Lecture Notes on Corporations Edit

7/21/2019 Lecture Notes on Corporations Edit

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LECTURE NOTES ON CORPORATIONS

INTRODUCTION AND PRELIMINARIES

1.

In the Philippines, business enterprises are organized principally in oneof four forms, the single proprietorship, the general partnership, thelimited partnership, and the corporation. The choice of the form oforganization is usually made by the original organizers and is dictated bythe requirements of the business.

a.

Normally, a single proprietorship will be resorted to if there is asingle owner who has the ''necessary resources for the intendedbusiness activity. Resort to partnerships and" corporations aredetermined, to a large extent, by the need for resources andlimitation of liability. The choice between a partnership and a

corporation on the other hand, is determined by Economic factors.

b.

Perhaps, the most significant economic reason for the continueduse of-partners tax based. A partnership's distributable Income istaxed once, while that of the corporation is taxed twice, once at the

corporate level and once again at the stockholder-level. Then again,the same reason may be advanced in favor of a corporate structureas the imposition of tax at the stockholder level may be delayeduntil there is a declaration of dividends.

c.

Another, though not necessarily less significant, is the nature of

the business. Traditionally, partnerships are ideal for short, termbusiness ventures, where the organizers do not foresee thecontinuance of their union after completion of the business activityand would like to liquidate their investments quickly

d. A corporation and a partnership are distinguishedas follows:

a) THE MANNER OF CREATION- a corporation is created

by law, while a partnership is created by agreement

b) TO THE NUMBER OF INCORPORATORS - a corporation

generally requires a minimum of 5 and a maximum of 5

incorporators, while a partnership requires a minimum of2. The exception is a corporation sole

c) COMMENCEMENT OF EXISTENCE - a corporation,

commences to have existence upon the issuance or a


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certificate of incorporation, while, a partnershipcommences to have existence upon agreement

d) POWERS THAT MAY BE EXERCISED - a corporation

can only exercise powers allowed by law, while a

partnership can exercise power not contrary to law orpublic policy

e) MANAGEMENT - a corporation is managed by a board,

while a partnership is managed by the managing partner

f)

SUCCESSION - a corporation enjoys the right of-succession, while a partnership does not

g) PERSONAL LIABILITY - as a general rule, stockholders

do not have personal liability beyond the value of their

shares, while partners are liable beyond what they havecontribute

h) TRANSFERABILITY OF INTEREST -one's interest in a

corporation is transferable without consent, while that inpartnership, requires consent

i) TERM OF EXISTENCE- acoloration can exist for terms

of no more than 50 years- at any given time but subject

to extension, while a partnership is not limited as to term

j)

DISSOLUTION a corporation cannot be dissolvedwithout. the consent of the state, while a partnership canbe dissolved without need for the consent of the state

e.

The Similaritiesare:i.

both have juridical personalityii.

can act only through its agentiii.

both are composed of an aggregate of individualsiv.

distribution of profits is given those who have contributed

capitalv.

both can only be organized if there is a law authorizing its

registrationvi.

both are taxed as corporation

f.

Nonetheless, what is prevalent is the use of the corporate structureas the preferred business organization. Reasons advanced for its

use are: limitation of liability, capital generation from equity, debtand income retention, organizational control, free transferability ofownership, and succession.


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2.

Other forms of business organizations that have been utilized to varying

degrees are:

a.

joint accounts

b.

business trustsc.joint ventures

d.

cooperatives

e.

syndicates.

a. Joint accounts or sociedad de cuentas en participacion arearrangements among merchants who Interest themselves In thetransactions of other merchants, contributing thereto the part ofthe capital they may agree upon, and who participate in thefavorable or unfavorable results thereof in the proportion they maydetermine.

It is a form of business Association in which two or more

persons interest themselves in the business of another

contributing thereto money, property, or industry; andparticipating in the results of the business in the proportion thatthey may determine.

b.

A business trustis a legal relation whereby one person, called thetrustor, conveys a property to another for the benefit of a personcalled the beneficiary. The person in whom confidence is reposedas regards the property is called the trustee.

A trust agreement can actually be entered into with a trust

department of a commercial or universal bank. Pertinentregulations issued by the Bangko Sentral ng Pilipinas defines the

term "trust business" as any activity resulting from a trustor-trustee relationship or trusteeship involving the appointment of atrustee by a trustor for the administration, holding, managementof funds and/or properties of the trustor by the trustee for the use,benefit or advantage of the trustor or of others called beneficiaries

In the United States, a business trust is called the"Massachusetts Trust" because they were developed inMassachusetts from 1910 to 1925. It is defined as anunincorporated business association established by a declaration

or deed of trust, and governed contributions to the capital requiredand accepting a fair share of the risks and benefits of the

undertaking in accordance with universally accepted cooperativeprinciples.

c.

A Syndicateis a group of people who come together to work for acommon aim. This unincorporated business association is often encounteredamong insurance companies who may be underwriting a, large risk or bonkswho are lending 3 huge amounts. Syndication therefore the practice of dividinginvestment risk between several persons in order to minimize individual risk.


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ADVANTAGES AND DISADVANTAGES OF A CORPORATION

1.

The advantages are:a.

the capacity to act as a legal unit

b.

limitation of or exemption from, individual liability of shareholders;

c.

continuity of existence;d. transferability of sharese.

centralized management of board, of directors;f.

professional management;g.

standardized method of organization, and finance; andh.

easy capital generation.

2. The disadvantages are:a.

it is prone to "double taxation;b.

they are subject to greater governmental regulation and control;

c. corporation may be burdened with an Inefficient management if

stockholders cannot organize to oppose management;d.

limited liability of stockholders may at times translate Into limitedability to raise creditor capital;

e.

it is harder to organize compared to other business organizations;

f.

it is harder or more complicated to maintain; andg.

the "owners" or stockholders do not participate in the day to daymanagement.

SUBJECT COVERAGEThese notes cover the Corporation Code, SEC Code of Corporate

Governance, Corporate Recovery, Securities Regulation Code, and otherrelated laws.

THE CONSTITUTIONAL BASIS FOR ENACTMENT OF THE CORPORATIONCODE

The constitutional basis for the Code is Section 16, Art. 12 of the1973 Constitution which provides: "Congress shall not, except byGeneral law provide for the formation, organization or regulation ofprivate, corporations, government owned or controlled corporations may

be created by or established by special charters in the interest of thepublic good and subject to the test of liability.

SCOPE OF THE CORPORATION CODEThe Corporation Code:

a.

Provides for the incorporation, organization and regulation ofprivate corporations, both stock and non-stock, includingeducational and religious corporations

b. Statement of corporate powers and provides for dissolution


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c.

Fixes the duties and liabilities of directors/trustees/officersd.

Declares the rights of stockholders or members

e.

Prescribes the conditions under which it may conduct businessf.

Provide penalties for violation of the Code

g.

Repeal all laws or parts thereof that are inconsistent

CORPORATION DEFINED

1.The law defines a, corporation as an artificial being created by operationof law having the right of succession and the powers, attributes andproperties expressly authorized by law or incident to its existence.

a.

From the definition, theattributesof a corporation are:i. created by operation of law

ii. it is an artificial being

iii.

it only has the power, attributes and property expresslyallowed by law or incident to its existence

iv.

it has the right of succession.

2.

When a corporation is said to be created by operation of Law. It meansthat it cannot come into existence without the consent or anygrant of authority from the sovereign government.

a.

The grant of authority by the sovereign government is a

concession. Thus the concept known as the Concession Theoryor Government Paternity Theory" or the "Franchise Theory"

b.

Distinguishing between Plenary or Corporate or General; Franchisewhich refers to the privilege enjoyed by individuals to form acorporation, and the Secondary or Special Franchise which refersto the privilege enjoyed by the (corporation) to be and to act as acorporation.

c.

Private corporations are generally organized and formed under theprovisions of the Corporation Code.

d.

They can also be formed under special laws or charters which

then shall be the primary Jaw that will govern them to besupplemented by the Corporation Code.

3.

The corporation is said to be an artificial being that is invisible andintangible, it is said to exist only in contemplation of Jaw. The law treats

as though it were a person by process of fiction". It is likewise said to bea juristic person resulting from an association of human beings beinggranted legal personality by the state


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a.

