Salient Features of Law on Private Corporations

8/9/2019 Salient Features of Law on Private Corporations

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Salient Features of Law on Private Corporations

Enabling Law- The New Corporation Code (Batas Pambansa No. 68), whih beamee!eti"e on #a$ %, %&8'.

enition o* Corporation+

orporation is an artiial being reated b$ operation o* law, ha"ing the right o*session and the powers, attribtes and properties epressl$ athori/ed b$ law or inident toits eistene.

ttribtes o* a Corporation+

%. 0t is an artiial person. 1 2eparate and distint 3ridial personalit$ ommening*rom the time the 2EC appro"es the rtiles o* 0norporation and isses theertiate o* 0norporation (2e. %&)

4. 0t is reated b$ operation o* law. - 5ne appro"ed b$ the 2tate, the orporation ison*erred

a) Primar$ ranhise 1 the right gi"en to eist as a orporationb) 2eondar$ ranhise- 0t is the right gi"en to operate its bsiness wit all the

powers, attribtes and properties.

7. 0t has the right o* session.- #a$ ontine to eist *or the dration o* its li*eterm, ninterrpted and na!eted b$ the internal hanges within the orporation,sh as death, insol"en$ or insanit$ o* a diretor or stoholders.

9. 0t has the powers, attribtes and properties athori/ed b$ law o* inident to itseistene.

:ow to determine the nationalit$ o* iti/enship o* a orporation;

%. 0norporation rle - The orporate nationalit$ o* the orporation shall bedetermined in aordane with the laws o* the ontr$ where it is reated.

4. Control Test- The nationalit$ o* the orporation is determined b$ the nationalit$ o*the ontrolling stoholders.

0mportant otrines+

%. otrine o* the Piering the )- sbsriber or stoholder shall be onsidered atrstee *or his npaid sbsription b$ the orporation and the orporate reditorsntil sh npaid balane o* the said sbsription is *ll$ paid.

9. Trst nd otrine- (2e. %44) There are two onepts o* this dotrine whereb$the stoholders who reei"e he orporate assets are deemed Trstees *or shpropert$ or assets reei"ed b$ them nder the *ollowing instanes+

a) =hen a sol"ent orporation, throgh its Board o* iretors, distribtes allits orporate assets to its stoholders, the orporate reditors an sediretors and reo"er the assets *rom the stoholders?

b) 0n a dissol"ed orporations, the orporate reditors ma$ also se thediretors i* the assets are distribted to the stoholders withot rstli@idating all orporate liabilities and reo"er sh assets *rom thestoholders.

>. otrine o* Limited Capait$ 1 Ander 2etion 4 o* the New Corporation Code, aorporation has onl$ sh powers as are epressl$ granted, those are neessaril$implied *rom those epressl$ granted and those inident to its eistene.

Classes o* Corporation+

%. 2to Corporation - Pri"ate orporations with apital sto di"ided into shares andare athori/ed to distribte to holders o* sh shares, di"idends or allotments o*the srpls prots on the basis o* the shares held.

4. Non- 2to Corporation- Those whih are organi/ed *or prot and do not isseshares o* stos.

inds o* Corporation+


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%. Pbli Corporation- those *ormed or organi/ed *or the go"ernment o* a portion o* a2tate.

4. asi Pbli orporation-Those whih aepted *rom the 2tate the grant o**ranhise or ontrat in"ol"ing the per*ormane o* pbli dties bt whih areorgani/ed *or prot.

7. Pri"ate Corporation- those *ormed *or some pri"ate prpose, benet, aim or end.9. omesti Corporation- one inorporated nder the laws o* the Philippines.

>. oreign Corporation-one *ormed or organi/ed or eisting nder the laws other thanthe Phils.

6. Corporation 2ole-a Deligios Corporation onsisting o* one member or orporatoronl$ and his sessors, sh as a bishop.

. Corporation ggregate- orporation omposing o* more than one orporator.8. e ato Corporation- a orporation eisting in *at bt not in law (2e. 4%).&. e Fre Corporation- orporation in *at and in law.%'. Eleemos$nar$ Corporation- one established *or haritable prposes or those

spported b$ harit$.%%. Elesiastial Corporation-one organi/ed *or religios prpose.%4. La$ Corporation- 5ne organi/ed *or a prpose other than *or religion.%7. Close Corporation- orporation limited to seleted persons or members o* a

*amil$ (2es. &6-%'>)%9. 5pen Corporation- Corporation that is open to e"er$bod$ who wishes to beome a

stoholder.

%>. #lti-national Corporation- orporation organi/ed in one state bt operates inse"eral ontries.

%6. Corporation b$ Estoppel 1 one that in realit$ is not a orporation, either de 3re orde *ato, bease it is so de*eti"el$ *ormed, bt it is onsidered a orporation inrelation to those who, b$ reason o* ats or admissions, are prelded *romasserting that it is not a orporation. Ander 2e. 4%, persons who representthemsel"es as a orporation althogh not legall$ onstitted shall be liable asgeneral partners *or all debts, liabilities and damages inrred therein.

%. Corporation b$ Presription- one whih has eerised orporate powers *or anindenite period withot inter*erene on the part o* the so"ereign power and b$tion o* law is gi"en a stats o* a orporation. E. The Doman Catholi Chrh

istintion between 0norporators and orporators (2e. >)

%. Corporators are the people who omprise the orporation sh as theinorporators, stoholders or members.4. 0norporators - These are the original *onders o* the orporation whose name

appears in the artiles o* inorporation.

enition o* Promoter - promoter is one who assists the inorporations in the organi/ation o*a orporation b$ maing all the preparations *or its organi/ation, attrats in"estors to nane itand assists in the appro"al and lanhing o* the orporation.

ntions o* a Promoter+

%) Loos *or the right ind o* bsiness4) Taes are o* the *ormlation o* a bsiness and nanial plans.7) Loo *or naning people to in"est in a orporation9) ssists in the appro"al and lanhing o* the orporation.

2teps in the reation o* a orporation+

%. Promotion 1 0t inldes all bsiness operations peliar to the bsiness world sha bringing together the inorporation o* persons interested in the enterprise,proring sbsription, maing nanial arrangement, et.

