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CORPORATION LAW
U N I V E R S I T Y O F S A N T O T O M A S
F a c u l t a d d e D e r e c h o C i v i l
ACADEMICS CHAIR: LESTER JAY ALAN E. FLORES II VICE CHAIRS FOR ACADEMICS: KAREN JOY G. SABUGO & JOHN HENRY C. MENDOZA VICE CHAIR FOR ADMINISTRATION AND FINANCE: JEANELLE C. LEE VICE CHAIRS FOR LAY OUT AND DESIGN: EARL LOUIE M. MASACAYAN & THEENA C. MARTINEZ
CORPORATION LAW
Q: What are the distinctions between partnership and corporation? A: See Appendix D A. CORPORATION DEFINED Q: What is a corporation? A: An artificial being created by operation of law having the right of succession, and the powers, attributes and properties expressly authorized by law and incident to its existence. (Sec. 2) Q: May a corporation enter into a contract of partnership? A: GR: Corporations have no power to enter into partnership. Reason: Public policy. In a partnership, the corporation would be bound by the acts of the persons who are not its duly appointed and authorized agents and officers, which would be entirely inconsistent with the policy of the law that the corporation shall manage its own affairs separately and exclusively. XPN: The SEC allowed corporations to enter into partnerships with other corporations and individuals provided:
- The authority to enter into partnership relation is expressly conferred by the Charter or the AOI and the nature of the business venture to be undertaken by the partnership is in line with the business authorized by the charter or the AOI. (SEC Opinions, Feb. 29, 1980, Dec. 1, 1993, and Feb. 23, 1994.)
- The partnership must be a limited partnership and the corporation must be a limited partner
- If it is a foreign corporation, it must obtain a license to transact business in the country. Q: Does a defective incorporation result into a partnership? A: The answer depends on whether or not there is a clear intent to participate in the management of the business affairs on the part of the investor. Parties who intends to participate or has actually participated in the business affairs of the proposed corporation would be considered as partners under a de facto partnership. On the other hand, parties who took no part notwithstanding their subscriptions do not become partners with other subscribers. (Pioneer Insurance v. CA, G.R. No. 84197, July 28, 1989) Q: May a corporation enter into a joint venture? A: Yes. It may enter into a joint venture with another where the nature of that venture is in line with the business authorized by its charter. (Aurbach v. Sanitary Wares Manufacturing Corporation, G.R. No. 75875, Dec. 15, 1989) Q: What are the distinctions between joint account and partnership? A: JOINT ACCOUNT PARTNERSHIP Has no firm name and is conducted In the name of the ostensible partner. Has a firm name. Has no juridical personality and can sue or be sued only in the name of the ostensible partner. Has juridical personality and may sue or be sued under its firm name Has no common fund. Has a common fund. The ostensible partner manages its business operations. All general partners have the right of management. Liquidation thereof can only be done by the ostensible partner. Liquidation may, by agreement, be entrusted to a partner or partners. Q: What are the attributes of a corporation? A:
- It is an artificial being
- It is created by operation of law
- It enjoys the right of succession
- It has the powers, attributes and properties expressly authorized by law or incident to its existence Q: What are the theories on the formation of a corporation? A:
- Concession theory or fiat theory Means that a corporation was conceived as an artificial person owing existence through creation by a foreign power. It has without any existence until it has received the imprimatur of the state acting according to law, through the SEC. (Tayag v. Benguet
UST GOLDEN NOTES 2011
MERCANTILE LAW TEAM: ADVISER: ATTY. AMADO E. TAYAG; SUBJECT HEAD: EARL M. LOUIE MASACAYAN; ASST. SUBJECT HEADS: KIMVERLY A. ONG & JOANNA MAY D.G. PEÑADA; MEMBERS: MA. ELISA JONALYN A. BARQUEZ, ANGELI R. CARPIO, ANTONETTE T. COMIA, ALBAN ROBERT LORENZO F. DE ALBAN, JOEBEN T. DE JESUS, CHRIS JARK ACE M. MAÑO, ANNA MARIE P. OBIETA, RUBY ANNE B. PASCUA, FLOR ANGELA T. SABAUPAN, GIAN FRANCES NICOLE C. VILCHES Consolidated, Inc., G.R. No. L 23276, Nov. 29, 1968) Note: Philippine jurisprudence adopted this theory as the underlying basis for the existence and powers of corporate entities.
- Theory of corporate enterprise or economic unit The corporation is not merely an artificial being, but more of an aggregation of persons doing business, or an underlying business unit. (However, this doctrine is being used in support of other doctrines) Note: Recognizes the existence of a business enterprise as the bases of several contracts and transactions apart from the issue of whether there was duly constituted a juridical person.
- Genossenschaft theory Treats a corporation as the reality of the group as a social and legal entity, independent of State recognition and concession. (Tayag v. Benguet Consolidated, Inc., G.R. No. L 23276, Nov 29, 1968) Q: What are the two kinds of franchise? A:
- Corporate or primary/general franchise grant given to exist as a corporation;
- Special or secondary franchise certain rights and privileges conferred upon existing as a corporation (e.g. right to use the streets of a municipality to lay pipes of tracks, erect poles, or string wires). B. CLASSIFICATION OF CORPORATIONS Q: What are the classifications of corporation? A:
- As to Corporation Code: a. STOCK CORPORATION one which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividends or allotments or the surplus profits on the basis of the shares held. ( Sec 3 ) b. NON STOCK CORPORATION is one which do not issue shares and are created not for profit but for public good and welfare and where no part of its income is distributable as dividends to its members, trustees, or officers. (Sec 87)
- As to the number of persons who compose them: a. Corporation aggregate corporation consisting of more than one member or corporator; b. Corporation Sole religious corporation which consists of one member or corporator only and his successor.
