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UNIVERSITY OF THE PHILIPPINES COLLEGE OF LAW CORPORATION LAW

Prof. Danilo L. Concepcion Table of Contents
CHAPTER I: Introduction ............................................................................................... 1 15 November 2010 ................................................................................................... 2 CHAPTER II: Classification of Private Corporations ..................................................... 4 CHAPTER III: Formation and Organization of Corporation ......................................... 7 22 November 2010 ................................................................................................... 7 24 November 2010 ................................................................................................... 9 26 November 2010 ................................................................................................. 11 1 December 2010 ................................................................................................... 13 CHAPTER IV: The Corporate Entity............................................................................. 15 3 December 2010 ................................................................................................... 16 CHAPTER V: Promoter s Contracts Prior to Incorporation ....................................... 19 6 December 2010 ................................................................................................... 19 CHAPTER VI: Corporate Powers ................................................................................. 21 8 December 2010 ................................................................................................... 23 CHAPTER VII: Control and Management of Corporation ......................................... 23 10 December 2010 ................................................................................................. 25 7 January 2011 ........................................................................................................ 29 10 January 2011...................................................................................................... 32 14 January 2011...................................................................................................... 36 17 January 2011...................................................................................................... 39 19 January 2011...................................................................................................... 43 21 January 2011...................................................................................................... 46 24 January 2011...................................................................................................... 48 28 January 2011...................................................................................................... 52 31 January 2011...................................................................................................... 55 2 February 2011...................................................................................................... 59 4 February 2011...................................................................................................... 62 CHAPTER VIII: Duties of Directors and Controlling Stockholders ........................... 63 9 February 2011...................................................................................................... 65 11 February 2011 ................................................................................................... 68 14 February 2011 ................................................................................................... 70 CHAPTER IX: Right of Inspection ................................................................................ 70 CHAPTER X: Derivative Suits ....................................................................................... 73 16 February 2011 ................................................................................................... 73 18 February 2011 ................................................................................................... 75 CHAPTER XI: Financing the Corporation; Capital Structure ..................................... 75 21 February 2011 ................................................................................................... 78 28 February 2011 ................................................................................................... 82 CHAPTER XII: Consideration ....................................................................................... 85 2 March 2011 .......................................................................................................... 87 9 March 2011 .......................................................................................................... 91 CHAPTER XIII: Dividends and Purchase by Corporation of its Own Shares ............. 95 11 March 2011 ........................................................................................................ 96 CHAPTER XIV: Amendments of Charter ..................................................................... 99 16 March 2011 ...................................................................................................... 102 CHAPTER XV: Transfer of Shares .............................................................................. 103 28 March 2011 ...................................................................................................... 107 CHAPTER XVI: Dissolution ......................................................................................... 107 CHAPTER XVII: Corporate Combinations ................................................................. 112 CHAPTER XVIII: Foreign Corporation ....................................................................... 113 Special Corporations ................................................................................................. 114 Non-Stock Corporations ........................................................................................... 115

CHAPTER I: Introduction
This is the most boring course Common law institution Business organization 2 main form of business organizations before corporation was brought in the Philippines y Sociedades anonima y Partnership Many form nearest in civil law that we can call equivalent of corporation is sociedades anonima. Or anoneme in French. Americans introduced in our system of law. Corporation supplanted and repealed provisions of law in sociedades anonima Basic material is corporation code Revised version of old corporation law Copy of Delaware corporation law Enacted a corporation law which became a model of all corporation laws in the US To understand the principles and how transformed in the Phil setting Refers to work of old corporation law authors. Salonga, Tolentino, Caguioa, Simplicio Guevarra (who is the lolo of Chiz Escudero) Before the advent of new corporation law, Simplicio Guevarra Today, we use the two-volume work of Campos spouses (Justice and Professor), when they were no longer willing to teach, Jac and DLC took over We ll use outline of book as syllabus of course. Although we d modify sequencing of some subject matters, the way treated deviate from outline but announces Other reference materials y De Leon Ateneo prescribed y Ruben Agpala COMELEC chair y Magic notes y Rosario Lopez spot the different with Campos spouses y CSV y Puno clan y Paras Adopted Paras Corporation Principles and Practice y Many other authors not worth mentioning. They only compile in orderly manner. Prof. Perfecto Fernandez greatest tersarial scholarship scissors cut and paste Jo Laureta good writer who calls his students bastards and idiots

Foreign materials are available in the lib. If only to amuse yourselves. Fletcher Encyclopedia of Corporation rd 3 restatement has 21 volumes. Ganon ka-vast ang subject na ito
y

It s called company law in England because corporation is American invention. It s difficult to read British SC decisions. Upper House of Parliament, Justice Learnedhand.

Civil law system no concept of jurisdiction.

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Cheap source of materials for US and colony. Market for finished product of industries. Move raw materials to mainland and finished products to the islands. Rules dictated by American masters medium is transaction. So they introduced commercial law of US e.g. sales (supplanted civil law), corporation killed sociedades anoneme) but sustained partnership, NIL, insurance in order to do business in the country. Contract of sale attracts several provisions of CC. Many instances they are in conflict with traditional concepts of sale. Kailangan mestizo raw pati yung batas. Adjustment to harmonize conflicting provisions. Principle of corporation conceived and flourished in a common law background. When transported to civil law environment, some provisions collide with so many conflicting provisions so offspring is not bastard. Therefore, bring two codes in class. Civ and corporation. So you can readily look at the article mentioned and see for yourself the wording of the provision. Digest in your handwriting all the cases in Campos book. No digest, no finals. 3.
y y

y y

What is the reason behind the law? There was no prohibition in the original law from which our Corpo Code was copied. Franchise of the corporation. But they observed it was inimical to growth of commerce. For commerce to grow and provide velocity to economic activities, dapat mabilis din pag-churn ng mga business organizations. Going to congress unduly delays formation of business organizations. Not only that, palakasan na sa mga congressman because every franchise, those who contributed more to campaign lobbied with tax holidays and special favorable treatment. To prevent this from happening, several states adopted non-creation by direct legislation principle and then we copied that in the Phil as a lesson from the US experience. There is an exception to the constitutional exception: GOCC? Shares of stock are drawn and controlled by government but they are also private corporation. There is a condition for them to be created by condition. Definition of GOCC is not in the GOCC nor Corpo Code but in Admin Code s preliminary provisions. General law adopted by the legislative arm of the government referred to in the constitution is the Corpo Code. i.e. Batasang Pambansa which Sir was a member. He was part of the drafters of the Corpo Code. Observer lang sha at that time.

15 November 2010
There are two types of corporation: public (covered by LGC) and private (Corporation Code)

DEFINITION OF A CORPORATION
2: definition of corporation. Not qualified by code but refers only to private corporation 1. Artificial from PFR: 2 beings/persons are recognized. Natural person is not defined anywhere in the CC. Juridical person has no physical existence as compared with natural. It exists only in the mind, only by contemplation of law. Private corporation has in general for that matter is not a natural person but a juridical person, artificial being. In general: CC recognizes 3 juridical entities a. Partnership b. Corporation c. Trusts to some extent d. Estate of deceased person as an extension of deceased person s personality Created by operation of law y A smart person would ask why the wording of law is formulated created by operation of law vs. created by law Congress cannot create a private corporation. Congress can only create a general law. y Why can t congress create a private corporation by direct legislation? What prevents the congress from doing it? Constitutional limitation, power to enact a law is plenary. Article IX, Section 16 The Congress shall not, EXCEPT by general law, provide for the formation, organization, or regulation of private corporations. Government-owned or controlled corporations may be created or established by special charters in the interest of the common good and subject to the test of economic viability.

Succession y Does not refer to succession as it is known in civil law. At least now. Because in the original concept of succession during Roman times, the heir is successor of personality (takes the place/space formerly occupied by) of the decedent. Ngayon kasi property na lang. y Common law concept ang corporation, it does not refer to civil law succession but continuality of the corporation being separate from personality of the members of the corporation. Separate and distinct personality of corpo and stockholders. As a consequence of distinct personality, stockholders may come and go and be succeeded by own heirs, they may sell and transfer their shares. In fact they may transfer and sell their shares but the corporation does not change. y Continuation of personality of corporation. Powers, attributes and properties expressly authorized by law and incident to its existence. For a person to have substance, for it to transact business, for the corporation to have acts with juridical effect, that corporation must have full civil capacity. This is true for all persons, it must be in possession of 2 things: 2 elements of civil capacity: a. Juridical personality Art. 37 CC Juridical capacity, which is the fitness to be the subject of legal relations, is inherent in every natural person and is lost only through death. Capacity to act, which is the power to do acts with legal effect, is acquired and may be lost. Fitness: Is a cat a person? May a cat be a donee in a contract of donation? Natural person is not defined in the code but underlying presumption that it refers to a human being. Heir must be able to accept the inheritance. Dog and the cat may not accept. Pag nilagay under guardianship? 19 by provision of law, it s given juridical personality, i.e. becomes fit to become subject of a legal relation. Capacity to act Art. 37 CC Juridical capacity, which is the fitness to be the subject of legal relations, is inherent in every natural person and is lost only through death. Capacity to act,

4.

2.

b.

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which is the power to do acts with legal effect, is acquired and may be lost. Juridical personality is inherent. A person obtains it from birth. But capacity to act is acquired and may be lost. Capacity to act is presumed. Can do anything under the sun. It may be restricted by certain situations (e.g. insanity, minority). Hence, 1 yr old infant has juridical capacity but no capacity to act. How about in the case of corporation? It has juridical capacity, but what about its capacity to act? 2 powers and attributes expressly authorized by law or incident to existence. No presumption in favor of corporation, you will have to prove it. But of course, magkakaron ng processual presumption. When corporation is incorporated with SEC and certificate of incorporation is issued. In cases na hindi naman hinahanap ng kakontrata mo anyway. Burden of proof rests with corporation if challenged to prove that it has power to do a particular act. on to the stockholders. It may be different in the form of usual contracts we encounter in the civil law. Same structure as the partnership. While a corporation is a contract among the incorporators or stockholders, the personality of the corporation does not commence from the time the incorporators agree on the formation of the corporation. When does the corporation s personality commence? S19 it commences from the time the articles of incorporation is approved by the SEC. Is because it refers to a document not to each and every article of the document. Same rule for by-laws, it s a document. Sa partnership di kailangan ito. Why is interest of a partner not freely transferable? Not entirely accurate. The interest of a partner in a partnership is freely transferable but not automatically become the partner. The transferee just doesn t become automatically become a partner. It s because of principle of delectus personae. A partner became a partner because of a special relationship the other partner reposed on him. Namili sila. Not any Tom, Dick or Harry can become a partner. Pamoso, mayaman. Qualities of partner were considered because of special fiduciary relationship. For this reason, you cannot ask just anybody to take your place. Does not include right to include any other partner in the partnership. Not the same in case of corporation, the interest which a stockholder has in the corporation is freely transferable. It s not in the law. Saang provision ang freedom of transferability of shares of stock in the corporation? It s not in the law because it s assumed as the general principle of corporation. History of general principle: Corporation as form of business organization developed as a response to the inadequacies and impracticabilities attendant to partnership. Corporation cannot impose any prohibition on the transferability of shares. Maski wala sa batas, sinusunod natin yun. For prohibition to be valid, there s no statutory prohibition. As of now, there is none. S98 buttresses the principle. You are a bunch of illiterates! 1471: discovery of Americas by the Vikings and the Marco Polo was not st the 1 European to reach the Far East. Cavemen Europeans vs. Silk clad Chinese. At least our ancestors, pero Pinoy nakahubad pa. In England, the first of corporations is a mode or as a system of organization of monks. The Abbeys in England had an organization akin to a corporation. But of course, this was copied from the political organization of Greek city states. So ang root ng corporation as a system of organization ay mga municipal corporation in Greece. Inapply lang ang system to a smaller organization like an Abbey or a religious society or a business. Yung Civil Code of Justinian, walang corporation dun. Partnership lang. To finance a ship that will go to the Far East to trade, huge amount is needed, if partnership yan, 1000 yung partners, mahirap. In a general partnership, each of them is a manager because of mutual partnership lagi sila may meeting tuloy. Sell shares of stocks to everyone who has excess cash to finance a bapor and its provisions. Ships don t travel alone. They travel in two s para may sasagip sa cargos nung isa. Maraming lumulubog sa Cape of Good Hope kasi maalon dun, kasi dun nagmimeet ang Indian Ocean at Atlantic Ocean. Kung liable sila for everything, walang mag-iinvest kaya ininovate nila at tinanggal ang liability with present and future properties. Limited liabilities lang ang investor to the amount he committed in the venture. The amount he commits is the amount of the values he bought.

y y y

Powers of corporation are two types: express and implied. To be discussed more detail later. (See page 21)

CHOICE OF BUSINESS ORGANIZATIONS

How is corporation different from a partnership? A partnership is form of business organization. Is single proprietorship an organization? No, you should have members. It s not really a business organization. Pero it s classified as such. Organization no longer refers to the number of persons involved. Instead, it refers to how the business was organized. Single proprietorship is included in the forms. Important? Of course, e.g. you have a client, what form will you advise him/her to pursue? Which one is better suited to his requirements? As to
Number of parties Manner of creation Transferability of interest

PARTNERSHIP
At least 2 partners Upon the meeting of the minds consensual Not freely transferable, requires consent of all other partners. Transferee does not become a partner automatically. Partner s liability is unlimited (general); extends to present and future properties. Anyone of them can bind the partnership Dissolved

CORPORATION
At least 5 Articles of incorporation May transfer interest and transferee becomes stockholder. Transferee takes his place. The amount he commits is the amount of the values he bought.

Liabilities

Management Death/withdrawal of a partner

Why five directors? Why not 3, 4 or 6? It is ideal to avoid ties during board meetings. Law makers think it s the smallest ideal number for a corporation to distinguish it from a partnership. Parang sex yan, pag hindi consensual rape yan. Contract takes effect immediately upon meeting of mind of parties. Must it be in writing? No Is a corporation a contract? What are the elements of a contract? Parties, object, consent, vinculum. What is the juridical nature of a corporation? Formation of the corporation is a contract, among the original subscribers and then later

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Very impractical to allow every stockholders bind the corporation. Management is given to a smaller group of those who invested in the corporation, called board of directors. Bawal sumali ang tanga. Death and withdrawal of partner or stockholder. Very cumbersome to create a new one. To address this undesirable feature of partnership, corporations are granted with right of succession. Personality that succeeds throughout its term. Continuity of life as a person during the term of its existence. May a partnership be a stockholder in a corporation? Yes, because it s a person. It can own, subscribe and buy shares of stock. May even exercise the rights of a SH. May a corporation be a partner in a corporation? Violative of a corporation law principle, a corporation may only be bound by its board of directors. Case cited in Campos has not been overruled by the SC. It may not be a partner in a GP because it will be bound by an entity other than the board of directors, i.e. the other general partners. Contrary to general principle of corporation law that only its board may bind its corporation. Esteban Bautista s Treatise of Partnership: doctrine not applicable to limited partnerships. Chi: What about SEC OPINION [February 29, 1980]? Sarthou s question: Differentiate corporations entering into joint venture and partnership. DLC: Joint venture has no separate personality and only single transaction. Main difference between the two: no common fund, and therefore, no mutual agency between the parties. Usually happens between land owner and developers. Si Sir ang gumawa ng Master Deed ng mga Ayala Prime Towers.

CHAPTER II: Classification of Private Corporations

There are two general classes of private corporations: The stock and the non-stock. Pero kung titingnan mo ang corporation code, corporation sole (S110)

STOCK AND NON-STOCK CORPORATION

Stock corporations is described in S3 as
Corporations which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held are stock corporations. All other corporations are non-stock corporations.

Bad way of making description kasi by elimination ito. 1. 2. 3. 4. 5. 6. Capital stock Which is divided into shares Authorized to distribute dividends Holders Dividends from surplus profits On basis of shares held

If one of the features is missing, it won t be stock corporation. Capital stocks not pro rata. Equal among stock holders. Hindi magiging stock corporation. Club Filipino de Cebu v CIR: SC applying principles of corporation law identified the primary distinction between stock corporation and nonstock corporation. Under the regime of old corporation law. Bakit nagkaron ng issue? Itong Club Filipino was organized to provide entertainment, leisure, recreation and other allied services exclusively to members. Members contribute fund to club and club will use funds to construct clubhouse where they can avail of those services. Hindi member yung provincial revenue officer, ayaw papasukin kaya inimbestigahan sila. Hindi kayo nagbabayad ng tax! Tumutubo kayo sa bar through mark-ups! Tax evasion, pay-up tax deficiency! Maraming abogadong members dun. Punyetang BIR ito. So nagdemandahan sila. Arguments (na hindi nakalagay mashado jan) they have a basic assumption here: The Club is not liable to pay the percentage business tax/graduated sales tax (now replaced by the VAT, not income. Not engaged in business because we re a non-stock corporation. How do we define engaged in business ? Invest amount of money or anything of value in return of profit. Members do not invest money for profit. Does not return to us for profit. We are not engaged in business, we are not exempt from paying. Authorized capital stocks divided into shares. No return from contributions. No dividend? But there was a declaration in your records! They received stock dividends in the past. That was not really distribution, just to adjust the value which member has in the assets of corporation because of revaluation. Long story short the issue is: Whether club Filipino is a stock and nonstock corporation? Kung ngayon ito pupunta sa court, hindi ito ang issue because non-stock corporations may also engage in business. Noon, parang the underlying principle was a corporation which is non-stock non-profit does not engage in business. That s the underlying presumption. Ano sabi ng SC?