4. 0norporation - ra*ting and eetion o* the artiles o* inorporation, ling o* theartiles o* inorporation, pa$ment o* the ling and pbliation *ees, issane b$the 2erities and Ehange Commission o* the ertiate o* inorporation i* allpapers are *ond in order.

7. ormal 5rgani/ation and ommenement o* bsiness operations- Corporateeistene ommenes to ha"e 3ridial personalit$ onl$ *rom the moment the 2ECisses to the inorporators a ertiate or inorporators, nder its oGial seal. Btthe orporation is not $et read$ *or bsiness nless it is organi/ed.

Note+ Non-ser o* the orporate harter within two (4) $ears *rom the date o*inorporation shall reslt to atomati dissoltion o* the orporation. 0* orporationalread$ ommened bsiness bt sbse@entl$ beomes ontinosl$ inoperati"e *orperiod not less than > $ears, it beomes a grond *or sspension or re"oation o* itsorporate harter. (2etion 44)

No. o* 0norporator in 2to Corporation 1 not less than > bt not more than %>

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aliationsNatral personsCapaitated to enter into ontrats

#st own and sbsribe to at least one share#a3orit$ o* the inorporators mst be residents o* the Philippines.

isssions+

0n the absene o* an$ pro"isions in the b$-laws, diretors are not entitled *or an$ompensation eept *or reasonable per diems. Ths, the$ are entitled o* ompensation i* (a)pro"ided in the b$ laws and (b) b$ a "ote o* the stoholders representing ma3orit$ o* theotstanding apital sto. 2igniantl$, i* diretors are allowed to laim ompensation, their$earl$ ompensation shall not eeed %'H o* the net inome o* the orporation be*ore inometa o* the preeding $ear (2e. 7').

2el*-dealing diretors are diretors o* the orporation who enter a ontrat with theorporation. 2aid ontrats are "oidable in harater at the option o* the orporation eept+

a) The presene o* sh diretor or trstee in the board meeting in whih theontrat was appro"ed was not neessar$ to onstitte a @orm *or shmeeting?

b) That the ote o* sh diretor or trstee is not neessar$ *or the appro"alo* the ontrat?

) The ontrat is *air and reasonable nder the irmstanes? andd) That in the ase o* an oGer, the ontrat with the oGers has been

pre"iosl$ athori/ed b$ the Board o* iretors.

Contrats entered b$ a sel*-dealing diretor is howe"er ratied b$ a "ote o* thestoholders representing 4I7 o* the otstanding apital sto. (2e. 74)

0nterloing diretor- is one who is a diretor o* two orporations dealing with eahother.

The rle is the ontrat entered b$ two orporations with interloing diretors are"alid pro"ided there is no *rad and the ontrat is *air and reasonable nder irmstanes.Bt an interloing diretor ma$ be treated as sel*-dealing diretor where his interest in oneorporation is merel$ nominal and in the other orporation greater than 4'H o* its otstanding

apital sto, in sh ase the rle on 2e. 74 applies. (2e. 77)

2 T5 PED05+

#aimm li*e o* a orporation is *t$ $ears (>') $ears, nless sooner dissol"ed ornless said period is etended *or periods not eeeding a total o* another >' $ears. Etensiono* the term o* the orporation mst be made within > $ears prior to its epiration. Etension o*orporate eistene mst preede amendment o* its rtiles o* 0norporation, whih is dl$appro"ed b$ the 2EC. The rle o* Power o* 2ession or Perpetal Eistene applies. Thismeans that the orporation en3o$s ontinit$ o* orporate eistene *or the entire dration o*his li*e, ninterrpted and na!eted b$ internal hanges whih ma$ or in the orporationsh as death, insol"en$ or insanit$ o* the diretors or stoholders.

The Corporation Code does not presribe a ed amont o* thori/ed Capital 2to.Bt it is re@ired that 4>H o* the thori/ed Capital 2to is sbsribed (whih is then alled

as 2bsribed Capital 2to) and 4>H o* the 2bsribed Capital 2to shall be paid p. Paid papital mst not be less tan P >,'''.

0* the thori/ed Capital 2to is epressed in No Par H sbsribedapital sto and 4>H paid in apital shall be based on he no par "ale shares o* theathori/ed apital sto.

=hat are the things important in the rtiles o* 0norporation to an ontant;

%. The li*e o* the orporation to determine i* it still "alidl$ eists.4. The prpose o* the orporation to determine i* it is operating within its powers and

ob3ets.7. The amont o* its thori/ed Capital 2to and its e@i"alent in terms o* shares,

the part "ale o* eah share.

9. The amont o* its 4>H 2bsribed Capital 2to and its 4>H Paid-p.>. The treasrerJs Gda"it erti*$ing that the thori/ed Capital 2to has beensbsribed and 4>H o* the sbsribed apital sto is paid-p whih is not lessthan P >,'''.

mendment o* the artiles o* inorporation ma$ be appro"ed b$ a ma3orit$ "ote o* theBoard o* iretors and the "ote or written assent o* the stoholders onstitting 4I7 o* theotstanding apital sto, (2e. %6). The amendment o* the artiles o* inorporation taese!et pon the appro"al o* 2EC or *rom the date o* ling with 2EC i* not ated pon within 6months not de to the *alt o* the orporation.

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5tstanding apital sto- the total shares o* sto issed to sbsribers orstoholders *ll$ or partiall$ paid as long as there is a binding sbsription agreement.

Kronds *or re3etion or disappro"al o* the rtiles or mendment o* rtiles (2e. %)

%. =hen the artiles or amendments are not in the presribed *orm?

4. =hen the prposeIs are patentl$ nonstittional, illegal, immoral or ontrar$ togo"ernment rles and reglations?

7. =hen the treasrerJs aGda"it is *alse?9. =hen ownership o* apital sto b$ ilipino iti/ens is not in aordane with the

Constittion or eisting laws?>. No rtiles or mendments o* bans, nanial instittion, et., shall be aepted or

appro"ed b$ the 2EC nless aompanied b$ a *a"orable reommendation o* theappropriate go"ernment agen$ sh rtiles or mendments are in aordanewith law.Corporate eistene ommenes *rom the time the 2EC appro"es the rtiles o*

0norporation and isses a Certiate o* 0norporation. The orporation ths a@ires3ridial personalit$, (2e. %&).

