Corpo UP Bar Ops 2003

8/3/2019 Corpo UP Bar Ops 2003

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* General Rule: Separate personality is vested to a corporate entity when it isissued the certificate of incorporation by the SEC. The exceptions are:o de facto corporationo corporation by estoppel

E. Piercing the veil of corporate fiction1. Nature of the piercing doctrine

* Piercing the veil of corporate entity requires the court to see through the protective shroud which exempts its stockholders from liabilities that ordinarilythey could be subject to, or distinguishes one corporation from a seemingly separate one, were it not for the existing corporate fiction. But to do this, the court must be sure that the corporate fiction was misused, to such an extent thatinjustice, fraud or crime was committed upon another, disregarding, their, his,her or its rights. It is the protection of the interests of innocent third persons dealing with the corporate entity which the law seeks to protect by this doctrine. [Traders Royal Bank v. CA]* Whether the existence of the corporation should be pierced depends on questions of facts, appropriately pleaded. Mere allegation that a corporation is the alter ego of the individual stockholders is insufficient. The presumption is that

the stockholders or officers are distinct entities. The burden of proving otherwise is on the party seeking to have the court pierce the veil of corporate entity. [Ramoso v. VA]* Piercing the veil of corporate entity is merely an equitable remedy, and may be awarded only in cases when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime or where the corporation is a mere alter ego or business conduit of a person.

2. Extent of the legal effects of piercing* The application of the piercing doctrine to a particular case does not deny the corporation of legal personality for any and all purposes, but only for the particular transaction or instance for which the doctrine was applied. [Koppel Phil. Inc. v. Yatco]

* Piercing is not allowed unless the remedy sought is to make the officer or another corporation pecuniarily liable for corporate debts

3. Illustrative Cases where piercing the veil is allowed* If done to defraud the government of taxes due it* If done to evade payment of civil liability* If done by a corporation which is merely a conduit or alter ego of another corporation* If done to evade compliance with contractual obligations* If done to evade financial obligation to its employees

4. Parent-subsidiary relationship* The mere fact that a corporation owns all or substantially all of the stocks of another corporation is not sufficient to justify their being treated as one entity. If used to perform legitimate functions, the subsidiarys separate existence may be respected. However, to prevent abuses of the separate entity privilege, the court will pierce the veil of corporate entity and regard the two corporations as one.* Circumstances which if present in the proper combination renders the subsidiary and instrumentality:a) The parent corporation owns all or most of the subsidiarys capital stockb) The parent and subsidiary corporations have common directors or officersc) The parent corporation finances the subsidiaryd) The parent corporation subscribes to all the capital stock of the subsidiaryof otherwise causes its incorporation

e) the subsidiary has grossly inadequate capitalf) the parent corporation pays the salaries and other expenses or losses of thesubsidiary


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g) the subsidiary has substantially no business except with parent corporation or no assets except those conveyed to or by the parent corporationh) In the papers of the parent corporation or in the statements of its officers,the subsidiary is described as a department or division of the parent corporation or its business or financial responsibility is referred to as the parent corporations owni) the parent corporation uses the property of the subsidiary as its own

j) the directors or executives of the subsidiary do not act independently in theinterest of the subsidiary but take their orders from the parent corporation inthe latters interestk) the formal ledger requirements of the subsidiary are not observed.* The subsidiary cannot be considered a mere instrumentality of the parent corporation just by the combination of the 11 signs listed above. For the veil of corporate entity of the subsidiary to be pierced so that it is considered just aninstrumentality, the act questioned must have an illegal or unfair purpose whichresults to prejudice to third persons who may seek redress from the corporate entity

F. Nationality of the corporation

1. The corporation is a national of the country under whose laws it is organizedor incorporated: the place of incorporation test.* Domestic corporations organized and governed under and by Philippine laws* Foreign corporations organized under laws other than those of the Philippinesan can operate only in the territory of the state under whose laws it was formed. However, they may be licensed to do business here.2. Nationality of the Corporation as determined by the Control Test* Exploitation of Natural Resources - Section 2, Art. XII CONST. only Filipino Citizens or Corporations whose capital stock are at least 60% owed by Filipinos can qualify to exploit natural resources.* Public Utilities- Sec. 11, Art XII, CONST. xxx no franchise, certificate or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations or

ganized under the laws of the Philippines at least 60% of whose capital is ownedby such citizens. * War-time Test - If the controlling stockholders are enemies, then the nationality of the corporation will be base on the citizenship of the majority stockholders in times of war.* Investment Test - Sec. 3(a) and (b), Foreign Investments Act of 1991 (RA7042).It considers for purpose of investment a Philippine National as a corporation or

ganized under the laws of the Philippines of which at least 60% of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines, or a trustee of the funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least 60% of the fund will accrue to the benefit of Philippine nationals.

3. Grandfather rule* Used to determine the nationality of a corporation by which the percentage ofFilipino equity in corporations engaged in nationalized and/or partly nationalized areas of activities, provided for under the constitution and other nationalization laws, is computed, in cases where corporate shareholders are present in the situation, by attributing the nationality of the second or even subsequent tier of ownership to determine the nationality of the corporate stockholder.

4. SEC formula:* Shares belonging to corporations or partnerships at least 60% of the capital ofwhich is owned by Filipino citizens shall be considered as of Philippine nationality, but if the percentage of Filipino ownership in the corporation or partner

ship is less than 60% only the number of shares corresponding to such percentageshall be considered as of Philippine nationality.


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G. Kinds of corporations1. Stock corporation* One which has a capital stock divided into shares and is authorized to distribute to the holders of such shares dividends or allotments of the surplus profits(i.e., retained earnings on the basis of the shares held (Sec. 3)* It is organized for profit.* The governing body of a stock corporation is usually the Board of Directors.

2. Non-stock corporation* All other corporations are non-stock corporations (Sec 3)* One where no part of the income is distributable as dividends to its members,trustees, or officers, subject to the provisions of the Code on dissolution. Provided that any profit which a non-stock corporation may obtain as an incident toits operation shall whenever necessary or proper be used for the furtherance ofthe purpose or purposes for which the corporation was organized. (Sec 87)* Not organized for profit.* Its governing body is usually the Board of Trustees.

3. Corporation de jure - Organized in accordance with the requirements of law

4. De facto corporation - A corporation with some flaw in its incorporation.

Rule on de facto corporations:* The due incorporation of any corporation claiming in good faith to be a corporation, and its right to exercise corporate powers, shall not be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by the Solicitor General in a quo warranto proceeding. (Sec 20)

5. Corporation by estoppel* It is a status acquired by persons who assume to act as a corporation knowingit to be without authority. Such persons shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof (Se

c 21)* When such ostensible corporation is sued on any transaction entered by it as acorporation or any ort committed by it as such, it shall not be allowed to useas a defense as lack of corporate personality. (Ibid)* One who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation (Ibid)6. Public corporation - One formed or organized for the government or a particular state. Its purpose is for the general good and welfare.7. Private corporation - One formed for some private purpose, benefit, aim or end

8. Close corporation (Section 96)* One whose Articles of Incorporation provide that:a) all of the corporations issued stock of all classes, exclusive of treasury shares, shall be held of record by not more that a specified number of persons, notexceeding 20b) all of the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by the Codec) the corporation shall not list in any stock exchange or make any public offering of any of its stock of any classd) at least 2/3 of its voting stock must not be owned or controlled by another corporation which is not a closee) must not be a mining or oil company, stock exchange, bank, insurance company,

public utility, educational institution or corporation vested with public interest (Sec 96)


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9. Educational corporation (Section 106) - Those corporations which are organized for educational purposes. This type of corporation is governed by Section 106of the Corporation Code

10. Religious sole and aggregate (Section 110, 111 (2), 123)* A corporation sole is one formed for the purpose of administering and managing, as trustee, the affairs, property and temporalities of any religious denominat

ion, sect, or church, by the chief archbishop, bishop, priest, rabbi, or other presiding elder of such religious denomination, sect or church. (Sec 110)* The corporation sole is an exception to the general rule that at least five (5) members are required for a corporation to exist. Here, there is only one (1)incorporator. This is applicable to religious communities the regulations of which provide that the communitys properties are to be placed in the name of the head and administered by him. (Sec 111(2))* A corporation aggregate is a religious corporation incorporated by more than one person.

