Corp Own Notes

8/12/2019 Corp Own Notes

1/13

VACANCIES IN THE OFFICE OF DIRECTORS AND TRUSTEES

A vacancy in the office of the director or trustee may be filled as follows:

1. By the stockholders or members2. By the members of the Board A director or trustee so elected to fill a vacancy shall be elected only for the unexpired term of his predecessor in office

COMPENSATION OF BOARD MEMBERS

GR:

- Directors, in their capacity as such, are not entitled to receive any compensation except for reasonable per diems.EXP:

- When their compensation is fixed in the by-laws- When granted by the vote of stockholders representing at least a majorityof the outstanding capital stock at a regular or

special stockholders meeting

LIMITATIONS

- The amount to be given shall not exceed 10% of the net income before income tax of the corporation during the precedingyear

LIABILITY OF DIRECTORS, TRUSTEES AND OFFICERS

Three Fold Duties of Directors

1. Obedience2. Diligence3. Loyalty

Nature of Powers of BOD/T

1. Theory of Original Powerthe powers of the BOD/T are Original and Undelegated. The Stockholders or members do notconfer, nor can they revoke those powers

2. Derivativeonly in the sense of being received from the State in the act of incorporationBusiness Judgment Rule

Personal Liability of DirectorsGR

- Directors and officers are not solidarily liable with the corporationEXP

- VAGWAS see page 116 San Beda A directors is not liable for misconduct of co-directors or other officers unless:

o He connives or participates in ito He is negligent in not discovering or acting to prevent it

When officers of a corporation exceeded their authority, their actions are not binding upon the corporation or is stoppedfrom disclaiming them

Remedies in Case of Mismanagement

1. Dissolution2. Receivership3. Injunction4. Derivative Suit or complaint filed with the SEC

DEALINGS OF DIRECTORS, TRUSTEES OR OFFICERS WITH THE CORPORATION

Contracts: VOIDABLE

Ratification: 2/3

CONTRACTS BETWEEN CORPORATIONS WITH INTER-LOCKING DIRECTORS

- Valid;


2/13

o Provided: There is no fraud The contract is fair and reasonable under the circumstances

o If exceeds 20% of the OCS: Ratification is needed

DISLOYALTY OF A DIRECTOR

Doctrine of Corporate Opportunity

- Applicabilityo Unless his act is ratified, a director shall refund to the corporation all the profits he realizes on a business

opportunity which:

The corporation is financially able to undertake From its nature, is in line with corporations business and is of practical advantage to it; and The corporation has an interest or a reasonable expectancy

- Non-applicabilityo A business opportunity ceases to be corporate opportunity and transforms to personal opportunity where the

corporation refuses or is definitely no longer able to avail itself of the opportunity

o Director is not precludedo Opportunity is one not essential to the corps business

EXECUTIVE COMMITTEE

- A body created by the by-laws and composed of not less than 3 appointed members of the board which, subject to thestatutory limitations, has all the authority of the board to the extent provided in the board resolution or by-laws

Limitations on the Powers of the Executive Committee

It cannot act on the following:

1. Approval of any action for which shareholders approval is also required 2. Filling up of board vacancies3. Amendment or repeal of any resolution of the Board which by its express terms is not amendable or repealable and4. Distribution of cash dividends to shareholders

**************************************************************************************************

TITLE IV

POWERS OF COPORATION

Corporate Powers and Capacity

1. Express2. Incidental:

a. Successionb. Corporate Namec. Make by-lawsd. Sue and be suede. Acquire and hold propertiesf. Contract

3. Implied:a. Acts in the usual course of businessb. Acts to protect debtsc. Embarkingd. Protect or aid employeese. Increase business

Extension/Shortening of Corporate Term

1. Approval by BOD/T: Majority Vote2. Notice3. Ratification by SH: 2/34. Copy of the amended AOI shall be submitted to the SEC for approval


3/13

- If there is no approval, the amendment is deemed approved upon inaction of the SEC for 6 monthsafter submission duenot to the fault of the corporation

