LADIA CORPO LECTURE PART 1Topics:

CLASSIFICATION OF CORPORATIONS MEETINGS CONTENT AND FORMAT OF THE AOI

o CORPORATE NAMEo PURPOSE CLAUSEo PRINCIPAL OFFICEo CORPORATE TERMo INCORPORATORSo DIRECTORS AND TRUSTEESo DISQUALIFICATIONS OF THE MEMBERS OF THE BOARDo CAPITAL STRUCTURE OF A CORPORATION

What is the meaning of “capital”? CLASSIFICATION OF SHARES

o VOTING AND NON-VOTING SHARESo TREASURY SHARESo PAR VALUE AND NO PAR VALUE SHARESo STOCK WATERING AND CONSEQUENCES

RESTRICTION IN TRANSFERES OF SHARES ORGANIZATION, COMMENCEMENT AND INOPERATION OF BUSINESS DE FACTO CORPORATION

o RIGHTS AND OBLIGATIONS OF STOCKHOLDERS, BOD OF A DE FACTO CORPORATION CORPORATION BY ESTOPPEL CORPORATE ENTITY THEORY PIERCING THE VEIL OF CORPORATE FICTION AMENDMENT OF THE ARTICLES OF INCORPORATION

Sec. 2 Corporation – is an artificial being created by operation of law having the right of succession and the powers, attributes and properties expressly authorized by law. It was lifted from the old definition of the law Sec. 3 then now Sec. 2. One of the most vexing questions of its attributes is being an artificial person. In 1962, the higher court came out with the decision that a corporation being an artificial being is not entitled to award of moral damages. It ruled to the effect that awarding moral damages it ruled to the effect that moral damages may be awarded for physical sufferings, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock and social humiliation. A corporation being an artificial person and existing only in contemplation of law has no feelings. It has no senses and it cannot therefore experience mental and physical sufferings. In 1968 however, the higher court handed down a decision in “Mambulao Lumber vs. PNP” that a corporation however, may have a good reputation which if besmirched, may be a ground to award moral damages. Then came the case law in “Filipinas Broadcasting v. Ago Medical Center” that article 2219 of the Civil Code authorizes a person to recover moral damages in cases of libel, slander and other forms of defamation. By Justice Carpio, Article 2219 does not qualify whether the plaintiff is a natural or a juridical person. A juridical person can

file a complaint against libel and other forms of defamation and claim moral damages. This was reiterated in “Meralco v. TEAM Electronics” in 2007, that when a corporation that has a reputation that is defaced resulting because of its humiliation in the business realm, moral damages may be awarded. This established that moral damages may be awarded to juridical persons in case of libel and other forms of defamation. OF course sec.2 likewise provides that it has powers, attributes and properties expressly authorized by law and those incidental to its existence. This is what we call the doctrine of limited capacity in the corporate form of business. It means that unlike a natural person, a corporation being a corporation of law can only do those things that the law allows it to do. Natural person can do anything he wishes unless it is contrary to law, morals, public order or public policy. The corporation cannot do that. Otherwise if it does acts not conferred to it by law, the acts performed are considered ultra vires which are acts beyond corporate powers or authority.

CLASSIFICATION OF CORPORATIONS

Sec. 3 speaks of the first classification of corporations. There are several classifications. Sec speaks of stock and non stock corporations. Stock Corporation is a corporation with capital stock divided into shares and authorized to distribute allotment of its surplus profits by way of dividends to the shareholders or members. It has been asked in the bar at least 3 times already. Note that there are corporations in the country with capital stock but they are not authorized to distribute their surplus profits by way of dividends. We have most of them, the club shares, and the sports club. Their shares are very expensive for instance, Manila Golf Club, its 25 million per share. But since they do not distribute their income or surplus profits by way of dividends, they are considered non-stock corporations. Why is it important to know the importance between these types of corporations? Of course it is important to know that the importance in determining what provision of the corporation code or what law will apply to the particular corporation involved. For instance, Sec. 87 or Title 11 of the Corporation Code, it is clear that the provisions governing stock corporations when pertinent shall be applicable to non-stock corporations except as may be covered by specific provision of that same title 11.

MEETINGS

Sec 51 of meetings – says at the city or municipality of the principal office is located or established. As far as practicable, at the principal office. Sec. 93 of non stock corporations authorizes a non stock corporation to validly provide in their by laws that the meetings may be held anywhere in the Phils. So if there is a provision of the AOI of the non-stock corporation to allow the meetings anywhere, they can do so. Absent the provision in the AOI of the non-stock corporation, then the general rule pertaining to stock corporations will apply because the law says that the provisions applicable to stock corporations when pertinent shall also apply to a non-stock corporation. Note, however in Sec. 51, that speaking of meetings, Metro Manila is considered as one single city or municipality. It applies to both stock and non-stock corporations. Speaking of non stock corporations, we were saying that it is governed by different provisions of the code or the law itself, under Sec 24 of the code, stockholders in stock corporations are expressly granted by law for “cumulative voting” it cannot be denied by a provision on the AOI. But then again, we have provisions of title 11 of the code that members of a non-stock corporation can cast only