11. Eleemosynary corporation - One organized for a charitable purpose12. Domestic corporation - A domestic corporation is one formed, organized, or e

xisting under the laws of the Philippines.13. Foreign corporation - One formed, organized or existing under any laws otherthan those of the Philippines and whose law allows Filipino citizens and corporations to do business in its own country and state. (Sec 123)14. Corporation created by special laws or charter (Section 4)* Corporations which are governed primarily by the provisions of the special lawor charter creating them (Sec 4)* Corporation Code is suppletory in so far as they are applicable (Ibid)

II. FORMATION AND ORGANIZATION OF CORPORATIONSA. Promotional stage1. Promoter* person who brings together persons who become interested in the enterprise

* aids in procuring subscription and sets in motion the machinery which leads tothe formation of the corporation itself* formulates the necessary initial business and financial plans2. Contracts entered into by promoters* these are prior to existence of corporation thus the corporation could not have been a party to it.* However, the corporation may make the contracts its own and may become bound on such contracts if after incorporation, it accepts or ratifies the same, or accepts its benefits with knowledge of the terms thereof.* Ratification may be express by board resolution or implied by acts of the board3. Personal Liability of Promoter on Pre-incorporation contractsa) may make a continuing offer on behalf of the corporation which if accepted will become a contract. The promoter does not assume any liabilityb) make a contract at the time binding himself with the understanding that if the corporation, once formed, accepts or adopts the contract, he will be relievedof all responsibilitiesc) may bind himself personally and assume responsibility of looking to the proposed corporation when formed for reimbursemento In the absence of any express or implied agreement to the contrary, a promoteris personally liable for contracts made by him on behalf of the proposed corporation and the fact that the corporation when formed has adopted or ratified thecontract does not release him from liability unless a novation was intended4. Compensation: Gen rule the corporation is not liable to pay compensation because this would be an imposition on innocent investors.

Exceptions:* if after it is formed, corpo expressly promises to do so* services done partly before and partly after incorporation and the corporation


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takes the benefits thereof5. Securities Act authorizes a promotion fee if it is provided for in the registration statement of the securities involved6. Fiduciary relationship between corporation and promoters promoters are underthe duty to exercise good faith and fairness in all their acts and transactions

B. What should be contained in the Articles of Incorporation (Sec 14)

1. Corporate name* No corporate name may be allowed by the SEC if the proposed name is identicalor deceptively or confusingly similar to that of any existing corporation or toany other name already protected by law or is patently deceptive, confusing or contrary to existing laws. (Sec 18)* Change of corporate name shall require the approval of the SEC. SEC will issue amended certificate of incorporation under the amended name (Ibid)* This is essential because through it, corporation can sue and be sued* SEC may allow incorporators to reserve the name for a particular period* To distinguish from partnerships and other business orgs, the law requires corporations to append the word Corporation or Inc to its chosen name* A corporation should transact business only through its chosen name which it m

ay amend in accordance with requirements of the law and SEC

2. Primary and Secondary purpose or purposes* Where a corporation has more than 1 purpose, the AI shall state which is the primary purpose and which is secondary (Sec 14(2))* A non-stock corporation may not include those which contradict or change its nature (Ibid)* SEC can reject or disapprove the AI if the stated purpose is patently unconstitutional, illegal, immoral, contrary to government rules and regulations.(Sec 17(2))* Purpose clause confers as well as limits the powers which a corporation may exercise* A corporation only has such powers as are expressly granted to it by law and b

y its AI, those which may be incidental to such conferred powers, those reasonably necessary to accomplish its purposes, and those which may be incident to itsexistence.* Reasons for purpose clause:o so that a stockholder contemplating an investment will know what lines of business his money is to be riskedo so that management will know what lines of business it is authorized to acto so that anyone who transacts with the corporation may ascertain whether a transaction he is entering is one with the general authority of the management* Under Sec 14(2) corporation can have as many purposes as it wants provided:o AI specify the corporations primary and secondary purposes which need not be related to each othero Corporation for which special provisions are made can only have the purpose peculiar to themo Purposes must be lawful* If purpose is lawful, SEC is not authorize to inquire whether corporation hashidden motives and mandamus will lie to compel it to issue certificate* PD 902-A gives SEC, after consultation with BOI, NEDA, or other appropriate government agency, the power to refuse or deny the application for registration ofany corporation if its establishment, organization, operation will not be consistent with the declared national economic policies

3. Principal Office* Must be within the Philippines (Sec 14 (3))* AI must specify both province or city or town where it is located

* Important in (1) determining venue in an action by or against the corporation(2) determining the province where a chattel mortgage of shares should be registered


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* The statement of the principal office establishes the residence of the corporation

4. Number of directors or trustees* Not less than 5 but not more than 15 (Sec 14 (6))* Stock: not less than 5, not more than 15* Non-stock: may be greater than 15 but not less than 5

* For educational corporations, trustees must be in multiples of 5* For bank mergers, as many directors equivalent to total number of directors ofmerging banks* A director must own at least one share of stock and a trustee must be a member* In areas of business and industry which are partly nationalized, aliens may bedirectors of a corporation but only in such number as may be proportional to the allowable participation or shares in the capital of such entity

5. Names, nationalities and residence of the Incorporating Directors* Persons who act as directors or trustees until the first regular directors ortrustees are duly elected and qualified in accordance with this Code (Sec 14 (7))

6. Corporate term (Section 11 and 14)* When a corporation is organized, the maximum life that can be stipulated in the Articles of Incorporation is 50 years. But during the life of the corporation, the life or term can be extended to another 50 years at any one instance (Sec11)* But such extension of the life a corporation cannot be made earlier than 5 years before the end of its original term. Exception: where there are justifiablereasons for an earlier extension as may be determined by the SEC. (Ibid)* Exception: Condominium corporations can be organized for a period of 200 years

7. Names, nationalities and residence of the Incorporators* Corporators those who compose a corporation, whether stockholders or members (

Sec 5)* Incorporators stockholders or members mentioned in the Articles of Incorporation as originally forming and composing the corporation and who are signatories thereof. (Ibid)* Qualification: (Sec 10)a) At least 5 not more than 15b) Natural personc) legal aged) majority of whom are residents of the Philippinese) incorporators of a stock corporation must own or subscribe to at least 1 share of the capital stock of the corporation (qualifying share)* There is no general requirement of Philippine citizenship except in some areas:a) public utilities (Consti XII, Sec 11)b) retail trade (RA 1180)c) banks (Sec 12 RA 337; RA 720; RA 4093)d) investment houses ( Sec 5 PD 129)e) savings and loan associations (RA 3779)f) schools (Consti XIV, Sec 4 (2)g) other areas of investment as Congress may by law provide (Consti XII Sec 10)* Even though there are no legal restrictions as to alien ownership, where > 40%of the outstanding capital stock will be owned and controlled by aliens, must get written authorization from BOI before it can register with SEC. (purpose is to enable BOI to determine whether such corporation wherein aliens own a substantial number of shares would contribute to the sound and balanced development of t

he national economy)

8. Capital


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* Authorized capital stocko State the authorized capital stock in lawful money of the Philippines, the number of shares into which the ACS is divided, and the par value of each par valueshares (Sec 14)o Stock corporations are not required to have any minimum authorized capital stock except when special laws provide otherwise (Section 12)o Amount fixed in the AI to be subscribed and paid in or secured to be paid in b

y the shareholders of a corporation at the organization of the corporation or afterwards and upon which its is to conduct its operations. It sets the limit tothe total par or issued value of the shares which a corporation may issue.