Consequently, the corporation as a juridical person has a

personality separate and distinct from the persons composing it. Infact, this separate personality is recognized under the Civil Code

which begins the minute it is said to be duly constituted according

to law.

b.

The Civil code also provides that as such it may acquire andpossess property of all kinds as well incur obligations and bringcivil or criminal actions in conformity with laws and regulations oftheir organizations

c.

Property so required or conveyed to the corporation is the propertyof the corporation and vice versa. It has no personality to bringaction for recovery of property belonging to stockholder or its

members.

d.

The interest of a stockholder/member is inchoate. It becomesactual, direct and existing only upon liquidation of the assets of acorporation and its eventual Assignment to him.

e.

The obligations of a corporation are not obligations of itsstockholders or members 'and vice-versa. The principle though issubject to an exception, the Doctrine of Piercing the Veil OfCorporate Fiction applies. This doctrine is also known as the'-

Doctrine of Disregarding the Fiction of Corporate Entity orCorporate Alter Ego doctrine. It is an exception because the

application of the doctrine seeks to hold the stockholder ormembers of the corporation personally liable for corporateobligations.

f.

For the doctrine to apply, any of following circumstances mustobtain:

i.

Corporate fiction is being used to defeat publicconvenience. The convenience is the creation of a separateand distinct person from the stockholder or members to

facilitate the transaction of business. These are referred to asthe Alter-Ego cases. An example Is when a stockholder or

member who has an unsavory reputation utilizes corporatefiction to hide his true identity for illegal purposes, or

ii.

It justifies a wrong, protects fraud or defends crime. Theseare the referred to as the Fraud cases.


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g.

To sustain the application of the doctrine-to alter-ego cases, resorthas been had to the instrumentality Rule. The requisites of which

are:i.

There is complete domination of control of policy and

business practice

ii.

The control is used to commit the fraudiii. The control used is the proximate cause of injury or loss

h.

The residence of a corporation is ordinarily the place ofincorporation. For venue purposes, a domestic corporation is aresident of a particular province, city or municipality.

i.

Tort liability can be imposed on a corporation because generallyspeaking, the rules governing liability of a principal or master for atort committed by an agent or servant are the same whether the

principal or master be a natural person or a corporation. Hence,

when a tortuous act is committed by an officer or agent of acorporation under express direction or authority of the corporation,It would be liable

j.

A corporation is a person, in proper cases, within the due processand equal protection clause of the Constitution. Just like a naturalperson, It cannot be deprived of Its life and property due processHowever, it cannot exercise constitutional rights is inconsistentwith its being an artificial being, such as protection of liberty. Note

however that while a corporation can invoke the right againstunreasonable search and secure, there is a legal way to obtain the

required information as a corporation cannot refuse to produce itsbooks and records lawfully required rely by the appropriategovernment agency. Hence, it has been held that when acorporation, vested with special privileges and franchises, ischarged, with abuse of such privileges and franchises cannot claima right against self-incrimination when directed to produce itsbooks and records.

h.

As a rule, no criminal action can lie against a corporation. A

corporation cannot commit felonies as provided for in the RevisedPenal Code because artificial beings are incapable of intent, nor

can it actually perform an overt act.

i.

To make a corporation criminally liable, the Supreme Court

clarified that it is necessary that the statute, by express words orby necessary intendment include corporations within the personswho could offend against criminal laws and the legislature must atthe same time establish a procedure applicable to corporations.Hence, the court acquitted the president of a corporation who


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signed a trust receipt as the law prevailing prior to the enactmentof the Trust Receipts Law did not provide for the existence of

corporate criminal liability

j.

It cannot be entitled to moral damages. Note the ruling in

"Mambulao-Lumber vs.. PNB allowing recovery of moral damagesfor a besmirched reputation which was modified by the case ofAcme Shoe vs. Court of Appeals when the Supreme Court saidthat: mental suffering can only be experienced by one having anervous system and it flows from real ills, sorrows and grief of life,all of which cannot be suffered by respondent banks as an artificialperson. The subsequent case of Solid Homes vs. Court of Appealsprovided that there is not abandonment of the Mambulao rulingbecause it is not ah en banc decision. This was followed by AssetPrivatization Trust vs. Court of Appeals, which restated Mambulao,

then again by ABS-CBN v Court of Appeals stated that Mambulao

is an obiter dictum, then BPI vs. CasaMontessori Internationale,which again cited Mambulao and held that for breach of thefiduciary duty required of a bank, a corporate client may claimmoral damages when its good reputation is besmirched by the

breach, and social humiliation results therefrom. The latest IsFilipinas Broadcasting Network, Inc. vs. Ago Medical andEducational Center where it was held that Article 221 The CivilCode allows the recovery of moral damages on cases of libel,slander or any other form of defamation without qualification as to

whether the plaintiff is a natural or juridical person. While thecourt may allow the grant of moral damages to corporations, it is

not automatically granted; there must be proof of the existence ofactual basis of the damage and its causal relation to thedefendant's acts.

k.

When a corporation is said to have only those powers of propertiesexpressly authorized by law or incident to its existence, we look towhat is provided for by law or its charter first, then determine thecausal connection between the act or power with what is express.

l.

This attribute is a recognition of what is known as the "Theory ofSpecial or Limited Capacities. The opposite of this theory is the

"Theory of General "Capacities" which maintains that a corporationcan exercise any and all powers that may be exercised by persons.

m.

Partnerships, corporations can only exercise those expresslyauthorized by law, can be implied or are necessary to carry out itspurposes, such as acts In the usual course of business orIncidental to y its existence because they attach to a corporationupon its creation and said to be inherent such as the right of


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succession or to sue. Natural persons or partnerships, on the otherhand can exercise or perform any act provided! it is not contrary to

law. The reason being that corporations owe their existence to thestate, while natural persons or partnerships.

Express and Implied powers can further be distinguished as follows:

(a)

Express powers deal with main business, object or purposed ofthe corporation, while Implied powers deal with the means andmethods of attaining the object or purpose

(b)

Express powers are determined by the language of the law andits charter while Implied powers may change according to .time,place and circumstances,

(c)

Test of Express powers is whether they are found in the Words ofthe law or charter while the Test of Implied powers is whetherthey are purely incidental to Its express powers and isreasonably necessary to their being carried out

The right of succession refers to its continued existence unaffected byanything that happens to its stockholders or members limited only by the termstated in its Articles of Incorporation.

It does not contemplate Corporate Immortality but rather a continuity ofexistence irrespective of that of its components.

Under the Code, the term of a corporation is fifty (50) years is subject torenewal.

KINDS OF CORPORATIONS

There are two basic kinds of corporations.

1.

A stock corporation is one whose capital stock is divided into sharesand are authorized to distribute to the holders of such shares dividends

or allotments of the surplus profits on the basis of the shares held.

2.

A non-stock corporation Is one where no part of its income is

distributable as dividends to Its members, trustees or officers, and whenany profit is obtained as an incident if its operations shall, whenevernecessary or proper be used for the furtherance of the purpose/s forwhich the corporation was organized


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3.

These general types of corporations have also been distinguished as civilcorporations referring to those organized for the benefit, pecuniary or

otherwise, of its members as opposed to an eleemosynary or charitablecorporation that is organized to administer a charitable trust

4.

The provisions on stock corporations apply in the absence of specificprovisions covering non-stock corporations.

DIFFERENCES BETWEEN STOCK AND NON STOCK CORPORATIONS

1.

Subject to the Articles of Incorporation or By-Laws, the right to vote maybe limited, broadened or denied to some extent.

a.

Unless so provided, each member is entitled to one vote.

b.

In exercising the right, he may vote by proxy and also by mail orother similar means as authorized by the Articles of Incorporationor By-Laws with the approval of and under conditions prescribedby the SEC.

2.

Membership and all rights are personal and non-transferable unlessprovided by the Articles of Incorporation or By-Laws.

a.

It may be terminated in the manner and for the uses provided in

the Articles of Incorporation or By-Laws

b.

Note that courts have no power to strip membership as itconstitutes an unwarranted and undue interference with the rightof a corporation to determine its membership.

c.

