TITLE V BY – LAWS

SEC. 46. ADOPTION OF BY-LAWS BY-LAW – is a rule or law of a corporation, for its

government. These are self-imposed rules or self-made rules resulting from an agreement or contract between the corporation and its stockholders or members and directors and officers to conduct the corporate business and affairs in a particular manner.

One (1) month after receipt of certificate of incorporation from the SEC

Affirmative votet of the SH representing at least a majority of the OCS, or at least a majority of the members.

If filed with the AoI, it must be approved and signed by all the incorporators and submitted to the SEC

Effective only upon issuance by the SEC of a certification that the by-laws are not inconsistent with the Code

ELEMENTS OF VALID BY-LAWS: Must not be contrary to existing law or

inconsistent with the Code Must not be contrary to morals and public policy Must not impair contract obligations Must be general and uniform in operation Must be consistent with the charter or AoI Must be reasonable

CONTENTS OF BY-LAWS: Time, place and manner of calling and

conducting regular or special meetings of the D or T

Time and manner of calling and conducting regular or special meetings of SH or members

Required quorum in SH/members’ meetings and the manner of voting therein

Form of proxies of SH/members and the manner of voting them

Qualifications, duties and compensation of D/T/O

Time for holding the annual election of D/T and the mode or manner of giving notice thereof

Manner of election or appointment and term of office of all officers other than D/T

Penalties for violation of by-laws Manner of issuing stock certificates Such other matters as may be necessary for the

transaction of corporate business

AMENDMENTS TO BY-LAWS: Majority vote of the BoD/BoT and owners of at

least a majority of the OCS/members if non-stock corporation

At a regular or special meeting duly called for the purpose

Owners of 2/3 of the OCS/members may delegate to the BoD/BoT the power to amend/repeal any by-laws or adopt new by-laws

EFFECTIVITY OF NEW BY-LAWS: Upon issuance by the SEC that the

amendments are not inconsistent with the Code should the provisions of the amended by-laws be followed and observed.

TITLE VI MEETINGS

KINDS OF MEETINGS Regular and special meetings of SH/members Annually on a date fixed in the by-laws If no date is fixed, on any date on April of every

year Written notice 2 weeks prior if meeting is

regular; 1 week prior if meeting is special Held where the principal office of the corporation

is located Regular and special meetings of BoD/BoT

REQUISITES FOR A VALID MEETING: It must be held at the stated date and at the

appointed time or at a reasonable time thereafter

There must be previous notice It must be called by the proper person It must be held at the proper place There must be quorum In case of a special meeting, it may not consider

business other than those listed in the notice

REQUISITES OF NOTICE OF MEETING: It must be issued by one who has authority to

issue It must be in writing It must state the date, time and place of the

meeting, unless otherwise provided in the by-laws

It must state the business to be transacted thereby

It must be sent at a certain time before the scheduled meeting as fixed by law, unless a different period is required by the by-laws

MEETINGS QUORUM : number necessary to constitute a

quorum may vary from one corporation to another

Non-stock corporation: in determining quorum, the basis should be the total number of registered members

Stock corporation: the basis should be the total subscription and not the amount paid for them

MANNER OF VOTING:

Directly by the SH/member himself Indirectly, through a representative by: Proxy Trustee under a VTA Executors, administrators, receivers, or other

legal representatives duly appointed by the court

VOTING IN CASE OF JOINT OWNERSHIP

Consent of all owners necessary Unless there is a written proxy, signed by all co-

owners, authorizing one or some of them or any other person to vote such share or shares

When the shares are owned in an “and/or” capacity, any one of the joint owners can vote or appoint a proxy therefor

PROXIES The authority given by the SH or member who

has a right to vote for another to attend and/or exercise his voting rights

The person authorized by the SM or member to vote for him at a SH/member’s meeting

The instrument or document evidencing the relation between the SH and the proxyholder

PURPOSE OF PROXIES:

It is one of the devices for securing voting control or management control in a corporation

It assures the presence of a quorum in meetings of SH of large corporations

It protects the interests of SH/members who cannot attend in person to enable elections to be held and other necessary corporate business to be transacted

It enables the shares standing in the name of another corporation to be voted by such officer, agent or proxy

VOTING TRUST Voting Trust – a trust created by an agreement

between a group of stockholders of a corporation and a trustee or by a group of identical agreements between an individual SHs and a common trustee

VOTING TRUST AGREEMENT Agreement in writing whereby one or more SH

transfer their shares to a trustee or trustees Not exceeding five (5) years In writing and notarized A certified copy must be filed with the

corporation and the SEC Certificate of stocks covered by the VTA shall be

cancelled and new ones issued in the name of the trustee

Trustee executes a voting trust certificates to the transferror

PURPOSE OF VTA:

To assure continuity of policy and management especially of a new corporation desirous of attracting investors

To enable the owners of a majority of the stock of the corporation to control the corp

To vest and retain the management of the corporation for a fixed period in the persons originally promoting it

To carry out a proposed sale of the corporation’s assets and to facilitate its dissolution

To enable two companies to operate jointly a

corporation controlled by them

JUSTIFIED IN THE FOLLOWING INSTANCES: Where there is a property interest to conserve Where there is a definite policy in the interest of

the corporation to be carried out Where there is beneficial interest of the SH to be

served Where there is some purpose not unlawful of an

advantageous character to the SH to be effectuated

NULLITY OF VOTING TRUSTS: If the object is to accomplish some unlawful act; To effect the practical merger of 2 or more

corporations in defiance of law To give control of one corporation to another Formation of a monopoly To defeat competition In restraint of trade (Sec. 59) If the purpose is to give unfair advantage to a

party or parties to the agreement

TITLE VII STOCK AND STOCKHOLDER

SEC. 60. SUBSCRIPTION CONTRACT Subscription – a contract by which the

subscriber agrees to take a certain number of shares of the capital stock of a corporation, paying for the same, or expressly or impliedly promising to pay for the same.