1 vote per candidate. But again, as I was saying Title 11 was so specific specifically Sec 89 that voting rights of members of non-stock corporations may be broadened, limited or denied by a provisions in the AOI so given if there is a provision in title 11 provides only 1 vote per member, if the AOI provides for cumulative voting, then so be it. Of course, we also have corporations created by special law, they are governed by the special law creating them not the Corporation Code. Further supplemented only by the Code when they are pertinent. Even if it will run counter to the Corporation Code of the Phil. In Gonzales v. PNB involving inspection, there is nothing in the Corporation Code that provides or prohibits stockholders from inspecting the books of incorporation. That is an inherent right that attach to stock ownership. Of course in that case, Gonzales, a stockholder of PNB wanted to check the books of the bank but the bank has its own charter. And the charter provides that the books and records of the bank are subject to inspection by only the Monetary Board of the Central Bank. And there is also a special provision that any person violating the laws creating the PNB may be subjected to fine and or imprisonment. That cannot be done in ordinary stock corporations because it is an inherent right of the stockholder. I do not know if this is still applicable because the PNB has been privatized but if the law still stands are remains unaltered, amended or repealed, the law is the law until amended or repealed. Another matter asked in the bar regarding different types of corporation, what law governs employer employee relationship in government owned and controlled corporations? PNOC EDC v NLRC under present state of the law, the test determining whether GOCC is under Civil Service laws or the Labor Code is the manner of its creation. If it has its own charter, then the charter will prevail. Absent any, it is the Civil service law. When it is incorporated under the Corporation Code, it is the Labor laws. Absent charter, Civil service law.

Corporations under Sec. 19, commences to exist upon the issuance of certificate of incorporation or registration by the SEC but is that entirely correct? Under Sec. 19, a corporation will be vested juridical personality upon the issuance of the certificate of registration. But that is only a general rule because there is another corporation that may commence to exist without the issuance of the COR of the SEC. We have the corporation sole. Under Sec. 112 of the Corporation Code. A corporation sole commences to exist and a juridical personality upon the filing. UPON THE FILING, is the word used. Of the AOI with the SEC and NOT upon issuance of COR. Of course we can also say that those created by special law. The moment the law creating them exists, they start to exist. OF course that is only the general rule, the rule that a corporation exists upon the issuance of COR or incorporation.

Content and format of AOI: Sec. 14 and 15 of the Corporation Code

CORPORATE NAME

Art. 1 would be the Corporate Name

Under Sec. 18 of the code, no corporate name shall be allowed by the SEC, if the proposed name is identical or deceptively or confusingly similar to any existing corporation or any other name protected by law. The name of the Corporation designates the corporation in the same manner that an individual designates the person. This is so because the corporate name is the principal means of distinguishing it not only to the stockholders and holder but also from other firms and entities. Under 14 and 15, the

corporate name must include the word Corporation or Inc. either in full or abbreviated term. That is mandated by law. If you do not include that, the SEC will now allow you to register. Only corporations can append the words Corporation or Inc. in their name. It cannot be done in a partnership. That is why it is a means in distinguishing it from other firms and entities. A corporation once formed with its chosen name cannot choose any other name unless of course it has been amended in accordance with law as this would result in confusion and may even open the door to fraud and evasion and as well as difficulties in administration and supervision. Just like the anti alias law. Parehas lang yan.

The statutory provision on the use of the corporate name cannot be any clearer, ruled the court in Philips Export v. CA in 1992. To come within its scope (Sec. 18), 2 requisites must concur, first, that the complainant corporation acquired a prior right over the use of the corporate name and second, the proposed name is either identical or deceptively or confusing to an existing corporation or one that may be protected by law or is patently deceptive, confusing or contrary to law. In that ruling, the SC ruled that proof of actual confusion need not be shown. It suffices that confusion is probably or likely to occur. Note therefore, in case of Lyceum of the Phils. v CA decided by SC, held that the policy underlying the prohibition against the registration of corporate name which is identical or deceptively or confusingly similar is the avoidance of confusion or fraud. Of course, if there is no such confusion or fraud, then the corporate name may be allowed by SEC. In that case, the Lyceum of the Phils. Instituted an action to bar other institutions in using the name Lyceum in their chosen name. SC said that corporate names of these institutions, but confusion or deception is effectively precluded by the appending the geographic location of the institutions. There is no fraud or deception. Lyceum of Baguio from Lyceum of the Phils. So much so, that even there seems that there is similarity, it can be allowed if there is no confusion or deception. That is the intent of Sec. 18. In the same case, the SC applied the doctrine of secondary meaning under the patents law in the application of Sec. 18 likewise. Can you appropriate a word being used another corporation? Maybe yes. Under the doctrine of secondary meaning a word or phrase originally incapable of exclusive appropriation with reference on article in the market because of geographic or descriptive might has been used exclusively by one producer or provider with reference to his article or service, to that trade or branch, that word or phrase to mean that the article is his product. If that is the case then, even if it is a generic word, it may exclusively be appropriated by a corporation.

PURPOSE CLAUSE

In the AOI is the purpose clause. A Corporation can have as many local purpose or purposes but it does, the law is categorical that it must state the principal purpose. And of course, the secondary purpose or purposes separately. The importance of the statement of the purpose clause is that it practically defines the scope the corporate enterprise. This is connected with the doctrine of limited capacity in the corporate form of business. It confers and limits the actual authority of the corporation. In Sec. 45 of the Code, it can only do acts and things as the law allows it to do. It includes the AOI purpose clause. Allowing a collateral attack on the part of the contracting parties, to question the validity of the act or contract for being beyond corporate powers or authority. Normally, purpose clause maybe reasonably stretched so as to cover these unexpected situations. For instance, PLDT, telecom, it can be involved in DSL, but it cannot sell computers, they do not have retail business.