Termination of membership .carries with it all rights to propertyand other privileges unless By-Laws provide otherwise. Note thatadmission is an expressly granted power in the Corporation Code.

3.

It may have any number of trustees as fixed in the Articles of

Incorporation or By-law from the ranks of its membership.

a.

The term of the original trustees is such that 1/3 of their numbershall serve for a year, the second 1/3 for two years and the third1/3 for three years

b.

Trustees subsequently elected shall then serve for a term of threeyears. Trustees elected to fill vacancies, shall only serve for theunexpired portion.


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4.

The members elect corporate officers, unless otherwise provided byArticles of Incorporation or By-Laws.

5.

Meetings can be held outside the place of principal business. Provided,

there be notice of the date, time, and place and should always be in the

Philippines

PROBLEMS CONCERNING NON-STOCK CORPORATIONS

1.

A non-stock corporation cannot amend its Articles of Incorporation andconvert itself into a stock corporation as the members are not entitled toshare in the profits of the corporation as / all present and future profitsbelong to the corporation. By converting to. a stock corporation it will bedeemed to have distributed corporate P assets among members without

a. prior dissolution. On the other hand, if it were a stock corporation at

the onset, it may be converted to a non-stock corporation as thecorporation is not distributing assets without dissolution, but rather,they are waiving-their rights.to any profits/dividends.

2.

XY is a recreational club which was organized to operate a golf course forits members with an original authorized capital stock of PHP100,000,000.00. The Articles of Incorporation or the By Laws providedfor declaration of dividends although there was a provision that after itsdissolution all its assets shall be given to a charitable corporation. In

this case, XY is a stock corporation as the power to declare dividends isinherent in a stock corporation and the provision allowing for

distribution of its assets to a charitable corporation does not prohibit adeclaration of dividends before dissolution.

PURPOSE OF ORGANIZATIONNon-Stock Corporations may be organized for the following

purposes: charitable, recreational, fraternal, religious, trade, cultural,educational, literary, scientific, professional, social, civic service,industry, agricultural, chambers or any combination subject to special

provisions

DISTRIBUTION OF ASSETS UPON DISSOLUTION

1.

The assets of a non-stock corporation are to be distributed in accordancewith the following rules:

a.

Liabilities and obligations of the corporation shall be paid, satisfiedor discharged, or adequate provisions made therefore


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b.

Assets held under a condition requiring return, transfer]

conveyance and which condition occurs by reason of dissolutionshall be returned, transferred and conveyed.

c.

Assets received and held by the corporation subject to limitationspermitting use only for charitable, religious, benevolent,educational or similar purposes, but not subject to return, transferor reconveyance by reason of dissolution shall be transferred tocorporations undertaking similar activities pursuant to the plan ofdissolution

d.

Other assets shall be distributed in accordance with the Articles ofIncorporation or By-Laws determining the distributive rights of itsmembers or0as provided

e.

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

2.

The plan of distribution must be consistent with the distribution rulesabove-outlined. This plan is adopted pursuant to a majority vote of theBoard of Trustees, then submitted for the affirmative vote of 2/3 of themembers having voting rights at a regular or special meeting, priornotice having been given.

ADDITIONAL DISTINCTIONS BETWEEN CORPORATIONS

1.

As to the state of incorporation- it is a domestic corporation ifincorporated under Philippine law or a foreign corporation if incorporatedunder the laws of another country. Note though that for purposes oftransacting, business in the Philippines, it must be one whose state ofincorporation allows Filipino corporations of citizens to do businesstherein.

2.

As to whether it is open to the public or not it is a closed corporation whenit limits stockholders to a number not exceeding 20, has limitations on

transfers and does not list in the stock exchange or makes any publicoffering of its shares or it is an open corporation when its stocks arepublicly traded

i.

A corporation that goes from close to open is said to be going publicpublic.", while one that goes from being open to close is said to begoing private


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3.

As to whether it is a public or private corporation- a public, A corporationis one that is formed for the government of a portion of the state for the

general good, while a private corporation is one that is formed toundertake a private activity which includes government owned or

controlled corporations. It also includes quasi-public corporations that

have accepted from the state a franchise involving 0o the performance of apublic activity for profit.

4.

As to legal right to exist- it is de jure, a corporation by estoppels or acorporation by prescription.

i.

A de jure corporation is one that is considered as a legally constitutedcorporation, having fully complied with all the requirements of law.

ii.

A de facto corporation is one that is so defectively created as not be a

de jure corporation, but nevertheless Is the result of bona fide attempt

to incorporate under existing statutory authority coupled with theexercise of the corporate powers and is recognized by the courts assuch upon grounds of public policy in all proceedings, except upon adirect attack by the State questioning its corporate existence;

iii.

The requisites of a de facto corporation are:1.There is a valid law under which the corporation may be

recognized.2.

Thereisa bona fide attempt in good faith to incorporate

3.

There is an actual valid exercise of corporate powers.

iv.

In general a de facto corporation is deemed to have substantial legalexistence except as against the state. Consequently it has the samecorporate power and liabilities like a de jure corporation. It is obligedto pay taxes contracts that are entered, into are valid and binding, it isallowed to bring suit

v.

Its existence is not open to a collateral attack. The only way by whichis can be; attacked is by way of quo warranto proceedings to determinethe right to the use or exercise of a franchise or office and to oust the

holder from his enjoyment of the same, that is initiated by the SolicitorGeneral because (a) it is the state's right or authority that is usurped

(b) it would produce endless confusion if it's existence is questioned inevery suit that it is a party to (c) it is in the public interest to maintainthe validity of the business transactions entered into with de facto

corporations,

vi.

A corporation by Estoppel arises when the persons assume to act as acorporation knowing it to be without authority to do so; in this casesaid persons shall be liable general partners for debts, liabilities and


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damages and it cannot as a defense, neither can one dealing with itresist performance. Hence, one who assumes an obligation to an

ostensible corporation as such; cannot resist-performance thereof onthe ground that there was in fact no corporation.

vii.

A corporation by prescription is one that is not formally organized assuch but has been duly recognized for a substantial length of time as acorporation with rights and duties that are enforceable under the law.In the Philippines, the Roman Catholic Church is recognized as such.

COMPONENTS OF A CORPORATION

1.

The components of a corporation are:a.

Corporators are those who compose the corporation either as

stockholders or members

b. Incorporators ate those stockholders or members mentioned in thearticles as originally forming the corporation and are signatoriesthereof

2.

Other components are:a. Promoters are those who bring about the incorporation and

organization of a corporation

b. Subscribersare those who have agreed to take out and pay for originalunissued shares of a corporation formed or to be formed.

c.

Subscribers become stockholders upon payment of the agreedconsideration for the purchase of shares a provided for in theirsubscription contracts.

d.

As to number of components. It is a corporation it consists of morethan one member, or a corporation sole if it consists of only onemember.

e.

A corporation sole is an ecclesiastical corporation as it is composed

entirely of a spiritual persona established to further a religion andperpetuate the rights or a church. The opposite of an ecclesiastical

corporation is a lav corporation,

NUMBER AND QUALIFICATIONS OF INCORPORATORS

The required number and qualification of Incorporators are:a.

5 not more than 15 persons, exception when It is a corporation sole


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b.

Capacity to enter into contract, the act of forming a corporation being acontractual in nature. Further, the articles must be acknowledged to

secure the state against the possibility of a fictitious name to besubscribed and to furnish proof of signatures.

c.

A majority must be residents of the Philippines. It is mandatoryrequirement because the business is to be conducted in the Philippines

d.

They must be residents of the Philippines. It is a mandatory requirementbecause the business is to be conducted in the Philippines

e.

They must own or subscribe to at least one share of stock

CAPITALIZATION

Stock /corporations shall not be required to have a minimum authorized

capital stock, except as otherwise provided by special laws, subject, to theprovisions of Section 13 providing that 25% of the authorized capital stockmust be subscribed and 25% of which must be paid up, the remaining balanceto be payable on a date fixed or upon call, which in no case shall be less than

Php 5,000.00

a. Examples of capitalization requirements as fixed by law are:Universal Bank- PHP 4,950,000,000.00. Commercial Bank PHP2,400,000,000.00, Thrift Bank in Metro-Manila PHP 325,000,000.00

and a Rural Bank in Baguio PHP 6,500,000.00.

b.