Stock subscription – contract between a corporation to sell a certain number of shares and the subscriber to purchase the stock from the corporation

Refers only to original, unissued shares or to the increase of capital stock after incorporation

Need not be in writing

SUBSCRIPTION VS. PURCHASE OF STOCKSubscription Purchase

May be made before or after incorporation

Made only after incorporation

A subscriber becomes a SH even if he has not fully paid the subscription

Purchaser does not become a SH until he has fully paid the purchase price

A subscriber may exercise his voting rights and other rights even if he has not paid his subscription as long as the same is not declared delinquent

Purchaser cannot exercise the rights of a SH until he has fully paid the price and the purchase is recorded in the corporate books

KINDS OF SUBSCRIPTIONS: Pre-incorporation subscription (PISA) – one

entered into before a corporation’s incorporation, constituting a binding contract among the subscribers

Post-incorporation subscription – one entered

into after the incorporation for the acquisition of unissued stock of the corporation

ILLEGAL SUBSCRIPTIONS: A subscription is void where it provides for the

issuance of fully paid stocks upon payment of less than its par value

When a corporation receives subscription in excess of its authorized capital stock

When subscriptions are without consideration When subscriber had no capacity to contract

SEC. 61. PRE-INCORPORATION SUBSCRIPTION Irrevocable for a period of at least six (6) months

from the date of subscription; unless all of the other subscribers consent to the revocation, or unless the incorporation of said corporation fails to materialize within said period

No PISA may be revoked after the submission of the AoI to the SEC

SEC. 62. CONSIDERATION FOR STOCKS Actual cash paid to the corporation Tangible or intangible property Labor performed or services rendered Issue of stock in payment of debt Stock dividend as consideration Exchange for outstanding stocks

SEC. 63. CERTIFICATE OF STOCK AND TRANSFER OF SHARES

Stock certificates must be signed by the president or vice-president, counter-signed by the secretary, and sealed with the seal of the corporation

Considered as personal property and may be transferred by delivery of the certificate plus endorsement

Valid only as far as the corporation is concerned if the transfer is recorded in the books of the corporation

MODES OF TRANSFER OF STOCKS: By endorsement coupled with delivery By deed of assignment in case no certificate of

stock has been issued; provided that there is no unpaid claim against the stock

RESTRICTIONS ON TRANSFER OF SHARES Consent restriction – absolutely prohibits the

sale of stock without the consent of the directors or other stockholders before any transfer of stock can be effected (see Sec. 98)

First option restriction – it requires stockholders desiring to sell their stocks to first offer them to the corporation or to existing shareholders, giving the latter the first opportunity to buy the same at a reasonable period before disposing it to third parties.

WHY REQUIRE THE REGISTRATION OF TRANSFER OF STOCKS?

To enable the officers of the corporation to know at all times who its SHs are, which is essential in conducting election of officers, in calling meetings of SHs, and for other purposes

To afford to the corporation the opportunity to object or refuse its consent to the transfer should it have a valid claim against the stock sought to be registered or for any valid reason

To avoid fictitious or fraudulent transfers To protect persons who may deal with the

corporation and become its creditors

REMEDY IN CASE CORPORATION REFUSES TO REGISTER THE TRANSFER

Specific performance and Mandamus with the following requisites:

Application has been made and denied There are no unpaid claims against the stock by

the corporation An ordinary action against the corporation for

damages would be inadequate An action in the nature of a suit in equity to

secure a decree ordering the transfer would be inadequate

Receipt of payment of the tax herein imposed if filed with and recorded by the stock transfer agent or corporate secretary

DOCTRINE OF INDIVISIBILITY OF SUBSCRIPTION CONTRACT

A subscription is one, entire and indivisible whole contract. It cannot be divided into portions, so that the stockholder shall not be entitled to a certificate of stock until he has paid the full amount of his subscription together with interest and expenses.

The principle is absolute as Sec. 64 speaks of no exception

REMEDIES IN CASE OF NON-ISSUANCE OF STOCK CERTIFICATE

File a suit for specific performance of an implied contract

File for damages where specific performance cannot be granted

File a petition for mandamus to compel the issuance of a certificate where the conditions, facts and circumstances of the case bring it within the legal rule which govern the granting of the writ

Rescind the contract of subscription if the corporation wrongfully refuses to deliver a certificate and sue to recover back what he has paid

SEC. 65 LIABILITY FOR WATERED STOCK WATERED STOCK – stock which is issued as

fully paid up, when in fact the whole amount of the par value thereof has not been paid in. Hence, the “water” in the stock represents the difference between the fair market value at the time of the issuance of the stock and the par or

issued value of said stock Both par and no par stocks can be watered

stocks

VARIOUS WAYS OF ISSUING WATERED STOCKS: Issued gratuitously or under an agreement that

nothing at all should be paid to the corporation Issued upon payment of, or under an agreement

to pay, less than its par value in money, or for cash at a discount

Issued in payment for property, labor or services, the par value of the property, labor or services being shown to be less than the par value of the shares

Issued in the guise of stock dividend, where there are no sufficient profits to justify it

LIABILITY FOR WATERED STOCK Corporate creditors can set up the inadequacy

of the consideration for the issuance of stocks and thus claim the difference

Consenting director/officer - joint and several with the SH concerned

Subscriber – liable for the “water” in the stock and must pay the difference between the amount paid and the par or issued value of the shares.

