reviewer for finalscorpo - corporation law svsantos

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1 | P a g e | | C o r p o r a t i o n L a w R e v i e w e r ( B O 2 ) | | F i n a l s | | S V S AN T O S

CORPORATION LAW REVIEWERFor Final Exam

(BUSINESS ORGANIZATION II)

[Outline by Asst Omb Cabras; Combined Notes and Commentaries from

PH Corporate Law Compendium – Atty Aquino, 2014, Handbook on

Partnership Law and Corporation Code – Atty Nolledo, 1998 & Corp book

by Atty Campos; Additional lecture notes and pointers from Asst Omb

Cabras] Prepared by:Salymar Santos

CORPORATION CODE(Batas Pambansa Blg. 68)

II. FINANCIAL STRUCTURE

Includes the Authority to Issue Debt Structures; Power to

incur, create or increase bonded indebtedness (Sec 38)

Sources of Funds;The capital needed to finance the

business of a corporation may come from any or all the

following sources:

1. LOANS from the bank or advances by Creditors;

2. Contributions of its Shareholders

3. Profits by which the corporation may earn

[Campos 2004].

The Capital Structure refers to the aggregate of the securities

issued by the corporation. The instruments usually represent

relatively LONG-TERM investment in the corporation.

Basically, there are two (2) classes:

1. DEBT SECURITIES

2. SHARES OF STOCK (Equity Securities)

**A sound capital structure is of UTMOST IMPORTANCE

because it may spell the success or failure of the business

[Campos 2004]

***Capital Stock and Capital Distinguished[Campos 2004

and Nolledo 1998]:

CAPITAL STOCK: signifies the amount fixed, usually by

the corporate charter, to be subscribed and paid in or

secured to be paid in by the shareholders of a corporation,

wither in money, or in property, labor or services at the

organization of the corporation or afterwards, and upon

which it is to conduct its operations.

“When it has not yet issued all such shares, then its “outstanding”

or “subscribed” capital stock”

CAPITAL: the actual property of the corporation, including

cash, real and personal property. It therefore includes all

corporate assets – contributions of stockholders, loan by

third persons, and earnings less of course, any loss which

have been incurred in the business.

A. DEBT SECURITIES

Generally:

Lirag Textile Mills, Inc., vs. SSS (GR No. L-33205 [1987])

ISSUE:Whether or not the PURCHASE AGREEMENT is a

DEBT INSTRUMENT.

RULING: YES.Purchase Agreement is a debt instrument,

imposing upon the petitioners the obligation to pay the

amount owed, and creating as between them the relation of

creditor and debtor, not that of a stockholder and a

corporation.

The Purchase Agreement is, indeed, a debtinstrument. Its terms and conditions unmistakably show that

the parties intended the repurchase of the preferred shares on

the respective scheduled dates to be an absolute obligation

which does not depend upon the financial ability of petitione

corporation. This absolute obligation on the part of petitioner

corporation is made manifest by the fact that a surety was

required to see to it that the obligation is fulfilled in the event

of the principal debtor's inability to do so. The unconditional

undertaking of petitioner corporation to redeem the preferred

shares at the specified dates constitutes a debt which is define

"as an obligation to pay money at some fixed future time, or at a

time which becomes definite and fixed by acts of either party

and which they expressly or impliedly, agree to perform in th

contract.

1. Authority to Issue Debt Securities

- Power to incur, create or increase bonded indebtedness

(Section 38 of the Corporation Code)

Section 38. Power to increase or decrease capital stock; incur

create or increase bonded indebtedness. –No corporation sha

increase or decrease its capital stock or incur, create or increa

any bonded indebtedness unless approved by a majority voteof the board of directors and, at a stockholder’s meeting duly

called for the purpose, two-thirds (2/3) of the outstanding

capital stock shall favor the increase or diminution of the

capital stock, or the incurring, creating or increasing of any

bonded indebtedness. Written notice of the proposed increas

or diminution of the capital stock or of the incurring, creating

or increasing of any bonded indebtedness and of the time and

place of the stockholder’s meeting at which the proposed

increase or diminution of the capital stock or the incurring or

increasing of any bonded indebtedness is to be considered,

must be addressed to each stockholder at his place of residen

as shown on the books of the corporation and deposited to thaddressee in the post office with postage prepaid, or served

personally.

A certificate in duplicate must be signed by a majority of the

directors of the corporation and countersigned by the

chairman and the secretary of the stockholders’ meeting,

setting forth:

(1) That the requirements of this section have been complied

with;

(2) The amount of the increase or diminution of the capital

stock;

SV SANTO




(3) If an increase of the capital stock, the amount of capital

stock or number of shares of no-par stock thereof actually

subscribed, the names, nationalities and residences of the

persons subscribing, the amount of capital stock or number of

no-par stock subscribed by each, and the amount paid by each

on his subscription in cash or property, or the amount of

capital stock or number of shares of no-par stock allotted to

each stock-holder if such increase is for the purpose of making

effective stock dividend therefor authorized;(4) Any bonded indebtedness to be incurred, created or

increased;

(5) The actual indebtedness of the corporation on the day of

the meeting;

(6) The amount of stock represented at the meeting; and

(7) The vote authorizing the increase or diminution of the

capital stock, or the incurring, creating or increasing of any

bonded indebtedness.

Any increase or decrease in the capital stock or the incurring,

creating or increasing of any bonded indebtedness shall

require prior approval of the Securities and ExchangeCommission.

One of the duplicate certificates shall be kept on file in the

office of the corporation and the other shall be filed with the

Securities and Exchange Commission and attached to the

original articles of incorporation. From and after approval by

the Securities and Exchange Commission and the issuance by

the Commission of its certificate of filing, the capital stock

shall stand increased or decreased and the incurring, creating

or increasing of any bonded indebtedness authorized, as the

certificate of filing may declare: Provided, That the Securities

and Exchange Commission shall not accept for filing any

certificate of increase of capital stock unless accompanied bythe sworn statement of the treasurer of the corporation

lawfully holding office at the time of the filing of the certificate,

showing that at least twenty-five (25%) percent of such

increased capital stock has been subscribed and that at least

twenty-five (25%) percent of the amount subscribed has been

paid either in actual cash to the corporation or that there has

been transferred to the corporation property the valuation of

which is equal to twenty-five (25%) percent of the subscription:

Provided, further, That no decrease of the capital stock shall be

approved by the Commission if its effect shall prejudice the

rights of corporate creditors.

Non-stock corporations may incur or create bonded

indebtedness, or increase the same, with the approval by a

majority vote of the board of trustees and of at least two-thirds

(2/3) of the members in a meeting duly called for the purpose.

Bonds issued by a corporation shall be registered with the

Securities and Exchange Commission, which shall have the

authority to determine the sufficiency of the terms thereof.

What is bonded indebtedness?

- A debt that is secured by an issued bond with the

monies received to be used for corporate purposes.

DEBT SECURITIES: (also called “bonds”) generally involve

the corporation’s promise to pay the principal amount of a

loan at a stated time and interest rate, while the debt remains

unpaid. Further, corporate operations may be financed by

other forms of credit, such as a credit line extended by

suppliers.

2. TYPES OF DEBT SECURITIES1. Unsecured Bonds –also called debentures

involve the sole obligation of the corporation

and there is essentially no security attached to

the load. However, to protect debenture

holders, the debenture agreements usually

impose limitations on corporate borrowing,

payment of dividends, and redemption and/o

acquisition of its own share.

2. Secured Bonds– A secured bond, aside from

the general obligation of the corporation,

creates a claim against the corporation’s gener

assets and a lien on specific property.

3. Income Bonds –A loan where payment of

interest is conditioned on corporate earnings.

- Payable out of net profit.

4. Convertible Bonds – there are bonds which

may be exchanged, usually at the option of the

holder, for other corporate securities at a

specified ratio.

5. Callable Bonds –these are bonds wherein

there is stipulation that the corporation can

redeem or call all or part of the loan before

maturity at a specified redemption price.

B. EQUITY SECURITIES

Equity Securities (commonly called “shares”) are called suc

as said securities represent a proportionate proprietary

interest in the corporation. However they do not vest the

owner with title to any property of the corporation. Shares

confer the owner with a three (3) fold interest in the

corporation. THE –1. Right to participate in control

2. Right to participate in the earnings of the

corporation

3. Right to participate in the residual assets of the

corporation upon liquidation

Garcia vs. Lim Chu Sing , 59 PHIL 562

- A share of stock or the certificate thereof is not an

indebtedness to the owner not evidence of indebtedness

and, therefore, it is not a credit.

SV SANTO




- Stockholders, as such, are not creditors of the

corporation.

- the capital stock of a corporation is a trust fund to be

used more particularly for the security of creditors of the

corporation, who presumably deal with it on the credit of

its capital stock.

Therefore, the defendant – appellant Lim Chu Sing not beinga creditor of the Mercantile Bank of China, although the

latter is a creditor of the former, there is no sufficient ground

to justify a compensation.

N.B – Equity placements in a corporation which form part of

the capital stock are not assets, they are capital accounts,

hence they do not represent a credit on the part of the SHs

nor a debt on the part of the corporation. As such they

cannot be subject to compensation.

1. Issuance of Shares

a. Certificate of Stock (Section 63 of the Corporation Code)Section 63. Certificate of stock and transfer of shares. – The

capital stock of stock corporations shall be divided into shares

for which certificates signed by the president or vice president,

countersigned by the secretary or assistant secretary, and

sealed with the seal of the corporation shall be issued in

accordance with the by-laws. Shares of stock so issued are

personal property and may be transferred by delivery of the

certificate or certificates indorsed by the owner or his attorney-

in-fact or other person legally authorized to make the transfer.

No transfer, however, shall be valid, except as between the

parties, until the transfer is recorded in the books of thecorporation showing the names of the parties to the

transaction, the date of the transfer, the number of the

certificate or certificates and the number of shares transferred.

No shares of stock against which the corporation holds any

unpaid claim shall be transferable in the books of the

corporation.