Endorsement from Government Agencies

0t shold be noted that ertain inds o* orporations re@ire seondar$ liense andendorsement *rom other go"ernment agenies depending on their prpose and natre. The

*ollowing are the orporate ati"ities that re@ire endorsements *rom di!erent go"ernment

agenies.

a. Ci"il eronatis Board (CB) 1 *or ir Transport

b. Bango 2entral ng Pilipinas 1 *or baning, pawnshops other nanial intermediaries with

@asi-baning *ntions.

. Kames and msement Board (KB) 1 *or Pro*essional boing

d. Philippine Charit$ 2weeptaes 5Ge (PC25) 1 *or operation o* games o* hane (e.g. lotto)

e. epartment o* Edation (epEd) 1 *or edational instittion 1 elementar$ to eigh shool

*. Commission on :igher Edation (C:E) 1 *or edational instittion 1 ollege or gertiar$

orse

g. Tehnial 2ills e"elopment thorit$ (TE2) 1 *or edational instittion 1 tehnial or

"oational orse

h. epartment o* Energ$ (5E) 1 *or eletri power plants

i. epartment o* :ealth (5:) 1 *or hospitals

3. 0nsrane Commission (0C) 1 *or insrane

. Land Transportation ranhise Deglator$ Board (LTDB) 1 *or land transport

l. #aritime 0ndstr$ thorit$ (#D0N) 1 *or water transport, onstrtion and bilding o*

"essels

m. National Teleommniations Commission (NTC) 1 *or operation o* radio, tele"ision and

telephone

n. Philippine 5"erseas Emplo$ment dministration (P5E) 1 *or reritment o* o"erseas

emplo$ment

Persons ating as a Corporation b$ Estoppel shall be liable as general partners*or all debts, liabilities and damages inrred. The Corporation b$ Estoppel shall notbe allowed to pt p as a de*ense its la o* orporate personalit$. Neither an a thirdpart$ dealing with the orporation re*se per*ormane or esape liabilit$ on the grondthat he was not dealing with a "alid orporation, (2e. 4%).

#eaning o* e ato Corporation 1 e ato orporation is one, whih atall$ eists *or all pratial prposes as a

orporation bt whih has no legal right to orporate eistene as against the 2tate.

De@isites o* a de *ato orporation.

%. "alid law nder whih the orporation might be inorporated?4. bonade attempt to organi/ed nder sh law?7. tal ser or eerise in good *aith o* orporate powers on*erred pon it b$ law?

Eamples+%. Name o* orporation losel$ resembles that o* a pre-eisting orporation that will

tend to deei"e the pbli?4. The inorporator or a ertain nmber o* them are not residents o* the Phils.?7. The anowledgment o* the artiles o* inorporation or ertiate o* inorporation

is insGient or de*eti"e in *orm or it was anowledged be*ore the wrong oGer.

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The *ollowing annot gi"e rise to de *ato orporation+

%. bsene o* artiles o* inorporation4. ailre to le artiles o* inorporation with the 2EC7. La o* ertiation o* inorporation *rom the 2EC

de *ato orporation an onl$ be assailed throgh a A5 =DDNT5 proeedingwhih means Mb$ what right;. 0t is a proeeding in@iring as to the right i* theorporation to operate its bsiness and initiated b$ the 2tate throgh the 2oliitorKeneral.

C5DP5DTE P5=ED2+

Classiation o* Corporate Powers+

%. Epress Powers 1 those on*erred b$ law or its harter.4. 0mplied Powers - those powers inidental to the orporationJs eistene or

neessar$ to eete the epress powers.

KENEDL P5=ED2 EOPDE22L KDNTE T5 C5DP5DT05N2 (2e. 76)

%. To se and to be sed in its orporate name?4. 5* session b$ its orporate name *or a period o* time stated in the artiles o*

inorporation and the ertiate o* inorporation.7. To adopt and se a orporate seal.9. To amend its artiles o* inorporation in aordane with pro"ision o* the

orporation Code.>. To adopt b$-laws, not ontrar$ to law, morals or pbli poli$ and to amend and

repeal the same in aordane with the Code?6. 0n ase o* sto orporations, to isse or sell stos to sbsriber and to sell

treasr$ stos in aordane with pro"ision o* the ode? and to admit members tothe orporation, i* it is a non-sto orporation.

. To prhase, reei"e, tae or grant, hold, on"e$, sell, lease, pledge, mortgage andotherwise deal with sh real and personal propert$, inlding serities and bondso* other orporations, as the transation o* the law*l bsiness o* the orporation

ma$ reasonabl$ and neessaril$ re@ire, sb3et to the limitations presribed b$law and the Constittion.8. To enter into merger or onsolidation with other orporations as pro"ided in the

Code.&. To mae reasonable donations, inlding those *or pbli wel*are or *or hospital,

haritable, ltral, sienti, i"i, similar prposes. :owe"er, no orporation,domesti or *oreign, shall gi"e donation in aid o* an$ politial part$ or andidate *orprpose o* partisan politial ati"it$.

%'. To establish pension, retirement and other plans *or the benet o* its diretors,trstees, oGers and emplo$ees? and

%%. To eerise sh other powers as ma$ be essential or neessar$ to arr$ ot itsprpose or prposes as stated in its artiles o* inorporation.

5T:ED P5=ED2 EOPDE22L C5NEDDE B T:E C5E+

%. Power to etend or shorten orporate term (2e. 7)

4. Power to inrease or derease apital sto (2e. 78)7. Power to inr, reate or inrease bonded indebtedness (0bid)9. Power to den$ pre-empti"e right (2e. 7&)>. Power to sell, lease, ehange, mortgage, pledge or otherwise dispose all or

sbstantiall$ all o* its propert$ or assets (2e. 9')6. Power to a@ire or prhase its own shares (2e. 9%). Power to in"est orporate *nds in another orporation or bsiness or *or an$ other

prposes (2e. 94)8. Power to delare di"idends (2e. 97)&. Power to enter into management ontrats.


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6. To inr or derease the apital sto- ma3orit$ "ote o* the diretors and 4I7 o* theotstanding apital sto (2e. 78)?

. To inr, reate or inrease bonded indebtedness- ma3orit$ "ote o* the diretorsand 4I7 o* the otstanding apital sto (2e. 78)?