- As to whether they are for religious purpose or not: a. Ecclesiastical corporation one organized for religious purpose b. Lay corporation one organized for a purpose other than for religion.
- As to whether they are for charitable purpose or not: a. Eleemosynary one established for religious purposes b. Civil one established for business or profit
- As to state or country under or by whose laws they have been created: a. Domestic one incorporated under the laws of the Philippines b. Foreign one formed, organized, or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or state. (Sec 123)
- As to their legal right to corporate existence: a. De jure one existing both in fact and in law b. De facto one existing in fact but not in law
- As to whether they are open to the public or not: a. Close one which is limited to selected persons or members of the family. (Sec 96 105)
UST GOLDEN NOTES 2011
MERCANTILE LAW TEAM: ADVISER: ATTY. AMADO E. TAYAG; SUBJECT HEAD: EARL M. LOUIE MASACAYAN; ASST. SUBJECT HEADS: KIMVERLY A. ONG & JOANNA MAY D.G. PEÑADA; MEMBERS: MA. ELISA JONALYN A. BARQUEZ, ANGELI R. CARPIO, ANTONETTE T. COMIA, ALBAN ROBERT LORENZO F. DE ALBAN, JOEBEN T. DE JESUS, CHRIS JARK ACE M. MAÑO, ANNA MARIE P. OBIETA, RUBY ANNE B. PASCUA, FLOR ANGELA T. SABAUPAN, GIAN FRANCES NICOLE C. VILCHES
C. NATIONALITY OF CORPORATIONS
Q: What are the tests in determining the nationality of corporations? A:
- Incorporation test Determined by the state of incorporation, regardless of the nationality of the stockholders.
- Domiciliary test Determined by the principal place of business of the corporation.
- Control test Determined by the nationality of the controlling stockholders or members. This test is applied in times of war.
- Grandfather rule Nationality is attributed to the percentage of equity in the corporation used in nationalized or partly nationalized area. Q: What are the requisites of the control test? A:
- Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked such that the corporate entity as to this transaction had at that time no separate mind, will or existence of its own
- Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest or unjust act in contravention of plaintiffs legal right; and
- The control and breach of duty must proximately cause the injury or unjust loss complained of. (Velarde v. Lopez, Inc., G.R. No. 153886, Jan. 14, 2004; Heirs of Ramon Durano, Sr. v. Uy, G.R. No. 136456, Oct. 24, 2000) Q: Who are considered Philippine Nationals under Foreign Investment Act of 1991 (R.A. No. 7042)? A:
- Corporations organized under Philippine laws of which 60% of the capital stock outstanding and entitled to vote is owned and held by Filipino citizens
- Corporations organized abroad and registered as doing business in the Philippines under the Corporation Code of which 100% of the capital stock entitled to vote belong to Filipinos. Note: However, it provides that where a corporation and its non Filipino stockholders own stocks in a SEC registered enterprise, at least 60% of the capital stock outstanding and entitled to vote of both corporations and at least 60% of the members of the board of directors of both corporations must be Filipino citizens (DOUBLE 60% RULE). Q: What is the nationality of a corporation organized and incorporated under the laws of a foreign country, but owned 100% by Filipinos? A: Under the control test of corporate nationality, this foreign corporation is of Filipino nationality. Where there are grounds for piercing the veil of corporate entity, that is, disregarding the fiction, the corporation will follow the nationality of the controlling members or stockholders, since the corporation will then be considered as one and the same. (1998 Bar Question) D. CORPORATE JURIDICAL PERSONALITY Q: What is the doctrine of separate (legal) personality? A: It is a well settled doctrine that a corporation has a personality distinct and separate from its individual stockholders or members (Cruz vs. Dalisay, A.M. No. R 181 P, July 31, 1987). Q: What are the significances of the doctrine of separate personality? A:
- Liability for acts or contracts the acts of the stockholders do not bind the corporation unless they are properly authorized. The obligations incurred by a corporation, acting through its authorized agents are its sole liabilities. The obligations of the corporation are not the obligations of its shareholders and members and vice versa. (Cease v. CA,G.R. No. L 33172, Oct. 18, 1979)
- Right to bring actions may bring civil and criminal actions in its own name in
CORPORATION LAW
U N I V E R S I T Y O F S A N T O T O M A S
F a c u l t a d d e D e r e c h o C i v i l
ACADEMICS CHAIR: LESTER JAY ALAN E. FLORES II VICE CHAIRS FOR ACADEMICS: KAREN JOY G. SABUGO & JOHN HENRY C. MENDOZA VICE CHAIR FOR ADMINISTRATION AND FINANCE: JEANELLE C. LEE VICE CHAIRS FOR LAY OUT AND DESIGN: EARL LOUIE M. MASACAYAN & THEENA C. MARTINEZ the same manner as natural persons. (Art. 46, Civil Code)
- Right to acquire and possess property property conveyed to or acquired by the corporation is in law the property of the corporation itself as a distinct legal entity and not that of the stockholders or members. (Art. 44[3], Civil Code) Note: The interest of the shareholder in the properties of the corporation is inchoate only. The interest of the shareholder on a particular property becomes actual, direct and existing only upon the liquidation of the assets of the corporation and the same property is assigned to the shareholder concerned.
- Acquisition of court of jurisdiction service of summons may be made on the president, general manager, corporate secretary, treasurer or in house counsel. (Sec. 11, Rule 14, Rules of Court).
