BY-LAWS.

1. BY-LAWS are: the rules of action adopted by a corporation for its internal government and for the government of its stockholders or members and those having the direction, management and control of its-affairs in relation to the corporation and among themselves

a. The nature of power to have by-laws isinherent in a corporation.b. Distinguished from a resolution; approved by-laws is a permanent rule of action and

mode' of conduct of corporate affairs while a resolution ordinarily applies to g single act of the corporation.

2. Before—Incorporation It is to be approved and signed by all incorporators and filed simultaneously with the Articles

1.1 Note that the adoption can take place even after to, the actual jjjcaiBfiratiiHL2. After incorporation within a month after receipt of the certificate or incorporation.3. By-laws are adopted by the affirmative vote of stockholders or

a. Members representing a;majorityof the outstanding capital stock or its members.-

3.1 It is to be signed by stockholders or members and is kept in the principal office subject to inspection.

3.2 A copy certified by a majority of the directors / trustees countersigned by the corporate secretary is filed with the SEC and attached to the Articles.157

4. The By-laws are rendered valid upon the Issuance by the SEC of a certification that it is not inconsistent with the Code.

4.1 If the corporation is regulated by specific agencies, it requires a •certification from said agency that the By-laws are in accord with their ^gqulsttKfns.

5. The non-adoption of by-laws does not result In the demise of the corporation. This can be implied from the act that while it is given the power to adopt by-laws, it doesn’t make It a matter of necessity to exercise the power to ensure corporate life or to validate corporate

5.1 However, the non-adoption, ground for a suspension or a revocation of its corporate franchise.

ELEMENTS OF VALID BY-LAWS1. The elements of valid by-laws are: (a) they must not be contrary to the code, it is void if

contrary to the code (b)not be contrary to moral or public policy (c) must not impair obligations of contract - as a general rule (d)^they must be general and uniform in application (e) they must be consistent with the Charter / Articles (f) they must be reasonable or capable of compliance.

2. By-laws cannot affect 3rd persons that deal with the corporation unless they have full knowledge of the pertinent portion of the by-taws affecting their transaction.159 Notice to third persons will not be presumed. A contract signed by the chairman of the board, even if mentioned in the by-laws as an authorized signatory is valid.

3. No provision in the By-Laws may be adopted If it is contrary tolaw. (Tolerance cannot be considered ratification. The practice nomatter how long continued cannot give rise to vested right if it is contrary to law.

CONTENTS OF BY-LAWS1. The By-Laws should contain the following: (a) Time, place, manner of calling and conduct

and regular or special meetings of Directors or Trustees, stockholders or members (b) Required quorum in meetings of stockholders or members and the manner of voting (c) Form of proxies of stockholders or members and the manner of voting them (d) Qualifications, duties and compensation of directors, trustees officers, and employees (e) Time of the holding of elections of Directors/Trustees and the manner of giving notice thereof (e) Manner of election or appointment and the terms of officers other than Directors/Trustees (f) Penalties for violation of By-laws (g) In stock corporation manner of issuing certificates (h) Such other matters as may be necessary for the proper conduct or convenient transaction of its corporate business and affairs.

2. Amendments to the by-laws can be undertaken by a majorityvote of- the Board and majority vote of stockholders or members in ameeting duly called for that purpose. By vote of the Board, if thepower to amend has been delegated by 2/3 vote of the outstandingcapital' stock or members.

a. Provided that the delegated authority may be revoked bymajority vote of stockholders or members at a regular or special meeting. Note the omission)of the place at a meeting duly called for the purpose.

3. The amendment is then attached to the original by-laws in the.a. Office of the corporation and a copy thereof duly certified under oathb. by the secretary and a majority of the Board is filed with the SEC. It is effective

upon issuance by SEC of a certification that it is not Inconsistent with the Code.4. By-laws are distinguished from the Articles as follows: (a) Articles Is the fundamental law.

By-laws provide rules or regulations (b) Articles executed before incorporation, By-laws are usually executed after incorporation (c) The filing of Articles is a condition precedent to incorporation, while the filing of By-laws is a condition

5. In case, of a conflict between the Articles and the By-laws, the former shall prevail as the Code provides that the contents of the y latter shall be subject to the contents of the former. Hence, if the articles provide for a definite number of directors, a contrary provision in the By-laws must yield to the stated number In the former.

MEETINGSWHEN HELD

1. Regular meetings of stockholders/members are held/annually on- the date fixed in the By-Laws or any date In April as determined by the Board Special meetings are held at anytime as deemed necessary or as fixed in the By-Laws

2. Regular meetings of directors/trustees are held monthly unless otherwise provided, Special meetings are held at anytime upon call of the president.

NOTICE (REQUIREMENTSa. Regular meetings of stockholders/members require 2 weeknotice, while special

meetings require 1 week notice, unless .the By- Laws provide otherwise.b. Regular meetings of directors/trustees require one day notice unless otherwise

provided.c. Notice can however be impliedly or expressly waived.

WHERE MEETING IS TO BE HELD1. Stockholders/members are to be held in the city or municipality where the principal

office is located.2. Board meetings can be held anywhere In or outside of the Philippines unless the By-

laws provide otherwise.

WHO PRESIDES1. In oil instances, the president presides unless otherwise provided.2. Where the meeting is called by a stockholder or a member upon showing of good

cause to the SEC, the stockholder or member is allowed to preside until a presiding officer is elected.

WHO CALLS 1. Person designated in the By-Laws - director/ trustee or officer entrusted

with managingpetitioning stockholder ormember, in cases of removal, the corporate secretary or a stockholder or member in proper instances."

VALIDITY OF ACTIONSIn stockholder or memberconsisting of a majority of the business so transacted shall becorporation.meetings, there being aoutstanding capital stockvalid within the powers

1. Even if meeting is improperly called or held within the-powers of the corporation and all stock holders or members are present or by their representatives

2. Note the following instances when only a majority is required of stockholders or members: (a) election of the members of the Board (b) removal of directors or trustees (c) approval ofmanagement contracts (d) adopt by laws/amend/or repeal or

revoke power delegated to the Board (e) fix issued price of no par value shares179 (f) fixing compensation of directors

3. In directors or trustees meetings, there being a quorum, all acts are valid. But if not undertaken in a duly convened meeting, theyare generally invalid but may be ratified.

WHY ARE MEETINGS NECESSARY 1. Meetings are necessary because corporate powers are vested inthe Board or

stockholders or members as a body and not asindividuals.

2. It serves as protection and assurance' to stockholders ormembers as it affords them an opportunity to be heard and to discuss,the matter at hand and vote thereon.

Requisites of a valid meeting of stockholders or membersThe requisites are:

1. Held at the proper place 2. Held at the stated date and time or at a reasonable time thereafter3. Called by the proper person 4. Previous notice must be given5. There must bequorum.

WHEN ARE MEETINGS NOT NECESSARY1. The instances when meetings are not necessary are (a) when a corporation amends its

articles and written assets is sufficient (b) when there is an agreement to be bound despite the absence of a meeting (c) when the Articles of a close corporation allows directors to take action without a meeting

CAN MEETINGS BE POSTPONED1. As a rule, meetings may be postponed but annual meetings be postponed if the purpose is to extend the term of office of directors or trustees.

COMPENSATION FOR ATTENDING STOCKHOLDER OR MEMBER MEETINGS1. They are notentitled 4:o payment for attending meetings as they are exercising a right of rendering a service. Note that Section 47(5) only allows compensation for directors, trustees or officers.

HOW ARE MATTERS TAKEN UP IN MEETINGS PUT INTO FORMAL FORM1. They are formalized by the exercise of the right to vote

WHO ARE ENTITLED TO VOTE1. Stockholder or members are entitled to vote as it is through the exercise of the right to

vote that they are able to participate in managementa. The right to vote Is inherent )in stock ownership or in membership.184 Provided, they

remain ds such In the books of the corporation as of the date fixed in the-notice.b. If the stock is co-owned, the consent oft all is necessary to vote the stock, except

where all of them have executed a proxy.c. If owned in an and/or capacity, any one can vote the stock

2. The right to vote cannot be exercised if the: (a) shares are delinquent(b) shares are non-voting, unless the matter to be votedupon allows them to vote (c) when the shares are In the treasuryshares

3. Although, not stockholders the following may exercise the rightto voted (a) Pledgees or mortgagees when they are given the right andsuch is recorded in the books of the corporation188 (b) Executors,administrators, receivers and other legal representatives appointed bythe Court (c) heirs of the stockholder who have executed a judicial orextra-judicial settlement, registered with the Registry of Deeds uponpresentation of the settlement to the corporate secretary.