a) Subscribedo At least 25% of authorized capital stock must be subscribed (Section 13)o Subscription mutual agreement of the subscribers to take and pay for the stockof a corporationo Pre-incorporation subscription amount which each incorporator or stockholder agrees to contribute to a proposed corporation

b) Paid-up

o 25% of subscribed capital stock must be paid-up but in no case shall be less than P 5000 (Section 13)o Portion of the authorized Capital which has been subscribed and paidNot all funds or assets received by the corporation can be considered paid-up capital, forthis term has a technical signification in corporation law. Such must from partof the authorized capital stock of the corporation, subscribed and then actually paid-up. [MSCI-NACUSIP Local Chapter v. National Wages and Productivity Commission]o Must be in the form of (a) cash deposited in a bank or (b) property which maybe used or actually needed by the corporation in its operationso Capital cant consist or be invested in money market placemento Corporations with more stringent capital requirements:* Insurance corporations must have paid-up capital stock of at least P 5 M

* Banks monetary board fixes minimum paid-up capital requirements for the different classes of banks.

c) Outstandingo total shares of stock issued to subscribers or stockholders whether or not fully or partially paid (as long as there is a binding subscription agreement) (Sec137)o Stockholder cannot get back its capital unless:* Exercises appraisal right* Dissolution* Treasury shares

9. Treasurer-in-Trusto The person elected by the subscribers as Treasurer of the corporation at the time of the incorporation, who is named as such in the AOI and who has been authorized to receive for and in the name and for the benefit of the corporation, allsubscriptions, fees, contributions or donations paid or given by the subscribers or members

10. Treasurers Affidavito The sworn statement of the Treasurer elected by the subscribers stating at least 25% of the authorized capital stock of the corporation has been subscribed and that at least 25% of the total subscription has been fully paid to him in actual cash and/or property, the fair valuation of which is equal to at least 25% ofthe said subscription, such paid-up capital being not less than 5,000.00 (Sec 1

4)

11. Classification of Shares (Section 6)


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* Shares of stock of stock corporations may be divided classes or series of shares or both* Each class or series of shares may have rights, privileges, restrictions, stated in the AOI* No share may be deprived of voting rights, except:o Preferred oro Redeemable shares,

* unless otherwise provided by the Code* There shall always be a class/series of shares which have a COMPLETE VOTING RIGHTS* EACH SHARE SHALL BE EQUAL IN ALL RESPECTS TO EVERY OTHER SHARE, except as otherwise provided in the AOI

a) Commono A stockholder, owner of at least one common share, has the following rights:* right to vote at meetings* right to dividends* right to examine corporate bookso Most commonly issued

o Entitles owner to equal pro-rata division of profits after preference

b) Preferredo Stocks which are given preference by the issuing corporation in the distribution of assets of the corporation in case of liquidation and in the distribution of dividends, or such other preferences as may be stated in the articles of incorporation which are not violative of the Corporation Code. (Sec 6)o Limitations on preferred shares:* Preferred shares can only be issued with par value* Preferred shares must be:(1) Stated in the Articles of Incorporation or(2) May be fixed by the BOD where authorized by the Articles of Incorporation, provided: such terms and conditions shall be effective upon filing of a certifica

te thereof with the SEC.o Entitles holder to some preferences in dividends, distribution of assets uponliquidation or both:* preference as to dividends dividends are payable only when profits are earnedand as a general rule, even if there are existing profits, BOD has discretion todeclare dividends or not(1) participating after getting their fixed dividend preference ahead of CS, they share with the CS the rest of the dividends(2) unless expressly provided, they are non-participating(3) cumulative dividends in arrears accrue, must be paid first before common stock dividends are paid.(4) Non cumulative contract makes dividends depend upon existence of profits forthe year* as to voting rights usually does not have voting rights; but unless clearly withheld, PS would have right to vote* preference upon liquidation in the absence of provision, participate pro ratawith common stock* not a creditor theres no assurance that you will get back investments but if the corporation profits, you participate in the profits

c) Par valueo These are shares with a stated value set out in the articles of incorporation.their value is fixed in the Articles of Incorporation. This remains the same regardless of the profitability of the corporation. This gives rise to financialstability and is the reason why banks, trust corporations, insurance companies

and building and loan associations must always be organized with par value shares.o One in the certificate of stock of which appears an amount in pesos as the nom


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inal value of the shareso AI must state par valueo Cant be issued at less than par valueo Par value is minimum issue price of such share in the AI which must be statedin the certificate

d) No par value

o These are shares without a stated value. Their value, which shall not be lessthan P5, will be set by the Corporation upon their issuance.o Shall be deemed fully paid and non-assessable and the holders of such shares shall not be liable to the corporation or to its creditors in respect thereto (Sec 6)o Entire consideration received by the corporation for its no-par value shares shall be treated as capital and shall not be available for distribution as dividends (Ibid)o Cannot be issued as Preferred Shares (Ibid)o AI must state the fact that corp issues no-par shares and the number of shareso Three ways of determining value of no par value shares (Sec 62):* By majority vote of the outstanding shares (issued shares) in a meeting called

for the purpose* By Board of Directors pursuant to authority conferred upon it by the Articlesof Incorporation* By Amendment of the Articles of Incorporation.o Corporations which cannot issue no par value shares:* Banks* Insurance Companies* Trust Companies* Building and Loan Associations* Public utilities

e) Founderso Those shares, classified as such in the articles of incorporation, which are g

iven certain rights and privileges not enjoyed by the owners of other stocks. (Sec 7)o Where exclusive right to vote and be voted for in the election of directors isgranted, such right must be for a limited period not to exceed 5 years subjectto approval by SEC. 5 year period shall commence from date of approval by SEC. (Ibid)

f) Redeemableo Those shares, expressly so provided in the articles of incorporation, which may be purchased or taken up by the corporation upon the expiration of a fixed period regardless of the existence of unrestricted retained earnings in the books of the corporation and upon such terms and conditions stated in the AI and in thecertificate of stock (Sec 8)

g) Treasuryo These are shares of stock which have been issued and fully paid for but subsequently re-acquired by the issuing corporation by purchase, redemption, donationor through some other lawful means. Such shares may again be disposed of for areasonable price fixed by the BOD. (Sec 9)o May be sold at less than par, regarded as corporate propertyo In this manner, stocks can be retired gradually, even those which arent redeemableo No limit as to how many shares can be retired

h) Convertible A type of preferred stock that the holder can exchange for a pred

etermined number of the corporations common shares at a specified timei) Participating A type of preferred stocks that, in addition to a fixed dividend, shares in dividends paid on the common stock


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j) Non-voting shares (Section 6)o Shares which have , generally, no voting rights; except in the following circumstances:* Amendment of the AOI* Adoption and amendment of by-laws* Sale, lease, exchange, other disposition of all or substantially all of the co

rporate property* Incurring, creating or increasing bonded indebtedness* Increase or decrease of capital stock* Merger and consolidation* Investment of corporate funds in another corporation or business* Dissolution of the corporation

C. What is the Form of Articles of Incorporation? (Section 15)* Special provision for corporations engage in any business or activity reservedfor Filipino citizens: No transfer of stock or interest which will reduce theownership of Filipino citizens to less than the required percentage of the capital stock as provided by existing laws shall be allowed or permitted to be record

ed in the proper books of the corporation and this restriction shall be indicated in all the stocks certificates issued by the corporation. (Sec 15)

D. Filing of Articles of incorporation1. Failure to file AI will prevent due incorporation of the proposed corporationand will not give rise to its juridical personality. It will not even be a defacto corporation2. Grounds for disapproving articles of incorporation (Section 17)* The SEC may reject any AI thereto if the same is not in compliance with the requirements of this Code* The SEC shall give the incorporators a reasonable time within which to corrector modify the objectionable portions of the articles or amendment.* The following are grounds for such rejection:

AI is not substantially with the form prescribeda) Purpose is patently unconstitutional, illegal, immoral, contrary to governemnt rules and regulationsb) Treasurers Affidavit is falsec) Percentage requirement of ownership as required by the Constitution not complied with.* The AIs of the following institutions must be accompanied by a favorable recommendation of the appropriate government agency to the effect that such articles or amendment is in accordance with lawa) banks, banking and quasi-banking institutions,b) building and loan associations,c) trust companies and other financial intermediaries,d) insurance companies,e) public utilities,f) educational institutions, andg) other corporations governed by special laws3. After consulting with BOI, NEDA, appropriate government agency, SEC may denyregistration of any corporation if its establishment will not be consistent withdeclared national policies* Certificate of authority required of the following:a) Insurance Companies- Insurance Commissionb) Banks, Building and Loan Associations, Finance Companies- Monetary Boardc) Educational Institutions- Secretary of Educationd) Public Utilities- Board of Power, Board of Transportation, National Telecommunication Commission, etc..