- Changes in individual membership corporation remains unchanged and unaffected in its identity by changes in its individual membership. Q: Is a corporation liable for torts? A: Yes whenever a tortuous act is committed by an officer or agent under the express direction or authority of the stockholders or members acting as a body, or, generally, from the directors as the governing body. (PNB v. CA, G.R. No. L 27155, May 18, 1978) Q: Is a corporation liable for crimes? A: GR: No. Since a corporation is a mere legal fiction, it cannot be held liable for a crime committed by its officers, since it does not have the essential element of malice; in such case the responsible officers would be criminally liable. (People v. Tan Boon Kong, G.R. No. L 32066. Mar. 15, 1930) Note: An officer of a corporation can be held criminally liable for acts or omissions done in behalf of the corporation only where the law directly makes the person who fails to perform the act in the prescribed manner expressly liable criminally .(Sia v. People, L 30896, Apr. 28, 1983) XPN: If the penalty of the crime is only fine or forfeiture of license or franchise. (Ching v Secretary of Justice, G. R. No. 164317, Feb. 6,
Q: Is a corporation entitled to moral damages? A: GR: A corporation is not entitled to moral damages because it has no feelings, no emotions, no senses. (ABS CBN Broadcasting Corporation v. CA, G.R. No. 128690 Jan 21, 1999 and Phillip Brothers Oceanic, Inc, G.R. No. 126204, Nov. 20, 2001) XPN:
- The corporation may recover moral damages under item 7 of Article 2219 of the New Civil Code because said provision expressly authorizes the recovery of moral damages in cases of libel, slander, or any other form of defamation. Article 2219(7) does not qualify whether the injured party is a natural or juridical person. Therefore, a corporation, as a juridical person, can validly complain for libel or any other form of defamation and claim for moral damages (Filipinas Broadcasting Network, Inc. v. AMEC BCCM, G.R. No. 141994, Jan 17, 2005.
- When the corporation has a reputation that is debased, resulting in its humiliation in the business realm (Manila Electric Company v. T.E.A.M. Electronics Corporation, et. al., G.R. No. 131723, Dec. 13, 2007. Q: What is the doctrine of piercing the veil of corporate fiction? A: It is the doctrine that allows the State to disregard the notion of separate personality of a corporation for justifiable reason/s. Note: This is an exception to the Doctrine of Separate Corporate Entity. Q: What are the effects of piercing the veil? A: Courts will look at the corporation as an aggregation of persons undertaking the business as a group. Note: When the veil of corporate fiction is pierced in proper cases, the corporate character is not necessarily abrogated. It continues for legitimate objectives. The decision applies only for that
CORPORATION LAW
U N I V E R S I T Y O F S A N T O T O M A S
F a c u l t a d d e D e r e c h o C i v i l
ACADEMICS CHAIR: LESTER JAY ALAN E. FLORES II VICE CHAIRS FOR ACADEMICS: KAREN JOY G. SABUGO & JOHN HENRY C. MENDOZA VICE CHAIR FOR ADMINISTRATION AND FINANCE: JEANELLE C. LEE VICE CHAIRS FOR LAY OUT AND DESIGN: EARL LOUIE M. MASACAYAN & THEENA C. MARTINEZ
(1) NUMBER AND QUALIFICATIONS OF
INCORPORATORS
Q: What are the distinctions between corporator and incorporator? A: INCORPORATOR CORPORATOR Signatory of the Articles of Incorporation May or not be signatory of the Articles of Incorporation Does not cease to be an incorporator upon sale of his shares Cease to be a corporator by sale of his shares in case of stock corporation. In case of non stock corporation, when the corporator ceases to e a member. GR: 5 to 15 natural persons XPN: In case of cooperative,incorporator of rural bank; corporation sole No limit Originally forms part of the corporation Not necessarily GR: Filipino citizenship is not a requirement. XPN: When engaged in a business which is partly or wholly nationalized where majority must be residents Depending on the nature of business of the corporation. If it is nationalized, the citizenship becomes material. Q: What are the required number and the qualifications of incorporators in a stock corporation? A:
- Natural person
- GR:^ Not less than 5 but not more than 15 XPN: Corporation sole
- Of legal age
- Majority must be residents of the Philippines
- Each must own or subscribe to at least one share. (Sec.10) Q: Who can be incorporators? A: GR: Only natural persons can be incorporators. XPN: When otherwise allowed by law, Rural Banks Act of 1992, where incorporated cooperatives are allowed to be incorporators of rural banks. Note: An incorporator can be corporator. Non residents may be incorporators because the law only requires the majority to be residents of the Philippines. An incorporator remains to be an incorporator even if he will later on cease to be a shareholder. However, an incorporator who ceases to hold a share cannot be considered a corporator. (2) MINIMUM CAPITAL STOCK AND SUBSCRIPTION REQUIREMENTS Q: What are the capital stock requirements? A: GR: There is no minimum authorized capital stock as long as the paid up capital is not less than P5,000. XPN: As provided by special law (e.g. Banks). Q: Is it required that each subscriber pay 25% of each subscribed share? A: No. It is only required that at least 25% of the subscribed capital must be paid. (3) CORPORATE TERM Q: What is the term of corporate existence? A: GR: It depends on the period stated in the Articles of Incorporation. XPN: Unless sooner dissolved or unless said period is extended. Note: Extension may be made for periods not exceeding (50) years in any single instance by an amendment of the articles of incorporation. However, extension must be made within 5 years before the expiry date of the corporate term. Extention must aldo comply with procedural requirements for amendment of AOI. Q: What is the doctrine of relation or relating back doctrine? A: Generally, the filing and recording of a certificate of extension after the term cannot relate back to the date of the passage of the resolution of the stockholders to extend the life of the corporation. However, the doctrine of
UST GOLDEN NOTES 2011