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How do we know whether it s a stock or non-stock corporation? The principal distinction between stock and non-stock is the authority of corporation to declare dividends. SC proceeded to examine the articles of incorporation of club Filipino, no authority for the corporation to declare dividends. Questionable decision of the SC here. Look at S43 of the code. Power to declare dividends, came from S16-A of the old corporation law. When a corporation is a stock corporation, even though the articles is silent, it has power to declare dividends because of S43. Maski silent ang AOI. Let s change the facts: y Suppose a corporation is organized as a non-stock corporation and the articles is silent: May the non-stock corporation declare dividends? y Suppose a corporation is organized as non-stock but there is in AOI power to declare dividends: What kind of organization is that? Null and void ba dapat? Club of Filipino v CIR: It is the authority to declare dividends which makes a corporation a stock corporation. y Can we not argue that this corporation, because there is authorization, must be treated as stock corporation although organized as non-stock? y The other way around will also pose the same problem for us: Suppose prohibition to declare dividends, how to classify that corporation, stock or non-stock? Which one prevails over which? Silent because that s not allowed.___ Problem will arise if organized as stock corporation but prohibition in AOI to declare dividends, or if the corporation is organized as non-stock corporation (no authorized capital stock divided into shares) and yet there s a provision allowing for the declaration of dividends. Which one prevails: authority to declare stocks OR the form ? If the form prevails, CIR v Club Filipino is no longer a controlling case. If form prevails over authority: Argue that authority is illegal because contrary to principles of corporation law that a stock corporation has authority to declare dividends. In which case, form prevails over authority. BUT if form prevails, then it will control the characterization of the nature of the corporation. Kung meron shang authority to declare dividends although the form is non-stock it will be treated as stock so that will be authority prevailing over form. Stock corporation with prohibition, and that corporation will be treated as non-stock although organized as stock. Best way to put it, when you see an actual document articles of incorporation. I ll show you an actual AOI and then tell you what type of private corporation is it? Stock or non-stock? How will you answer the problem, what will you look for in the articles to determine the type of corporation described in the articles. When DLC was SEC Commissioner, he had an opportunity to render an opinion. Manila Bay Yacht Club is a non-stock, non-profit corporation. It collects m onthly membership dues in exchange for which entitled to uses facilities of yacht club. You garahe your sailboats in their marina. Breakwater. President of Yacht Club was then Atty. (now Justice) Tony Carpio. They needed additional capital to upgrade the facilities and additional operating capital for restaurant and other services. Wala tayong mga specialized board. Isang security lang ang tinetrade, shares of stock lang. Wala silang shares of stock so wala silang pwedeng ioffer as IPO. Why don t you follow what other non-stock corporation had done e.g. Ayala Alabang created a corporation which owns the assets. If you buy a share of stock of corporation, not automatically make you a member. Not a member unless a stockholder. No dividends because retained as additional operating capital. Bottom line: No surplus profit available for declaration of dividends. Ayaw ng MBYC kasi costly mashado. Proposal: Amend the articles to create an authorized capital stocks divided into shares, BUT for it to remain as non-stock corporation. Hindi lang chopsuey yan, parang yak (large cattle crossed between beasts of burden not related to each other). Another option offered by Sir: Dissolve this stock corporation to convert into non-stock. Amend lang the AOI. BUT what is the effect of the amendment? It s as if you dissolved the non-stock and then incorporate a stock corporation. Whatever assets were left after paying off obligations will be used to subscribe the initial subscription of resulting corporation. Contribution to the capital of the resulting non-stock corporation: they don t like it because of tax incident Every time a corporation is dissolved and liquidated, it gives rise to tax incident. Gusto nila i-amend but remain as non-stock corporation. Sabi ng commissioners, may third option pa ba, tawagin nila si Danny. Maybe, CIR v Club Filipino is still good law, principal distinction is authority to declare dividends. If that is principal distinction, form not authority. If authority to declare dividends is in AOI, regardless of form which it was organized, should be treated as stock corporation. When there s prohibition to declare, that should prevail over the form, on the assumption that CIR v Club gives us the real distinction between these two types of corporation. How do we solve MBYC problem? Bigyan ng authorized capital stock divided into shares but lagyan ng prohibition to declare dividends remain as non-stock + require that corporation cannot amend that provision without (condition to prevent to avoid matapos maclassify because of prohibition) treated as stock corporation. Whether a corporation should be treated as non-stock corporation applying CIR Club, authority is distinction. This is the classification into stock and non-stock. Saka na corporation sole. From now on, we shall divide our discussion into stock and non-stock. Stock muna after finishing that, that s the time we go to non-stock. Easier to study non-stock after stock. Point out distinctions.

PARENT AND SUBSIDIARY CORPORATIONS

Last meeting, corporation has a personality separate and distinct from personality of its stockholders. Juridical person ang corporation. As such, what are its rights and obligations? In Stonehill v Diokno, is corporation a juridical entity entitled to protection of bill of rights? Of course says SC. Constitution does not qualify the word person hence even juridical person is entitled to bill of rights. Harry Stonehill is a GI during WW2. After liberation, he looked for an opportunity to make money so he made cigarettes through a factory. Lumago pa ang kanyang business which lead to his bribery for his businesses to be treated specially and to have protection, maraming bina-bribe na government officials. In fact in one case, remember Arnault v Nazareno? Sabi nung tao ni Stonehill, may payola daw sha. List of congressmen who receive money. Arnault was summoned, appeared to testify. Invaded corporate offices of Stonehill, one truckload of documents from his offices. Kaya kinuha yung document para hindi na mabunyag not to file a case against Stonehill. Stonehill instead filed a case against search done in his offices.

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SC said tama si Harry Stonehill. Hindi pwede shotgun warrant, specify place to be searched and thing to be seized! Did SC release all the documents? No, because they were owned by your corporation. Therefore, you are not your corporation. Different and separate personality from your corporation. PERO hindi ba dapat wala rin sha personality to question the warrant? May a corporation adopt a baby? Swerteng bata ang maaadopt ng SMC! May board din sa Family Code: husband, wife and the court in case of spouses disagreement. The corporation board will also decide where the baby will go to school. What is the purpose of adoption? Mimic the relationship of parent and child. So what is the original condition that it s supposed to mimic, a natural parent and a natural child. Corporation cannot possibly mimic the role, duties and obligations of a natural parent. Purpose pa lang, hindi na lulusot ang corporation. Kaya nga adoption even though not provided in the law expressly, only a natural person will qualify to adopt, implied it is there because there is also citizenship requirement in adoption. Underlying assumption in adoption: Natural persons lang yun kasi filiation which is not applicable to juridical entities. Kaya nga parent and subsidiary not parent and child. Why use parent then? Kasi yun ang ginamit by analogy to describe the relationship between these two corporations. May a corporation own shares of stock of that other corporation? Yes, corporation has power to own property (like shares), it therefore maybe a shareholder in another corporation. If it owns all the shares of the other corporation (that s possible), that corporation will now control the other corporation. In Roman Law, controlled ng parent ang child kasi chattel lang ang latter. 50 years ago, that concept still reverberates. Dominion of parents over their children, that s why they force who to marry. Pambayad utang. Parents have power of life and death over their children. If corporation has control over the other (parens patriae), the other corporation is called a subsidiary. Does a corporation have a citizenship? Yes. So does the citizenship allow the corporation to vote? Constitutional provision implies that only natural persons may be citizens of this country. Corporation, a juridical person, can only have nationality but not citizenship. This principle is followed all over the world. by holding company. Transactions over shares of stocks are treated specially. Maybe I don t know Tax but I know the Commissioner! Therefore, VENUS MEJIA YOU NEED TO BECOME TAX COMMISSIONER! CORPORATION SOLE inserted in the code to accommodate the Catholic Church which is a dictatorship of the Infallible Pope which cascades to lower levels like cardinals, bishops and parish priests. Behind the mysterious death of a pope is a Jesuit. Father general of Jesuits is the Black Pope. What is the liability of the parish when priest enters for and in behalf of the parish? Crown and the miter. Limit the liability of the bishop. What is the personality of the church? Berlin v Ramirez: Aglipay seceded from Roman Catholic Church, joined by many parish priests in Ilocos and one in Bicol. The Bicol Bishop suddenly declared: Itong church na ito, Aglipayan na ito! Nueva Caceres filed MTD on the ground that Catholic Church had no standing. ISSUE: What is its personality to bring suit to recover the church? SC said How dare you? Wala pang Pinas may Catholic Church na. Anomalous diba? Iglesia ni Cristo is also organized as a corporation sole. Aglipay made his church as religious society not a corporation sole with a board kaya laging nag-aaway. Kaya yung doctrine of infallibility, it s a th th recent creation, wala yan during the 12 and 14 century. Ginawa lang yang dogma so that pope will have ascendancy during quarrels inside the church. Next meeting: Formation and organization of corporation.

AFFILIATE/SISTER CORPORATION
Relation of two subsidiaries which are controlled by the same parent corporation. Why not brothers? Ayaw ng lalaki na nacocontrol sila. Babae lang pambayad utang. Pero ngayon iba na ibig sabihin ng phrase na yan. Karma na yan. Some jurisdictions don t use sister corporation as formal term: Affiliates! They find sister to be too vulgar. All three of them are affiliates because they have relationship with each other. For these affiliates, may isang term na ginagamit: Group of corporations e.g. Yuchengco, Lopez,

HOLDING COMPANIES
Organized to hold nothing but shares of stocks of corporations When the owner of parent corporation will buy other corporation, shares of stocks will be bought by the holding company. Owners own the control company. Parent is the holding company. Bakit ginagawa ito? Under the NIRC, there s a special tax treatment for shares of stocks held

7 CHAPTER III: Formation and Organization of Corporation

22 November 2010
WHO MAY FORM A CORPORATION
Who may form a corporation? Law provides for a minimum and maximum number. May all of the students in this class become original members of the corporation? They want their names to be written on the article. Pwede ba yun? There is a difference between an incorporator and corporator. Law does not provide a maximum number of corporators originally forming a corporation. Not all the 60 may be incorporators. Only 15 of the 60 may be listed as incorporators. But all the 60 may be listed as SH originally forming the corporation. See S14. Nos. 7 and 8. Original subscribers has no limit as to number. All of you may be listed as original subscribers. Address has to be indicated opposite the name, number of shares subscribed and amount paid on your subscription. But not all original subscribers may be incorporators. How do we know if original subscriber is an incorporator? What differentiates original subscriber from an incorporator? They have to be named one by one. S14 No. 5. Not only that, the five people have to sign the articles. Original subscribers do not sign. San nakalagay yung pumipirma sila? S5: and who are signatories thereof Incorporator ay hindi nababago. Corporation may exist more than 50 years through extension of term, it may amend articles several time but not amend the incorporators because it s fait accompli. What special function do incorporators perform? Is there special function to be performed by the 15 so they have to be separately named by the nd articles? S46, 2 paragraph. There are many sections there with many paragraphs so ngayon pa lang lagyan niyo na. By laws shall be approved and signed by the incorporators y Why incorporators only? Sasagutin natin yan when we get to bylaws. y cf that section with S61: May a subscriber to a corporation which is still to be registered with SEC withdraw his subscription? Yes, he can withdraw provided all of the other subscribers (NB not incorporators) consent to the revocation. May an alien be an incorporator? If you will look at Corporation Code, there s no prohibition for alien to be incorporator. As a GENERAL RULE: An alien may be an incorporator. May all the incorporators be aliens? Yes, no prohibition either. Kaya lang, majority of them must be residents of the country. i.e. resident alien Why does the law require majority of the incorporators to be residents (either alien or citizen)? Law does not limit the residency requirement to aliens. It applies to all incorporators. So that the regulatory agencies in the Philippines can easily compel and enforce regulations against this nascent corporation. This nascent corporation may comply with regulations through majority vote. Since they are residents, summons may easily be served on them. There ll be no problem about service of summons. Courts can easily acquire jurisdiction over persons of residents is much easier than when the person is a non-resident. Limitations and restrictions are not in Corporation Code but in constitution or special laws. But may he be a subscriber to shares of stock of another corporation? Yes. Original SH? Yes. In fact, in practice, you ll readily notice, all corporations which you will incorporate will be owned by corporation which shall be listed as an original subscriber. Incorporators are only nominees with one share each.
y y

Constitutional prohibition on mass media which should be controlled and owned by 100% Filipino. If the corporation will own land, 60% must be Filipino.

May a partnership be an incorporator? No, because the law is very very clear, incorporators must be natural persons which a partnership is not. For the same reason, corporation may not be an incorporator.

STEPS IN FORMING A CORPORATION

1. Promotion stage

Those who initiate the formation of a corporation are necessarily the promoters of the formation of a corporation. Hindi uubra na yung 5 tao nagkita sa CR, nagkatinginan, let s form a corporation. Usually one or 2 people will think of a business opportunity. Usually when he has necessary resources to put up business, di na mag-iimbita ng kasosyo yan. If for one reason or another he does not have the resources, he will look for other people to provide lacking ingredients for business to take off. E.g. capital, connection with other corporation who will provide us with contracts, supplier of cyanide. Most likely he can say that the business is a partnership. If after analyzing the pros and cons, the promoter decides that corporation is best business organization to accommodate requirement, he will promote the corporation. e.g. kakausapin money provider, formula. Process of convening people to participate in the organization. Those responsible for promotion are all promoters. What if he only provided the elements for business organization to come to fruition but did not join? Still a promoter, no need for him to be an incorporator or subscriber. BUT experience tells us that he who actively participates in the formation, he ends up with the controlling interest in the business corporation. Incorporator must be subscriber to at least one share of stock. Why not? If he doesn t he is only a miron/audience. Mas maingay pa sa players. From the Spanish word mira, which means to watch. An incorporator occupies a special position in the incorporation. For the incorporator to have a genuine interest, there must be genuine stake in the corporation. Unless he owns a share of stock, unless he has invested in at least a share of stock of the incorporation. Are there instances that the promoter is not really kasahog? Sulsol lang. Danilo Ortigas y Ayala who own a big track of land in Sta. Rosa, Laguna. You, you form a corporation and develop my land, di na ako makikisali sa kita niyo. The idea of forming a corporation is marketed, promoted. End in view: gather all required investments and subscribers and everything necessary for the corporation to go to business. That s what you call promotion.

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May a promoter enter into contracts? Yes, he may enter on behalf of corporation still to be formed. We discuss that in Chapter V. See Page 19. Illustration: There is a good vacant lot we can turn into a parking building with beerhouse underneath. DaniCon and Oposa s dad organized the first debating and poetry reading club in the college. Ang dami niyang inincorporate. He tried convincing the owner of land to join the corporation as stockholder. But landowner refuses, you only want my land, upahan niyo na lang. It will take 2 weeks to complete the registration process, eh by the time corporation is registered, Hudyo yan, itataas na niya, or ipapaupahan sa iba. Even before the registration is done, nakipagcontract na sha. That s called a promoter s contract. What is the status of the contract? Is that valid? We will discuss what a promoter can do later. But the name may also be a business name. Who holds the registry? DTI. It may even be trade name or brand name. Who holds registry? IPO It might be copyrighted. What has copyright? Intellectual creation which is protected by law. Who holds registry? National Library

2.