NOTE: the existence of the “water” in the stock must be determined at the time of issuance of stock so that any subsequent increase in the value of the property will not eliminate the “water” on the stock nor relieve the consenting director/officer and the subscriber himself

INTEREST ON UNPAID SUBSCRIPTIONS Gen. rule: Subscribers are not liable to pay

interest on their unpaid subscriptions Exception: If by-laws provide for the payment of

interest (Sec. 66) Interest must be paid from the date of

subscription until the date of payment Rate to be imposed as fixed in the by-laws If by-laws are silent, rate to be imposed is the

legal rate of 12% per annum

PAYMENT OF BALANCE OF SUBSCRIPTION When is it payable? On the date specified in the contract of

subscription, without need of call (Sec. 13) On the date stated in the call by the board, if the

subscription contract is silent (Sec. 67) Effect of failure to pay Renders the entire balance due and payable After 30 days, the stocks are considered

delinquent

POWER OF THE BOARD The BoD has the power to make a “call” when

the subscription contract is silent as to when payment for the subscription should be made

The BoD has no power to refuse payment made on the subscription in the date fixed in the

subscription contract The BoD cannot make a “call” earlier that the

date fixed in the subscription contract The BoD has the power to determine the

amount or percentage of the unpaid subscription to be subject to the “call”

CALL An official declaration that the sum subscribed or

any specified installment or amount, is required to be paid

Usually embodied in the resolution of the board of directors relative to the notice, demand for payment and time when payment should be made

Generally applicable to unpaid subscriptions only

WHEN DOES A STOCK BECOME DELINQUENT? If the contract of subscription fixes the date

when payment should be made on the subscription, the stock becomes delinquent in case of failure to pay on that date, without need of a call

If no date is fixed in the subscription contract, the BoF can make a call for payment, and the time is specified as to when payment on the balance of the subscription should be made. Failure to make the payment 30 days from that date renders the stock delinquent.

REQUISITES FOR A VALID CALL: The call must be made in the manner prescribed

by law The call must be made by the board of directors The call must be uniform in application

DOCTRINE OF INDIVISIBILITY OF SUBSCRIPTION CONTRACT is likewise applicable to delinquent stocks

Partial payments shall be deemed forfeited and the whole subscription declared delinquent upon failure to pay on the date fixed in the contract or on the date fixed by the board on call of the directors

SEC. 68 DELINQUENCY SALE HIGHEST BIDDER – one who offers to pay the

whole amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of fraction of a share

The corporation is not bound to accept the highest bid, as it is not the one making the offer. It is the bidder who is making the offer to purchase, which the corporation may or may not accept.

PROCEDURE FOR SALE OF DELINQUENT STOCK1. The BoD adopts a formal resolution declaring

due and payable the whole or a certain percentage of the unpaid subscriptions and specifying the date for payment thereof

2. The SH is given notice of the board resolution by the corporate secretary either personally or by registered mail

3. If SH does not pay within 30 days from the date specified, the stocks covered by his subscription shall become delinquent and shall be subject to sale under Sec. 68

4. The BoD, may, by resolution, order the sale of delinquent stocks, stating the amount due on each subscription, the date, time and place of the same which shall not be less than 30 days nor more than 60 days from the date the stock become delinquent

5. The delinquent stockholder is given notice of the sale with copy of the board resolution by the corporate secretary either personally or by registered mail.

6. The notice of sale shall be published once a week for 2 consecutive weeks in a newspaper of general circulation.

7. On the date of the sale, the delinquent stock shall be sold at public auction to the highest bidder

SEC. 69 GROUNDS FOR RECOVERY OF STOCK UNLAWFULLY SOLD

Irregularity or defect in the notice of sale Irregularity or defect in the sale itself Conditions: Party seeking to maintain such action must first

pay or tender to the party holding the stock the sum for which the same was sold with interest from the date of sale at the legal rate

The action must be commenced within 6 months from the date of sale

SEC. 70 COURT ACTION TO RECOVER UNPAID SUBSCRIPTION

Ordinary court action under Sec. 78 Extrajudicial sale at public auction of delinquent

stocks following the procedure on call for payment, delinquency and sale at public auction (Sec. 67 & 68)

Collection from cash dividends (Sec. 43)

SEC. 71 EFFECT OF DELINQUENCY SH loses the right to vote SH loses the right to be voted upon SH loses the right to inspect corporate books SH loses the right to continue sitting on the

board if he is currently a member of the board SH does not lose his right to receive dividends

SEC. 72 RIGHTS OF UNPAID SHARES Rights regarding control and management of the

corporation Right to attend and vote personally or by proxy Right to elect and remove directors Right to enter into a VTA Proprietary or economic right Right to receive dividends Right to preemption

Remedial rights Right to inspect corporate books & records Right to financial statement Right to bring individual action or representative

or derivative suit

SUITS BY STOCKHOLDERS/MEMBERS INDIVIDUAL SUIT – where the wrong done or

the injury is one to the plaintiff as a stockholder personally and to him only individually, and not to the corporation

CLASS or REPRESENTATIVE SUIT – where the wrong done is to a group of stockholders or members of a corporation, a class or representative suit may be instituted for the protection of all stockholders or members belonging to the same group

DERIVATIVE SUIT – where the wrong done is to the corporation itself

DERIVATIVE SUIT Individual stockholder or member is allowed to

institute a derivative action on behalf of the corporation wherein he holds stock in order to protect or vindicate corporate rights whenever the officers or directors of the corporation refuse to sue or are the ones who are to be sued