Certificate of Stock:the written acknowledgement by the

corporation of the stockholder’s interest in the corporation

and its property.

b. Pre-Emptive Rights (Section 39 of the CorporationCode)

Section 39. Power to deny pre-emptive right. – All

stockholders of a stock corporation shall enjoy pre-emptive

right to subscribe to all issues or disposition of shares of any

class, in proportion to their respective shareholdings, unless

such right is denied by the articles of incorporation or an

amendment thereto: Provided, That such pre-emptive right

shall not extend to shares to be issued in compliance with laws

requiring stock offerings or minimum stock ownership by the

public; or to shares to be issued in good faith with the

approval of the stockholders representing two-thirds (2/3) of

the outstanding capital stock, in exchange for property neede

for corporate purposes or in payment of a previously

contracted debt.

c. Consideration (Section 62 of the Corporation Code)

Section 62. Consideration for stocks. – Stocks shall not be

issued for a consideration less than the par or issued price

thereof. Consideration for the issuance of stock may be any oa combination of any two or more of the following:

1. Actual cash paid to the corporation;

2. Property, tangible or intangible, actually received by the

corporation and necessary or convenient for its use and lawfu

purposes at a fair valuation equal to the par or issued value o

the stock issued;

3. Labor performed for or services actually rendered to the

corporation;

4. Previously incurred indebtedness of the corporation;

5. Amounts transferred from unrestricted retained earnings t

stated capital; and6. Outstanding shares exchanged for stocks in the event of

reclassification or conversion.

Where the consideration is other than actual cash, or consists

of intangible property such as patents of copyrights, the

valuation thereof shall initially be determined by the

incorporators or the board of directors, subject to approval by

the Securities and Exchange Commission.

Shares of stock shall not be issued in exchange for promissory

notes or future service.

The same considerations provided for in this section, insofar

they may be applicable, may be used for the issuance of bond

by the corporation.

The issued price of no-par value shares may be fixed in the

articles of incorporation or by the board of directors pursuan

to authority conferred upon it by the articles of incorporation

or the by-laws, or in the absence thereof, by the stockholders

representing at least a majority of the outstanding capital stoc

at a meeting duly called for the purpose. (5 and 16)

National Exchange vs. Dexter , 51 PHIL 601

ACT 1459: Section 16 -No corporation organized under this Act

shall create or issue bills, notes, or other evidence of debt for

circulation as money, and no corporation shall issue stock or bondsexcept in exchange for actual cash paid to the corporation or for

property actually received by it at a fair valuation equal to the par

value of the stock or bonds so issued.

In the absence of restrictions in its character, a

corporation, under its general power to contract, has the powe

to accept subscriptions upon any special terms not prohibited

by positive law or contrary to public policy, provided they are

not such as to require the performance of acts which are beyon

the powers conferred upon the corporation by its character, an

provided they do not constitute a fraud upon other subscriber

SV SANTO




or stockholders, or upon persons who are or may become

creditors of the corporation.

The prohibition against the issuance of shares by

corporations except for actual cash to the par value of the stock

to its full equivalent in property is thus enshrined in both the

organic and statutory law of the Philippine; Islands; and it

would seem that our lawmakers could scarely have chosen

language more directly suited to secure absolute equalitystockholders with respect to their liability upon stock

subscriptions.NOW,if it is unlawful to issue stock otherwise

than as stated it is self-evident that a stipulation such as that

now under consideration, in a stock subcription, is illegal, for

this stipulation obligates the subcriber to pay nothing for the

shares except as dividends may accrue upon the stock. In the

contingency that dividends are not paid, there is no liability

at all. This is a discrimination in favor of the particular

subcriber, and hence the stipulation is unlawful.

- FAIR TREATMENT.

"Conditions attached to subcriptions, which, if valid, lessen thecapital of the company, are a fraud upon the grantor of the

franchise, and upon those who may become creditors of the

corporation, and upon unconditional stockholders."

**A by law provision that unduly limits or provides for only one

way to enforce the obligation to pay is VOID. There war no way

to enforce payment except thru dividend declaration and if

there is no dividend declaration, the subscriber is excused from

payment.

However, a stipulation that the ‘obligation to pay the

subscription may be enforced by the BoD by withholding the

dividends declared on shares’ is VALID as it merely gives the

BoD an option to choose and does not prevent exercise of other

remedies to enforce payment.

**Consideration for par value or no par value shares:Stocks

must be issued for a consideration not less than the par or

issued price (in case of no par),whether the consideration is

for actual case or other than actual cash. If the par value for

example is 10php, then anactual cash of 10php must be paid

for it, orproperty, etc. equivalent to said valuemust be

delivered to the corporation. But consideration may be in the

form of services actually rendered or exchange ofshares (as inconversion), orprevious corporate debt(which can be

measured or computed in terms of peso/s), oramounts

transferred from surplus to capital (stock dividends), or

intangible property like patents or copyrights[Nolledo 1998].

WHAT IF THE CONTRACT STATED “WHICH MAY BE” AS

OPPOSED TO “PAYABLE FROM”?

The stipulation would have been valid as the collection is not

limited by the contingent event of dividend declaration.

-SETTING AN OPTION.

The usual kinds of shares under Section 6 of Corporation

Code are:

1. Common Shares -one which entitles the owner or

holder to an equal prorate division of profits withou

any preference or advantage over any class of

stockholders.

2. Preferred Shares –one which entitles the holder to

some priority as to dividend or principal or both ove

some other class or classes of stockholders.

**As to different types of ISSUANCE OF SHARES:

3. Par Value Shares –one on the certificate of which or

in the articles of incorporation, appears an amount in

pesos as the nominal value of the share [Nolledo 199

The function of the par value is to fix its minimum

subscription price. [Ibid.]

The par value of a share is fixed in the articles of

incorporation and is the minimum issue price of

such share. This value must be stated in thecertificate of stock, which cannot be issued until th

subscriber has paid his subscription in full. The

stocks cannot be issued or sold by corporation at

less than par, otherwise they would be “watered

stock” and the stockholder would still be liable for

the difference between what he paid and the par

value thereof. [Section 65 Corp Code; Campos

2004]. They may however be issued ot sold at high

price than par.

Advantages:

a. Ease of Sale;

b. Greater protection to creditors;

c. Unlikelihood of sale of subsequently issue

shares at a lower price;

d.Unlikelihood of the distribution of

dividends that are ostensible profits;

e. Reduced danger of surplus becoming

“frozen” in a merger or consolidation.

Disadvantages:

a. Liability by subscribers for unpaid

subscription;

b. Inaccurate representation as to its truevalue. [Nolledo 1998]

4. No Par Value Shares –is a share without any nomin

value in terms of peso or peso’s worth [Nolledo 1998

The issuance of No Par value shares shall result in

the share being fully paid and non-assessable and

the holder of such shares shall not be liable to the

corporation or to its creditors in respect thereto.

[Ibid.]

SV SANTO




No par shares are those whose issued price is not

stated in the certificate, but which may be fixed in

the Articles of Incorporation, or by the board of

directors when so authorized by said articles or by

the by-laws, or in the absence thereof, by the

shareholders themselves [Section 62 Corp Code;

Campos 2004]

Advantages:a. Less likely to mislead naïve investors who

may take the par value printed on the

certificate as a representation of its present

actual value;

b. Flexibility of price;

c. Disappearance of personal liability for

unpaid subscription;

d.Affords remedy for or relief from the evil of

over-capitalization;

e. Stock dividends are more easily issued,

simplifying accounting procedure;

f. No par value share tells no untruth

concerning the value of the shareholder’s

contributions.

Disadvantages:

a. Large issues of stock for property;

b. Lesser protection to creditors; [Nolledo

1998; Aquino 2014]

PAR VALUE NO PAR VALUE

Pre-determined at the time

of the establishment of the

Corporation

No pre-determined price

Non-flexible:Par value

prevents issuance of shares

at a discount that may be

desirable for business

purposes in some cases.

Flexibility of the price; No

par valueshares are resorted

to maintain flexibility on the

price that may be hampered

at times because of the rule

on watered stocks.

The issue or stated value of

the shares may be HIGHER

than the par value. The

value fixed cannot be below

par.

With respect to no par value

shares, the stated or issued

value cannot be less than

five (5) pesos.

Arbitrary (dictated) amount

under the AoI or Corporate

charter. The BOD is

authorized to fix the amount

subscribed to such shares.

Price depends on the Market

Value and other conditions;

its price may also be fixed in

the Articles of Incorporation

or by BOD pursuant to the

authority conferred upon it

by the AoI or Bylaws.

Subscriber may be led to

believe that the actual value

of his interest is equal at

least to the par value stated

There is no false appearance

behind which true value of

the stock in money is

hidden.

in the certificate

Section 15. Forms of Articles of Incorporation.

X X X

(In case all the share are without par value): That the capital

stock of the corporation is ______________ shares without pa

value. (In case some shares have par value and some are

without par value): That the capital stock of said corporation

consists of _____________ shares of which ______________shares are of the par value of _________________

(P____________) PESOS each, and of which

_________________ shares are without par value.

X X X

d. Payment of the Balance of the Subscription (Sections 6

and 67 of the Corporation Code)

Section 66. Interest on unpaid subscriptions. –Subscribers f

stock shall pay to the corporation interest on all unpaid

subscriptions from the date of subscription, if so required by,

and at the rate of interest fixed in the by-laws. If no rate ofinterest is fixed in the by-laws, such rate shall be deemed to b

the legal rate.

Section 67. Payment of balance of subscription. – Subject to

the provisions of the contract of subscription, the board of

directors of any stock corporation may at any time declare du

and payable to the corporation unpaid subscriptions to the

capital stock and may collect the same or such percentage

thereof, in either case with accrued interest, if any, as it may

deem necessary.

Payment of any unpaid subscription or any percentage thereo

together with the interest accrued, if any, shall be made on th

date specified in the contract of subscription or on the datestated in the call made by the board. Failure to pay on such

date shall render the entire balance due and payable and shal

make the stockholder liable for interest at the legal rate on

such balance, unless a different rate of interest is provided in

the by-laws, computed from such date until full payment. If

within thirty (30) days from the said date no payment is mad

all stocks covered by said subscription shall thereupon becom

delinquent and shall be subject to sale as hereinafter provided

unless the board of directors orders otherwise.

Lingayen Gulf vs. Baltazar , 93 PHIL 404

Under theCorporation Law,notice of call for payment for

unpaid subscribed stock must be published, except when th

corporation is insolvent, in which case, payment is

immediately demandable. We also rule that release from

such payment be made by all the stockholders.

When the Corporation Code lays down the procedure, the

same is mandatory; failure to comply with such procedure

renders the transaction void.

