa mag sugod akong existence? NO. What is written in the certificate ofincorporation is presumed to be the date of issuance of thecertificate of incorporation.

Question, can a corporation still to be formed enter into avalid contract before it is even formed? You will learn later ofthis actors in the formation of a corporation. Incorporators,corporators, stockholders or shareholders, members of acorporation and then officers. These are actors in theformation of a corporation, is it not?

Incorporator – if your name is in the articles and yousigned, you are an incorporator.

Subscriber – if your name is there but you did not sign but

you are not an incorporator, wa man ka mu-sign. The mostnumber of member is 15, the least is 5.

Subscriber, you enter into a contract with the corporation toreceive new shares and then you come in money. If it is parvalue shares, you subscribe for installments. But par valueshares, you pay all in, at once.

Have you heard of a promoter, an underwriter? Who arethese?

Underwriters are those who actually sell the shares ofstock of the corporation and they are imported on acommission basis. Some of them will sign on a best-effortsbasis. Best effort basis, kutob lang sa mabaligya, ang dili

mabaligya, kamo nay mangita.

Underwriters also sell on a firm-commitment. Give me all theshares of stock that you are going to sell and I will sell it inthe market and those that will not be bought, I myself willbuy it. That is firm-commitment.

Now, you might say, gibaligya man ang shares nila. Kaygibaligya man, issue-han man na sila ug stock certificate.Unya pagbaligya nila sa public, dili na na subscription, thatis a contract of sale already. NO, they are not sold shares.They are given allocations and then they appropriate theallocations through their various ***. Ipasa nila sa corporation ang shares and then the corporation will issuedirectly through the clients of the *** member the certificate

of stock.

What is this promoter? A promoter mainly has underwriters.Normally, a promoter provides his service. Mubaligya ka ugbag-ong issued preferred shares. 6% return shares. Unyamuadto si JP Morgan. Enter a contract ―promote my sharesof stock.‖ What would JP Morgan do? JP Morgan willprogram his list. Kinsa man akongmgaclientenaangilangindustry mga ***. Mao ni akong gusto kanang dili allergicug merging countries.

*Inaudible* This building, this conference room. Kinsa maynaa dira? Promoter. Kinsa may magpadalasa invitation?

Promoter. Kinsa may magpakaon nila ? Promoter. Humanmuabot an gtaga PLDT. Naa siya‘y ipakita nga mga slides

―it‘s more fun in the Philippines.‖ Mao nay ginatawag na showcasing. Ipakita niya ang ka- attractive nimo. You arepromoting the security of the shares that PLDT is selling.

Now if you are a corporation still to be formed, can theincorporators enter into a contract with the promoter? SCsays YES, you can. The moment the corporation is formed,the contract retroacts. It goes back to the time it is entered.Why? Because it is for the benefit of the corporation. That‘san example that even before the corporation is formed, it isalready made the subject of obligations that are binding. Somuch so that if the incorporators committed fraud againstthe promoter, is the corporation liable? IT DEPENDS. IF THECORPORATION PROFITED FROM THE WRONG, THECORPORATION ITSELF IS LIABLE. If the fraudulentincorporator who entered in his own name is the one whoperpetrated the fraud and the fraud did not redound to the

benefit of the corporation, then the responsibility is personalto the incorporator.

Now, if the promoter makes unwarranted gains from acontract entered into with a corporation still to be formed, isthe promoter liable to the corporation? The answer is YES.The promoter can be made to refund to the corporation thegains made from transactions from subscriptions of thecorporation.

Kinsay nakadungog na anang Double Dragon Corporation?Local na. Mao nay nagsugod na *** stock market. Kinsa may founder anang Double Dragon? Ang founder ana angnagsugod sa MangInasal. Anakni Henry Sy.

[stories about manginasal, jollibee and bulkachong]*

So, you are already formed as a corporation because you arenow issued a certificate of stock. What is the next thing to bedone? You go to Sec. 22.