PRINCIPAL OFFICE

Art. 3 speaks of principal office of the corporation. The PO of the corporation establishes the residence of the corporation. Which is important for:

1. Determining venue of actions for or against the corporation. For the Rules of Court, if a person is to be sued he can be sued in the city where he resides. If the action arises not from a contract, the corporation can only be sued in the city or municipality where it has its principal office because that is the residence of the corporation.

2. To determine venue of meetings of stockholders or members. (Sec. 51) meetings for stockholders must be held at their principal office. It must be noted in the AOI of the non-stock corporation that meetings may be held anywhere in the Phils. If it is improperly held, then any stockholder may question the validity of any resolutions arising from that meeting for being held in an improper venue.

3. Where service of summons be served. 4. Registration of chattel mortgage. Shares of stocks maybe mortgaged or pledged by the owner. If

it is, where should it be registered? Under the mortgage law, it must be registered in the registry of deeds of the city where the principal office of corp. is located and or established. And if the owner resides in a different city or municipality, it must also be registered in the city or municipality where the owner resides. If you did not comply with the requirement, then it will not bind subsequent creditors or third parties. Case law of Sua Uhang v. Magsasaka.

CORPORATE TERM

Article 4 is the corporate term. Under Sec. 11, a corporation can exist for a period of not more than 50 years from the date of its incorporation, or unless sooner dissolved or the period is extended. It may be extended for periods not exceeding 50 years for any single instance by the amendment of the AOI. The law further states that no extension be made earlier than 5 years prior to the original expiration of the term stated in the AOI. Unless there are justifiable reasons for earlier extension as may be determined by the SEC. You cannot file an amendment extending your corporate term, let’s say 7 years before. That is the general rule. But if there are justifiable reasons then it may be done. Once the corporate term expires without any extension has been made by amendment of the AOI, the corporation ceases to exist as a body politic and loses its juridical personality for the purpose of executing its business purpose. There will be no need of any procedures administrative or otherwise to determine what point in time the corporation cease to exist because the period of existence is stated in the AOI. You have agreed that the corporation shall live only for 50 years. Bago mamatay, dapat humingi ka ng extension sa Diyos. Once the term expires, the corporation is dead for the purpose of continuing the business for which it was formed or organized. This was reiterated in the year 2011 in the case Majority stockholders probi? Industrial Operations vs. Lim but even though, we will note that a corporation either dissolved through expiration of term or any other way will continue to have been vest with a body politic for a period of 3

years for the purpose of liquidation and winding up corporate affairs but CANNOT BE FOR THE PURPOSE of continuing the business for which it was organized.

INCORPORATORS

Art. 5 would be the incorporators. The names, nationalities and residences of the incorporators. The incorporators are the stockholders or members originally forming and composing the corporation and who are signatories of the AOI. Sec 10 provides that any number of natural persons not less than 5 but not more than 15 all of legal age and majority of whom are residents of the Philippines may be incorporators. With that provision, a corporation cannot generally be an incorporator because it is not a natural person. Because under RA 720 as amended by PD 122, it allows cooperatives and corporations primarily organized to hold and engage in rural bank to be incorporators, other than that a corporation cannot be an incorporator because it is not a natural person. Second, can a minor be an incorporator? No. even if represented by parents or legal guardians. Minors cannot be incorporators. May corporations have incorporators consisting solely of foreigners? Yes. There is no nationality requirement. The only requirement that majority of them must be residents of the phils. Unless you have the nationalization clause. Example the media should be reserved for Filipino citizens, therefore no foreigners can hold equity in the mass media. Unless therefore provided by law, a corporation created under Philippine laws can have an incorporators solely consisting of foreigners. The Retail Trade Law of the Phils. If the Paid up capital is not less than 2.5 million dollars, the retail trade shall be own solely by foreigners. To be an incorporator, one must subscribe to at least 1 share of the corporation. Note not less than 5. Any number of persons not less than 5. Can it be organized by a single individual? Again the Corporation Sole can be organized by a single individual according. To sec 110 of the code.

DIRECTORS AND TRUSTEES

Art.6 speaks of Directors and Trustees. Normally when you speak of directors, it is the governing board of a stock corporation. They are generally referred to as board of trustees in a non stock corporation. According to Sec 138 of the Code, the governing board of a non stock corporation or other special corporations may be designated in any other appropriate name. There is nothing to stop non stock corporation to change their governing body. Board of governors – Rotary Club. Again, not less than 5, not more than 15. He must own at least 1 share of the capital stock which share shall stand in his name in the books of corporation. Majority shall be residents of the Phils. And such other qualifications as may be provided in the by laws. According to sec. 47 of the Code, item 5, the by laws may provide for additional qualifications and these qualifications to become a director of the governing board. There is no citizenship requirement but only residency. Majority must be residents of the Philippines. Again a domestic corporation created under Philippine laws can have a governing board consisting solely of foreigners as long as the majority requirement would be met. Unless the law otherwise requires. For instance Sec 4 of the Art 14 of the Philippine Constitution. Subject to certain exceptions. Management of educational institutions shall be vested solely to Filipino citizens. Even if constitution allows foreigners a max of 40% of the shares of stock of an educational institution, they cannot serve as members of the

