ust golden notes - corporation law

CORPORATION LAW

UNIVERSITYOFSANTOTOMASF a c u l t a d d e D e r e c h o C i v i l

ACADEMICSCHAIR:LESTERJAYALANE.FLORESIIVICECHAIRSFORACADEMICS:KARENJOYG.SABUGO&JOHNHENRYC.MENDOZAVICECHAIRFORADMINISTRATIONANDFINANCE:JEANELLEC.LEEVICECHAIRSFORLAYOUTANDDESIGN:EARLLOUIEM.MASACAYAN&THEENAC.MARTINEZ

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CORPORATIONLAWQ: What are the distinctions betweenpartnershipandcorporation?A:SeeAppendixD

A.CORPORATIONDEFINEDQ:Whatisacorporation?A:Anartificialbeingcreatedbyoperationof lawhaving the right of succession, and the powers,attributesandpropertiesexpresslyauthorizedbylawandincidenttoitsexistence.(Sec.2)Q: May a corporation enter into a contract ofpartnership?A:

GR:Corporationshavenopowertoenterintopartnership.Reason: Public policy. In a partnership, thecorporationwouldbeboundby theactsof thepersons who are not its duly appointed andauthorizedagentsandofficers,whichwouldbeentirely inconsistentwith the policy of the lawthatthecorporationshallmanageitsownaffairsseparatelyandexclusively.

XPN: The SEC allowed corporations to enter

into partnerships with othercorporationsandindividualsprovided:

1. Theauthority toenter intopartnership

relation is expressly conferred by theCharterortheAOIandthenatureofthebusiness venture to be undertaken bythe partnership is in line with thebusiness authorized by the charter orthe AOI. (SECOpinions, Feb. 29, 1980,Dec.1,1993,andFeb.23,1994.)

2. The partnership must be a limitedpartnership and the corporation mustbealimitedpartner

3. If it is a foreign corporation, it mustobtaina license to transactbusiness inthecountry.

Q:Does a defective incorporation result into apartnership?A:Theanswerdependsonwhetherornot thereisaclearintenttoparticipateinthemanagementofthebusinessaffairsonthepartoftheinvestor.Partieswho intendstoparticipateorhasactually

participated in the business affairs of theproposed corporation would be considered aspartners under a de facto partnership. On theother hand, parties who took no partnotwithstanding their subscriptions do notbecomepartnerswithothersubscribers.(PioneerInsurancev.CA,G.R.No.84197,July28,1989)Q:Mayacorporationenterintoajointventure?A: Yes. It may enter into a joint venture withanother where the nature of that venture is inlinewith the business authorized by its charter.(Aurbach v. Sanitary Wares ManufacturingCorporation,G.R.No.75875,Dec.15,1989)Q: What are the distinctions between jointaccountandpartnership?A:

JOINTACCOUNT PARTNERSHIPHasnofirmnameandisconductedInthenameoftheostensiblepartner.

Hasafirmname.

Hasnojuridicalpersonalityandcansueorbesuedonlyinthenameoftheostensiblepartner.

Hasjuridicalpersonalityandmaysueorbesuedunder

itsfirmnameHasnocommonfund. Hasacommonfund.Theostensiblepartnermanagesitsbusiness

operations.

Allgeneralpartnershavetherightofmanagement.

Liquidationthereofcanonlybedonebytheostensiblepartner.

Liquidationmay,byagreement,be

entrustedtoapartnerorpartners.

Q:Whataretheattributesofacorporation?A:

1. Itisanartificialbeing2. Itiscreatedbyoperationoflaw3. Itenjoystherightofsuccession4. It has the powers, attributes and

properties expressly authorized by laworincidenttoitsexistence

Q:Whatare the theorieson the formationofacorporation?A:

1. Concession theory or fiat theory Means that a corporation wasconceived as an artificialpersonowingexistencethroughcreationbya foreignpower. It has without any existenceuntil it has received the imprimatur ofthe state acting according to law,through the SEC. (Tayag v. Benguet

UST GOLDEN NOTES 2011

MERCANTILELAWTEAM:ADVISER:ATTY.AMADOE.TAYAG;SUBJECTHEAD:EARLM.LOUIEMASACAYAN;ASST.SUBJECTHEADS:KIMVERLYA.ONG&JOANNAMAYD.G.PEADA;MEMBERS:MA.ELISAJONALYNA.BARQUEZ,ANGELIR.CARPIO,ANTONETTET.COMIA,ALBANROBERTLORENZOF.DEALBAN,JOEBENT.DEJESUS,CHRISJARKACEM.MAO,ANNAMARIEP.OBIETA,RUBYANNEB.PASCUA,FLORANGELAT.SABAUPAN,GIANFRANCESNICOLEC.VILCHES

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Consolidated, Inc., G.R. No. L23276,Nov.29,1968)Note: Philippine jurisprudence adoptedthistheoryastheunderlyingbasisfortheexistence and powers of corporateentities.

2. Theory of corporate enterprise oreconomicunitThe corporation isnotmerely an artificial being, butmore ofan aggregation of persons doingbusiness, or an underlying businessunit. (However, this doctrine is beingusedinsupportofotherdoctrines)

Note: Recognizes the existence of abusinessenterpriseasthebasesofseveralcontractsandtransactionsapart fromtheissue of whether there was dulyconstitutedajuridicalperson.

3. Genossenschaft theory Treats a

corporationastherealityofthegroupasasocialandlegalentity,independentof State recognition and concession.(Tayag v. Benguet Consolidated, Inc.,G.R.No.L23276,Nov29,1968)

Q:Whatarethetwokindsoffranchise?A:

1. Corporateorprimary/general franchisegrantgiventoexistasacorporation;

2. Specialorsecondaryfranchisecertainrights and privileges conferred uponexisting as a corporation (e.g. right touse the streets ofamunicipality to laypipes of tracks, erect poles, or stringwires).

B.CLASSIFICATIONOFCORPORATIONS

Q:Whataretheclassificationsofcorporation?A:

1. AstoCorporationCode:a. STOCK CORPORATION one which

have capital stock divided intoshares and are authorized todistribute to the holders of suchshares dividends or allotments orthe surplusprofitson thebasisofthesharesheld.(Sec3)

b. NONSTOCKCORPORATIONisonewhichdonot issuesharesandarecreatednotforprofitbutforpublic

good and welfare and where nopart of its income is distributableas dividends to its members,trustees,orofficers.(Sec87)

2. As to the number of persons who

composethem:a. Corporation aggregate

corporation consisting of morethanonememberorcorporator;

b. Corporation Sole religiouscorporationwhich consists of onememberorcorporatoronlyandhissuccessor.

3. As to whether they are for religiouspurposeornot:a. Ecclesiastical corporation one

organizedforreligiouspurpose

b. Laycorporationoneorganizedforapurposeotherthanforreligion.

4. As to whether they are for charitablepurposeornot:a. Eleemosynaryoneestablished for

religiouspurposes

b. Civil one established for businessorprofit

5. As to state or country under or bywhoselawstheyhavebeencreated:a. Domesticone incorporatedunder

thelawsofthePhilippines

b. Foreignoneformed,organized,orexistingunderany lawsotherthanthoseofthePhilippinesandwhoselaws allow Filipino citizens andcorporations to do business in itsowncountryorstate.(Sec123)

6. As to their legal right to corporateexistence:a. De jure one existing both in fact

andinlaw

b. De facto one existing in fact butnotinlaw

7. As to whether they are open to the

publicornot:a. Close one which is limited to

selected persons or members ofthefamily.(Sec96105)

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b. Open one which is open to anypersonwhomaywhichtobecomeastockholderormemberthereto

8. As to their relation to anothercorporationa. Parent or Holding one which is

relatedtoanothercorporationthatithasthepowereither,directlyorindirectly to, elect themajorityofthe director of such othercorporation

b. Subsidiaryonewhich issorelatedto another corporation that themajority of its directors can beelected either, directly orindirectly, by such othercorporation

9. As towhether theyarecorporations in

atruesenseoronlyinalimitedsense:a. Trueonewhichexistsbystatutory

authority

b. Quasi one which exist withoutformallegislativegrant.i.Corporationbyprescriptiononewhich has exercised corporatepowers for an indefinite periodwithoutinterferenceonthepartofthesovereignpowerandwhichbyfictionoflaw,isgiventhestatusofacorporation;ii. Corporation by estoppel onewhich in reality is not acorporation, either de jure or defacto, because it is so defectivelyformed, but is considered acorporations in relation to thoseonlywho,by reasonof theirsactsoradmissions,areprecluded fromasserting that it is not acorporation.

10.As to whether they are for public(government)orprivatepurpose: a. Public one formed or organized for

the government or a portion of theState

b. one formed for some provatepurpose,benefitorend

Q: What are the requisites of a de factocorporation?A:

1. Organizedunderavalidlaw.

2. Attempt in good faith to form acorporation according to therequirementsofthelaw.Note: The Supreme Court requires thatArticles of Incorporation have alreadybeen filed with the SEC and thecorrespondingcertificateof incorporationisobtained.

3. Useofcorporatepowers.Note: The corporation must haveperformedtheactswhicharepeculiartoacorporation like entering into asubscriptionagreement,adoptingbylaws,andelectingdirectors.

Q:How is the status of a de facto corporationattacked?A: The existence of a de facto corporation shallnotbeinquiredintocollaterallyinanyprivatesuittowhich such corporationmaybeaparty.SuchinquirymaybemadebytheSolicitorGeneralinaquowarrantoproceeding.(Sec.20)Note: However, as long as it exists, a de factocorporation enjoys all attributes of a corporationuntiltheStatequestionsitsexistence.Incomparisonwithacorporationbyestoppelwherethe stockholders are liable as general partners,stockholdersinadefactocorporationareliableasadejurecorporation.Hence,uptotheextentoftheirshareholdings.Q: Distinguish de facto corporation fromcorporationbyestoppel.A:

DEFACTOCORPORATION

CORPORATIONBYESTOPPEL

ThereisexistenceinlawThereisnoexistencein

lawThedealingsamongthepartiesonacorporatebasisisnotrequired

Thedealingsamongthepartiesonacorporate

basisisrequiredWhenrequisitesarelacking,itcanbe

corporationbyestoppel

Itwillbeconsideredacorporationinanyshape

orform



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C.NATIONALITYOFCORPORATIONSQ: What are the tests in determining thenationalityofcorporations?A:

1. Incorporation test Determined by thestateof incorporation, regardlessof thenationalityofthestockholders.

2. Domiciliary test Determined by theprincipal place of business of thecorporation.

3. Control test Determined by thenationality of the controllingstockholders or members. This test isappliedintimesofwar.

4. Grandfather rule Nationality is

attributedtothepercentageofequity inthe corporation used in nationalized orpartlynationalizedarea.