Nature of the Power

1. Power to extend termnot inherent2. Power to shorten terminherent

Power to Increase or Decrease authorized Capital Stock

- Appraisal right is not available to a dissenting SH in case of increase or decrease of capital stock Power to Incur, Create or Increase Bonded Indebtedness

Nature of the Powerinherent

Corporate Bond

- An obligation to pay a definite sum of money at a future time at fixed rate of interest, whether secured or unsecured,evidenced by a written debt instrument called a bond or debenture

Power to Deny Pre-emptive Right

Pre-emptive Right

- Preferential right of shareholders to subscribe to all issues or disposition of shares of any class in proportion to their presentshareholdings

- Extends even to the unsubscribed portion and even to the treasury- Can be denied if the AOI or by-laws denies

Instances the Right is not available

1. Public shares2. Reoffered share by the corporation3. Shares issued in good faith, ratified by SH4. Shares issues in payment of previously contracted debts, approved by SH5. Denied by AOI6. Waiver7. Non-stock corp8. Already exercised

Sell, Dispose, Lease, Encumber all or substantially all of Corporate Assets

- Appraisal Right available- No need SEC approvalNo Ratificatory Vote from the SH/M is needed if:

1. Necessary in the usual and regular course of business2. Proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of the remaining

business

3. The transaction does not cover all or substantially all of the assetsPower to Acquire own shares

Instances:

1. Eliminate Fractional shares out of stock dividends- Fractional shares cannot be represented at corporate meetings2. Collect or compromise indebtedness3. Pay dissenting or withdrawing SH4. Acquire treasury shares5. Redeemable shares6. Effect a decrease of capital stock7. Deadlock in close corp

Invest Corporate Funds in another Corporation or for purposes other than the Primary Purpose

- Appraisal right available- Ratification of 2/3 must be made at a meeting duly called for the purpose


4/13

Power to Declare Dividends out of Unrestricted Retained Earnings

Requirements

1. Unrestricted Retained Earnings2. Resolution of the Board3. 2/3 concurrence of outstanding capital stock

URE

- Retained earnings which have not yet been reserved or set aside by the board of directors for some corporate purposeDividends

- Corporate profits set aside, declared and ordered to be paid by the directors for distribution among shareholders at a fixedtime

FORMS OF DIVIDENDS:

1. Cash2. Property3. Stock

Note:

- Dividends among SH of the same class must always be pro rata equal and without discrimination and regardless of the timewhen the share were acquired

- The right of the SH to be paid dividends accrues as soon as the declaration is made- Right to dividend accrues even if there is no SEC approval. However, declaration of dividend shall be reported to the SEC

w/in 15 days from declaration

- Declaration of dividend is discretionary upon the boardGR

- Dividends cannot be declared out of the capitalEXP

- D from investments wasting assets corp- To utilize a lease or patent- Liquidating dividends

Requirements

- Stock Dividends: approval of 2/3- Other dividends: Resolution by the MAJORITY of the quorumGR

- Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-in capitalSpecial Rules

1. Gain from Real property - d2. Revaluation Surplus - d3. Paid-in Surplus - d4. Reduction Surplus - d5. Sale of Treasury Sharesnd6. Indebtednessnd7. Corporate earnings not yet receivednd8. Interim IncomeGR, nd esp not expired

Power to enter into Management Contract

Management Contract

- Contract whereby a corporation undertakes to manage or operate all or substantially all of the business of anothercorporation, whether such contracts are called service contracts, operating agreements or otherwise

Requirements

1. BOD: Majority quorum2. SH: Majority Ratification, both managing and managed


5/13

3. SH: 2/3 Ratification, managed if:a. Own or control more than 1/3 of the total outstanding capital stock, managing corp (interlocking SH)b. Where a majority of the members of the BOD of the managing corp ALSO constitute a majority of the members of

the BOD of the managed corp (Interlocking BOD)