REQUISITES OF DERIVATIVE SUIT The party bringing the suit should be a SH as of

the time of the act or transaction complained of, number of shares is immaterial

He has exhausted intra-corporate remedies The cause of action actually devolves on the

corporation, the wrongdoing or harm having been caused to the corporation and not to the particular SH bringing the suit

If the suit is successful, the plaintiff is entitled to reimbursement from the corporation for the reasonable expenses of litigation, including attorney’s fees

SEC. 73 LOST OR DESTROYED CERTIFICATES Affidavit by the registered owner of the

certificate of stock or his legal representative showing the circumstances of loss, theft or destruction must be executed and filed with the corporation

Verification of the affidavit and supporting evidence by the corporation and publication of notice in a newspaper of general circulation once a week for three consecutive weeks at the expense of the registered owner of the lost, stolen, or destroyed certificate

After the expiration of one year from the date of last publication, a new certificate shall be issued by the corporation if no contest has been presented to the corporation regarding said stock certificate

If a contest had been presented or there is a pending action on the ownership of the shares, the issuance of a new certificate shall be

suspended until the final decision on the rightful ownership of the shares has been made by the court.

TITLE VIII CORPORATE BOOKS AND RECORDS

Proper Corporate Books & Records Records of all business transactions Minutes book for meetings of stockholders or

members Minutes book for meetings of the BoD/BoT Minutes book for meetings of the ExeCom Stock and transfer book Optional and subsidiary books Other required by law to keep

Sec. 75. Right to financial statements Balance sheet as of the end of the last taxable

year Profit or loss statement for the said year,

showing in detail its assets and liabilities and the results of its operation

TITLE IX MERGER and CONSOLIDATION

TYPES OF RE-ORGANIZATIONStatutory merger or consolidation

Acquisition by one corporation, in exchange solely for all or a portion of its voting stock for stock in another corporation, if immediately after the acquisition the acquiring corporation is in control of the other corporation

Acquisition by one corporation of substantially all of the properties of another corporation in exchange for the acquiring corporation’s voting stock;

The transfer by a corporation of all or a part of its assets to another corporation, if immediately after the transfer the transferror or its shareholders are in control of the transferee

The transfer by a corporation of all or a part of its assets to another corporation, if immediately after the transfer the transferror or its shareholders are in control of the transferee

A recapitalization A mere change in identity, form or place of

organization

MERGER The absorption of one or more corporations by

another existing corporation, which retains its identity and takes over the rights, privileges, franchises and properties of the absorbed corporations(s). The absorbing corporation continues its existence while the life or lives of the other corporation(s) is/are terminated.

The absorption of one or more corporations by another existing corporation, which retains its identity and takes over the rights, privileges, franchises and properties of the absorbed corporations(s). The absorbing corporation continues its existence while the life or lives of

the other corporation(s) is/are terminated. Example: Corp A acquires the shares of Corp B.

Corp A distributes the said shares to its SH in exchange for its own shares. Corp A will have no more assets and no SH. Corp A becomes a corporate shell and can be dissolved. Corp A is the merged or absorbed corporation while Corp B is the surviving or absorbing corporation.

MERGER SEC REQUIREMENTS Articles of merger setting forth the a) plan of

merger; b) number of shares outstanding/number of members; c) number of outstanding shares/name of members voting for and against the plan

Articles of merger setting forth the a) plan of merger; b) number of shares outstanding/number of members; c) number of outstanding shares/name of members voting for and against the plan

Copies of the minutes of the board meeting and SH/member’s meeting

List of creditors of the absorbed corporation Audited Financial Statements Amended Articles of Incorporation/By-laws of

the surviving corporation, whenever necessary

CONSOLIDATION The union of two or more corporations to form a

new corporation, having the combined rights, privileges, franchises and properties of the constituent companies, all combining to lose their corporate existence (Amalgamation)

The union of two or more corporations to form a new corporation, having the combined rights, privileges, franchises and properties of the constituent companies, all combining to lose their corporate existence (Amalgamation)

Example: Corp A and Corp B agree to sell all of its assets to Corp C (still to be formed) in exchange for the shares of stock of C. After both A and B have transferred all of their assets to C and they distribute the shares received by them from C to their own shareholders in exchange for their own shares, then a consolidation results.

CONSOLIDATION SEC REQUIREMENTS Articles of consolidation setting forth the a) plan

of consolidation; b) number of shares outstanding/number of members; c) number of outstanding shares/name of members voting for and against the plan

Articles of consolidation setting forth the a) plan of consolidation; b) number of shares outstanding/number of members; c) number of outstanding shares/name of members voting for and against the plan

Copies of the minutes of the board meeting and SH/member’s meeting of the constituent corp/s

List of creditors of the constituent corporation/s Audited Financial Statements (long form audit)

Amended Articles of Incorporation/By-laws of the surviving corporation, whenever necessary

LEGAL EFFECT OF MERGER/CONSOLIDATION There will only be a single corporation. The

surviving corporation (merger) and the consolidated corporation (consolidation)

There will only be a single corporation. The surviving corporation (merger) and the consolidated corporation (consolidation)

Termination of the separate existence of the constituent corporations, except that of the surviving corporation (merger) or the consolidated corporation (consolidation)

The surviving corporation (merger) or the consolidated corporation (consolidation) will have all the powers, attributes, rights, privileges, immunities and shall be subject to all the duties and liabilities of a corporation organized under the Corporation Code

The surviving corporation (merger) or the consolidated corporation (consolidation), will possess all the franchises, rights, privileges, immunities and all of the properties of the constituent corporations without further act of deed (only the issuance by the SEC of the Certificate of Filing of Articles of Merger/Consolidation