SV SANTO




IF THERE IS NO STIPULATION AS TO PAYMENT OF

INTEREST, SHOULD INTEREST BE PAID?

NO. The payment of interest must ne stated in the by laws,

otherwise, it is not de,andable.

IF INTEREST IS AGREED UPO AND NO PERCENT IS

AGREED UPON, WHAT IS THE RATE?

The legal rate of interest of 12% will be imposed.

IF A SUBSCRIPTION AGREEMENT PROVIDES FOR AMATURITY DATE, CAN A CALL STILL BE MAD E BY

THE BOARD OF DIRECTORS?

NO. A call is necessary only in instances where there is no

date of payment in the subscription agreement. The call can

specify that all subscription receivable are due and

demandable or that a certain percentage of said receivable is

due.

HOW IS A CALL MADE IN ORDER TO IN SHS?

The BoD may make a call at an y time, setting the date for

payment to be made. If said date arrives and NO PAYMENT

is made, the ENTIRE balance shall be due and demandableand interest starts to run. The SH must pay within 30 days

from the date set, otherwise, their shares become delinquent.

WHAT ARE THE TWO (2) WAYS BY WHICH

SUBSCRIPTION IS RECEIVABLE BECOME DUE?

1) By the expiration of the period as STATED IN THE

AGREEMENT

2) By expiration of the period as STATED IN THE

CALL

!!! IMPORTANT: IF THE PERIOD LAPSE, DO THE

SHARES BECOME DELINQUENT?

No. The shares become delinquent thirty (30) days from the

lapse of the above period or the call. The BoD may declare

the shares do not become delinquent even after the lapse of

30 days.

WHAT ARE THE LGAL EFFECTS WHEN SHARES

BECOME DELINQUENT?

Delinquent shares cannot vote or e-voted upon.

Dividends, if any, are first applied to delinquency.

HOW WILL DELINQUENT SHARES AFFECT QUORUM?As to VOTING QUORUM, they are not part thereof

As to DIVIDENDS QUORUM, they are still part thereof.

e. Liability for Unpaid Subscriptions

Keller vs. COB Group , 141 SCRA 86

As to the liability of the stockholders, it is settled that a

stockholder is personally liable for the financial

obligations of a corporation to the extent of his unpaid

subscription.

f. Delinquency Subscription (Sections 68 to 71 of the

Corporation Code)

Section 68. Delinquency sale. –The board of directors may,

by resolution,order the sale of delinquent stock and shall

specifically state the amount due on each subscription plus

all accrued interest, andthe date, time and place of the sale

which shall not be less than thirty (30) days nor more than

sixty (60) days from the date the stocks become delinquent.

Notice of said sale, with a copy of theresolution, shall be sent to every delinquent stockholder eithe

personally or by registered mail. The same shall furthermore

be published once a week for two (2) consecutive weeks in a

newspaper of general circulation in the province or city wher

the principal office of the corporation is located.

Unless the delinquent stockholder pays to

the corporation, on or before the date specified for the sale of

the delinquent stock, the balance due on his subscription, plu

accrued interest, costs of advertisement and expenses of sale,

or unless the board of directors otherwise orders, said

delinquent stock shall be sold at public auction to such bidde

who shall offer to pay the full amount of the balance on the

subscription together with accrued interest, costs of

advertisement and expenses of sale, for the smallest number

shares or fraction of a share. The stock so purchased shall be

transferred to such purchaser in the books of the corporation

and a certificate for such stock shall be issued in his favor. Th

remaining shares, if any, shall be credited in favor of the

delinquent stockholder who shall likewise be entitled to the

issuance of a certificate of stock covering such shares.

Should there be no bidder at the public

auction who offers to pay the full amount of the balance on th

subscription together with accrued interest, costs ofadvertisement and expenses of sale, for the smallest number

shares or fraction of a share, the corporation may, subject to th

provisions of this Code, bid for the same, and the total amoun

due shall be credited as paid in full in the books of the

corporation. Title to all the shares of stock covered by the

subscription shall be vested in the corporation as treasury

shares and may be disposed of by said corporation in

accordance with the provisions of this Code.

Section 69. When sale may be questioned. – No action to

recover delinquent stock sold can be sustained upon the

ground of irregularity or defect in the notice of sale, or in the

sale itself of the delinquent stock, unless the party seeking to

maintain such action first pays or tenders to the party holdin

the stock the sum for which the same was sold, with interest

from the date of sale at the legal rate; and no such action shal

be maintained unless it is commenced by the filing of a

complaint within six (6) months from the date of sale.

Section 70. Court action to recover unpaid subscription. –

Nothing in this Code shall prevent the corporation from

collecting by action in a court of proper jurisdiction the

SV SANTO




amount due on any unpaid subscription, with accrued interest,

costs and expenses.

Section 71. Effect of delinquency. – No delinquent stock shall

be voted for or be entitled to vote or to representation at any

stockholder’s meeting, nor shall the holder thereof be entitled

to any of the rights of a stockholder except the right to

dividends in accordance with the provisions of this Code, until

and unless he pays the amount due on his subscription withaccrued interest, and the costs and expenses of advertisement,

if any.

Delinquency Sale Procedure; WHEN SHARES ARE

DECLARED DELINQUENT, WHAT REMEDIES ARE

AVAILABLE TO THE CORPORATION? (68 to 71)

A delinquency sale with the following procedure:

1) BoD by a resolution shall order the sale

2) The sale is set 30-60 days from the date the shares

were declared delinquent;

3) NOTICE to delinquent SH, by personal service or

registered mail;

4) PUBLICATION in a newspaper for two (2)

consecutive weeks;

5) SH may pay if not PUBLIC BIDDING;

6) A new certificate is issued in favor of the winning

bidder;

7) If there is no winning bidder, the shares become

TREASURY SHARES.

HOW DOES THE BIDDING WORK?

The winning bidder is the one who offers t o pay

the FULL AMOUNT OF THE BALANCE (plus interests andcosts) FOR THE SMALLEST NUMBER OF SHARES OR A

FRACTION OF A SHARE.

When there are similar amounts of bids, but

different number of shares, get the one who offered the

smallest number of shares.

When different amounts of bids, but the same number of

shares, get the highest bidder/amount.

When there are different amounts and number of shares, get

the one who offered the smallest number of shares

(provided his bid covers the full amount).

REMEMBER:As long as all the amounts bided are enough

to cover the total amount due, always get the bidder who

offered the smallest number of shares.

If there is more than one bidder offering the same smallest

number of shares, get the bid with the higher amount.

WHAT IS THE PURPOSE OF A DELINQUENCY?

- To recover the payment for the entire balance of the

subscription, plus interest.

- For a return in the costs of advertisement and sale.

- To protect the interest of the delinquent SH to the extent

possible.

Phil Trust vs. Rivera , 44 PHIL 496

It is established doctrine that subscription to the capital of a

corporation constitute a find to which creditors have a right tolook for satisfaction of their claims and that the assignee in

insolvency can maintain an action upon any unpaid stock

subscription in order to realize assets for the payment of its

debts. (Velasco vs. Poizat, 37 Phil., 802.) A corporation has no

power to release an original subscriber to its capital stock from

the obligation of paying for his shares, without a valuable

consideration for such release; and as against creditors a

reduction of the capital stock can take place only in the manne

an under the conditions prescribed by the statute or the charte

or the articles of incorporation. Moreover, strict compliance

with the statutory regulations is necessary

WHAT ARE THE REQUISITIES TO EFFECTIVELY RELEAS

THE PAYMENT OF SUBSCRIPTION RECEIVABLE?

1. Consent of ALL the SHs – as a subscription contract

also a contract between and among the SHs.

2. Consent of ALL the CREDITORS – because of the

Trust Fund Doctrine.

TIMELINE:

Shares become delinquent unless otherwise ordered by

the BoD:

Miranda vs. Tarlac Rice Mill , 57 SCRA 619

Section 38 of the Corporation Law providesthat the board

of directors of every corporation may at any time declare

due and payable to the corporation unpaid subscriptions

to the capital stock and may collect the same with interes

accrued thereon or such percentage of said unpaid

subscriptions as it may deem necessary. In his work, “The

Philippine Law of Stock Corporation” page 97, Justice Fishe

expressedthe opinion that his power of the directors isabsolute and cannot be limited by the subscription

contract, but this does not mean that the directors may no

rely on the subscription contract if they see fit to do so.

“No call is necessary when a subscription is payable, not

upon call or demand by the directors or stockholders, bu

immediately, or on a specified day, or on or before a

specified day, or when it is payable in installments at

specified times. In such cases it is the duty of the

subscriber to pay the subscription or installment thereof

SV SANTO




as soon as it is due, without any call or demand, and, if

falls to do so, an action may be brought at any time.”

ABAD SANTOS, ;., dissenting:

Considering the reasons behind the provisions of law under

consideration, which, to my mind, account for their

mandatory character,the rule followed in some

jurisdictions that no call is necessary when a subscription

is payable in installments at specified times, should not beapplied here.

In the case at bar, we cannot even indulge in the

presumption that there was a call for subscriptions, for it is

agreed by the parties that,with the exception of Alberto

Miranda, none of the other stockholders of the defendant

corporation has paid or been required to pay on his

subscription. Thus we see here practiced by the directors of

the defendant corporation the very favoritism which the

statutory provisions above mentioned seek to avert. And yet

this court is going to sanction such an evil practice.

** The defense of the subscriber that other subscribers havenot been required to pay is untenable. The SC stated that

after a general call is made, the BoD may, in the exercise of

the BJR (business judgment rule) may, decide against whom to

collect.

However, if it can be shown that the exercise is in

grave abuse of discretion or prompted by discriminatory

motivations, it cannot fall within the BJR.

If the BoD refuses to collect on delinquencies, the

remedy is for the SHs to file a derivative suit.

IT IS WITHIN THE BOARD OF DIRECTORS’

DISCRETION TO DECLARE DVIDENDS (EXCEPT

WHEN RETAINED EARNINGS EXCEEDS 100% OF PAID

UP). CAN THE BOARD CHOOSE ONLY SPECIFIED

SHAREHOLDERS TO WHOM DIVIDENDS MUST BE

GIVEN?

NO. The grant of dividends must not be

discretionary.

COMPARE THAT POWER OF THE BOARD WITH ITS

POWER IN DELINQUENCY PROCEEDINGS?

GR: The making of the call is within the BJR.