Registration

If Oposa succeeded in gathering required number in his business proposal, they will now register i.e. formalize the organization of corporation as their form of business organization. What exactly do we do here? a. Drafting the AOI maraming kaduktong na documents yan and we will discuss it later

Concrete example: There s a businessman who wanted to go to business and chose corporation as the form of business organization so he requested his lawyer to register a corporation with the SEC. Yung lawyer, hindi UP grad so ang alam lang niya, nagparehistro lang. Ano yung business nung investor? Restaurant. Gustong name? Restaurants R (baligtad pa) Us. Shadong original diba? Nagpaverify. Please check if this name has already been appropriated. Nakakuha sila ng magandang spot sa MegaMall. Nagbukas ng resto sa MegaMall so may malaking karatula sa labas. On the day of the opening, dumating ang sheriff of Mandaluyong RTC enjoining them from using the name because somebody else has registered it as business name with the DTI. What am I trying to tell you? Not simply because you ve succeeded in registering a particular name as corporation name, it will not give you exclusive name as business name. In fact, you may not have the right to use it as a business name because somebody else has appropriated it with the DTI. Ganyang ganyan yung nangyari sa Dad s. Sari-sari store sa admin bldg sa ilalim ng chapel ng White Plains. May Dad s Corporation open Dad s restaurant in Megamall? Nilapitan may-ari to benta the right to use the name. He was paid P200,000. Racket yan ng mga lawyers. Maglist down ng mga newly opened establishments sa US tas ireregister dito sa Pilipinas. Sasampalin kayo pag ginawa niyo yan! Sir s wife s case: Couturier, design ladies shoes carrying his surname as the brand name. Hindi Santos ang surname niya, mabibilang sa kamay ang may ganong apelyido. Registered na kagad by someone not having that surname. Now she s in the process of cancelling the registration of the first registrant. What am I trying to tell you? Even if corporation has succeeded in registering the corporation under the chosen name, even if corporation succeeded in registering the name of the corporation as a business name with the DTI, this corporation may still be prevented from using corporate name as a brand name. E.g. Oposa ang apelido, registered as corporation. Registered as a business name with DTI on a store na Oposa Shoes. E di ngayon ano nakalagay sa store, shoes. Nakalagay dun sa mga shoes ay Oposa. Tas sa opening, may TRO dahil registered by another owner. Ergo, to ensure that your client will have exclusive use of a particular name, you should check not only with the SEC (corporation and partnership registry), also business trade registry of DTI and then also tradename and trademark registry of IPO and lastly, the copyright registry with the National Library sa Kalaw. When name is already appropriated, the SEC will add 2 more terms to make it different. E.g. Acme, Zenith, Summit, Pinnacle, Top. Lahat ng topmost gusto nila. Acme Inc. first na naregister 1930s pa lang. Oposa also wants Acme so what he did was add two terms, hence Acme Real Estate Development Corporation. Pero kung may corporation na Acme Devt Corporation, 3 na idagdag mo. Kung gusto mo talaga magamit ang acme, isang km na ang haba. Dagdag ng 2 in order to make it different from an existing corporation. SEC also looks into the line of business. SEC has freedom in determining WON a name is confusingly deceptively similar. Wide latitude of discretion. If you do not agree with the SEC, may appeals naman under PD 902-A go to CA from SEC on petition for review on certiorari. E.g.

(1) Corporate name If you were the draftsman, what s the first thing you should do to come up with a draft of the articles? What to name this corporation? What can you use as a corporate name? Why must this business organization have a name? See S18 Can we use Pacquiao Trading Corporation? S18 gives us restriction on the name a corporation may use. May not allow if it is: [1] identical [2] deceptively or confusingly similar to that of any existing corporation because there may be unfair competition, fraud or misrepresentation to the transacting public Not just similar corporation, but may also include partnership. E.g. San Miguel Corporation and Saint (pronounced as San because it s French lol) Miguel Corporation. People might part with their money or valuable resources believing they are transacting with the real SMC. It s like fraud committed by some BIR people, there s one who got charged with plunder. He registered a corporation whose acronym is BIR. Opened an account under the name of the corporation. in the application of bank account, with check payable to BIR hundreds of millions of pesos ang naideposito niya. Ano parusa niya? RP kasi wala nang death penalty. BTW, differentiate between RP and life penalty? But in the law penalizing plunder, it s RP. Therefore, kapag nakaisip kayo ng pangalan and you put it in AOI and you bring it to SEC, SEC may say, Sorry naunahan na kayo. There already exists a corporation under that name. So how do we deal with it? We go to the SEC and to check whether the name has been appropriated and then reserve. But they only have registries of corporation and partnership. Pwede ka bigyan ng go signal ng SEC but later on you may not open it because it has already been appropriated by a partnership or a single proprietorship. Pwede rin open a business under that name but you may not use it as a brand name kasi appropriated in a patent office. What is in a name? A particular name May be corporate/partnership name. When used by one corporation already, can t be used by another corporation or partnership again.

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Lyceum as name of school. Lyceum University in the Intramuros has been existing as corporation for many years, owned by Laurel of Batangas. Is Lyceum a common word? Greek. Pero meron kasing isang Lyceum sa Northern Philippines University (plus two words na yun). Nag-file Lyceum University to cancel registration LNPU on the ground of similar. Natalo ang LU. It will give people a wrong notion that that Lyceum is a branch of LU in Intramuros. I don t know why they lost. Deceptively or confusingly similar yan. In order to ensure that you can use your name when the AOI is presented to the SEC, you must reserve it when available for a fee. Bakit kailangan reservation? Pwede po ba ito? Umuwi ka tas pagbalik mo naunahan ka na, may nakabantay pala. 30 or 60 day reservation. You can even renew the reservation for a fee. Shempre mas mahal pag longer. Sir maganda yung Jollibee Trading and Merchandising Corporation. Hindi yan pwede because the word is copyrighted. That s not in the dictionary. Even if you add 100 words to it, SEC will not allow it. There are prohibited words that cannot be used in a corporation or business name. E.g. name of national heroes. What about RCBC? Rizal there is province. Wala pa yung batas prohibiting the use. Vested right so they cannot be deprived. Jose Rizal University. Term/word national cannot be part of business name of corporation that will engage in financing or banking. Why? Because mislead public that this bank is government-owned and therefore is a solid bank. Hindi yan tutumba. Hello PNB. There s also a law which prohibits the use of name of former presidents unless it s the family using the name. Parang may ganon, check niyo na lang. There s also a law prohibiting the names appropriated by the UN as a regency. E.g. UNESCO, UNICEF. It s a protected name. Names of individuals, dead or alive, unless it is your name. SEE MAGIC NOTES to produce finished case, it will take the place of cash. Hence balance sheet. At any given time, it should always be balanced. Trust Fund Doctrine Sino CPA dito? She will be the resource person for capital structure of corporation. Where is Trust Fund Doctrine in the code? S122 last paragraph Potential SH should know until when his investment will be tied up. It is for this reason that the law requires to state the term for the existence of the corporation. Why 50 years? So that the SH may get liquidating dividends before he dies. Is there minimum length of time for the term of corporation? No minimum. Pero kung magiincorporate ka tas term of existence is only 1 year, sira ang ulo mo non. It has costs eh. Pagkakuha mo pa lang ng certification, expired na agad. Maximum is 50 but extendible for another 50 years. Extensions have no limit. (5) Names, nationality and residences of incorporators The incorporators in S10 cannot be less than 5 nor more than 15. We have already discussed the reason behind the minimum number of 5. But why is the max 15? Kinapa-kapa na lang ito. Arbitrary. Wala lang. Why are the names, nationality and residence required to appear in the articles? y Name is to identify who they are y Nationality (actually it should be citizenship) so it will be easy for SEC to regulate in enforcing nationalization laws. How would they discover if Anti-Dummy law has been violated, constitutional requirements y Residences to know if majority of incorporators are residents of the country. For them to know that, articles should show where they are residents so SEC can implement Corporation Code requirement of majority residency (6) Number of directors and trustees y Directors for stock corporation y Trustees for non-stock corporation If number of incorporators is 5, may there be 15 directors at the board? Must the incorporators correspond to the number of directors? No requirement that number of incorporators should correspond to the number of directors. Ergo, there may be more incorporators than directors in a corporation and the reverse is also true: more directors than incorporators. Therefore, it will not be uncommon for you to see articles where there are 15 incorporators and yet only 5 members of the board. HOWEVER, experience has showed us that in 90% of the cases, number of incorporators correspond with directors. GENERAL RULE: The limitation as to minimum and maximum apply to both directors/trustees and incorporators. ONLY EXCEPTION: Non-stock corporation Where the trustees may be more than 15 Anecdote: DLC was instructed by the boss to make AOI of non-stock. With 20 incorporators! Pwede yan. Isasampal ko sayo. Look at S92: only allows the TRUSTEES, not incorporators

24 November 2010
(4) Term of existence Investments remain with the corporation during its term. - Why? For the protection of public who may extend credit to the corporation. Anyone who extends credit to the corporation may be presumed to have considered the capital of the corporation. Therefore, it has the right to presume that such capital will remain with the corporation until the credit has been paid. The contributions therefore of the stockholders in the capital of the corporation are held by the corporation in trust for the benefit of laymen and creditors of corporation who have right to presume that such contributions will remain with the corporation until the dissolution of the corporation. Of course, not the entire amount of those contributions are intact at any given time because corporation will need money/funds in its commercial or business operations. At the time corporation was incorporated, total contribution of SH amounted to 2M, when that corporation goes into business, it will make use of the 2M as its initial capital. When that initial capital has been used up, cash will be gone pero mapapalitan ng ibang other assets. E.g. acquire piece of land where the plant will be constructed, then that will take the place of the cash. If they use the cash

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Kailangan bang odd numbered yung members of the board? No, pwedeng even, walang sinabing bawal. HOWEVER: In case of educational institution (non-stock corporation) may sinabi diyan na dapat multiples of 5. (See S108 1st par) Non-stock corporation must be multiples of 3 if they will adopt term of office for their trustees of 3 years. Stock corporation with 1 year term, no such requirement oddnumber. But why do you always see odd-numbered? So that there ll be no tie. DLC says kalokohan yun kasi assuming present lahat sila. Pano pag umabsent yung isa. (7) Names, nationality and residences of incorporators who shall acts as persons or trustees until duly elected are qualified Baka mamaya naapprove yung AOI by the SEC eh di pa nakasched yung meeting for the election of directors. In the meantime, law wants that upon the approval, there are already interim directors who shall continue and complete the organization of the corporation. They are called interim directors designated in the article till the regular directors shall have been elected and shall have qualified. (8) Authorized capital New terms: y Authorized capital stock (ACS) maximum amount of capital corporation may raise from contributions (To be discussed in Capital Structure of Corporation ) y Par Value arbitrary face value given to a share of stock. Determination that value of share of stock is piso. Not necessarily market value of share, it s just a bench mark. Corporation has fixed the benchmark value for its shares of stocks. So that any value below that benchmark will be a scam. It will give us the picture of the financial status of corporation, it s on the red. If it s above the par value, that will be a premium. Bakit tumaas? Because maybe investors want to subscribe to shares of stock of corporation. Supply and demand or net worth (assets less liabilities) net worth of share if divided by all shares. It may be bigger than value. Quick determination if corporation is making money or in the red. y SEC will be given info on WON the corporation has complied with 60-40 requirement like in ownership of land, nationalization law (educational corporation, mass media), retail trade, advertising (7030) SEC has to know who the SH are. y No par no fixed value make it easier for corporation to raise money from the subscription in shares of stocks CK s question: Corporation cannot issue its shares of stock for a price/consideration less than par (S6) What about non-stock? It has no ACS but it has capital which it needs to operate. It has to be stated in the article. Where will that come from? Contributions of the members. All those who paid membership dues must be paid therein. The law does not require all the original subscribers to sign the articles. But while only the incorporators are the signatories, most likely, the original subscribers will not contribute and will not allow their names to be included unless they have seen the articles. Assumption natin ito. Hindi natin sila pinapapirma baka di na mabasa ang articles sa dami ng pirma. Hindi lang execution page (last page where the names are typewritten above which they should sign) ang pinipirmahan jan. They must also sign the margins. Why sign the margins? What do the marginal signatures prevent? Substitution. Pero pwede pa rin silang magkonchaba na pumirma na lang ulit to sign the falsified page. Its purpose is to authenticate the page as the page originally forming the articles. SEC requires articles to be notarized (acknowledged before the notary public) - Notarial acknowledgment in S15. By the incorporators who signed the articles, b. Filing of the AOI and payment of fees ito na yung mga maraming kaduktong na documents

After the AOI is done, attach other documents: a. Treasurer s affidavit because corporation code requires that at least 25% of ACS be subscribed and at least of the total subscription be fully paid.

How will SEC know this? All the subscribers are listed in the articles and their respective subscriptions are listed opposite their names. Therefore, total subscription is there found in the articles. We ll see how much is subscribed vis--vis ACS. How will SEC know how much is paid? Every original SH nakalagay dun ang amount subscribed and amount paid. Pero maraming Filipino ay sinungaling. Bayad daw pero hindi bayad. That s why law requires treasurer to execute affidavit. Why affidavit? Subjects him to perjury May nadedemanda ba dito? Meron kasi nagrarandom check ang SEC. Paminsan-minsan may nahuhuli sila. Kulong ang penalty dito. b. General information sheet Form is available online. It s included in the express lane form. Para hindi na itype ang S15. You just fill it up with information and then sign. May typewriter pa ba kayo? Itago niyo yan dahil relic na yan.

Why can t we just make a Word template? Express lane purpose is not only to make it convenient for applying corporation in drafting and making articles. It s not the only reason. To facilitate examination by the SEC. If you were the one who made the articles, SEC will scrutinize every line. Habang humahaba yan, tumatagal ang approval. They made the expresslane form and so they re sure walang illegal dun. Expresslane Form was introduced when Monico Jacob was SEC commissioner. That innovation won an award. From a time frame of 3 weeks to incorporate a simple corporation, nareduce into 3 days. This facility helped the economy through increased commercial transactions. When DLC was in the SEC, tanggalin na rin yung expresslane form, put the template in the computer. Isang datasheet na lang ang pipirmahan. Pero ayaw naming yan, threatened yan kasi wala na sila work. It s the cooperative that prints the expresslane form. Hindi pwede ang P250 sa isang page. Member pala si sir ng cooperative. P20,000 a year. Expresslane form pa rin!

3.

Issuance by the SEC of the Certificate of Incorporation

What documents will SEC ask you when you file? y Express lane: articles and by-laws y If not express lane: pwedeng AOI lang, later the by-laws What should come with AOI? y Reservation for corporate name y Treasurer s affidavit y General information sheet

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You should pay the following: y Filing fee 1/10 of 1% of ACS (P1000 for every million) y Legal research fee goes to the UP Law Center. Research daw of the UP Law faculty y Miscellaneous fees When you pay, you get official receipt. Then you get official receipt stamp. Then it will be brought to examination by examiners. They ll check if documents are in compliance with requirements of law. Take note that in addition to those requirements, the SEC will also require presentation of the consent given by other government agencies which regulate the business of the corporation whenever the law or rules and regulation applicable require consent of regulation agency before SEC may act on application for incorporation. Basis in corporation code S17, last paragraph: Banks, insurance companies etc because they are regulated by another government agency. Enumeration in this paragraph is not exclusive. Other corporations fall under jurisdiction of other government agencies. What government agencies usually do is write to SEC and inform SEC that corporation engage should not be processed without our favorable recommendation. Tatandaan ni SEC yun. Anecdote: Law office from post-grad. Golf everyday partner. The rainmaker who looks for client. Sir doesn t play golf because he s ultrasensitive to sunrays. Good golfer is a good lawyer. Pag ganon ang kliyente madaling magbayad, hindi nag-iisip ang kliyenteng yun. Is line of business important? Under the regulation of another government entity, look at the regulation of agency if that agency requires other things to be complied with like minimum ACS. There is no minimum ACS in Corporation Code (S13). But that s bullshit because if you will look there is a P5000 reference in treasurer s affidavit (S14). If minimum paid up is P5000, what is the minimum ACS a corporation may have? P5000, fully paid and fully subscribed Purpose clause in the AOI: There is a form book for that. 6 volumes lang naman. American publication. E.g. - Labor recruitment approval of POEA is needed. SEC will forward you to POEA to ask for approval if you go there without prior approval. SEC will not process your AOI. What does POEA require? Marami! Minimum ACS, cash-bond. You have to be prepared. - You cannot incorporate a travel agency unless it is with the approval of DOT. Bank unless without approval by CB. - Insurance corporation unless approved by Insurance Commission. Hospital approved by DOH. - School approved by CHED or DepEd. - Security agency regulated by an agency in Crame. - Pawnshop regulated by CB Makati law firms usually have a checklist for additional requirements by government regulatory agencies for incorporation of certain businesses, they keep it updated. Otherwise, you ll look like you don t know what you re doing. Lesson: Always look at the line of business. Pick up phone and start calling. Best person to ask is the SEC. When all those approvals have been obtained and you have complied with all those additional requirements, okay lang sana kung submitting. It will be different if problem is on the minimum ACS. Suppose the regulatory agency requires higher ACS and the one provided in the AOI is lower than the required. Ano gagawin mo ngayon? Baguhin yung AOI. Hindi pwedeng additional lang na ACS. Pag winithdraw mo at ibinalik mo, magbabayad ba ulit ng filing fee? Remedy of SEC: Withdraw the AOI not the application so that you will change/modify (and not amend kasi wala pang corporation). They will note that the AOI is withdrawn for changing, not the application itself. So no more need to pay again. Unless you increase, you must pay for the deficiency which is the amending fee now (Mai s question).