MANNER OF VOTINGThe right to vote may be exercised in person or by proxy

1. The right to vote by proxy cannot be exercised in boardmeetings.

2. A proxy is a formalauthorization given by the holder of the stock who has the right to vote, or by a member, to another person to exercise the voting right of former.

a. In another sense, it can also refer to the person who was authorized.3. The requisites of a valid proxy as provided by law are it

must be in writing and signed by the stockholder or member (b) filedbefore the scheduled meeting with- the corporate secretary (c) itshould not be valid and effective for a period of 5 yearsat anyone timeit is valid only for the meeting for which it is intended unlessotherwise provided. |

a. The By-laws may provide for other requisites. The board cannotprescribe other formalities besides that provided by the Code if the By-laws does not so provide. Absent such provisions, compliance withwhat is prescribed by the Code is sufficient

b. As when, absent a requirement in the By-laws as to notarization,the proxy is valid as the Code only requires it to be written.

c. The writing must show the intention to empower the person towhom it is given to act as agent in voting the stock, and to enable thecorporate officers to know that such authority is given.

4. The common kinds are (a) General, which confers generaldiscretionary power that is continuing, or (b) Limited, which limits thepower conferred.

5. When a proxy is given to two or more persons, they must agree on the vote unless the proxy provides otherwise or discriminates. If there Is no agreement, the majority will prevail

a. If only one of them will attend the meeting, he will be deemed authorized to exercise the powers of a proxy.

6. When the stockholder intends to designate several proxies, the number of shares of stock represented by each proxy must be specifically indicated in the proxy form.

a. If some forms do not indicate the number, the shareholdings as indicated shall be tallied and compared with that appearing In the books, the balance, if any shall then be allotted to the holder of the proxy without a number indicated.

b. If all the proxies are blank, the shareholdings shall be distributed equally among all the proxies.

c. The number of proxies may be limited by the By-laws.,7. A revocation of the proxy can be done expressly or impliedly, by writing, orally or by

conduct, with notice or without at anytime-except if coupled with an Interest, referring to an instance wherethe proxy giver has incurred liability and Is looking at the grant of the right to vote to another as a means of reimbursement or indemnity

a. As regardsSeveral proxies: (a) last proxy revokes all previous proxies (b) if undated, date of postmark if matted or time of presentation, If not mailed

8. Since a proxy is a corporate control device, solicitation of the same should be undertaken In accordance with law, which requires among others, the submission to the SEC of preliminary copies o£ the Information Statement and Proxy Form at least 10 business days

prior to the date definitive copies of such materials shall first be sent or given to security holders.

a. The proxy solicitation rules shall apply to: (a) an issuer which has sold a class of its securities pursuant to a registration under Section 12 (b) an issuer with a class of securities listed for trading on an exchange (c) an issuer with assets of at least PHP 50,000,000.00 or such amount as the Commission may prescribe, and having 200 or more holders each having at least 100 shares of a class of its equity securities.

9. The right to appoint a proxy, cannot be denied in a stock corporation. In a non stock corporation it can be denied.

VOTING TRUST AGREEMENTS1. A voting trust agreement is an agreement in writing whereby one or more stockholders of

a stock corporation transfers their share to any person/s or corporation having authority to act as a trustee or the purpose of vesting in such person voting or other rights pertaining to the shares for a certain period not exceeding that fixed in the Code and upon terms and conditions stated in the agreement.

a. The statute does not apply to agreements-whereby stockholdersagree to bind themselves to each other as shall vote their shares. These are called pooling agreements generally a stockholder exercises wide liberality in voting and his motives, while for personal profit, are not objectionable "or may be determined by whims or caprices, so long as he does not violate a duty owed to other stockholders.

b. The limitations applying to voting trust agreements are: (a) it should not be executed for a period not excess of 5 years except if executed as a condition for a loan, in which case It should expire upon payment (b) it should not be executed to circumvent the law against monopolies and Illegal combinations in restraint of trade or used for purposes of fraud, such as fixing prices or a merger/consolidation tocreate a monopoly

c. The other requirements are: (a) must be in writing, notarized 'containing and specifying all terms and conditions (b) it should must be filed with the SEC, otherwise it is ineffective or unenforceable [ (c) it should be subject to examination (d) It should automatically expire at the end of the agreed period

d. Some uses of voting trust agreements are: (a) concentrate stockholder control in one or few persons, who primarilythrough the election of directors can control corporate affairs utilized by founders or incorporators to retain control.

2. If a voting trust agreement is validly executed, the shares of the trustor are cancelled and new ones are Issued to the trustee and noted in the corporate books that the transfer is pursuant to a voting trust agreement

a. The trustee then delivers or executes voting trust certificates, which are transferable like shares, to evidence the trustors' ownership and right to dividends.

b. Both the shares and voting trust certificates are then cancelled upon the expiration of the term and new certificates are issued to the' trustor.

c. The voting trustee shall then be allowed to: (a) possess the right to vote (b)exercise the right to vote in person or by proxy (c) has theright of inspection (d) since he is the legal bidder, he can be elected as a director

DISTINCTION BETWEEN PROXY AND A VOTING TRUST1. The distinctions between a proxy and a voting trust are: (a) proxy has no legal title, a

voting trustee has legal title (b) the proxy is generally revocable, while a voting trust generally is not revocable (c) proxy can only act at a specified meeting unless it is continuing, a trustee Is not so limited (d) proxy can only vote if stockholder or member is not present while a trustee votes nevertheless (e) a proxy is usually shorter in duration than a voting trust

2. Other distinctions: (a) a voting trustee can appoint a proxy, while a proxy, as a rule, cannot further delegate his authority (b) a voting trustee votes in his own name, while a proxy is an agent of the shareholder. .

STOCKS AND STOCK HOLDERS ACQUISITION OF STOCKS1. A person may become a stockholder of a corporation by acquiring a share through a

purchase from the corporation or other shareholders.2. The purchase from the corporation is primarily effected by means of a subscription

contract if the object are unissued sharesa. A subscription contract is any contract for the acquisition of unissued stock in an

existing corporation or one that is still to be formed regardless of whether It is referred to as a purchase or some other contract.This is so to prevent the avoidance of provisions of the code insofar as pre-incorporation subscription contracts.

b. The kinds of subscription contracts are pre-incorporation and I Post Incorporation contracts.

c. A pre-incorporation is irrevocable for a period of at least 6 months, counted from the date of subscription because there is a needto ensure that the corporation shall have capital to undertake the »business for which it was created. The irrevocable nature of thecontract shall stand unless all subscribers’ consent to the revocation or the corporation falls to materialize- within the period or such-period fixed in the contract. However,no pre-incorporation subscription /contract can be revoked if the Articles have already be in submitted to 1 the SEC.

d. Distinguished from a stock option which refers to the privilege granted to a party to subscribe to a certain portion of unissued stock within a certain period.

3. If the object of the purchase are-Issued scares, they may be /purchased from other shareholders or from the corporation Itself when it disposes of treasury shares

PAYMENT FOR UNISSUED SHARES1. Shares are paid for by or any combination of: (a) cash (b) property - tangible or intangible,

actually received by the corporation and necessary or convenient for Its use and lawful purpose at a fair valuation equal to par or issued value (c) labor performed or services actually rendered (d) previously Incurred Indebtedness (e) amounts transferred from unrestricted retained earnings to stated capital (f) outstanding shares exchanged for stocks in the event of a reclassification or conversion.

a. Regarding items (b) to (f), the valuation must be determined by the incorporators or the Board subject to approval by the SEC

b. Shares cannot be issued in exchange for promissory notes or future services because they are supposed to and are intended to represent a value received by the corporation to form part of its capital

c. The enumeration of acceptable consideration is also acceptable as consideration for the issuance of bonds.

2. The amount to be paid is the par value, as fixed or if no par value, the value which may be fixed in the Articles or by the Board pursuant to the authority conferred by the Articles / By Laws or in its absence by the stockholders in a meeting duly called by a majority vote of the outstanding capital stock.

WHEN PAYMENT FOR SHARES MUST BE MADE1. They are payable on: (a) date fixed the subscription contract, orupon call.

a. A call is the act of the board in declaring due and payable unpaid;) subscriptions in full or such percentage, In either case, with accrued interest, counted from date of subscription, If so required by the Bylaws and at the rate fixed thereon. If no interest rate is fixed, the legal rate. Absent such provisions for the collection of Interest and a rate, it cannot be collected

b. The purpose of the call is to fix the period of payment but is not necessary if the, corporation is Insolvent or payment is provided for in the contract.

2. The requisites of a valid call| are: (a) made in the manner provided by law, it requires a resolution and notice (b) it must be made by the board (c) operate uniformly among all shareholders

3. If no payment is made 30 daysafter due date orafter the date stated in the call, the shares shall be considered to foe delinquent,

4. Consequently:, (a) they shall not be voted for or be entitled to vote or representation at a shareholders meeting (b) no rights may be exercised, except the right to receive dividends.

a. This situation will obtain until the amount due, interest andexpenses are paid.5. If the subscriber is hot delinquent, he exercises all rights of ashareholder.