MERCANTILE LAW TEAM: ADVISER: ATTY. AMADO E. TAYAG; SUBJECT HEAD: EARL M. LOUIE MASACAYAN; ASST. SUBJECT HEADS: KIMVERLY A. ONG & JOANNA MAY D.G. PEÑADA; MEMBERS: MA. ELISA JONALYN A. BARQUEZ, ANGELI R. CARPIO, ANTONETTE T. COMIA, ALBAN ROBERT LORENZO F. DE ALBAN, JOEBEN T. DE JESUS, CHRIS JARK ACE M. MAÑO, ANNA MARIE P. OBIETA, RUBY ANNE B. PASCUA, FLOR ANGELA T. SABAUPAN, GIAN FRANCES NICOLE C. VILCHES relation applies if the failure to file the application for extension within the term of the corporation is due to the neglect of the officer with whom the certificate is required to be filed or to a wrongful refusal on his part to receive it (Aquino, Philippine Corporate Law Compendium, 2006). SHARES OF STOC (4) CLASSIFICATION OF SHARES Q: What are the kinds or classifications of share? A:
- Par value shares
- No par value shares
- Common shares
- Preferred shares
- Redeemable shares
- Treasury shares
- Founders share
- Voting shares
- Non voting shares
- Convertible shares
- Watered stock
- Fractional share
- Shares in escrow
- Over issued stock
- Street certificate
- Promotion share Q: What are par value shares? A: Shares with a value fixed in the articles of incorporation and the certificates of stock. The par value fixes the minimum issue price of the shares. Note: A corporation cannot sell less than the par value but a shareholder may sell the same less than the par value because it is his. Shares sold below its par value is called watered stocks. Q: What are no par value shares? A: These are shares having no stated value in the article of incorporation. Q: What are the limitations on no par value shares? A:
- Shares which are no par value, cannot have an issued price of less than P5.00;
- The entire consideration for its issuance constitutes capital so that no part of it should be distributed as dividends;
- They cannot be issued as preferred stocks;
- They cannot be issued by banks, trust companies, insurance companies, public utilities and building and loan association;
- The articles of incorporation must state the fact that it issued no par value shares as well as the number of said shares;
- Once issued, they are deemed fully paid and non assessable. (Sec. 6) Q: What are common shares? A: These are ordinarily and usually issued stocks without extraordinary rights and privileges, and entitle the shareholder to a pro rata division of profits. It represents the residual ownership interest in the corporation. The holders of this kind of share have complete voting rights and they cannot be deprived of the said rights except as provided by law. Q: What are preferred shares? A: These entitle the shareholder to some priority on distribution of dividends and assets over those holders of common shares. Q: Are holders of preferred shares creditors? A: No. Holders thereof cannot compel the corporation to give them dividends. The preference only applies once dividends are declared. Q: What are the kinds of preferred shares? A:
- Preferred shares as to assets Shares which gives the holder preference in the distribution of the assets of the corporation in case of liquidation. a. Participating preferred shares Entitled to participate with the common shares in excess distribution b. Non participating preferred shares Not entitled to participate with the common shares in excess distribution.
- Preferred shares as to dividends Shares which are entitled to receive dividends on said share to the extent agreed upon before any dividends at all are paid to the holders of common stock.
UST GOLDEN NOTES 2011
MERCANTILE LAW TEAM: ADVISER: ATTY. AMADO E. TAYAG; SUBJECT HEAD: EARL M. LOUIE MASACAYAN; ASST. SUBJECT HEADS: KIMVERLY A. ONG & JOANNA MAY D.G. PEÑADA; MEMBERS: MA. ELISA JONALYN A. BARQUEZ, ANGELI R. CARPIO, ANTONETTE T. COMIA, ALBAN ROBERT LORENZO F. DE ALBAN, JOEBEN T. DE JESUS, CHRIS JARK ACE M. MAÑO, ANNA MARIE P. OBIETA, RUBY ANNE B. PASCUA, FLOR ANGELA T. SABAUPAN, GIAN FRANCES NICOLE C. VILCHES subject to approval by the SEC, and cannot exceed 5 years from the date of approval. (Sec. 7) Q: What are voting shares? A: Shares with a right to vote. If the stock is originally issued as voting stock, it may not thereafter be deprived of the right to vote without the consent of the holder. Q: What are non voting shares? A: Shares without right to vote. The law only authorizes the denial of voting rights in the case of redeemable shares and preferred shares, provided that there shall always be a class or series of shares which have complete voting rights. Q: What are the instances when holders of non voting shares are allowed to vote? A: These redeemable and preferred shares, when such voting rights are denied, shall nevertheless be entitled to vote on the following fundamental matters:
- Amendment of articles of incorporation
- Adoption and amendment of by laws
- Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property
- Incurring, creating or increasing bonded indebtedness
- Increase or decrease of capital stock
- Merger or consolidation of the corporation with another corporation or other corporations
- Investment of corporate funds in another corporation or business in accordance with this Code
- Dissolution of the corporation. (Sec. 6 par. 6) Q: What are convertible shares? A: A share that is changeable by the stockholder from one class to another at a certain price and within a certain period. GR: Stockholder may demand conversion at his pleasure. XPN: Otherwise restricted by the articles of incorporation. Q: What is a fractional share? A: A share with a value of less than one full share. Q: What are shares in escrow? A: Subject to an agreement by virtue of which the share is deposited by the grantor or his agent with a third person to be kept by the depositary until the performance of certain condition or the happening of a certain event contained in the agreement. Q: What is an over issued stock? A: It is a stock issued in excess of the authorized capital stock; it is null and void. Q: What is a street certificate? A: It is a stock certificate endorsed by the registered holder in blank and the transferee can command its transfer to his name from issuing corporation. Q: What is promotional share? A: This is a share issued by promoters or those in some way interested in the company, for incorporating the company, or for services rendered in launching or promoting the welfare of the company. Q: Are classes of shares infinite? A: Yes. There can be other classifications as long as they are indicated in the AOI, stock certificate and not contrary to law. Q: Who may classify shares? A:
- Incorporators the classes and number of shares which a corporation shall issue are first determined by the incorporators as stated in the articles of incorporation filed with the SEC.
- Board of directors and stockholders after the corporation comes into existence; they may be altered by the board of directors and the stockholders by amending the articles of incorporation pursuant to Sec. 16.