Corporations may subscribe but cannot be considered in determiningcompliance with 25/25 rule because they are not incorporators. Suchhowever is debatable as Section 13 states authorized capital stockwithout qualification

PROCESS OF INCORPORATION:

1)

The process of incorporation begins with the execution of the Articles of

Incorporation, which upon return by the SEC, together with the Certificateof Incorporation constitutes it as the Charters of the corporation.

2)

The Articles of Incorporation is the document prepared by the person'sregion of decomposing the Corporation and subsequently filed with the SEC

containing requirements of law. When a group of persons which to create acorporation, they would have to execute documents and comply with therequirements of this state before being given juridical personality, sincesuch is a mere privilege. This is another explanation for what is known asthe Concession Theory


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a.

in addition, since incorporation involves the execution of contractsamong members, between members and the Corporation, and between

members or the Corporation and the state, the process of incorporationis known as the Contract Theory.

CONTENTS OF THE ARTICLES OF INCORPORATION

1. Nameof the corporation

- it is from the name that a corporation acquires juridical personality- it is through the name that it exercises the power of succession- it is how it is distinguished from another corporation

a.

If the name is identical, deceptively, or identical or confusingly similarto that of an existing corporation, or to any name already protected by

law, or patently deceptive or contrary to law it cannot be allowed.

b.

The change of name does not dissolve the corporation and becomeseffective only upon approval of the amendment of the articles.

c.

Use of corporate name is a right in REM. If a corporate name of anothercorporation is confusingly similar to its corporate name, it is entitled toseek its cancellation as the appropriation of a dominant part isconsidered an infringement. Test is priority adoption.

d.

The SEC has authority to deny the registration corporate name that isin its estimation cause confusion.

e.

It must not be contrary to law. Example: section 1, RA 226 prohibits theuse of the emblem, seal, and name of the United Nations.

2. Specific purpose for which it is being incorporated. If it has more than

one, the articles must state what is the primary purpose to facilitate itsclassification.

a.

Provided, and on stock corporation may not include the purpose that

would change or contradict its nature as such.

b.

Other reasons why the purpose is required are:i.

This operates as authorization to management to enter intocontracts, the directors, officers are made aware of the scope

of the allowable business activity.ii.

Persons who invests will know where and in what kind ofbusiness this money will go.

iii.

Third persons can be made aware whether the corporationsthis transaction within its authority.


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3.

These where principal officeis located is required for effective regulation /

supervision. It refers to the place where the books and records are kept.

a.

Change of address to another city or municipality requires amendment

of the articles. If otherwise, note is sufficient.

4. Statement of Name, nationalities and residences of incorporatorsdetermines prima facie compliance with constitutional and legal requirements.

5

Term of existence is for a maximum of 50 yearsfrom date of incorporationunless sooner dissolved or the term is extended.

a.

Be extended for periods not exceeding 50 years at any instance theamendment of the articles. Provided, no extension can be made earlier

than five years prior to original or subsequence expiry date unless

justifiable reasons for an earlier extension is given to the SEC.

b.

Amendment requires majority board action, confirmed by 2/3 ofstockholders or members, who shall have the right of appraisal

available.

c. If delay in affecting amendment is due to the neglect of the office withwhom it is required to be filed or a wrongful refusal on its party toreceive it, it would be considered as having been file before the expiry

date. This is known as the DOCTRINE OF RELATION. If due to theforce majeure without the intervention of the Corporation, it can also

be considered as filed on time.

d.

In the event of failure to have the term extended, the remedy is to re-incorporate. The requisites of which are:i.

meeting of stockholders to affirm the decision to re-incorporate.Those who are not willing will have to be their participation afterprovisions for liabilities have been made

ii.

copy of passed resolution signed by all stockholders voting for re-incorporation countersigned by the president and secretary is

submitted to the SEC with the new articles of incorporationiii.

deed of assignment of assets and liabilities, including the name of

the defunct Corporation to the new one is to be attached to theArticles.

6.

Number of directorsor trusteeswhich shall not be less than 5 nor morethan 15.

7.

Names, nationalities and residences of the persons who shall serve asdirectors / trustees until the first regular election.


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8.

If a stock corporation, the following must be stated:

1.

amount of authorized capital stock

2.

number of shares into which it is divided; if it be with or without

par value3. names, nationalities, residences of original subscribers and the

amount subscribe and paid.

ii.

Defining topic of stock and related terms:

authorized capital stock - is the amount fixed in the articles to besubscribed and paid, or agreed to be paid by stockholders in money,property services or other means at the organization of the corporation

and after wards and upon which it is to conduct business

subscribed capital stock - is the amount of capital stock that issubscribed

outstanding capital stock- is the portion of capital stock issued andheld by persons other than the corporation itself

unissued capital stock - is the portion of capital stock not issued orsubscribed

paid up capital stock - is the portion of subscribed or outstanding

capital stock that is paid

Legal Capital - is the amount equal to the aggregate par value in orissued value of outstanding capital stock.

iii.

Shares or stocks or the representation of ones right or interest in acorporation, its management from the right to vote, incorporateearnings may be of dividends, and property upon dissolution.

iv.

The authorized capital stock when divided into shares may:

1.

Further be divided into classes/series or both, having rights,privileges or restrictions as stated in the Articles. Absent such,they are equal in all respects. This classification may also be

undertaken for the purpose of complying with constitutional orlegal requirements.

2.

When so classified, they may further be divided into commonshares entitled to a pro-rata division of profits or preferred shares


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that are given preference in the distribution of assets, dividendsor other privileges, provided such are not in violation of the

Corporation Code or do not have a right greater than corporatecreditors. Such preferences are decided by the board, as it may be

authorized to fix terms and conditions, which shall be effective

only upon filling of the appropriate certificate with the SEC.

3.

If shares are classified as common, they may or may not have parvalue except when it is a bank, trust company, utility, building orloan association.

4.

If the shares are classified as preferred, it

a.

should always have par value

b. it may be deprived of voting rights, together with redeemable

shares but if so, there must be class/series which shall havefull voting rights or In addition, even if voting rights are notenjoyed, holders of such shares shall still vote in thefollowing instances:

i.

amendment of articlesii. adoption or amendment of by lawsiii.

Sale, lease, exchange, pledge or other disposition of all orsubstantially all of corporate property

iv.

increase/decrease of corporate bonded indebtednessv.

increase/decrease of corporate capital stock

vi.

merger/consolidationvii.

investment in another Corporation or business, andviii.

dissolution

5.

If shares are without par value, they:a.

are considered fully paid and none assessable, meaning thestockholder is no longer liable to the corporation

b.

cannot be issued for less than P5.00c.

entire consideration is treated as capital, thus not available

for dividends.

6.

Shares may also be classified as:

a. FOUNDERs Share (Preferred shares) - which are classified

in the articles as having been given certain rights orprivileges not enjoyed by others. Provided, if the exclusiveright to vote and they voted for in the election of the Board ofDirectors, it should be for a limited period not exceeding fiveyears subject to SEC approval.


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b. REDEEMABLE SHARES which the Corporation may issuewhen expressly allowed by the Articles and may be

purchased and taken up by the Corporation upon theexpiration of a fix period, regardless of the existence of

unrestricted retained earnings and such other terms and

conditions stated in the articles and the certificate of stock.Note though that they hold the power that the SupremeCourt has held in the case of Republic Planters Ban v.Agana, Sr. that the Corporation after redemption, must havesufficient assets in its books to cover debts and liabilitiesinclusive of capital stock. As a rule, redeemable shares arenot to be re-issued unless allowed by its Articles

c.

TREASURY SHARESare shares that have been issued andpaid for but subsequent reacquired by purchase,

redemption, donation or any other lawful means. It may

again be disposed of for a reasonable price as determined bythe board. Note that its acquisition must be always befunded by surplus profits, otherwise it violates the TRUSTFUND DOCTRINE as capital is impaired.