REMEDIES TO ENFORCE A DELINQUENCY1. A corporation may collect the unpaid subscription by judicial action. However, absent any

date for payment in the subscription contract, a call is still necessary.2. Another option is to conduct a delinquency sale.

1. A delinquency sale requires: (a? Resolution by the Board ordering the sale of delinquent stocks, specifying the amount due, interest, and the date, time, place which shall not be less than 30 days nor more than 60 days from the date of delinquency (b) Notice is sent to the subscriber personally or by registered mail and published in a newspaper of general circulation in the province or city where the corporation has its principal office once a week for 2 consecutive weeks.

2. At the auction sale, the winning bidder shall be the one who shall pay the full amount of the balance and all expenses for the least number of shares. Note that there is^ no deficiency because the winning bid cannot be less than the amount due.

3. The stock so purchased Is transferred In the name of the purchaser, the rest if any goes to the delinquent subscriber

3. If there is no bidder at the auction sale, the corporation may purchase the shares. Note that the highest bidder's bid may be rejected by the Board as in a public auction sale, the corporation is not making an offer to sell but rather the purchaser is offering to buy.

4. If delinquent stock Is sold, It may be recovered or^ the ground that: (a) There is a defect or irregularity In the notice of sale (b) There is a defect or irregularity in the sale itself. Provided, the party bringingthe action pays to the person holding the stock the sum paid, plus legal interest from date of sale and the action is brought within six months from date of sale.

STOCK CERTIFICATES1. A stock certificate/is the written instrument signed by the properofficer of a

corporation stating or acknowledging that the person named therein is the owner of a designated number of shares of stock

2. It is issued once the consideration, plus interest and expenses j due on a delinquency, if any, have been paid.

3. Partial payments are pro-rated among all the shares. Note that in the case of Baltazar v. Lingayen Gulf a certificate was issued for less than the number subscribed provided the par value of each of the [stocks represented by the certificate has been fully paid. The basis is Section 37 of the old law. Hence, By-laws of older corporations may carry such a provision

4. The formal requirements for/the issuance of a stock certificate are: (a) signed by the president or vice-president (b)countersigned by the corporate secretary or assistant secretary (c) sealed with the [ corporate seal (d) issued in accordance with the by-laws

5. Note that a stock certificate is not essential to the creation of astockholder relationship as regards the corporation In the absence of a f statute or agreement.

WATERED STOCK

1. The definition of watered stock is stock issued not in exchange for its equivalent in cash, property, shares stock dividends or 'services

a. Includes stock that is Issued (a) without consideration (b) issued as fully paid when the corporation receives a sum less than par or issued value (c) issued for a consideration other than cash, the fair valuation of which is less than par or issued value (d) stock dividend j without sufficient returned earnings or surplus.

2. The director or officer consenting or having knowledge, and does not express that same in writing and files it with the corporate secretary shall be solidary liable with the shareholder to the corporation and its creditors for the difference between the fair value received at the time of issuance and its actual par or issued value

a. There is liability because a party giving credit to a corporation is entitled to rely upon its ostensible capitalization as the basis for the credit given. Thus if watered stock is issued, the ostensible capital is in excess of real assets, thereby he recover less.

3. Only originally Issued stock may be watered, as a subsequent transfer is a sale, the provision says issuance

4. A subsequent increase in value will not eliminate the "water", asthe last paragraph of Section 65 states that point of reckoning of liability is issuance

NATURE OF STOCK CERTIFICATES1. Stock certificates are in the nature of personal property.2. Transfers may be effected by delivery and indorsement.

a. However, no transfer shall be valid between the parties unless it is recorded in the books of the corporation.

b. What is to be recorded are the names of the transferor and transferee, date, number of shares and number of the certificate.

c. It must be recorded by the corporate secretary or the designatedstock and transfer agent, if one has been appointed. Otherwise, it isinvalid.

d. No share over which the corporation holds an unpaid claim or a delinquency shall be transferable.

3. If the By-laws do not provide otherwise delivery and sale mayalso be through another document but an indorsement is a mandatory requirement.

4. If what is transferred is a subscription, the corporation must consent by resolution because the transfer constitutes a novation requiring the consent of the creditor.

5. The registration of transfer to: (a) enable the corporation to know at all times who its shareholders are as mutual rights and obligation exists between them (b) to afford the corporation a right or opportunity to object or refuse consent to a transfer in case it has a (c) to avoid a fictitious or fraudulent transfer.

6. An unregistered transfer is: (a) valid between transferor and transferee (b) 4nvalid against the corporation except if} notice is giveninvalid against corporate creditors when the-veil of corporationfiction is pierced or there is liability for watered stocks (d)invalid against creditors of transferors (e) transferor has the right to vote and be voted upon until challenged (f) transferor can collect the dividends

7. Since the law did not prescribe a period within which registration of transfer should be affected, the action to enforce the right does not accrue until a demand is made and such is refused. Hence, an action for mandamus can be made even after 24 years.

PAGE 15PHOTO # 199LOST CERTIFICATES— The procedure tor the procurement of lost or replacements certificates are:

The registered owner or legal representative shall file an affidavit In triplicate setting forth (a) circumstances of the loss, theft, or destruction (b) number of shares, number of certificate and name of the corporation (c) such other matter or evidence he may deem if necessary

Upon verification of the affidavit and books, the corporation shall cause notice of loss to be published at shareholder's expense for 3 consecutive weeks, stating the specifics of loss and that

l year from date of publication, should no contest be presented, it will cancel and issue new certificates.

The publication requirement can be dispensed with if the shareholder files a bond or surety good for 1 year satisfactory to theboard.

Provided, in any case, if contest or suit is brought/presented, the issuance of the certificate shall be suspended until a final decision of the court or determination of ownership is made.— Except in case of fraud, bad faith or negligence of the corporation, no action can be brought against It for issuing a certificate/s pursuant to the procedure laid down by law.

RIGHTS OF STOCKHOLDERS1. Under the Corporation Code, stockholders exercise and enjoy the following rights (c) right

to attend and vote at meetings (b) elect or remove directors (c) approve corporate acts (d) adopt amend by-laws (e) compel the calling of a meeting (f) issuance of a stock certificate (g) receive dividends (h) receive property upon dissolution (i) Transfer stock (j) pre-emption (k) inspection of books (I) secure financial statements (m)recover stock at delinquency if unlawfully sold (n)enter into voting trust agreements (n) exercise the right of appraisal (o)participate in dissolution (p) bring derivative suits.

a. A summary of rights can be had as, fallows: (a) right to dividends (b) right to participate in management (c) right to share in corporateproperty upon dissolution.

2. Note that a subscriber cannot exercise the right to demand theissuance of a stock certificate.

DERIVATIVE SUIT1. A derivative suit one brought by one or more stockholder/s or member in the name of the

corporation and in its behalf to redress wrongs committed against It or to protect or vindicate corporate rights whenever the officials of the corporation refuse to sue, are the ones to be sued or hold control of the corporation.

a. It is an available remedy In cases where the officers are over compensated or there is a refusal to take action without sufficient explanation.

2. The requisites for its institution are (a) there must be anexisting cause of action (b) That demand to sue has been made, unlessdemand is useless(c) That he must have been a stockholder or member at the time the act was committed unless it becontinuing (d) action is brought In the corporate name.

a. Additional requisites are; no appraisal rights are available for activity complained of and that it is not a nuisance or harassment suit

b. The shareholder is a nominal party, the real party in interest isthe corporation. It is an indispensable party.

c. The number of shares held is of no consequence. What is required is that the party-bringing suit is a shareholder without regardto the number of shares held.

3. An action brought in the name of the shareholder is an individualsuit or if the act is committed against shareholders as a group, it is arepresentative suit.

CORPORATE BOOKS1. The following corporate books and records must be kept and

preserved at its principal officea. Record of all business transactionb. Minutes of stockholders or Board meetings, setting forth: time and place, how

authorized, notice given, whether regular or special, those present/absent, every act done or ordered. Upon demand, the time that the a director, trustee or officer entered or left, the yeas and [the nay, and any protest may be recorded in full

c. Stock and Transfer book which should contain a record of all stocks, names of stockholders, installments paid/unpaid, statement of alienation, date thereof and

other matters prescribed by the By-Laws. Note though that the stock and transfer book can be except with the stock and transfer books or one principally engaged In the business of registering transfers of stocks in behalf of a corporation.

2. All books are available for inspection at reasonable hours on business days, and in cases of records other than the stock and transfer book, a demand in writing for excerpts can be made.

3. Any officer or agent refusing inspection shall be liable for damages and a violation of the Code.

a. Provided, that if refusal is due to a resolution or order of theboard, liability will attach to the director or trustee voting for it.

b. Further, it is a valid defense against party seeking information orInspection that (a) he has Improperly used any information served in a prior examination even of another corporation (b) not acting in good faith (c) purpose is not legitimate.