The surviving corporation (merger) or the consolidated corporation (consolidation), will possess all the franchises, rights, privileges, immunities and all of the properties of the constituent corporations without further act of deed (only the issuance by the SEC of the Certificate of Filing of Articles of Merger/Consolidation

The liabilities of the constituent corporations will have to be assumed by the surviving corporation or the consolidated corporation

TITLE X APPRAISAL RIGHT

APPRAISAL RIGHT The right to demand payment of the fair value of

his shares after dissenting from certain corporate acts involving substantial and fundamental changes in the corporate structure or organization, not contemplated by him during the time he made his investment in the corporation

The right to demand payment of the fair value of his shares after dissenting from certain corporate acts involving substantial and fundamental changes in the corporate structure or organization, not contemplated by him during the time he made his investment in the corporation

RIGHT to WITHDRAW

WHEN IS APPRAISAL RIGHT AVAILABLE In case any amendment of the articles of

incorporation has the effect of changing or

restricting the rights of any stockholders or class of shares

In case any amendment of the articles of incorporation has the effect of changing or restricting the rights of any stockholders or class of shares

In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition or all or substantially all of the corporate property and assets

In case of merger or consolidation In case the corporation decides to invest its

funds in another corporation (under Sec. 42) In case of a stockholder in a close corporation

(under Sec. 105)

WHO MAY EXERCISE THE RIGHT? The right is granted only to a SH who says “I

vote against” or “I disagree” with the proposed corporate act

The right is granted only to a SH who says “I vote against” or “I disagree” with the proposed corporate act

It does not include a SH who was absent at the meeting called for the approval of the proposed act or who was present thereat but abstained from voting on it or one who simply kept quiet during the meeting.

A written demand within 30 days after the date on which the vote was taken. Failure to make the required written demand is deemed a waiver

DETERMINATION OF FAIR VALUE The appraisal shall be at fair value as of the day

prior to the date of the meeting when the action objected to was adopted by the corporation

The appraisal shall be at fair value as of the day prior to the date of the meeting when the action objected to was adopted by the corporation

Elements in Valuation of Corporate Stocks:◦ Market value◦ Net asset value◦ Investment value

Market Value – means the price at which the stock was selling on the market on the day prior to the action which is objected to

Market Value – means the price at which the stock was selling on the market on the day prior to the action which is objected to

Net asset value – share which the stock represents in the value of the net assets of the corporation, based on a hypothetical dissolution and distribution of the corporate assets

Investment value – takes into account factors such as capitalization, earnings and dividend record, position in the industry, prospects of the business (future course of the stock in the market), goodwill and earning capacity

OTHER CONDITIONS FOR THE VALID EXERCISE OF THE RIGHT TO APPRAISAL:

Submission by the withdrawing stockholder of his shares to the corporation for notation of being a dissenting stockholder within ten (10) days from written demand

Submission by the withdrawing stockholder of his shares to the corporation for notation of being a dissenting stockholder within ten (10) days from written demand

Constitution of independent appraisers when the SH and the corporation cannot agree on the fair value of the shares

Payment of the shares only when the corporation has unrestricted retained earnings to cover such payment

Upon payment, the SH must transfer his shares to the corporation

EFFECT OF DEMAND AND TERMINATION OF RIGHT From the time of demand for payment by the

dissenting SH until either the abandonment of the corporate action involved or the purchase of said shares by the corporation, the dissenting SH looses all rights as a SH including voting and dividend rights

From the time of demand for payment by the dissenting SH until either the abandonment of the corporate action involved or the purchase of said shares by the corporation, the dissenting SH looses all rights as a SH including voting and dividend rights

If the SH however is not paid his shares within 30 days after the award, whatever be the reason, his rights shall be immediately restored

WHEN RIGHT TO PAYMENT CEASES When he withdraws his demand for payment

with the consent of the corporation When he withdraws his demand for payment

with the consent of the corporation When the proposed corporate action is

abandoned When the proposed corporate action is

disapproved by the SEC where such approval is necessary

When the SEC determines that such SH is not entitled to the appraisal right

WHO BEARS COSTS AND EXPENSES OF APPRAISAL?

By the corporation◦ Where the price which he corporation

offered to pay to the dissenting SH is lower than the fair value determined by the appraisers

◦ Where an action is filed by the dissenting SH and the refusal of the SH to receive payment is found to be justified by the court

By the dissenting SH◦ Where the price offered by the corporation is

approximately equal to the fair value as determined by the appraisers

◦ Where the court founds unjustifiable reasons

for the SH to refuse payment

NOTATION ON CERTIFICATE Dissenting SH must present his certificate within

10 days after written demand Dissenting SH must present his certificate within

10 days after written demand Corporate secretary makes notation that these

certificates are dissenting shares, thus withdrawal of all SH’s rights

Title XI NON-STOCK CORPORATIONS

NON-STOCK CORPORATION There is no capital stock divided into shares No part of its income may be distributed as

dividends to its members, trustees or officers Considered as non-profit corporation even if it

derives income from the operation of its facilities It does not have the power to venture primarily

in business activities

RIGHT TO VOTE Regardless of class, Members are entitled to

one vote unless broadened, or denied in the articles of incorporation or by-laws

May cast as many votes as there are trustees to be elected, but may not cast more than one vote for one candidate, unless provided in the AoI or by-laws

How members vote? In person By proxy By mail or other means (if so provided in the AoI

or by-laws)

NON-TRANSFERABILITY OF MEMBERSHIP Membership in a non-stock corporation is a

personal right and non-transferable unless otherwise provided in the AoI or by-laws