8. To sell, lease, ehange, mortgage or otherwise dispose all or sbstantiall$ allproperties or assets o* the orporation- ma3orit$ "ote o* the diretors and 4I7 o*the otstanding apital sto (2e. 9')?

&. To in"est orporate *nds in another bsiness other than the primar$ prpose-ma3orit$ "ote o* the diretors and 4I7 o* the otstanding apital sto (2e. 94)?

%'. To isse sto di"idends- ma3orit$ "ote o* the diretors and 4I7 o* the otstandingapital sto (2e. 97). The appro"al o* the stoholders is not re@ired withrespet to other di"idends sh as ash and bond di"idends?

%%. To enter into a management ontrat- a ma3orit$ o* the @orm o* the board o* thediretors and a ma3orit$ o* the otstanding apital sto o* both the managed andmanaging orporation and in some ases 4I7 o* the total otstanding apital stoentitled to "ote with respet to the managed orporation (2e. 99)

%4. To adopt b$ laws 1 ma3orit$ "ote o* the otstanding apital sto (2e. 96)%7. To amend or repeal the b$-laws or adopt a new b$-laws- a ma3orit$ o* the board

and otstanding apital sto (se. 98)%9. To delegate to the board the power to amend, repeal and adopt b$ laws,-4I7 o* the

otstanding apital sto, (2e. 96)%>. To re"oe the power delegated to the Board in No. %9-ma3orit$ "ote o* the

otstanding apital sto.%6. To the issed prie o* non par "ale shares- ma3orit$ o* the @orm o* Board, i*

athori/ed and in the absene o* athorit$, b$ ma3orit$ o* the otstanding apitalsto ( 2e. 64, last par.)

%. To e!et or amend a plan o* merger or onsolidation- ma3orit$ "ote o* the diretorsand 4I7 o* the otstanding apital sto o* the onstitent orporation (2e. )?

%8. To dissol"e the orporation- ma3orit$ "ote o* the diretors and 4I7 o* theotstanding apital sto (2es. %%8-%%&)?

%&. To adopt a plan o* distribtion o* assets o* a non-sto orporation- ma3orit$ "ote o*the trstees and 4I7 o* the members ha"ing "oting rights (2e. &>, par, 4)?

E0N0T05N 5 C5##5N C5DP5DTE TED#2+

%. Capital 2to- The amont ed in the artiles o* inorporation to be sbsribed

and paid in or agreed to be paid in b$ the stoholders o* a orporation.4. thori/ed apital sto- s$non$mos with apital sto i* re*erring to orporationsissing par "ale shares. 0* the orporation isses no par "ale shares, it has noathori/ed apital sto bt it has a apital sto the amont o* whih is not statedin the artiles o* inorporation.

7. 2bsribed Capital 2to- the amont o* the apital sto sbsribed whether *ll$paid or not.

9. 5tstanding Capital 2to- This is s$non$mos with sbsribed apital sto inmost ases. 0t is that portion o* the apital sto, whih is issed and held b$persons other than the orporation. Treasr$ shares are not onsideredotstanding.

>. Paid-p apital sto- that portion o* the apital sto that is paid.6. Capital- the atal propert$ or assets o* the orporation.

#eaning o* shares o* sto - is an integral nit o* the athori/ed apital sto o* a orporation.

#eaning o* 2to ertiate- a written e"idene o* ownership o* shares in a orporation andthe rights and liabilities and is not onsidered as the sto itsel*.

Note+ s a rle a ertiate o* sto will not be issed to a stoholder ntil hissbsription is *ll$ paid

#ain lasses o* shares

%. Par "ale shares- shares with a spei "ale ed in the artiles o* inorporationand appearing in the ertiate o* sto?

4. No par "ale shares- shares withot an$ stated "ale appearing on the *ae o* theertiate o* sto.Notes + The *ollowing annot isse no par "ale shares+

a) Bans, trst ompanies, insrane ompanies and bilding and loanassoiations.

Pre*erred shares o* sto ma$ be issed onl$ with a stated par "ale.

2hares issed withot par "ale shall be deemed *ll$ paid and non-assessable and the holder o* sh shares shall not be liable to theorporation or to the reditors with respet thereto.

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2hares withot par ma$ not be issed *or a onsideration less than the"ale o* P >.'' per share. The entire onsideration reei"ed b$ theorporation *or its no par "ale shares shall be treated as apital and shallnot be a"ailable *or distribtion as di"idends.

7. . 0n"estment o* orporate *nds in other orporation6. issoltion o* the orporation

>. Common shares- stos whih orporations generall$ isse.6. Pre*erred shares- shares entitle the holder thereo* ertain pre*erenes o"er the

holders o* ommon shares in the pa$ment o* di"idends or distribtion o* the assets

o* the orporation.. 2hares in Esrow- shares sb3et to an agreement b$ "irte o* whih the share is

deposited b$ the grantor or his agent with third person to be ept b$ thedepositar$ ntil the per*ormane o* a ertain ondition or happening o* a ertaine"ent ontained in the agreement.

8. Con"ertible shares- sto whih is on"ertible or hangeable b$ stoholders *romone lass to another lass sh as *rom pre*erred to ommon, at a ertain prieand within a ertain period.

&. Promoter shares- shares issed to promoters.%'. onderJs shares- shares issed to organi/ers o* the orporation in onsideration a

spposed right or propert$. The$ are gi"en speial rights and pri"ileges noten3o$ed b$ the owners o* other stos, sh as pre*erene in the pa$ment o*di"idends and the elsi"e right to "ote and be "oted *or the eletion o* diretors.2aid right to "ote and be "oted is limited to a period o* > $ears, sb3et to the

appro"al o* 2EC.%%. Dedeemable shares (allable 2hares)-shares sall$ pre*erred, whih b$ its terms isredeemable at a ed date or at the option o* either the orporation or stoholderor both at a ertain redemption prie. The law re@ires that all terms andonditions a!eting sh shares mst be stated not onl$ in the artiles o*inorporation bt also in the ertiate sto. Dedeemable shares ma$ beredeemed b$ the orporation regardless o* the eistene o* nrestrited retainedearnings in the boos o* the orporation. (2e. 8)

%4. Treasr$ shares- shares whih has been law*ll$ issed b$ the orporation as *ll$paid and later rea@ired b$ prhase, redemption, donation or throgh someother means. The orporation ma$ again dispose o* *or a reasonable prie ed b$the Board. 0t is not entitled to "ote, not entitled o* di"idends, annot be "oted andnot entitled o* an$ pri"ileges or rights.