4. A stockholder may examine the books and records of a whollyowned subsidiary as long as it utilizes the same office and has identicaldirectors as the parent corporation.

RIGHT OF SHAREHOLDER OR MEMBER TO FINANCIAL STATEMENTSa. A stockholder has the right to request in writing a copy of

Financial Statements, which the corporation must comply with within 2 days from receipt, by furnishing the party making the request withcopies of the corporation's balance sheet and profit or loss statementshowing in reasonable detail its assets and liabilities and the result ofits operations.

b. At the regular meeting of the stockholders, the Board mustpresent a financial report of operations for the preceding year, toinclude financial statements duly signed and certified by a CPA exceptwhen its paid up capital is less than PHP 50,000.00, in which case, acertificate under oath by the treasurer or responsible officer issufficient.

MERGERS and CONSOLIDATIONSWHAT ARE MERGERS AND CONSOLIDATIONS

1. Mergers refer to the absorption by one corporation by another, which Is "called the “surviving corporation, while Consolidations refer to the combination oftwo or more corporations to form a new corporation, called the consolidated corporation,

2. The procedure for a merger or consolidation is as follows:a. The Board of each corporation shall execute a plan of merger or consolidation setting

forth: (a) names of the corporations proposing to merge or consolidate (b) the terms of the merger or consolidation and the manner of carrying it into effect (c) statement of changes, if any, in the articles of the surviving corporation, in case of a merger or with respect to the consolidated corporation, all statements required by Section 14 to be contained in the Articles of Incorporation (d) such other provisions that may be deemed necessary

b. Upon approval by a majority vote of each of the Boards, the plan of merger/consolidation shall be submitted to the stockholders of each of the corporations at separate meetings duly called, notice of which having been given at least 2 weeks prior to the date of the meeting, personally or by registered mail Note that the vote requirement is 2/3 of the outstanding capital stock, provided a dissenting stockholder may exercise the right of appraisal, the exercise of which can be extinguished if the plan is abandoned.

c. Any amendment of the plan shall be subject to the same procedure.d. After approval, the Articles of Merger/Consolidation will be executed by each of the

constituent corporations signed by the President or Vice President, certified by the Corporate Secretary or |Assistant Corporate Secretary stating: (a) the plan of merger

or consolidation (b) in stock corporations, the number of shares outstanding and in non stock corporations, the; number of members (c) in each corporation, the number of shares or members voting for or against the plan.

e. Articles of Merger/Consolidation signed and certified shall be submitted to the SEC for approval together with a favorable recommendation in cases of banks, building and loan associations, trust companies, insurance companies, public utilities and educational institutions.

f. The effectivity of the merger/consolidation is upon the issuance by the SEC of a certificate of merger/consolidation.

g. Note that it after investigation, the SEC has reason to believe that it is contrary to law, it may give the corporations an opportunity to be heard after notice of time, date, and place is given to each corporation, at least 2 weeks prior to the hearing.

EFFECTS OF A MERGER OR CONSOLIDATION1. The effects of a merger or consolidation are

a. The constituent corporations become the surviving corporation in case of a merger, and the consolidated corporation in case of a consolidation

b. The separate existence of the constituent corporations shall cease except that of the surviving or consolidated corporation

c. The surviving or consolidated corporation shall possess all the rights, privileges immunities and powers and shall be subject to al duties and liabilities of a corporation organized by or under the corporation code

d. The surviving or consolidate corporation shall thereupon and thereafter possess all the rights, privileges franchise of each of theconstituent corporations and all property, real or personal, and all receivables due on whatever account. Including subscriptions of shares and other chooses of action and all and every Interest of or belonging to or each of the constituent corporations shall be taken and deemed transferred and vested, in the surviving / consolidated corporation without further act or deed.

e. The surviving or consolidated corporation shall be responsible and liable for all liabilities and obligations of each of the constituent corporations in the same manner as the surviving or consolidatedcorporation had itself incurred the liability or obligation. Any claim, action or proceeding pending by or against the constituent corporations may be prosecuted by or-against the constituted or surviving corporation as the case may be. Neither shall the rights of creditors or lien upon property of any of the constituent corporation be Impaired by the merger or consolidation

2. In a case, the issue resolved by the court was: "Does the surviving corporation have a right to enforce a contract entered into by the absorbed company subsequent to the date of the merger but prior ""to issuance of a certificate of merger by the SEC". The court held in the affirmative as the merger agreement contains a stipulation that all references to the absorbed corporation shall be deemed a reference to the surviving corporation.

3. The employees of the dissolved corporation shall be assumed by the surviving corporation. Their tenure should be treated as having started when they started with the dissolved corporation.

DISTINGUISH BETWEEN MERGER OR CONSOLIDATION AND THE SALE OF ASSETS1. They can be distinguished as follows:

a. In a merger or consolidation, there is no contract of sale, while in a sale of assets, a sale is always involved

b. In a merger or consolidation, there is automatic assumption ofliabilities, in a sale of assets, generally the buyer is not liable) except when (a) he expressly/impliedly assumes liability (by in a de facto B. merger or consolidation (c) where the purchasing corporation is merely a continuation of the selling corporation that eventually dissolves itself (d) where the transaction is fraudulently entered into to avoid liabilityfor debts.

c. In a merger or consolidation, there is continuance of the enterprise, in the sale of asset, a liquidation is usually contemplated

d. In a merger or consolidation, title to assets is transferred virtue of law, in a sale of assets, title is transferred by virtue of contract

e. In a merger or consolidation, one or all the constituentcorporation/s are dissolved, in a sale of assets, there is no dissolution by the selling corporation

TERMS RELATED TO A MERGER OR CONSOLIDATION1. Due Diligence - is the process of investigation by a party, disinterested or otherwise, into a

business transaction for the purposeof providing information with which to evaluate the advantages and disadvantages of the same

2. Corporate Take - Over is the process of acquisition of control or possession over a corporation

3. Poison Pill - is a financial tactic or provision used by a company to make an unwanted takeover prohibitively expensive or less desirable.Example: Sale of assets at a discount to stockholders.

4. Tender Offer – a public officer to purchase a specified number of shares from shareholders. Usually the purchase is at a premium, meaning at a price higher than the par value of the stock.

5. Corporate Raiding – gaining control of a company for purpose of liquidating its assets at a profit.

RIGHT OF APPRAISALDEFINED

1. The right of appraisal Is the right of stockholder to demand payment of the fair value of its shares after dissenting from a proposed corporate action involving a fundamental change in the corporation in the cases, provided for by law.

2. It is available where (a)Articles are amended and such has the effect of changing or restricting the rights of a shareholder or a class of shares or authorizing preferences in any respect superior to those outstanding shares of any class (b) extending or shortening the corporate term (c) In cases of sale, lease, exchange transfer,mortgage, pledge or disposition of all or substantially all of corporate assets or property(d) In cases of mergers/consolidations (e)investment by the corporation in another corporation or business other than its primary purpose (f) a stockholder in a close corporation for any reason may compel the said corporation to allow the exercise of his appraisal rights.

HOW IS IT EXERCISED1. After voting against the proposed corporate action, a writtendemand must be made on the

corporation within 30 days after the date on which the vote was taken for payment of the fair value of his shares

a. If no demand is made within 30 days, he is deemed to have waived the exercise of the right

2. The stockholder must submit his certificate of stock within 10 days for notation that such shares are dissenting shares

a. If the certificate is not submitted for notation within 10 days, the corporation may consider the exercise of the right terminated at its option

3. Upon a demand all rights accruing to the share are suspended including voting rights, only the right to receive the fair value is not suspended i2iil, if there is no payment within 30 days after the award, he is restored to all his rights.

a. However, the exercise of the right after demand is made shall cease if: (a) stockholder withdraws his demand and the corporation consents (b) proposed action is abandoned or rescinded (c) SEC disapproves the action, if its approval is necessary (d) SEC determines that the stockholder is not entitled to the exercise of the right, in the effect is that he is restored to all rights and accrued dividends are paid to him.