Admission, maintenance and limitation of membership in a non-stock corporation must be governed by the by-laws

Issued a “Membership Certificate” Best evidence is the “membership book”

TERMINATION OF MEMBERSHIP Only in the manner and for the causes provided

in the articles of incorporation or by-laws It extinguishes all rights of a member in the

corporation or in its property SEC guided by the general rule in corporate

jurisprudence provides that the power to expel a member may be exercised under certain situations:

TERMINATION OF MEMBERSHIP when an offense is committed which, although it

has no immediate relation to a member’s duty as such is of so infamous a nature as to render him unfit for the society of honest man, and which is indictable at common law

when the offense is a violation of his duty as a

member of the corporation when the offense is of a mixed nature, being

both against his duty as a member of the corporation and also indictable at common law

ELECTION AND TERM OF TRUSTEES Qualifications of trustees Trustees of non-stock corporations must be

members thereof Majority of the trustees must be residents of the

Philippines By-laws may provide for other qualifications Term of trustees One year/staggered term in the absence of any

provision in the AoI or by-laws As long as the term of 1/3 of its trustees expire

every year Not to exceed 5 years (Sec. 7)

NUMBER OF TRUSTEES May have more than 15 trustees There appears to be no limit Powers of board of trustee Much broader than the powers of the board of

directors where approval of SH is mandatory in several corporate actions

Limited only in certain corporate acts:◦ Sell. Lease or mortgage real property

without the approval of the members (Sec. 40)

◦ Amend its corporate charter or by-laws (Sec. 16, 48 respectively)

◦ Decrease bonded indebtedness (Sec. 38)

PLACE OF MEETINGS Regular or special meetings may be held even

outside the place where the principal office of the corporation is located

Proper notice must be sent to all members Within the Philippines However, meetings of the board of trustees may

be held outside of the Philippines since Sec. 51 and 93 only refers to meetings of members of the association

RULES FOR DISTRIBUTION Payment of all liabilities and obligations of the

corporation Return of all assets held by the corporation

(where there exists a condition requiring its return by reason of dissolution)

Assets not subject to return shall be transferred to corporations/organizations engaged in activities substantially similar to that of the dissolving corporation

Assets other than those mentioned in the 2 preceding paragraphs shall be distributed in accordance with the provisions of the AoI or by-laws

Assets may be distributed to such persons, societies, organizations or corporations as may be specified in the plan of distribution

PLAN FOR DISTRIBUTION: Shall be distributed in accordance with the rules

laid down in Sec. 94; In accordance with the plan adopted by a

majority vote of the board of trustees and approved by at least 2/3 vote of the members, provided written notice of the proposed plan of distribution together with the date, time and place of such meeting be given to each member entitled to vote

TITLE XII CLOSE CORPORATIONS

CLOSE CORPORATIONS: All its stock, exclusive of treasury shares, shall

be held of record by not more than a specified number of persons, not exceeding twenty (20)

All its stock shall be subject to one or more specified restrictions on transfer permitted by the Code

There should be no listing of the shares in any stock exchange and no public offering of its shares of stock

ALLOWABLE PROVISIONS IN THE AOI A classification of shares or rights and the

qualifications for owning or holding the same as well as the restrictions on their transfers as may be stated therein

Classification of directors into one or more classes, each of which may be voted for and elected solely by a particular class of stock

A quorum or voting requirements in meetings of stockholders or directors greater than those provided in this Code

Management of corporate affairs and business of the corporation by the stockholders rather than by the board of directors

All officers or employees as such may be specified by the AoI shall be elected or appointed by the SH instead by the BoD

VALIDITY OF RESTRICTIONS Such restrictions must appear in the articles of

incorporation and in the by-laws as well as in the certificate of stock, otherwise they shall not be binding on any purchaser thereof in good faith;

Such restrictions shall not be more than onerous than granting the existing stockholders or the corporation the option to purchase the shares of the transferring stockholder with such reasonable terms, conditions or period stated therein.

RIGHT OF FIRST REFUSAL – SH must first offer it to either the corporation or to the other existing SHs upon such terms, conditions and period previously agreed upon

Such restrictions must appear in the articles of incorporation and in the by-laws as well as in the certificate of stock, otherwise they shall not be binding on any purchaser thereof in good faith;

Such restrictions shall not be more than onerous than granting the existing stockholders or the corporation the option to purchase the shares of the transferring stockholder with such reasonable terms, conditions or period stated therein.

RIGHT OF FIRST REFUSAL – SH must first offer it to either the corporation or to the other existing SHs upon such terms, conditions and period previously agreed upon

EFFECT OF ISSUANCE OR TRANSFER IN BREACH OF QUALIFYING CONDITIONS:

Transferee cannot be allowed to prove lack of notice even if such is the fact

Corporation cannot be compelled to register the transfer of the stock in the transferee’s name

Notwithstanding the conclusive presumption under Sec. 99 the transfer shall be binding upon the corporation if:

It has been consented to by all the SHs of the close corporation

If the close corporation has amended it AoI as provided in #5 of Sec. 103

AGREEMENTS BY STOCKHOLDERS Not exclusive SH’s pre-incorporation agreements are

considered valid when executed by SHs of a close corporation

No need for ratification in a close corporation as the SHs are the same so that corporate personality may be disregarded

WHEN ACTION TAKEN AT BOARD MEETINGS UNNECESSARY OR IMPROPERLY HELD DEEMED VALID:

If before or after such action is take, written consent thereto is signed by all the directors

All the SHs have actual or implied knowledge of the action and do not make any prompt objection thereto in writing