%7. =atered stos - 2tos issed b$ the orporation that are+a) 2tos issed *or a prie less than their par "ale (disont shares)?

b) 2tos are issed *or no "ale or onsideration at all (Bons shares)?) 2tos are issed as pa$ment *or propert$ a@ired b$ the orporation, the

"ale o* whih is less than the par "ale o* the shares issed?d) 2tos are issed as di"idends, the par "ale o* whih is not spported b$

amont o* prots taen *rom retained warning aont and trans*erred tostated apital.

Note+ liabilit$ o* diretors *or watered sto+ diretors or oGers who onsentto the isse o* watered stos shall be solidaril$ liable together with thestoholder who reei"es the watered stos, to the orporation and theorporate reditors *or the di!erene between the *air "ale reei"ed at thetime o* issane o* the sto and the par or issed "ale o* sh sto. (2e.6>)

PPD02L D0K:T

0t is the right o* the stoholder to dissent against ertain orporate ations and todemand pa$ment o* the *air "ale o* his shares.

=hat orporate ations an a stoholder eerised appraisal right;

%. mendment to the artiles hanging or restriting the rights o* an$ stoholder orlass o* shares?

4. 0n ase o* amendment etending or shortening the orporate term

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8/14

7. in ase o* sale or other disposition o* all or sbstantiall$ all assets o* theorporation?

9. 0n ase o* merger and onsolidation>. 0n ase o* in"estment o* orporate *nds in another orporation6. n$ stoholder in a lose orporation, ma$ *or an$ reason, ompel said

orporation to prhase his shares nder 2e. %'>)

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9/14

2imilarl$, 2etion %(a) o* the rles and reglations implementing the 0 epressl$ pro"ides *orthe appliation o* the ontrol test+Philippine national shall mean a iti/en o* the Philippines or a domesti partnership orassoiation wholl$ owned b$ the iti/ens o* the Philippines? or a orporation organi/ed nderthe laws o* the Philippines o* whih at least sit$ perent (6'H) o* the apital stootstanding and entitled to "ote is owned and held b$ iti/ens o* the Philippines? or aorporation organi/ed abroad and registered as doing bsiness in the Philippines nder the

Corporation Code o* whih %''H o* the apital sto otstanding and entitled to "ote is wholl$owned b$ ilipinos or a trstee o* *nds *or pension or other emplo$ee retirement or separationbenets, where the trstee is a Philippine national and at least sit$ perent (6'H) o* the *ndwill are to the benets o* the Philippine nationals? Pro"ided, that where a orporation andits non-ilipino stoholders own stos in 2erities and Ehange Commission (2EC)registered enterprise, at least sit$ perent (6'H) o* the apital sto otstanding and entitledto "ote o* eah o* both orporations mst be owned and held b$ iti/ens o* the Philippines andat least sit$ perent (6'H) o* the members o* the Board o* iretors o* eah o* bothorporation mst be iti/ens o* the Philippines, in order that the orporation shall beonsidered a Philippine national. The ontrol test shall be applied *or this prpose.(ndersoring spplied)=hile the ontrol test was enshrined in the 0 and its implementing rles, the 2EC ontinesto appl$ the grand*ather rle when the ilipino e@it$ ownership is Min dobt (as pro"ided inthe %&8& 5F Dling). or eample, in 2EC-5KC 5pinion No. 44-' dated eember , 4'',the 2EC stated+

. . . when there is dobt as to the atal etent o* ilipino e@it$ in the in"estee orporation,the Commission is not prelded *rom sing the Krand*ather Dle.#$ *ormer pro*essor at the AP College o* Law, Pro*. Dal Palabria, maes a great smmar$ o*the 2EC position in his Philippine ail$ 0n@irer olmn+. . . this shold not be taen to mean that the grand*ather rle is alread$ histor$. 0n an in"ersewa$, the 2EC pointed ot that the Mgrand*ather rle will not appl$ in ases where the 6'-9'ilipino e@it$ ownership Q is not in dobt.The rle there*ore is+ =hile the ontrol test shall be sed as standard to determine thenationalit$ o* orporations, the grand*ather rle will be applied i* there are @estions abotompliane with ilipino ownership re@irements. (see Dal Palabria, Nationalit$ 5wnershipDle, Philippine ail$ 0n@irer, 5tober %&, 4'')Based on the 0 and its implementing rles and reglations (whih embod$ the ontrol test),m$ personal "iew is that the ontrol test shold be the test sed in determining the nationalit$o* a orporation. =hile the %&8& 5F opinion made re*erene to the appliation o* the

grand*ather rle when the 6'-9' e@it$ ownership interest is in dobt, the %&8& 5F opinionwas issed prior to the enatment o* the 0. lso, 0 belie"e that i* there is dobt as to the 6'-9' ilipino-alien e@it$ ownership interest in the in"esting orporation that has a 6'H e@it$ ina orporation engaged in a partl$ nationali/ed ati"it$, what shold be applied is the nti-mm$ Law (in on3ntion with the ontrol test), not the grand*ather rle. Ths, i* 6'H o* theshares o* the in"esting orporation is held b$ ilipinos as dmmies *or *oreigners, that 6'He@it$ in the in"esting orporation will not be deemed held b$ Philippine nationals. ppl$ingthe ontrol test, the in"estee orporation will not also be a Philippine national.A return to the "randfather rule#0t is noteworth$ that a reent 2EC ase raises the isse o* whether the 2EC is now going bato the grand*ather rle as the primar$ test *or determining the nationalit$ o* a orporation.0n Redmont Consolidated Mines Corporation vs. McArthur Mining Corporation, 2EC En BanCase No. '&-'&-% dated #arh 4>, 4'%', the 2EC applied the grand*ather rle bease the*oreign in"estor pro"ided Mpratiall$ all the *nds o* the Philippine mining ompanies? assh, the 2EC onlded that the 6'-9' ilipino alien e@it$ ownership was in dobt and