4. Period must not be longer than 5 years for any 1 terma. Exp Contracts on:

i. Explorationii. Developmentiii. Exploitationiv. Utilization of natural resources

ULTRA VIRES ACTS OF CORPORATIONS

Types of Ultra Vires Act

1. Beyond the Powers2. Acts or contracts entered into in behalf of a corporation by persons who have no corporate authority3. Illegal or contrary to law

May be done by:

1. Corporation2. BOD3. Corporate Officers

Remedies in Case of Ultra Vires Acts

1. State- Judgment of forfeiture- SEC may suspend or revoke the Certificate of registration2. SH- Injunction- Derivative Suit3. Creditors- Nullification of Contract

**************************************************************************************************

TITLE VBY-LAWS

By-laws

- Internal governmentAdoption of By-laws

Required Votes:

1. Before Incorporation = all incorporators2. After incorporation = Majority of SH Failure to file the By-laws within 30 days from incorporation is a ground for suspension of revocation of its charter after

proper notice and hearings

Amendments of the By-Laws

Requirements

1. MAJORITY= BOD, regular or special meeting called for the purpose, amend2. 2/3 = SH/M, delegate to BOD, amend- Delegation revoked when MAJORITY if SH/M will vote in the meeting

**************************************************************************************************

TITLE VI

MEETINGS


6/13

Regular and Special Meetings of SH/M

Regular = annually on a date fixed in the by-laws

= or any date in April

= Notice at least 2 weeks before the meeting

Special = any time deemed necessary or as provided in the by-laws

= at least 1 week

Where?- City/Municipality where the principal office of the corporation is located; and- If practicable, in the principal office of the Corporation- MM, considered as a city or municipality

Regular and Special Meetings of BOD/T

Regular = monthly, unless the by-laws provide otherwise

= Notice, at least 1 day prior the scheduled meeting (whether regular or special)

= EXP: unless otherwise provided by the by-laws

Special = any time upon the call of the president or as provided in the by-laws

Where?

- Anywhere in or out of the Philippines, unless the by-laws provide otherwisePerson authorized to make call a meeting

1. Person or persons designated in the by-laws2. By director or trustee or by any officer entrusted with the management of the corporation3. SEC, upon petition of a SH/M and on the good showing of good cause, may issue an order to the petitioning SH/M directing

him to call a meeting of the corporation by giving proper notice.

4. Secretary/SH/M for the special meeting for the removal of D/T*Notice is needed

Even if the meeting by improperly held or called, all proceedings and any business transacted at such meeting called bevalid if:

o Within the powers or authority of the corporation, ando Provided that allthe SH/M are present or duly represented at the meeting

Once a quorum is called and the meeting was called to order, even if some people left are less than the majority, theproceedings will be valid so long as there is quorum when the meeting was called to order.

Person who shall preside

- President, unless otherwise provided by the by-laws- Where the officer entitled to preside is not present a SH/M who takes the floor may Temporarily preside, pending the

selection of the officer

***RULES ON MEETING/VOTING APPLICABLE TO CERTAIN KINDS OF SHARES

Delinquent Shares Not entitled to vote

Treasury Shares No voting rights while they remain in the treasury

Fractional Shares Not entitled to vote

Escrow Shares Not entitled to vote before the fulfilment of the condition

imposed thereon

Unpaid Shares If Delinquent, not entitled to vote

Sequestered Shares If ill-gotten, immediate danger or dissipation

- Pledgor or Mortgagor = may attend and vote, unless pledgee or mortgagee has been given the right in writing- Executors, Administrators, Receivers, other legal representatives = may attend and vote in behalf of the SH/M w/o need of

written proxy

- Heirs = especially when no administrator has been appointed


7/13

Shares Jointly Owned

- Consent of allthe co-owners necessaryo Unless there is a written proxy, signed by allthe co-owners

- If shares are owned in an and/or capacity by the holders thereofo Any oneof the joint owners can vote or appoint a proxy thereof