Directors are used to taking informal action with the express or implied acquiesence of all the SHs

All the directors have express or implied knowledge of the action and do not make any prompt objection thereto in writing

PRE-EMPTIVE RIGHT IN CLOSE CORPORATIONS Extends to all stock to be issued, including

reissuance of treasury shares, whether for money or for property or personal services, or in payment of corporate debt, unless otherwise provided for in the AoI

Pre-emptive rights in close corporations are necessary to maintain the balance of power in such a small unit

AMENDMENT OF THE AOI Approved by affirmative vote of at least 2/3 of

the OCS, with or without voting rights, at a SH’s

meeting duly called for the purpose Mere written assent allowed in Sec. 16, would

not suffice

DEADLOCKS File a petition with the SEC which shall have the

power to arbitrate the dispute The power to arbitrate given by Sec. 104 may be

exercised by the SEC notwithstanding any provision in the AoI, by-laws or agreements by the SHs to the contrary

Provisional Director – impartial person, neither a SH nor a creditor of the corporation

WITHDRAWAL OF SH OR DISSOLUTION OF CORPORATION:

For any reason, a SH of a close corporation may compel the corporation to purchase his shares at fair value, which must not be less than their par or issued value provided the corporation has sufficient assets in its books to cover its debts and liabilities exclusive of capital stock

Written petition to the SEC to compel dissolution of such corporation wherever any of the acts of the directors, officers is illegal, fraudulent or dishonest or oppressive or unfairly prejudicial to the corporation or any stockholder, or whenever corporate assets are being misapplied or wasted (granted even to a minority SH other than a close corporation)

TITLE XIII SPECIAL CORPORATIONS

EDUCATIONAL CORPORATIONS Governed by Act No. 2076 (“An act making the

inspection and recognition of private schools and colleges obligatory for the Sec of Educ.”); R.A. No. 6055 (conversion of educational corporations from stock corporation to non-profit foundation); and B.P. Blg. 232 (Education Act of 182)

Requires favorable recommendation by the Sec. of Educ. prior to incorporation

Board of Trustees: ◦ Not be less than 5, nor more than 15◦ Must be in multiples of five◦ Term of 1/5 must expire every year◦ Term of office not more than 5 years◦ Trustees elected to fill vacancies shall hold

office only for the unexpired period◦ Majority of the trustees shall constitute a

quorum◦ Powers and authority must be defined in the

by-laws

CLASSES OF RELIGIOUS CORPORATIONS: Religious Sole – incorporated by “one” person Religious society – incorporated by “2 or more”

persons Religious Corporation Sole for the purpose of

administering and managing the affairs, property and temporalities of any religious denomination, sect or church:

Chief archbishop Bishop Priest, Minister, Rabbi

ARTICLES OF INCORPORATION OF RELIGIOUS SOLE

Sec. 111 speaks of no term of existence and hence it gives a corporation sole perpetuity;

It provides for the manner in which any vacancy may be filled;

It is not required to file by-laws, it is enough that the corporation sole is governed by the rules, regulations and discipline of its religious denomination, sect or church. Its articles of faith already contain the provisions normally embodied in the by-laws of an ordinary corporation.

COMMENCEMENT OF CORPORATE EXISTENCE Corporate existence of a corporation sole

commences from and after filing of the articles of incorporation together with the supporting documents mentioned in Sec. 112.

No need for a Certificate of Incorporation

POWER TO ACQUIRE REAL PROPERTY In the case of Republic vs. Villanueva, 114

SCRA 875, the Iglesia ni Cristo was disqualified to acquire or hold alienable lands of the public domain, except by lease, because of the prohibition in Art XII Sec.2 of the Constitution

In the case of RCAA of Davao vs. Land Registration Commission and Reg. of Deeds of Davao City, it was held that a corporation sole despite the fact that the head was a Canadian citizen, can purchase lands in the Philippines as ownership thereof logically falls and devolves upon the church or congregation acquiring the same.

MORTGAGE OR SALE OF REAL PROPERTY A corporation sole may mortgage or sell real

property held by it only upon obtaining an order for that purpose from the RTC of the province where the property is located, provided it is shown that:

The notice of application for leave to mortgage or sell was published or in any manner and for such time as the court may have directed

It is to the interest of the corporation that leave to mortgage or sell should be granted

The application for leave to mortgage or sell must be made by petition, verified by the head of the denomination, sect or church concerned

AGGREGATE RELIGIOUS SOCIETIES The following may become aggregate religious

societies: Any religious society or order

Any diocese Synod District organization of any church Acquires legal personality upon filing with the

SEC Intended by law to exist perpetually Board of trustees of not less than 5 not more

than 15

Title XIV DISSOLUTION

Denotes the termination of the existence of a corporation, the extinguishment of its charter, the winding up of the corporate affairs and the distribution of corporate assets to the creditors and then to the stockholders

Modes: Voluntary

◦ Application for dissolution with the SEC▪ Where no creditors are affected▪ Where creditors are affected

◦ Shortening of the corporate term by amending the articles of incorporation

Involuntary◦ Expiration of the corporate term◦ Failure to organize and commence business

within 2 years from the date of issuance of the certificate of incorporation

◦ Legislative dissolution◦ Quo warranto suit against a de facto

corporation◦ Minority stockholders’ suit for dissolution on

justifiable grounds◦ SEC dissolution, upon complaint and after

notice and hearing

Effects of Dissolution: Transfer of legal title of corporate property to the

stockholders who become owners thereof Continuation of corporate business merely as an

association without juridical personality Conveyance by the stockholders of their

respective shareholdings toward the creation of a new corporation to continue the business of the old