there*ore the grand*ather rle shold be applied. :owe"er, the 2EC did not stop there 1 the2EC made statements that seem to indiate a retrn to the grand*ather rle. The 2EC said+The a"owed prpose o* the Constittion is to plae in the hands o* ilipinos the eploitation o*or natral resores. Neessaril$, there*ore, the Dle interpreting the onstittional pro"isionshold not diminish that right throgh the legal tion o* orporate ownership and ontrol. Btthe onstittional pro"ision, as interpreted and pratied "ia the %&6 2EC Dles, has *a"ored*oreigners ontrar$ to the ommand o* the Constittion. :ene, the Krand*ather Dle mst beapplied to aratel$ determine the atal partiipation, both diret and indiret, o* *oreignersin a orporation engaged in a nationali/ed ati"it$ or bsiness.Compliane with the onstittional limitation(s) on engaging in nationali/ed ati"ities mst bedetermined b$ asertaining i* 6'H o* the in"esting orporationJs otstanding apital sto isowned b$ Milipino iti/ens, or as interpreted, b$ natral or indi"idal ilipino iti/ens. 0* shin"esting orporation is in trn owned to some etent b$ another in"esting orporation, thesame proess mst be obser"ed. 5ne mst not stop ntil the iti/enships o* the indi"idal or

natral stoholders o* la$er a*ter la$er o* in"esting orporations ha"e been established, the"er$ essene o* the Krand*ather Dle.Lastl$, it was the intent o* the *ramers o* the %&8 Constittion to adopt the Krand*ather Dle.=hile the onstittional deliberations ertainl$ made re*erene to the grand*ather rle, there isnothing in the Constittion that ltimatel$ embodied the grand*ather rle. 0n the absene o*an$ pro"ision in the Constittion embod$ing the grand*ather rle, 0 belie"e that Congress anadopt a law (in this ase the 0) embod$ing the ontrol test.:ope*ll$, the statements made b$ the 2EC in Redmontdo not signal a retrn to thegrand*ather rle. hange in the rles o* the game will ha"e a tremendos ad"erse impat onin"estor ondene in the Philippines.

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5ne nal note. Redmont in"ol"ed mining ompanies that re@ire 6'H ilipino ownershipbease these mining ompanies apparentl$ applied *or a #ineral Prodtion 2haringgreement (whih an be granted to Philippine nationals onl$). 0n Redmont, the 2EC appearsto ha"e reahed the onlsion that the 6'-9' ilipino-alien e@it$ ownership was in dobtbease the *oreign in"estor pro"ided Mpratiall$ all the *nds o* the Philippine miningompanies. #$ own "iew is that the *at that the *oreign in"estor ma$ ha"e ontribted a bighn o* the orporate *nds shold not, b$ itsel*, pt the 6'-9' ilipino-alien e@it$ ownership

in dobt. The important onsideration is whether the ilipino stoholders legall$ andbeneiall$ own and ontrol 6'H o* the shares in the rele"ant ompan$ (and do not otherwiseat as dmmies *or the *oreigners). 0* the *oreigner wishes to pro"ide greater nanial spport*or the mining pro3et, that shold be ne *or as long as ilipinos remain the legal andbeneial owner o* 6'H o* the shares in the mining ompan$ (or in a la$ered strtre, thein"esting ompan$). =e shold not depri"e ilipinos o* the abilit$ to enter into ontrats with*oreigners whereb$ *oreigners pro"ide greater *nding to pro3ets that remain nder ilipinoontrol.(Note: This is part of a series of How To articles. These articles intend to give the reader ageneral overview of the legal aspects of doing certain things and the! will not contain alldetails regarding the proposed action. There ma! "e changes to applica"le laws andregulations after the article is posted. #ou should consult !our law!er if !ou wish to ta$e aparticular action. %ee &isclaimer page for additional disclaimers.'

RKrand*ather DleR - the method b$ whih the perentage o* ilipino e@it$ in a orporationengaged in nationali/ed andIor partl$ nationali/ed areas o* ati"ities, pro"ided *or nder theConstittion and other nationali/ation laws, is ompted in ases where there are orporateshareholders.

The present liberal appliation o* the rle embodies the ontrol test+

2hares belonging to orporations or partnerships at least 6'H o* the apital o* whih is ownedb$ ilipino iti/ens shall be onsidered as o* Philippine nationalit$.

Bt i* perentage o* ilipino ownership in the orporation or partnership is less than 6'H onl$the nmber o* shares orresponding to sh perentage shall be onted as o* Philippinenationalit$.

Nationali/ed Corporations+

%''H ilipino 5wned

%. #ass media whih inldes radio, tele"ision and print media (2e. %% (%), rt O


11/14

$0.

The Constittion and "arios laws reser"e ertain areas o* ati"ities to Philippine

iti/ens or to orporations that ha"e a minimm perentage o* ilipino ownership. or

eample, with respet to orporations, ownership o* land is limited to orporations Mat

least sit$ per entm o* whose apital is owned b$ Philippine iti/ens. 0* 6'H o* the

apital o* a Philippine orporation is owned b$ indi"idals who are Philippine iti/ens,

then there wold be no isse on whether the Philippine orporation is a Philippinenational @alied to own land.

5n the other hand, an isse wold arise i* 6'H o* the apital o* the Philippine

orporation is owned, in trn, b$ another Philippine orporation that has *oreign

stoholders.

0* a Philippine orporation has orporate stoholders, how does one determine

whether sh Philippine orporation is a Philippine national; Two tests ha"e been

emplo$ed in the Philippines+ (a) the grand*ather rle? and (b) the ontrol test.

To illstrate how these tests are applied, letJs tae a Philippine orporation (alled

MCorporation O) with the *ollowing ownership strtre+

(a) non-Philippine iti/ens own 9'H o* the apital sto otstanding and entitled to

"ote o* Corporation O?(b) another Philippine orporation (alled MCorporation ) owns 6'H o* the apital

sto otstanding and entitled to "ote o* Corporation O.

5n other hand, Corporation has the *ollowing ownership strtre+

(a) non-Philippine iti/ens own 9'H o* the apital sto otstanding and entitled to

"ote o* Corporation ?

(b) Philippine iti/ens own 6'H o* the apital sto otstanding and entitled to "ote o*

Corporation .