XPT:When the subscription contract itself fixes the time forpayment (the BoD thus loses its discretion).

XPT to XPT:When the corporation is insolvent – the contract

becomes immediately due and demandable.

De Silva vs. Aboitiz , 44 PHIL 755

FACTS:De Silva subscribed for 650 shares of stock of

Aboitiz of the value of P500 each. He only paid for the value

of 200 shares, for which he became indebted to the

corporation in the amount of P255,000, representing the

unpaid value of his subscription. The secretary of the

corporation notified him of the resolution passed by

Board, declaring the unpaid subscriptions to have becom

due and demandable. Further, the said resolution also state

that all such shares which remain unpaid will be declare

delinquent, and will be advertised for sale at public auctio

De Silva thus filed a complaint in the CFI against th

corporation, asking the court to enjoin the corporation fro

holding such sale. He said that the corporation exceeded

authority, as he said that its By-laws stated that the unpashares shall be paid out of the 70% of the profit obtaine

which shall be distributed among the subscribers, who sha

not receive any dividend until the shares are paid in fu

Further, he contends that the By-laws provide an operati

way of paying for the shares continuously until their fu

amortization. The CFI dismissed the case.

ISSUE: Whether or not, under the provision of article 4

of the bylaws of the defendant corporation, the latter m

declare from unpaid shares delinquent, or collect the

value by another method different from that prescribed

the aforecited article.X X X

Said article reads thus:

As will be seen from the context of the said article, its first

part specifies the manner in which the net profit resulting

from the annual liquidation should be distributed…

So thatit is discretionary on the part of the board of

directors to do whatever is provided in the said article

relative to the application of a part of the 70 per cent of th

profit distributable in equal parts on the payment of the

shares subscribed to and not fully paid, and to the creatio

of a special emergency fund or extraordinary reserve fun

and the fact itself that said special fund may not be created

when the dividend appearing to be distributable, after

deducting from the said 70 per cent the amount to be

applied on the payment of the unpaid subscription, is less

than 10 per cent of the capital actually paid, shows that it is

the board of directors and not the delinquent subscriber th

may and must judge and decide whether or not such value

must be paid out of a part of the 70 per cent of the profit

distributable in equal parts among the shareholders, as

provided in the first part of the said article. It lies therefore

within the discretion of the board of directors to make us

of such authority.

In the instant case,the defendant corporation, through its

board of directors, made use of its discretionary power,

taking advantage of the first of the two remedies provide

by the aforesaid law. On the other hand, the plaintiff has n

right whatsoever under the provision of the above cited

article 46 of the said by-laws to prevent the board of

directors from following, for that purpose, any other metho

than that mentioned in the said article, for the very reason

that the same does not give the stockholders any right in

connection with the determination of the question whether

SV SANTO




or not there should be deducted from the 70 per cent of the

profit distributable among the stockholders such amount as

may be deemed fit for the payment of subscriptions due and

unpaid. Therefore,it is evident that the defendant

corporation has not violated, nor disregarded any right of

the plaintiff recognized by the said by-laws, nor exceeded

its authority in the discharge of its executive functions, nor

abused its discretion when it performed the acts

mentioned in the complaint as grounds thereof, and,consequently, the facts therein alleged do not constitute a

cause of action.

The by laws may provide a remedy for the collection of

unpaid subscriptions. Such remedies are not exclusive of

those provided under the Corpraotion Code (extra-judicial

or judicial sale).

This case contained a similar provision in the by laws as the

National Exchange vs Dexter case, however, in this case a

mere option was being granted to the BoD as opposed to the

said case where it was imperative.

**As long as it is in the power of the BoD. MUST BE

IN THE BYLAWS. In the absence of such

stipulation, the default would be the remedies

provided under the delinquency sale.

*** To add for other ways of payment of unpaid

shares.

**Can you deviate from the authority given by the

bylaws? Or change the provisions under the

delinquency sale?

NO!!!But you can add or insert, using the by-laws

as long as there is no violation of the principle of

Due Process.

Effect:Once you make it mandatory, you must

COMPLY.But again, as to the procedure provided

by the LAW (Corp Code Sec 68 – 71), NO!!!!! You

cannot change the law.

EG: As to declaration of a delinquent stock:

There is no way that a particular share is delinquent

without resolution

Fun Cun vs. Summers , 44 PHIL 705The claim was for a subsequent indebtedness of Fua Cun to

the bank and the bank was not claiming under the

subscription agreement but from a mere ordinary obligation.

Thus, as an ordinary creditor, its claims were subject to prior

registration.

GR: A corporation is not bound but the notice of mortgage

of shares if said shares are not fully paid as the corporation

has a lien on unpaid claims which includes shares not fully

paid. Corporate claims over unpaid shares take precedence

over mortgages

XPT:By way of an exception , even if shares are not fully

paid, the corporation is bound by the notice of mortgage,

if its claim over the shares arises out of a SUBSEQUENT

ORDINARY OBLIGATION E.Gindebtedness. If the

corporation, in order to collect a debt from a debtor, who is

the same time a subscriber, AFTER knowledge of the notice

of mortgage, then the mortgagee’s claim will prevail.

**If there is a delinquency, then the corporation is claiming

from the subscription agreement –No attendant circumstanc

in this case, in other words, their relationship is that of a creditor

and debtor only.*Just an amount not an unpaid subscription.*

*** Review of Monserrat and Chua Guan cases –the STB

(Stock and Transfer Book) is the repository of all transfers o

shares, mortgages, not being transfers has no proper place

the STB. Annotations of mortgages in the STB do not bind

the world since it is not a repository of mortgages.

HOWEVER, a mortgage of stocks, if registered in the STB o

brought to the knowledge of the corporation, binds thecorporation as long as the shares are fully paid up as notice

is equivalent to registration

*** Can you compel the corporation to put the mortgage in the

STB? WHAT can you compel the corporation to do?

Effect of mortgage?

Summary:

SALE OR ALIENATION:

1) If the shares are FULLY PAID, the corporation is

bound to recognize and record in its books the sale

or alienation.2) If the shares are NOT FULLY PAID , the corporatio

is not bound to recognize not record any sale or

alienation. The STB is not the repository of “not

fully paid” shares as:

- they are not covered by certificates.

- Section 63 (P2) if unpaid not transferable

to books.

MORTGAGE or ENCUMBRANCE:

Whether or not the shares are fully paid, the corporation is

not bound to register the mortgage in the STB, it cannot be

compelled by mandamys to register.If FULLY PAID SHARES, then the corporation has no more

previous claim and is thus bound by the notice of mortgage

If NOT FULLY PAID SHARES, the corporation retains its

previous claim and is therefore not bound by the notice of

mortgage. Between the corporation’s unpaid claim and the

mortgage, the unpaid claim prevails.

If the corporation is a SUBSEQUENT claim based on an

ordinary obligation and not an unpaid subscription, the

corporation is BOUND by the notice of mortgage.

SV SANTO




A corporation may, furthermore, classify its

shares for the purpose of insuring compliance with

constitutional or legal requirements.

Except as otherwise provided in the articles

of incorporation and stated in the certificate of stock, each

share shall be equal in all respects to every other share.

Where the articles of incorporation provide

for non-voting shares in the cases allowed by this Code, the

holders of such shares shall nevertheless be entitled to vote onthe following matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;

3. Sale, lease, exchange, mortgage, pledge or other disposition

of all or substantially all of the corporate property;

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

6. Merger or consolidation of the corporation with another

corporation or other corporations;

7. Investment of corporate funds in another corporation or

business in accordance with this Code; and8. Dissolution of the corporation.

Except as provided in the immediately

preceding paragraph, the vote necessary to approve a

particular corporate act as provided in this Code shall be

deemed to refer only to stocks with voting rights.

***Section 6 provides for the General Rule as to the

Classification of Shares. That, as a default, each share ARE

GIVEN the same rights and privileges.

- Classifications such as preferences will be put in

the Articles of Incorporation.

1. Preferred Shares –A share is considered as PREFERRED

if it has CONTRACTUAL rights SUPERIOR to common

stock as to DIVIDENDS or ASSETS in LIQUIDATION or

both. These rights must be provided for in the AoI.

GR:Preferred shares may have as many feature as may be

desired.

LIMITATION:The preferred features must be stated in the

Articles.

The AoI must still conform to the limitations provided bylaw. Even if preferences are stated in the AoI, you are still

subject to the presumption of law – if an assured 18%

dividend is granted to a Preferred Share, such can only be

given if there subject to the availability of the Unrestricted

Retained Earnings (URE).

IF PREFERENCES ARE GRANTED TO PREFERRED

SHARES (PS), WHAT IS THE DISTINCTION BETWEEN

TSAID SHARES AND COMMON SHARES (CS)?

The CS bears the risk of loss, while PS have priority

in cases of dividends and/or liquidation is to take place,

whatever assets which remain after payment of debts shall

first be applied to the payment of the investments of PS.

Thus, greater risk is assumed by CS holders.

WHY WOULD A PERSON INVEST TO CS IF THERE

ARE PREFERENCES GIVEN TO PS?

CS are still attractive to the investing public as they

as a general rule, are granted the right to PARTICIPATE in

management and are given voting rights. As by thepreferences given to FS, you can legally deprive them of

voting rights.

SUBTYPES OF PREFERRED SHARES:

Participating and Non-Participating

Participating shares are those which entitle the holders of

preferred shares to participate with holders of CS in the

surplus profits (after the amount of stipulated dividend ha

been granted to said PS).

Non-participatingshares entitles the holders of preferred

shares only to the stipulated preferred dividends.

WHEN ARE PS DEEMED PARTICIPATING SHARES?

The right to dividends is an inherent feature of

shareholding, thus the only time you are deprived of such

feature is when there is a stipulation to such effect. Thus, in

the absence of such a stipulation, shares become

participating because SAID RIGHT HAS NOT BEEN

DENIED TO THEM.

- Must be with specifications.

**In the absence of any express stipulation, preferred stocksare deemed to be non-participating.

Cumulative and non-Cumulative

Cumulativeshares are those preferred shares which entitle

the holders to both current dividends and dividends not

paid from previous years. It preferred dividend had not

been paid in full in any year, be said dividends earned or

unearned, the back dividends is paid to CS.

Non-cumulativeshares are those preferred shares that are

entitled only to current dividends.

WHEN ARE PS DEEMED CUMULATIVE SHARES?