board because directors are the corporate managers and the law, the constitution is specific; management of educational institutions shall be vested to Filipino citizens. Of course, he must own at least 1 share of the capital stocks which shall stand in his name in the books. The question is, should he be the equitable or beneficial owner of the shares to qualify as member of the board? No. It suffices that he has the “legal title” Lee v. CA, what is material is the legal title to and not beneficial ownership of the stock as appearing the books. At least one share in the books, no matter as how he holds the share, in trust or otherwise, he can be a director. Which is different in the old law which states that “he must in his own right own at least 1 share of the capital stock of the corporation. Now, only legal title is required. This legalizes the concept of “nominees” in the board of directors of subsidiary companies. For instance PNB owns 100% of the PNB IFL group. How can there be BOD in the PNB IFL if all the shares are owned by one single entity? They assign shares to them in trust for PNB itself and they qualify to be directors. There are no “dummies” in corporate business practice. They are called “nominees”. Katulad ng PNOC-EDC was put up it was 100% owned by PNOC. They entrust to certain persons, they are legal owner of the shares as long as they are listed in the books as the owner of at least one share.

DISQUALIFICATIONS OF THE MEMBERS OF THE BOARD

27, Disqualifications of members of the board. It is conviction, conviction CONVICTION! By final judgment of an offense punishable by imprisonment for a period exceeding 6 years. Kaya if charged ka lang, qualified ka pa din or violation of the Corporation Code of the Philippines 5 years prior to the date of his election. Of course if he ceases to be a stockholder of the corporation under Sec. 23 of the Code, he will also automatically cease to be a director. Again as may be provided for in the by-laws. The by-laws may provide for additional qualifications and disqualifications for membership in the board of directors. In the case of Gokongwei v SMC the by laws of SMC was amended to disqualify a member from being elected as a member of the board if he happens to own a substantial interest in another competitor corporation and the by-laws was validly amended by the corporation and the Sc ruled that Gokongwei in that instance is not qualified. We also have the case of Government v El Hogar Filipino which requires for additional qualifications for membership in the board. Ang nakalagay sa by-laws nila eh a stockholder may qualify to be a member of the board if he owns at least 5 thousand shares of stock. Other than that, you do not have to have that amount of shares of stock. But Sec. 47 provides that the by-laws may provide additional qualifications and disqualifications in the board of directors.

CAPITAL STRUCTURE OF A CORPORATION

Art. 7 would be the capital structure of a corporation. In the case of a non-stock corporation, the SEC would merely require statement as to the contributed capital for its operational expenses and the names and nationalities who contributed to its capital. In the case however of the stock corporation, Sec 14 item 8 requires every stock corporation to provide in their AOI, the authorized capital stock, the number of shares in which it is divided, the par value of shares, the number and amount of shares subscribed and the paid up capital. Sec 13 provides that at least 5% of the ACS must be subscribed and that at least of 25% of the total subscriptions must be paid. The wording is 25% of the TOTAL subscription must be paid. Which means that the law does not require that each of the subscribers maybe at least 25% of their respective subscriptions. Which means anyone, or just some of them of the

stockholders may pay in the requisite minimum paid up capital. Let’s say the ACS is 1 million, 25% is 250,000. 5 of them subscribed at 50,000 each, paid in capital requirement is 62,500. At least 25% of the total subscription. So, kung 5 nagsubscribe ng tig 50,000, yung number 1 and 2 subscriber binayaran 100,000. You have already complies. At least 25% of the TOTAL SUBSCRIPTIONS must be paid in. There is nothing to prevent the corporation in subscribing the total capital and paying the entire ACS, that is only the min. requirement: at least 25 % of the TOTAL ACS has been Subscribed and that at least 25% of the TOTAL SUBSCRIPTIONS must have been paid in. In no case therefore that the total capital be less than 5,000pesos. Even if the law says that in no case shall the paid up capital be less than 5,000 pesos, there are certain business activities where the law requires a higher paid up capital. Like financing company act of the Phil. Requiring that a financing company located in Manila must be at least 10Million pesos. Other cities and municipalities 5 million pesos. Tulad sa POEA, recruitment of workers abroad. Ngayon 3 million na. For construction companies, paid up capital is 100,000, ni isang poste di mo matayo. Under Construction Classification Board of the Phils. Only triple AAA companies can undertake such projects. There is a case in June 2011, which involves PLDT whether or not PLDT has violated our nationalization laws, whether or not PLDT violated the requirement.

What is the meaning of “capital”?

Majority of the SC in Sec. 11 of Art. 12 of the Phil. Constitution, refers on the shares of stock entitled to vote in the election of directors. If you are not entitled to vote, hindi capital ung cinotribute mo. In that case, PLDT issued “preferred non voting shares” which were held by foreigners and a minority stockholder questioned the validity of this and questioning whether is it violative of nationalization laws. The ruling of the court is specific, “capital” refers only to shares of stock entitled to vote in the election of directors. Considering that common shares have voting rights, normally they have the exclusive right to do so, they have voting rights which translates to control. As opposed to “preferred shares” which usually has no voting rights because according to Sec. 13 of the Code, only preferred and redeemable share maybe denied the right to vote. That is why the court said that preferred shares usually has no voting rights. The term capital under the constitution only refers only to common shares, but if the preferred shares have the right to vote, in the election of directors, then the term capital shall also include preferred shares in the capital because the right to participate in the control and management of the corporation is exercised through the right to vote in election of directors. The court ruled that the term “capital” under the constitution, refers to shares that can vote in the election of directors. Pero may dissenting opinion si Justice Velasco, the corporation Code defines outstanding stocks as the total stocks issued by the corporation it does not distinguish between common and preferred shares, which means it includes all types of shares whether voting or non-voting. He cites the ruling of the opinion of SEC , the SEC defines capital as both voting and non-voting in determining the nationality of the corporation. Capital denotes the sum total of the shares, subscribed and paid, or to be paid, irrespective of the nomenclature by the corporation in the conduct of its operation. Hence, non-voting preferred shares shall be considered in the computation of the 60-40 requirement of alien involvement. “If ever asked in the bar, follow the majority rule, unless if they will ask you the opinion”.