LetJs also assme that Philippine iti/ens onstitte at least 6'H o* the members o*

the board o* diretors o* eah o* Corporation O and Corporation .

0* the grand*ather rle is applied, Corporation O will not be deemed a Philippine

national bease the grand*ather rle taes into aont the diret and indiret *oreign

e@it$ o* *oreigners in Corporation O (see2EC 5pinion re+ 2ilahis 0nternational :otel,

#a$ 9, %&8). ppl$ing the grand*ather rle, the diret and indiret *oreign e@it$ in

Corporation O wold be 69H, allated at *ollows+

iret *oreign-owned e@it$ in Corporation O 1 9'H

0ndiret *oreign owned e@it$ in Corporation O 1 49H

Ander the abo"e senario, the *oreigners are deemed to ha"e a 49H indiret *oreign

e@it$ in Corporation O bease *oreigners own 9'H o* Corporation , whih in trn

owns 6'H o* Corporation O (i.e., 9'H mltiplied b$ 6'H e@als 49H). Ths, nder the

grand*ather rle, Corporation O is not @alied to own land.

5n the other hand, i* the ontrol test is applied, Corporation O is deemed to be a

Philippine national @alied to own land. Ander the ontrol test, Corporation O isonsidered a Philippine national sine at least 6'H o* its apital sto otstanding and

entitled to "ote is held b$ Corporation , whih is also onsidered a Philippine national

sine at least 6'H o* its apital sto otstanding and entitled to "ote is held b$

Philippine iti/ens.

The control test as the pri-ar test

s a rle, the ontrol test applies. The prima$ o* the ontrol test o"er the grand*ather

rle an be traed to 5F 5pinion No. %&, s. %&8& (the M%&8& 5F Dling), whih

states+

. . . the MKrand*ather Dle, whih was e"ol"ed and applied b$ the 2EC in se"eral

ases,will not appl$ in ases where the 6'-9' ilipino-alien e@it$ ownership in a

partilar natral resore orporation is not in dobt. (ndersoring spplied)

0n other words, aording to the epartment o* Fstie, the ontrol test generall$

applies, with the grand*ather rle appliable onl$ when the 6'-9' ilipino-alien e@it$

ownership is in dobt.

5n the basis o* the %&8& 5F Dling, the 2EC issed se"eral opinions doing awa$ with

the grand*ather rle. or eample, in a #a$ 7', %&&' opinion, the 2EC stated+

. . . the Commission En Ban, on the basis o* the 5pinion o* the epartment o* Fstie

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No. %8., 2. %&8& dated Fanar$ %&, &%8& "oted and deided to do awa$ with the strit

appliationIomptation o* the so alled Mgrand*ather rle. . . and instead applied the

so-alled Montrol test method *or determining orporate nationalit$. (ndersoring

spplied)(see also 2EC 5pinion dated gst 6, %&&%? 2EC 5pinion dated 5tober %9,

%&&%)

rond two $ears a*ter the issane o* the %&8& 5F Dling, Congress enated theoreign 0n"estments t o* %&&% (M0), whih epressl$ embodied the ontrol test.

2etion 7(a) o* the 0 (as amended b$ Depbli t No. 8%&) pro"ides+

. . . the term Philippine national shall mean a iti/en o* the Philippines? or a domesti

partnership or assoiation wholl$ owned b$ iti/ens o* the Philippines? or a orporation

organi/ed nder the laws o* the Philippines o* whih at least sit$ perent (6'H) o* the

apital sto otstanding and entitled to "ote is owned and held b$ iti/ens o* the

Philippines? or a orporation organi/ed abroad and registered as doing bsiness in the

Philippines nder the Corporation Code o* whih one hndred perent (%''H) o* the

apital sto otstanding and entitled to "ote is wholl$ owned b$ ilipinos or a trstee

o* *nds *or pension or other emplo$ee retirement or separation benets, where the

trstee is a Philippine national and at least sit$ perent (6'H) o* the *nd will are

to the benet o* Philippine nationals+ Pro"ided, That where a orporation and its non-

ilipino stoholders own stos in a 2erities and Ehange Commission (2EC)registered enterprise, at least sit$ perent (6'H) o* the apital sto otstanding and

entitled to "ote o* eah o* both orporations mst be owned and held b$ iti/ens o* the

Philippines and at least sit$ perent (6'H) o* the members o* the Board o* iretors,

in order that the orporation shall be onsidered a Philippine national. (ndersoring

spplied)

2imilarl$, 2etion %(a) o* the rles and reglations implementing the 0 epressl$

pro"ides *or the appliation o* the ontrol test+

Philippine national shall mean a iti/en o* the Philippines or a domesti partnership or

assoiation wholl$ owned b$ the iti/ens o* the Philippines? or a orporation organi/ed

nder the laws o* the Philippines o* whih at least sit$ perent (6'H) o* the apital

sto otstanding and entitled to "ote is owned and held b$ iti/ens o* the Philippines?

or a orporation organi/ed abroad and registered as doing bsiness in the Philippines

nder the Corporation Code o* whih %''H o* the apital sto otstanding and

entitled to "ote is wholl$ owned b$ ilipinos or a trstee o* *nds *or pension or other

emplo$ee retirement or separation benets, where the trstee is a Philippine national

and at least sit$ perent (6'H) o* the *nd will are to the benets o* the Philippine

nationals? Pro"ided, that where a orporation and its non-ilipino stoholders own

stos in 2erities and Ehange Commission (2EC) registered enterprise, at least

sit$ perent (6'H) o* the apital sto otstanding and entitled to "ote o* eah o*

both orporations mst be owned and held b$ iti/ens o* the Philippines and at least

sit$ perent (6'H) o* the members o* the Board o* iretors o* eah o* both

orporation mst be iti/ens o* the Philippines, in order that the orporation shall be

onsidered a Philippine national. The ontrol test shall be applied *or this prpose.

(ndersoring spplied)

=hile the ontrol test was enshrined in the 0 and its implementing rles, the 2EC

ontines to appl$ the grand*ather rle when the ilipino e@it$ ownership is Min

dobt (as pro"ided in the %&8& 5F Dling). or eample, in 2EC-5KC 5pinion No. 44-

' dated eember , 4'', the 2EC stated+

. . . when there is dobt as to the atal etent o* ilipino e@it$ in the in"estee

orporation, the Commission is not prelded *rom sing the Krand*ather Dle.