* Remedy in case of rejection of AI: by petition for review in accordance with the Rules of Court


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E. Issuance of Certificate of Incorporation1. A private corporation formed or organized under this Code commences to have corporate existence and juridical personality and is deemed incorporated from thedate the Securities and Exchange Commission issues a certificate of incorporation under its official seal (Sec 19)2. Thereupon the incorporators, stockholders/members and their successors shallconstitute a body politic and corporate under the name stated in the articles of

incorporation for the period of time mentioned therein, unless said period is extended or the corporation is sooner dissolved in accordance with law. (Ibid)3. If incorporators are found guilty of fraud in procuring Certificate of Incorporation, SEC may revoke the same after proper notice and hearing

F. How are the Articles of Incorporation amended?1. Procedure for amendment of articles of incorporation (Sec 16)a) For a legitimate purposeb) By Majority Vote of the Board; and Vote (in a meeting) or mere written assent(no meeting) of 2/3 of the outstanding stock, or in case of a non-stock corpo

ration, by the members of the corporation.* Once the amendment is approved, dissenting stockholders may exercise their ri

ghts of appraisal if it involved diminishing of substantial rights previously granted or creating a new set of shares with priority rights.c) The original and amended articles together shall contain all provisions required by law to be set out in the articles of incorporation. Such articles, as amended shall be indicated by underscoring the change or changes maded) A copy thereof duly certified under oath by the corporate secretary and a majority of the directors or trustees stating the fact that said amendment or amendments have been duly approved by the required vote of the stockholders or members, shall be submitted to the Securities and Exchange Commission.e) The amendment of the Articles of Incorporation will be effective only upon approval of the SEC; but should no action be taken by the SEC within 6 months fromthe date of filing, then automatically, the amendment is deemed effective, provided that delay is not attributable to the corporation.

2. Grounds for disapproving amendment (Section 17)* The SEC may disapprove any amendment thereto if the same is not in compliancewith the requirements of this Code* The SEC shall give the incorporators a reasonable time within which to corrector modify the objectionable portions of the articles or amendment.* The following are grounds for such disapproval:a) Amendment is not substantially with the form prescribedb) Purpose is patently unconstitutional, illegal, immoral, contrary to government rules and regulationsc) Treasurers Affidavit is falsed) Percentage requirement of ownership as required by the Constitution not complied with

G. By-laws1. Definition of by-laws* These are regulations, ordinances, rules or laws adopted by an association orcorporation or the like for its internal governance. By laws define the rightsand obligations of various officers, persons or groups within the corporate structure and provide rules for routine matters such as calling meetings.* Every corporation under this code shall have the power and capacity: (5) to adopt by-laws not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this code (Sec 36)

2. When to adopt by-laws (Section 46)

* Every corporation formed under this code must within 1 month after receipt ofofficial notice of the issuance of its certificate of incorporation by the SEC adopt a code of by-laws for its government not inconsistent with this code. (Sec


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46)* May be adopted and filed prior to incorporation, in such case, shall be approved and signed by all incorporators submitted to SEC together with AI (Sec 46)

Loyola Grand Villas Homeowners Ass v. CA* The Supreme Court held that although the Corporation Code requires the filingof by-laws within one month after the issuance of the Certificate of Incorporati

on, it does not expressly provide for the consequences of non-filing within thesaid period.* It should be noted, however, that under Section 6 of PD 902-A, the SEC can revoke the certificate of registration of corporations for failure to file the by-laws within the required period but only after proper notice or hearing.* There is no automatic dissolution for failure to file by-laws within the required period.

3. How filed* Must be approved by the affirmative vote of the Stockholders representing themajority of the outstanding capital stock or majority of members (Sec 46)* Must be signed by the stockholders or members voting for it (Sec 46)

* Must be filed with the SEC certified by the majority of directors/trustees andcountersigned by the secretary of the corporation which shall be attached to original AI (Sec 46)

4. Where kept* Must be kept in the principal office of the corporation; subject to inspectionof stockholder or member during office hours (Sec 46)

5. Effectivity of by-laws* Effective only from the issuance of SEC of certification that bylaw are not inconsistent with the Code (Sec 46)* Cannot bind stockholders / corporation pending approval* By laws, like AI are contracts of adhesion. They will bind the corporation an

d stockholders including those who vote against as well as those who became members after approval* Contracts entered into without strict compliance with by-laws may be binding on the corporation due to long acquiescence and usage* By laws are mere internal rules among stockholders and cannot affect or prejudice 3rd persons who deal with the corporation unless they have knowledge of thesame

6. Contents (Section 47)* Subject to the provisions of the Constitution, this Code, other special laws,and the articles of incorporation, a private corporation may provide in its by-laws for:a) The time, place and manner of calling and conducting regular or special meetings of the directors or trustees;b) The time and manner of calling and conducting regular or special meetings ofthe stockholders or members;c) The required quorum in meetings of stockholders or members and the manner ofvoting therein;d) The form for proxies of stockholders and members and the manner of voting them;e) The qualifications, duties and compensation of directors or trustees, officers and employees;f) The time for holding the annual election of directors of trustees and the mode or manner of giving notice thereof;g) The manner of election or appointment and the term of office of all officers

other than directors or trustees;h) The penalties for violation of the by-laws;i) In the case of stock corporations, the manner of issuing stock certificates;


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andj) Such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs.

7. Procedure for amendment of by-laws (Section 48)* Voting Requirement: board of directors or trustees by a majority vote and the owners of at least a majority of the outstanding capital stock, or majority of

the members of a non-stock corporation, at a regular or special meeting duly called for the purpose, may amend or repeal any by-laws or adopt new by-laws* Delegation of power to amend to the BOD: The owners of two-thirds (2/3) of theoutstanding capital stock or two-thirds (2/3) of the members in a non-stock corporation may delegate to the board of directors or trustees the power to amend or repeal any by-laws or adopt new by-laws* Revocation of the delegation of power to amend: Any power delegated to the board of directors or trustees to amend or repeal any by-laws or adopt new by-lawsshall be considered as revoked whenever stockholders owning or representing a majority of the outstanding capital stock or a majority of the members in non-stock corporations, shall so vote at a regular or special meeting* Whenever any amendment or new by-laws are adopted, such amendment or new by-la

ws shall be attached to the original by-laws in the office of the corporation, and a copy thereof, duly certified under oath by the corporate secretary and a majority of the directors or trustees, shall be filed with the Securities and Exchange Commission the same to be attached to the original articles of incorporation and original by-laws.* The amended or new by-laws shall only be effective upon the issuance by the Securities and Exchange Commission of a certification that the same are not inconsistent with this Code.

H. Non-use of Charter / Continuous Inoperation1. Non-user for 2 years (non-use of charter)- when the corporation does not formally organize and commence the transaction of its business or the construction of its works within 2 years from the date of its incorporation. Its corporate po

wers cease and the corporation shall be deemed dissolved (automatic)* Formal organization may consist in the election of new board of directors or trustees and corporate officer* Commencement of business may take the form of contracting for lease or sale ofproperties to be used as business site of the corporation and other preparatoryacts geared towards fulfillment of the purpose for which the corporation was established2. Non-user for 5 years (continuous inoperation)- when the corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least 5 years. The same shall be a ground for the suspension or revocation of its corporate franchise or Certificate of Incorporation(not automatic). Notice and hearing is required.