CORPORATION LAW
U N I V E R S I T Y O F S A N T O T O M A S
F a c u l t a d d e D e r e c h o C i v i l
ACADEMICS CHAIR: LESTER JAY ALAN E. FLORES II VICE CHAIRS FOR ACADEMICS: KAREN JOY G. SABUGO & JOHN HENRY C. MENDOZA VICE CHAIR FOR ADMINISTRATION AND FINANCE: JEANELLE C. LEE VICE CHAIRS FOR LAY OUT AND DESIGN: EARL LOUIE M. MASACAYAN & THEENA C. MARTINEZ
F. INCORPORATION AND ORGANIZATION
Q: What is incorporation? A: It is the performance of conditions, acts, deeds, and writings by incorporators, and the official acts, certification or records, which give the corporation its existence. Q: What are the steps in the creation of a corporation? A:
- Promotion
- Incorporation (Sec10)
- Formal organization and commencement of business operations ( Sec22) (1) PROMOTER Q: Who is a promoter? A: Is a person who brings about or cause to bring about the formation and organization of a corporation by:
- bringing together the incorporators or the persons interested in the enterprise,
- procuring subscriptions or capital for the corporation and
- setting in motion the machinery which leads to the incorporation of the corporation itself. Q: What is the liability of a promoter? A: All promoter(s) have joint personal liability for a corporation that was never formed. He remains liable on contracts even after incorporation even though corporation adopts the contract. Q: Are promoters agents of a corporation? A: No. Promoters are not agents of the corporation before it comes into existence. Upon incorporation, the practice is for the BOD to pass a resolution ratifying the contracts entered into by the incorporators with the promoter. Then, they become agents of the corporation. Q: What are the kinds of underwriting agreement? A:
- English the underwriter sells what the corporation cannot sell
- Firm Commitment the underwriter purchases outright the securities and then resells the same
- Best Efforts the underwriter merely sells for commission. (2) SUBSCRIPTION CONTRACT Q: What is a subscription contract? A: It is a contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed. It is considered as such notwithstanding the fact that the parties refer to it as purchase or some other contract. (Sec. 60) Q: What are the kinds of subscription contracts? A:
- GR: Pre incorporation subscription entered into before the incorporation and irrevocable for a period of six (6) months from the date of subscription unless all other subscribers consent or if the corporation failed to materialize. It cannot also be revoked after filing the Articles of Incorporation with the SEC (Sec. 61) XPN: When creditors will be prejudiced thereby.
- Post incorporation subscription entered into after incorporation. (3) PRE INCORPORATION SUBCRIPTION AGREEMENTS Q: Who are required to pay their subscription in full? A:
- Non resident foreign subscribers upon incorporation must pay in full their subscriptions unless their unpaid subscriptions are guaranteed by a surety bond or by an assumption by a resident stockholder through an affidavit of liability.
- In case of no par value shares, they are deemed fully paid and non assessable. Q: Is a stockholder entitled to the shares of stock subscribed although not fully paid? A: Yes. As long as the shares are not considered delinquent, they are entitled to all rights granted
CORPORATION LAW
U N I V E R S I T Y O F S A N T O T O M A S
F a c u l t a d d e D e r e c h o C i v i l
ACADEMICS CHAIR: LESTER JAY ALAN E. FLORES II VICE CHAIRS FOR ACADEMICS: KAREN JOY G. SABUGO & JOHN HENRY C. MENDOZA VICE CHAIR FOR ADMINISTRATION AND FINANCE: JEANELLE C. LEE VICE CHAIRS FOR LAY OUT AND DESIGN: EARL LOUIE M. MASACAYAN & THEENA C. MARTINEZ Q: What are the contents of AOI? A: NaP PlaTINum ASONO
- Name of corporation
- Purpose/s, indicating the primary and secondary purposes
- Place of principal office Note: To determine proper venue in filing of an action
- Term of existence
- Names, nationalities and residences of Incorporators
- Number of directors or trustees, which shall not be less than 5 nor more than 15, except for corporation sole
- Names, nationalities, and residences of the persons who shall Act as directors or trustees until the first regular ones are elected and qualified
- If a Stock corporation, the amount of its authorized capital stock, number of shares and in case the shares are par value shares, the par value of each share;
- Names, nationalities, number of shares, and the amounts subscribed and paid by each of the Original subscribers which shall not be less than 25% of authorized capital stock;
- If Non stock, the amount of capital, the names, residences, and amount paid by each contributor, which shall not be less than 25% of total subscription; name of treasurer elected by subscribers; and
- Other matters as are not inconsistent with law and which the incorporators may deem necessary and convenient. (Sec. 14) Q: What are the limitations in the amendment of AOI? A:
- The amendment must be for legitimate purposes and must not be contrary to other provisions of the Corporation Code and Special laws;
- Approved by majority of BOD/BOT;
- Vote or written assent of stockholders representing 2/3 of the outstanding capital stock or 2/3 of members;
- The original and amended articles together shall contain all provisions required by law to be set out in the articles of incorporation. Such articles, as amended, shall be indicated by underscoring the change/s made; 5. Certification under oath by corporate secretary and a majority of the BOD/BOT stating the fact that said amendment/s have been duly approved by the required vote of the stockholders or members, shall be submitted to the SEC; 6. Must be approved by SEC. (Sec. 16); 7. Must be accompanied by a favorable recommendation of the appropriate government agency in cases of: a. Banks b. Banking and quasi banking institutions c. Building and loan associations d. Trust companies and other financial intermediaries e. Insurance companies f. Public utilities g. Educational institutions h. Other corporations governed by special laws. (Sec. 17 [2]) Q: When does amendment of AOI take effect? A: Upon approval by the SEC. That is upon issuance of amended certificate of incorporation. Q: Is it necessary that the approval of SEC be express? A: No, implied approval of SEC is also allowed. Thus amendment may also take effect from the date of filing with SEC if not acted upon within 6 months from the date of filing for a cause not attributable to the corporation. Q: What are the provisions of AOI that cannot be amended? A: Those matters referring to accomplished facts, except to correct mistakes. E.g.