#$ *ormer pro*essor at the AP College o* Law, Pro*. Dal Palabria, maes a great

smmar$ o* the 2EC position in his Philippine ail$ 0n@irer olmn+

. . . this shold not be taen to mean that the grand*ather rle is alread$ histor$. 0n an

in"erse wa$, the 2EC pointed ot that the Mgrand*ather rle will not appl$ in ases

where the 6'-9' ilipino e@it$ ownership Q is not in dobt.

The rle there*ore is+ =hile the ontrol test shall be sed as standard to determine the

nationalit$ o* orporations, the grand*ather rle will be applied i* there are @estions

abot ompliane with ilipino ownership re@irements. (see Dal Palabria, Nationalit$

5wnership Dle, Philippine ail$ 0n@irer, 5tober %&, 4'')

Based on the 0 and its implementing rles and reglations (whih embod$ the

ontrol test), m$ personal "iew is that the ontrol test shold be the test sed in

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determining the nationalit$ o* a orporation. =hile the %&8& 5F opinion made

re*erene to the appliation o* the grand*ather rle when the 6'-9' e@it$ ownership

interest is in dobt, the %&8& 5F opinion was issed prior to the enatment o* the 0.

lso, 0 belie"e that i* there is dobt as to the 6'-9' ilipino-alien e@it$ ownership

interest in the in"esting orporation that has a 6'H e@it$ in a orporation engaged in

a partl$ nationali/ed ati"it$, what shold be applied is the nti-mm$ Law (in

on3ntion with the ontrol test), not the grand*ather rle. Ths, i* 6'H o* the shareso* the in"esting orporation is held b$ ilipinos as dmmies *or *oreigners, that 6'H

e@it$ in the in"esting orporation will not be deemed held b$ Philippine nationals.

ppl$ing the ontrol test, the in"estee orporation will not also be a Philippine

national.

A return to the "randfather rule#

0t is noteworth$ that a reent 2EC ase raises the isse o* whether the 2EC is now

going ba to the grand*ather rle as the primar$ test *or determining the nationalit$

o* a orporation. 0n Redmont Consolidated Mines Corporation vs. McArthur Mining

Corporation, 2EC En Ban Case No. '&-'&-% dated #arh 4>, 4'%', the 2EC applied

the grand*ather rle bease the *oreign in"estor pro"ided Mpratiall$ all the *nds o*

the Philippine mining ompanies? as sh, the 2EC onlded that the 6'-9' ilipino

alien e@it$ ownership was in dobt and there*ore the grand*ather rle shold be

applied.

:owe"er, the 2EC did not stop there 1 the 2EC made statements that seem to indiate

a retrn to the grand*ather rle. The 2EC said+

The a"owed prpose o* the Constittion is to plae in the hands o* ilipinos the

eploitation o* or natral resores. Neessaril$, there*ore, the Dle interpreting the

onstittional pro"ision shold not diminish that right throgh the legal tion o*

orporate ownership and ontrol. Bt the onstittional pro"ision, as interpreted and

pratied "ia the %&6 2EC Dles, has *a"ored *oreigners ontrar$ to the ommand o*

the Constittion. :ene, the Krand*ather Dle mst be applied to aratel$ determine

the atal partiipation, both diret and indiret, o* *oreigners in a orporation engaged

in a nationali/ed ati"it$ or bsiness.

Compliane with the onstittional limitation(s) on engaging in nationali/ed ati"ities

mst be determined b$ asertaining i* 6'H o* the in"esting orporationJs otstanding

apital sto is owned b$ Milipino iti/ens, or as interpreted, b$ natral or indi"idal

ilipino iti/ens. 0* sh in"esting orporation is in trn owned to some etent b$

another in"esting orporation, the same proess mst be obser"ed. 5ne mst not stop

ntil the iti/enships o* the indi"idal or natral stoholders o* la$er a*ter la$er o*

in"esting orporations ha"e been established, the "er$ essene o* the Krand*ather

Dle.

Lastl$, it was the intent o* the *ramers o* the %&8 Constittion to adopt the

Krand*ather Dle.

=hile the onstittional deliberations ertainl$ made re*erene to the grand*ather rle,

there is nothing in the Constittion that ltimatel$ embodied the grand*ather rle. 0n

the absene o* an$ pro"ision in the Constittion embod$ing the grand*ather rle, 0belie"e that Congress an adopt a law (in this ase the 0) embod$ing the ontrol

test.

:ope*ll$, the statements made b$ the 2EC in Redmontdoes not signal a retrn to the

grand*ather rle. hange in the rles o* the game will ha"e a tremendos ad"erse

impat on in"estor ondene in the Philippines.

5ne nal note. Redmont in"ol"ed mining ompanies that re@ire 6'H ilipino

ownership bease these mining ompanies apparentl$ applied *or a #ineral

Prodtion 2haring greement (whih an be granted to Philippine nationals onl$).

0n Redmont, the 2EC appears to ha"e reahed the onlsion that the 6'-9' ilipino-

alien e@it$ ownership was in dobt bease the *oreign in"estor pro"ided Mpratiall$

all the *nds o* the Philippine mining ompanies. #$ own "iew is that the *at thatthe *oreign in"estor ma$ ha"e ontribted a big hn o* the orporate *nds shold

not, b$ itsel*, pt the 6'-9' ilipino-alien e@it$ ownership in dobt.

The important onsideration is whether the ilipino stoholders legall$ and

beneiall$ own 6'H o* the shares in the rele"ant ompan$ (and do not otherwise at

as dmmies *or the *oreigners). 0* the *oreigner wishes to pro"ide greater nanial

spport *or the mining pro3et, that shold be ne *or as long as ilipinos remain the

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legal and beneial owner o* 6'H o* the shares in the mining ompan$ (or in a la$ered

strtre, the in"esting ompan$). =e shold not depri"e ilipinos o* the abilit$ to

enter into ontrats with *oreigners whereb$ *oreigners pro"ide greater *nding to

pro3ets that remain nder ilipino ontrol.

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14

Documents

Salient Features of Law on Private Corporations