3. Exception: cause or non-use or operation was due to causes beyond the controlof the corporation as determined by SEC (ex. Mineral lands to be developed by the corporation as per its purpose are the object of court litigation and a courtinjunction against the corporate activities has been issued)

I. Defective Attempts to Incorporate: De Facto Corporations1. De jure - complied substantially with the mandatory legal requirements2. De facto - no substantial compliance with mandatory legal requirements3. Rule on de facto corporations: The due incorporation of any corporation claiming in good faith to be a corporation, and its right to exercise corporate powers, shall not be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by the Solicitor General in aquo warranto proceeding. (Sec 20)

Requisites of a de facto corporationa) Valid statute there is an apparently valid statue under which the corporation


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with its purposes may be formed. There can be no de facto corporation under a statue subsequently declared unconstitutionalb) Good faith there has been colorable compliance with the legal requirements ingood faithc) User of corporate powers there has been some user of corporate powers, the transaction of business in some way as if it were a corporation* not necessary that dealings between the parties should have been on a corporat

e basis* election of directors and officers would not be user of corporate powers sincethese acts are just indicative of a mere association* taking subscriptions to and issuing shares of stock, buying lot, constructing,and leasing a building on it will constitute sufficient user of corporate powers to constitute a de facto corporationd) Colorable compliance - there has been colorable compliance with legal requirements* while the corporation is still in the process of incorporation, it is quite clear that there can be no substantial or colorable compliance and therefore it cannot be at such a stage a de facto corporation* Compliance with the above conditions would make the corporation de facto whose

incorporation cannot be attacked collaterally. It may only be attacked directly by the State in a quo warranto proceeding* De facto doctrine grew out of the necessity to promote the security of business transactions and to eliminate quibbling over irregularities.* Where corporations are neither de jure or de facto, associates may be held liable as partners unless estoppel applies

J. Corporation by Estoppel* It is a status acquired by persons who assume to act as a corporation knowingit to be without authority. Such persons shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof. (Sec 21)* When such ostensible corporation is sued on any transaction entered by it as a

corporation or any act committed by it as such, it shall not be allowed to useas a defense as lack of corporate personality (Sec 21)* One who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation (Sec21)Lozano v. de los Santos and Anda* This case involved two incorporated drivers associations that decided to uniteand elect one set of officers to be given authority to collect the daily dues ofthe drivers who are members of the consolidated association.* Doctrine of estoppel applies when persons assume to form a corporation and exercise corporate functions and enter into business relations with third persons.

* Where there is no third persons involved and the conflict arises only among those assuming the form of a corporation, who therefore know that it has not beenregistered there is no corporation by estoppel.

International Express Travel v. CA* Petitioner International Express Travel secured airline tickets for the tripsof the athletes and officials of the respondent Philippine Football Federation (PFF), through its managing director, Mr. Kahn.* Petitioner sued respondent Federation and Khan for the unpaid balance.* Issue is whether Khan may not be made liable as PPF is liable as corporation by estoppel.* Doctrine misapplied. Estoppel applies to a third party only when he tries to e

scape liabilities on a contract from which he has benefited on the irrelevant ground of defective incorporation. In the CAB, petitioner is not trying to escapeliability from the contract but rather is the one claiming from the contract.


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* The doctrine of corporation by estoppel may apply to:o a third party - a 3rd party who had dealt with an unincorporated association as a corporation may be precluded from denying its corporate existence on a suitbrought by the alleged corporation on the contract even if he did not know of the defective incorporation. 3rd party is considered to have admitted the existence of a corporation by the fact that he dealt with it as a corporationo the alleged corporation - when a third person has entered into a contract with

an association which represented itself to be a corporation, the association isestopped from denying its corporate capacity in a suit against it by such 3rd person. It cannot allege lack of personality to be sued to evade responsibilityon a contract it has entered into and by virtue of which it has received advantages and benefitso associates as partners - when business associates fraudulently misrepresents the existence of a corporation and the 3rd party contacts with the association asa corporation without knowing the serious defects in its incorporation, such 3rd party may sue associates as general partners. Where both the associates and the 3rd party were ignorant of the defective incoroporation, 3rd party cant hold the associates liable since they were in good faith. If 3rd party knew of defectsin incorporation and still dealt with the corporation, he must be deemed to hav

e chosen to deal with the corporation as such and should be limited in his recovery to the corporate assets.

III. POWERS OF CORPORATIONSA. In general (Section 36)1. To sue and be sued in its corporate name;2. Succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of incorporation;3. To adopt and use a corporate seal;4. To amend its articles of incorporation in accordance with the provisions of this Code;5. To adopt by-laws, not contrary to law, morals, or public policy, and to amendor repeal the same in accordance with this Code;

6. In case of stock corporations, to issue or sell stocks to subscribers and tosell stocks to subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to admit members to the corporation if it be a non-stock corporation;7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transaction of the lawful business ofthe corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution;8. To enter into merger or consolidation with other corporations as provided inthis Code;9. To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or similar purposes: Provided,That no corporation, domestic or foreign, shall give donations in aid of any political party or candidate or for purposes of partisan political activity;10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees; and11. To exercise such other powers as may be essential or necessary to carry outits purpose or purposes as stated in the articles of incorporation. (in the purpose clause)

* Sources of powero Section 36o Purpose clause* Sec 38 par 11 grants such power as are essential or necessary to carry out its

purpose or purposes as stated in the AI. A corporation is presumed to act within its powers and when a contract is not on its face necessarily beyond its authority, it will in the absence of proof to the contrary presumed valid


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* 2 general restrictions on the power of the corporation to acquire and hold properties:o that the property must be reasonably and necessarily required by the transactions of its lawful businesso that the power shall be subject to the limitations prescribed by other speciallaws and the constitution (corporation may not acquire more than 30% of votingstocks of a bank; corporations are restricted from acquiring public lands except

by lease of not more than 1000 hectares)

B. Specific Powers* Extend or shorten the corporate term* Increase or decrease capital stock* Incur, create or increase bonded indebtedness* Deny preemptive right* Sell or otherwise dispose of substantially all its assets* Acquire its own shares* Invest in another corporation or business* Declare dividends* Enter into management contracts

C. To extend or shorten corporate term (Section 37)1. Approval and Voting and Notice Requirement:a) Approved by a majority vote of the board of directors or trustees andb) Ratified at a meeting by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members in case of non-stock corporations.c) Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence asshown on the books of the corporation and deposited to the addressee in the postoffice with postage prepaid, or served personally.2. Appraisal right In case of extension of corporate term, any dissenting stockholder may exercise his appraisal right under the conditions provided in this cod

e.

D. To increase or decrease capital stock; To incur, create, increase, bonded indebtedness (Section 38)1. Approval and Voting and Notice Requirement:a) Approved by a majority vote of the board of directorsb) Two-thirds (2/3) of the outstanding capital stock shall favor the increase ordiminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness in a meeting duly called for the purposec) Written notice of the proposed increase or diminution of the capital stock orof the incurring, creating, or increasing of any bonded indebtedness and of thetime and place of the stockholder's meeting at which the proposed increase or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be considered, must be addressed to each stockholder at his placeof residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally2. Certificate of Filing: A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by the chairman and thesecretary of the stockholders' meeting, setting forth:a) That the requirements of this section have been complied with;b) The amount of the increase or diminution of the capital stock;c) If an increase of the capital stock, the amount of capital stock or number ofshares of no-par stock thereof actually subscribed, the names, nationalities and residences of the persons subscribing, the amount of capital stock or number of no-par stock subscribed by each, and the amount paid by each on his subscripti

on in cash or property, or the amount of capital stock or number of shares of no-par stock allotted to each stock-holder if such increase is for the purpose ofmaking effective stock dividend therefor authorized;


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d) Any bonded indebtedness to be incurred, created or increased;e) The actual indebtedness of the corporation on the day of the meeting;f) The amount of stock represented at the meeting; andg) The vote authorizing the increase or diminution of the capital stock, or theincurring, creating or increasing of any bonded indebtedness.3. Approval of SEC: Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded indebtedness shall require prior approv

al of the Securities and Exchange Commission.* One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed with the Securities and Exchange Commission and attached to the original articles of incorporation.4. Effectivity: From and after approval by the Securities and Exchange Commission and the issuance by the Commission of its certificate of filing, the capitalstock shall stand increased or decreased and the incurring, creating or increasing of any bonded indebtedness authorized, as the certificate of filing may declare5. Treasurer Affidavit: Provided, That the Securities and Exchange Commission shall not accept for filing any certificate of increase of capital stock unless accompanied by the sworn statement of the treasurer of the corporation lawfully ho

lding office at the time of the filing of the certificate, showing that at leasttwenty-five (25%) percent of such increased capital stock has been subscribed and that at least twenty-five (25%) percent of the amount subscribed has been paid either in actual cash to the corporation or that there has been transferred tothe corporation property the valuation of which is equal to twenty-five (25%) percent of the subscription* Decrease of capital stock: No decrease of the capital stock shall be approvedby the Commission if its effect shall prejudice the rights of corporate creditors* Non-stock corporations: May incur or create bonded indebtedness, or increasethe same, with the approval by a majority vote of the board of trustees and of at least two-thirds (2/3) of the members in a meeting duly called for the purpose.