Q:Whataretherequisitesofthecontroltest?A:

1. Control,notmeremajorityorcompletestockcontrol,butcompletedomination,not only of finances but of policy andbusiness practice in respect to thetransaction attacked such that thecorporate entity as to this transactionhadatthattimenoseparatemind,willorexistenceofitsown

2. Such control must have been used bythe defendant to commit fraud orwrong,toperpetuatetheviolationofastatutoryorotherpositivelegalduty,ordishonestorunjustactincontraventionofplaintiffslegalright;and

3. The control and breach of duty mustproximately cause the injury or unjustloss complained of. (Velarde v. Lopez,Inc., G.R. No. 153886, Jan. 14, 2004;HeirsofRamonDurano, Sr. v.Uy,G.R.No.136456,Oct.24,2000)

Q: Who are considered Philippine NationalsunderForeign InvestmentActof1991 (R.A.No.7042)?A:

1. Corporations organized underPhilippine laws of which 60% of thecapitalstockoutstandingandentitledto

vote is owned and held by Filipinocitizens

2. Corporations organized abroad andregistered as doing business in thePhilippinesundertheCorporationCodeof which 100% of the capital stockentitledtovotebelongtoFilipinos.

Note:However,itprovidesthatwhereacorporationand its nonFilipino stockholders own stocks in aSECregisteredenterprise,atleast60%ofthecapitalstock outstanding and entitled to vote of bothcorporationsandatleast60%ofthemembersoftheboard of directors of both corporations must beFilipinocitizens(DOUBLE60%RULE).Q: What is the nationality of a corporationorganizedand incorporatedunderthe lawsofaforeigncountry,butowned100%byFilipinos?A: Under the control test of corporatenationality, this foreign corporation isof Filipinonationality.Wheretherearegroundsforpiercingthe veilof corporateentity, that is,disregardingthe fiction, the corporation will follow thenationality of the controlling members orstockholders, since the corporationwill then beconsidered as one and the same. (1998 BarQuestion)

D.CORPORATEJURIDICALPERSONALITYQ: What is the doctrine of separate (legal)personality?A: It isawellsettleddoctrine thatacorporationhas a personality distinct and separate from itsindividual stockholders or members (Cruz vs.Dalisay,A.M.No.R181P,July31,1987).Q:Whatarethesignificancesofthedoctrineofseparatepersonality?A:

1. Liability foractsorcontracts theactsof the stockholders do not bind thecorporation unless they are properlyauthorized.Theobligations incurredbya corporation, acting through itsauthorizedagentsare itssole liabilities.The obligations of the corporation arenot the obligations of its shareholdersandmembersandviceversa.(Ceasev.CA,G.R.No.L33172,Oct.18,1979)

2. Right tobringactionsmaybring civilandcriminalactions in itsownname in

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the same manner as natural persons.(Art.46,CivilCode)

3. Righttoacquireandpossessproperty

property conveyed to or acquired bythecorporationisinlawthepropertyofthecorporation itselfasadistinct legalentityandnot thatof the stockholdersormembers.(Art.44[3],CivilCode)Note: The interest of the shareholder inthe properties of the corporation isinchoate only. The interest of theshareholder on a particular propertybecomes actual, direct and existing onlyupon the liquidation of the assets of thecorporation and the same property isassignedtotheshareholderconcerned.

4. Acquisition of court of jurisdiction

service of summons may be made onthe president, general manager,corporate secretary, treasurer or inhouse counsel. (Sec.11,Rule14,RulesofCourt).

5. Changes in individual membership corporation remains unchanged andunaffected in its identitybychanges initsindividualmembership.

Q:Isacorporationliablefortorts?

A:Yeswhenevera tortuousact iscommittedbyanofficeroragentundertheexpressdirectionorauthorityof the stockholdersormembersactingasabody,or,generally,fromthedirectorsasthegoverning body. (PNB v. CA, G.R. No. L27155,May18,1978)Q:Isacorporationliableforcrimes? A:

GR: No. Since a corporation is a mere legalfiction, it cannot be held liable for a crimecommitted by its officers, since it does nothavetheessentialelementofmalice; insuchcase the responsible officers would becriminally liable. (People v. Tan Boon Kong,G.R.No.L32066.Mar.15,1930)

Note: An officer of a corporation can be heldcriminally liable for acts or omissions done inbehalf of the corporation only where the lawdirectlymakes thepersonwho fails toperformtheactintheprescribedmannerexpresslyliablecriminally.(Siav.People,L30896,Apr.28,1983)

XPN:Ifthepenaltyofthecrimeisonlyfineorforfeiture of license or franchise. (Ching vSecretaryofJustice,G.R.No.164317,Feb.6,2006)

Q:Isacorporationentitledtomoraldamages?

A:

GR: A corporation is not entitled to moraldamages because it has no feelings, noemotions, no senses. (ABSCBN BroadcastingCorporation v. CA, G.R. No. 128690 Jan 21,1999 and Phillip Brothers Oceanic, Inc, G.R.No.126204,Nov.20,2001)XPN:1. The corporation may recover moral

damagesunderitem7ofArticle2219ofthe New Civil Code because saidprovision expressly authorizes therecoveryofmoraldamages in casesoflibel, slander, or any other form ofdefamation. Article 2219(7) does notqualify whether the injured party is anaturalorjuridicalperson.Therefore,acorporation, as a juridical person, canvalidly complain for libel or any otherformofdefamationandclaimformoraldamages (Filipinas BroadcastingNetwork, Inc. v. AMECBCCM,G.R.No.141994,Jan17,2005.

2. Whenthecorporationhasareputationthat is debased, resulting in itshumiliation in the business realm(Manila Electric Company v. T.E.A.M.ElectronicsCorporation,et.al.,G.R.No.131723,Dec.13,2007.

Q: What is the doctrine of piercing the veil ofcorporatefiction?A: It is the doctrine that allows the State todisregard thenotionofseparatepersonalityofacorporationforjustifiablereason/s.Note: This is an exception to the Doctrine ofSeparateCorporateEntity.Q:Whataretheeffectsofpiercingtheveil?A: Courts will look at the corporation as anaggregationofpersonsundertaking thebusinessasagroup.Note:Whentheveilofcorporatefictionispiercedinproper cases, the corporate character is notnecessarily abrogated. It continues for legitimateobjectives. The decision applies only for that



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particularcase.(ReynosoIVv.CA,G.R.Nos.11612425,Nov22,2000)Q: What circumstances the mere existence ofwhich does not necessarily entitle piercing theveil?A:

1. Controlling ownership of thecorporationsshare

2. 2corporationshavecommondirectors3. Substantialidentityoftheincorporators

or 2 corporations and identity of itsbusiness

Q:Whatare the tests inpiercing the corporateveil?A:

1. Fraudtest(Whencorporatefictionusedto justify a wrong, protect fraud ofdefendcrime)

2. Controltest3. Alterego or instrumentality test (or

conduitcases)4. Publicconvenienceorobjectivetest5. Equitycases/test

Q: Plaintiffs filed a collection action against XCorporation. Upon execution of the court'sdecision,XCorporationwasfoundtobewithoutassets. Thereafter, plaintiffs filed an actionagainst its present and past stockholder YCorporationwhichownedsubstantiallyallofthestocks of X corporation. The two corporationshave the same board of directors and YCorporation financed the operations of Xcorporation. May Y Corporation be held liableforthedebtsofXCorporation?Why?

A:Yes,YCorporationmaybeheld liable for thedebtsofXCorporation. Thedoctrineofpiercingtheveilofcorporationfictionappliestothiscase.The two corporations have the same board ofdirectors and Y Corporation owned substantiallyall of the stocks of X Corporation, which factsjustifytheconclusionthatthe latter ismerelyanextension of the personality of the former, andthattheformercontrolsthepoliciesofthelatter.Added to this is the fact that Y Corporationcontrols the finances of X Corporation which ismerelyanadjunct,businessconduitoralteregoof Y Corporation. (CIR v. Norton & HarrisonCompany,G.R.No.L17618,Aug.31,1964)(2001BarQuestion)

E.CAPITALSTRUCTUREQ.Whatarethecomponentsofacorporation?A:

1. Corporators Those who compose acorporation,whetherasstockholdersormembers

2. Incorporators They are thosementioned in the Articles ofIncorporation asoriginally forming andcomposingthecorporationandwhoaresignatoriesthereof.

3. Directors and trustees The Board ofDirectors is the governing body in astock corporation while the Board ofTrusteesisthegoverningbodyinanonstockcorporation.

4. Corporate officers they are theofficers who are identified as such inthe Corporation Code, the Articles ofIncorporation, or the Bylaws of thecorporation.

5. Stockholders Owners of shares of

stockinastockcorporation.

6. Members Corporators of acorporationwhichhasnocapitalstock.Theyarenotownersofsharesofstocks,and their membership depends onterms provided in the articles ofincorporationorbylaws(Sec.91).

7. PromoterApersonwho,actingalone

or with others, takes initiative infoundingandorganizingthebusinessorenterprise of the issuer and receivesconsideration therefor. (Sec. 3.10, R.A.No.8799,SRC)

8. Subscriber personswho have agreedto take and pay for original, unissuedsharesofacorporationformedortobeformed.

9. Underwriterapersonwhoguaranteesona firmcommitmentand/ordeclaredbest effort basis the distribution andsaleofsecuritiesofanykindbyanother.

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(1)NUMBERANDQUALIFICATIONSOFINCORPORATORS

Q:Whatarethedistinctionsbetweencorporatorandincorporator?A:

INCORPORATOR CORPORATOR

SignatoryoftheArticlesofIncorporation

MayornotbesignatoryoftheArticlesofIncorporation

Doesnotceasetobeanincorporatoruponsaleofhisshares

Ceasetobeacorporatorbysaleofhissharesincaseofstockcorporation.Incaseofnonstockcorporation,whenthecorporatorceasestoeamember.