CLASSIFICATION OF SHARES

Sec. 6 empowers the stock corporations to provide for classification of shares or series of shares which may grant the holder certain rights and privileges not otherwise accorded to holders of other types of shares. Rights and privileges must be clearly provided for in the AOI or in the contract of subscription, otherwise under par.4 sec. 6, all type of shares, irrespective of their classification shall have the same rights and privileges. Doctrine of equality of shares. That’s why we are saying the preferred shares, if there is nothing in the AOI or contract of subscriptions which would prevent them from voting, they have the right to vote. Kaya if you want to grant certain rights and privileges to certain shareholders, you have to indicate the rights and privileges. Unless otherwise provided in the AOI or the contract of subscriptions, why should the corporation classify its shares?

First, to define and specify the rights and privileges of the stock holders. The corporation can issue voting and non-voting shares or the preferred and common shares. Siyempre if voting shares ka, you have the right to vote in all the meetings of the stockholders. Kung non-voting ka, you do not have the right to vote in instances provided for by law. Preferred shares may be granted the right to receive the dividends first with specified amount or percentage of dividends declared by the corporation before any stockholders may receive their share of the surplus profits of the corporation.

Second is for the regulation or control of the issuance of the shares of stocks for the protection of not only the existing stockholder but also the purchasers of the shares. Title 12 of the Code “Close Corporation” the corporation, corporation, all shares of stocks shall be to be held of record, by not more than 20 specified persons. There is exclusivity of stock ownership in a close corporation. You cannot be one of the stockholders if you are not one of the specified persons in the AOI. Gusto kasi nila, maging exclusive ung enterprise. So much so, the stockholders will be amply protected if provided for by the AOI.

Of course, it may also be as a management control devise. Mag-issue ka ng voting and non-voting shares. Non voting di sila makaelect ng directors. Issuance of “Founders shares” we note that founders shares under the code may be granted the exclusive right to vote and voted upon in the election of the members of the boards and other corporate officers which may be valid for a maximum period of 5 years which shall be approved by the SEC. If that is the case, then for that specified period of time, kung hindi ka founder share holder, you are not qualified to vote and be elected as member of the board. You have control of the corporate enterprise. Likewise, the other reason is to comply with the statutory requirements particularly with nationalized or partly nationalized industries for instance Development of Natural Resources. Min. ownership of Filipino. citizens is 60%. Let us say there are 1 million shares. 600,000 class A shares to be owned and held exclusively by Filipino citizens. The remaining 400,000 to be owned or held by another person. You have guaranteed yourself that the nationalization laws will never be violated. You have complied with the statutory requirements of the Philippines. Dahil yung 60% na yan, Filipino lang ang pwedeng humawak, under the “no transfer clause” of the AOI, it provides that no transfer of shares of stocks shall be required to be allowed to be recorded

in the books of incorporation if it is violative of the naturalization laws. Kahit na itransfer mo yung shares na exclusive for Filipinos, hindi irerecord ng corporation yan. Guaranteed ang compliance with nationalization clause.

Of course it may also be better ensure return of investment. You would be looking at the redeemable and preferred shares. The redeemable shares are likened to a bond. Inissue yan ng corporation to return them either on demand or on a specified date and with a specified rate or interest. The same holds true with the preferred shares. Ang preferred shares would normally be granted the rights to receive dividends on certain percentage or specified amount of dividends before any other stockholder may receive their share. So merong specified return on their investment.

VOTING AND NON-VOTING SHARES

We were saying awhile back that if a corporation would opt to provide for voting and non voting shares. Sec. 6 provides that only preferred and redeemable shares may be denied the right to vote. Unless specifically stated, they have the same rights and privileges under the doctrine of equality of shares. Common shares, cannot be denied the right to vote. It usually carries the right to vote and frequently the exclusive right to do so. It must be observed that there could be more than 1 kind of share, each share, irrespective of their classification shall be equal in all respects. Non voting shares are not counted or included in determining compliance with the voting requirements to pass a valid corporate act. But they are not absolutely denied voting rights. In the last paragraph of Sec. 6, if you take a look at Sec. 6 it provides that except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act, as provided in the code, is deemed to refer only to stocks with voting rights. So kung walang voting rights ung holder, hindi siya kinocount to determine the voting requirement. May 1 million shares. 25% are non voting shares. One of the matter is entering in management contract – majority ang requirement. Hindi 50% +1 of the entire shares but 50% +1 of the 750,000 shares of the voting shares. In determining the voting requirement. However, there are instances when non-voting shares are entitled to vote under the same provisions of Sec. 6 like amendment of AOI, adoption and amendment of the by laws, increase and decrease in capital stock, sale or disposition of all or substantially all of the assets of the corporation, merger or consolidation, investment of corporate funds and dissolution. If these are to be taken up, then even non-voting shares will be included in determining the voting requirement. Take note, wala diyan yung voting of directors. That is why the issuance of voting and non voting shares is a management control devise. Wala ring diyan yung entering in management contracts, so kung hindi naenumerate diyan, non voting shares are not included in voting requirements imposed by law to pass a valid corporate act. Exclude the non-voting shares to end up at majority requirement. Hindi mo isasama yung non-voting shares if it does not fall under those in Sec.6 of the Code. Only preferred and redeemable shares may be denied the right to vote. In the same case, of Gamboa v. Teves, common shares cannot be deprived of the right to vote in any corporate meeting and even further any provision in the AOI restricting right of common share holders is invalid. Any provision is INVALID. You cannot provide that, under the law only preferred and redeemable shares may be deprived the right to vote. But you can observe that common shares “MAY” be effectively denied the right to vote in the election of corporate directors if founders shares are issued