9. If non-stock, amount of capital, names, nationalities, residences ofcontributors and amounts.

10. Such other matters that are not inconsistent with law, which they

incorporate diversity be necessary and convenient. Note, if the corporation isto engage in nationalized business activity, a prohibition must be stated that

it will not allow any transfer of stock or interests that will reduce itsownership to less than the percentage required by law.

FORM AND ATTACHMENTS TO ARTICLES

The Articles, as we've been in Filipino or English, must be accompanied by:a.

treasures affidavit indicating compliance with the 25/25 ruleb.

if favorable recommendation, if required, and

c.

should be up knowledge to guard against fictitious names andsignatures.

PROCEDURE FOR AMENDMENT

1.

Unless otherwise provided by the code or special law, amendments makethe place by(a) a majority vote of the board, and(b) 2/3 vote or written asset of outstanding capital stock or members


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(c) the original and amended articles are then submitted to the SEC withunderscoring, duly certified by corporate secretary and majority of the

directors that it has been duly approved by the record vote(d) in case of corporations that are regulated by another government

agency, a favorable recommendation must be submitted likewise.

The rule that allows written assent does not apply when the object ofthe amendment is to extend or shorten the term or the increase ordecrease capital stock.

2.

The amendments are effective(a) Upon approved by the SEC, or(b) from date of fighting with the SEC If not opted upon within six monthsfrom date of fighting for a cause not attributable to the Corporation.

This rule is not applicable to an amendment the short end of term as a

means to dissolve the corporation.

3. If it is a foreign corporation amending its articles, it must file within 60 days,and shall be authenticated copy of its articles of incorporation which should

not enlarge or alter the purpose for which it was granted a license.

4. Amendments may be rejected or disapproved if(a) not substantially in accordance with the prescribed form(b) purpose is unconstitutional, illegal, immoral or contrary to

government rules or regulations(c) treasurers Affidavit is false

(d) required percentage of ownership of capital stock has not beencomplied with

(e) no favorable recommendation for banks, quasi banking, building andloans associations, trust companies and other financial intermediaries,Insurance companies, public utilities, corporations and other governmentcorporations covered by special laws indicating that the amendments are inaccordance with law is submitted. Provided, that the Corporation be given bythe SEC a reasonable time within which to correct or modify the objectionableportions of the articles or amendments thereto.

COMMENCEMENT OF CORPORATE EXISTENCE

A corporation commences to have existence from the issuance by the

SEC Of a certificate of incorporation under its official seal. The effect of whichis to constitute its stockholders or members and their successors as a BODYPOLITIC and CORPORATE under the name and for the term stated in thearticles.(SEARCH)


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CORPORATE MANAGEMENT

1.

There are three levels of control in the corporate hierarchy:

a.

The board - which Dicker means corporate policy and prescribes the

manner of general management of its business activities. Towards thisend, the law provides that all corporate powers of all corporationsformed under it shall be exercised, all business conducted and allproperty held by a board of directors or trustees. This is for thepurpose of efficiency in exchange for profits.

b.

The corporate officers- ward charge with the mandate to execute thedecisions of the board and who, oftentimes, determining the bestmanner by which the business is to be run.

c.The stockholders or members - who are considered as having

residual power over fundamental corporate changes as they arerequired by law to give their assent by the exercise of the right to vote.Note though that they hold the power to elect themselves to the board.In fact, the authority to elect is vested solely in them. Directors cannot

indirectly usurp such authority or disregard an election conductedpursuant to such authority.

2.

The directors are the executive representatives of the Corporation who arecharged with the administration of its internal affairs and management and

use of its assets. A corporation can only act through its directors andofficers. The board is the central power, which authorizes the executive

agents to enter into contracts and to embark on the business. It must benoted that in the exercise of corporate powers that:

a.

With the exception of powers reserved by law to stockholders ormembers any action by them is advisory in a resolution passed notrecognizing the board is without effect.

b.

The powers that are expressly reserved by law to the stockholders ormembers are:

(a) removal of directors or trustees(b) granting of compensation, other than for diems, the directors

(c) Rectification of acts of self-dealing directors or trustees,interlocking directors, disloyal directors

(d) The litigation of power to amend by laws

(e) calling off a meeting, upon good cause, when no person isauthorized call it

(f) wend management of the close Corporation is vested in thestockholders.


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c.

The courts or the SEC cannot interfere unless the acts are sounconscionable and oppressive so as to amount to a wanton

destruction of the rights of the majority. As long as they areundertaken in good faith, they are not reviewable. This is known as the

BUSINESS JUDGMENT RULE.

d.The principal remedy to internal dissension our corporate elections asthe majority must be a allowed to rule as long as he keeps within thepowers provided in the charter.

QUALIFICATIONS FOR ELECTION:

1.

A stockholder or member who would like to be elected to the board shouldpossess the following qualifications:

a.

You must own at least one share or at least it should be listed in hisname as owner, if it is a nonstock corporation, he must be a member.

b.

What matters is legal title to the share. A person who does not hold

beneficial title, like the voting trustee in a voting trust agreement isallowed to be elected as a director.

c.

A pledgee / mortgatee on the other hand cannot be elected. She maynot be a stockholder for the present time but upon assumption of

office, it is absolutely necessary that he must own at least one share ofstock.

d.

One who has been elected director as a nominee of the PCGG whichholds the shares pursuant to sequestration is a de facto direct or asthe shares may only be voted by its members or proxies.

e.

Ownership is absolutely necessary upon the assumption to the officeof an elected director. Hence, a person can be elected even if he doesnot own the stock at the time of election. If he is not a stockholder, hemay be considered an ex-officio member without voting rights in the

board.

f.

Between husband and wife, if both are listed as owners, they arequalified to be elected but only one can be elected, unless they ownshares listed in their individual names.

2. Every developer must continuously own at least a share during his term,otherwise, you shall cease as the director. Any subsequent purchase does notreturn the director to his previous position.


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3. The majority must be residents of the Philippines as the business isprimarily undertaken in the Philippines.

4. Him us that have been convicted by final judgment of an offense punishable

by a period in excess of 6 six years or a violation of the code, committed within

a period of five years prior to the date of election.

5. Citizenship in the instances required by law. Example: corporation engagedin mass media is required to be 100% owned and managed by Filipinos.

6.

Such other qualifications that may be provided by the by-laws. Example: hemust have paid for his subscriptions in full. Disqualifications may also beprovided. Example: engaging in competing business, unjustified absencesduring the previous term, unless the stockholder resigns his currentemployment with the Corporation.

a.

It would not be acceptable, however, if the by-laws will provide that thequalifications or disqualifications shall be subject to the judgment ordetermination of the board, what is required is that the same shall beexpressly spelled out in the bylaws. Absent the provision, a

corporation cannot require additional qualifications other than thatprescribed by law.

b.

A proposal that the directors come from the ranks of corporate officersis not in accordance with law. They must come from the stockholders

or members of the Corporation.

c.

While no age requirement has been provided by law, a stipulationallowing a minor to be elected as a member of the board is not somecorporate practice as they have limited capacity to act. It has alsobeen said that since incorporators are required to be of legal age, thesame requirement should be applied to subsequent directors.

HOW ELECTED:

1. From among the holder of shares or members or a term of one year untiltheir successors are elected and qualified.

2. Note though that in a nonstock corporations, the terms of trustees isbetween 1 to 3 years for the original trustees, then 3 years for those

subsequently elected and for educational corporations it is between 1 to 5years for though subsequently elected.


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REQUIRMENT FOR VALID ELECTION:

1.

The requirements for embedded election area.

the presence of a majority of the capital stock or members authorized

to vote

b.

election must be made by ballot, if requestedc. number of votes to elect must be obtained

2.

In a nonstock Corporation, unless otherwise provided in the Articles / By-Laws, A member has as many votes as there are trustees but only one votegoes to each candidate.

3.

In a stock corporation, a stockholder has as many votes as he has shares, ifthe by-laws are silent, he can:

1. Vote the number of shares for us many persons as there are directors

to be elected or

2.

Cumulate his votes be giving one candidate as many votes as there arenumber of directors to be elected.

Ex. 100 shares x 5 direct verse means he has 500 votes and he cangive one candidate or

3.

He may distribute to as many candidates as he deems fit PROVIDEDthat the total number of shares cast shall not exceed the number of

shares owned multiplied by the number of directors to be elected

4.