GR:5to15naturalpersonsXPN: In case ofcooperative,incorporatorof rural bank;corporationsole

Nolimit

Originallyformspartofthecorporation

Notnecessarily

GR:Filipinocitizenshipisnotarequirement.XPN:Whenengaged inabusiness which is partlyor wholly nationalizedwhere majority must beresidents

Dependingonthenatureofbusinessofthecorporation.Ifitisnationalized,thecitizenshipbecomesmaterial.

Q: What are the required number and thequalifications of incorporators in a stockcorporation?A:

1. Naturalperson2. GR:Not less than5butnotmore than

15XPN:Corporationsole

3. Oflegalage4. Majority must be residents of the

Philippines5. Eachmustownorsubscribe toat least

oneshare.(Sec.10)Q:Whocanbeincorporators?A:

GR: Only natural persons can beincorporators.XPN:When otherwise allowed by law, RuralBanks Act of 1992, where incorporated

cooperativesareallowed tobe incorporatorsofruralbanks.

Note: An incorporator can be corporator. Nonresidentsmaybeincorporatorsbecausethelawonlyrequires the majority to be residents of thePhilippines.An incorporatorremainstobeanincorporatorevenif he will later on cease to be a shareholder.However, an incorporator who ceases to hold asharecannotbeconsideredacorporator.

(2)MINIMUMCAPITALSTOCKANDSUBSCRIPTIONREQUIREMENTS

Q:Whatarethecapitalstockrequirements?A:

GR: There is nominimum authorized capitalstockaslongasthepaidupcapitalisnotlessthanP5,000.00XPN:Asprovidedbyspeciallaw(e.g.Banks).

Q:Isitrequiredthateachsubscriberpay25%ofeachsubscribedshare?A:No.It isonlyrequiredthatat least25%ofthesubscribedcapitalmustbepaid.

(3)CORPORATETERMQ:Whatisthetermofcorporateexistence?A:

GR: It depends on the period stated in theArticlesofIncorporation.XPN: Unless sooner dissolved or unless saidperiodisextended.

Note: Extension may be made for periods notexceeding(50)yearsinanysingleinstancebyanamendment of the articles of incorporation.However, extension must be made within 5years before the expiry date of the corporateterm. Extention must aldo comply withproceduralrequirementsforamendmentofAOI.

Q: What is the doctrine of relation or relatingbackdoctrine?A: Generally, the filing and recording of acertificate of extension after the term cannotrelate back to the date of the passage of theresolutionof the stockholders toextend the lifeof the corporation. However, the doctrine of



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relationappliesifthefailuretofiletheapplicationforextensionwithin the termof thecorporationisduetotheneglectoftheofficerwithwhomthecertificateisrequiredtobefiledortoawrongfulrefusalonhisparttoreceiveit(Aquino,PhilippineCorporateLawCompendium,2006). SHARESOFSTOC

(4)CLASSIFICATIONOFSHARES

Q:Whatarethekindsorclassificationsofshare?A:

1. Parvalueshares2. Noparvalueshares3. Commonshares4. Preferredshares5. Redeemableshares6. Treasuryshares7. Foundersshare8. Votingshares9. Nonvotingshares10. Convertibleshares11. Wateredstock12. Fractionalshare13. Sharesinescrow14. Overissuedstock15. Streetcertificate16. Promotionshare

Q:Whatareparvalueshares?A: Shares with a value fixed in the articles ofincorporation and the certificates of stock. Thepar value fixes the minimum issue price of theshares.Note: A corporation cannot sell less than the parvaluebutashareholdermaysellthesame lessthantheparvaluebecauseitishis.Shares sold below its par value is called wateredstocks.Q:Whatarenoparvalueshares?A:Theseareshareshavingnostatedvalueinthearticleofincorporation.Q: What are the limitations on no par valueshares?A:

1. Shareswhich are nopar value, cannothaveanissuedpriceoflessthanP5.00;

2. Theentireconsiderationforitsissuanceconstitutes capital so thatnopartof itshouldbedistributedasdividends;

3. They cannot be issued as preferredstocks;

4. They cannot be issued by banks, trustcompanies,insurancecompanies,publicutilities and building and loanassociation;

5. Thearticlesofincorporationmuststatethe fact that it issued no par valueshares as well as the number of saidshares;

6. Once issued, they are deemed fullypaidandnonassessable.(Sec.6)

Q:Whatarecommonshares?A:Theseareordinarilyandusually issued stockswithout extraordinary rights and privileges, andentitle the shareholder to a pro rata division ofprofits. It represents the residual ownershipinterest in the corporation. The holders of thiskind of share have complete voting rights andtheycannotbedeprivedofthesaidrightsexceptasprovidedbylaw.Q:Whatarepreferredshares?A:Theseentitletheshareholdertosomepriorityondistributionofdividendsandassetsoverthoseholdersofcommonshares. Q:Areholdersofpreferredsharescreditors?A: No. Holders thereof cannot compel thecorporation to give them dividends. Thepreference only applies once dividends aredeclared.Q:Whatarethekindsofpreferredshares?A:

1. Preferred shares as to assets Shareswhich gives the holder preference inthe distribution of the assets of thecorporationincaseofliquidation.a. Participating preferred shares

Entitled to participate with thecommon shares in excessdistribution

b. Nonparticipating preferred shares Not entitled to participate withthe common shares in excessdistribution.

2. PreferredsharesastodividendsShareswhichareentitled to receivedividendsonsaidsharetotheextentagreeduponbefore anydividends at all arepaid totheholdersofcommonstock.

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a. Cumulativepreferred shares If a

dividend isomitted inany year, itmust be made up in a later yearbefore any dividend may be paidonthecommonsharesinthelateryear.

b. Noncumulativepreferred sharesThere is no need to make up forundeclareddividends

Q: What is preferred cumulative participatingshareofstock?A:This isakindof sharewhichgives theholderpreference inthepaymentofdividendsaheadofcommon stockholders and to be paid thedividends due for prior years and to participatefurther with common stockholders in dividenddeclaration.Q:Whatareredeemableshares?A: These are shares of stocks issued by acorporationwhichsaidcorporationcanpurchaseor takeup from theirholdersuponexpiryof theperiodstatedincertificatesofstockrepresentingsaidshares(Sec.8).Q: What are unrestricted retained earnings(URE)?A: These are surplus profits not subject toencumbrance.Q: What are the limitations on redeemableshares?A:

1. Issuanceofredeemablesharesmustbeexpressly provided in the articles ofincorporation;

2. Thetermsandconditionsaffectingsaidshares must be stated both in thearticles of incorporation and in thecertificatesofstock;

3. Redeemablesharesmaybedeprivedofvoting rights in the articles ofincorporation, unless otherwiseprovidedintheCode.(Sec.6,par.6)

4. Redemption cannot be made if it willcauseinsolvencyofthecorporation.

Q:Whataretreasuryshares?A: Shares that have been earlier issued as fullypaid and have thereafter been acquired by the

corporation by purchase, donation, andredemptionorthroughsome lawfulmeans. (Sec.9)Toputsimply,thesearesharesreacquiredbythecorporation. They are called treasury sharesbecause they remain in the corporate treasuryuntilreissued.Moreimportantly,theyhaveno:

1. VotingRights2. Righttodividends.

Note: Treasury shares are not retired shares. Theydo not revert to the unissued shares of thecorporation but are regarded as property acquiredbythecorporationwhichmaybereissuedorresoldatapricetobefixedbytheBoardofDirectors(SECRules Governing Redeemable and Treasury Shares,CCPNo.11982).Q: What are the other means in which acorporationmayacquireitsownshares?A:

1. To collect or compromise unpaidindebtednesstothecorporation;

2. Toeliminatefractionalshares;3. To pay dissenting or withdrawing

stockholders entitled to payment fortheirshares;

4. Redemption;and5. Closecorporation.

Q:Whatarethelimitationsontreasuryshares?A:

1. Theymaybe reissuedor soldagainaslongastheyareheldbythecorporationastreasuryshares.

2. Cannotparticipateindividends.3. It cannot be represented during

stockholdersmeetings.4. The amount of URE equivalent to the

costof treasurysharesbeingheldshallbe restricted from being declared andissuedasdividends.

Note:Whentreasurysharesaresoldbelowitsparorissued value, there can be no watering of stockbecause such watering contemplates an originalissuanceofshares.Q:Whatarefounders'shares?A: Shares classified as such in the articles ofincorporation which may be given specialpreference in voting rights and dividendpayments.Butifanexclusiverighttovoteandbevoted for as director is granted, this privilege is



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subject to approval by the SEC, and cannotexceed5yearsfromthedateofapproval.(Sec.7)Q:Whatarevotingshares?A: Shares with a right to vote. If the stock isoriginally issued as voting stock, it may notthereafter be deprived of the right to votewithouttheconsentoftheholder.Q:Whatarenonvotingshares?A:Shareswithoutrighttovote.Thelawonlyauthorizesthedenialofvotingrightsin the case of redeemable shares and preferredshares,providedthatthereshallalwaysbeaclassor series of shares which have complete votingrights.Q:Whataretheinstanceswhenholdersofnonvotingsharesareallowedtovote?A:Theseredeemableandpreferredshares,whensuch voting rights aredenied, shallneverthelessbeentitledtovoteonthefollowingfundamentalmatters:

1. Amendmentofarticlesofincorporation2. Adoptionandamendmentofbylaws3. Sale,lease,exchange,mortgage,pledge

or other disposition of all orsubstantially all of the corporateproperty

4. Incurring,creatingorincreasingbondedindebtedness

5. Increaseordecreaseofcapitalstock6. Merger or consolidation of the

corporation with another corporationorothercorporations

7. Investment of corporate funds inanother corporation or business inaccordancewiththisCode

8. Dissolution of the corporation. (Sec. 6par.6)

Q:Whatareconvertibleshares?A:Ashare that ischangeableby thestockholderfromone class toanotheratacertainpriceandwithinacertainperiod.

GR:Stockholdermaydemandconversionathispleasure.XPN:Otherwise restrictedby thearticlesofincorporation.