4.

Organization

After SEC has completed examination of articles and all accompanying documents, and SEC has been satisfied that all requirements of law has been complied with and nothing in other documents is contrary to the code or any special law/rule or regulation, SEC will approve the application for regulation. SEC will issue a certificate of incorporation. From then on, the corporation is registered and has acquired corporate personality under S19. The law does not require a corporation for all its SH to be fully subscribed, only 25%. Why 25%? It s a commercial or business reality that at the start of business that that amount of money is not needed. Gradual need yan. 25% lang ng subscribed ang talagang kailangan. Or kung yun ang kailangan, yun lang ipepaid up so there ll be room for additional subscription later on without having to resort to amendment of articles. Meron ka pang unissued stock na pwedeng iissue in the future. Kung ano lang kailangan, yun muna ang paid up. The rest will just be commitment for future requirements. It will become counterproductive if fully subscribed. Effective deterrent and discourage investors to open businesses. Masisira ang cash flow. Constrict the market for investors. Mahirap kwentahin yung 30%. Yung 25% madaling kunin kasi . Arbitrary number. Feel lang nila na reasonable yun.

26 November 2010
Grounds to reject an article: S17 Are the 4 grounds exclusive? No, there are other grounds for the rejection of the articles. Those are found in special laws as well as rules and regulations promulgated by the SEC. The SEC is empowered under S143 of the Corporation Code, Revised Securities Act and another one to promulgate rules and regulations in its exclusive jurisdiction to supervise corporation organized under the Code.

DEFECTIVE ATTEMPTS TO INCORPORATE

In approving or disapproving the articles of incorporation applying for registration, the SEC will examine the articles. Requirements for incorporation are classified into two: 1. Mandatory may either be: a. Total noncompliance Corporation will be either de facto or non-entity. See Hall v Piccio and Municipalty of Malabang v Benito

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b. Substantial noncompliance no effect on the status of the corporation but SEC may require him to comply with that which has not been totally complied with. Corporation will remain a de jure corporation In Municipality of Malabang v Benito, SC cited with approval the cases decided in the US on de facto corporations. Sabi ng court, not all corporations defectively formed are de facto corporations. Ano lang ang de facto? Only those which were 1. organized under a valid law who have colorable attempt to organize under that law and who 2. had exercised corporate powers in good faith are de facto corporations. 3. Lastly, there must be user of corporate power in good faith. (Must comply with these three requirements) How about corporations defectively organized not falling under that category because one of the 3 conditions for de facto existence was absent? What do we call them? They are non-entities, neither de factor nor de jure. Non-existent corporations. They never became either a de jure or a de facto corporation. What happened in that case? During the time of Diosdado Macapagal and Carlos P. Garcia, several laws were passed by congress creating new municipalities, carving out territories from existing cities and municipalities to create new ones. A municipality in Mindanao was created under this new law, i.e. Malabang. Manuel Pelaez of Misamis challenged the validity of creation of new municipality on many grounds one of which is gerrymandering. Second ground, relied upon in latest SC case reversed on motion on recon, creation of cities and municipalities kasi nacreate these cities and municipalities without compliance with the requirements of the constitution. But since you re in the Philippines, cases extend for years. Municipality was created already while the law creating it was still pending. Several years thereafter SC rendered judgment declaring the creation of the municipality as unconstitutional. What happened to the LGU now? It has entered into contracts now, it has acquired properties and liabilities. What is the status of all those transactions? Are they void, enforceable? Are those liabilities still subsisting despite the declaration of unconstitutionality of law creating the municipality? SolGen says it s de facto corporation, therefore all the acts should be respected. The appointed officials who discharged their powers before law was unconstitutional are also de facto. SC says there can be no de facto corporation where they can be no de jure. Impossible to have de jure municipality of Malabang because the law itself creating the municipality has been declared unconstitutional. The first requirement for de facto corporation to exist is absent: valid law under which the corporation may be organized. There was no such valid law because it was declared unconstitutional. It creates no rights, imposes no obligation. In the eyes of the law, it did not exist at all. What kind of corporation is it now? Neither. It s a non-entity. What happens to the transactions? Respect them because the passage of the unconstitutional law and its implementation by the creation of municipality are operative facts which SC cannot close its eyes upon. They have to be respected. DLC finds the foundation of this decision as shaky. Declare non-entity pero walang effect, as if de facto pa rin cos of the operative fact. Fait accompli, nangyari na. Naimplement na ang batas. They can no longer turn the hands of time backward. Di pwede scratch scratch rewind. Problem with this: Municipality of Malabang v Benito, SC used in the municipal corporation by analogy doctrines applicable to private corporation.

2.

Directory noncompliance with this shall not affect the status of corporation when the SEC approves the articles. Non-compliance has no effect. But that doesn t mean lusot na. SEC may require him to comply even after certificate of incorporation has been issued to him. SEC will issue an order requiring newly incorporated corporation to comply albeit belatedly. Corporation will remain a de jure corporation

BUT how do we know whether a requirement is directory or mandatory? If you will look at Art. 5 of CC (Acts executed against the provisions of mandatory or prohibitory laws shall be void, except when the law itself authorizes their validity.), not even the CC tells us when a law is directory or mandatory. But there are some badges which somehow gives us a hint on whether or not a requirement/law is directory or mandatory. One of those badges the effect of non-compliance. If the law provides for a sanction for non-compliance with a law or a requirement, then we can conclude that such law or requirement is mandatory because there is a sanction. There is a penalty for non-compliance. It is directory when the effect does not constitute a penalty. It does not constitute punishment. If the result of noncompliance is penal in nature, or if the result or effect of non-compliance will inflict damage to the non-compliant party, then the law or requirement is mandatory. What requirements are mandatory and what are directory? Maybe we can safely assume that both those requirements are mandatory. The case of Hall v Piccio and Municipality of Malabang v Benito is instructive. Kapag total noncompliance, pwede maging defacto, pwede maging non-entity. What is the difference between de facto and de jure? y De jure corporation has all the powers of a corporation because it was properly organized y De facto corporation there is a defect in its corporation. Corporation that resulted will not be de jure. BUT it enjoys all the rights, possesses al the powers of a de jure corporation. What then is the difference between the two? The only difference is availability of a successful attack on its existence. y If the corporation is de jure, nobody can successfully attack its de jure existence. Anyone who may question its legal existence will fail. No one shall succeed to oust the corporation from its corporate existence because it is a de jure corporation. y In the case of a de facto corporation, a successful attack may be lodged before the proper tribunal. A de facto corporation may be ousted from its corporate existence. Who may attack/challenge the de jure existence of a corporation? It s stated in the law, the SolGen. When he files an action to oust a corporation form its corporate existence on the ground that it s not a de jure corporation, the action is a quo warranto. Where does the SolGen file the quo warranto action to oust a de facto corporation from its corporate existence? S20 it has to be filed with regular courts. SEC has no jurisdiction. Let s see if under the RoC, who has the jurisdiction on that matter.

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Supposed Corporation Code was declared unconstitutional after several years of existence, what will happen to those private corporations during time it was not yet declared unconstitutional? They can t become de facto because existence of valid law under which the corporation may be organized is wanting. Pano na the katakot-takot na contracts? PROBLEM: (Actual case) Spouses with three children: 7, 10 and 12 years old. The husband opened a business. Nagclick ang business. It s high time for use to formalize this business so he went to SEC to obtain an expresslane form. Who are his incorporators? Sha, misis and three children who are minors. But remember the law requires the incorporators to be of legal age. Sila rin ang original subscribers. Para di disapprove ng SEC ang articles, husband misrepresented in the documents the age of the children. He falsified the document by representing that the 3 children were already of legal age. Sedula lang naman hinihingi nung araw. Articles were approved, certificate of incorporation was issued. After operating successfully for around 5 years, the husband and the wife quarreled. Si Mister ay sumakabilang bahay. May kulasisi. Away sila. Naghiwalayan na! If you want to take care of children, take them. If not, iwan. Husband controls the business. Pag galit ang tao, ano ang gustong gawin. Revenge!!! Parang sa radio. File an action against husband for falsification of public document i.e. AOI. He represented falsely that three of incorporators were of age. Notarized pa nga yan, if not falsification, perjury. Eh kasali ka rin jan! Defense: Hindi ko po alam kung ano yung pinipirmahan ko! As to criminal aspect, for sure there is a crime committed. But the question is what is the effect on the status of the corporation that was issued a certificate of incorporation? not require a quo warranto case for that corporation to be enjoined from exercising the powers of the corporation. They only need to file action/complaint to cancel/revoke the certificate of incorporation of that corporation . Any third party may file it, no need for the SolGen to act on it.

CORPORATION BY ESTOPPEL
Misnomer because it gives impression that created by estoppel of parties. Not correct. No corporation is created by estoppel. You cannot create a corporation by estoppel. It will simply estop the parties who held themselves as corporation from invoking the absence of the corporation as a defense to resist an action brought against them as a corporation. Illustration: Suppose 5 individuals represented themselves to a 3 party as a corporation. Proposing a contract that they were a corporation. Corporate letter head and brochures, perhaps also a fake AOI or certificate of incorporation. Trusting these people, third party entered into contract with them but in the name of the corporation. When you look at the contract, the 3P contracted with a corporation. Entity represented to be in existence by the people with whom he transacted. In every scam, when 3P had already parted with money, abscond na mga kausap niya. Walang dineliver because of this failure to comply with the end of the bargain, maghahanap si 3P ng idedemanda. File a case with the court against the corporation (kasi contract yung evidence niya). Pwede ba sabihin ngayon ng people he transacted with MTD on the ground that party-defendant have no legal personality because it does not exist as a corporation, not registered in SEC? S21, those parties who held themselves out as a corporation will be estopped from raising that as a defense, invoking absence to as defense to resist claim against them. Judgment rendered against corporation, how do we enforce that now kung wala ngang corporation and no property either? As practical/procedural matter, lawyers do this: 1. Before enter with contract with corporation, we check if they re registered in the SEC. Pano kung hindi naicheck dahil hindi UP grad yung naunang abogado, malamang Atenean. Nung idedemanda na, no more Atenista so the UP grad files a case against him. What is the first thing you do when filing a case against corporation? Check the documents with the SEC, where the principal office is, all the latest filings insofar as that corporation is concerned. Hindi parang abogado ni Pinoy. Issue proclamation ng amnesty tas babawiin. Sloppy work! On the job training ba ito? 2. Kung nabisto niyo yung hindi nakita ng Atenista na hindi pala registered with the SEC, what do you do? Idedemanda pa rin but you include the people who transacted with you in the name of the corporation in the name of the corporation. 3. Pero kung nabisto mo nakafile na the case, then amend the complaint to include those people who transacted in the name of the corporation. When Sir supervised OLA students, they had a case like this. Student did not check and filed a case against the corporation right away. Sabi nung people they dealt with, maghabol kayo sa tambol ngayon. Pumasok ako may judgment na, so what do we do instead? Reopen proceedings? You can t execute the judgment cos no property at all. Motion for issuance of writ of execution isinama ni Sir at pumayag yung court. Nakupo UP itey. Natakot siguro the third party so nag-settle na lang. Albert v University Publishing Case you can use for this case. When you discover that no corporation towards the end of the litigation.
rd

1 December 2010
Bear in mind ruling in Hall v Piccio: No colorable compliance with requirements for organizing a corporation until a certificate of corporation has been issued by the SEC. Remember there are 3 requirements for a de facto corporation to exist: 1. Valid law under which the corporation may be organized 2. Colorable compliance with that law in good faith 3. User of corporate powers in good faith In Hall v Piccio, there can be no colorable compliance with law authorizing organization of that corporation until SEC has issued certificate of incorporation. Therefore, till certificate of incorporation, no de facto corporation will exists. That s still good law. Problem left previous session: Wife filed falsification against husband. Surely, falsification was committed. Bigger issue for us is the effect of such fraud committed by the husband in the incorporation of the family corporation. Is the corporation de facto or de jure? Neither. While there is a valid law under which it was organized, there was no substantial compliance with a mandatory requirement of that law. That there be five incorporators who are all natural persons of legal age, in my opinion is a mandatory requirement of the Corporation Code. Failure to comply or substantially comply with this requirement will make the incorporation a defective corporation? What kind of defective corporation? The answer is no, because there s no colorable attempt in good faith to comply with the mandatory requirement. There was no good faith, in fact there was fraud committed by husband in the registration of the corporation. The resulting is not de jure because not substantial compliance. Neither is it de facto because no colorable compliance in good faith with requirement of the law. The corporation is a non-entity therefore it does

14
When SolGen brings suit to oust it from corporate powers, the decision of the court resolved from continuing with its . incomplete sentence Para siyang dinidissolve. It will be ordered disbanded by the court. No right to exist as a corporation. no right to represent yourself to public as a corporation. We don t say dissolve kasi that s used for de jure, but the effect is just the same. In natural persons, what s the capital punishment? Punishment. Papatayin/bibitayin. Dito sa corporation, that s also the capital punishment. Bitay, then dissolved na sha. Though later on, there will be cases (esp ultra vires acts) where the court has adopted the policy not to impose penalty if the corporation can still be enjoined from performing illegal acts. BUT if the corporation is de facto, cannot be. Cause it does not lawfully exist. Though yung illegitimate child, hindi naman pinapatay. When an action is brought against non-existing corporation, what will be liability of party, had there been a corporation, what will be their liability? Limited on their promised contribution or assets of the corporation. What is liability of persons transacted with corporation? No personal liability, if at all to the extent of equity. BUT what if de facto corporation, what is the liability of de facto SH now? Same. Before ousted of corporate charter, limited liability applies. Taken care of by assets of de facto corporation. Equity capital of corporation. Pareho lang ang de jure and de facto, the only difference is availability of successful attack against personality of corporation. What is liability of individuals in corporation by estoppel? No limited liability because no corporation. Natural sila lang in their personal capacity. They acted on behalf of a non-existent principal. Principle of agency. Principal represented to public is non-existent. Under law of partnership, they are liability. Joint and solidary as joint tortfeasors. Their liability is with all their present and future property. Para silang de facto partners diyan in a general partnership. Tandaan this. You will find this handy in practice. Naeencourage ko kayong maging corporate lawyer kaya onti na lang ang nasa criminal field. Corporate na ako talaga from the start. The action to revoke registration of corporation is still with the SEC by virtue of PD 902-A, not with the regular case. Suppose complaint for revocation is successful on the ground that there was fraud in registration of corporation, pero 10 years na tumatakbo ang corporation then you file complaint is only now. SEC cannot do anything if there s fraud. What happens to the corporation now? Will it be dissolved? DLC s opinion lang naman: That will be considered as de facto partnership. If you want to pursue, we remove certificate of registration but you cannot continue using name of corporation. That s written in S21 liable as general partners Until when will these interim members of directors serve? Until election of regular. When does regular election happen? During annual SH meeting, date of which may be found in the articles OR bylaws.

2.

Make the bylaws

Bylaws of corporation is necessary for the internal organization of the corporation. The corporation may be considered as microcosm of the society, in the political society, there s constitution and statutes. The latter cannot go against the former. Corporation is like a republic constitution is AOI and statutes is the bylaws. That s how we describe by analogy the relationship between articles and bylaws. Bylaws provide for internal rules for relationship between board and SH, member of board and board, officers and the board, SH and another SH insofar as business transactions of corporation are concerned. When to make the bylaws? Pwedeng kasama na sa AOI? When the bylaws are submitted together with the AOI, what are the requirements? S46.
Sec. 46. Adoption of by-laws. - Every corporation formed under this Code must, within one (1) month after receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission, adopt a code of by-laws for its government not inconsistent with this Code. For the adoption of by-laws by the corporation the affirmative vote of the stockholders representing at least a majority of the outstanding capital stock, or of at least a majority of the members in case of non-stock corporations, shall be necessary. The by-laws shall be signed by the stockholders or members voting for them and shall be kept in the principal office of the corporation, subject to the inspection of the stockholders or members during office hours. A copy thereof, duly certified to by a majority of the directors or trustees countersigned by the secretary of the corporation, shall be filed with the Securities and Exchange Commission which shall be attached to the original articles of incorporation. Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and filed prior to incorporation; in such case, such by-laws shall be approved and signed by all the incorporators and submitted to the Securities and Exchange Commission, together with the articles of incorporation. In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange Commission of a certification that the by-laws are not inconsistent with this Code. The Securities and Exchange Commission shall not accept for filing the bylaws or any amendment thereto of any bank, banking institution, building and loan association, trust company, insurance company, public utility, educational institution or other special corporations governed by special laws, unless accompanied by a certificate of the appropriate government agency to the effect that such by-laws or amendments are in accordance with law. (20a)

ORGANIZATION OF THE CORPORATION

3 step: Internal (not international) organization of the corporation. How does a corporation organize?
rd

Pwede ring hindi sabay, in such a case, when shall the corporation adopt the bylaws? S46 30 days within one month from receipt of official notice of the issuance of the certificate of corporation What is the effect if no bylaws were filed in the SEC within or after the 1 month period? The corporation is now in violation of a provision of the code. What is the effect, will the registration be revoked? Under PD 902-A S6, violation of any provision of the code is a ground for revocation of the registration of the corporation. in the Corporation Code, merong revocation in S22 deemed dissolved

1.