and are granted exclusive right to vote and be voted upon under Sec. 7. You cannot provide in AOI that they are denied the right to vote. Invalid provision.

TREASURY SHARES

The other types of shares “treasury shares” – shares of stock that has been fully paid up but subsequently reacquired by the issuing corporation either by purchase, redemption, donation or by any other lawful means. Under Sec. 57 of the Code, treasury shares, even if they remain the treasury, have no voting and dividend rights. Of course these shares may subsequently be reissued by the corporation by a price to be determined by the board of directors. If they are reissued they will become outstanding stocks again. And titling the holder to exercise the rights of the stockholder to vote and receive dividends. Treasury if nasa treasury ng corporation. Kapag inissue ulit, outstanding shares na.

PAR VALUE AND NO PAR VALUE SHARES

STOCK WATERING AND CONSEQUENCES

The par and no par value shares. Par – may stated value. The corporation can issue shares in the certificate that they are no par value shares. The code allows the corporation to issue no par value shares but there are restrictions and limitations on the right of a corporation to issue no par value shares. Under Sec. 6 of the Code, once they are issued, they are deemed fully paid and non –assessable, the consideration of the issuance of the no par value shares shall be not less than 5 pesos per share. The entire consideration constitutes capital hence not available for dividend declaration. What does that mean? Let’s say min. of no par value is 5 pesos, if let’s say issue value increases to 10 pesos. Difference 5 pesos is capital not profit, therefore dividends cannot be declared because dividends can only be declared out of the unrestricted retained earnings hindi earnings ung 5 pesos ng corporation. They cannot be issued as preferred shares. And they cannot be issued by banks, insurance companies, trust companies, public utilities, buildings and loans associations. Itong first statement, once issued they are deemed fully paid and non assessable. Baliktarin natin 10 pesos no par value share noon, inissue 5 pesos, that is stock watering. Stock watering are those shares that are issued fully paid up when in fact they are not fully paid up. Ang basis ng termination ng watered stock is the par value or issued value. According to Sec. 65 of the code, If there is stock watering, the stockholder and the members of the board are solidarily liable for the difference in the water in the stock. If it is a par value share 1 peso per share issued at 80 centavos, the stockholder and those with the knowledge of the issuance are solidarily liable. Paano kung no par value shares? The stockholder will not be solidarily liable with the board of directors. Sabi nga ng Sec. 9, they are deemed fully paid and not assessable, ung mga directors lang who consented or who had knowledge will be solidarily liable. The stockholder will NOT BE LIABLE.

RESTRICTION IN TRANSFERES OF SHARES

The next article is the restrictions in transfers of shares. The code does not require corporations to provide for restrictions on transfer of shares of stocks. There is nothing in the law that restricts them to do so, like the “right of first refusal”. Granting the existing stockholders the right in purchasing the shares of a selling stockholder before they may sell the same to outsiders. If the corporation desires, it

must provided in the AOI and stock certificates issued by it to be binding against 3rd persons. In the case of a close corporation, one of the requirements that close corporation may exist, to be governed specially by title 12, that all of its shares of any class shall be subjected to one or more specified restriction on transfer of shares allowed by the code. If you do not provide for a restriction on transfer of shares of Class C shares, yung C shares walang restriction, hindi na yun close corporation.

You have the “no transfer clause” which shall be proper for our naturalization laws. The ???

ORGANIZATION, COMMENCEMENT AND INOPERATION OF BUSINESS

After its incorporation or registration, Sec 22 requires every corporation registered under its general provisions that it must organize and commence the transaction of business within a period of 2 years from the date of incorporation. Its failure to do so, will result to the automatic dissolution of the corporation. It ceases to exist as a corporation. If it has commenced but subsequently becomes inoperative continuously for at least a period of at least 5 years, the same is merely A GROUND for suspension or revocation of the corporate franchise which means that there should be proper notice and hearing before it may be suspended or revoked, that is continuous inoperation for 5 years, failure to organize is automatic dissolution. Note in Sec. 22 if the failure to organize, or commence the transaction or continuously operate is due to causes beyond the control of the corporation as determined by the SEC, automatic dissolution, suspension or revocation will not ensue. Of course, we have seen how the de jure corporation is organized, from corporate name to acknowledgement. There are other corporation that may be formed even if does not contain all.