Q:Whatisafractionalshare?A:Asharewithavalueoflessthanonefullshare.Q:Whataresharesinescrow?A:Subjecttoanagreementbyvirtueofwhichtheshare is deposited by the grantor or his agentwitha thirdperson tobekeptby thedepositaryuntiltheperformanceofcertainconditionorthehappening of a certain event contained in theagreement. Q:Whatisanoverissuedstock?A: It isastock issued inexcessoftheauthorizedcapitalstock;itisnullandvoid.Q:Whatisastreetcertificate?A: It is a stock certificate endorsed by theregisteredholder inblankandthetransfereecancommand its transfer to his name from issuingcorporation.Q:Whatispromotionalshare?A:Thisisashareissuedbypromotersorthoseinsome way interested in the company, forincorporating the company, or for servicesrendered in launching or promoting thewelfareofthecompany.Q:Areclassesofsharesinfinite?A:Yes.Therecanbeotherclassificationsas longastheyare indicated intheAOI,stockcertificateandnotcontrarytolaw.Q:Whomayclassifyshares?A:

1. Incorporators theclassesandnumberof shares which a corporation shallissue are first determined by theincorporatorsasstatedinthearticlesofincorporationfiledwiththeSEC.

2. Board of directors and stockholders after the corporation comes intoexistence; theymay be altered by theboardofdirectorsandthestockholdersby amending the articles ofincorporationpursuanttoSec.16.

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F.INCORPORATIONANDORGANIZATIONQ:Whatisincorporation?A: It is the performance of conditions, acts,deeds, and writings by incorporators, and theofficial acts, certification or records, which givethecorporationitsexistence.Q: What are the steps in the creation of acorporation?A:1. Promotion2. Incorporation(Sec10)3. Formalorganizationandcommencementof

businessoperations(Sec22)

(1)PROMOTERQ:Whoisapromoter?A:Isapersonwhobringsaboutorcausetobringabout the formation and organization of acorporationby:

1. bringing together the incorporators orthe persons interested in theenterprise,

2. procuring subscriptions or capital forthecorporationand

3. setting inmotion themachinerywhichleads to the incorporation of thecorporationitself.

Q:Whatistheliabilityofapromoter?A:Allpromoter(s)have jointpersonal liabilityforacorporationthatwasneverformed.Heremainsliableoncontractsevenafter incorporationeventhoughcorporationadoptsthecontract.Q:Arepromotersagentsofacorporation?A: No. Promoters are not agents of thecorporationbeforeitcomesintoexistence.Uponincorporation,thepracticeisfortheBODtopass a resolution ratifying the contractsenteredinto by the incorporators with the promoter.Then,theybecomeagentsofthecorporation.Q: What are the kinds of underwritingagreement?A:

1. Englishtheunderwritersellswhatthecorporationcannotsell

2. Firm Commitment the underwriterpurchases outright the securities andthenresellsthesame

3. Best Efforts the underwriter merelysellsforcommission.

(2)SUBSCRIPTIONCONTRACT

Q:Whatisasubscriptioncontract?A: It isacontract for theacquisitionofunissuedstock inanexisting corporationora corporationstill to be formed. It is considered as suchnotwithstandingthefactthatthepartiesrefertoitaspurchaseorsomeothercontract.(Sec.60)Q:Whatarethekindsofsubscriptioncontracts?A:

1. GR: Preincorporation subscription entered into before the incorporationand irrevocable for a period of six (6)months from the date of subscriptionunlessallothersubscribersconsentorifthe corporation failed tomaterialize. Itcannot also be revoked after filing theArticles of Incorporation with the SEC(Sec.61)

XPN:Whencreditorswillbeprejudicedthereby.

2. Postincorporation subscription

enteredintoafterincorporation.

(3)PREINCORPORATIONSUBCRIPTIONAGREEMENTS

Q:Whoarerequiredtopaytheirsubscriptioninfull?A:

1. Nonresident foreign subscribers uponincorporation must pay in full theirsubscriptions unless their unpaidsubscriptions are guaranteed by asurety bond orby an assumption by aresident stockholder through anaffidavitofliability.

2. Incaseofnoparvalueshares,theyare

deemedfullypaidandnonassessable.Q:Isastockholderentitledtothesharesofstocksubscribedalthoughnotfullypaid?

A:Yes.As longas thesharesarenotconsidereddelinquent,theyareentitledtoallrightsgranted



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toitwhetherornotthesubscribedcapitalstocksarefullypaid.Q: What are the distinctions betweensubscriptionandpurchase?A:

SUBSCRIPTION PURCHASEMaybemadebeforeorafterincorporation

Maybemadeonlyafterincorporation

Subscriberbecomesastockholderevenifhehas

notfullypaidthesubscription

Buyerdoesnotbecomea

stockholderuntilthefulfillmentofthe

termsofthesaleandregistrationthereofinthebooksofthe

corporationCannotbereleasedfromhis

subscriptionunlessallstockholdersagreetheretoandnocreditoristhereby

prejudiced

Thecorporationmayrescindorcancelthecontractfornonfulfillmentofthe

contractbythebuyerCorporatecreditorsmayproceedagainstthe

subscriberforhisunpaidsubscriptionincasetheassetsofthecorporationarenotsufficienttopay

theirclaims

Creditorsmaynotproceedagainstthebuyerfortheunpaidpriceasthereisnoprivityofcontractbetweenthem

Maybeinanyform,writtenororal,expressorimplied,andtherefore,notcoveredbytheStatuteofFrauds

Inpurchaseamountingtomorethan500pesos,theStatuteofFrauds

shallapplySubscriptionpriceareconsideredassetsofthecorporation,hence,

creditorsmaygoafterthem

Purchasepricedoesnotbecomeassetsof

thecorporationunlessfullypaid

Q: What is the rule on right to issuance ofcertificateofstock?A: A corporation may now, in the absence ofprovisions in theirbylaws to thecontrary,applypayments made by subscribersstockholders,eitheras:

1. Full payment for the correspondingnumberofsharesofstock,theparvalueof each of which is covered by suchpayment;or

2. Payment prorata to each and all theentirenumberofsharessubscribedfor.(Baltazarv.LingayenGulfElectricPowerCo., Inc,G.R.No. L1623638, June 30,1965)

(4)CONSIDERATIONFORSTOCKSQ: What are valid considerations in asubscriptionagreement?A:

1. Actualcashpaidtothecorporation;2. Property, tangible or intangible (i.e.

patents or copyrights), the requisitesareasfollows:a. The property is actually received

bythecorporationb. The property is necessary or

convenient for its use and lawfulpurposes

c. It must be subject to a fairvaluation equal to the par orissuedvalueofthestockissued

d. Thevaluationthereofshall initiallybe determined by theincorporators;and

e. The valuation is subject to theapprovalbytheSEC.

3. Labor or services actually rendered to

thecorporation

4. Prior corporate obligations orindebtedness

Note: The indebtedness involved is onethatisacknowledgedbytheboard.

5. Amounts transferred from unrestrictedretained earnings to stated capital (incaseofdeclarationofstockdividends)

6. Outstanding shares in exchange for

stocksintheeventofreclassificationorconversion.

Note: Promissory notes or future services are notvalidconsiderations.

(5)ARTICLESOFINCORPORATIONQ:Definearticlesofincorporation.A: Articles of Incorporation (AOI) is one thatdefines the charter of the corporation and thecontractual relationships between the State andthe corporation, the stockholdersand the State,and between the corporation and itsstockholders.

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Q:WhatarethecontentsofAOI?

A:NaPPlaTINumASONO1. Nameofcorporation2. Purpose/s, indicating the primary and

secondarypurposes3. Placeofprincipaloffice

Note:Todeterminepropervenueinfilingofanaction

4. Termofexistence5. Names, nationalities and residences of

Incorporators6. Numberofdirectorsor trustees,which

shallnotbe less than5normore than15,exceptforcorporationsole

7. Names,nationalities,and residencesofthe personswho shallAct as directorsor trustees until the first regular onesareelectedandqualified

8. IfaStockcorporation,theamountofitsauthorized capital stock, number ofshares and in case the shares are parvalue shares, the par value of eachshare;

9. Names,nationalities,numberofshares,and the amounts subscribed and paidby each of the Original subscriberswhich shall not be less than 25% ofauthorizedcapitalstock;

10. IfNonstock,theamountofcapital,thenames,residences,andamountpaidbyeachcontributor,whichshallnotbelessthan25%oftotalsubscription;nameoftreasurerelectedbysubscribers;and

11. Other matters as are not inconsistentwith law and which the incorporatorsmay deem necessary and convenient.(Sec.14)

Q:WhatarethelimitationsintheamendmentofAOI?A:

1. Theamendmentmustbefor legitimatepurposes andmust not be contrary toother provisions of the CorporationCodeandSpeciallaws;

2. ApprovedbymajorityofBOD/BOT;3. Vote orwritten assent of stockholders

representing 2/3 of the outstandingcapitalstockor2/3ofmembers;

4. The original and amended articlestogether shall contain all provisionsrequired by law to be set out in thearticlesof incorporation. Sucharticles,as amended, shall be indicated byunderscoringthechange/smade;

5. Certification under oath by corporatesecretary and a majority of theBOD/BOT stating the fact that saidamendment/shavebeendulyapprovedbytherequiredvoteofthestockholdersormembers, shallbe submitted to theSEC;

6. MustbeapprovedbySEC.(Sec.16);7. Must be accompanied by a favorable

recommendation of the appropriategovernmentagencyincasesof:a. Banksb. Banking and quasibanking

institutionsc. Buildingandloanassociationsd. Trust companies and other

financialintermediariese. Insurancecompaniesf. Publicutilitiesg. Educationalinstitutionsh. Other corporations governed by

speciallaws.(Sec.17[2])Q:WhendoesamendmentofAOItakeeffect?A: Upon approval by the SEC. That is uponissuanceofamendedcertificateofincorporation.Q: Is it necessary that the approval of SEC beexpress?A: No, implied approval of SEC is also allowed.Thus amendmentmay also take effect from thedateoffilingwithSEC ifnotacteduponwithin6months from the date of filing for a cause notattributabletothecorporation.Q:WhataretheprovisionsofAOIthatcannotbeamended?A:Thosemattersreferringtoaccomplishedfacts,excepttocorrectmistakes.E.g.