4. The corporation then pays the stockholder the fair value upon surrender of the certificate.

a. The value paid is the value as of the day prior to the date on which the; vote is taken, excluding any depreciation or appreciation in anticipation of the corporate action.

b. If the fair value cannot be determined within 60 days from the date corporate action was approved, it shall be appraised by 3 disinterested persons one chosen by the stockholder, one chosen by the corporation and one chosen by both representatives. A decision of a majority shall be final and the award paid within 30 days after such award is made.

c. The cost of the valuation shall be shouldered as follows: (a) the corporation, unless the fair value as ascertained is equal to or approximates that which it offered, then it will assessed against the shareholder (b) if suit is brought to recover payment, the corporation shall be liable unless the shareholder Is found to have an unjustifiable reason not to receive payment

d. Provided, in all cases (a) no payment can be made if the corporation has no unrestricted retained earnings, and (b) that the shareholder shall forthwith transfer his shares to the corporation

5. A transfer pending exercise of the right of appraisal shall cause the rights of the transferor as a dissenting stockholder to cease and the transferee shall have all the rights of stockholder including the dividends which would have accrued to the Shares as by so buying, it indicates his desire to be a stockholder

CLOSE CORPORATIONSCLOSE CORPORATION DEFINED

1. A close corporation is a corporation whose articles provide that:All the corporation's issued stock of all classes, exclusive oftreasury shares, shall be held of record by not more than a specified ofpersons not to exceed 20.

a. All issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted In this title. Any restriction can be put provided: (a) the restriction must appear in the articles of incorporation by-laws as well as the certificate of stock, otherwise it is not. bindingon a purchaser in good faith (b) it or they should not be more onerous than that granting the existing stockholders or thecorporation the option to purchase the shares with such reasonable terms, conditions or periods stated therein. If at the end/expiration of the period, a stockholder/s or the corporation falls to exercise the option to purchase, the transferring stockholder may sell his shares to any third person. Example: fixing a price below actual/market value, prescribing a longer holding period or a transfer without consent of the board

b. The corporation must not list in any stock exchange or make any public offering of any of its stock of any class.

c. Notwithstanding, if, 2/3 of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of the Code, the corporation shall not be deemed a close corporation.

2. Other provisions of the Code shall have supplemental effect in the absence of express provisions found in the title on close corporations.

3. No close corporation can be formed if will be engaged in thefollowing business activities: mining, stock exchange, banks, Insurance company, public utility or educational corporations or are otherwise vested with public interest.

4. The number of shareholders is mandatory.a. In case of the death of a stockholder, if his heirs will cause the number to exceed

20, their remedy Is to put only In the name of one of them or they can create a corporation to hold the shares.

5. Distinguishing a close corporation from an ordinary stock corporation: (a) there is a limitation on shareholders in the former, none exists in the latter (b) there are restrictions of transfer in the former, none exists in the latter (c) there are qualifications that may be imposed for shareholders in the former, qualifications are notnormally imposed in the former (d) a public offering of shares isprohibited in the former, there can be a

public offering of shares in the latter (e) the former may be managed by, shareholders, the latter is always managed by a board.

6. Distinguished from a "closely held corporation" referring to the number of shareholders at a particular time, indicating that they are''few in number or a corporation whose shares are owned by a relatively small number of shareholders. Even corporation can be stockholders of a closed corporation provided however that the corporation which is a stockholder is not a close corporation within the meaning of the code, it must not own 2/3 of the voting stock or voting rights.

CONTENTS OF THE ARTICLES OF INCORPORATION OF A CLOSE CORPORATE1. In addition to what is required by Section 14 of the Code, the Articles of Incorporation of a

close corporation may provide for:a. Classification of shares or rights and the qualifications for owning or holding then and

restrictions on their transferb. Classification of directors into one or more classes each of which may be voted for or

elected solely by a particular class of stockc. Greater quorum or voting requirements for stockholder or board meetingd. Provide that the corporation's business shall be managed by the stockholder rather

than the board as long as (a) no meetings of stockholders are necessary to be called to elect directors (b) unless the context clearly requires otherwise, stockholders shall be deemed directors for the purpose of applying the provisions of the code (c) stockholders and the corporation shall be subject to all liabilities of director

e. May provide that all officers or employees or that specified officers; shall be elected or appointed by stockholders instead of the Board.

2. Note that the term of directors for a close corporation is 1year as it is a stock corporation, while those in non-stock corporations will have a term of 3 years and in an educational corporation the term is for 5 years.

RULES TO APPLY TO TRANSFERS OF STOCK IN BREACH OF QUALIFYING CONDITIONS 1. A person holding stocks in a close corporation in conclusively presumed to have notice of

the fact of his Ineligibility to be a stockholder if he is not entitled under any of its provisions in the Articles of Incorporation to be a holder of record of stock and the certificate for such stock conspicuously shows the qualifications of the persons entitled to be holders.

2. If the Articles of Incorporation state the number of persons not exceeding 20 entitled to be holders of stock and the certificate for such stock states such fact, the person to whom stock is issued or transferred that will exceed the number is conclusively presumed to have knowledge or notice of such fact

3. If stock certificate conspicuously shows a restriction on transfer, the transferee is conclusively presumed to have notice of the fact that he has acquired stock in violation of the restriction, If such acquisition violates the restriction.

4. The effects of such is that the corporation may at its option refuse to register the transfer of stock in the name of the transferee have the corporation may record if it is consented to by all the stockholders or if the close corporation had amended its Articles and effect of such amendment is to terminate the status of the corporation as a close corporation as long as the purpose of the amendment Is either: (a) delete/remove provision required under the title to be contained in the Articles of Incorporation. Example: restrictions (b) reduce quorum or voting requirement.

5. It will require a 2/3 vote of the outstanding capital stock or such higher proportion as fixed In the Articles, whether with or without voting rights. No written assent is allowed.

6. Other related matters: (a) the manner of transfer is the same as stock corporations (b) transfers are not limited to transfers for value (c) it does rot Impair/prejudice the right of the transferee to rescind or recover on the warranty express or implied

VALIDITY OF STOCKHOLDER AGREEMENTS

1. Agreements signed by and among all the stockholders executed before the formation or organization of the corporation shall survive incorporationand shall continue to be valid and binding if such be their intent as long as they are not Inconsistent with the Articles, irrespective of whether or not they are embodied in the Articles or not, but aspects requiring it to be embodied must be so embodied.Examples: (a) agreements between stockholders to sell their shares to each other must be embodied (b) agreement to stay in the corporation for a definite period

2. Agreement between 2 or more stockholders in writing and signed by them may provide that in exercising any voting rights, the shares held by them shall be voted as provided, as they may agree or as determined by the procedure agreed between them.Example: voting trust agreements.

3. No provision in any written agreement signed by a stockholder relating to any phase of corporate affairs shall be invalidated as between the parties on the ground that its effect is to make them partners among themselves.Example: contracts as to the use of dividends

4. Neither will an agreement among some or all of the stockholders in a close corporation be invalidated on the ground that it relates to conduct of business of the corporation as to restrict or interfere in the discretion of the board. Provided that such shall impose on stockholders who are partners thereto liabilities for a managerial acts reposed on directors. Example, consultation agreements not to deal with particular entities or deal with particular entities only.

5. To the extent that a stockholder is actively engaged in the management or operation of the business affairs of a close corporation stockholder shall be held to strict fiduciary duties to each other and among themselves, said stockholder shall be personally liable for corporate torts unless the corporation has obtained reasonably adequate insurance.

EFFECTS OF ACTIONS TAKEN WITHOUT BOARD MEETINGS OR TAKEN DURING IMPROPERLY HELD ONES

1. The general rule is that all actions are valid If: (a) signed and written consent of all directors is obtained before or after the action (b) all stockholder have actual or implied knowledge and no prompt objections In writing Is made (c) directors are accustomed to take informal action with express or implied acquiescence of all stockholder (d) all directors have express or implied knowledge of the action in question and no one makes a prompt objection In writing and the by-lawsdo not provide otherwise.

2. If a directors meeting is held without call or notice, an action taken within corporate powers is deemed ratified by the director who fail to attend unless he promptly files a written objection with the secretary after having knowledge therefore.

PRE-EMPTIVE RIGHTS 1. In a close corporation, pre-emptive rights extend to all stock issued, including a re-

issuance of treasury shares, whether for money, property, personal services or in payment of corporate debts unless the Articles otherwise provide.

DEADLOCKS1. Deadlocks occur if directors or stockholders are so divided regarding the management of

the corporation's business and affairs that the necessary vote cannot be obtained, the consequence of which is that the business and affairs of the corporation can no longer be conducted to the advantage of stockholders

2. Deadlocks are resolved by the SEC, who upon written petition, may arbitrate and in the exercise of Its powers (a) cancel or alter a provision in the articles, by-laws or agreements (b) cancel, alter or enjoin any resolution or act of the corporation or its board, stockholder or officers or other parties to the action (c) prohibiting or greeting any art of the corporation, its board, officers,stockholders or parties party o the action (d) requiring the purchase at fair market value of the shares a stockholder, either by the corporation earning or by any other stockholder (e) appointing a provisional director who shall be impartial neither a stockholder nor a creditor of the corporation, its subsidiaries or

affiliates and whose further qualifications, if any may be determined by the corporation (f) dissolving the corporation (g) granting such other relief as the circumstances may warrant.a. Note that the provisional director: (a) Is not a receiver and does the right to notice,

vote until removed by the SEC or all stockholders his compensation is determined by agreement with the corporation, approved by the SEC, or fixed by agreement

b. The petition to resolve a deadlock is initiated by written petitionby any stockholder notwithstanding any contrary provision in the article by-laws or agreements

WITHDRAWAL OR DISSOLUTION1. Without prejudice to other remedies, a stockholder may for any reason compel the

corporation to purchase his shares at their fair market value, which shall not be less than par or issued value when the corporation has sufficient assets to cover debts and liabilities,elusive of capital stock.