DE FACTO CORPORATION

The de facto corporation under Sec. 20. One that is so defectively created so as not to be a de jure corporation. But nevertheless exist for all practical intents as a corporate body by virtue of its bonafide attempt to incorporate under an existing statutory authority coupled with corporate powers exercise in good faith under sec. 20, the due incorporation of any corporation, claiming in good faith to be a corporation under the code and its rights to exercise corporate powers shall not be inquired into collaterally and in any private suit in which private suit that such corporation may be a party. Such inquiry may be made by the Sol Gen in a quo warranto proceeding. While it may not be a de jure corporation due to an irregularity in its organization, constitution or even some omission in statutory requirement from the statute which it may have been a de jure corporation, it nevertheless exist as a corporate body. Separate and distinct from the stockholders and members composing IF ALL THE REQUISITES FOR ITS EXISTENCE AS A CORPORATION ARE PRESENT:

1. There must be a law or an apparently validly statute in which it could have been formed or organized as a de jure corporation

2. An attempt in good faith to form a corporation according to the requirements of the law which should go far enough to a colorable compliance with the said law

3. Use of corporate powers in good faith.

All these requisites must concur so as to consider it as a de facto corporation. If one of them is missing, it does not exist as a corporation at all. And the rules against the collateral attack on its existence will not also apply. Any person can question its existence as a corporate body if that is the case. Like the case of Municipality of Balabang v. Benito where an EO was issued contrary to the municipal code of the Phils. Balabagan was created. The latter would have not been considered a de facto corporation and its existence may be attacked by any person in interest. Citing the Pelaez doctrine under the law, it was ruled that an unconstitutional law is not a law. It confers no rights, it imposes no duties, it affords no protection and creates no office. It shall be in legal contemplation as though it had never been passed at all. It cannot be a de facto corporation because there is no law or an apparently valid statute for it to be formed as a de facto corporation. In the case of Hall v. ___ between and among the supposed stockholders, a de facto corporation cannot exist if the cert of registration has not been issued by the SEC. Because between and among themselves aware of the fact of the non-registration and they cannot therefore claim in good faith to be an act as a corporation. Absent of the requisites, it cannot be considered a corporation and may be attacked collaterally by any interested party. Sec. 20 will not apply.

RIGHTS AND OBLIGATIONS OF STOCKHOLDERS, BOD OF A DE FACTO CORPORATION

Are the rights, obligations and responsibilities of the stockholders, board of directors of a de facto corporation the same or similar to those of the de jure corporation?

- Yes. They are subject to the same laws, rules and regulations for a de facto corporation. The only importance between them is for the purpose of determining the applicability of whether or not their existence as such corporations may be questioned or attacked. That is the existence of the de jure corporation cannot be attacked even by the state. While the de facto corporation may be attacked by the state in a quo warranto proceeding but only by the state of course. But only by the state of course. Parehas sila if may solidary liability sa pag issue ng watered stock sa de jure corporation, ganun din sa de facto corporation. The stockholders of the de facto corporation can exercise their right to check the books of the corporation similarly with the de jure corporation.

CORPORATION BY ESTOPPEL

- Sec. 21 is the corporation by estoppels. It says all persons who assume to act as a corporation knowing it to be without authority to do so, will be liable as general partners for all debts, liabilities and damages incurred or arising therefrom. Provided that when the corporation is sued under transaction entered into it or any tort claim against it cannot use the defense of its lack of its corporate capacity. That is the consequence of corporation by estoppels. 21 is the consequence. It is not the definition. It is defined as neither a de jure or de facto corporation by virtue of a serious defect in its organization as a corporate body but nonetheless exist as a corporate body by virtue of their agreement, admission or conduct. It may a3pply for or against the corporation or a third party dealing with the particular corporation. The GR: any person who has contracted or dealt with an association in such a way as to recognized or effect or admit its legal existence as corporate body cannot deny its juridical personality in an action arising

therefrom. The case of Asia Banking v. Standard Products if such be the case, he cannot allege lack of personality on the part of the supposed corporation that it has not been registered. Hindi naman registered edi no personality to sue. This doctrine will not hold true however where fraud takes part in the transaction like the case of Salvatierra v. garlitos? Where in that case, a plaintiff was charged that she was unaware of the fact that the association had no juridical personality the defendant gave no confirmation nor denial. In the circumstances attendant to execution of the contract lead to the conclusion that the plaintiff was really made to believe that such corporation was duly formed and organized in accordance with law. She cannot be estopped in denying that there is no corporation to speak of and prevent her from making the associates personally liable as provided under Sec. 21. Likewise in the case of International Express Travel and Tours v CA the application of the doctrine of corporation by estoppel applies to a third party only where he is trying to escape liability on a contract from which he has benefitted on the irrelevant ground of defective incorporation. Kahit na alam mo walang corporation, nakipagdeal ka, kung hindi mo naman tinatakbuhan ung obligation mo, at ineenforce mo yung right mo, hindi ka in estoppel. To claim that the associates are not personally liable. He will not be stopped from claiming from the associates. As held in the case of Lozano v. Santos corporation by estoppels is founded on principles of equity. It is designed to prevent injustice and unfairness. It applies when persons assume to form a corporation and exercise corporate functions and enter into contract with 3rd person. If there is no third person and the conflict on arise between those in the corporation, there can be no corporation by estoppels. The liability of the associates of the alleged corporation cannot be over looked, if the doctrine of corporation by estoppels cannot be applied because the third party dealing with it cannot in any manner deemed to have chosen to deal with it as an association. The associates shall be liable as general partners. But who shall be liable? All the associates? Or only the active ones? Kasi 22 is clear. The better view seems to be therefore that only those who actively participated in holding out the association as corporation shall be held liable as expressed provision of sec. 21. All persons who assume to act as a corporation and the word used is “knowing it without authority to do so” shall be liable as general partners for all debts, liabilities arising therefrom.” Now, considering this express provision of sec 21, is the doctrine of limited shareholders liability in the corporate form of business applicable to stockholders in a corporation by estoppels? Because that is one of the advantages of corporate form of business. There is shareholders limited liability in the corporate form of business. NO. there is no such thing in a corporation by estoppels. Because Sec. 21 is very clear. All persons who assume to act as a corporation and the word used is “knowing it without authority to do so” shall be liable as general partners . You all know that general partners may be liable ever beyond his promised contributions. Even his personal properties not used in the business maybe subject to attachment or foreclosure by the creditors. Kaya there is no such thing as shareholders limited liability in the case of corporation by estoppel because they are liable as general partners.