1. Namesofincorporators2. Names of original subscribers to the

capital stock of the corporation andtheirsubscribedandpaidupcapital

3. Namesoftheoriginaldirectors4. Treasurer elected by the original

subscribers5. Memberswhocontributedtotheinitial

capitalofthenonstockcorporation6. Witnesses to and acknowledgement

withAOI



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Q: What are the grounds for the rejection ordisapprovalofAOIoramendmenttheretobytheSEC?A:

1. Ifsuchisnotsubstantiallyinaccordancewiththeformprescribed

2. The purpose/s of the corporation arepatently unconstitutional, illegal,immoral, or contrary to governmentrulesandregulations

3. Thetreasurersaffidavitconcerningtheamount of capital stock subscribedand/orpaidisfalse

4. The required percentage of ownershipof the capital stock to be owned byFilipino citizenshasnotbeen compliedwith.(Sec.17)

Note: The above grounds are not exclusive. ThegroundsaccordingtoP.D.No.902Aare:

1. Fraud in procuring its certificate of

incorporation;2. Seriousmisrepresentationas towhat the

corporation can do or its doing to thegreat prejudice of, or damage to, thegeneralpublic;

3. Refusal to complywith, or defiance or alawful order of the SEC restraining thecommissionof actswhichwould amounttoagraveviolationofitsfranchise;

4. Continuous inoperation foraperiodofatleast five (5)yearsaftercommencing thetransactionofitsbusiness(Sec.22);

5. Failure to file the bylaws within therequiredperiod;

6. Failuretofilerequiredreports.Q: IsthereanautomaticrejectionoftheAOIoranyamendmentthereto?A: No, the SEC shall give the incorporators areasonable time within which to correct ormodify theobjectionableportionsof theAOIoramendment.(Sec.17[1])Q: What is the effect of nonuse of corporatecharter and continuous inoperation of acorporation?A:

1. Failure to organize and commencebusiness within 2 years fromincorporation its corporate powersceases and the corporation shall bedeemeddissolve.

2. Continuous inoperation for at least 5

years ground for the suspension or

revocation of corporate franchise orcertificateofincorporation(Sec.22).

Note:Theaboveshallnotbeapplicableifitisduetocauses beyond the control of the corporation asdeterminedbySEC.Q:Isthedissolutionorrevocationduetofailuretooperateorinoperationautomatic?A:No,SEC isoftheopinionthatthereshouldbeproper proceedings for the revocation ofAOI incompliancewithdueprocess.

(6)CORPORATENAMEQ: What are the limitations in adoptingcorporatename?A:

1. The proposed name is identical ordeceptively or confusingly similar tothatofanyexistingcorporation

2. Anyothernameprotectedbylaw;or3. Patently deceptive, confusing or

contrarytoexistinglaws.(Sec.18)4. The corporate name shall contain the

word Corporation or its abbreviationCorp.orIncorporated,orInc.

5. ThepartnershipnameshallcontainthewordCompanyorCo.

6. For limited partnership, the wordLimitedorLtd.Shallbeincluded

7. If thenameor surnameof aperson isused as part of a corporate orpartnership name, the consent of saidperson or his heirsmust be submittedexcept if that person is a stockholder,member,partneroradeclarednationalhero.

8. Thenameofadissolved firm shallnotbe allowed to be used by other firmswithin3yearsaftertheapprovalofthedissolution of the corporation by SEC,unlessallowedby the laststockholdersrepresenting at least majority of theoutstanding capital stock of thedissolved firm (SEC MemorandumCircular14).

Q: Ifacorporationchanges itscorporatename,isitconsideredanewcorporation?A:No, it isthesamecorporationwithadifferentname,anditscharacterisinnorespectchanged.(Republic Planters Bank v. CA, G.R. No. 93073,Dec21,1992)

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(7)REGISTRATIONANDISSUANCEOFCERTIFICATEOFINCORPORATION

Q:Whatare thebasic requirements fora stockcorporation?A:

1. Nameverificationslip2. AOIandbylaws3. Treasurersaffidavit4. Registrationdatasheet5. Proof of payment of subscription like

BankCertificateofDeposit if thepaidupcapitalisincash

6. Favorable endorsement from propergovernment agency in case of specialcorporations.

Q:Whatisthecontentofatreasurersaffidavit?A: That at least 25% of the authorized capitalstockofthecorporationhasbeensubscribed,andat least 25% of the total subscription has beenfully paid in actual cash and/or property; suchpaidupcapitalbeingnotlessthanP5,000.Q:Whatisthedoctrineofcorporateentity?A:

GR:Acorporationcomesintoexistenceuponthe issuance of the certificate ofincorporation. Then and only then will itacquireajuridicalpersonality.

XPN: Sec. 112 clearly states that from andafterthefilingwiththeSECofthearticlesofincorporation, the chief archbishop shallbecomecorporationsole

(8)ELECTIONOFDIRECTORSANDTRUSTEES

Q: Is permanent representation allowed in theBOD?A: No, the board of directors of corporationsmustbeelectedfromamongthestockholdersormembersdirectorseveryyear.Estoppeldoesnotset in to legitimize what is wrongful. (GraceChristianHighSchoolv.CA,G.R.No.108905,Oct.23,1997)Q:What are the limitations on the election ofdirectors/trustees?A:

1. At a meeting of stockholders ormembers called for the election ofdirectors or trustees, there must be

present either in person or byrepresentative authorized to act bywritten proxy, the owners of themajority of the outstanding capitalstock or majority of the membersentitledtovote.

2. The election must be by ballot ifrequested;

3. Astockholdercannotbedeprivedinthearticles of incorporation or in the bylawsofhisstatutoryrighttouseanyofthemethodsofvotingintheelectionofdirectors;

4. Nodelinquentstockshallbevoted;5. The candidates receiving the highest

number of votes shall be declaredelected.(Sec.24)

Q: Is a provision in the bylaws of thecorporation declaring a person engaged in acompetingbusinessineligiblefornominationforelectionstotheboardofdirectorsvalid?A: Yes, provided that before such nominee isdisqualified, he should be given due process toshow that he is not covered by thedisqualification (Gokongwei v. SEC, G.R. No. L45911,Apr.11,1979).Note: The disqualification of a competition frombeingelected to theboard isa reasonableexerciseofcorporateauthority.Q:Whohasjurisdictionoverelectioncontestsinstockandnonstockcorporation?A: As amended by R.A. 8799 (The SecuritiesRegulation Code), the jurisdiction of the SECunderSec.5P.D.No.902A (SECReorganizationAct) is now transferred to Courts of GeneralJurisdiction (RegionalTrialCourt).Thus,RTCnowhasjurisdictionoverelectioncontest.Q: In case where there are 2 lists of BODsubmittedtoSEC,whichoneiscontrolling?A: It is the list of directors in the latest generalinformation sheet as filedwith the SECwhich iscontrolling. (Premium Marble Resources, Inc. v.CA,G.R.No.96551,Nov.4,1996)Q: What is the next step after the election ofdirectors?A: The directors must formally organize by theelectionofcorporateofficers.(Sec.25)



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Q:Whoarethecorporateofficers?A:

1. President Must be a director at thetimetheassumesoffice,notatthetimeofappointment;

2. Treasurer May or may not be adirector;asamatterofsoundcorporatepractice,mustbearesident

3. Secretary Need not be a directorunlessrequiredbythebylaws;mustbearesidentandcitizenofthePhilippines;(Sec.25);and

4. Suchotherofficersasmaybeprovidedinthebylaws.

Note: An officer is also considered a corporateofficer if he has been appointed by the board ofdirectors. (Easycall Communications Phils., Inc. v.EdwardKing,G.R.No.145901,Dec.15,2005)Anytwoormorepositionsmaybeheldconcurrentlybythesameperson,exceptthatnooneshallactaspresident and secretary or as president andtreasureratthesametime.(Sec.25)Q: What are the distinctions between acorporateofficerandacorporateemployee?A:

CORPORATEOFFICERCORPORATEEMPLOYEE

PositionisprovidedforinthebylawsorundertheCorporationCode.

Employedbytheactionofthemanagingofficerofthecorporation.

RTCactingasaspecialcommercialcourthasjurisdictionoverintracorporatecontroversies.

LAhasjurisdictionincaseoflabordisputes.

(9)ADOPTIONOFBYLAWS

Q:Whatarebylaws?A:Rulesand regulationsorprivate lawsenactedby the corporation to regulate, govern andcontrol itsownactions,affairsandconcernsandofitsstockholdersormembersanddirectorsandofficersinrelationtheretoandamongthemselvesintheirrelationtoit.Q:Whataretherequisitesforthevalidityofbylaws?

A: 1. Must be consistent with the

CorporationCode,otherpertinent lawsandregulations

2. Must not be contrary to morals andpublicpolicy

3. Must not impair obligations andcontracts or property rights ofstockholders

4. Mustbeconsistentwith the charterorarticlesofincorporation

5. Mustbereasonable6. Mustbeofgeneralapplicationandnot

directedagainstaparticularindividual.

Q: In caseof conflictbetween thebylaws andthearticlesofincorporationwhichprevails?A: The AOI prevails because the bylaws areintendedmerelytosupplementtheformer.Q:Whatisthebindingeffectofbylaws?A:

1. As tomembersandcorporationTheyhavetheforceofcontractbetweenthemembersthemselves.

2. As to third persons They are notbound to know the bylawswhich aremerelyprovisionsfor thegovernmentofacorporationandnoticetothemwillnotbepresumed.

Note: Bylaws have no extracorporate forceand are not in the nature of legislativeenactments so far as third persons areconcerned.

Q:Givetheproceduresinadoptingbylaws.A: The bylawsmay be adopted before or afterincorporation. In all cases, the Bylaws shall beeffectiveonlyupon the issuanceby theSECofacertificationthatthebylawsarenotinconsistentwiththeAOI.