Proxy

- Written authorization- instrument

Requirements:

1. It shall be valid only for the meeting which it was intended2. Signed by the SH/M concerned3. In writing4. Filed before the scheduled meeting with the Corporate Secretary5. Shall not be longer the period of 5 years in any one time

Instances for Proxy

1. Election of BOD/T2. Joint ownership of stock3. Trustee under voting trust agreement4. Voting by members in a non-stock corporation5. Pledge or Mortgage of shares6. As provided for in its by-laws

Kinds of Proxy

1. Generalgeneral discretionary2. Limitedspecified matters3. Specificparticular meeting4. Continuingany and all regular or special SH meeting

Voting Trust Agreement

- An agreement- Title to the shares conveyed is transferred to the trustee on the books of the corporation - The transferring SH parts with the voting power but only retains the equitable or beneficial ownership of the stock

**************************************************************************************************

TITLE VII

STOCKS AND STOCKHOLDERS

Ways to become a Stockholder of a Corporation

1. Subscription contract with the corporation2. Purchase or acquisition of shares from the existing SH3. Purchase of Treasury Shares from the corporation4. Buy shares traded in the stock market5. Buy to any SH who unload his shares

Subscription Contract

- Any contract for the acquisition of UNISSUED STOCK in an existing corporation or the shares of a corporation still to beformed shall be deemed a subscription

- Consensual- Until the stocks are fully paid, it continues to be a subsisting liability that is legally enforceable- Parties

o Subscribero Corporation

- Stocks that never been issued = made before or after incorporation- Increase of Capital Stock = made after incorporation only


8/13

Pre-incorporation Subscription

- It shall be irrevocable for a period of at least 6 months from the date of subscription, unless:o All the other subscribers consent to the revocationo Incorporation fails to materialize

- It shall likewise be irrevocable after the submission of the AOI to the SECStock Options

Notes:- Subscribers who have not paid in full unless they have been validly released from their undertaking, are debtors of the

corporation for the balance and if the corporation does not enforce the liability, its creditors may do so.

- Liability of a subscriber for unpaid subscription cannot be compensated or set-off with the value of his share nor can a stockdividends declared be applied as payment for the same.

- Accordingly, a SH who voluntarily remits an amount in excess of that stated in the call is estopped from claiming suchexcess because once payment is accepted by the corporation, it becomes a part of the assets of the corporation and any

reduction thereof would necessarily constitute a violation of the 3 par of 122. Nor has the corporation of the power to grant

such refund.

- Option = within 3 yearsfrom approvalUnderwriting Agreement

- Underwriter purchases a stipulated amount of stocks or bonds, specified in the underwriting agreement, if such securitiesare not purchased by those to whom they are first offered.

Considerations for Stocks

Valid Considerations for Stocks

1. Cash2. Property

a. Tangibleb. Intangible

i. Patentsii. Copyrightiii. Intellectual Property

3. US dollars, shall be converted to Peso, otherwise they shall be considered payment by way of property4. Notes5. Shares of Stocks6. Bonds7. Labor or services actually rendered to the Corporation8. Previously incurred corporate indebtedness, acknowledged by the Board9. Amounts transferred from the unrestricted retained earnings to stated capital10. Outstanding shares in exchange for stocks in the event of reclassification or conversion

Invalid Considerations

1. Promissory notes2. Future services

However, there is no prohibition on the use of checks, bills or notes in payment of the cash consideration.