CORPORATE ENTITY THEORY

- Corporate Entity Theory. The corporation exists separately and independently from the stockholders members, directors, and are not affected by the rights and liabilities of stockholders members, directors and vice versa. They exist independently and separately but when the notion of corporate entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime. The law will regard the corporation as mere association of persons. Or in case of 2 or more corporations, they will merge them into 1, one would be considered as a conduit, adjunct or instrumentality of the other.

PIERCING THE VEIL OF CORPORATE FICTION- The corporate entity theory is only a GR cannot apply in cases when the SC is justified in

piercing the veil of corporate fiction but for the separate juridical personality of the corporation to be disregarded, the wrongdoing must be clearly and convincingly established fraud must be proven by clear and convincing evidence amounting to more than preponderance. It cannot be justified by speculation and can never be ???. The mere fact the corporation can own alone the entire corporation, like PNB IFL – entirely owned by the PNB. There mere fact owns all shares of stocks of PNB IFL, they can justify piercing the veil of corporate fiction. IN the case of Borromeo v CA and this finds the justification as the “instrumentality rule”. Also enunciated in Concept Builders v NLRC to the effect that when one corporation is organized and controlled and its affairs are conducted so that it is in fact a mere instrumentality or adjunct of the other, the fiction of corporate entity of the instrumentality may be disregarded. The SC laid down 3 tests for the applicability of piercing the veil of corporate fiction. In relation to these instrumentality rule:

- 1. Control – when you speak of control, it is not merely majority or complete stock control. Hindi yung pag-aari niya ng shares of stocks but rather domination not only of the finances but of policy and business practices in respect to transaction attack so that the corporate entity as to this particular act or transaction had at that time no separate mind, will or existence of its own.

- 2. Such control must have been used to commit fraud or wrong doing to perpetuate violation of the plaintiff’s legal rights

- 3. Control and breach of duty must proximately cause the injury or unjust cause complained of. Under the same ruling, the absence of any one of the elements prevents piercing the veil of corporate fiction.

- Yamamota v. Nishino Leather industries

AMENDMENT OF THE ARTICLES OF INCORPORATION16- amendment of the AOI. Except as otherwise provided in the code, or a special law, and for legitimate purposes any provision or matters stated in the AOI may be amended by a majority vote of the members of the BOD subject to the written assent of the stockholders, owning and representing at least 2/3 of the OCS. Amendments shall take effect upon the approval of the SEC or from the date of its filing with the said commission if not acted upon by it within a period of 6 months from the date of filing. It retroacts to the date of its filing. That will apply only in cases of ordinary or regular amendments because under Sec 38. Increase or decrease capital stock will

only be valid upon the approval of the SEC. If the SEC does not approve the increase or decrease, it will up to the applicant to check with the SEC.

- 23. Unless Otherwise provided for in the code. All corporate powers, all business are conducted and all properties are controlled by the BOD. They are the corporate managers and are the ones who can act for and behalf the corporation. They must SIT AND ACT AS A BODY in a validly conducted meeting to have a valid corporate act or transaction. Individual directors cannot bind the corporation by their individual acts unless: there is a valid delegation of authority, expressly conferred, where the person is clothed with actual or apparent authority or when expressly or impliedly ratified. The quorum requirement in the directors meeting is majority of the members of the boards as fixed in the AOI. Ung nakalagay the quorum requirement for a valid directors meeting is the majority of the members of the boards as fixed in the AOI and every decision of at least a majority of the directors present at a meeting at which there is a quorum would pass a valid corporate act. Thus when the quorum requirement is the majority of the entire members, the voting requirement is not majority of the entire members of the board but majority vote of those present at which there is a quorum. Exception of this is the election of corporate officers which requires the vote of the majority of the entire members of the board or when the AOI or by laws require a greater quorum or voting requirement. If there are 9 members of the board as fixed in the AOI and 2 of them resigned or passed away, the vacancy created by the resignation or death have not been filled up, there are 9 members, now there are only 7 living members, what is the quorum requirement? It is still 5. The code is specific. Majority of their number as fixed in the AOI. So, 9 sila, 5 nag-attend ng meeting. 3 bumoto na bumili ng generator. Is there a valid corporate act? Yes. Quorum requirement majority requirement – 5. Voting requirement is majority of those present at which there is a quorum. Unless, it involves the election of corporate officers which would require the vote of the majority of the entire members of the board or when the AOI or by laws require a greater quorum or voting requirement. We were saying that they must generally sit and act as a body, the BOD to pass a valid corporate act, are the directors required to be PHYSICALLY PRESENT to have a valid meeting? NO! THE e-commerce law, allows the members of the BOD to meet via teleconference or BDO conference. There is no authority to stockholders meetings.