1. Pre incorporation It shall beapproved and signed by all theincorporatorsandsubmittedtotheSEC,togetherwithAOI.

2. Postincorporationa. Vote of the majority of the

stockholders representing theoutstanding capital stock ormembers;

b. Bylaws shall be signed by thestockholders or members votingforthem;

c. It shall be kept in the principaloffice of the corporation andsubject to the inspection of thestockholders ore members duringofficehours

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d. Copythereof,dulycertifiedby theBODorBOT countersignedby thesecretary of the corporation, shallbe filedwith theSECand shallbeattached with the original AOI.(Sec.46)

Q:Whatistheeffectofnonfilingofthearticlesofincorporationwithintherequiredperiod?A: Failure to submit the bylawswithin 30 daysfrom incorporation does not automaticallydissolvethecorporation.Itismerelyagroundforsuspension or revocation of its charter afterpropernoticeandhearing.Thecorporation is,atthe very least, a de facto corporation whoseexistence may not be collaterally attacked.(Sawadjaanv.CA,G.R.No.142284,June8,2005)Q:Whatarethecontentsofbylaws?A:

1. Time, place andmanner of calling andconducting regular or specialmeetingsofdirectorsortrustees

2. Time and manner of calling andconducting regular or specialmeetingsofthestockholderormembers

3. The required quorum in meeting ofstockholders or members and themannerofvotingtherein

4. The form for proxies of stockholdersandmembersandthemannerofvotingthem

5. The qualification, duties andcompensation of directors or trustees,officersandemployees

6. Time forholding theannualelectionofdirectors or trustees and themode ormannerofgivingnoticethereof

7. Mannerofelectionorappointmentandthe term of office of all officers otherthandirectorsortrustees

8. Penaltiesforviolationofthebylaws9. In case of stock corporations, the

mannerofissuingcertificates10. Suchothermattersasmaybenecessary

for the proper or convenienttransaction of its corporate businessandaffairs.(Sec.47)

Q:Whatarethewaysofamending,repealingoradoptingnewbylaws?A:

1. Amendment may be made bystockholders togetherwith theBoardby majority vote of directors and

owners of at least a majority of theoutstandingcapitalstock/members;or

2. By theboardonlyafterduedelegationby the stockholders owning 2/3 of theoutstanding capital stock/members.Provided,thatsuchpowerdelegatedtothe board shall be considered asrevokedwheneverstockholdersowningat least majority of the outstandingcapitalstockormembers,shallvoteataregularorspecialmeeting.(Sec.48)

Q:What are the distinctions betweenAOI andbylaws?A:

AOI BYLAWS

Conditionprecedentintheacquisitionofcorporateexistence

Conditionsubsequent;itsabsencemerelyfurnishesagroundfortherevocation

ofthefranchiseEssentiallyacontract

betweenthecorporationandthe

stockholders/members;betweenthestockholders/

memberinterse,andbetweenthe

corporationandtheState;

Fortheinternalgovernmentofthe

corporationbuthastheforceofacontractbetweenthecorporationandthestockholders/members,

andbetweenthestockholdersandmembers;

Executedbeforeincorporation

Maybeexecutedafterincorporation.Sec.46

allowsthefilingofthebylawssimultaneouslywith

theArticlesofIncorporation

Amendedbyamajorityofthe

directors/trusteesandstockholdersrepresenting2/3oftheoutstanding

capitalstock,or2/3ofthemembersincaseofnonstockcorporations

MaybeamendedbyamajorityvoteoftheBODandmajorityvoteof

outstandingcapitalstockoramajorityofthememberinnonstockcorporation

Powertoamend/repealarticlescannotbedelegatedbythestockholders/memberstothe

boardofdirectors/trustees

Powertoamendorrepealbylawsoradoptnewbylawsmaybedelegatedbythe2/3oftheoutstandingcapitalstockor2/3ofthemembersinthecaseofnonstockcorporation



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G.CORPORATEPOWERSQ:Whatarethekindsofpowersofcorporation?A:

1. Express powers Granted by law,Corporation Code, and its Articles ofIncorporation or Charter, andadministrativeregulations

2. Inherent/incidental powers Not

expressly statedbutaredeemed tobewithin the capacity of corporateentities.

3. Implied/necessary powers Exists as a

necessary consequenceof theexerciseof the express powers of thecorporation or the pursuit of itspurposesasprovidedforintheCharter

(1)GENERALPOWERS

Q: What are the general powers of acorporation?A:SuSuCoABSPMEDPO

1. ToSUeandbesued2. OfSUccession3. ToadoptanduseofCorporateseal4. ToamenditsArticlesofIncorporation5. ToadoptitsBylaws6. For Stock corporations: issue and sell

stocks to subscribers and treasurystocks; for nonstock corporations:admitmembers

7. To Purchase, receive, take or grant,hold, convey, sell, lease, pledge,mortgage and deal with real andpersonalproperty,securitiesandbonds;

8. ToEnterintomergerorconsolidation9. To Make reasonable Donations for

public welfare, hospital, charitable,cultural, scientific, civic or similarpurposes,provided thatnodonation isgiventoanya. Politicalparty,b. Candidateandc. Partisanpoliticalactivity.

10. To establish Pension, retirement, and

other plans for the benefit of itsdirectors, trustees, officers andemployeesbasisofwhich isthe laborcode

11. To exercise Other powers essential ornecessarytocarryoutitspurposes.

Q: When does the power to sue and be suedcommence?A: Upon issuance by SEC of Certificate ofIncorporation.Q:Whatarethelimitationsofthecorporationindealingwithproperty?A:

1. In dealingwith any kind of property, itmust be in the furtherance of thepurpose for which the corporation wasorganized.

2. Constitutional limitations cannotacquirepubliclandsexceptbylease.With regard toprivate land,60%of thecorporation must be owned by theFilipinos, samewith theacquisitionofacondounit.Note: No law disqualifies a person frompurchasing shares in a landholdingcorporation even if the latter will exceedthe allowed foreign equity, what the lawdisqualifies isthecorporationfromowningland.

3. SpeciallawsubjecttotheprovisionsoftheBulkSalesLaw

Q:Whataretherequisitesforavaliddonation?A:

1. Donationmustbereasonable2. Must be for valid purposes including

public welfare, hospital, charitable,cultural, scientific, civic or similarpurposes

3. Mustnotbeanaidinanya. Politicalparty,b. Candidateandc. Partisanpoliticalactivity

4. Donation must bear a reasonablerelation to the corporations interestandnotbesoremoteandfanciful.

Q:Canacorporationactassuretyorguarantor?A:

GR:No.XPN: Such guaranty may be given in theaccomplishment of any object forwhich thecorporation was created, or when theparticular transaction isreasonablynecessaryorproperintheconductofitsbusiness.

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Q: What are the specific powers of acorporation?A:

1. Power to extend or shorten corporateterm.(Sec.37)

2. Increase or decrease corporate stock.(Sec.38)

3. Incur, create, or increase bondedindebtedness.(Sec.38)

4. Denypreemptiveright.(Sec.39)5. Sell, dispose, lease, encumber all or

substantially all of corporate assets.(Sec.40)

6. Purchaseoracquireshares.(Sec.41)7. Invest corporate funds in another

corporation or business for otherpurpose other than primary purpose.(Sec.42)

8. Declare dividends out of unrestrictedretainedearnings.(Sec.43)

9. Enter into management contract withanother corporation (not with anindividual or a partnership withingeneral powers) whereby onecorporation undertakes to manage allorsubstantiallyallofthebusinessoftheother corporation for a period notlonger than five (5) years for any oneterm.(Sec.44)

10. Amend Articles of Incorporation. (Sec.16)

(2)SPECIFICPOWERS

(a)POWERTOEXTENDORSHORTEN

CORPORATETERMNote:Maybeusedasmeanstovoluntarilydissolveacorporation

Q: What are the procedural requirements inextending/shorteningcorporateterm?A:

1. MajorityvoteoftheBODorBOT;2. Ratification by 2/3 of the SH

representing outstanding capital stockor by at least 2/3 of the members incaseofnonstockcorporation;

3. Written notice of the proposed actionand of the time and place of themeeting shall be addressed to eachstockholder ormember at his place ofresidenceasshownonthebooksofthecorporation and deposited to theaddressee in the post office withpostageprepaid,orservedpersonally;

4. Copy of the amended AOI shall besubmitted to the SEC for its approval;and

5. In case of special corporation, afavorable recommendation ofappropriate government agency. (Sec.37)

Note: The extension must be done during thelifetimeof the corporationnotearlier than5 yearsprior to the expiry date unless exempted. Theextensionmustnotexceed50years.After the term had expiredwithout extension, thecorporation is dissolved. The remedy of thestockholdersisreincorporation.Any dissenting stockholder may exercise hisappraisal right in case of shortening or extendingcorporateterm(Sec.37).(b)POWERTOINCREASEORDECREASECAPITAL

STOCKQ: What are the procedural requirements inincreasingordecreasingcapitalstock?A:

1. MajorityvoteoftheBOD;2. Ratification by stockholders

representing 2/3 of the outstandingcapitalstock;

3. Writtennoticeoftheproposedincreaseordiminutionofthecapitalstockandofthetimeandplaceofthestockholdersmeetingatwhichtheproposedincreaseordiminutionof thecapitalstockmustbeaddressedtoeachstockholderathisplace of residence as shown on thebooksofthecorporationanddepositedtotheaddresseeinthepostofficewithpostageprepaid,orservedpersonally

4. Acertificateinduplicatemustbesignedby a majority vote of the directors ofthe corporation and countersigned bythe chairman and the secretary of thestockholdersmeeting,settingforth:a. That the foregoing requirements

havebeencompliedwith;b. The amount of increase or

diminutionofthecapitalstock;c. Ifan increaseof the capital stock,

the amount of capital stock ornumber of shares of no par stockactually subscribed, the names,nationalitiesand residencesof thepersons subscribing, the amount



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of capital stock or number of nopar stock subscribedbyeach,andthe amount paid by each on hissubscriptionincashorproperty,orthe amount of capital stock ornumber of shares of no par stockallottedtoeachstockholderifsuchincrease is for the purpose ofmaking effective stock dividendauthorized;

d. The amount of stock representedatthemeeting;and

e. The vote authorizing the increaseordiminutionofthecapitalstock

Note:The increaseordecrease in the capital stockor the incurring, creating or increasing bondedindebtednessshallrequirepriorapprovaloftheSEC.Q: What is the additional requirement withrespecttotheincreaseofcapitalstock?A:TheapplicationtobefiledwiththeSECshallbeaccompanied by the sworn statement of thetreasurerofthecorporation,showingthatatleast25% of the amount subscribed has been paideither incashorpropertyorthattherehasbeentransferred to the corporation property thevaluation of which is equal to 25% of thesubscription.Q:What shallbe thebasisof the required25%subscription?A: Itshallbebasedon theadditionalamountbywhichthecapitalstock increasedandnotonthetotalcapitalstockasincreased.Note:Therewillbenotreasurersaffidavitincaseofdecrease in capital stock. Corporation need notexhaust itsoriginal capitalbefore increasing capitalstock.Q: What is the additional requirement withrespecttothedecreaseofcapitalstock?A:The samemustnotprejudice the rightof thecreditors.Q:Whatarethewaysofincreasingordecreasingthecapitalstock?A:Byincreasingordecreasingthe:

1. Numberofsharesandretainingtheparvalue;

2. Par value of existing shares withoutincreasingordecreasingthenumberofshares;

3. Number of shares and increasing ordecreasingtheparvalue.

Q:The stockholdersofPeoplePower, Inc. (PPI)approved two resolutions in a specialstockholders'meeting:

a) Resolution increasing the authorizedcapitalstockofPPI;and

b) Resolution authorizing the Board ofDirectors to issue, for cash payment,the new shares from the proposedcapital stock increase in favor ofoutside investors who are nonstockholders.