- Corp cannot issue stock as gratuity- It is lawful for corp to issue bunos stock

Amount of Consideration

- It shall not be less than the par or issued price thereof, except treasury shares so long as the price is reasobnable- Such as WATERED STOCK

Sources of Corporate Capital

1. Funds furnished by SH2. Borrowings3. Profits and stock dividends


9/13

Certificate of Stocks and Transfer of Shares

Shares of Stock

- Interest or right w/c owner has in the mgt of the corporation and its surplus profits and on dissolution, in all of its assetsremaining after the payment of its debt

Certificate of Stocks

- The paper representation or tangible evidence of the stock itself and of the various interests therein.- Expresses the contract between the corporation and the SH- Not essential to the ownership and/or existence of the share of stock- It is prima facie evidence that the holder is a SH in a corporation

Note:

- In the absence of the COS, the ownership of stocks may be shown by the record thereof in the corporate books.- But mere inclusion of a person as a SH in the General Information sheet filed with the SEC is insufficient proof that one is a

shareholder in a corp where there is no COS in his name, nor any written document such as an assignment in his favour

- A COS is a quasi-negotiable instrument.o It may be transferred by indorsement, coupled with delivery but the holder thereof takes it without prejudice to

such rights or defenses. (page 140)

Remedies where the corporation Refuses to Issue COS

1. Mandamus2. Specific Performance3. Damages4. Rescind Contract of subscription and recover the consideration paid

Issuance of the COS

Requisites:

1. Signed2. Sealed3. Delivered4. Fully Paid5. Original Certificate surrendered

Transfer of Stocks to be ValidRequisites:

1. Delivered2. Indorsed3. Recorded

Actions by SH/M

Derivative Suit

- One brought by one or more SH/M in the name and on behalf of the corporation to redress wrongs committed against it; or- To Protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue or are the ones to be sued

or hold control of the corporation

- The SH is only a NOMINAL party in a derivative suit, the real party in interest is the Corporation- Mere trustee of shares registered in his name cannot file a derivative suit for he is not a SH in his own right

Individual Suit

- An action brought by a SH against the corporation for direct violation of his contractual rightsRepresentative Suit

- One brought by a person in his own behalf and on behalf of all similarly situated Liability for Watered Stock

1. Consenting Director or officersolidary2. Subscriberliable to contribute3. Subsequent Transfereeoccupies the same position w/ the transferor, esp made himself a party


10/13

4. Transferor or party to the fraud damagesInterest on Unpaid Subscriptions

Payment of Balance of Subscription

Delinquency Sale

- If date fixed, Non payment within 30 days = delinquent- In no date fixed, Notice of Call is mandatory to ALL SH

When call in Not Necessary

- Dates is fixed- Corp is insolvent

Highest Bidder in a Delinquency Sale

1. Person participating in the delinquency sale who offers to pay the fullamount of the balance of the subscription togetherwith the accrued interest, costs of advertisement and expenses of sale for the smallest number of shares

2. If there is no bidder as mentioned above, the corporation may bid for the same, and the total amount due shall be creditedas pain in full in the books of the corporation. Such shares shall be considered as treasury shares

Prescriptive period

- 10 years = based on written subscription- 6 years = based on verbal subscription

Note:

- No delinquent stock shall be voted for nor be entitled to vote or representation at any SH meeting, nor shall the holder beentitled to any of the rights of a SH;

o Except= the right to dividends in accordance with the provisions of this Code until and unless he pays the amountdue on his subscription with accrued interest, and the cost and expenses of advertisement, if any.

- Delinquent stock shall not be included in determining the existence of quorum- QUO WARRANTO proceedings may be instituted against directors elected by delinquent SH

**************************************************************************************************

TITLE VIII

CORPORATE BOOKS AND RECORDS

Who can inspect Corporate Books?

1. Any director, trustee, SH/M2. Voting trust certificate holder3. SH of a sequestered Company4. Beneficial owner of shares- Refusal to allow such right to inspect and to demand such copy shall subject the erring officer or agent to civil and crimina

liabilities and if such refusal is by virtue of a resolution or order of the board of directors or trustees, the liability shall be

imposed upon the directors or trustees who voted thereof

What are the rights of the SH to Corporate Books and records?

1. Inspection2. Demand list of SH3. Demand detailed auditing of business expenditures4. Examine books of the corps subsidiary5. Financial Statements

What are the Extent of the Right of Inspection?