The right to dividends is an inherent feature of

shareholding, thus the only time you are deprived of such

feature is when there is a stipulation to such effect. Thus, in

the absence of such a stipulation, shares become cumulativ

because SAID RIGHT HAS NOT BEEN DENIED THEM.

There is a guaranteed return which must be expressly

denied to justify the failure to carry over.

Section 6 has been made part of the Corporation Code so

that a corporate planner may have all tools needed to attrac

SV SANTO




the investing public, with the only limitation being the fact

that preferences must be stated in the AoI.

**In the absence of any express stipulation, preferred stocks

are deemed to be cumulative.

Whatever the reason for such failure, once profits

are made and dividends declared in any subsequent year, all

arrears must be paid to the preferred before the common

stocks can receive any shares on the profits. [Campos 2004]

2. Redeemable Shares (Section 8 of the Corporation Code)

Section 8. Redeemable shares. – Redeemable shares may be

issued by the corporation when expressly so provided in the

articles of incorporation. They may be purchased or taken up

by the corporation upon the expiration of a fixed period,

regardless of the existence of unrestricted retained earnings in

the books of the corporation, and upon such other terms and

conditions as may be stated in the articles of incorporation,

which terms and conditions must also be stated in the

certificate of stock representing said shares.

Redeemable shares allow a corporate investor to limit the

period of investment, so as not to wait for the liquidation/

dissolution of the corporation before he can recoup on his

investments.

The fact that a certain kind of shares are deemed redeemable

shares, along with the other terms and conditions for their

redemption must be so stated in the articles.

As a general rule, any and all features granted to shares

must not violate the TRUST FUND DOCTRINE (TFD),Section 8 is specifically provided as without such provision,

a classification of shares with the features of a redeemable

share is a violation of the Trust Fund Doctrine.

Republic Planters Bank vs. Hon. Agana(GR No. 51765 [1997])

A preferred share of stock, on one hand, is one which

entitles the holder thereof to certain preferences over the

holders of common stock. The preferences are designed to

induce pensions to subscribe for shares of a corporation.

Preferred sharestake a multiplicity of forms. The most

common forms may be classified into two:(1) Preferred

shares as to assets; and (2) preferred shares as to dividends.3. Founder’s Shares (Section 7 of the Corporation Code).

The former is a share which gives the holder thereof

preference in the distribution of the assets of the corporation

in case of liquidation; the latter is a share the holder of

which is 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.There is no guaranty,

however, that the share will receive any dividends.

Thus, the declaration of dividends is dependent

upon the availability of surplus profit or unrestricted

retained earnings, as the case may be. Preferences granted

preferred stockholders, moreover, do not give them a lien

upon the property of the corporation nor make them

creditors of the corporation, the right of the former being

always subordinate to the latter. Dividends are thus payabl

only when there are profits earned by the corporation and

a general rule, even if there are existing profits, the board o

directors has the discretion to determine whether or not

dividends are to be declared. Shareholders, both commonand preferred, are considered risk takers who invest capita

in the business and who can look only to what is left after

corporate debts and liabilities are fully paid.

Redeemable shares, on the other hand, are shares

usually preferred, which by their terms are redeemable a

a fixed date, or at the option of either issuing corporation

or the stockholder, or both at a certain redemption price.

redemption by the corporation of its stock is, in a sense,a

repurchase of it for cancellation.The present Code allows

redemption of shares even if there are no unrestricted

retained earnings on the books of the corporation. This is

a new provision which in effect qualifies the general rulethat the corporation cannot purchase its own shares excep

out of current retained earnings. However, while

redeemable shares may be redeemed regardless of the

existence of unrestricted retained earnings, this is subjec

to the condition that the corporation has, after such

redemption, assets in its books to cover debts and

liabilities inclusive of capital stock. Redemption, therefor

may not be made where the corporation is insolvent or if

such redemption will cause insolvency or inability of the

corporation to meet its debts as they mature.

3. Founder’s Shares (Section 7 of the Corporation Code)

Section 7. Founders’ shares. – Founders’ shares classified as

such in the articles of incorporation may be given certain righ

and privileges not enjoyed by the owners of other stocks,

provided that where the exclusive right to vote and be voted

for in the election of directors is granted, it must be for a

limited period not to exceed five (5) years subject to the

approval of the Securities and Exchange Commission.The

five-year period shall commence from the date of the

aforesaid approval by the Securities and Exchange

Commission.

CAN FOUNDER’S SHARES (FS) BE GRANTED TO

NON-FOUNDERS?

YES. Under Section 6, it is legal to issue FS even to

non-founder. If a right to vote or an exclusive right to be

voted in the BoD is a feature granted to a share under

Section 6 (as opposed to Section 7), the five (5) year

limitation therein will not apply. The reason for such

limitation under Section 7 is the desire not to have founder

perpetuate themselves in office; if the same is created by

virtue of Section 6 there is deemed to be a free choice as to

SV SANTO




the acceptance of limitations (the person knew what he was

getting into prior to entering into the relation).

***Founder’s shares can be sold or transferred

4. Treasury Shares (Section 9 of the Corporation Code)

Section 9. Treasury shares. – Treasury shares are shares of

stock which have been issued and fully paid for, but

subsequently reacquired by the issuing corporation bypurchase, redemption, donation or through some other lawful

means. Such shares may again be disposed of for a reasonable

price fixed by the board of directors. (n)

Treasury Shares –Shares that the corporation buys back

after it has issued them. They are issued but NOT

OUTSTANDING shares as opposed to issued to outstanding

shares, which have the rights to vote and of pre-emption.

-After buy-back = No more voting rights.

Commissioner vs. Manning , 66 SCRA 14

Although authorities may differ on the exact legal and

accounting status of so-called "treasury shares," they are

more or less in agreement that treasury shares are stocks

issued and fully paid for and re-acquired by the

corporation either by purchase, donation, forfeiture or

other means.Treasury shares are thereforeissued shares,

but being in the treasury they do not have the status of

outstanding shares. Consequently, although a treasury

share, not having been retired by the corporation re-

acquiring it,may be re-issued or sold again, such share, as

long as it is held by the corporation as a treasury share,

participates neither in dividends, because dividends

cannot be declared by the corporation to itself, nor in themeetings of the corporation as voting stock, for otherwise

equal distribution of voting powers among stockholders

will be effectively lost and the directors will be able to

perpetuate their control of the corporation, though it still

represents a paid-for interest in the property of the

corporation. The foregoing essential features of a treasury

stock are lacking in the questioned shares.

Under Manning, the share were not treated as treasury

shares as they were transferred to the trustees and not to the

corporation, Treasury shares have two (2) features:

1. At one point in time they were fully paid andoutstanding; and

2. They were acquired by the corporation thru the

modes of ownership.

Shares classified as treasury shares have neither the

right to VOTE(for if they can be used to vote, the BoD will

be the ones to use them, electing their representatives and

thus perpetuating themselves in office)nor to DIVIDENDS

(as it would prejudice the SHs as URE is an equity for SHs).

Treasury shares do not enjoy the right of pre-

emption, however, they are subject to pre-emptive rights –

the disposition of TS are subject to the pre-emptive rights o

the SHs.

b. Watered Stocks (Section 65 of the Corporation Code)

Section 65. Liability of directors for watered stocks. – Any

director or officer of a corporation consenting tothe issuance

of stocks for a consideration less than its par or issued valu

or for a consideration in any form other than cash, valued in

excess of its fair value, or who, having knowledge thereof,does not forthwith express his objection in writing and file th

same with the corporate secretary, shall be solidarily, liable

with the stockholder concerned to the corporation and its

creditors for the difference between the fair value received at

the time of issuance of the stock and the par or issued value o

the same. (n)

c. Quasi-Reorganization (Section 38 of the Corporation

Code):Section 38 allows the reduction of capital stock and

the reason for such reduction is as follows:

A capital deficit may prevent the distribution of

dividends, thus reducing capital might wipe-out the defici

and permit the payment of dividends.

If capital invested is more than that is needed for

carrying out the business of the corporation, a reduction of

legal capital may be availed of to distribute as liquidating

dividends said surplus.

- Management strategies:

- Stock Splits-In a stock split, issued shares are

broken up into a greater number of shares, each of which

has a value proportionate to said issued shares prior to the

stock split. A stock split lowers the price of shares to a mormarketable price, possibly attracting more investors.

- Stock Consolidation –A stock consolidation

combines issued shares that once comprised a broken grou

of such shares. The advantage to such consolidation is it

allows the corporation to place the stocks on a higher strata

possibly attracting institutional investors.

C. DIVIDENDS AND OTHER DISTRIBUTIONS

Right to Dividends (Section 43 of the Corporation Code)

Section 43. Power to declare dividends. - The board of

directors of a stock corporation may declare dividends out ofthe unrestricted retained earnings which shall be payable in

cash, in property, or in stock to all stockholders on the basis o

outstanding stock held by them: Provided, That any cash

dividends due on delinquent stock shall first be applied to th

unpaid balance on the subscription plus costs and expenses,

while stock dividends shall be withheld from the delinquent

stockholder until his unpaid subscription is fully paid:

Provided, further, That no stock dividend shall be issued

without the approval of stockholders representing not less

than two-thirds (2/3) of the outstanding capital stock at a

regular or special meeting duly called for the purpose. (16a)

SV SANTO




Stock corporations are prohibited from retaining surplus

profits in excess of one hundred (100%) percent of their paid-in

capital stock, except: (1) when justified by definite corporate

expansion projects or programs approved by the board of

directors; or (2) when the corporation is prohibited under any

loan agreement with any financial institution or creditor,

whether local or foreign, from declaring dividends without

its/his consent, and such consent has not yet been secured; or

(3) when it can be clearly shown that such retention isnecessary under special circumstances obtaining in the

corporation, such as when there is need for special reserve for

probable contingencies. (n)

Dividend; Definition:a corporate profit set aside, declared

and ordered by the directors to be paid to stockholders on

demand or at a fixed time. [Nolledo 1998]

DOES THE SHAREHOLDERS HAVE A RIGHT TO

DEMAND DIVIDENDS?

YES. Whenever the unrestricted retained earnings is

more than 100% of paid-up capital, the SHs may demand

the declaration of dividendsEXCEPT:

If there are expansion projects approved by the BoD if

consent is yet to be obtained for a loan agreement special

circumstances or probable contingencies.