Section 22. Effects on non-use of corporate charter andcontinuous inoperation of a corporation. – If a corporationdoes not formally organize and commence the transaction ofits business or the construction of its works within 2 yearsfrom the date of its incorporation, its corporate powers ceaseand the corporation shall be deemed dissolved. However, if acorporation has commenced the transaction of its businessbut subsequently becomes continuously inoperative for aperiod of at least 5 years, the same shall be a ground for the

suspension or revocation of its corporate franchise orcertificate of incorporation.

x x x

You have 2 years to organize. What does organize mean?First, if you are a stock corporation, the stockholders electthe directors. Then the directors elect the officers. That isthe organization. Then you fill up the forms then you reportthat to SEC. How much time do you have to report that?

According to Sec. 26, within 30 days from the election ofdirectors, the same must be reported to the SEC.






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3.

That in that meeting was passed by majority boteor by unanimous vote the following resolution.[Father: Then you quote the Resolution]

―It is hereby resolved that XYZ Corp. shall file

suit to recover its properties usurped by so andso. Provided further that the President isempowered to engage services of a lawyer andto do such other acts as to successfully complywith this Resolution. He is given general power,sign all documents, etc―

4.

That this Certification is offered as proof that thecorporation has lawfully authorized the assertion ofthe right of the corporation to recover its propertiesfrom so-and-so.

Witness [xxx]…this 16th day of December, 2015 in the City ofDavao, Philippines.‖

Then, Donubopase. Unsa ba nang donubopase? Document

number, page number, book number, series of 2015. Unya[sa other side], blanko ka naa may timbre ang notary public.I-file na nimo, pirma na . It‘s the corporation who has acted.

Why is this necessary to have that?

Because the corporation is an artificial being. Now that istrue even of the state, the Republic of the Philippines. Waman, artificial being man na.

The simple fact alone of spending money: how does theState spend money? The Congress has to pass a law. On thebasis of that law, then, the necessary funds can be raisedand then the Executive can follow the GAA, and spendaccording to the budget items. Wa gani na sa budget items,

then there is no authority to spend!Tan-awa nang DAP ni PNOY. To me the DAP was a worseoffense that the PDAF. Maayo pa‘tong PDAF, naa‘y balaod .

Ang DAP, wala. Sya lang mag-gastos . From the lawyer‘spoint of view, that is a worse offense. He just usurped. He is

just like a student council! I‘m not kidding…SAMA HAN hasmany funds cases. Unaccounted-for funds! One of the worststudent governments! Some grade schoolers trying to runsome semblance of an organization. :D

[Ciena: ―Buti nalang di nya sinabi Law School SSC!‖ ]

That is why you have to go to the formalities! Worse comesto worst, [for example,] there‘s a corporation, and you arethe lawyer. Everybody looks to you kay ikaw man kabalo sabalaod. Ayaw ingna na, kay Nazareno, [xxx] unya sayopdiay. Paita ana. Kung mapatay nako mu-tuyok ko sa akongxxx. I will turn in my grave. So, master the formalities.

Pangutan-a na ninyo si Ferrer, kinsa ba nang sa sa SGV ***.Mga taga ADMU. Pagsugod sa buhaton sa corporation, waladiay sila tudlui.

Never hold a meeting unless you know the result. Themeeting of the board is not a discussion! You meet, so youcan sign the Resolution. Do not meet if you cannot come upwith a Resolution; if you do not know beforehand.

When should the ideas of the corporation of what it is to do,when should it be ruminated? It should be ruminated incaucuses!

[For example,] ―Mag-branch out ba ta sa atong business?‖

Get the numbers, kumbinsihon mo and then – meeting. Walana discussion-discussion ang meeting. The purpose of themeeting is to decide, not to discuss. Useless man mag- discuss sa meeting. Unya ang sa minutes ―X he stood up andthis was opposed by Y …‖ Unsa man na! High school man na! Who cares who stood up? Nobody cares!

What is material is:

What were the votes?

What was the resolution about?

I came across a corporation who agonized: ―dili ta mu -[act]?‖

Do not agonize over a negative thing. Do you pass aresolution where [you decide] that you do not decide to do.That‘s a difference between a natural person and a juridicalperson. Resolutions are all positive. If you do not, then you

just don‘t meet. So. That is why formalities are important.

I told you, there are 2 ways to comply with the requirementthat for the amendment of the Articles, the participation ofthe stockholders or members is INDISPENSABLE. They mustparticipate.