Election

First step, election or constitution of its corporate officers. AOI requires applicant to name interim members of the board after the SEC has approved the articles and after it has issued certificate. Meron na agad officers yan so they can comply right away.

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Pag hindi nagsubmit ng bylaws sa SEC within 2 years, that s the time that your registration will be revoked. Hindi pa ground yung failure within 30 days. The effect is SEC will penalize. If within 2 year period, they submit bylaws, the bylaws will not be accepted unless you pay the fine. Daily fine. Pag 1 year na hindi nagfile, tens of thousands na. Pag ganun, dissolve na lang natin. Incorporate na lang tayo ulit. Hayaan na lang na mairevoke. Wait, can we use our former name again? Another requirement from the SEC not in the code: Stock and transfer book. If you don t submit, there s also penalty. Though no case yet of corporation whose registration has been revoked for failure to file a stock and transfer book. Pero yung bylaws, marami na. Revoked after 2 years. Submission of bylaws is a step/requirement for the formal organization of the corporation. That s why para hindi na lang mapenalize, let s just submit template bylaws together with the AOI then amend it later on. Stock and transfer book is submitted after certificate of incorporation has been issued by the SEC. Ask your paralegal to submit it. Nakukuha yan sa National. It comes in different sizes. If AOI was submitted without bylaws, bylaws has to be submitted within one month. How to submit? Under S46, the bylaws has to be adopted by a majority vote of all SH entitled to vote. Kailangan approve that. After that, bring to SEC. Will it be effective right away? When will bylaws take effect? Upon approval of SEC of by laws. How about the corporation, are the stock holders bound by the bylaws which they approve? There are 2 views, but what is the view of the Camposes? Even the SH are not bound by the bylaws before SEC s approval BECAUSE look at the wording of S46 in all cases they bylaws will only be effective upon approval by the SEC. What if not yet approved but already in operation? Bound na ba by bylaws the SHs? DLC s opinion: Since they approved it, maski by estoppel, they should be denied the right to question the applicability of bylaws to them. Kasi bumoto sila in that favor so maybe we can apply estoppel. S22: failure to formally organize and commence the transaction of business within 2 years, the corporate powers shall seize and shall be deemed dissolved Is the dissolution of the corporation automatic upon the lapse of 2 years? Agbayani says yes. DLC says no. Because there s a defense i.e. third paragraph: causes beyond the control of the corporation. DP requires the corporation to prove that the delay was not due to its fault. Ganyan ang ginagawa sa SEC, when they see that you haven t filed anything, they issue show cause order addressed to corporation and its officers. They say in the orders Based on the record on SEC, failed to formally organize and commence business hereby ordered to show cause why your reg should not be revoked within 15 days from receipt of order If no response to show cause, that s when they issue order to revoke. Mali si Agbayani, with due respect. Kailangan ng proceeding. Hindi sila pwede magpaka-Jesus at irevive ala Lazarus.

CHAPTER IV: The Corporate Entity

THEORY OF CORPORATE ENTITY; ITS EFFECTS
What is the theory of corporate entity? A corporation is a separate person, different from the people/persons comprising it. Personality is separate and distinct from personalities of SH comprising the corporation. What are the effects of corporation having separate personality? Own properties, owned by corporation is not owned by SHs. Own liabilities, liabilities of corporation/SH are not liabilities of the other o Because the corporation is a different person with a separate personality May enter into contracts May sue and be sued o When it sues, is it entitled to moral damages? Only in one instance, besmirched reputation. o May a corporation commit a crime? E.g. it was used to sell pirated DVDs. Classical view: No, because cannot harbor/hatch a criminal intention. If crime committed in name of corporation, the corporation has nothing to do with it. It s a creature of the law, as such, it cannot but be obedient to the law. Every crime committed in its name is committed by people in their personal capacities. Ergo, if director of corporation authorized a crime to be committed in the name of corporation, that s the personal act of the director, not the corporation. Modern view: Sino papasok sa kulungan? Ikukulong natin yung AOI? The corporation will only be liable for a crime in case penalty is fine or fine/imprisonment. May be convicted and imposed penalty of crime. This is kalokohan for DLC. Philosophy of criminal laws: Corporation cannot commit a crime. Wala ngang physical existence so ang mga tao ang liable na nag-hatch and carry out ng criminal intention. Does a corporation have a nationality/citizenship? No citizenship, if you look at Constitutional provisions on citizenships, only natural persons are given Philippine citizenship. Corporations have nationality but not citizenship. Any corporation that was organized and registered under Phil laws is a Filipino national. Are SH co-owners of real property? Illustration: 5 individuals decided to form a corporation. They subscribed to the shares and paid on the shares. Decided to buy piece of property. Title therefore to property is in the name of the corporation. Sila yung members of the board. They bought a piece of land. Registered in the name of the corporation. with that property, corporation commenced business operation. Ron nalulong sa sugal. Casino nang casino. Nalubog sa loansharks in the casino. The loansharks filed action: estafa (bec checks bounced) and civil (to recover amount of promissory note). Dun muna us sa civil action for collection. Default na lang sha kasi wala namang depensa dun. Judgment by default ordering Ron to pay loan he obtained + interest and cost of suit. Kuha the creditors with writ of execution. May the creditors levy on 1/5 of the property on the ground that it s his share of the property? Not allowed because the SH are not co-owners of specific property of the corporation. Maglulumpasay na lang ba the creditors? What do they levy? The shares of stock, it s also property. Garnish them then it may be sold at a public auction. In one case: SH of Guanzon & Sons v Register of Deeds of Manila

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FACTS: Corporation was organized but after acquiring properties, it was dissolved. After paying all liabilities of the corporation, a real property titled in the name of the corporation remained. Tayo na may-ari niyan! They became co-owners of property after the dissolution. Used the analogy of succession of natural individuals. When decedent dies, heirs become co-owners of all properties in the estate. In order to divide, they executed deed of partition which was presented to register of deeds for presentation, be cancelled and new issued in the names of the coowners. Register: cannot be because you ll have to pay transfer tax. SH: What transfer tax eh we re co-owners already so no more transfer there. Kaya nga deed of partition. So case was filed SC: Upon dissolution of corporation, the SH even assuming they became co-owners of the property, those properties became co-owned by them because of transmission. The ownership was transmitted from corporation to the SH. That transmission is subject to transfer tax. Same thing with natural persons, when he dies, those properties are automatically owned by his heirs who become co-owners of the property. They became co-owners because of transmission from death to heirs called succession. From that transmission, a tax is due, i.e. estate tax. Register of deeds is therefore correct. It s called liquidating dividend. Absent na naman si Gay haha: In case of corporation, what tax is due sa liquidating dividends? Gallagher v Germania Brewing FACTS: Germania sued by Gallagher (assignee in bankruptcy of Westphal Corporation) because one of his duties is to recover properties belonging to the bankrupt company. Hanapin ang mga assets of this corporation to sell and then pay the proceeds to the creditors. Asset of corporation receivable from Germania on account of raw materials bought on credit. Purchase price had remained unpaid = credit. Bayad na us! After delivery of supplies, WestPhal has debt from Germania s principal SH i.e. Vanderhort, they offset quits . Ay no you still payment and we pay Vanderhort on our own. Why doesn t Germania agree to this modus, is it not the same? Kasi Gallagher will be able to collect in full what Germania owed to corporation. Pag natanggap ni Gallagher yan, pay Vanderhort will only be one of the creditors, hindi pwede collect the entire thing. It s available to all the creditors. Vanderhort not able to collect in full, mababawasan since he ll share with other creditors. Germania invoked equity. SC: You cannot set-off, you have not satisfied the requirements of compensation under CC. Debtors and creditors of each other. In this case, this is what s missing. Not mutual creditor and debtor of each other. WestPhal has no receivable from Vanderhort to set off its payable to Vanderhort. Vanderhort and Germania are not one and the same. DLC: Katangahan ang nangyari here. Inadvertence and negligence. Vanderhort should have assigned its credit with Germania. Assignment of an obligation requires consent of the debtor, but assignment of credit does not require consent of the debtor. Pag after bankrupt, di na pwede kasi in fraud of creditors. May a corporation be organized and all its stocks be owned by a single individual? Yes, that s allowed. Individual may simply approach 4 other individuals as nominees in the corporation. They will not contribute any capital or fund, they ll simply lend their names so that 5 corporation be completed to organize a corporation. In such a sitch, will the separate personality of corporation be disregarded so as to consider the person owning all the shares and the corporation as one and the same? No. Simply because all shares are owned by single individual does not justify disregarding separate personality of the corporation. For the separate personality of corporation to be disregarded, it must be shown that it s being used to commit something wrongful, to commit injustice, to commit or perpetrate fraud. There are some or many cases reproduced by Camposes in their book, I m sure you ve read all of them. FIRST ASPECT ABCDE contracted with x Who must X sue? The funds were held by ABCDE, nothing was with the corporation. They were using the corporation to avail of limited liability. So when X sues the corporation, recovery becomes nil and illusory because the corporation didn t have money. In disregarding corporate entity, the corporate veil will be pierced and that will allow x to run after ABCDE. The veil that separates the corporation from its SH is disregarded. When it s disregarded the corporation as a separate entity vanishes and who will remain, the people who represented as the corporation. That s a simple way to explain this principle. May we make the liability of the corporation, the liability of the SH? Can we make the SH liable for corporate liability? Yes, in those instances which allow the disregarding of the corporate personality. SECOND ASPECT How about the reverse, individual entered into contract with 3P in his personal and individual capacity. The contract was breached so the 3P sued the individual he contracted with. Only to find out that individual didn t have money anymore, resources were already transferred to a corporation. In case that arrangement was resorted to by this individual precisely to hide his properties and prevent the 3P from recovering, may the separate personality of the corporation be disregarded to make the corporation liable for an obligation incurred by a SH? That s the obverse side. It s the SH who incurred liability and we are making the corporation liable for the obligation of the SH. This is also allowed. Your authority will be State ex rel Attorney General v Standard Oil Co. Important cases under this topic: US v Milwaukee Refrigerator Transit A law was passed involving the creation of railroad system in the US for the use of railroad companies. It made a highway for the private vehicles, the same goes for railroads. It lays down the railways for use of operators of train systems. That s why there are so many rail transits in the States. Since the railroad is owned by the state, it s regulated by the state. An act was enacted for that purpose. Rail transit company provides the locomotive (pulls the coaches). These rail transits own coaches which they rent out/charter to users, there were some outfits who had their own coaches e.g. Budweiser. Custom built for the requirements of the goods it transports e.g. refrigerated containers. For Walmart, it has own coaches which it uses to ferry goods/merchandise to be sold in the different Walmart outlets. Long train, every coach has a destination. Topless beaches in Spain.

3 December 2010
DISREGARDING CORPORATE ENTITY
Separate personality however may be used for wrongful purposes. In such a case, the separate personality of a corporation may be disregarded and only those comprising it and corporation held as one and the same. In the US, disregarding corporation is called piercing corporation, in UK it s lifting of corporate veil.

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Under this law, transit company is prohibited from giving rebates to end users. What did the beer manufacturer do? Brewing company now gets coaches from a refrigerator transit company. Refrigerated coaches for chartering by shippers. Yun lagi ang ginagamit niya. Volume discount is given to the refrigerator transit company by the railroad. The railroad cannot give the discount directly to the shipper. The discount is given instead to the refrigerated transit company. May nagreklamo. Refrigerated and brewing company is one and the same, therefore the discount is in reality a rebate given to brewing company in violation of Elvis (?) Act. In that case, the issue was are the corporations one and the same? This leaves us to another variation of the disregarding the corporate entity principle. Here, two corporations which have separate personalities were to be considered as one and the same. The separate personalities were disregarded and they were treated as one and the same entity. Dito, dalawang corporation, why did they disregard the separate personalities? Because controlled by same set of interests. Same people are controlling stock interest. Pati payroll tiningnan. Who decides? Court said that they are controlled by the same set of interests. Since the separate personalities of two corporations were being used to circumvent the Elkins Act, therefore it s being used for a wrongful purpose which is not allowed. Therefore, disregard. Discount given to refrigerated company is a rebate to the shipper i.e brewing company which falls within the prohibited act under Elvin s Law. Dito sa case na ito kayo may mememoryahin: There is in effect an identity of interests used to perpetrate fraud Hindi ko makita. Nasan yun dito? See Page 149 of Campos Vol. 1. If any general rule can be laid down in the present state of authority, it is that the corporation will be looked upon as an entity. Until sufficient reason to the contrary appears, that when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud or defend crime, the law will regard the corporation as an association of persons. Pwedeng maraming corporations being controlled by a set of individuals. All those corporations may be disregarded. When they are disregarded, sino matitira? The association of individuals. Attorney General v Standard Oil A case you must always remember. Iba din ang variation dito ng application ng disregarding corporate personality. In the US, they have Anti-Trust Laws which are designed to curb monopolies, cartels because cartelization of certain industries will be detrimental to the consuming public. Sino ba yung mga nagcacartel na yan? Oil companies involved here. When they cartel, they supply the oil, same price so poor gas buyers and other oil products. They re at the mercy of oil companies. Wala tayo magagawa kung kelan nila gusto taasan, they supply it. So they need to compete with each other freely in an open market. So prices of product dictated not by the management of oil companies but by market forces. When does monopoly or cartelization occur? When players in an industry agree to act in a particular manner. They make business decisions in unison. The Phil sitch is a different problem altogether. Here, the SH of Standard Oil joined voting trusts. What is that (voting trusts)? SH surrenders legal title to a trustee so that trustee will exercise rights of a SH in the corporation except the right to dividends. Right to receive dividend will remain with original owner of the share. Not interested to get involved in the management of corporation, he only wants to earn from corporation s equity. What he did is to give shares of stock to a voting trustee? You vote, I get dividend. This is called voting trust agreement legal title is divorced from beneficial title which remain with original owner. Legal owner goes to another which in this case is a trustee. Voting trust where the trustee is also the trustee in several other oil companies. The control over several oil companies fell into hands of a voting trustee. Sha ngayon ang magcocontrol ng several oil companies because the SH of these oil companies joined the trust agreement. They transferred the voting trust of their shares to the same voting trustee. Di ba cartelization yun? So Atty. Gen. says violative of Anti-Trust Laws. Oil industry is now cartelized cos companies fell in the hands of same individuals. Brought cases against several oil companies to dissolve them. He s asking for extreme penalty for engaging in illegitimate purpose. Standard Oil says: Corporation is a different person from its SH. The SH in their personal capacities entered into voting trust agreements, walang kinalaman ang corporations dun. SH is free to do whatever he wants with his own shares of stocks. He may donate, sell, give it away for free. SHs are free to deal with his property. shares of stock is property of SH, SH are free to deal with that. Actions of SH are not acts of corporation. Corporation is a separate person. SC of Ohio: In many of those cases that are reproduced, puro state SC lang yan kasi that s how US Fed System is organized, Marbury v Madison. 13 colonies is 13 states, all of them were sovereign states. When they join a federal form of government, they simply surrender a part of powers to federal government which may exercise only such powers surrendered by member states. Regulation of commerce is not one of the powers surrendered by state to the federal government. Ano lang ang napunta sa federal government jurisdiction? Regulation of interstate commerce. Within the state, only state law will apply. Other powers surrendered: foreign affairs, defense Disregard natin ang separate personality because separate personality of corporation is being used to evade application of Anti-Trust law. Atty. Gen. wants to disregard corporate personality so that acts of the SHs will be considered the acts of the corporation. Disregarding of corporate personality ba ito? Acts of SH are to be treated as acts of the corporation. Kabisahin ito: See page 155. Second to the last par. it therefore follows as we think from discussion we have given subject, where all or majority of the SH comprising a corporation do an act which is designed to affect business and property of company and which through the control over selection form of resolution of board ultra vires and against public policy done in individual capacity concealing their purpose and object disregarded as cor. Daming conditions diba, pero ano ba ang important? In individual capacity for purpose of concealing real purpose and object which is illegal or unjust or contrary to morals or fraudulent. Masama ang purpose nila. Other elements are just secondary. Sila na ang halos ang board jan, concerted manner ang kanilang ginawa, all of them are there. Not necessarily hundred percent, just a majority entered into trust agreement. It s as if the corporation did it. Their number allows them to control the board of the corporation. Not simply number allow control board will justify disregarding corporation s separate personality. May isang ingredient pa: that separate personality of corporation is being used for a wrongful/unlawful purpose. Laguna Transportation v SSS