***Dividends are classified intotwo (2) kinds, namely:

(1) Cash dividends; and(2) Stock dividends. Cash

dividends has numerous variations they may be payable in

cash (money) or property, or bond or in stock of another

corporation (a dividend in stock which is not a stock

dividend), or in scrip. When a cash dividend is payable inkind (property etc) it is taxable in its fair market value.

[Nolledo 1998]

Nature of Stock Dividends: Stock dividends do not

constitute taxable income except in case of redemption, or

subsequent sale thereof or in case of change of stockholder’s

interest as in stock operation.

A stock dividend is a fruit or income belonging to

the usufructuary. [Nolledo 1998]

1. Types of Dividends and Other Distributions

Nielsen & Co. vs. Lepanto Consolidated , 26 SCRA 540(1968)

A"stock dividend" is any dividend payable in

shares of stock of the corporation declaring or authorizing

such dividend. It is, what the term itself implies, a

distribution of the shares of stock of the corporation among

the stockholders as dividends. A stock dividend of a

corporation is a dividend paid in shares of stock instead of

cash, and is properly payable only out of surplus profits. So,

a stock dividend is actually two things: (1) a dividend, and

(2) the enforced use of the dividend money to purchase

additional shares of stock at par. When a corporation issues

stock dividends, it shows that the corporation's accumulate

profits have been capitalized instead of distributed to the

stockholders or retained as surplus available for distributio

in money or kind, should opportunity offer. Far from being

realization of profits for the stockholder, it tends rather to

postpone said realization, in that the fund represented by

the new stock has been transferred from surplus to assets

and no longer available for actual distribution. Thus , it is

apparent that stock dividends are issued only tostockholders. This is so because only stockholders are

entitled to dividends. They are the only ones who have a

right to a proportional share in that part of the surplus

which is declared as dividends. A stock dividend really

adds nothing to the interest of the stockholder; the

proportional interest of each stockholder remains the same

a stockholder is deprived of his stock dividends - and this

happens if the shares of stock forming part of the stock

dividends are issued to a non-stockholder — then the

proportion of the stockholder's interest changes radically.

Stock dividends are civil fruits of the original investment,

and to the owners of the shares belong the civil fruits.

Under Section 16 of the Corporation Law stock

dividends cannot be issued to a person who is not a

stockholder in payment of services rendered. And so, in

the case at bar Nielson cannot be paid in shares of stock

which form part of the stock dividends of Lepanto for

services it rendered under the management contract. We

sustain the contention of Lepanto that the understanding

between Lepanto and Nielson was simply to make the case

value of the stock dividends declared as the basis for

determining the amount of compensation that should be

paid to Nielson, in the proportion of 10% of the cash value the stock dividends declared.

CASH DIVIDEND STOCK DIVIDEND

Has variations (cash,

property, bonds or stocks in

other corporations)

Payable in stocks of the

corporation

Declared by a mere majority

of the BoD

Declared by the BoD and

approved by 2/3rds of SHs

Payable to holders of

delinquent Shs but applied

to unpaid balance and costs

of subscription

Stock dividends may be

given but they are withheld

until full payment of the

delinquencyRevocable BEFORE

announcement

Revocable EVEN AFTER

announcement

Involves actual

disbursement [Nolledo 1998]

Does not involve any

disbursement

Becomes absolute property

of stockholder once declared

and paid, making it beyond

the reach of corporate

creditors

Is still part of corporate

property and can, therefore

be subject to claims of

corporate creditors [Nolled

1998]

SV SANTO




2. Legal Restrictions on Dividends and Other

Distributions

Unrestricted Retained Earnings:The amount of

accumulated profits and gains realized out of the normal

and continuous operation of the company after deducting

therefrom distributions of stockholders and transfers to

capital stock or other accounts which is:

1) Not appropriated by its BODs for corporate

expansion profits or programs;2) Not covered by a restriction fro dividend

declaration under a loan agreement; and

3) Not required to be retained under special

circumstances obtaining in the corporation such as

when there is a need for a special reserve for

probable contingencies. [Aquino 2014]

Restricted Retained Earnings:the accumulated profits

realized out of normal and continuous operations of the

business after deducting therefrom distribution of

stockholders or transfers to capital stock or other accounts.

Realized earnings include not only the earnings realizedfrom the ordinary course of business of the corporation but

also those arising from transactions not associated with but

incidental to or necessary in keeping the business for which

the corporation was organized (e.g Gains from sale of Real

Property). [Ibid]

*** UNRESTRICTED RETAINED EARNINGS

Under Section 43 dividends can only be declared out of

“unrestricted retained earnings.” In determining the amount

of retained earnings, the following formula is used:

Retained Earnings= Assets–[Liabilities and Legal

Capital]

Retained earnings are technically the corporation’s PROFITS.

For a portion of such retained earnings to be qualified as

“UNRESTRICTED” it must be shown that such portions has

not been reserved by the board for some corporate purpose

or for some other legal or contractual obligation. Hence,

unrestricted retained earnings is tantamount to actual profits

(profits less business, legal and contractual obligations)

The above restriction is equivalent to the EARNEDSURPLUS TEST, which allows dividends payments only

from excess of net assets of a corporation over its stated

capital. Other tests, allowable in pertinent USA jurisdictions,

are as follows:

1. SURPLUS TEST – where dividends are paid out

from any surplus, be it earned or capital.

2. NET ASSETS TEST – allows dividend payments in

all instances except in situation where the

corporation’s total assets, after payment of

dividends, is less than the sum of its total liabilities

and the amount of liquidation preferences to

preferred shares.

3. NIMBLE DIVIDENDS – allows the payment of

dividends from current profits despite the existenc

of a deficit for the current year, Thus, the board ma

declare dividends during a year where there are n

earnings so long as the corporation had earnings f

the immediately preceding year.

BUSINESS JUDGMENT RULE (BJR)

The existence of URE, does not be itself determine the right

of stockholders to receive dividends, as the decision to

declare dividends is subject to the sound business judgmen

of the board. The board can decide not to declare as

dividends surplus profit and the court’s will not substitute

its discretion with that of the board so long as there is no

bad faith or abuse of discretion.

3. Declaration and Payment of Dividends

***Requisites for valid declaration of Cash Dividends:

1. Existence of unrestricted retained earnings (URE);2. Declaration by the BOD for the payment of cash

dividends out of such earnings;

In the declaration of cash dividends, it is only the BOD

that acts or decides there is no need if concurrence by

the shareholders. [Nolledo 1998]

***Requisites for valid declaration of Stock Dividends:

1. Existence of URE;

2. Existence of original and unissued shares which

may be issued as stock dividends (the capital stock

however, may be increased to accomplish issuance

of stock dividends);

3. Dividend declaration is made by the BOD and

approved by 2/3 of the outstanding capital stock a

a regular or special meeting called for the purpose

It will be noted then that in the declaration of stock

dividends, the stockholders must give their

concurrence; this is not true in case of cash dividends.

[Ibid]

NO DIVIDENDS CAN BE DECLARED OUT OF

CAPITAL:Considering that the legal requirement is that

dividends can be declared out of URE, dividends cannot bedeclared out of capital. The Trust Fund Doctrine will be

violated if dividends are declared out of capital.

XPT:

a. In the case if liquidating dividends;

b.In the case of “dividends” from investment in a

wasting assets corporation. [Nolledo 1998, Campo

2004]

CIR vs. Court of Appeals , GR No. 108576 (20 January 1999

Stock dividends, strictly speaking, represent capital and

do not constitute income to its recipient. So that the mere

SV SANTO




issuance thereof is not yet subject to income tax as they are

nothing but an "enrichment through increase in value of

capital investment."As capital, the stock dividends

postpone the realization of profits because the "fund

represented by the new stock has been transferred from

surplus to capital and no longer available for actual

distribution."

In a loose sense, stock dividends issued by thecorporation, are considered unrealized gain, and cannot be

subjected to income tax until that gain has been realized.

Before the realization, stock dividends are nothing but a

representation of an interest in the corporate properties.

As capital, it is not yet subject to income tax. It should be

noted that capital and income are different.Capital is

wealth or fund; whereas income is profit or gain or the

flow of wealth. The determining factor for the imposition of

income tax is whether any gain or profit was derived from a

transaction.

EXCEPTION: However, if a corporation cancels or redeemsstock issued as a dividend at such time and in such manner

as to make the distribution and cancellation or redemption,

in whole or in part, essentially equivalent to the distribution

of a taxable dividend, the amount so distributed in

redemption or cancellation of the stock shall be considered

as taxable income to the extent it represents a distribution of

earnings or profits accumulated after March first, nineteen

hundred and thirteen.

Corporate earnings would be distributed under the guise

of its initial capitalization by declaring the stock

dividends previously issued and later redeem said

dividends by paying cash to the stockholder. This process

of issuance-redemption amounts to a distribution of taxable

cash dividends which was just delayed so as to escape the

tax. It becomes a convenient technical strategy to avoid the

effects of taxation.

Thus,to plug the loophole the exempting clause was

added.It provides that the redemption or cancellation of

stock dividends, depending on the “time” and “manner” it

was made, is essentially equivalent to a distribution of

taxable dividends, “making the proceeds thereof “taxableincome” to the extend it represents profits.” Theexception

was designed to prevent the issuance and cancellation or

redemption of stock dividends, which is fundamentally

not taxable, from being made use of as a device for the

actual distribution of cash dividends, which is taxable.

***As qualified by the phrase “such time and in such

manner” the exception was not intended to characteristics

as taxable dividend every distribution of earnings arising

from the redemption of the equivalent of a “taxable

dividend” is a question of fact, which is determinable on

the basis of the particular facts of the transaction in

question. No decisive test can be used to determine the

“essentially equivalent” negative any idea that a weighte

formula can resolve a crucial issue. Should the

distribution be treated as taxable dividend? On this

aspect, American courts developed certain recognized

criterion, which includes the following:

1. The presence or absence of real business purpose

2. The amount of earnings and profits available for thdeclaration of a regular dividends and the

corporation’s past record with respect to the

declaration of dividends;

3. The effect of the distribution as compared with the

declaration of regular dividend;

4. The lapse of time between issuance and redemptio

5. The presence of substantial surplus and generous

supply of cash which invites suspicious does a

meager policy in relation to both current earnings

and accumulated surplus.