2. Provided also, that a stockholder may by written petition to the SEC compel dissolution when: (a) the acts of director, officers or persons in control are: (1) Illegal; (2) fraudulent; (3) dishonest; (4) oppressive or unfairly prejudicial to the corporation; (5) corporate assets are being misapplied or wasted.

SPECIAL CORPORATIONS EDUCATIONAL CORPORATIONS1. Are stock or non-stock corporations organized to provide facilities for teaching or

instruction and are governed by speciallaws and by general provisions of the code.2. Prior to its incorporation, a favorable recommendation must beobtained from the

Department of Education.a. A Non-stock corporation is a corporation whose capital stock is not divided into shares.

No part of its income is distributable as dividends to its members, trustees or officers. Any income obtained as an incident of its operations shall be used for the furtherance of the purpose to which it has been organized.

MANAGEMENT OF A NON-STOCK EDUCATIONAL CORPORATION1. The Board of Trustees shall not be less than 5 no more than 15 membersbut always in

multiples of 5, so classified so that 1/5 of its membersshall have terms that expire every year and those subsequently elected shall serve for a term of. five years

2. Any vacancies are only filled up for the unexpired portion but if organized as a stock corporation, the provisions applicable to stock corporations shall govern

3. For the conduct of its business, a majority of the board shallconstitute a quorum.

RELIGIOUS CORPORATIONS1. Are corporations incorporated by one or more persons and areclassified as either a

corporation sole or religious society and is to be governed by this chapter and generally by other provisions governing non stock corporations.a. They are corporations composed of entirely spiritual persons and which is organized

for the furtherance of a religion or for perpetrating the rights of the church or for the administration of church or religious work or property

2. A Corporation sole isone formed by the archbishop, bishop, priest, minister, rabbi, Or other presiding elder of a religious denomination sector church for thepurpose of administering and managing as trustee-the affairs property and temporalities or money revenues of such religious denomination, sect, or church.

a. The Articles of Incorporation must provide (a) that he is the archbishop bishop, priest, minister, rabbi or presiding elder (b) rules are not inconsistent with his becoming a corporation sole nor is it prohibited ' (c) that he is charged with the administration of its temporalities and the management of its affairs within its territorial jurisdiction (d) the manner vacancies are filled (e) place where the principal office is located.

b. A corporation sole is deemed incorporated once the Articles are submitted to the SEC together with an affidavit of affirmation. Henceforth he becomes a corporation sole

c. Property may be bought or encumbered by a corporation sole. Authority may also be obtained from the RTC if no internal rules govern the same.

d. Vacancies can, be filled by the, filing with the SEC of his commission or certificate of election or proof of assumption.

e. The dissolution takes place by the filing with the SEC of a verified declaration of dissolution setting forth: (a) name (b) reason for dissolution (c) authorization for dissolution (d) name and address of the persons who will supervise dissolution or winding up of its affairs. Upon SEC approval, it ceases to carry on its operations.

3. A Religious Society is the same as a corporation sole as far as purposes are concerned but Incorporation Is brought about by 2/3 vote 5 or written consent of its members, who then file its articles with the SEC, verified by affidavit of the presiding elder, secretary, clerk or member stating that: (a) that the society is a religious organization of some religious denomination, sect or church (b) that 2/3 of its member have given their written consent or vote to incorporate at a J duly convened meeting of the body (c), that its incorporation is notforbidden by competent authority or by is constitution, rules, regulations or discipline of the religious denomination, sect or church to which it belongs (d) that its purpose is to manage or administer itsaffairs, properties or estate (e) location of Its principal office ,which s ^ must be in the Philippines (f) names, nationalities and residences of I § the trustees elected to serve the first year or such other period as prescribed, which board must not be less than 5 or more than 15

4. The rules or the law on non stock corporations will govern them if applicable or in the absence of an express provision of law.

DISSOLUTION1. Dissolution is the extinguishment of its franchise to be acorporation at the

termination of its corporate existence.a. A corporation formed under the code, may be dissolvedvoluntarily or involuntarily.b. What is covered by de jure dissolution, or one that is adjudgedand determined by

judicial sentence, or brought about by an act of or with the consent of the state, or which results from the expiration of the period of corporate life, as opposed to a fact dissolution that is brought about by cessation of business insolvenc

2. The steps in dissolution are: (a) termination of corporateexistence as far as the right to go on doing ordinary business (b) winding up of corporate affairs, payment of debt, distribution of assets no creditors prejudiced

a. A corporation is really dissolved after liquidation. A corporation can still exercise corporate powers while the liquidation phase is not yet terminated.

MANNER OF VOLUNTARY DISSOLUTION1. With no creditors prejudiced.

a. It is Initiated by a majority vote of the Board and a resolution adopted by the outstanding capital stock or members at a meetingto be held upon call of the Board after publishing notice of the time, lace and object For 3 consecutive weeks In a newspaper or general circulation and notice to a shareholder or member given by registered mail or delivered personally 30 days prior to the meeting. A copy of the Resolution is then certified by a majority of the Board, countersigned by the secretary submitted to the SEC.

b. It will take effect upon Issuance by the SEC of a Certificate of Dissolution2. With creditors prejudiced.

a. It is initiated by the filing of a petition with the SEC, signed by amajority of the Board or other officers having management, verified byPresident, Secretary or one of its directors or trustees.

b. The petition will set forth: (a) all claims and demands against it (b) that dissolution was resolved upon the affirmative vote of 2/3 of outstanding capital stock or members at a duly called meeting. If the SEC finds the petition to be in

proper form, an order will be issued fixing date on or before which objections may be made, which date shall not be less than 30 days nor more than 60 days after the entry of the order. Publication will also required once a week for 3 weeks and posted in 3 public places. 5 days after the date fixed, the SEC will try all issues, objections and if all material allegations are true.

c. The dissolution takes effect upon judgment directing disposition of assets and payment of debts, and if required, appoint a receiver.261

3. Amendment to shorten the terma. It is initiated by a majority vote of the Board and subject to the affirmative vote of

2/3 of the outstanding capital stock or members, followed by the submission to the SEC of the amended articles duly certified by the secretary and a majority of the Board together with an affidavit of publication.

b. The dissolution takes effect upon expiration of the shortened term without further proceedings.

INVOLUNTARY DISSOLUTION 1. It is undertaken by the SEC upon the filing by a real party in

interest of a verified complaint, after proper notice or bearing on thefollowing grounds or instances contemplated by law

a. Expiration of the term provided in the Articles of Incorporation.Note that this can voluntary if the corporation will, dissolve uponexpiration.

b. Legislative enactment as the enactment of laws carry with it the power to amend or repeal but is limited by the non-impairment clause of the Constitution.

c. Failure to formally organize and commence transaction ofbusiness within 2 years from date of incorporation

d. Dissolution by judicial decree on the grounds of:a. the corporation has offended against a provision of an act for its creation or

renewal. Note: de facto corporations b. when It has forfeited its privileges and franchises by non-userc. when it has committed an act or omitted an act which amounts to a

surrender of corporate rights, privileges or franchised. when It has misused a right privilege or franchise or used it In violation of the

law by order of the SEC in cases of a violation of the code deadlocks and mismanagement in a close corporation, suspension, or revocation of the Certificate of Registration/Incorporation when:

i. thereis fraud In its procurementii. serious misrepresentation as to1 its activitiesiii. refusal to comply or willful defiance of SEC ordersiv. continuous cooperation for 5 yearsv. failure to file By-lawsvi. failure to file required reports

POWER OF A SHAREHOLDER TO BRING ABOUT DISSOLUTION1. As a general rule, a shareholder cannot, sue to demand dissolution unless they are unable

to obtain redress and protection for their rights or violations warrant quo warranto proceedings."08

EFFECTS OF DISSOLUTION1. The effects of dissolution are:

a. legal title to corporate property is vested in shareholdersb. corporation ceases as a body politic to continue the business for which it was

organizedc. it cannot be revivedd. dissolution does not, by itself imply the diminution or extinguishment of rightse. upon expiration of the winding up period of 3 years, the corporation ceases, it can no

longer sue or be sued

LIQUIDATION This is the 2ndphase of dissolution.

1. It pertains to the winding up of the affairs of the corporation by reducing its assets in money, settling with creditors, and apportioning the amount of profit and loss.