- Names of incorporators
- Names of original subscribers to the capital stock of the corporation and their subscribed and paid up capital
- Names of the original directors
- Treasurer elected by the original subscribers
- Members who contributed to the initial capital of the non stock corporation
- Witnesses to and acknowledgement with AOI
UST GOLDEN NOTES 2011
MERCANTILE LAW TEAM: ADVISER: ATTY. AMADO E. TAYAG; SUBJECT HEAD: EARL M. LOUIE MASACAYAN; ASST. SUBJECT HEADS: KIMVERLY A. ONG & JOANNA MAY D.G. PEÑADA; MEMBERS: MA. ELISA JONALYN A. BARQUEZ, ANGELI R. CARPIO, ANTONETTE T. COMIA, ALBAN ROBERT LORENZO F. DE ALBAN, JOEBEN T. DE JESUS, CHRIS JARK ACE M. MAÑO, ANNA MARIE P. OBIETA, RUBY ANNE B. PASCUA, FLOR ANGELA T. SABAUPAN, GIAN FRANCES NICOLE C. VILCHES Q: What are the grounds for the rejection or disapproval of AOI or amendment thereto by the SEC? A:
- If such is not substantially in accordance with the form prescribed
- The purpose/s of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations
- The treasurers affidavit concerning the amount of capital stock subscribed and/or paid is false
- The required percentage of ownership of the capital stock to be owned by Filipino citizens has not been complied with. (Sec. 17) Note: The above grounds are not exclusive. The grounds according to P.D. No. 902 A are:
- Fraud in procuring its certificate of incorporation;
- Serious misrepresentation as to what the corporation can do or its doing to the great prejudice of, or damage to, the general public;
- Refusal to comply with, or defiance or a lawful order of the SEC restraining the commission of acts which would amount to a grave violation of its franchise;
- Continuous inoperation for a period of at least five (5) years after commencing the transaction of its business (Sec. 22);
- Failure to file the by laws within the required period;
- Failure to file required reports. Q: Is there an automatic rejection of the AOI or any amendment thereto? A: No, the SEC shall give the incorporators a reasonable time within which to correct or modify the objectionable portions of the AOI or amendment.(Sec. 17[1]) Q: What is the effect of non use of corporate charter and continuous inoperation of a corporation? A:
- Failure to organize and commence business within 2 years from incorporation its corporate powers ceases and the corporation shall be deemed dissolve.
- Continuous inoperation for at least 5 years ground for the suspension or revocation of corporate franchise or certificate of incorporation (Sec. 22). Note: The above shall not be applicable if it is due to causes beyond the control of the corporation as determined by SEC. Q: Is the dissolution or revocation due to failure to operate or inoperation automatic? A: No, SEC is of the opinion that there should be proper proceedings for the revocation of AOI in compliance with due process. (6) CORPORATE NAME Q: What are the limitations in adopting corporate name? A:
- The proposed name is identical or deceptively or confusingly similar to that of any existing corporation
- Any other name protected by law; or
- Patently deceptive, confusing or contrary to existing laws. (Sec. 18)
- The corporate name shall contain the word Corporation or its abbreviation Corp. or Incorporated, or Inc.
- The partnership name shall contain the word Company or Co.
- For limited partnership, the word Limited or Ltd. Shall be included
- If the name or surname of a person is used as part of a corporate or partnership name, the consent of said person or his heirs must be submitted except if that person is a stockholder, member, partner or a declared national hero.
- The name of a dissolved firm shall not be allowed to be used by other firms within 3 years after the approval of the dissolution of the corporation by SEC, unless allowed by the last stockholders representing at least majority of the outstanding capital stock of the dissolved firm (SEC Memorandum Circular 14). Q: If a corporation changes its corporate name, is it considered a new corporation? A: No, it is the same corporation with a different name, and its character is in no respect changed. (Republic Planters Bank v. CA, G.R. No. 93073, Dec 21, 1992)
UST GOLDEN NOTES 2011
MERCANTILE LAW TEAM: ADVISER: ATTY. AMADO E. TAYAG; SUBJECT HEAD: EARL M. LOUIE MASACAYAN; ASST. SUBJECT HEADS: KIMVERLY A. ONG & JOANNA MAY D.G. PEÑADA; MEMBERS: MA. ELISA JONALYN A. BARQUEZ, ANGELI R. CARPIO, ANTONETTE T. COMIA, ALBAN ROBERT LORENZO F. DE ALBAN, JOEBEN T. DE JESUS, CHRIS JARK ACE M. MAÑO, ANNA MARIE P. OBIETA, RUBY ANNE B. PASCUA, FLOR ANGELA T. SABAUPAN, GIAN FRANCES NICOLE C. VILCHES Q: Who are the corporate officers? A:
- President Must be a director at the time the assumes office, not at the time of appointment;
- Treasurer May or may not be a director; as a matter of sound corporate practice, must be a resident
- Secretary Need not be a director unless required by the by laws; must be a resident and citizen of the Philippines; (Sec. 25); and
- Such other officers as may be provided in the by laws. Note: An officer is also considered a corporate officer if he has been appointed by the board of directors. (Easycall Communications Phils., Inc. v. Edward King, G.R. No. 145901, Dec. 15, 2005) Any two or more positions may be held concurrently by the same person, except that no one shall act as president and secretary or as president and treasurer at the same time. (Sec. 25) Q: What are the distinctions between a corporate officer and a corporate employee? A: CORPORATE OFFICER CORPORATE EMPLOYEE Position is provided for in the by laws or under the Corporation Code. Employed by the action of the managing officer of the corporation. RTC acting as a special commercial court has jurisdiction over intra corporate controversies. LA has jurisdiction in case of labor disputes. (9) ADOPTION OF BY LAWS Q: What are by laws? A: Rules and regulations or private laws enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and of its stockholders or members and directors and officers in relation thereto and among themselves in their relation to it. Q: What are the requisites for the validity of by laws? A:
- Must be consistent with the Corporation Code, other pertinent laws and regulations
- Must not be contrary to morals and public policy
- Must not impair obligations and contracts or property rights of stockholders
- Must be consistent with the charter or articles of incorporation
- Must be reasonable
- Must be of general application and not directed against a particular individual. Q: In case of conflict between the by laws and the articles of incorporation which prevails? A: The AOI prevails because the by laws are intended merely to supplement the former. Q: What is the binding effect of by laws? A:
- As to members and corporation They have the force of contract between the members themselves.