1. Right to make copies, abstracts and memoranda of their contents2. Personal but can be made by any proper rep or atty-in-fact3. Trade secrets not covered

What are the Limitations of the right?


11/13

1. During reasonable hours on business days2. Info was not improperly used3. Demand was made in good faith or for a legitimate purpose

Remedies if Inspection is Denied

1. Mandamus2. Damages3. Criminal Suit

************************************************************************************************************

TITLE IX

MERGER AND CONSOLIDATION

Merger

- A union whereby one or more existing corporations are absorbed by another corporation which survives and continues thecombined business

- A + B = BConsolidation

- The union of two or more existing corporations to form an new corporation called the consolidated corporation- A + B = C

Combination

- Alliance or confideration- Ex:

o Sales of Asseto Lease of Asseto Sale of Stocko Mergero Consolidation

Note:

- A partnership may not be allowed to merge with a corporation, buto The partnership may transfer all its assets and liabilities to the corporation which will issue its shares of stock to bedistributed to the partners in proportion to their respective interest in the partnership. Provided the partnership

shall be dissolved in accordance with the civil code.

SH/M Approval

Articles of Merger and Consolidation

SECs approval and Effectivity of Merger or Consolidation

De facto Merger

Types of Acquisitions

1. Asset Only Level- Raw assets and properties of the business- Transferee not liable for the debts and liabilities of the transferor2. Business-Enterprise Level- Transferee continues the same business of the transferor since he obtains the earning capability of the venture- Transferee is liable for the debts and liabilities of the transferor3. Equity Level- Purchasing the shareholdings of the corporate owner- Purchased the ability to elect the members of the board of the corp who run the business


12/13

Legal Effects of Merger and Consolidation

1. Automatic assumption of the liabilities of the absorbed corporation2. Absorbed corp ipso facto dissolved3. Permits transfer of the assets and distribution of consideration4. Exchanges of properties5. Consent of the OE not necessary

************************************************************************************************************

TITLE X

APPRAISAL RIGHT

Appraisal Right

- the right to demand payment of the fair value of his shares, after dissenting from a proposed corporate action involving afundamental change in the corporation in the cases provided by law

- not a matter of absolute right Instances of Appraisal right

A-S-I-M-A

1. Amendment to the articles that has the effect of:a. Changing or Restricting the Rights of SHb. Authorizing Preferences Over those of Outstanding Sharesc. Changing the term of Corporate Existence

2. Sale, encumbrance or other dispositions of all or substantially all of the corp property or asset3. Investment of corporate funds in another corp or in a purpose other than the primary purpose4. Merger or Consolidation5. In a close corporation, a SH may, for any reason, compel the corp to purchase his shares when the corp has sufficient assets

in his books to cover its debts and liabilities exclusive of capital stock

Conditions For Exercise Appraisal Right (pg 150)

Effect of Demand and Termination of Right

Payment

When Right to payment ceases

GR:

- A dissenting SH who demands payment of his shares is no longer allowed to withdraw from his decisionEXP

- Corp consents to the withdrawal- SEC disapproved, where its approval is necessary- Abandoned or rescinded by the corp- SEC determines that such SH is not entitled to appraisal right

************************************************************************************************************

TITLE XI

NON-STOCK CORPORATION

- No part of its income is distributable as dividends to its members- Even if there is a statement of capital stock, for as long as there is no distribution of retained earnings to its members, the

corporation is non-stock

- Any profit which it may obtain as an incident to its operation shall, whenever necessary or proper, be used in furtherance ofthe purpose or purposes for which it was organized

- Membership is personal, unless allowed by AOI or by-laws- Juridical person may be member- Political Purposes not included


13/13

Rules on Conversion

Stock to Non-Stock = ALLOWED

Non-Stock to Stock = NOT ALLOWED

- What the corp should do is to dissolve itself and its members may decide to organize a stock corpRules Applicable Only to Non-stock Corporation

***********************************************************************************************************

Corp Own Notes

Documents

Transcript of Corp Own Notes