The foregoing resolutions were approved bystockholders representing 99% of the totaloutstandingcapitalstock.ThesoledissenterwasJimmyMoratowhoowned1%ofthestock.Are the resolutions binding on the corporationand its stockholders including Jimmy Morato,thedissentingstockholder?A: No. The resolutions are not binding on thecorporationand itsstockholders including JimmyMorato.While these resolutionswere approvedby the stockholders, the directors' approval,which is required by law in such case, doesnotexist.(1998BarQuestion)Q: What remedies, if any, are available toMorato?A: JimmyMoratocanpetition theSecuritiesandExchange Commission to declare the two (2)resolutions,aswellasanyandallactionstakenbytheBoardofDirectorsthereunder,nullandvoid.(1998BarQuestion)Q:Whatisbondedindebtedness?

A: It isa longterm indebtednesssecuredbyrealorpersonalproperty(corporateassets).Note: The requirements for the power to incur,createor increasebonded indebtedness isalso thesamewiththepowertoincreaseordecreasecapitalstock.Not all borrowings of the corporation needstockholders approval. Only bonded indebtednessrequiressuchapproval.

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(c)POWERTODENYPREEMPTIVERIGHTQ:Whatispreemptiveright?A: It is the preferential right of shareholders tosubscribe toall issuesordispositionofsharesofany class in proportion to their presentshareholdings.(Sec.39)Q:Whatisthepurposeofpreemptiveright?A: To enable the shareholder to retain hisproportionate control in the corporation and toretainhisequityinthesurplus.Q: Istherepreemptiverightonthereissuanceoftreasuryshares?A: Yes. When a corporation reacquires its ownshareswhichtherebybecometreasuryshares,allshareholders are entitled to preemptive rightwhen the corporation reissues or sells thesetreasury shares. The reissuance of treasuryshares is not among the exception provided bySec.39whenpreemptiverightdoesnotexist.Q: May preemptive right be waived by thestockholder?A:Yeswhen the stockholder fails toexercisehispreemptive right after being notified and givenanopportunitytoavailofsuchright.Q: Is the preemptive right of a stockholdertransferable?A:Yes,unlessthereisanexpressrestrictionintheAOI.Q: Suppose that X Corporation has alreadyissued the 1000 originally authorized shares ofthe corporation so that its Board of DirectorsandstockholderswishtoincreaseX'sauthorizedcapital stock. After complying with therequirements of the law on increase of capitalstock,X issuedanadditional1000sharesofthesamevalue.Assume that stockholderApresentlyholds200outofthe1000originalshares.WouldAhaveapreemptive right to 200 of the new issue of1000shares?Why?A:Yes,Awouldhaveapreemptive right to200of the new issue of 1000 shares. A is astockholder of record holding 200 shares in XCorporation.According to theCorporationCode,eachstockholderhasthepreemptiverighttoall

issues of shares made by the corporation inproportion to thenumberof sharesheholdsonrecordinthecorporation.Q:WhenshouldstockholderAexercisethepreemptiveright?A: Preemptive right must be exercised inaccordancewith theArticlesof IncorporationortheByLaws.When theArticlesof Incorporationand theByLaws are silent, theBoardmay fix areasonable time within which the stockholdersmayexercisetheright.

Q: Assuming a stockholder disagrees with theissuance of new shares and the pricing for theshares,maythestockholderinvokehisappraisalrights and demand payment for hisshareholdings?A:No,thestockholdermaynotexerciseappraisalrightbecause thematter thathedissented fromis not one of those where right of appraisal isavailableunder theCorporationCode. (1999BarQuestion)Q:Whencan thecorporationdenypreemptiveright?A:Thecorporationcandenypreemptive right ifthe articles of incorporation or amendmenttheretodeniessuchright.Q:Distinguishpreemptiverightfromrightoffirstrefusal.A:

PREEMPTIVERIGHTRIGHTOFFIRST

REFUSAL

Maybeexercisedevenwhenthereisnoexpress

provisionoflaw

Arisesonlybyvirtueofcontractual

stipulationsbutisalsograntedundertheprovisionsonclose

corporationPertainstounsubscribedportionoftheauthorizedcapitalstock.Arightthatmaybeclaimedagainst

thecorporation.Itincludestreasuryshares.

Exercisableagainstanotherstockholderofthecorporationofhis

sharesofstock

Q:Whataretheinstanceswhenpreemptiverightisnotavailable?A:

1. Sharestobeissuedtocomplywithlawsrequiring stock offering or minimumstockownershipbythepublic;



130

2. Shares issued in good faith with theapproval of the stockholdersrepresenting 2/3 of the outstandingcapital stock in exchange for propertyneededforcorporatepurposes;

3. Shares issued inpaymentofpreviouslycontracteddebts;

4. IncasetherightisdeniedintheArticlesofIncorporation;

5. Waiveroftherightbythestockholder.(d)SELL,LEASE,EXCHANGE,MORTGAGE,PLEDGEOROTHERDISPOSITION(SLEMPO)OFALLORSUBSTANTIALLYALLOFCORPORATEASSETS

Q:Whataretheproceduralrequirements?

A:

1. MajorityvoteoftheBODorBOT2. Ratification by stockholders

representingatleast 2/3 of theoutstandingcapital stockorbyat least2/3 of the members in case of nonstockcorporation

3. Written notice of the proposed actionand of the time and place of themeetingaddressedtoeachstockholderormemberathisplaceof residenceasshownonthebooksofthecorporationand deposited to the addressee in thepost office with postage prepaid, orservedpersonally.(Sec.40)

Note:Thesaleof theassetsshallbesubject to theprovisions of existing laws on illegal combinationsandmonopolies.After such authorization or approval by thestockholders the board may, nevertheless, in itsdiscretion,abandonsuchSLEMPO.(Sec.40)Anydissentingstockholder shallhave theoption toexercisehisappraisalright.Q: What is meant by substantially all ofcorporateassets?A:Ifthecorporationwouldbe:

1. rendered incapable of continuing thebusiness,or

2. accomplishing thepurpose forwhich itwasincorporated.

Q: When may the corporation forgo theratificationbySH/members?A:

1. If sale is necessary in the usual andregularcourseofbusiness;

2. If the proceeds of the sale or otherdispositionofsuchpropertyandassetsare tobeappropriated for theconductoftheremainingbusiness;

3. If the transactiondoesnot coverallorsubstantiallyalloftheassets.

Q: What is the effect of sale of all orsubstantiallyallofassetsofone corporation toanothercorporation?A:

GR: The selling corporation of all orsubstantially all of the assets of thepurchasingcorporationshallnotbe liable forthedebtsofthetransferorcorporation.XPN:1. Express or implied assumption of

liabilities;2. Mergerorconsolidation;3. If the purchase was in fraud of

creditors;4. If the purchaser becomes a

continuationoftheseller;5. If there is violation of the Bulk Sales

Law.

(e)POWERTOACQUIREOWNSHARESQ:Canacorporationacquireitsownshares?A:

GR:Intheabsenceofstatutoryauthority,thecorporationcannotacquireitsownsharesXPN:SECOpinion,Oct.12,1992,imposedthefollowingconditionsonitsexercise:1. Thecapitalofthecorporationmustnot

beimpaired;2. Legitimate and proper corporate

objectiveisadvanced;3. Condition of the corporate affairs

warrantsit;4. Transaction isdesignedandcarriedout

ingoodfaith5. Interestof creditorsnot impaired, that

is, not violative of the trust funddoctrine.

Note:Sec.41oftheCoderequiresthat:

1. theacquisitionshouldbe fora legitimatecorporatepurpose;and

2. there should be unrestricted retainedearnings[URE].

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Q: What are the instances where corporationmayacquireitsownshares?A:

1. To eliminate fractional shares out ofstockdividends;

2. To collect or compromise anindebtednesstothecorporation,arisingout of unpaid subscription, in adelinquency sale and to purchasedelinquentsharessoldduringsaidsale;

3. To pay dissenting or withdrawingstockholders (in the exercise of thestockholdersappraisalright);

4. Toacquiretreasuryshares;5. Redeemable shares regardless of

existenceofretainedearnings;6. Toeffectadecreaseofcapitalstock;7. In close corporations, when there is a

deadlock in the management of thebusiness.

(g)INVESTCORPORATEFUNDSINANOTHERCORPORATION OR BUSINESS FOR OTHERPURPOSEOTHERTHANPRIMARYPURPOSEQ:Whataretherequirements? A:

1. Approval by the majority vote of theBODorBOT

2. Ratification by stockholdersrepresenting at least 2/3 of theoutstandingcapital stockorbyat least2/3 of the members in case of nonstockcorporation

3. Ratificationmustbemadeatameetingdulycalledforthepurposes,and

4. Prior written notice of the proposedinvestment and the time and place ofthemeetingshallbemadeaddressedtoeachstockholderormemberbymailorbypersonalservice.

Note: Investment of a corporation in a businesswhich is in line with its primary purpose requiresonlytheapprovaloftheboard.Anydissentingstockholdershallhaveappraisalright.