- As to third persons They are not bound to know the by laws which are merely provisions for the government of a corporation and notice to them will not be presumed. Note: By laws have no extra corporate force and are not in the nature of legislative enactments so far as third persons are concerned. Q: Give the procedures in adopting by laws. A: The by laws may be adopted before or after incorporation. In all cases, the By laws shall be effective only upon the issuance by the SEC of a certification that the by laws are not inconsistent with the AOI.
- Pre incorporation It shall be approved and signed by all the incorporators and submitted to the SEC, together with AOI.
- Post incorporation a. Vote of the majority of the stockholders representing the outstanding capital stock or members; b. By laws shall be signed by the stockholders or members voting for them; c. It shall be kept in the principal office of the corporation and subject to the inspection of the stockholders ore members during office hours
CORPORATION LAW
U N I V E R S I T Y O F S A N T O T O M A S
F a c u l t a d d e D e r e c h o C i v i l
ACADEMICS CHAIR: LESTER JAY ALAN E. FLORES II VICE CHAIRS FOR ACADEMICS: KAREN JOY G. SABUGO & JOHN HENRY C. MENDOZA VICE CHAIR FOR ADMINISTRATION AND FINANCE: JEANELLE C. LEE VICE CHAIRS FOR LAY OUT AND DESIGN: EARL LOUIE M. MASACAYAN & THEENA C. MARTINEZ d. Copy thereof, duly certified by the BOD or BOT countersigned by the secretary of the corporation, shall be filed with the SEC and shall be attached with the original AOI. (Sec. 46) Q: What is the effect of non filing of the articles of incorporation within the required period? A: Failure to submit the by laws within 30 days from incorporation does not automatically dissolve the corporation. It is merely a ground for suspension or revocation of its charter after proper notice and hearing. The corporation is, at the very least, a de facto corporation whose existence may not be collaterally attacked. (Sawadjaan v. CA, G.R. No. 142284, June 8, 2005) Q: What are the contents of by laws? A:
- Time, place and manner of calling and conducting regular or special meetings of directors or trustees
- Time and manner of calling and conducting regular or special meetings of the stockholder or members
- The required quorum in meeting of stockholders or members and the manner of voting therein
- The form for proxies of stockholders and members and the manner of voting them
- The qualification, duties and compensation of directors or trustees, officers and employees
- Time for holding the annual election of directors or trustees and the mode or manner of giving notice thereof
- Manner of election or appointment and the term of office of all officers other than directors or trustees
- Penalties for violation of the by laws
- In case of stock corporations, the manner of issuing certificates
- Such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs. (Sec. 47) Q: What are the ways of amending, repealing or adopting new by laws? A:
- Amendment may be made by stockholders together with the Board by majority vote of directors and owners of at least a majority of the outstanding capital stock/members; or
- By the board only after due delegation by the stockholders owning 2/3 of the outstanding capital stock/members. Provided, that such power delegated to the board shall be considered as revoked whenever stockholders owning at least majority of the outstanding capital stock or members, shall vote at a regular or special meeting. (Sec. 48) Q: What are the distinctions between AOI and by laws? A: AOI BY LAWS Condition precedent in the acquisition of corporate existence Condition subsequent; its absence merely furnishes a ground for the revocation of the franchise Essentially a contract between the corporation and the stockholders/ members; between the stockholders/ member inter se, and between the corporation and the State; For the internal government of the corporation but has the force of a contract between the corporation and the stockholders/ members, and between the stockholders and members; Executed before incorporation May be executed after incorporation. Sec. 46 allows the filing of the by laws simultaneously with the Articles of Incorporation Amended by a majority of the directors/ trustees and stockholders representing 2/3 of the outstanding capital stock, or 2/ of the members in case of non stock corporations May be amended by a majority vote of the BOD and majority vote of outstanding capital stock or a majority of the member in non stock corporation Power to amend/repeal articles cannot be delegated by the stockholders/ members to the board of directors/ trustees Power to amend or repeal by laws or adopt new by laws may be delegated by the 2/3 of the outstanding capital stock or 2/3 of the members in the case of non stock corporation
CORPORATION LAW
U N I V E R S I T Y O F S A N T O T O M A S
F a c u l t a d d e D e r e c h o C i v i l
ACADEMICS CHAIR: LESTER JAY ALAN E. FLORES II VICE CHAIRS FOR ACADEMICS: KAREN JOY G. SABUGO & JOHN HENRY C. MENDOZA VICE CHAIR FOR ADMINISTRATION AND FINANCE: JEANELLE C. LEE VICE CHAIRS FOR LAY OUT AND DESIGN: EARL LOUIE M. MASACAYAN & THEENA C. MARTINEZ Q: What are the specific powers of a corporation? A:
- Power to extend or shorten corporate term. (Sec. 37)
- Increase or decrease corporate stock. (Sec. 38)
- Incur, create, or increase bonded indebtedness. (Sec. 38)
- Deny pre emptive right. (Sec. 39)
- Sell, dispose, lease, encumber all or substantially all of corporate assets. (Sec. 40)
- Purchase or acquire shares. (Sec. 41)
- Invest corporate funds in another corporation or business for other purpose other than primary purpose .(Sec. 42)
- Declare dividends out of unrestricted retained earnings. (Sec. 43)
- Enter into management contract with another corporation (not with an individual or a partnership within general powers) whereby one corporation undertakes to manage all or substantially all of the business of the other corporation for a period not longer than five (5) years for any one term. (Sec. 44)
- Amend Articles of Incorporation. (Sec.