Reincorporation of the dissolved corporation by refilling new articles of incorporation and by-laws

Corporation continues as a body corporate for 3 years for purposes of winding up

Liquidation The process by which all the assets of the

corporation are converted into liquid assets (cash) in order to facilitate the payment of obligations to creditors, and the remaining balance, if any, is to be distributed to the stockholders or members

Methods of Liquidation: By the corporation itself through its board of

directors/trustees

By a trustee to whom the corporate assets have been conveyed

By a management committee or rehabilitation receiver appointed by the SEC

TITLE XV FOREIGN CORPORATION

Foreign CorporationA corporation formed, organized or existing under

any law other than those of the Philippines, and whose law allow Filipino citizens and corporations to do business in its own country or state

Generally, not permitted to transact or do business in the Philippines, until it has secured a license for that purpose from the SEC and a certificate of authority from the appropriate government agency

Contents for Application of License Date and term of incorporation Address of the principal office in the country of

incorporation Name and address of resident agent Place in the Philippines where it intends to

operate The specific purpose or purposes Names and addresses of the present directors

and officers of the corporation Statement of its outstanding capital stock Statement of the amount actually paid in

Resident Agent An individual, who must be of good moral

character and of sound financial standing, residing in the Philippines, or a domestic corporation lawfully transacting business in the Philippines, designated in a written power of attorney by a foreign corporation authorized to do business in the Philippines, on whom any summons and other legal processes may be served in all actions or other legal proceedings against the foreign corporation. (Sec. 127-128)

Grounds for Revocation of License Failure to file annual reports required by the

Code Failure to appoint and maintain a resident agent Failure to inform the SEC of the change of

residence of the resident agent Failure to submit copy of the amended articles

or by-laws or articles of merger or consolidation A misrepresentation in material matters in

reports Failure to pay taxes, imposts and assessments Engage in business unauthorized by SEC Acting as dummy of a foreign corporation Not licensed to do business in the Philippines

(Sec. 134)

Effects of Lack of License On suits

◦ Foreign corporation doing business in the

Philippines:▪ May not sue or intervene in any action in

any court or administrative agency of the Philippines; but

▪ May be sued on any valid cause of action recognized in the Philippines

◦ Foreign corporation not doing business in the Philippines▪ It may not sue and be sued in any court

or administrative agency of the Philippines

▪ However, it may sue and be sued for isolated transactions, as well as those which are casual or incidental thereto

▪ Exception: To seek redress for an isolated

transaction To protect its corporate reputation,

name and goodwill To enforce a right not arising out of

a business transaction, e.g. tort that occurred in the Philippines

When the parties have contractually stipulated that Philippines is the venue of actions; and

When the party sued is barred by the principle of estoppel and/or principle of unjust enrichment from questioning the capacity of the foreign corporation

Effects of Lack of License On contracts

◦ Gen. Rule: The contracts are unenforceable. They are enforceable only upon securing a license. However, they are null and void if they are contrary to law, morals, good customs, public order and public policy

“Doing or Transacting Business in the Philippines” JURISPRUDENTIAL TEST

◦ Twin Characterization Test▪ Substance Test – whether the FC is

maintaining or continuing in the Philippines the body or substance of the business for which it was organized

▪ Continuity Test – whether there is continuity of commercial dealings and arrangement, contemplating to some extent performance of acts or works

◦ Contract Test▪ Whether the contracts entered into by

the FC are consummated in the Philippines

Statutory Tests Foreign Investment Act of 1991 or R.A. No.

7042◦ Soliciting orders, service contracts, opening

offices, whether liaison offices or branches◦ Appointing representatives or distributors

who in any calendar year stay in the country

for a period of 180 days or more◦ Participation in the management,

supervision or control of any domestic business

◦ Any acts that imply a continuity of commercial dealings or arrangements

Implementing Rules of R.A. No. 7042◦ Mere investment as a shareholder in a

domestic corporation and/or the exercise of rights as such investor

◦ Appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account

◦ Publication of a general advertisement◦ Maintaining a stock of goods in the

Philippines solely for the purpose of having the same processed by another entity in the Philippines

◦ Consignment by the FC of equipment with a local company to be used in the processing of products for export

◦ Collecting information in the Philippines◦ Performing services auxiliary to an existing

isolated contract of sale which are not on a continuing basis

Jurisprudential Rules DOCTRINE of ISOLATED TRANSACTION –

FC, even unlicensed ones, can sue or be sued on a transaction or series of transactions set apart from their common business in the sense that there is no intention to engage in a progressive pursuit of the purpose and object of business transaction (Eriks Pte. Ltd. Vs CA, 267 SCRA 567)

IN PARI DELICTO RULE – In the case of Top Weld Manufacturing vs. ECED, S.A., the court denied the relief prayed for by the petitioner when it rules that the very purpose of the law was circumvented and evaded when the petitioner entered into the said agreements despite the prohibition contained in the questioned law. The parties were considered as being in pari delicto because they equally violated R.A. No. 5455

ESTOPPEL RULE – A party is estopped from questioning the capacity of a FC to institute an action in our courts where it had obtained benefits from its dealings with such foreign corporations and thereafter committed a breach or sought to renege on its obligations (European Resources vs. Ingnieburo)

Transitory Provisions Sec. 144 – Violations of the Code Fine of not less than P1,000.00 but nor more

than P10,000.00 or Imprisonment for not less than 30 days but not

more than 5 years or both Exception: Sec. 65 on watered stocks; Sec. 74

on refusal to allow SH/member to examine

records or minutes of the corp.