18
The separate personality of corporation was disregarded in order to avoid circumvention of the SSS Law which is bago lang yan after the war. Marcos authored and sponsored this bill in Congress. Kinopya lang din naman nila yun sa SSS laws in the US. Ganun naman tayong Pinoy, magaling mangopya. Labor laws are copied from the US. The Phil which rd st is 3 world country has labor laws for 1 world country. Parang hindi match yung conditions sa actual situations. After the war, there are a lot of surplus war vehicles which is not needed anymore: jeeps and trucks. They are called owner jeeps. Iraq service vehicle: Hummer. Hindi pa uso ang A/C sa motor vehicles. Surplus of machines, sira ang kaha and chassis. Enterprising Filipinos turned them into jeepneys. Para kang tinatahip pag sumakay ka jan. Ganyan sasakyan ko nung HS. Trucks were turned into passenger buses. Hindi na namin inabutan. Si Sarao naman yung jeepney. He was a case study in business management. Tumaas then bumagsak. Yung mga trucks Dangwa, Dapitan, San Pablo and Laguna by the Potencianos. That s how their buses look like (think Princess Diaries tram). Laguna Transportation was organized originally as a partnership. Later on the partnership was converted into a corporation. Less than a year after converted into corporation, the SSS law was adopted by congress and became a law. There s a compulsory coverage there. But in the compulsory coverage of employers, there s an exemption. Corporations organized less than a year before the passage of law are not covered mandatorily by the law. Laguna Trans: less than year pa lang kami so we are not covered mandatorily by this law. This brings us to another variation of application of disregarding corporate entity. Kung partnership kayo before, but now you re a corporation but that was less than a year before passage of law. But you re already employer of these employees long before. Issue: Shall we allow separate personality of corporation a personality separate from personality of the partnership and of the partners, shall we respect those separate personalities in order to allow the corporation to avail of the exception? SC: Of course no, because to allow this corporation to invoke the separate personality of the corporation will defeat the applicability of the law which has for its purpose social justice. DLC comment: Is the separate personality of the corporation being invoked for a wrongful purpose? If it remained a partnership, the partnership is mandatorily covered. If the partnership was converted into a corporation for the purpose of evading or availing the exception, then the purpose is clearly wrongful. Kung walang ganung purpose, it just so happened we intended to incorporate while the SSS is underway, why can t we avail? The intention may not be wrongful but the application may result to injustice. It s not needed to have wrongful intention but if the separate personality of the corporation will be allowed, it will result to injustice. So inallow na rin nila, so the personality of the corporation is disregarded so that the partnership is considered as the employer of the new corporation. Nung same entity na sila, no more corporate personality fo the corporation, covered na by the SSS law. Palacio v Fely Transportation Nakasagasa the bus of one transit company, since they are sued, they have subsidiary liability. When driver held criminally liable, the owner is subsidiary liable for the civil liability of the driver. Lahat ng properties ng operator inalis na and transferred to corporation. Nung nanalo the victim, no more property of the operator, nilipat na. So court looked for it. Invoked the defense of separate personality. We will not allow operator to make use of separate personality to evade liability to the victim of the accident.

PARENT-SUBSIDIARY RELATIONSHIP
When parent and subsidiary, are they always treated as one and the same entity? No, not because there is only one owner, automatically treated as one and the same entity. No. show the separate personality of corporation will result to something unlawful/unjust/fraudulent/wrongful. The principle is not in the Code but judge-made in the exercise of their equity jurisdiction. No dura lex sed lex in common law. Koppel v Yatco and Miguel v Collector Separate personality of subsidiary is being used to avoid payment of tax. Tax evasion naman. Before, tax structure is different. When manufacturer sells manufactured goods, he s liable to pay sales tax. Different tax applies to subsequent sale which is lower. Sell manufactured car to subsidiary at a lower price. Lower price means lower tax. Subsidiary sold automobiles at higher price to consuming public. Tax bite is smaller. Loss of money on the part of government. Niloloko niyo us! Transfer pricing mechanism. BIR says maybe we should consider subsidiary to whom first sale was done as one and the same as parent manufacturer. If they are the same, they cannot sell to themselves. Otherwise, it s auto-contract. Subsidiary controlled by same people controlling the manufacturing company. Sale between manufacturer and subsidiary is not subject to manufacturer s tax but the sale to public. Yutivo v CTA In another case, not proven that subsidiary is being used to commit something wrongful nor that they were under the control of same interest. What am I trying to tell you? Not because controlled by same interest will justify as treated as one and the same. Not enough but you have to show that treatment of separate personalities will result to something unlawful/unjust/fraudulent. In this case, it will result to nonpayment of correct tax. Hindi ba pwedeng sabihing avoidance yun? La Campana Coffee Factory v Kaisahan Coffee and gawgaw. Same machine and technology are use to produce them. Pag walang demand sa gawgaw, kape na lang. Parking lot or admin building lang ang humahati jan. Payroll of coffee and gewgaw people were processed by same admin people. The decision for both were taken by same management people. Gawgaw and coffee are separate corporation. Employees want to form a union. Minimum number of employees for it to be certified. Coffee or gewgaw alone cannot unionize. But together they can. Since they are transferable, gusto nila magsama. Mahirap pagsamahin ang gawgaw at kape. SC says: Managed by the same interests, managed by the same people. If they re allowed to treat as separate corporations, result to injustice to employees who want to form union to protect their interests. Next: Promoter s contract.

19 CHAPTER V: Promoter s Contracts Prior to Incorporation

6 December 2010
We have discussed before how promoter gets to enter a contract on behalf of corporation still to be incorporated. binigyan niya ng malaking contract. You will be paid this amount. After registration with the SEC, the printer started performing duties with the newly formed corporation. Later on after about six months, board changed its mind and wanted to get out from the contract between promoter and printer. Printer filed an action to recover what was given him in the contract. Corporation said they were not bound by the promoter s contract. There s no resolution adopted by the board of the newly formed corporation adopting the promoter s contract. We can sack you anytime. SC said: Sira ba ulo niyo? Ano ng hindi inadopt eh pinasweldo niyo nga. Ba t niyo sinwelduhan?! From the fact that the corporation even though there s no form of resolution paid the monthly salary of the printer, we can infer that the corporation must have adopted the contract because if did not, it should have not paid the salary of the printer. Di lalabas ang pera kung di niyo pinirmahan, kung di niyo alam kung san inapply yung pera. From the act of the corporation in paying the salary of the printer, the corporation is deemed to have adopted the promoter s contract. Cagayan Fishing Company v Sandiko When the corporation adopts a promoter s contract, is the corporation at rd all times bound in such a contract? If a 3 party not privy to such contract will be prejudiced by the implementation of the contract, the adoption of the corporation of such contract may be enjoined. And if it has already adopted the contract, it may be enjoined from enforcing or implementing the contract. Contract adopted by the corporation will prejudice third parties who had no notice should ________. Therefore, if the contract though binding on the corporation will prejudice 3rd parties who were not privies and who had no notice, implementation of the contract should not be allowed to result to such prejudice. Siguro, may be enforced between corporation and parties but rd not to prejudice 3 parties. Clifton v Tomb When a corporation adopts a promoter s contract, is it bound by all the terms of the contract entered into by the promoter? No, the corporation will only be bound by the terms that were disclosed to the corporation. Corporation cannot be bound by secret stipulations between promoter and the third party.

LIABILITY OF CORPORATION FOR PROMOTERS CONTRACTS

Is the corporation liable on the promoter s contract? Two scenarios may happen. rd 1. Promoter disclosed to the 3 party that he is entering on the contract on behalf of the corporation still in process of incorporation. Hence, in the documentation, the promoter specifically indicated in the document that he is entering into the bill for the benefit of the corporation in the process of incorporation. 2. Promoter did not disclose to the 3rd party that he is entering into this contract for the benefit of the corporation. What are the effects? When the corporation has successfully incorporated, is the corporation liable under the contract? As a General Rule, no it is not liable under the contract of the promoter. Why not? Because the corporation did not consent to be bound. The board of directors of corporation did not approve to be bound by such contract. Under corporation law principles, corporation may only be bound by its board of directors. At the time the contract was entered into by the promoter, corporation was not yet in existence. Therefore, the corporation cannot give its consent to such contract for the simple reason that it was still not yet in existence. It cannot even be the principal of the promoter. Promoter cannot claim that it was an agent and acting for the principal which is yet to be formed. Agency is also a contract. For the principal to be bound by that agency, it has to give its consent. That s the rule. Even if the corporation has succeeded at registration, it is not bound under the promoter s contract. What is the exception? Only bound if it adopts the contract. In civil law rd especially oblicon, stipulation in favor of a 3 party or stipulacion pour autri. In such a case, the third party becomes bound in the contract if it accepts the stipulation. If it doesn t, it s not bound. E.G. Ron and Oliva enter into contract giving benefit to Oposa. When Oposa learned about stipulation in his favor, he accepted and upon that acceptance he becomes bound under the contract. Same is true here. Promoter s contract may be considered as stipulation in favor of a 3rd party i.e. the corporation to be formed. When it accepts the stipulation, it becomes bound nun pro tunc (now further). It retroacts. How may corporation accept/adopt the promoter s contract? The corporation may adopt the contract either expressly or impliedly. y Express board of directors of newly formed corporation meets and passes a resolution expressly and categorically adopting the contract entered into by the promoter. y Implied board does not meet, does not adopt the resolution accepting the contract BUT from its acts, it can be inferred that the corporation has accepted the contract. E.g. McArthur v Tiles Printing Company Certain individuals wanted to set up a printing press. Tasked to pirate skilled printers from other competitors. Organizer now even before the incorporation approached a printer. Para mapalipat yung printer,

CORPORATE RIGHTS UNDER PROMOTERS CONTRACTS

Adoption
When the corporation adopts the promoter s contract, then it can enforce the contract against 3P as if the 3P directly dealt with the corporation. The corporation will assume all the rights and obligations under the contract as if the 3P contracted directly with the corporation. Implied adoption Corporation accepted benefits that flowed from the stipulation in the promoter s contract. Corporation sees to enforce the contract. When it does to received benefits and advantage, cannot later on allege that it s not bound when liability is enforced against the corporation flowing from the contract.

Rejection
Suppose the corporation rejects the contract. Adoption yung una diba. Rejection may be express or implied. y Express when the board meets and adopts a resolution rejecting the promoter s contract y Implied

20
o o Corporation has failed to approve/accept the contract expressly or impliedly From its acts it can be inferred that the corporation has rejected the contract. After the contract has been adopted by the corporation and contract has already been transferred to the corporation, the corporation receives benefit from such a promoter s contract. Is the promoter entitled to compensation? Kung ito agency lang, maliwanag that the agent as a GR is entitled to a compensation for services rendered to the principal. Here in promoter s K, there s no contract. Somehow when contract adopted by the corporation, it becomes a contract of the corporation nun pro tunc so parang nagkaron din ng agency. Meron ding compensation yung promoter. Even on the assumption that it s not a contract of agency because common law principle, then the promoter is rendered service and resorted to advantage in favor of corporation should be entitled to a compensation quantum meruit or else, that s unjust enrichment. Pero dahil walang contract as to how much, quantum meruit. Quantum meruit when agree board and promoter agree. Otherwise, compensation shall be fixed by the court.

PERSONAL LIABILITY OF PROMOTER ON PREINCORPORATION CONTRACTS

In case contract is rejected, who is liable to the 3P for the rejection of the contract? It depends. On what? 1. If the contract was entered into by the promoter on behalf of corporation still to be formed and after the incorporation, the corporation has rejected. In the absence of stipulation freeing the promoter of liability, promoter is liable in his personal capacity. For him to be not liable, not enough that he disclosed the contract to before the benefit of the corporation in the process of registration. He must expressly stipulate that in case corporation rejects OR fails to incorporate, he is not liable personally. Absent that, he is personally liable to his contract with 3P. 2. If he did not disclose for the benefit of the registration, with more reason that he becomes liable. Apply by analogy agency, he who transacts with 3P with an undisclosed principal, he becomes the principal. In such a scenario, in case of non-disclosure that for the benefit of corporation still to be formed, promoter passes the contract to corporation, may the contract be passed on to the corporation that succeeded an incorporation? It depends. On what? If it will amount to a novation by substitution of debtor. In case of subrogation of creditor, may be done without the consent of the debtor. What is the effect? If objected to by Garcia (ayoko magbayad kay Oposa), may Oliva over the objection of Garcia assign nonetheless the credit to Oposa? If he gave security for the collection of PN and it was assigned over the objection, the security is discharged. Security is released. May natutunan ba kayo sa UP? When novation involves substitution of the debtor, the debtor cannot be substituted without the consent of the creditor. Baka bigyan sha ng bankrupt na debtor. Applying the principle to promoter s contract, since he did not disclose that he is entering in behalf of the corporation still in the process of incorporation, kung biglang ipapalit yung corporation in lieu of promoter, pwede mag-object si 3P if the promoter has obligation under the contract which is to be assumed by the corporation. Magiging substitution of debtor ito which allows the corporation to object. E.g. when promoter is a well-known person tas biglang ipapasa sa unknown corporation of some mediocre people. Substitution of the promoter by the corporation does not automatically free from his liability under the contract. For him to be freed: 1. There must be express stipulation that no liability whatsoever in case reject or fail to incorporate. 2. The third party consents to substitution by the corporation and the 3P frees the promoter from the liability. Even if the 3P consents to the substitution of the debtor, substitution of the promoter by the corporation, the substitution will not free the promoter. He will only be freed upon express/implied consent/stipulation to be freed from liability because the new corporation had already accepted the contract and the 3P has accepted the substitution.

FIDUCIARY RELATIONSHIP BETWEEN CORPORATION AND PROMOTER

What is the relationship between corporation and promoter? Fiduciary, therefore, promoter cannot acquire an advantage to the detriment of his corporation. the promoter cannot choose his own interest over the interest of his corporation. Ergo, the fiduciary promoter cannot earn a secret keeping from the contract. Under the table with 3P then discovered, corporation can recover from him secret profits that he receives flowing from the promoter s contract. Old Dominion Copper Mining v Bigelow and Old Dominion Copper Mining v Lewison When the promoter is entitled to compensation, how may the compensation be paid? Cash? Of course. Shares of stocks? Nasa negotiation na yan between promoter and corporation. Kaya lang, us lawyers, we see that. We have to protect our fees. First thing a practicing lawyer should learn is how to bill a client. We should offer a course on the art of billing not milking a client. Dito lang mura ang lawyer. In SG, lawyers fees are atrocious. It s enough deterrent of filing a case in court. Napapahiya ang sarili kong billing. Maybe I should revise my rates. Studying abroad is not more for the knowledge but more for the network. Lahat ng nagrefer sakin, lahat ng nangopya sakin! Pasalubong sabay can I copy your notes?! EHEM EHEM EHEM. NOTES DAW OH. EHEM EHEM. Filipino expert. Emphasis on expert. Walang gustong mag-masters dito. You cannot make a secret. Drafting a promoter s contract. We shall be getting fees we receive. Most of the time, we expect to receive not cash, not property but shares of stocks. Kaya nga natin pinoromote because we want to be part. This is usually for the non-capital but part of the work force. Agreement that they will be paid with shares of stocks. With whom do we enter an agreement? With the interim directors of the corporation. Maski estoppel, directors will be bound by their commitment. As interim directors, they manage the corporation at incorporation. The right of the board to enter into contract with promoters may be abused. They have conchaba the interim with promoter as one of them, so lumaki yung shares of stock as compensation for the promoter. Other SH may question the deal on the ground that grossly disadvantageous on the corporation. Argument: fiduciary duty of the promoters and board of directors in favor of the corporation.