Cumulative Voting are allowed if no election can be had because therequired majority of stockholders or members cannot be had but itcannot be adjourned sine die or indefinitely.

5.

Neither is voting by zones and out as implied from section 24 when itsays that the majority of the capital stock or members is required to bepresent in a meeting. Note that the SEC only allows teleconferencing orvia videoconferencing for meetings of the board.

6.

Stock that is delinquent or in the treasury do not have voting rights.

NUMBER OF DIRECTORS/TRUSTEES

1.

The number of directors to be addicted in a stock corporation are 5 no morethan 15.

2.

In a non stock Corporation, there should be at least 5 but in the nonstockeducational corporation, there should be at least 5 no more than 15


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3.

In a close Corporation, there may be no board when the stockholders equityto manage the corporation themselves. In a Corporation sole, there is no

board.

INDEPENDENT DIRECTORS:

1. An independent director is a person who, apart from these fees andshareholdings, is independent of management and free from any businessor other relationship which could, or could reasonably the perceived to, butthe reality interfered with his exercise of independent judgment in carryingout his responsibilities as a director.

a.

He must(a) not have any personality, financial, her professional ties with theCorporation, its affiliates, and subsidiaries that may adversely affect his

ability to act objectively

(b) not have been employed in an executive capacity by the Corporation,related to companies or any of its substantial shareholders within thelast five years(d) not engaged in any transaction with the Corporation, pretty good

companies or any of its substantial shareholders, other than thoseconducted at arms lengthand are immaterial or insignificant.

b.

Other qualifications(a) Ownership of at least one share

(b) College dread weight or has engaged or exposed to business of theCorporation for not less than five years, and a person of integrity,

probity and hard-working.

c.

An independent director must not own more than 2% of the shares ofthe company and/or covered companies or any of its substantialshareholders as per RA 8799.

2.

Object is to minimize the incidence of front of and conduct can the boardand is meant to call attention the deviations from the path of goodcorporate governance.

3.

Independent directors are required in the following instances

a.

issuers of registered securities to the public, requires at least 2 or 20%of the board, whichever is lesser.

b.

In bank requires at least 2.

c.

As stock or securities exchange requires at least 3, and the presidentmust be an independent director.

d.

Finance companies, investment houses, brokers, investmentcompanies, preneed companies and subsidiaries of foreign corporationsoperating and are listed in the Philippine Stock exchange requires at least 1.


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LIMITATIONS ON THE EXERCISE OF CORPORATE POWERS BY THEBOARD:

1.

The action requires certification of the stockholder our members.

Example: investment of corporate funds in another corporation orbusiness other than the primary business of the corporation.

2.

The removal of directors which requires that

(a) it must take place at the regular meeting of the Corporation or specialmeeting called for that purpose

(b) there must be previous notice to stockholders or members of theintention to propose such removal. The notice must be specific and in

writing, by publication or sending of a copy of the notice

(c) The removal is affected by 2/3 vote of capital stock / membersentitled to vote except that a director elected by cumulative votingcannot be removed as it affects is to deprive minority stockholders or

members of the representation.

a. Any special meeting the cause removed by is to be called by theSecretary on order of the President or upon written demand ofstockholders representing at least a majority of the outstanding

capital stock or of the members. If the Secretary, refuses, does notexist, or fails to give notice, the call for a meeting may be

addressed directly to stockholders or members by thestockholders or members signing the demand.

b.

The election of new directors may take place in the same meeting.

3.

In close corporations, when its articles provide that it be managed by thestockholders.

DELEGATION OF CORPORATE POWERS

1.

Generally, the exercise of corporate powers can be delegated.

2.

There can be no delegation if the

(a) power rests only with stockholders / members(b) effect of delegation is to cede entire supervision / control over thecorporation(c) when the by-laws work authorization for an act restricts thedelegation.


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3.

A valid delegation can take place when the Corporation, Actingthrough board and by resolution, designates a particular person/s or

entity to exercises specific corporate power subject to the above statedlimitations.

a.

Or when an executive committee has been created by and underthe provisions of the bylaws.

b.

The committee is a body composed of no less than 3 membersof the board to whom corporate powers are delegated to assureprompt and speedy action and solution without the necessity ofboard meetings and manages the Corporation between meetingsof the board. It may act by majority vote on such matters thatare within the competence of the board as may be delegated toit in the bylaws or on majority vote of the board.

c.

The committee has no power to act on:(a) approval of option requiring stockholder or memberapproval.(b) filling of vacancies in the board

(c) Amendment or repeal of bylaws in the adoption of a new by-laws(d) amendment or repeal of any board resolution which by itsterms is not so repealable or amendable.(e) distribution of cash dividends to stockholders

FORMAL ORGANIZATION

1.

Immediately after the election, the directors of the corporation mustformally organize, by the election of a president, who shall be thedirector, a treasurer, who may or may not be a director, as secretary whomust be a resident and citizen of the Philippines and such others as maybe provided for in the by-laws.

a.

Any person may hold concurrent positions except that of the

President-Secretary our President-Treasurer.

b.

And appointive or elected public official cannot serve as acorporate officer of any private bank except when the service isincidental the financial assistance provided by the government or a

GOCC to the bank or unless otherwise provided.

2.

30 after election the secretary or any other officer shall submit to theSEC the names, nationalities and residents of thedirectors/trustees/officers elected.


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a.

Should any one of them die, or cease to hold office, such shallimmediately be reported to the SEC.

3.

Should a vacancy arise due to causes other than remove on or

expiration, it may be filed by the board by majority vote of the remaining

directors if still constituting a quorum.

a.

Otherwise, the vacancy should be filed by the stockholders ormembers in a regular or special meeting, the stockholder ormember so designated or elected shall only serve the unexpiredportion of the term.

4.

Designating the losing candidate who polled the highest number of votesin the immediately preceding election to fill up a vacancy which isautomatic in nature is contrary to law as an elections required.

a.

Where a heartbreak office is not specifically indicated in the rosterof corporate offices in the bylaws of the Corporation, the board ofdirectors may also be empowered under the bylaws to createadditional offices as may be necessary.

b.

If the bylaws provide, the board may create a board of advisors wasfunction should be purely advisory and should not in any mannerbe granted the authority to participate in the management andcontrol of the affairs of the Corporation since they belong

exclusively to the board.

c.

A newly elected board is not bound by the choice of officers of theprevious board as it violates the law as immediately after theelection, the newly elected board must for formally organized byelecting the corporate officers. A provision that provides that theincumbent Vice-Chairman should automatically be the Chairmanof the succeeding board, if elected, is not allowed

5.

The power to elect corporate officers is a power that is to be exercised bythe board and cannot be delegated.

HOW CORPORATE POWERS ARE EXERCISED

1.

Corporate powers are exercised and performed by the board through

meetings. This so because it must act as a body and a decision mustalways be reached after affording opportunity for consultation. Inaddition, Directors are trustees have the power to act other than as aboard.


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2.

The exceptions are:a.

directors happened to be the only stockholders

b.

act is undertaken by someone authorized by the boardc.

stockholders wave the necessity of having a meeting

d.

when there is an executive committee

e.

when the Corporation enters into a management contractf. when the act is ratified at a subsequent meeting.

3.

The requisites of a valid board meeting are:a.

meeting of the directors/trustees should be assembled as board.(Directors/trustees cannot attend or vote by proxy as theirpersonal judgment is required

b.

presence of a required quorumc.

the decision is reached by a majority vote of the quorum or by aentire board as required by law

d. meet at the time, place and manner provided in the bylaws.

4.

In the absence of a provision in the by-laws, a majority of thedirectors/trustees as is stated in the articles of incorporation shallconstitute a quorum.

5.

The formula for determining the majority this one half plus one of theentire numbers of directors/trustees notwithstanding the existence ofvacancies in the board.

6.

A quorum once established is not broken by the subsequence withdrewone of a part of a faction of those present, unless the transaction

requires the affirmative vote of a greater proportion.

WHAT IS CORPORATE GOVERNANCE AND CORRESPONDING THEGENERAL RESPONSIBILITY OF DIRECTORS/TRUSTEES

1. Corporate governance is a system whereby shareholders, creditors, and otherstakeholders of incorporation ensure that management enhances the value ofthe corporation as it competes in an increasingly global marketplace.