* Registration of bonds- Bonds issued by a corporation shall be registered withthe Securities and Exchange Commission, which shall have the authority to determine the sufficiency of the terms thereof.

E. To deny pre-emptive rights (Section 39)1. Definition of pre-emptive rights All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares ofany class, in proportion to their respective shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto* This is to prevent dilution in shareholding* If you increase common stock and some of the stockholders do not want to subscribe, get from them a waiver of pre-emptive right2. Limitation to exercise of pre-emptive right:a) Such pre-emptive right shall not extend to shares to be issued in compliancewith laws requiring stock offerings or minimum stock ownership by the public;b) Not extend to shares to be issued in good faith with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debtc) Shall not take effect if denied in the Articles of Incorporation or an amendment thereto.

* Preemptive right option privilege of an existing stockholder to subscribe to aproportionate part of shares subsequently issued by the corp before same can bedisposed of in favor of the others; includes all issues and disposition of sha

res of any class* Includes not only new shares in pursuance of an increase of capital stock butwould cover the issue of previously unissued shares which form part of the exist


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ing capital stock as well as treasury shares* Where the shares are issued in exchange for property needed for corporate purposes or for debt previously granted, SH cannot demand his pre-emptive right forright may prejudice corporate interest* In joint ventures, you can expand pre-emptive rights even in instances under Sec 39

3. Remedies in case of unwarranted denial:a) Injunctionb) Mandamus* in any case, the suit should be individual and not derivative because the wrong done is to the stockholders individually

F. To sell or dispose of corporate assets (Section 40)1. Restrictions: Subject to the provisions of existing laws on illegal combinations and monopolies2. Scope of power: To sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon such terms and conditions and for such consideration, which may be money

, stocks, bonds or other instruments for the payment of money or other propertyor consideration, as its board of directors or trustees may deem expedient* Meaning of disposition of substantially all of the corporate property and assets- if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated.3. Approval, voting and notice requirement:a) Majority vote of its board of directors or trustees,b) Authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or in case of non-stock corporation, by the vote of at least to two-thirds (2/3) of the members, in a stockholder's or member's meeting duly called for the purpose.c) Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as

shown on the books of the corporation and deposited to the addressee in the postoffice with postage prepaid, or served personally* When SH approval not necessary - If disposition is necessary in the usual andregular course of business of said corporation or if the proceeds of the sale orother disposition of such property and assets be appropriated for the conduct of its remaining business.* In non-stock corporations where there are no members with voting rights - thevote of at least a majority of the trustees in office will be sufficient authorization for the corporation to enter into any transaction authorized by this section.4. Appraisal right: That any dissenting stockholder may exercise his appraisal right under the conditions provided in this CodeAbandonment of the sale, lease - After such authorization or approval by the stockholders or members, the board of directors or trustees may, nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, pledge or other disposition of property and assets, subject to the rights of third parties under anycontract relating thereto, without further action or approval by the stockholders or members.

G. To acquire own shares (Section 41)* A stock corporation shall have the power to purchase or acquire its own sharesfor a legitimate corporate purpose or purposes (treasury shares) provided, thatthe corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired* Trust Fund doctrine the requirement of unrestricted retained earnings is becau

se subscription to the capital of a corporation constitute a fund to which creditors have a right to look for the satisfaction of their claims* Legitimate purpose includes:


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a) To eliminate fractional shares arising out of stock dividends;b) To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; andc) To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code.* A corporation must have unrestricted retained earnings in acquiring own shares

except:a) shares are acquired in the redemption of redeemable sharesb) shares are re-acquired to effect a decrease in capital stock approved by theSECc) shares are reacquired by a close corporation pursuant to the order of the SECacting to arbitrate a deadlock

H. To invest corporate funds in another corporation or business (Section 42)1. Subject to the provisions of this Code, a private corporation may invest itsfunds in any other corporation or business or for any purpose other than the primary purpose for which it was organized2. Approval, voting and notice requirement

a) Majority of the board of directors or trustees andb) ratified by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or by at least two thirds (2/3) of the members in the case of non-stock corporations, at a stockholder's or member's meeting duly called for the purpose.c) Written notice of the proposed investment and the time and place of the meeting shall be addressed to each stockholder or member at his place of residence asshown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally3. Appraisal right - any dissenting stockholder shall have appraisal right as provided in this Code4. When SH approval not necessary- where the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in the articles o

f incorporation* To avoid SH approval, include other business undertakings in the secondary purpose5. Rules in case a corporation will invest its funds in another corporationa) If it is the same purpose or incidental or related to its primary purpose, the board can invest the corporate fund without the consent of the stockholders.What is required is only the vote of the majority of the BOD. No appraisal rightb) If the investment is in another corporation of different business or purpose,the affirmative vote of majority of the board consented by 2/3 OS capital stockis required

I. To declare dividends (Section 43)* The board of directors of a stock corporation may declare dividends out of theunrestricted retained earnings which shall be payable in cash, in property, orin stock to all stockholders on the basis of outstanding stock held by them.* Any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription isfully paid* Approval & voting requirement:a) Approval of BODb) In case of stock dividend: It shall be not be issued without the approval ofstockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose.* Limitation on retention of surplus profits- Stock corporations are prohibited

from retaining surplus profits in excess of one hundred (100%) percent of theirpaid-in capital stock, except:a) when justified by definite corporate expansion projects or programs approved


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by the board of directors; orb) when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; orc) when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies.

* Stock dividends: distribution to stockholders of companys own stock. Corporateprofits or earnings are transferred to capital stock and shares of stock representing the increase in capitalization are distributed. May be issued out of premium surplus.o Limitation on the issue of stock dividends:* there must be unissued shares of the corporation* there must be unrestricted retained earnings* cannot be issued to non-stockholders even for services rendered* Whether or not there should be a distribution of dividends in whatever form, such matters are always subject to the business judgment of the BOD and the courts will not interfere with the formers discretion except:o when tainted with bad faith

o when tainted with fraudo when tainted with gross negligenceo when profits accumulated are in excess of 100% of the corporations paid-in capital stock unless exempted* When right to Dividends Vests:o General rule: as soon as the same have been lawfully declared by the BOD, becomes a debt owing to the SH. No revocation can be madeo Exceptions:* not yet announced or communicated to the public, revocable before announcementto shareholders* when stock dividends are declared since these are not distributions but merelyrepresent changes in the capital structure, may be revoked prior to actual issuance

* Rights of transferee to dividends Right to dividends vests upon declaration sowhoever owns the stock at time or stockholders of record also owns the dividend. Subsequent transfer of stock would not carry with it right to dividends* Record date The date on which a stockholder must be registered on a corporations stock and transfer book in order to be entitled to a dividend or voting rights.