COMPENSATION OF PROMOTERS

21 CHAPTER VI: Corporate Powers

It s nothing but the capacity to act of the corporation. As I have mentioned earlier, unlike the case of natural person when capacity to act is presumed, the same is not true as regards a corporation. You will have to justify and show that you have the power. If you can t, it does not exist. b. incident to the powers conferred or authorized

GENERAL POWERS OF CORPORATION

expressly authorized by law (S2)

Express

S36 (1-10)

S45 powers conferred by code/AOI Powers incident to its existence (S2)

INCIDENT TO ITS EXISTENCE Powers the corporation needs to exercise power for it to continue with its business. Where do we get the business? From the AOI. E.g. corporation was organized for the purpose of producing Portland cement. SEC approved the registration. Purpose of the corporation is to Portland cement. However, to ensure steady and cheap supply of electric power, the cement corporation it applied for CPC with the PSC to operate an electric producer. They also wanted to distribute excess electricity to other down line consumer. Existing operators will oppose. E.g. MERALCO and electric cooperatives. That happened in Teresa Electric v something else Oppositors said: You have no power to operate a power generating corporation because primary purpose is to manufacture Portland cement. SC said it s implied from the AOI of the cement manufacturing corporation. in order for it to manufacture cement, it needs electricity. Instead of buying from others, it can makes its own and sell the excess to others. SMC manufactures beer. When it does, what does it need? Bottle. How to you distribute the beer without a bottle? May SMC do business to produce bottles? Yes. Kaya nga may Union Glass. If it doesn t, it will be held captive by the bottle producers. Beer gets stale. They will be at the mercy of bottler makers. Manufacture of bottles is incident to its existence. Can it enter into the business of making fertilizers? Ang kanyang purpose is manufacture beer, of course because waste product of beer making is sapal. Kaya may Atlas Fertilizer. Dun galing yun sa waste product. For the same product, Dole Pineapple has the power of making wine and vinegar. Waste product nila yun eh. It can also make animal feeds. DOLE operated restaurants inside the plantation. After we went to the zipline na napakaikli, we ordered roast beef na pinakain ng pinya. Necessary for the business to continue operating, kahit hindi nakalagay sa secondary purposes niya. Lahat ng kailangan niya para makapagmanufacture sha efficiently and cheaply. Therefore, purpose clause authorized in the AOI is a source power. Lahat ng kailangan for that purpose to be carried out ay ibinagay ng batas unless business is illegal. Para tumaba ang baka, kailangang idroga yan. Marbled with fat kaya masarap ang beef. Pork is better than beef. Chicken is healthy as long as you remove the skin, pero yun ang masarap! Gusto mong masarapan, marami kang sakit! Mabubuhay ka mahaba, who cares. Buhay ka nga, miserable ka naman. That s the trade off. Life is a big trade off. Purpose clause is a source of power because all incidients for the carrying out of the purpose is implied powers. INCIDENT TO POWERS CONFERRED OR AUTHORIZED y Power to sue implies power to engage a lawyer Power to raise capital power to enter contracts y Powers in S36 No. 7 power to enter contract of sale/exchange/lease contract/make donations y Power in S37, 38, 20 express powers y S43 on dividend Conferred powers a. general grant S36, S2 b. specific power specific sections in the code where the power is given e.g. S43 (power to declare dividend)

Implied

S36 (11)

S45 incident tot he exercise of powers so conferred

Look at S2 of Corporation Code Then go to S36, look at no. 11 essential or necessary to carry out its purpose/s as stated in the AOI Then look at S45 Ultra vires acts of the corporation EXCEPT (two things)

Express
What is the difference from conferred by the Code or by the AOI and authorized by law ? Difference in different formula adopted by the Code. Hindi sila naging mashadong consistent in the wording of the provisions. CONFERRED: Technically, when the power is given by the Code, it is directly conferred or granted by law to the corporation. E.g. S44, S36, S18, S20. You can point your finger to the power. AUTHORIZED: as may be chosen. E.g. in AOI. May put it as powers as long as not inconsistent with powers given by law or any other law of the land.

Implied
How different is incident to existence from incident to powers authorized and conferred ? When we say incident, it s essential and necessary to carry out the purposes of the corporation. E.g. S36 When it sues, does it also have the power to engage an attorney? Yes because that incident to power conferred/authorized. Discuss them one by one. 1. EXPRESS a. conferred i. by the code ii. special laws b. authorized i. AOI IMPLIED essential or necessary a. incident to existence

THE ULTRA VIRES DOCTRINE

For a corporation to exercise of its powers validly, the power it exercises must be expressed or implied. If it falls neither, the exercise of the

2.

22
power is ultra vires. Ultra vires doctrine. If you can t justify the basis of the power, ultra vires. What is the effect when the exercise of power is ultra vires? In S45, no corporation under this code shall possess or exercise any corporate power, but S45 does not tell us the effect when the exercise of power is ultra vires. E.g. corporation enters into a contract which is outside the powers of the corporation whether express or implied. What is the status of that contract? There s a case there: Republic of the Philippines v Acoje Mining FACTS: Acoje mining is a mine in Zambales. Lumaki doon si Susan Roces whose father is a physician in that mining. Nung nandun si Susan, masaya ang mga minero dahil nakakakita ng maganda. Nung umalis na sha, nalungkot sila. Napansin ng management na lulugo-lugo ang miners. While the morale is down, production is also down. Hahawak ng piko tas ambagal kumilos. You can t tell them that their salary shall depend on the depth of the digging. Libangan there is AM radio. Management says to help boost the morale, give them line of communication with their family. Easy to send and receive letters to and from their family members. How they do that? Post office in the site. Management went to post office (government entity) and requested post master general to set up station at the mine site. Dahil kaunti lang miners, you won t recover the cost of operations. We will agree if you ll provide us with office and pay compensation of the postman. They had a MOA, place a post office in the site, assigned an admin personnel to man the post office. Everytime na may bumibili, bayad. Ayaw ng salary deduction. They didn t notice na lumaki ang accountability ng personnel assigned with stamps and absconded. Post office went after Acoje for payment of the absconding personnel s liability since postman is your accountability. We don t want to pay because it s not within our power in AOI to operate a post office. Ultra vires our MOA! SC said that not ultra vires because intended to boost the morale of the miners. Intention was actually to carry out the purpose of the corporation. Therefore, it s an incidental power of the corporation. Intra vires yan, purpose is to carry out efficiently the corporation. Kaya lang ang daldal ng Ponente: Nagdagdag pa sha, saying that in addition to the fact that it s an intra vires act, assuming it was ultra vires. The contract is merely voidable. The contract was even ratified when approved by SH the MOA when it was taken up in the SH meeting. Presented as an accomplishment: happy miner through post system. What s the real issue in this obiter: What is the status of an ultra vires contract: void, voidable, unenforceable? y Acoje says voidable. y DLC says that s wrong. We shall use A5 of NCC any act done in violation of a prohibitory/mandatory provision of law is void. Is ultra vires doctrine mandatory? Yes, may penalty nga diba under S144. Pwede nga makulong the officers responsible for execution of ultra vires act. May sanction diba. It void under A5, not merely voidable. Why is voidable wrong? One of the characteristics of voidable contract is susceptibility of being ratified. The ultra vires act o f a corporation, may it be ratified? Of course not. Hindi pwede i-ratify ang ultra vires act even if they meet. Only one way to do it to amount to ratification. Amend the entire AOI, not by merely voting in a SH meeting. Otherwise, mawawalang ang saysay the requirement for us to specify one specific purpose in the AOI.
y y

Camposes did not give categorical pronouncement as to their opinion. They merely stated the ruling. So mukhang agree sila.

Carlos v Mindoro Sugar FACTS: Mindoro Sugar is in need of additional capital for operation, instead of asking SH to contribute some more to capital, it borrowed from the public. It floated bonds. For those bonds to hindi na ipeddle, that will be very very cumbersome so they have collateral business. Who handles marketing of bonds? Securities corporation/firms, investment houses, banks, trust companies. They are called underwriters or dealers who sell. They approached Phil Trust Company. May either be best effort (kung ano lang nabili) or firm commitment (considered sold). PTC, to make bond issued by MS attractive, marketed that when the bond is not sold, they have recourse sa PTC. Pag di nila nabayaran, kami magbabayad! Investors bought MS s bonds. MS defaulted on those bonds. Carlos (buyer of bond) sued PTC to enforce the guaranty given by trsut company. PTC said not bound by the guaranty, it s not one of our powers to guarantee debt of a 3P. SC said: Tama wala sa express power niyo yan. But when you did it, it s implied. You did it for your business so they ll sell like hot potato. Therefore, to carry out more efficiently and profitably of underwriting securities. Hence, it s an implied power. Suppose the guaranty was not in pursuance/not to carry out in the business of the corporation. e.g. corporation s biggest SH is Oliva who does not have money. Corporation guaranteed his loan. Has the corporation power to guarantee loan of its SH? Carlos is intra vires because incident to carry out business of corporation. BUT if it s not, at walang nakalagay sa powers of incorporation, it s ultra vires. Kaya nga sa Pirovano v de la Rama: FACTS: Kastila running de la Rama steamship company that plied Cebu and Manila. Owners were very happy with the way Pirovano managed the shipping company. Pag namatay tong si gaddam Pirovano, setback sa corporation. Insurance policy on the life of Pirovano. They have insurable interest? Yes, damnified by the life of the person. Sino dapat ang beneficiary? Corporation cos it ll be damnified. Insurance was taken because it s a pre-war insurance from a reputable company in NY. Company paid the premium. Hinuli sha ng Japanese at incarcerated in UST dahil nga foreigner sha. One of them was my father in law incarcerated in UST and transferred to Muntinlupa. Guerilla yung tatay ko. Piruvano died inside the concentration camp. After the war, they collected the proceeds of insurance policy. When dela Rama has money, nakonsensha na yung mga anak ay nawalan na ng tatay at nawalan din ng provider. nagdalang habag so what they did is to use the proceeds to buy shares of stock to give to the heirs so they ll have source of income in the form of dividends. Apartment given to widow who decided to stay in NY. That s how much they love the family. Lumaki shares ng Pirovano children. Swing vote na sila kasi 6 sisters ang dela Rama nahati sa middle. Contra contra na. Pirovano are the swing vote. Kung sino kakampi becomes the majority. Son of former president, Sergio Osmena, Jr. Dela Rama sister is his wife. Not lawyer but Harvard Economics graduate SCL. Corporate dispute: Osmena needs to win but the Pirovano will not side with them so talo sila pati presidency is threatened. Let s take out their voting rights. Pano ba sila naging SH to begin with? Issue ni Sergio Osmena Jr: Has the corporation power to give away its assets to people who are strangers to the corporation i.e. proceeds of insurance policy? They tried their luck, filed a case in court to recover share of stocks from Pirovano on the ground that the transfer of shares of stocks is ultra vires.

Agbayani says unenforceable. Mali rin sha. Sorry to say. It does not fall under unenforceable contracts under the Code. 1403 and another that starts with 15. 1317 is the general provision.

23
SC said: Tama si Oiver Wendell Holmes, law is what the judge says it is. Kawawa naman the Pirovano children!!! The AOI scrutinized to find something to justify the donation of proceeds converted into shares. Itong libro na ito, walang highlight ako lang ang ngbabasa. Bautista-Angelo (one of sir s favorite justices): Kahit hindi ako bilib sa decision, maganda pagkakasulat. To lend money or credit to and aid in any other manner to any person. Eh they were aiding the children of former president. Look at S36 No. 9: reasonable donations including xxx charitable and No. 10: benefit of directors, trustees. If Pirovano shall happen now and there s no aid any person can we use any power expressly conferred to justify the making of the donation? ISSUE: May the corporation donate it shares of stock? San magfofall yan? Naawa ang SC sa children kaya hinanapan na lang ang AOI.

CHAPTER VII: Control and Management of Corporation

ALLOCATION OF POWERS AND CONTROL
Control and management of a corporation is allocated in three levels. Juridical entity not having existence may only act through an agent. Corporation cannot act on its own because it has no physical existence. The corporation therefore may exercise its powers only through an agency.

WHO EXERCISES CORPORATE POWERS

The law has appointed an agent that will exercise the powers of the corporation. Sino yang dinesignate ng batas to act on behalf of corporation?

8 December 2010
Unlike in the case of a natural person whose capacity to act is presumed and he who alleges that a certain person s incapacity has the burden of proving such incapacity, in case of corporation, the reverse is true. No presumption that corporation has the power to do a particular juridical act. The corporation has a duty to prove its capacity. However, for practical purposes, there is a presumption that all acts of a corporation are regular. Therefore when a corporation enters into a contract, there s a presumption that the contract was entered into by the corporation in accordance with law. HOWEVER, when the power of corporation to enter is challenged, the challenger has no burden of proof. The corporation has burden of proving that it has power. Take note that ultra vires doctrine should not be confused with an act ultra vires of the board. An act may be intra vires of corporation, but ultra vires of the board. The act is within powers of corporation, but board has no power to do it on behalf of the corporation. An UV act may not necessarily be criminal. It s not necessarily illegal insofar as the corporation is concerned. As far as corporation is concerned, it s necessarily illegal because contrary to S45, sanctioned by S144. What is the consequence if the corporation has been performing ultra vires acts? In addition to the officers incurring criminal liability under S144, what is the sanction insofar as the corporation is concerned? Corporation may be dissolved. It may be a ground for the revocation of the registration of the corporation under S6 of the PD 902-A. If it has been performing illegal acts under PD 602-A S6, it s a ground for revocation of the corporation s registration with the SEC. However, in a case decided by SC, it held that the penalty of dissolution should not be imposed on an erring corporation if the illegal acts may be enjoined. If the further commission of the illegal acts may be enjoined, then the court must enjoin instead of imposing ultimate penalty of dissolution. Equivalent as to natural person is death sentence.

Board of directors OR Trustees

Control and management of corporation therefore belongs primarily to the board of directors. Expressly provided in S23: If you look there, what does it provide? All powers of the corporation shall be exercised by the board. May the AOI provide otherwise? May it provide for the SH to exercise control and management in certain instances? No. That will be illegal, contrary to principle of corporation. S23 states the general principle of corporation law i.e. control and management of corporation belongs to board. Reason behind this (during discussion on distinction between partnership and corporation): Habang dumadami ang partners, nagiging cumbersome and messy the management of corporation. Since the corporation is designed to accommodate as many investors as possible, they have to address issue of management to make the operation of the corporation efficient and effective. Management should be lodge in a smaller body. Not all investors should be allowed to mess with the business of the corporation. Smaller body called board of directors. Bakit board, why not dictatorship? In many instances, dictatorship is more efficient. This gets elected during 6 years. Pwede ba yung republic pero dictator yung leader. Roman republic had a dictator. Republic means leader is chosen by people. Why not choose just one person, dictator of the corporation? a. They don t want because that will be an invitation to fraud. Money of other people is being risked in the business. b. To the advantage of the business of the corporation, if a group will decide on its operations on the principle that two heads are better than one. Di na masarap ang sawsawan pag lahat sumawsaw. Tagaaaay. Patay ka diyan Carcar. This is a balancing of interests. We don t want the corporation to be managed by a single person, but we don t want it to be managed by many many persons either. Kaya may minimum and maximum. May AOI provide that in certain decisions, the SHs are the ones who shall decide? The answer depends on the nature of the decision. y If it s an exercise of management prerogative, board cannot be deprived of that prerogative. It will make the provision illegal, contrary to S23. We cannot deprive the board of its exclusive prerogative to manage the affairs of the corporation. The SHs are entitled to share in the profits earned by the corporation, in exchange for that privilege of becoming SH and receiving dividends,

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SH surrender rights to participate in day to day management of the corporation. That s the theory of corporations. HOWEVER, if decision given to SH in the AOI is not a management decision or not management prerogative, okay lang. it will be valid. [2] by the required number of directors.
y y y

When is a decision management prerogative? Not stated in the law. But as a general statement, when you say management it involves operation of the business of the corporation. The housekeeping of the affairs of the corporation. It involves decision involving the relationship between the executive functions of the officers and the production functions of its employees. When a decision has a bearing/affect the profitability of the corporation s operation or liability of the corporation, that involves a management prerogative. Lalaki ba kita, utang, BIR responsibility? If you must have noticed, there s an exception to the rule in S23. Only the code is the exception. Where is that exception? Unless otherwise provided did you bother to look? Where is that exception in the Code? In the case of a close corporation where SH may directly manage the affairs of the close corporation. That s why they need to put that opening exception.

Proposal for the corporation to act is submitted to the board for deliberation. Dapat may resolution yung board to do a particular corporate act. For that resolution to be valid, it has to be adopted in a valid meeting, by the required number of directors.

When is there a valid meeting? When there is a valid call to hold the meeting, sufficient number of directors attending the meeting (i.e. quorum) and lastly decision is arrived at after a deliberation (opportunity to deliberate) by the members of the board.

Requirements for a board of directors meeting

How is a meeting of board of directors held? Look at S53. Regular and special meeting of directors. There are two kinds of meeting, like a siopao. Like a halohalo. a. REGULAR supposed to be held regularly. In a fixed interval of time i.e. one month. Unless the bylaws provide otherwise.