(f)POWERTODECLAREDIVIDENDSOUTOFUNRESTRICTEDRETAINEDEARNINGS(URE)

Q:Whataretherequirements? A:

1. Existence of unrestricted retainedearnings

2. Resolutionoftheboard

3. In caseof stockdividend, resolutionoftheboardwiththeconcurrenceofvotesrepresenting2/3ofoutstandingcapital.

Q:Whatareunrestrictedretainedearnings?A: These are retained earnings which have notbeen reserved or set aside by the board ofdirectorsforsomecorporatepurpose.Q:Whoareentitledtoreceivedividends?A:Thestockholdersofrecorddateinsofarasthecorporation is concerned; if there is no recorddate, thestockholdersat the timeofdeclarationofdividends(notatthetimeofpayment).Note: Incaseof transfer,dividendsdeclaredbeforethe transferof sharesbelong to the transferorandthose declared after the transfer belongs to thetransferee.Q:Whoareentitledtoreceivedividendsincaseofmortgagedorpledgedshares?A:

GR: The mortgagor or the pledgor has therighttoreceivethedividends.XPN: When the mortage or pledge isrecorded inthebooksofthecorporation, insuchacasethenthemortgageeorpledgeeisentitledtoreceivethedividends.

Q:Whataretheformsofdividends?A:

1. CashNote: Cash dividends due on delinquentstock shall first be applied to the unpaidbalance on the subscription plus cost andexpenses.

2. StockNote:Stockdividendsarewithheldfromthedelinquent stockholder until his unpaidsubscriptionisfullypaid.

3. PropertyNote:StockholdersareentitledtodividendsPRORATA based on the total number ofshares and not on the amount paid onshares.



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Q:Whenmaycorporationdeclaredividends?A:

GR:Evenifthereareexistingprofits,BODhasdiscretion to determine whether dividendsaretobedeclared.XPN: Stock corporations are prohibited fromretainingsurplusprofits inexcessof100%oftheirpaidincapitalstock.XPNtoXPN:1. Definite corporate expansion projects

approvedbytheboardofdirectors;2. Corporation is prohibited under any

loan agreement with any financialinstitution or creditor from declaringdividends without its/his consent andsuchconsenthasnotyetbeensecured;

3. Theretentionisnecessaryunderspecialcircumstances obtaining in thecorporation, such as when there is aneed for special reserve for probablecontingencies.

Q: What if there is a wrongful or illegaldeclarationofdividends?A: The Board of Directors is liable. Thestockholders should return the dividends to thecorporation(solutioindebiti).Q:Whatarethesourcesofdividends?A:

GR: Dividends can only be declared out ofactual and bona fide unrestricted retainedearnings.XPN:Dividendscanbedeclaredoutofcapitalinthefollowinginstances:1. Dividends from investments wasting

assetscorporation;2. Liquidatingdividends

Q:Whatarethesourcesofretainedearnings?Isitavailablefordividends?A:SOURCESOFRETAINED

EARNINGSAVAILABILITYFOR

DIVIDENDSPaidinsurplusItisthedifferencebetweentheparvalueandtheissuedvalueorsellingpriceof

theshares

Itcannotbedeclaredascashdividendbut

canbedeclaredonlyasstockdividends

RevaluationsurplusIncreaseinthevalueofafixedassetasaresultofitsappreciation.Theyare

bynaturesubjecttofluctuations.

Cannotbedeclaredasdividendsbecause

thereisnoactualgain(gaininpaperonly).

Reductionsurplus thesurplusarisesfromthe

reductionoftheparvalueoftheissuedsharesof

stocks.

Itcannotbedeclaredascashdividendbut

canbedeclaredonlyasstockdividends

GainfromSaleofRealProperty

Availableasdividends

TreasuryShares

Cannotbedeclaredasstockorcashdividendsbutitmaybedeclaredaspropertydividend

OperationalIncomeIncome

Availableasdividends

Q:Distinguishcashandstockdividends.A:

CASHDIVIDENDS STOCKDIVIDENDSPartofgeneralfund PartofcapitalResultsincashoutlay Nocashoutlay

Notsubjecttolevybycorporatecreditors

Onceissued,canbeleviedbycorporatecreditorsbecausetheyrepartof

corporatecapitalDeclaredonlybytheboardofdirectorsat

itsdiscretion(majorityofthequorumonly,notmajorityofallthe

board)

Declaredbytheboardwiththeconcurrenceof

thestockholdersrepresentingatleast2/3oftheoutstandingcapitalstockataregular/special

meetingDoesnotincreasethecorporatecapital

Corporatecapitalisincreased

Itsdeclarationcreatesadebtfromthe

corporationtoeachofitsstockholders

Nodebtiscreatedbyitsdeclaration

Ifreceivedbyindividual:subjectto

tax;Ifreceivedby

corporation:notsubjecttotax

Notsubjecttotaxeitherreceivedbyindividualora

corporation

Cannotberevokedafterannouncement

Canberevokeddespiteannouncementbutbefore

issuance

Appliedtotheunpaidbalanceofdelinquent

shares

Canbewithhelduntilpaymentofunpaid

balanceofdelinquentshares

Note:For thepurposesof thisdistinction,propertydividendsareconsideredascashdividends.

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Q: May stock dividends be issued to a personwho isnotastockholder inpaymentofservicesrendered?A:No.Onlystockholdersareentitledtopaymentofstockdividends.(Nielson&Co.,Inc.v.LepantoConsolidatedMiningCo.,G.R.No.21763,Dec.17,1966).

(h)POWERTOENTERINTOMANAGEMENTCONTRACT

Q:Whatisamanagementcontract?A: It is any contract whereby a corporationundertakes to manage or operate all orsubstantially all of the business of anothercorporation, whether such contracts are calledservice contracts, operating agreements orotherwise.(Sec.44)Note:Sec.44refersonlytoamanagementcontractwithanother corporation.Hence, itdoesnotapplyto management contracts entered into by acorporationwithnaturalpersons.Q:Whataretherequirements?A:

1. Contract must be approved by themajority of the BOD or BOT of bothmanagingandmanagedcorporation;

2. Ratified by the stockholders owning atleast the majority of the outstandingcapital stock, ormembers in case of anonstock corporation, of both themanaging and the managedcorporation,atameetingdulycalledforthepurpose

3. Contract must be approved by thestockholders of the managedcorporationowning at least 2/3of theoutstanding capital stock entitled tovote,2/3memberswhen:a. Stockholders representing the

same interest in both of themanaging and the managedcorporation own or control morethan 1/3 of the total outstandingcapitalstockentitledtovoteofthemanagingcorporation;

b. Majority of the members of theBOD of themanaging corporationalso constitute a majority of theBODofthemanagedcorporation.

Q: What is the allowed period for everymanagement contract entered into by thecorporation?A:

GR: Management contract shall be enteredinto foraperiodnot longer than5years foranyoneterm.XPN:Incasesofservicecontractsoroperatingagreementswhich relate to the exploitation,development, exploration or utilization ofnaturalresources, itmaybeenteredforsuchperiodsasmaybeprovidedby thepertinentlawsorregulations.

(i)ULTRAVIRESACTSQ:Whatareultraviresacts?A: Those powers that are not conferred to thecorporationby law,by itsAOIandthosethatarenot implied or necessary or incidental to theexerciseofthepowerssoconferred.(Sec45)Q:Whatarethetypesofultraviresacts(UVA)?

A:1. Acts done beyond the powers of the

corporation(throughBOD)2. Ultraviresactsbycorporateofficers3. Actsorcontractswhichareperseillegal

asbeingcontrarytolaw.Q: When does the act of the officers bind thecorporation?A:

1. Ifitisprovidedinthebylaws2. Ifauthorizedbytheboard3. Under the doctrine of apparent

authority4. Whentheactwasratified

Q:Whatisthedoctrineofapparentauthority?A: If a corporation knowingly permits one of itsofficers, or any other agent, to act within thescopeofanapparentauthority, itholdshimoutto the public possessing the power to do thoseacts; and thus, the corporation will, as againstanyone who has in good faith dealt with itthrough such agent, be estopped from denyingtheagentsauthority.Q: When is the corporation estopped to denyratification of contracts or acts entered by itsofficersoragents?



134

A: Generally, when the corporation hasknowledgethatitsofficersoragentsexceedtheirpower,itmustpromptlydisaffirmthecontractoract,andallow theotherpartyor thirdperson toact in the belief that it was authorized or hasbeen ratified. Otherwise, if it acquiesces, withknowledgeof the facts,or if it fails todisaffirm,ratification will be implied. (PremiereDevelopmentBankvs.CA,G.R.No.159352,Apr.14,2004)Q:Whataretheeffectsofanultraviresact?A:Ultra vires acts entered into by the board ofdirectors binds the corporation and the courtswillnotinterfereunlesstermsareoppressiveandunconscionable.(Gamboavs.Victoriano,G.R.No.L43324.May5,1979)

Thesearetheeffectsforthespecificacts:

1. Executed contract courtswill not setasideorinterferewithsuchcontracts

2. Executory contracts no enforcementeven at the suit of either party (voidandunenforceable)

3. Partly executed and partly executory principle of no unjust enrichment atexpenseofanothershallapply

4. Executory contracts apparentlyauthorizedbutultravirestheprincipleofestoppelshallapply.

Q:Whatarethedistinctionsbetweenultraviresactsandillegalacts?A:

ULTRAVIRESACT ILLEGALACTS

Notnecessarilyunlawful,butoutsidethepowersofthecorporation

Unlawful;againstlaw,morals,publicpolicy,andpublicorder

Canberatified CannotberatifiedCanbindthepartiesif

whollyorpartlyexecuted

Cannotbindtheparties

Q:Whatare the remedies incaseofultraviresact?A:

1. Statea. Obtainajudgmentofforfeiture;orb. The SEC may suspend or revoke

thecertificateofregistration

2. Stockholdersa. Injunction;orb. Derivativesuit

3. Creditors Nullification of contract infraudofcreditors.

(j)DOCTRINEOFINDIVIDUALITYOF

SUBCRIPTIONQ: What is the Doctrine of Individuality ofSubscription?A: A subscription is one entire and indivisiblewhole contract. It cannot be divided intoportions.(Sec.64)

(k)DOCTRINEOFEQUALITYOFSHARES

Q:Whatisthedoctrine

ust golden notes - corporation law

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