#1: Majority vote of the BOD/BOT

First, you have the vote majority of the BOD/BOT. Take notthat the majority vote is absolute majority. Not themajority of the quorum because this is not an ordinarybusiness. It is an extraordinary business. One of those[extraordinary business] is the amendment of the Articles ofIncorporation.

So if there are 11 boardmembers, then there must be atleast 6 who have voted to pass it.

If only 6 were present, that‘s a quorum. If 4 voted, that‘s amajority of the quorum BUT that‘s not enough for the Boardto endorse its action to the stockholders or members of thecorporation, because there is not enough consent of theBoard. It must be absolute majority.

Once you have that [absolute majority of the Board], youcan either:

1.

Call a meeting of these stockholders or

2.

You communicate to them to get their writtenassent.

Now, when do you know that it is a meeting that is needed,or just written assent? Look again in Section 6. Is it one ofthe instances mentioned in Section 6? [FGN reads Section 6]


That requires an amendment of the Articles.




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56

But is it one of the 8 [mentioned in Sec. 6]? If it is, thenthere has to be a meeting, there must be a voting by secretballot. And the meeting must be attended not only by thevoting shareholders but also the non-voting.

Suppose the amendment is for a change of name. Just achange of name. Do you need a meeting? Take a look atSection 6 again. Is it one of the instances? It is not.

Therefore you can accomplish that amendment by writtenassent. So you send a letter to all the stockholders – votingor non-voting – and you ask them, ―are you in favor of thechange of name?‖ They check it, then they mail it back toyou and you tabulate it. That‘s easier. Kay diha pa lang sa secretary… [Transcriber‘s note: Bisaya moment. Can‘tunderstand FGN ] Boto man na sila, and that they – together with the form – that they waive to be informed byregistered mail, that they have read this question, and theyvoted to approve. Wa na problema, naa na ang vote nila,human! All you have to do is determine if you have the

absolute majority of the stockholders both voting and non-voting, by written assent.

Grounds to reject or disapprove

Now, *** this particular Section:

Sec. 17. Grounds when articles of incorporation oramendment may be rejected or disapproved. – TheSecurities and Exchange Commission may reject the articlesof incorporation or disapprove any amendment thereto if thesame is not in compliance with the requirements of thisCode:

x x x

So failure to comply with requirements.

Provided, That the Commission shall give the incorporators areasonable time within which to correct or modify theobjectionable portions of the articles or amendment.

x x x

Very continuous, the following are the grounds for rejectionor disapproval.

The following are grounds for such rejection ordisapproval:

1. That the articles of incorporation or anyamendment thereto is not substantially in accordancewith the form prescribed herein;

So, the form. Remember, according to the firstparagraph of SEC14: ―containing substantially thefollowing matters, unless otherwise provided by thisCode or special law.‖ So you have to follow theseforms.

What is the exception? If it is a corporation sole.If it is a corporation sole, it is just an affidavit of thebishop, elder, rabbi or whoever it is who willconstitute the corporation sole.

2. That the purpose or purposes of the corporationare patently unconstitutional, illegal, immoral, orcontrary to government rules and regulations;

“Unconstitutional” for example, the case of Cong.Cabangbang forming a corporation for the purposeof making the PHL the 52nd state of the US. TheSEC says that is contrary to the Constitution. If thatcase went all the way to the SC, that would‘ve beeninteresting. Because are at the SEC level, and theysaid that that is dismantling our country and puttingit under the authority of a foreign power.

“Immoral” - for example if the corporation is to

facilitate mail-order brides. That‘s supposed to beillegal, immoral. That was also rejected at the SEClevel and has not reached the SC.

“Contrary to government rules andregulations…” This is the Acebedo case. Acebedowas a distributor of correctional lens, frames andother optical remedial apparatus for the eyes. And itwas said to be a corporation for the practice of aprofession. And the SC said, ―it is not!‖ If you are adistributor of eyeglass frames and lenses, you canhire optometrists because they know how to gradethis, they know how to make use of these materials.So it is not necessary for the practice of the

profession of optometry.