4. Liability for Improper Dividends andDistributions

Steinberg vs. Velasco , 52 PHIL 953 (1929)

D. TRANSFER OF INVESTMENT SECURITIES

1. Ownership of Securities

a. Right to Issuance (Section 64 of the Corporation Code

Section 64. Issuance of stock certificates. – No certificate of

stock shall be issued to a subscriber until the full amount of h

subscription together with interest and expenses (in case of

delinquent shares), if any is due, has been paid.

Baltazar vs. Lingayen Gulf , 14 SCRA 522

b. Joint Ownership (Section 56 of the Corporation Code)

Section 56. Voting in case of joint ownership of stock. – In

case of shares of stock owned jointly by two or more persons,

in order to vote the same, the consent of all the co-owners sha

be necessary, unless there is a written proxy, signed by all the

co-owners, authorizing one or some of them or any other

person to vote such share or shares: Provided, That when the

shares are owned in an "and/or" capacity by the holdersthereof, any one of the joint owners can vote said shares or

appoint a proxy therefor. (n)

c. Pledgor, Mortgagor and Administrators (Section 55 of

the Corporation Code)

Section 55. Right to vote of pledgors, mortgagors, and

administrators. – In case of pledged or mortgaged shares in

stock corporations, the pledgor or mortgagor shall have the

right to attend and vote at meetings of stockholders, unless th

pledgee or mortgagee is expressly given by the pledgor or

SV SANTO




mortgagor such right in writing which is recorded on the

appropriate corporate books. (n)

Executors, administrators, receivers, and other legal

representatives duly appointed by the court may attend and

vote in behalf of the stockholders or members without need of

any written proxy. (27a)

d. Pooling Agreements

- Control and Board Discretion (Section 100 of theCorporation Code)

Section 100. Agreements by stockholders. -

1. Agreements by and among stockholders executed before the

formation and organization of a close corporation, signed by

all stockholders, shall survive the incorporation of such

corporation and shall continue to be valid and binding

between and among such stockholders, if such be their intent,

to the extent that such agreements are not inconsistent with

the articles of incorporation, irrespective of where the

provisions of such agreements are contained, except those

required by this Title to be embodied in said articles ofincorporation.

2. An agreement between two or more stockholders, if in

writing and signed by the parties thereto, may provide that in

exercising any voting rights, the shares held by them shall be

voted as therein provided, or as they may agree, or as

determined in accordance with a procedure agreed upon by

them.

3. No provision in any written agreement signed by the

stockholders, relating to any phase of the corporate affairs,

shall be invalidated as between the parties on the ground that

its effect is to make them partners among themselves.

4. A written agreement among some or all of the stockholdersin a close corporation shall not be invalidated on the ground

that it so relates to the conduct of the business and affairs of

the corporation as to restrict or interfere with the discretion or

powers of the board of directors: Provided, That such

agreement shall impose on the stockholders who are parties

thereto the liabilities for managerial acts imposed by this Code

on directors.

5. To the extent that the stockholders are actively engaged in

the management or operation of the business and affairs of a

close corporation, the stockholders shall be held to strict

fiduciary duties to each other and among themselves. Said

stockholders shall be personally liable for corporate torts

unless the corporation has obtained reasonably adequate

liability insurance.

e. Stock and Transfer Book (Section 74 of the Corporation

Code)

Section 74. Books to be kept; stock transfer agent. – Every

corporation shall keep and carefully preserve at its principal

office a record of all business transactions and minutes of all

meetings of stockholders or members, or of the board of

directors or trustees, in which shall be set forth in detail the

time and place of holding the meeting, how authorized, the

notice given, whether the meeting was regular or special, if

special its object, those present and absent, and every act don

or ordered done at the meeting. Upon the demand of any

director, trustee, stockholder or member, the time when any

director, trustee, stockholder or member entered or left the

meeting must be noted in the minutes; and on a similar

demand, the yeas and nays must be taken on any motion or

proposition, and a record thereof carefully made. The protestof any director, trustee, stockholder or member on any action

or proposed action must be recorded in full on his demand.

The records of all business transactions of the corporation an

the minutes of any meetings shall be open to inspection by an

director, trustee, stockholder or member of the corporation at

reasonable hours on business days and he may demand, in

writing, for a copy of excerpts from said records or minutes, a

his expense.

Any officer or agent of the corporation who shall refuse to

allow any director, trustees, stockholder or member of the

corporation to examine and copy excerpts from its records or

minutes, in accordance with the provisions of this Code, shal

be liable to such director, trustee, stockholder or member for

damages, and in addition, shall be guilty of an offense which

shall be punishable under Section 144 of this Code: Provided

That if such refusal is made pursuant to a resolution or order

of the board of directors or trustees, the liability under this

section for such action shall be imposed upon the directors or

trustees who voted for such refusal: and Provided, further,

That it shall be a defense to any action under this section that

the person demanding to examine and copy excerpts from th

corporation’s records and minutes has improperly used any

information secured through any prior examination of therecords or minutes of such corporation or of any other

corporation, or was not acting in good faith or for a legitimat

purpose in making his demand.

Stock corporations must also keep a book to be known as the

"stock and transfer book", in which must be kept a record of a

stocks in the names of the stockholders alphabetically

arranged; the installments paid and unpaid on all stock for

which subscription has been made, and the date of payment

any installment; a statement of every alienation, sale or transf

of stock made, the date thereof, and by and to whom made;

and such other entries as the by-laws may prescribe. The stoc

and transfer book shall be kept in the principal office of the

corporation or in the office of its stock transfer agent and shal

be open for inspection by any director or stockholder of the

corporation at reasonable hours on business days.

No stock transfer agent or one engaged principally in the

business of registering transfers of stocks in behalf of a stock

corporation shall be allowed to operate in the Philippines

unless he secures a license from the Securities and Exchange

Commission and pays a fee as may be fixed by the

Commission, which shall be renewable annually: Provided,

That a stock corporation is not precluded from performing or

SV SANTO




making transfer of its own stocks, in which case all the rules

and regulations imposed on stock transfer agents, except the

payment of a license fee herein provided, shall be applicable.

(51a and 32a; P.B. No. 268.)

Chua Guan vs. Samahang Magsasaka , 62 PHIL 472

Monserat vs. Ceran , 58 PHIL 469

f. Lost or Destroyed Certificates (Sec. 73 of theCorporation Code)

Section 73. Lost or destroyed certificates. – The following

procedure shall be followed for the issuance by a corporation

of new certificates of stock in lieu of those which have been

lost, stolen or destroyed:

1. The registered owner of a certificate of stock in a corporation

or his legal representative shall file with the corporation an

affidavit in triplicate setting forth, if possible, the

circumstances as to how the certificate was lost, stolen or

destroyed, the number of shares represented by such

certificate, the serial number of the certificate and the name ofthe corporation which issued the same. He shall also submit

such other information and evidence which he may deem

necessary;

2. After verifying the affidavit and other information and

evidence with the books of the corporation, said corporation

shall publish a notice in a newspaper of general circulation

published in the place where the corporation has its principal

office, once a week for three (3) consecutive weeks at the

expense of the registered owner of the certificate of stock

which has been lost, stolen or destroyed. The notice shall state

the name of said corporation, the name of the registered owner

and the serial number of said certificate, and the number ofshares represented by such certificate, and that after the

expiration of one (1) year from the date of the last publication,

if no contest has been presented to said corporation regarding

said certificate of stock, the right to make such contest shall be

barred and said corporation shall cancel in its books the

certificate of stock which has been lost, stolen or destroyed and

issue in lieu thereof new certificate of stock, unless the

registered owner files a bond or other security in lieu thereof

as may be required, effective for a period of one (1) year, for

such amount and in such form and with such sureties as may

be satisfactory to the board of directors, in which case a new

certificate may be issued even before the expiration of the one

(1) year period provided herein: Provided, That if a contest has

been presented to said corporation or if an action is pending in

court regarding the ownership of said certificate of stock

which has been lost, stolen or destroyed, the issuance of the

new certificate of stock in lieu thereof shall be suspended until

the final decision by the court regarding the ownership of said

certificate of stock which has been lost, stolen or destroyed.

Except in case of fraud, bad faith, or negligence on the part of

the corporation and its officers, no action may be brought

against any corporation which shall have issued certificate of

stock in lieu of those lost, stolen or destroyed pursuant to the

procedure above-described. (R.A. 201a)

2. Transfer of Securities

a. Transfer of Shareholding (Section 63 of the Corporation

Code)

Section 63. Certificate of stock and transfer of shares.– The

capital stock of stock corporations shall be divided into sharefor which certificates signed by the president or vice presiden

countersigned by the secretary or assistant secretary, and

sealed with the seal of the corporation shall be issued in

accordance with the by-laws. Shares of stock so issued are

personal property and may be transferred by delivery of the

certificate or certificates indorsed by the owner or his attorney

in-fact or other person legally authorized to make the transfer

No transfer, however, shall be valid, except as between the

parties, until the transfer is recorded in the books of the

corporation showing the names of the parties to the

transaction, the date of the transfer, the number of the

certificate or certificates and the number of shares transferred

No shares of stock against which the corporation holds any

unpaid claim shall be transferable in the books of the

corporation. (35)

Uson vs. Diosomito , 61 PHIL 535

Escano vs. Filipinas Mining , 74 PHIL 711

Ponce vs. Alsons Cement (GR No. 139802 [2002])

Tan vs. SEC(GR No. 95696 [1992])

b. Remedy if Transfer is Refused

Hager vs. Bryan , 19 PHIL 138Batong Buhay vs. CA , 147 SCRA 4

Won vs. Wack Wack Golf Club , 104 PHIL 466

d. Validity of Restrictions

Lambert vs. Fox , 26 PHIL 588

Fleishcher vs. Botica Nolasco , 47 PHIL 583

Padgett vs. Babcock and Templeton , 59 PHIL 232

e. Forged Transfers

Sta. Maria vs. Hongkong and Shanghai , 89 PHIL 780

De Los Santos vs. Republic , 96 PHIL 577

f. Non-transferability of Membership in a

Non-Stock Corporation (Section 90 of the Corporation

Code)

III. MANAGEMENT STRUCTURE

A. CORPORATE GOVERNANCE

1. Powers of the Board or Trustees


Gamboa vs. Victoriano , 90 SCRA 40 (1979)

Gokongwei vs. SEC , 89 SCRA 336, (1979)