2. It prescribes that the board of directors is primarily responsible for the

governance of a corporation.

3. Hence, a directors office is one of trust and confidence. He should act in thebest interest of the Corporation in a manner characterized by transparency,accountability and fairness. He should exercise leadership, Prudence andintegrity in directing the Corporation towards sustained progress over the long-term. A director assurance certain responsibilities the different constituents orstakeholders, who have the right to expect that the institution is being run in aprudent and sound manner.


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THREE FOLD DUTIES OF DIRECTORS

1.

They must be diligent. Compliance with the duty of diligence requiresthe exercise of reasonable care, prudence, and equates knowledge and

skill.

a.

The meaning and extent of the duty of diligence is to be understoodto mean that those who voluntarily take the position of directorsundertake that they possess, at least, ordinary knowledge andskill, and that they will use such in the performance of theirobligations.

b.

The level of care, skill and diligence that is required is that whichan ordinary prudent band with exercise in similar circumstances(Campos and Lopez-Campos). Such, however, varies, depending onthe nature of the business of the corporation. Example: a director

of a banking corporation is held to a higher standard of diligence

as compared to a director in a manufacturing corporation.

c.

Consequently, a director should exert effort to obtain a basicunderstanding of the business of the corporation. He must be

familiar with its operations. He should be able to prepare himselffor board meetings to be able to make an informed decision.

d.

This duty is specifically imposed by the Corporation code, when itprovides that: directors are trustee willfully and knowingly vote for

or assent the patently unlawful acts of the Corporation or who areguilty of gross negligence In directing its affairs shall be liable

jointly and severally are all damages resulting therefrom sufferedby the Corporation, its stockholders or members and otherpersons.

e.

Corollary to this duty of diligence is the protection afforded todirectors under the BUSINESS JUDGMENT RULE. If in thecourse of management, they arrive at the decision for which thereis a reasonable basis and they acted in good faith, as the result oftheir independent judgment, and uninfluenced by any

consideration, other than what they believe to be for the bestinterests of the Corporation, it is not the function of the court to

say that it should have acted differently and to charge the directorsfor any loss or expenditures incurred.

2.

They must be loyal to be keeping the interest of the Corporation abovepersonal motives. Compliance with this duty requires that the directoract in a manner characterized by transparency, accountability andfairness.


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a.

The basic principle to be observed is that a director should not usehis position to make profit or to acquire benefit the advantage for

himself and/or his related interests. He should avoid situationsthat may compromise his impartiality. If an actual or potential

conflict of interest should arise on the part of directors or senior's

executives, it should be fully disclosed in the concerned directorshould not participate in the decision-making. A direct or who hasa continuing conflict of interest of a material nature shouldconsider incubating or resigning.

b.

This duty is specifically imposed by the Corporation: in theprovisions regarding self-dealing directors, interlocking directorsand disloyal directors.

c.

The general rule is that a contract between a self-dealing

director/appropriation this voidable at the option of the

Corporation. Notwithstanding, the contract shall be valid when(a) presence of the director/trustee in the board meeting in whichthe contract was approved was not necessary to constitute aquorum

(b) is the vote is not necessarily approve the contract(c) that the contract is fair and reasonable under thecircumstances. In the case of an officer, the contract haspreviously approved by the board. If however, conditions (a) and (b)Are absent, the contract may be ratifed by 2/3 vote of the

outstanding capital stock in the meeting duly called for suchpurpose with full disclosure of the adverse interest being made at

the meeting and that the contract is nevertheless fair andreasonable. Note that there is no requirement that the Corporationsuffer damage.

d.

The rules that obtains as far as contracts between corporationswith interlocking directors is that the contract is valid as long asthere is no fraud and the contract is fair and reasonable. However,if a director's interest in one Corporation is substantial in hisinterest in the other Corporation/s is nominal, the contract shall

be subject to the provisions of Section 32 insofar as theCorporation/s where he has a nominal share as it is as if the

Corporation is transacting with the self-dealing director.Shareholdings in excess of 20% of the outstanding capital stockshall be considered substantial.

e.

When a director is disloyal by virtue of his office, he acquires forhimself a business opportunity which should belong to theCorporation, thereby obtaining profit, you must account for it byrefunding the same to the Corporation, even if the director risk his


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own funds in the venture, unless, his act is rectified by a vote ofthe stockholders owning or representing 2/3 of outstanding capital

stock. This is also known as the DOCTRINE OF CORPORATEOPPORTUNITY. The provision does not apply if:

(a) he acts in good faith,

(b) the Corporation is unable to undertake the opportunity or thesame is not essential to the Corporation

f.

the duty of loyalty of a director precludes the director fromacquiring an opportunity that is open to the Corporation becausethat is in effect competing with the Corporation, oftentimes withthe advantage of inside information thus depriving it of the profitsthat it would have otherwise earned. Whether the particularopportunity is one which properly belongs to the Corporation is aquestion of fact which must be decided in the light of the

circumstances of each case. This rule is premised on the principles

of trust. It is the position of domination and control that makesthe thing of corporate opportunity objectionable.

g.

Distinguishing between Section 31 and Section 34, the former

speaks of the acquisition of any personal or pecuniary interest inconflict with his duty in respect to a matter reposed in him inconfidence as to which equity imposes a disability to deal in hisown behalf, he shall be liable as trustee it must account for all theprofits that would have otherwise accrued to the Corporation.

What is violated is the trust specifically reposed, thus there is noratification, the latter speaks of a violation of the general trust that

is reposed on a director.

h.

Action for a violation of this GP is the liability for damages underSection 31 of the Corporation code and forfeiture of all the benefitsobtained.

3.

They must be obedientby keeping within the powers of the corporation.The duty of obedience simply means that directors are bound to observethe limits of their authority. They should not perform acts which are

beyond the powers of the corporation, there should be shown to act insituations where the law has given such prerogative the stockholders.

Should they go beyond the limits, they are personally responsible for anydamages which the Corporation may suffer unless they acted in goodfaith and with due care in the exercise of their business judgment.

a.

This means that the board must keep within the powers of theinstitution as prescribed in the articles of incorporation, by-laws,and existing laws, rules and regulations. Conduct and maintainthe affairs of the institution within the scope of its authority and


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prescribed in the charter and in existing laws, rules andregulations.

b.

The above principle is embodied in the concept of ULTRA VIRES

pronounce in the Corporation code that: no corporation under this

code shall process her exercise any corporate powers except thoseconferred by this code in its articles of incorporation and exceptsuch as are necessary or incidental to the exercise of the powers soconferred.

PERSONAL LIABILITIES OF A DIRECTOR

1.

Directors are to be held to be personally liable if he:

(a) Willfully and knowingly assents or votes about the unlawful act of

the Corporation

(b) He is guilty of gross negligence or bad faith in directing the affairsof the Corporation. Example is illegal dismissal of employees when

attended by bad faith or malice, where they would be solidarity liablewith the Corporation.

(c) Acquisition of any personal or backing any interest in conflict withhis duty in respect of matter reposed in him in confidence,

(d) Consents to the issuance of watered stocks or having knowledge of

the issuance of watered stock does not quantify the corporatesecretary in writing of the fact of issuance

(e) Agrees to be personally liable

(f) Is made liable by specific provision of law.

COMPENSATION FOR DIRECTORS

1.

Directors as a rule do not receive compensation other than reasonable

per diems.

2.

Other or additional compensation may be granted only if

(a) fixed in the by laws(b) Is granted by a majority vote of stockholders at the regular or specialmeeting but in no case shall compensation exceed 10% of the incomebefore income tax of the preceding year.


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3.

In computing any additional compensation, per diems are not includedto determine whether the limit has been reached.