(2) SPECIFIC POWERS (a) POWER TO EXTEND OR SHORTEN CORPORATE TERM Note: May be used as means to voluntarily dissolve a corporation Q: What are the procedural requirements in extending/shortening corporate term? A: - Majority vote of the BOD or BOT;
- Ratification by 2/3 of the SH representing outstanding capital stock or by at least 2/3 of the members in case of non stock corporation;
- Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally;
- Copy of the amended AOI shall be submitted to the SEC for its approval; and
- In case of special corporation, a favorable recommendation of appropriate government agency. (Sec.
Note: The extension must be done during the lifetime of the corporation not earlier than 5 years prior to the expiry date unless exempted. The extension must not exceed 50 years. After the term had expired without extension, the corporation is dissolved. The remedy of the stockholders is reincorporation. Any dissenting stockholder may exercise his appraisal right in case of shortening or extending corporate term (Sec. 37). (b) POWER TO INCREASE OR DECREASE CAPITAL STOCK Q: What are the procedural requirements in increasing or decreasing capital stock? A:
- Majority vote of the BOD;
- Ratification by stockholders representing 2/3 of the outstanding capital stock;
- Written notice of the proposed increase or diminution of the capital stock and of the time and place of the stockholders meeting at which the proposed increase or diminution of the capital stock must be addressed to each stockholder at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally
- A certificate in duplicate must be signed by a majority vote of the directors of the corporation and countersigned by the chairman and the secretary of the stockholders meeting, setting forth: a. That the foregoing requirements have been complied with; b. The amount of increase or diminution of the capital stock; c. If an increase of the capital stock, the amount of capital stock or number of shares of no par stock actually subscribed, the names, nationalities and residences of the persons subscribing, the amount
UST GOLDEN NOTES 2011
MERCANTILE LAW TEAM: ADVISER: ATTY. AMADO E. TAYAG; SUBJECT HEAD: EARL M. LOUIE MASACAYAN; ASST. SUBJECT HEADS: KIMVERLY A. ONG & JOANNA MAY D.G. PEÑADA; MEMBERS: MA. ELISA JONALYN A. BARQUEZ, ANGELI R. CARPIO, ANTONETTE T. COMIA, ALBAN ROBERT LORENZO F. DE ALBAN, JOEBEN T. DE JESUS, CHRIS JARK ACE M. MAÑO, ANNA MARIE P. OBIETA, RUBY ANNE B. PASCUA, FLOR ANGELA T. SABAUPAN, GIAN FRANCES NICOLE C. VILCHES of capital stock or number of no par stock subscribed by each, and the amount paid by each on his subscription in cash or property, or the amount of capital stock or number of shares of no par stock allotted to each stockholder if such increase is for the purpose of making effective stock dividend authorized; d. The amount of stock represented at the meeting; and e. The vote authorizing the increase or diminution of the capital stock Note: The increase or decrease in the capital stock or the incurring, creating or increasing bonded indebtedness shall require prior approval of the SEC. Q: What is the additional requirement with respect to the increase of capital stock? A: The application to be filed with the SEC shall be accompanied by the sworn statement of the treasurer of the corporation, showing that at least 25% of the amount subscribed has been paid either in cash or property or that there has been transferred to the corporation property the valuation of which is equal to 25% of the subscription. Q: What shall be the basis of the required 25% subscription? A: It shall be based on the additional amount by which the capital stock increased and not on the total capital stock as increased. Note: There will be no treasurers affidavit in case of decrease in capital stock. Corporation need not exhaust its original capital before increasing capital stock. Q: What is the additional requirement with respect to the decrease of capital stock? A: The same must not prejudice the right of the creditors. Q: What are the ways of increasing or decreasing the capital stock? A: By increasing or decreasing the:
- Number of shares and retaining the par value;
- Par value of existing shares without increasing or decreasing the number of shares; 3. Number of shares and increasing or decreasing the par value. Q: The stockholders of People Power, Inc. (PPI) approved two resolutions in a special stockholders' meeting: a) Resolution increasing the authorized capital stock of PPI; and b) Resolution authorizing the Board of Directors to issue, for cash payment, the new shares from the proposed capital stock increase in favor of outside investors who are non stockholders. The foregoing resolutions were approved by stockholders representing 99% of the total outstanding capital stock. The sole dissenter was Jimmy Morato who owned 1% of the stock. Are the resolutions binding on the corporation and its stockholders including Jimmy Morato, the dissenting stockholder? A: No. The resolutions are not binding on the corporation and its stockholders including Jimmy Morato. While these resolutions were approved by the stockholders, the directors' approval, which is required by law in such case, does not exist. (1998 Bar Question) Q: What remedies, if any, are available to Morato? A: Jimmy Morato can petition the Securities and Exchange Commission to declare the two (2) resolutions, as well as any and all actions taken by the Board of Directors thereunder, null and void. (1998 Bar Question) Q: What is bonded indebtedness? A: It is a long term indebtedness secured by real or personal property (corporate assets). Note: The requirements for the power to incur, create or increase bonded indebtedness is also the same with the power to increase or decrease capital stock. Not all borrowings of the corporation need stockholders approval. Only bonded indebtedness requires such approval.