3. That the Treasurer's Affidavit concerning theamount of capital stock subscribed and/or paid iffalse;

Which means that the SEC is given authority tocursorily determine the truth of the contents of theTreasurer‘s Affidavit. It can make a phone callwhere you said, as treasurer, you have depositedthe capital contributions. You are required to set awaiver setting aside your right to secrecy of bankdeposits, and so the Treasurer can ask the bankmanager, ―how much is the balance of this

account?‖

Very simple, just compare the numbers! Becausethe Treasurer‘s Affidavit says ―that I have beenelected and that as such treasurer I hereby certifyunder that at 25% of the authorized capital stockhas been subscribed xxx ….has been paid andreceived by me in cash and property in the amountnot less than 5,000 pesos.‖

So the SEC will take a look at the AOI, zero in onpaid-in capital, then he looks at list of subscribers.There is no one who gave property it‘s all cash. So




Corporations Law |


he asks the bank, ―what is the current balance ofthis account?‖ When the bank manager gives anumber, and the number is not the same as thepaid-in capital, what is the conclusion? Theconclusion is that the TA is false. And therefore, you

can be rejected.

The requirement of paid-in money for non-stock,non-profit corporation is much higher now that instock and profit corporation. 5k pa man dinhi underthe law. But I think it‘s 100k now, for NSNP, why?Because there were so many fly-by-night NSNPcorporations and that vehicle began to be abused.So the SEC resolved to make it a seriousrequirement to have this much money to form aNSNP corporation.

4. That the percentage of ownership of the capitalstock to be owned by citizens of the Philippines has

not been complied with as required by existing lawsor the Constitution.

No articles of incorporation or amendment toarticles of incorporation of banks, banking andquasi-banking institutions, building and loanassociations, trust companies and other financialintermediaries, insurance companies, public utilities,educational institutions, and other corporationsgoverned by special laws shall be accepted orapproved by the Commission …

x x x

How is this verified? Go to the [list of] subscribers,

because the subscribers has the name, citizenship,residence, etc.

If the purpose is to engage in real propertydevelopment, and then you take a look and [youfind out] there are more foreigners who own sharesof stock of the corporation than 40% of theoutstanding stock issued, then you have a violationof the constitution. When does that happen? Thathappens when the AOI are completed without legalcounsel. Legal counsel is not there to verify. [Bisaya@_@] the effect na nag-buot buot lang sila himo ug

AOI]

That determination on majority is 60% Filipino is

not per head. If ang experience nimo kay sa cooperatives, mao na‘y imong gi ***.

So, now, then what is required is a specificendorsement where the corporation is governed

Banks, financial institutions, insurance companies,public utilities – you will need an endorsement. Infact, the SEC will ask you to produce anendorsement before they willl *** your AOI.

x x x

unless accompanied by a favorable recommendationof the appropriate government agency to the effectthat such articles or amendment is in accordancewith law.

Corporate name – I told you that this is the particular item inthe Articles which if amended, it is not covered by thegeneral rules on amendment of AOI - mainly that theamendment takes effect if within 6 months, the SEC does nottake action on the application for amendment, then all therequirements have already been complied with. Becauseonce you amend the name, then they will re-issue you a AOI

under the amended name.

Why? Because that is the symbol of the corporation. There‘sno physical referent, that is the closest. The name! So youwait until you are issued an Amended AOI.

[Example] Miss Escovilla, you changed your corporationname. In the meantime you have 100 pcs of real propertyregistered under the old name. Can you get a new Certificateof Transfer under the new name now? I-baligya na nimo,unya ang titulo kay under the old name, wala mu-tuo nimo.Unsaon man nimo?

Pagka-simple ana. Can you get a new TCT under the newname so you can transact those real property? You cannot!

Why not? Because the office from which you are asking thatis a Register of Deed. There must be a transaction. [In thisexample] there is no transaction, wa man kay sale, lease ortransaction, unsaon man paghatag ug bag-ong title. Deeds!That‘s the old archaic English version of do, done, deed!Deeds! It‘s a Register of Deeds. There has to be atransaction.

What do you do? Kuwaon nimo tanan karaan nimong titulo,you file an Omnibus Annotation dadto sa ROD ―whereasang ngalan nako karon, i-annotate na sa likod sang titulo sakaraan ngalan.‖ Naa man gud kag -transact. Because yournew name is recorded and registered with the Register.

But you cannot get a new TCT under the new name or the

corporation so changed.

FIRST EXAM COVERAGE COMPLETE. KJ

Documents

Corpo Law 1st Exam