2. During liquidation, a corporation continues to exist as a body corporate for the purpose of a. prosecuting and defending suits by or against itb. enable it to settle and close its affairsc. enable it to dispose of and convey property and distribute assets but it should not be

for the purpose of continuing the business

MANNER OF LIQUIDATION1. The corporation can undertake liquidation by (a) itself (b) a duly appointed receiver under

Section 119, (c) a trustee, where the property is conveyed to the trustee holding the same In trust for the benefit of shareholders, members, creditors and other Interested parties.

2. Note that receivers or trustees can act as such beyond the statutory 3 year period of liquidation.

a. Pending suits upon expiration of the three year period may still he prosecuted by the handling lawyer who will then be constituted as a trustee for such purpose

DISTRIBUTION OF ASSETS IN A STOCK CORPORATION:1. The preference will apply only if assets are Insufficient to pay the claims.2. It is as follows: (a) creditors (b) shareholders, members, directors', officers who are also

creditors (c) shareholders in proportion to shareholdings in the absence of a contrary provision.

a. If the shares are divided into classes, preferred shareholders before common shareholders.

a. Shareholders may get more than the fair market value. If assets are just enough, they get the par value or Issued value, or less if the assets are insufficient

3. If creditors or shareholders cannot be found, the assets will be escheated in favor of the municipality or city where the assets are found.

4. Note that assets can only be distributed upon lawful dissolution and payments of debts/liabilities.

a. The exceptions are: (a) Decrease of capital stock under Section 18 (b) Redeemable shares under Section 8 (c) Treasury shares under section 9 (d) Acquisition by the corporation of its own shares under section 41 (e) Dividends under Section 43 (f) Deadlocks under Section 104 (g) Withdrawal under Section 105.

DISTRIBUTION OF ASSETS IN A NON-STOCK CORPORATION1. The assets of a non stock corporation are to be distributed in accordance with the

following rules:a. Liabilities and obligations of the corporation shall be paid, satisfied or discharged, or

adequate provisions made thereforeAssets held under a condition requiring return, transfer,conveyance and which condition occurs by reason of dissolution shall be returned, transferred and conveyed

b. Assets received and held by the corporation subject to limitations permitting use only for charitable, religious, benevolent,educational or similar purposes, but not subject to return, transfer or reconveyance by reason of dissolution shall be transferred to corporations undertaking similar activities pursuant to the plan of dissolution

c. Other assets shall be distributed in accordance with the Articles of Incorporation or By-Laws determining the distributive rights of its members or as provided

d. In any other case, assets shall be distributed to such persons, societies or organizations whether organized for profit or not as provided in the plan of distribution.

2. The Plan of Distribution as outlined above must be consistent with Section 94

a. This is adopted pursuant to a majority vote of the Board of Trustees, then is submitted for the affirmative vote of 2/3 of the members having voting rights at a regular or special meeting, prior notice having been given.

FOREIGN CORPORATIONS1. A foreign corporation is one formed or organized or existing under any laws other than the

Philippines whose laws allow Filipino citizens and corporations to do business in its own country or state.

2. These corporations can transact business after it has obtained a license and a certificate of authority from the appropriate government agency. Corporations already doing business in the Philippines with licenses can continue operating but must comply with the provisions of the Code within 2 years.

PROCEDURE IN THE APPLICATION FOR A LICENSE1. Submit to the SEC the following documents:

a. Articles and Bylaws, certified In accordance with law and translated to an official language if necessary

b. Application containing i. date and term of incorporationii. address of the principal office of the corporation in the country or state of

Incorporationiii. name and address of a resident agent authorized to accept summons and

process in all legal j proceedings and pending establishment of the office, all notices affecting the corporation

iv. place in the Philippines where it intends to operatev. the purpose which it intends to pursue in transacting business which should

be stated in the authority, for which it is to be issued a license under Section 126

vi. name and address of present directorsvii. statement of authorized capital stock and the number of shares issued duly

itemizedviii. statementof outstanding capital stock and the aggregate number issuedix. statement of amount actually paid inx. such other information that may be necessary or appropriate to determine

whether corporation is entitled to a license2. Attached to the application are:

a. Certificate under oathof the officials of the jurisdiction of Its Incorporation attesting that its laws allow Filipino citizens and corporations to do business thereon

b. Statement under oath by the president or authorized officer showing to the satisfaction of the SEC that it is solvent and in sound financial condition: setting forth its assets and liabilities as of its date not exceeding 1 year prior to the filing of its application

c. Compliance with laws applicable to particular corporations and obtain the necessary authority from the appropriate regulating agency

d. Power of Attorney designating a resident agent. 3. The Resident Agent can be an individual or a corporation who is a resident of and is

transacting business in the Philippines.a. If it be an individual, he must be of good moral character and of sound financial

standing.b. The power of attorney must contain a provision that the foreign corporation

consents to service of summons and legal notice and that service on the resident agent is admitted and held as valid as if served on the duly authorized officer at its given address. It should also be accompanied by an agreement executed by the proper authority of the corporation that if there be cessation of business or if they shall be without a resident agent, service may be made on the SEC as if service has

been made upon it, the SEC in turn must transmit the same by mall to the head office within 10 days, service is then complete.

SERVICE OF SUMMONS ON A FOREIGN CORPORATION1. The rules on service of summons on a foreign corporation are

a. On the resident agent. If made on another If it has a resident agent is inefficacious. It is also exclusive.

b. On the SEC, if the corporation ceases to do business or there is no resident agentc. Any of its officers or agents in the Philippines if the foreign corporation has

neglected or refused to appoint a resident agent.d. If the foreign corporation Is not doing business, service may be made upon any

agent, as provided for by the 1997 Rules on Civil Procedure

WHEN IS THE LICENSE ISSUED1. The license is Issued when the SEC Is satisfied that the foreign corporation has complied

with all requirements of the code and other laws and will be valid as long as it remains a corporation under the country/state of Incorporation or the license is surrendered, revoked, suspended or annulled

2. After the license has been issued:a. The corporation must deposit within 60 days With the SEC for the benefit of present

and future creditors securities satisfactory' to the SEC consisting of bonds, evidences of indebtedness of the government or any of its political subdivision, shares of registered companies with the Board of Investments, shares in domestic corporations listed in the stock exchange, insurance companies or banks, or any combination thereof with a market value of PHP 100,000-00, except, If it is a bank, insurance company, foreign non-stock, foreign corporation with a representative office or regional or area HQ in the Philippines.

b. The deposit is to increase by 20% of the licensee's income in excess of PHP 5,000,000.00 within six months from the end of a fiscal year and if the value decreases by 10% but the SEC may release part of the securities if it increases by 10%. The SEC may also allow substitution.

c. The deposit is subject to return after cessation of business and satisfactory showing that it has no liabilities to Philippine residents or the government

3. The corporation shall transact business only for the purpose/s for which it was granted a license.

a. In the conduct of its business it will now be governed by laws, regulations or rules applicable to the same class of corporations in the Philippines except, those related to its creation, formation,organization, dissolution or to fix the relations and responsibilities of shareholders.

TRANSACTION OF BUSINESS only for the purpose for which the corporation was issued a License.

1. Upon the grant of a license, foreign corporations can now transact business. A license is no longer absolutely necessary. It matters only when access to the course is the issue.

a. If it is without a license, it can still transact business but the difference is that if it is transacting business with a license it is permitted to maintain or intervene in any action suit or proceeding in any court or administrative agency with the Philippines, otherwise it ' cannot maintain suit but may be proceeded against before Philippine courts on any valid cause of action.

b. Therefore if the foreign corporations Is: (a) transacting business with a license, it has access (b) not transacting business and has nolicense, it has access (c) transacting business without a license, it has no access (d) transacting business without license but subject qualifications/exceptions, it has access. What Is thus necessary is to determine what constitutes transacting business

2. The Rule is that there is no general rule as each case must be determined in the light of the obtaining circumstances or the belowguidelines:

a. Is the foreign corporation continuing the business or enterprise for which it was organized or whether it has retired from it and turned it over to another?

b. Are the acts of the foreign corporation indicative of a purpose on its part to engage in some part of its regular business?

c. Transacting business is not determined by number of transactions or volume. A single act is not merely incidental or casual but is of such a character as to distinctly indicate a purpose to do other business in the state or the performance of act/s for which it was created

d. The volume or amount of business is not entirely determinative of whether it is transacting business or not.

e. Continuity of conduct and intention to continue or establish a continuous business such as the appointment of an agent will constitute doing business.