CORPORATE POWERS

1. Every corporation incorporated under the code has the power to:

(a) to sue and be sued in its corporate name

(b) to succession by its corporate name for the time stated in itsarticle and certificate of incorporation

(c) to adopt and use a corporate seal. Note that Section 63 Requiresstock certificates to be sealed, although not a mandatory

requirement, it has been held to be desirable to have a seal as it is

prima fascia evidence that the instrument to which it is attached isthe act of the Corporation

(d) to amend its articles in accordance with the provisions of the

code. With appropriate provision is Section 14 As far as theamendments pertaining to the name, place of principal business,term, an authorized capital stock of the Corporation

(e) to adopt bylaws not contrary to law, morals and public policy

and to amend or repeal the same

(f) in cases of stock corporations, the issue or sell stocks tosubscribers and to sell treasury stocks in accordance with theprovisions of the code. If it is a nonstock Corporation, to admitmembers and obtain capital by increasing the number of personssharing the same purpose or mission.

(g) to purchase, receive, take or grant, hold, convey, lease, pledge,mortgage or otherwise dealing with real and personal property,including securities and bonds of other corporations as the

transaction of the lawful business of the Corporation thereasonably and necessarily require, subject to the limitations

prescribed by law in the Constitution. NOTE that investments aslong as stated in the articles, like involving the purchase of sharesor securities are valid, if not stated that stockholders approved is

required.

(h) to enter into mergers and consolidations with othercorporations as provided by section 76-80


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(i) to make reasonable donations, including those for public welfareor for hospitals, charitable, cultural, scientific, civic or similar

purposes EXCEPT the nations indeed of any political party or acandidate or for purposes partisan political activity

(j) to establish pension, retirement other than plans for the benefitof directors, trustees, officers and employees. The purpose is tocreate or foster better relations between the Corporation and itsemployees, which ideally should result in greater productivity

(k) to exercise such power as may be essential or in a society tocarry out the purposes stated in the articles.

2.

The power to extend or shorten the corporate term Is undertakenby a majority vote off the board and vote of 2/3 of the stockholders

holding the corporation's outstanding capital stock or members at

the meeting, of which they were given we can notice addressed tothem at the given address as shown in the books of theCorporation deposited at the post office or delivered personally.

i.

In case of an extension, a stockholder is allowed to exercisehis appraisal right. This is also allowed when the term isshortened.

ii.

The general rule of assumed approval under section 16 is not

applicable as the date of approval by the SEC maybe beforethe effectivity date of the extension, the determining

compliance in section 11 or shortening, which may be in thenature of a voluntary dissolution which requires the consentof the state.

3.

Power to increase or decrease capital stock, incur create orincrease corporate bonded indebtedness is undertaken by amajority vote of the board and vote of 2/3 of the stockholdersholding the showing compliance Corporation's outstanding capitalstock or members must favor the increase or decrease at the

meeting to which they would have received written noticeaddressed to their residences as shown in the books deposited at

the post office or delivered personally.

i.

For nonstock corporations, the same requirement is required

but it creates or increases Corporate bonded indebtedness

ii.

after the meeting - a certificate in duplicate must be signedby a majority of the directors, countersigned by the chairmanand secretary of the meeting stating that:


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(a) requirements of this section have been complied with

(b) amount of decrease or diminution of capital stock(c) if capital is increased

(1) amount of capital stock or number of shares

subscribed(2) names, nationalities, residences, of personssubscribing and the number or amount subscribed byeach, the amount paid in cash or property(3) or, amount of capital stock or number of par valuestock allotted to each stockholder if such increase isfor the purpose of making effective a stock dividendtherefore authorized

(d) any bonded indebtedness to be incurred, created orincreased

(e) actual indebtedness of the corporation on the date of the

meeting(g) vote authorizing the increase or diminution of the capitalstock, or the incurring increasing or creating of corporatebonded indebtedness.

iii.

One copy of the certificate is kept in the corporate officer, theother filed with the SEC and attached its articles. Otherattachments required are proof of the transfer of cash orproperty to the Corporation and a treasurers affidavit

showing compliance with the 25/25 rule. If corporate bondedindebtedness, the registration of the Bond for the SEC the

determinate sufficiency of terms.

iv.

From and after SEC approval and compliance of a certificateof filling, the capital stock shall stand increased or decreasedor the bonded indebtedness has been incurred created orincreased. Provided, no decrease shall be approved ifcreditors are prejudice or terms of bond issue is notsufficient.

v.

The limitation on when the decrease of capital stock is that itwill not be allowed if it would relieve stockholders of the

obligation to pay for their subscription without valuableconsideration. Hence, all subscriptions must be paid.

vi.

An increase in excess of the amount stated in the articles isUltra vires as there must be an amendment of the articlesand a reduction / increase of the capital stock can onlydecrease in the manner provided for by law.


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vii.

The ways of increasing or decreasing capital stock are asfollows:

(a)

Increase / decrease the number of shareswithout increasing / decreasing par value

(b)

increase / decrease par value without increasing

the number of shares, or(c)both.

viii.

A reduction creates a surplus if capital is not impaired bylosses. The surplus can be distributed to stockholders as longas the surplus is over and above the par value of theoutstanding capital stock as reduced and other corporateindebtedness, and the assets so distributed will not berequired to carry out the business.

ix. Bonds are undertakings that are fully secured. It has involves

3 parties(a) Borrowing Corporation(b) bond holder(c) trustee or holder of the security.

4.

Preemptive rights referring to the right subscribe on issues ordisposition of shares in proportion by stockholders shareholdingsmay be denied.

i.

The reason for its and I once is to preserve a stockholdersunaltered and unimpaired influence in the Corporation. It

does not apply to shares originally unsubscribe orundisposed

ii.

As a general rule, preemptive rights exist but mayberestricted were denied by the articles or an amendmentthereto. It will not exist when(a) the shares are issued in compliance with laws requiringstock offerings or minimum stock ownership(b) the shares are issued in good faith with approval of

stockholders representing 2.3 Of the outstanding capitalstock in exchange for property needed for corporate purposes

or in payment of a previously contracted debt

iii.

If the preemptive right is offered but not exercised, it does not

follow that it will be offered to other stockholders.

iv.

If restricted by an amendment, a stockholder may exerciseshis appraisal right


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5.

The power the cause the sale, lease, exchange, mortgage, pledge orother disposition of all or substantially all of corporate assets is

undertaken by a majority vote of the board and 2/3 vote ofStockholders are members, written notice having been given.

i.

In a nonstock corporation where there are no members withvoting rights, the vote of majority of the trustees will besufficient authorization

ii.

The disposition should not result in violation of laws or illegalcombination and monopolies. An example would be when thesale violates the Bulk Sales Law.

iii.

The contemplated disposition is when the Corporation isrendered incapable of continuing the business or

accomplishing its purpose. It does not apply to dispositions

that are necessary and in the regular course of businessorder proceeds of which are to be appropriated for theconduct of its remaining business.

iv.

Authorization, notwithstanding, the disposition may beabandoned with the board and its corporate officers withoutfurther approval by stockholders or members

v.

In case of dissent, the right of appraisal maybe exercised.

6.

The power to acquire its own shares can only be undertaken if it is

for a legitimate corporate purpose/s provided that it hasunrestricted retained earnings.

i.

The conditions that must obtain to be able to exercise thepower are:(a) capital is not impaired(b) there must be unrestricted retained earnings.(c) that it be for a legitimate and proper purpose(d) the Corporation in good faith and without prejudice the

stockholder rights(e) Condition of corporate affairs where it. Absent the

conditions, there is a violation of the Trust Fund Doctrinewhich holds that the assets of the corporation as representedby its capital are trust funds that are to be maintained

unimpaired and to be used by the corporation to pay itscreditors and that no distribution of the same can be madewithout provisions for the payment of corporate debt


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ii.

The legitimate corporate purposes for acquisition are:(a) elimination of fractional shares or those less than 1 share

(b) to collect or the compromise and indebtedness to theCorporation arising out of an unpaid subscription in a

delinquency shares and to purchase delinquent shares at the

auction(c) to pay dissenting or withholding stockholders entitled tothe payment of their shares.

iii.

Other legitimate purposes are(a) Exercise of the right of appraisal when there is anamendment of the articles, shortening or extending of theterm, investment in other businesses, merger orconsolidations, sale or other disposition of corporate assets,with no one in the close Corporation

(b) redemption of shares

(c) Decrease of capital stock(d) deadlock in a close Corporation.

Documents

Lecture Notes on Corporations Edit