SV SANTO




a. Must act as a body (Section 25 of the Corporation Code)

Islamic Directorate vs. CA , GR No. 117897 [14 May

1997]

Ramirez vs. Orientalist , 38 PHIL 634 (1918)

Board of liquidators vs. Kalaw , 20 SCRA 987

(1967)

Acuna vs. Batac Producers , 20 SCRA 562 (1967)

Harden vs. Benguet Consolidated , 58 PHIL 1140

(1948)

b. Executive Committee (Section 35 of the Corporation

Code)

B. ROLE OF SHAREHOLDERS

Right to Vote and Attend Meetings (Section 89 of the

Corporation Code)

Price vs. Martin , 58 PHIL 707

a. Instances:

- Election of Directors and Trustees

(Section 24 of theCorporation Code)

- Amendment of Articles of

Incorporation

(Section 16 of the Corporation

Code)

- Investment in another Business


Code)

Dela Rama vs. Ma-ao Sugar , 27

SCRA 247

Gokongwei vs. SEC , 89 SCRA 336,

(1979)

- Merger and Consolidation


Code)

- Increase and Decrease of Capital

Stock


Code)

- Adoption, Amendment, and Repeal of By-Laws


Code)

- Declaration of Stock Dividends


Code)

- Management Contracts


Code)

- Fixing of Consideration for Par

Value Shares


Code)

b. Treasury Shares (Section 57 of the

Corporation Code)

c. Conduct of Stockholders’ or Members

Meetings

- Kinds and Requirements of

Meetings

(Sections 49 and 50 of the

Corporation Code)

- Place and Time of Meeting

(Section 51 and 93 of theCorporation Code)

- Quorum (Section 52 of the

Corporation Code)

Lanuza vs. Court of Appeals(GR No. 131394

[2005])

d. Contracts and Agreements Affecting

Stockholders

a. Proxy (Section 58 of the

Corporation Code)

b. VTA (Section 59 of the

Corporation Code)Lee vs. Court of Appeals

205 SCRA 752 [1992]

NIDC vs. Aquino , 163 SCRA 153

c. Pooling agreements (Section 100

of the Corporation Code)

C. ENFORCEMENT OF RIGHTS OF

SHAREHOLDERS

a. Right to Inspect

1. Specified Records (Sections 74 and 75

the Corporation Code)2. Remedies

Philpots vs. Phil Manufacturing ,

40 PHIL 471

Pardo vs. Hercules , 46 PHIL 964

Veraguth vs. Isabela Sugar , 57

SCRA 266

Gonzales vs. PNB , 122 SCRA 489

3. Confidential Nature of SEC

Examinations


Code)

b. Appraisal Right (Sections 81 to 86 of the

Corporation Code)

c. Derivative Suits

Richardson vs. Arizona Fuels

Corp. , 614 P.2d 636

Bitong vs. CA (GR No. 123553 [1998])

SMC vs. Khan , 176 SCRA 447

Pascual vs. Orosco , 19 PHIL 83

Evangelista vs. Santos , 86 PHIL

387

SV SANTO




Republic Bank vs. Cuadero , 19

SCRA 671

Reyes vs. Tan , 3 SCRA 198

D. ROLE OF DIRECTORS AND OFFICERS

1. Function of the Board of Directors

a. Role of directors, officers and trustees

Generally:

Rural Bank Of Milaor vs. Ocfemia(GR No. 137686[2000])

2. Election and Tenure of Directors/Trustees

a. Qualifications of directors and trustees


Lee vs. Court of Appeals,205

SCRA 752 [1992]

Gokongwei vs. SEC , 89 SCRA 336, (1979)

Detective & Protective Bureau vs.

Cloribel , 26 SCRA 255 (1968)

Directors (Sections 24 and 26 of the Corporation

Code)

Grace Christian HS vs. CA , GR No.

108905, [23 October 1997]

Trustees (Section 92 and 138 of the Corporation Code)

a. Cumulative Voting (Villianueva, Philippine Corporate

Law)

1. Cole Formula

2. Glassner Formula

3. D’Hondt Remainders Table

b. Vacancy in the board


c. Term of office; Hold-Over Principle


Ponce vs. Encarnacion , 94 PHIL 81

(1953)

d. Removal of directors or trustees

- Section 28 of the Corporation Code

Roxas vs. Dela Rosa , 49 PHIL 609 (1926)

4. Exercise of Directors’ Functions

a. Meetings of directors or trustees

(Section 49 and 53 of the Corporation

Code)

Expertravel & Tours, Inc. vs. CA(GR No. 152392 [2005])

b. Compensation for directors or trustees


Western Institute of Technology vs. Salas(GR No. 113032

[1997])

5. Officers


Ongkingco vs. NLRC,270 SCRA 613 [1997]

Tabang vs. NLRC,266 SCRA 462 [1997]

Gurrea vs. Lezama , 103 PHIL 553 (1958)

PSBA vs. Leano , 127 SCRA 778 (1984)

Pearson & George vs. NLRC , 67 SCAD 698, 30 Jan 1996 (113928)

Reahs Corporation vs. NLRC , GR No. 117473 [14 April

1997]

6. Duties of Directors and Officers

a. Duty of Obedience

b. Duty of Diligence; Business Judgement Rule


Smith vs. Van Gorkom , 488 A.2nd

858 (1985)

Montelibano vs. Bacold-Murica , 5 SCRA 36 (1962

Board of Liquidators vs. Kalaw , 20 SCRA 987

(1967)

c. Duty of Loyalty; Doctrine of Corporate Opportunity

(Section 31 and 34 of the Corporation Code)

d. Corporate Dealings


Mead vs. McCullough , 21 PHIL 9

(1911)

Prime White Cement vs. IAC , 220

SCRA 103 (1993)

e. Contracts between corporations with interlocking

directors


IV. FUNDAMENTAL CHANGES

A. CHARTER AMENDMENTS

a.Articles of Incorporation (Section 16 of the Corporation

Code)

b.By Laws (Section 48 of the Corporation Code)

B. COMBINATIONS

a.Concept of Merger and Consolidation

PNB vs. Andrada Electric(GR No. 142936 [2002])

b. Procedure

- Plan of Merger or Consolidation


- Stockholders’ or Members’ Approval


- Articles of Merger or Consolidation


- Approval by the SEC

SV SANTO





c. Effects of Merger or Consolidation


Associated Bank vs. CA (GR No. 123793 [1998])

Filipinas Port Services, Inc. vs. NLRC(GR No.

97237 [1991])

C. REHABILITATION

PVB Employees Union-N.U.B.E. vs. Vega(G.R. No.105364 [2001])

PAL vs. Spouses Sadic(GR No. 146698 [2002])

RCBC vs. IAC(GR No. 74851 [1999])

D. DISSOLUTION

a. Dissolution (Section 177 of the Corporation

Code)

1. Voluntary

- No creditors are affected


- Creditors are affected

(Section 119 of the Corporation Code)2. Involuntary Dissolution

(Section 121 of the Corporation Code, Section 6)

(Section 2 of Rule 66 of the Rules of Court)

- Quo-Warranto

Republic vs. Bisaya Land Transportation , 81 SCRA 9

Government vs. Philippine Sugar Estate , 38 PHIL 15

Republic vs. Security Credit , 19 SCRA 58

3. Expiration of Term (Section 122 of the

Corporation Code)

4. Shortening of Corporate Term

(Sec. 120 of the Corporation Code)

5. Non-Use of Corporate Charter and

Continuous Inoperation


Code)

b. Liquidation of Corporate Assets


Buenaflor vs. Camarines Sur Industry , 108 SCRA 472

National Abaca vs. Pore , 2 SCRA 989

Tan Tiong Bio vs. CIR , 100 PHIL 86

Gelano vs CA , 103 SCRA 90

c. Methods of Liquidation

Board of Liquidators vs. Kalaw , 20 SCRA 987

China Banking vs. Michelin , 58 PHIL 261

Republic vs. Marsman , 44 SCRA 418

Alhambra Sugar vs. SEC , 24 SCRA 269

d. Rules for Non-Stock Corporations

Rules on Foundations

(Sections 94 and 95 of the Corporation Code)

e. Right to Proportionate Share of

Remaining Assets upon Dissolution

V. Foreign Corporation

a. Definition (Section 123 of the Corporation

Code)

Avon Insurance PLC vs. CA(GR No. 97642 [1997]

b. Concept of “Doing Business”

(Article 44 of the Omnibus Investments

Code)(Section 1 (f) of the Implementing Rules of the

Omnibus Investments Code)

- Application for License

(Section 124 and 125 of the Corporation Code)

(Article 48 of the Omnibus

Investments Code)

- Issuance of a License (Section 126 of th

Corporation Code)

(Article 49 of the Omnibus

Investments Code)

- Amendment of License (Section 131 ofthe Corporation Code)

Columbia Pictures, Inc. vs. CA

(GR No. 110318 [1996])

Granger Associates vs. Microwave

Systems , 189 SCRA 631

Marubeni vs. Tensuan , 190 SCRA 105

Facilities Management vs. Dela Osa , 89 SCRA 131

Top-Weld vs. ECER , 138 SCRA 118 (GR 44944 (1985)]

Schmid vs. Oberly , 116 SCRA 186

Mentholatum vs. Mangaliman , 72 PHIL 525

Aetna Casualty vs. Pacific Star Line , 80 SCRA 635

Agilent Technologies Singapore (PTE) LTD. vs.

Integrated Silicon Technology Philippines

Corporation

(GR No. 154618 [2004])

- Effects of Failure to Obtain License

(Sec. 133 of the Corporation Code)

Commissioner vs. KMK Gani , 182 SCRA 591

Marshal Wells vs. Elser , 46 PHIL 71

Western Equipment vs. Reyes , 51 PHIL 115

c. Applications and Effect of Local Laws on the Right of aforeign Corporation to Sue (SCRA Annotation 114 SCRA

429)

d. Resident Agent (Sections 127 and 128 of the

Corporation Code)

e. Applicable Laws to Foreign Corporations

(Section129 of the Corporation Code)

-Grey vs. Insular Life , 67 PHIL 139

f. Amendment of Articles of Incorporation

SV SANTO





g. Merger and Consolidation (Section 132 of the

Corporation Code)

h. Revocation of License (Section 134 and 135 of the

Corporation Code)

i. Withdrawal of Foreign Corporation


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