3. Transacting business can thus be Inferred from: (a) continuous business acts or transactions (b) isolated transaction or business act If an inference can be drawn or of such a character as distinctly to indicate a purpose or the part of the foreign corporations to do business and to make the state the base of its operations for the conduct of its ordinary business

4. Exceptions to the general rule are:a. When the foreign corporation is suing to seek redress for an isolated business

transaction, which is a transaction or a series of transactions set apart from the common business of a foreign enterprise in the sense that there is no Intention to engage in the progressive pursuit of the object/purpose of the business organization. This is an exception as it Is not the intention of the law to favor a domestic corporation who later on repudiate obligations on account of the foreign corporation's lack of a license

i. The requisites for its application are (a) It must disclose that it is not doing business in the Philippines and is suing under the Isolated a Business Transaction Rule (b) It must prove its juridical personality as a foreign corporation (c)It must name its duly authorizedrepresentatives or resident agent.

b. The foreign corporation is suing to protect its name,reputationand goodwill. If the foreign corporations are well known through products bearing its corporate and trade names, it has a legal right to maintain an action and it is also allowed by treaties to which thePhilippines is a party to.

c. The foreign corporation is suing to enforce a right not arising out of business transaction with a party in the Philippines. Example: failure of a shipping corporation to deliver goods shipped by the foreign corporation or an insurer-subrogee sues to recover from a Philippine carrier for the amounts paid to an insured.

d. To hold it liable for acts and omissions. Conversely, if a foreign corporation is allowed to sue without a license, it may also be sued in the Philippines for acts done to persons in the Philippines. It means that it cannot avoid suit due to the lack of a license. A foreign corporation shall not be allowed to impugn jurisdiction due to the lack 0f a license.

5. That notwithstanding the above-situations, the Supreme Court has ruleda. That the contract that is entered into is not void ab ignition. Thus, when a foreign

corporation which is doing business without a license contracts with a third party, any defect will subsequently be cured if it obtains a license to transact business

b. If a foreign corporation is doing business In the Philippineswithout a license, the move of the defendant to dismiss the complaint that said foreign corporation filed might still be neutralized by invoking the doctrine of estoppel.

c. The Supreme Court adopted the in pari delicto rule holding that no remedy could be afforded to the parties because of their presumptive knowledge that the transaction was tainted with illegality. The Court said that equity couldn't lend its aid to the enforcement of an alleged right claimed by virtue of an agreement entered into in contravention of law.

d. The prohibition against doing business without a license is subject to penal sanctions under Section 144 of the Code.

HOW IS A SURRENDER EFFECTED1. Subject to existing laws and regulations, It may file a petition for withdrawal of the license

but no certificate of withdrawal can be granted if the following requirements are not met:a. All claims that have accrued in the Philippines have be^n paid, compromised or

settleb. All taxes, imposts, assessments, penalties, If any, lawfully due the Philippine

Government, any of its agencies or political subdivisions have been paidc. The petition for withdrawal has been published in a newspaper of general circulation

in the Philippines once a week for 3 consecutive weeks2. The formal requirements are (a) letter petition of the resident agent (b) payment of filing

fee (c) resolution of the Board authorizing the closure of the Philippine office (d) latest balance sheet (e) proof of publication (f) surrender of the license.

a. Courts can review the action of the SEC approving withdrawal as the law should not be interpreted to mean that the foreign corporations is now permitted to escape the results of a pending action before the courts with all the deposited securities if it gets SEC approval.

b. Withdrawal subjects the corporation to the provisions of Section 122 as to liquidation as it operates as quasi-dissolution.

HOW IS A REVOCATION SUSPENSION OR ANNULMENT EFFECTED1. Without prejudice to the other grounds, a suspension or revocation of the license may

arise when the foreign corporation: a. Fails to pay fees or file annual reports b. Fails to appoint and maintain a resident agent c. Fails, after change of a resident agent or his address, to submit to the SEC a

statement of such change d. Fails to submit an authenticated copy of any amendment of its Articles/By- Laws or

any articles of merger or consolidation within the time prescribede. Misrepresentation of any material matter in the application, report, affidavit or other

document submitted pursuant to the required documentsf. Failure to pay any and all taxes, Imposts, assessments, penaltiesg. Transacting business outside the purpose/s for which it was issued a licenseh. Transacting business in the Philippines as an agent of or acting in behalf of a foreign

corporation or entity not duly licensed In the Philippinesi. Any other ground that would render it unfit to transact business.

2. Upon a revocation, the SEC shall Issue a certificate of revocation furnishing the appropriate government agency and it shall also mail to the corporation at its registered office in the Philippines a notice of revocation with a corresponding certificate of revocation.

3. Effect on contracts entered into (a) If prior to revocation, they are valid (b) If after revocation, they are Invalid and unenforceable as far as the foreign corporations.

AMENDMENTS OF THE ARTICLES OR BY-LAWS1. Amendments are to be governed by the laws of the country of incorporation but it must

within 60 days after the effectivity of the amendment file with the SEC and appropriate government agency, a duly authenticated copy of the Articles or By-Laws clearly underscoring the changes, duly certified by the authorized official of the state of incorporation J2iil the filing thereof shall not of Itself enlarge or alter the purpose for which foreign corporations was granted a license

2. If so enlarged or amended it must obtain an amended licensed or if it changes its corporate name by submitting an application with the SEC favorably enclosed by the appropriate regulating agency.

MERGERS/CONSOLIDATIONS1. If the foreign corporation merges or consolidates with a domestic corporation, it will be

allowed if such is permitted by Philippines laws and law§ of the state of incorporation, provided it complies with the laws of the Philippines on merger or consolidation

2. If it merges or consolidates with another corporation in the country or state of incorporation, it shall file a duly certified copy of the Articles of Merger or Consolidation with the SEC and appropriate regulating agency within 60 days from its date of effectivity.

3. Provided, that if the absorbed Corporation Is the foreign corporation, the corporation must file a petition to withdraw its license because it is in effect dissolved. Not a change of name as its identity ceases to exist.

SEE:.European Resources CASE 435 SCRA 246 re doing business.RULES TO OBSERVE WHEN SUING A FOREIGN CORPORATION OR VICE VERSA

1. The burden of proof to show that it is a foreign corporationtransacting business or suing under any of the exceptions is: on the foreign corporations by affirmatively pleading such fact

2. The defendant must specifically deny the allegation of a foreign corporation's capacity to sue

3. Proof of doing business is not necessary before jurisdiction is acquired4. For purposes of suit, a foreign corporation is a resident of the Philippines on account of

their being found and operating In the PhilippinesRESIDENCE is where the corporation prosecutes the corporate enterprise. See STATE INVESTMENT v. CITIBANK, 203 SCRA 9

miscellaneous PROVISIONSSec. 137 - OCS - total number shares of stock issued to subscribers or S/H whether fully or partially paid excluding Treasury shares Distinguished from - issued - all OCS Issued but not all Issued from OCS (Treasury shares)Subscribed - all subscribed are outstanding but not all OC are subscribed (paid)

Sec. 138 - N/S and SpecialCorporation may designate another have for the boardsSec. 139 - authority for the SEC to collect feesSec. 140 - right of NEDA to congress regarding limits for S/H in corporations vested with public InterestSec. 141 - annual reports together with financial statements for stock corporationSec. 142 - confidentiality of by the SEC except when the lawrequires disclosure or are necessary as evidence Sec. 143 - right of the SEC to make rulesSec. 144 - violations of the code fine of 1,000 no more than 10,000 30days imprisonment no more than 5 years or bothIf committed by a corporation it may be dissolved without prejudice tofiling of a proper actionSec. 145 - amendments or repealSec. 146 - repealing clauseSec. 147 - separabilitySec. 148 - application to existing corporation - 2 years Sec. 149 - Effectivity

An agreement of co-shareholders to mutually grant a right of first refusal to each other, by itself, does not constitute a violation of the provisions of the Constitution limiting land ownership to Filipinos or Filipino corporations. If the foreign shareholdings exceeds 40%, It is not their ownership that is adversely affected, but rather the capacity if the corporation to own land. The fact of land ownership by the corporation cannot deprive the stockholders of the right of first refusal. No law disqualifies a person from purchasing shares in a landholding corporation even if the latter will exceed the allowed foreign entity. This right belongs to the stockholders, while the right to the land belongs to the corporation. They are separate and distinct.

INTRACORPRATE DISPUTES:

1. Controversies arising out of intra-corporate or partnership relations, between and among stockholders, members, or associations between any or all of them ad the corporation, partnership or association of which they are stockholders, members, or association of which they are stockholders, members or association respectively between such corporation, connected with the regulation of the internal affairs of the corporation.

2. Jurisdictiona. jurisdiction to hear an Intracorporate dispute is determined by (a) the status of the

relationship between the parties, and (b) nature of the question that Is the subject of the controversy.

b. If the controversy Involves the contractual rights and obligations of the parties/stockholders and not the enforcement of rights and obligations under the Corporation Code, Jurisdiction belongs to the regular courts.

c. A Special Commercial Court likewise has Jurisdiction over: (a) devices and schemes employed by or any acts of the board of directors and/or the stockholder, partners, members of association and organization, business associates, Its officers or partners amounting to fraud, and misrepresentation which may be detrimental to the Interest of the public (b) controversies In the election or appointment of directors, trustees, officers, or managers of such corporation, partnership or association (c) petitions for suspension of payments or corporate rehabilitation.