J. To enter into management contract (Section 44)* Approval and Voting Requirement:o Approval by the board of directors, ando Approval by stockholders owning at least the majority of the outstanding capital stock, or by at least a majority of the members of both the managing and themanaged corporationo 2/3 vote required when:a. where a stockholder or stockholders representing the same interest of both the managing and the managed corporations own or control more than one-third (1/3)of the total outstanding capital stock entitled to vote of the managing corporation; orb. where a majority of the members of the board of directors of the managing corporation also constitute a majority of the members of the board of directors ofthe managed corporation* Term of management contract: No management contract shall be entered into fora period longer than five years for any one term.* These provisions shall apply to any contract whereby a corporation undertakesto manage or operate all or substantially all of the business of another corpora

tion, whether such contracts are called service contracts, operating agreementsor otherwise* Service contracts or operating agreements which relate to the exploration, dev


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elopment, exploitation or utilization of natural resources may be entered into for such periods as may be provided by the pertinent laws or regulations.* Management contract any contract whereby a corporation undertake to manage oroperate all or substantially all of the business of another corporation

K. Ultravires acts (Section 45)* Definition of ultravires acts These are acts which a corporation is not empowe

red to do or perform because they are not based on the powers conferred by itsAOI or by the Corporation Code on corporations in general, or because they are not necessary or incidental to the exercise of the powers so conferred.* Rule on Ultravires acts of corporations No Corporation under this Code shall possess or exercise any corporate powers except those conferred by this Code or by its articles of incorporation and except such as are necessary or incidental to the exercise of the powers so conferred.

Atrium v. CA* Atrium Management Corporation filed with RTC action for collection of the 4 postdated checks issued by the Hi-cement Corporation, though its signatories de Leon, treasurer, and de las Alas, chairman of the corporation to a certain ET Henr

y and Co which the latter endorsed to Atrium for rediscounting.* The act of issuing was well within the ambit of a valid corporate act, for itwas for securing a loan to finance the activities of the corporation, hence, notan ultravires act.* An ultravires act is distinguished from illegal act, the former being voidablewhich may be enforced by performance, ratification, or estoppel, while the latter is void and cannot be validated. SC however, held de Leon negligent.

Republic of the Philippines vs. Acoje Mining Co.* The company is estopped from denying liability on the ground that the board resolution is ultravires. Assuming arguendo that the resolution is an ultra viresact, the same is not void for it was approved not in contravention of law, customs, public order and public policy.

* The term ultravires should be distinguished from an illegal act for the formeris merely voidable which may be enforced while the latter is void and cannot bevalidated.

* General consequences of ultravires acts are as follows:a) Corporation may be dissolved under a quo warranto proceeding but in most cases, the court merely enjoins the corporation from commission of the ultra viresactsb) Certificate of Registration may be suspended or revoked by SECc) Parties to the ultravires contract if executory on both sides neither party can ask for specific performance. Will be left as they are if the contract has been fully executed on both sides. If one party has performed his part, the contract will be enforced provided it is not illegald) Contract proceeding from an ultra-vires act is voidablee) Any stockholder may bring either an individual or derivative suit to enjoin athreatened ultravires act or contract. If act or contract has already been performed, a derivative suit for damages may be filed against the directors, but their liability will depend on whether they acted in good faith and with reasonable diligence in entering into contracts. When based on tort, cannot set-up the defense of ultravires against injured party who had no knowledge that such was ultraviresf) May become binding by the ratification of all stockholders unless third parties are prejudice thereby or unless the acts is illegal

IV. SHARES OF STOCKS

* Stockholders: owners of shares in a corporation which has a capital stock* Members: Corporators of a corporation which has no capital stock* Stockholders or members have residual power over fundamental corporate changes


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like amendment of the articles of incorporation

A. Subscription to Shares1. Subscription Contract* Any contract for the acquisition of unissued stock in an existing or a corporation still to be formed shall be deemed a subscription contract, notwithstandingthe fact that the parties may refer to it as a purchase or some other contract.

(sec 60)* Transfer for consideration of treasury shares is a sale by the corporation (not subscription). A transfer of fully paid shares by a stockholder to a third person is a sale. But it seems that assignment by a subscriber of his unpaid subscription would require that the requisites for valid release from subscription must be complied with* Shareholders are not creditors of the corporation with respect to their shareholdings thereto and the principle of compensation or set-off has no application* Not necessarily required to be in writing

2. Pre-incorporation subscription (Section 61)* Pre-incorporation subscription is a subscription for shares of stock of a corp

oration still to be formed.* It shall be irrevocable for a period of at least six (6) months from the dateof subscription.* It can only be revoked, when:o when all of the other subscribers consent to the revocation, oro when the incorporation of the corporation fails to materialize within six (6)months or within a longer period as my be stipulated in the contract of subscription.* After the submission of the articles of incorporation to the SEC, no pre-incorporation subscription may be revoked.

B. Consideration for stocks (Sec 62)* Stocks shall not be issued for a consideration less than the par or issued pri

ce thereof.* Consideration for the issuance of stock may be any or a combination of any twoor more of the following:a) Actual cash paid to the corporation;b) Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equalto the par or issued value of the stock issuedo Valuation of consideration other than actual cash, or consists of intangible property such as patents of copyrights- initially be determined by the incorporators or the board of directors, subject to approval by the Securities and Exchange Commission.c) Labor performed for or services actually rendered to the corporation;d) Previously incurred indebtedness of the corporation;e) Amounts transferred from unrestricted retained earnings to stated capital; andf) Outstanding shares exchanged for stocks in the event of reclassification or conversion.* Fair valuation is appraisal made in good faith* Prohibited consideration: Shares of stock shall not be issued in exchange forpromissory notes or future service* Same consideration applies for the issuance of bonds by the corporation.* Fixing of issued price of no-par value shares: The issued price of no-par value shares may be fixed:a) in the articles of incorporation orb) by the board of directors pursuant to authority conferred upon it by the arti

cles of incorporation or the by-laws, orc) in the absence thereof, by the stockholders representing at least a majorityof the outstanding capital stock at a meeting duly called for the purpose.


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* The value of the consideration received must be equal to the issue price of the shares of stocks which in no case shall be less than par* Watered stock shares issued as fully paid-up when in fact the consideration agreed to and accepted by the directors of the corporation was something known tobe much less than the par value or issued value of the shares.* Water in stock refers to the difference between the fair market value at the time of the issuance and the par or issued value of said stock. Subsequent incre

ase in the value of the property used in paying the stock does not do away withthe water in the stock. The existence of such water is determined at the time of issuance of the stock.

C. Liability for watered stocks (Sec 65)* Any director or officer of a corporation consenting to the issuance of stockso for a consideration less than its par or issued value oro for a consideration in any form other than cash, valued in excess of its fairvalue,o or who, having knowledge thereof, does not forthwith express his objection inwriting and file the same with the corporate secretary,* shall be solidarily liable with the stockholder concerned to the corporation a

nd its creditors for the difference between the fair value received at the timeof issuance of the stock and the par or issued value of the same.

D. Certificate of Stock and transfer of shares1. Issuance of stock certificates* Definition Certificate of stock: It is the document issued to stockholders evidence of their ownership of such number of shares in the corporation that issued the certificate.* No certificate of stock shall be issued to a subscriber until the full amountof his subscription, together with the interest and expenses (in case of delinquent shares) if any is due, has been paid. (Sec 64)* How issued: The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or vice president, countersign

ed by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-laws. (Sec 63)* Shares are personal property Shares of stock so issued are personal property and may be transferred (Sec 63)

2. Transfer of shares* Shares of stock may be transferred as follows (Sec 63):a) indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transferb) delivery of the certificate or certificatesc) To be binding against third persons, transfer of shares should be recorded inthe books of the corporation showing therein the ff.:* names of the parties to the transaction,* the date of the transfer,* the number of the certificate or certificates and* the number of shares transferred.* No shares of stock against which the corporation holds any unpaid claim shallbe transferable in the books of the corporation (Sec 63).* Transfer of shares not tainted with any irregularity shall be valid as betweenthe parties.* Purpose of registrationa) enable the transferee to exercise all the rights of a stockholderb) to inform the corporation of any change in share ownership so that it can ascertain the persons (a) entitled to the rights (b) subject to the liabilities ofa SH

c) until registration is accomplished, the transfer, though valid between the parties, cannot be effective against the corporation* Effect of lack of registration:


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a) transferee cannot voteb) transferee cannot be voted forc) an outsiderd) cannot prevail over rights of a subsequent attaching creditore) not entitled to dividendsf) stockholder on record has the right to participate in meetings.* Unauthorized transfers:

a) certificates indorsed in blank where the stockholder indorses his certificatein blank in such a manner as to clothe whoever may be in possession of it withapparent authority to deal with the shares as the latters own, he will be estopped from claiming the shares as against a bonafide purchaser. This is called the theory of quasi-negotiabilityb) forged transfers if the corporation should issue a new certificate pursuant to a forged transfer, it incurs no liability to the person in whose favor it issued it and may demand its return for cancellation. It is the duty of the purchaser to determine that the indorsement was genuine. But with respect to a subsequent purchaser in good faith and for value, the corporation is estopped from denying the validity of the newly issued certificate because by issuing such, it hasrepresented that the person named therein is a stockholder of the corporation. E

xcept where recognition of the original and new subscriber will result to an overissue of shares. The new SH would now have right to damages against the corporation and the latter against those who made false representations.* A capital gains tax return must be presented / doc stamps paid to corporate secretary before transfer is effected in the books of the corporation.

Bitong v. CA* A certificate of stock cannot be considered issued in contemplation of law unless signed by the president or vice president and countersigned by the secretaryor assistant secretary.* The rule is that the endorsement of the certificate of the stock by the owneror his attorney in fact or any other person legally authorized to make the transfer shall be sufficient to effect the transfer of shares only if the same is cou

pled with delivery. The delivery of the stock certificate duly endorsed by the owner is the operative act of transfer of shares from the lawful owner to the newtransferee. Thus, for a valid transfer of stocks, the requirements are as follows:a) There must be delivery of the stock certificate;b) The certificate must be endorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer; andc) To be valid against third parties, the transfer must be recorded in the booksof the corporation.

Sunset View Condominium Corp v Campos* Sunset View Condominium corporation filed suit against Aguilar-Bernares Realtyand Lim Siu Leng for collection of assessments levied on their respective condominium units which they bought on installments and had not yet fully paid* Respondents not shareholders of condominium corporation because they are not yet fully paida) Sec 5 Condominium Act shareholding in a condominium corporation will be conveyed only in a proper caseb) Sec 4 of Condominium Act leaves to Master Deed the determination of when shareholding will be transferred to purchaser of a unitc) Master Deed provides that only owner of unit is a shareholder and that ownership of unit is acquired by purchaser subject to conditions and terms of the instrument conveying the unit to such purchaser.d) Deed of Conveyance provide that ownership is conveyed only upon full paymentof purchase price

e) Sec 10 Condominium Act Membership in Condominium corporation shall not be transferable separately from condominium unit of which it is an appurtenance


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Rivera v Florendo* Akasako, allegedly the real owner of the shares of stock in the name of Riverasold shares to Tsuchiya* Other stockholders sold shares to them as well* Thereafter, Rivera refused to make indorsement* Corporation refused to register the stock certificates* Action for mandamus to cause registration of stock certificates

* This is not intra-corporate, Tsuchiya is an outsider and not yet owner of shares unless and until registered* Dispute cannot be the subject of mandamus. Corporate Secretary cannot be compelled to register the transfera) Shares of stock in question (Rivera shares) are not even indorsed by registered owner. Tsuchiya and Jureidini has no clear legal right.b) Even the shares of stock purchased from other incorporators cannot be subjectof mandamus on the strength of mere indorsement of supposed owners without express instructions from them.c) These issues will have to be threshed out in an ordinary action

Abejo v dela Cruz

* Teletronics purchased shares of Pocketbell from the Abejo spouses and VirginiaBraga, the latter being indorsed in blank* Corporate secretary refused to register the transfer due to alleged failure torespect pre-emtive rights* Action for mandamus by Abejo and Teletronics to compel corporate secretary toregister the transfer* This is an intra-corporate disputea) Issue on pre-emptive right is between stockholders, I.e., Bragas pre-emptive right and Abejos right to transferb) Virginias street certificate is within special competence and jurisdiction ofthe SEC dealing with free transferability of corporate sharesc) There is no requirement that stockholder must be registered in order that SECmay take cognizance

d) Mandamus is propere) Registration of the valid transfer of shares of stock involves a ministerialduty on the part of the corporate secretaryf) The issue is not the ownership of shares but the non-performance of the Corporate Secretary of a ministerial duty

Tan v SEC* Alfonso Tan is owner of 400 shares in Visayan Educational Supply Corp evidenced by certificate No. 2* Alfonso transferred 50 shares to Angel* Certificate No. 2 was cancelled and Certificate No. 6 was issued to Angel andCertificate No. 8 was issued to Alfonso. However, Alfonso did not make the proper endorsement and did not make delivery of cerificate no. 2* Later on, Alfonso Tan elected to withdraw from the corporation. In exchange for his shares, he received stocks in trade* Certificate No. 8 was later on cancelled due to above* After several years, Alfonso Tan filed a case with Cebu SEC questioning the cancellation of his stock certificates despite non-endorsement and lack of delivery* Delivery and endorsement under S 63 of the corporation code is not mandatory because of the use of the word may* Delivery is not essential where it appears that the persons sought to be heldas stockholders are officers of the corporation and have custody of the stock book as in this case* To hold that cancellation of certificate of stock of Alfonso is null and void

because of lack of delivery and endorsement of mother certificate of stock no. 2which was deliberately withheld is to prescribe restrictions on the transfer ofstock in violation of corporation law


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Razon v IAC* Chudian was issued 1,500 shares at E Razon Inc with the corresponding stock certificate no 3* Said stock certificates was delivered to Enrique Razon allegedly because it was the latter who paid for all the subscription on the shares of stock in defendant corporation with the understanding that has was the owner of said shares of s

tock and was to have possession until such time as he was paid by other nominalincorporators/stockholders* Later on, parties delivered it for deposit with bank under the joint custody of the parties* Administrator of the estate of Chudian filed a complaint against Enrique Razonet al praying that the said stock certificates be delivered to estate of Chudian along with all cash and stock dividends and pre-emptive rights accruing thereto.* Chudian is still ownera) Shares of stock is transferred by delivery and endorsement of the stock certificateb) Such mode of transfer is not complied with in this case

c) In the books of the corporation, Chudian is still the owner of the stocks. He was even elected member of the board which proves that he is a stockholderd) One who claims ownership should show that the same was trasferred to him in accord with the valid mode of transfer. This petitioner failed to showe) Endorsement is a mandatory requirement of law for an effective transfer

Rural Bank of Salinas v CA* Guerrero, President of Rural Bank of Salinas and owner of shares in said corporation executed a Special Power of Attorney to his wife Melania giving her fullpower to sell or otherwise dispose of shares of stock of the Bank* Before death of Clemente, Melania, pursuant to said SPA, executed deed of Assignment of formers shares* After death of Clemente, Melania presented to bank deed of assignment for regi

stration which the bank refused* Mandamus filed by Melania to compel bank to register the transfer* Transfer before death valid, stock not yet part of estate* Shares of stock are personal property and may be transferred by delivery. Registration in corporate books is not necessary* The transfer effected in this case is valid* The corporation may not impose any restriction on such transfer* The right of transferee/assignee to have stocks transferred to his name is inherent right, duty of the corporation to register the transfer is ministerial

Batangas Laguna Tayabas Bus Co. v Bitanga* Dolores, Max, Mercedelin Potenciano, Delfin Yoro and Maya industries entered into Sale and Purchase Agreement of their shares at Batangas Laguna Tayabas Bus Company with BMB Property Holdings represented by Bitanga.* A month after, Bitanga and Lim were elected board of directors* Stockholders meeting on Nov 28, 1997 elected Bitanga as Chairman of the Boardand Lim as CEO* The next stockholders meeting was set on May 19, 1998. Majority s

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Corpo UP Bar Ops 2003