Corporate officers and agents

The second level in the allocation of control and management belongs to the OFFICERS of the corporation. Actually hindi naman sila nag-eexercise ng control and management prerogatives. The officers simply implement the decisions taken by the board. Only the board may decide for a corporation. In the implementation of the decisions of the board, officers will exercise some leeway in implementing the decision. This discretion is somehow equated by writers in corporation law as participation in the management of the affairs of the corporation.

May the bylaws provide for regular meetings more often than once a month? E.g. every week the board shall meet. How about the reverse, may the bylaws provide for meetings less often than once a month? E.g. every two months, every three months, every 6 years. Yung stock holders they meet every year S53 but the board held monthly not at least. y If you read the work of the Campos spouses. The bylaws can provide for regular meetings less often than once a month. The idea behind the provision of the code in S53 is to require the board of directors to meet at least. Therefore, according to them, the board meetings may provide to board meetings more often than once a month but not less often. Purpose for the Camposes: While they meet, the more they give attention to problem of the corporation, therefore it ll be more to the advantage of the corporation if they meet at least once a month. y DLC: Not sure if they ve [Camposes] been corporate secretary or board member of corporations, cos if they have been, they must have realized the impracticability of requiring the board to meet at least once a month. 1. Even assuming that it s indeed the provision of the code, what is the sanction if the board of directors will not meet at least once a month. 2. If they are unable to attend for some personal or justifiable reason, eh di nawalan ng quorum, it s as if they have not met. 3. Maybe that s the reason why the code did not add the word at least. Madaling gawan ng paraan para hindi sila magmeet. Directors meeting. 2-4 week, corporate sec will call them up. Tas they ll be abroad. Consultation with surgeons, meeting with president of the republic. Pwede ka bang magmeeting mag-isa mo? Kaya yung comment ng mga Campos spouses, that s merely an aspiration, but it s not practical. 4. Not also correct that the more time the board will meet for the corporation is more advantageous. That s not always correct. In fact, habang nagmimeet sila, lumalala ang takbo ng corporation. Babayaran sila every time they meet, lalong indecisive pag nag-usap. Mas hindi nagmimeet ang corporation, mas okay. DLC s managing partner: Pag nakasalubong ka niya sa elevator, bibigyan ka trabaho. Kaya ka nasa elevator, pantry or CR, wala kang ginagawa. So itatawag muna sa sekretarya kung nasan si boss bago pumunta sa pantry.

Stockholders
Lastly, the residual control belongs to the STOCKHOLDERS. If you read the provisions of the Code, you must have observed that there are corporate acts which require SH approval for validity. In those instances, since the corporation cannot act without the approval of the SHs, the SHs exercise control in the management of the corporation. This is called the residual power of control How does the board of directors (BOD) exercise corporate powers?

Board of directors (acts as a body)

Expressly
in a valid meeting valid call quorum deliberation by the required number

Impliedly

A. Expressly adopt the performance of an act [1] in a valid meeting - valid call - quorum - deliberation - (venue is only required for SHs meeting)

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b. SPECIAL It shall be held at any time upon the call of president OR as provided in the bylaws. Emergency. Whenever it is necessary. What do you put in the notice? Bihira yung naglalagay ng time and place in which case you ll put it in the notice. Eh sinong magbibigay? By practice, it s the corporate secretary. But he normally does not release a notice of meetings without directive from the president. Secretary is under the president. So the president will call the secretary: Sweetheart, magpadala ka na notice for the regular meeting of the board. Pag walang sinabi si pres kay sweetheart, magpapadala pa ba si sweetheart? What if pres calls sweetheart, Sweetheart, don t give out notice! Between the devil and the deep blue sea, he chose the devil. At least the devil is a warm body. So the directors now, they thought hindi lang nakarating. Naintercept lang ng katulong. Nagdatingan majority of the directors arrived at the usual place where they meet for regular meeting. No president, no sweetheart corporate secretary. But since regular meeting and quorum naman, itinuloy na lang. They just appointed someone to preside and some corporate acts were adopted. Was the meeting valid? Were the corporate acts adopted therein valid acts? Kailangan ba ng call? Sa special maliwanag, pero sa regular? American courts sabi valid. But there are also contrary cases saying you don t need the call. You students, when you make bylaws, depending on who your client is, you ll have to make that aspect clear. Can you put in the bylaws: it shall be held first Friday, time, place, without need of call ? A director/trustee may waive this requirement May isang board member na hindi ininvite kasi makulit, wag na nating invite that punyeta person kasi makulit lang, pampahaba lang. Pero magaling ang intel niya at dumating sha sa meeting! Talo sha kasi they ganged up on him. When he loss, he now files a case to invalidate all transactions adopted in that meeting cos he was not given notice. What is the effect if no notice was given? Since notice is a requirement, if no notice is given, it s not validly called. Isa lang ang di nakatanggap ,the other four received it. Will absence of notice in just one invalidate the meeting? Of course. Kahit may notice sha, matatalo rin naman sha kasi mag-isa lang sha. It ll be impractical to redo and recall the meeting all over again. Speculative! Ayaw niyo marinig what I have to say. I can talk you into it! Hello Barney. That s a possibility. WON talo sa botohan, speculative. Even if only one director not given notice, meeting is invalid. BUT TAKE NOTE: It s not automatically invalid. There s presumption of regularity because of which every meeting that the board will hold is presumed to be conducted regularly. However, it may be set aside when somebody questions it. Non-compliance with the requirement of the law for the holding of a valid meeting. He attended, will his case prosper to invalidate meeting which gave no notice to him? When you attended, you waived your right to the notice. You had actual notice of the meeting. You waived your right to complain. But in that case, there s the meeting which he wasn t given notice of. May director waive notice of meetings in the future? WON right to be notified of future meetings may be waived. Can you waive something in the future? See A6 of CC. Rights may be waived, unless the waiver is contrary to law, public order, public policy, morals, or good customs, or prejudicial to a third person with a right recognized by law.

VALID CALL Upon the call, so let s go to valid call In case of special meeting, who calls for it? S53 says the president. Kaya lang many of the intracorporate disputes that has reached the court, this is one of the things that the SH were fighting about WON the meeting were a special meeting where a corporate act was adopted is valid on the ground that WON the special meeting was validly called. E.g. Directors want to decide on a particular transaction. Malayo pa yung SH meeting but the members of board want to decide now. But since members don t see eye to eye with the president who had a different set of mind, ayaw niya tumawag ng special meeting. There are decisions which must be taken immediately because time is of the essence. May majority of the members of the board meet called by one of the members? In that meeting, they deliberated on the proposal and unanimously approved the proposal. Is the decision taken by that meeting valid. Is that decision a decision adopted by the board of directors? Tandaan niyo, there must be a valid call. S53, only president may call. Aaah. May the bylaws provide for the manner of calling a special meeting other than by the president? Yes, or as provided by the bylaws BUT what does this modify: time or call? DLC: Wala na tayong maikaqualify sa call. It may call anytime. So what this phrase qualifies is as to who will call. OR to be safe, the manner of calling and the one who will call. ERGO, my students know that. Pag gumawa kayo ng bylaws, ilalagay niyo yung conditions how the board may meet over the obstinate president. :P KAYA LANG. Do not forget that a lawyer is representing an interest. Pwede mo sabihin na depende kung sino ang president mo. Kung client mo yung president, alisin mo yan. Otherwise, give them the alternative way. Lol. Kaya nga UP grad, know how to spouse the position of our clients. Just like this Truth Commission. Violation of the EPC. Gusto ko sila ibagsak sa constitutional law. There are exceptions to the EPC. The acts of the former president should be considered a class by themselves. Nachura is a constitutional law professor, so tamang nag-dissent siya. Essentially legislative because of the appropriation of fund which is beyond the powers of the executive. Creation of an office providing funds therefor is essentially a legislative function. ERGO, in that example I gave you, the meeting held without the call from the president is a ramp session. It s an invalid meeting. Pwede sabihin ng president, I will not implement your decision there because it s invalid meeting. BUT if it s a regular meeting, do you need a call? Kaya nga regular because it s already written in the bylaws! Last Friday of the month, 3PM at the principal office of the business. Bihira yung naglalagay ng time and place in which case you ll put it in the notice. Do you still need call if the meeting is a regular meeting? Look at 3 paragraph. Does the notice requirement translate to call? Elements of a valid call 1. Who called 2. Notice underline the word must
rd

10 December 2010

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Bakit may cake? Hindi ko naman birthday. Nung panahon namin, kami kakain nung binili namin. DAla namin pati kubyertos. Pati sa pagsipsip, hindi kayo marunong! For a meeting to be valid, there has to be a valid call insofar as special meeting of the board is concerned. Must there be a call for the holding of a regular meeting? It would seem that a call is implied to be required because of the requirement of notice. At this point of time, if you are smart, you must have compared the provision of the code on notice for the SH s meeting in S501 and notice 2 requirement for meeting of board in S53 . SH needs the notice to be written. Underline the word written in S50. Dun sa board in S53, walang requirement. Notice may be waived, right. But may waiver include notices for future meetings? May the bylaws that for the regular meetings of the board, no notice need be sent ? According to the Camposes while the period for the meeting of the notices may be shortened, giving of notices may not be done away with in the bylaws. But look at S53. May must jan. Underline that. The bylaws should provide for the manner of calling of meetings. The qualifying phrase unless otherwise provided by the by-laws, what does it qualify? Sending of notice or period for the giving of the notice? Saan nag-aapply yung qualifier? How about the giving of notices? Pwede ba nakalagay jan no notice need be given? The notice must be sent at least one day prior to the scheduled meeting. Assuming that the phrase applies to that one day prior, pwede ba na yung at least one day be made longer, at least two days. May the bylaws provide for periods shorter e.g. at least one hour?
Sec. 50. Regular and special meetings of stockholders or members. - Regular meetings of stockholders or members shall be held annually on a date fixed in the by-laws, or if not so fixed, on any date in April of every year as determined by the board of directors or trustees: Provided, That written notice of regular meetings shall be sent to all stockholders or members of record at least two (2) weeks prior to the meeting, unless a different period is required by the by-laws. Special meetings of stockholders or members shall be held at any time deemed necessary or as provided in the by-laws: Provided, however, That at least one (1) week written notice shall be sent to all stockholders or members, unless otherwise provided in the by-laws. Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member. Whenever, for any cause, there is no person authorized to call a meeting, the Secretaries and Exchange Commission, upon petition of a stockholder or member on a showing of good cause therefor, may issue an order to the petitioning stockholder or member directing him to call a meeting of the corporation by giving proper notice required by this Code or by the by-laws. The petitioning stockholder or member shall preside thereat until at least a majority of the stockholders or members present have been chosen one of their number as presiding officer. (24, 26) Sec. 53. Regular and special meetings of directors or trustees. - Regular meetings of the board of directors or trustees of every corporation shall be held monthly, unless the by-laws provide otherwise. Special meetings of the board of directors or trustees may be held at any time upon the call of the president or as provided in the by-laws. Meetings of directors or trustees of corporations may be held anywhere in or outside of the Philippines, unless the by-laws provide otherwise. Notice of regular or special meetings stating the date, time and place of the meeting must be sent to every director or trustee at least one (1) day prior to the scheduled meeting, unless otherwise provided by the by-laws. A director or trustee may waive this requirement, either expressly or impliedly. (n)
2 1

Whether or not giving of notice may be dispensed with by the provision in the bylaws? Camposes: y Not giving of notice may not be dispensed with. It may be longer or shorter but not dispensed with. y Waiver: in conjunction with A6 of CC, you can only waive a vested right. For a meeting to be valid, there has to be a valid call. Is there an invalid call? Call should be done by president (unless otherwise provided by the bylaws) Where must board of directors meet? Can they meet outside the country? Yes. Kaya nga dapat sa notice, may place and time of the meeting. Cf that with notice to SH.
3 Look at S47, ano nawala sa number 2 na meron sa number 1? Place. It must be at the principal office of the corporation or at a place within the municipality where the principal office is located. The directors meeting may be made anywhere, kaya the notice must indicate the place.

The notice when the place for the holding of the meeting was indicated cannot be moved without serving another notice. If venue of notice moved without prior notice to all members of board, meeting held in another venue will also be invalid. Parang naglokohan lang sila. Ayaw lang kasi nila paattendin si Ron. Pag may ginugulangan, may remedy. That s equity. That s a common law principle. QUORUM How will this board be able to transact business? For the board to be considered acting as body, there must be sufficient number of members in attendance. If only one member of board in attendance, that lone member cannot be considered as acting as a body. We call the minimum number sufficient for the board to transact business quorum. The word quorum in this context has already acquired a secondary meaning. The original meaning: number of those in actual attendance.
Sec. 47. Contents of by-laws. - Subject to the provisions of the Constitution, this Code, other special laws, and the articles of incorporation, a private corporation may provide in its by-laws for: 1. The time, place and manner of calling and conducting regular or special meetings of the directors or trustees; 2. The time and manner of calling and conducting regular or special meetings of the stockholders or members; 3. The required quorum in meetings of stockholders or members and the manner of voting therein; 4. The form for proxies of stockholders and members and the manner of voting them; 5. The qualifications, duties and compensation of directors or trustees, officers and employees; 6. The time for holding the annual election of directors of trustees and the mode or manner of giving notice thereof; 7. The manner of election or appointment and the term of office of all officers other than directors or trustees; 8. The penalties for violation of the by-laws; 9. In the case of stock corporations, the manner of issuing stock certificates; and 10. Such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs. (21a)
3

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What is the quorum? Number in attendance. With time, it has acquired a secondary meaning: now designated to mean the minimum number of those in attendance necessary for a body to transact business. What is quorum in mahjong? Minsan magmamahjong tayo dito, for your continuing education. What is the quorum for the board to validly transact business? No quorum. How do we define a quorum? Majority is an inaccurate definition. Majority of the number as fixed in the article. S254. Quorum therefore is immutable. It s a fixed number. Not dependent on how many are holding office. It s not affected by vacancies in board. It s constant, unless the AOI is amended to reduce or increase the number. Quorum will be a constant number. Majority of number of directors as fixed in the articles. Therefore, if it provides for a 10-member board and there are 2 vacancies because of death, how many now actually hold office? What is the quorum? Anim pa rin. What is meant by majority? To say plus 1 is not accurate. Pano kung 11 members? Smallest whole number greater than half. When there is attendance, there is quorum. It can transact business, proceed with deliberation and proceed to adopt a corporate act in the meeting. In computing the quorum, may a director attend by proxy? Parang binyag. Can SH vote by proxy? Yes. How about a director, may he vote by proxy? No, prohibited by S25.
Directors or trustees cannot attend or vote by proxy at board meetings.

lahat yun. In fact, nakalagay dun ngayon, Chairman OR his duly designated representative. For an ordinary private corporation, hindi pwede under last paragraph of S25. This is why in the agenda for a directors meeting, first item is always call to order and then followed by determination of quorum. In the HR, for the congressmen to be able to transact business, constitution also requires them to be quorum. Pag may minority eh kukwestiyunin yung quorum, the session will be suspended. Remedy to that: When speaker has determined that there s no quorum in the session. Pag inopen yung meeting, May I dispense with the calling of attendance. It seems there s a quorum. Or omit entirely. Unless questioned, the presumption of regularity applies. Same thing happens here in board of directors. Suppose at the beginning of the meeting, there was a quorum, but in the middle of the meeting, some members walked out, reducing the remainders below quorum? What happens to the transactions adopted after the walkout? When quorum present at the beginning of meeting, presumed to subsist until the adjournment of the meeting. UNLESS the issue of quorum was raise. GR: Conclusive that quorum until adjournment EXCEPTION: Para di maka-act yung board, di aattend yung against. By simply not attending, they ll defeat the corporate proposal calendared to be taken up in that meeting. Not attending the corporate meeting is used to delay or defeat the passage of corporate proposal. Pag may umalis, no one will be left to raise the issue of quorum. Bago kayo mag-walk out, make sure someone will be left to raise the issue of non-quorum after the walkout. Logan Johnston v Louis Johnston If the walkout by the members was justified, the Court may set aside what transpired in the meeting after the walkout. Basta may gulangan, may remedy! Just convince the court in the exercise of its equity jurisdiction to give you relief. Unless you raise the quorum issue, the presumption is quorum existing at the time the meeting was called to order subsisted until the meeting adjourned. May the bylaws provide for a quorum greater than majority? E.g. 2/3 of the board as fixed in the AOI. Quoting S25: Unless the articles of incorporation or the by-laws provide for a greater majority, a majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum Can t be reduced below majority because the allowance is to increase to a simple majority. Simple majority 50% Qualified majority 60%, 2/3 Absolute majority unanimous, everybody must be present Hindi pwedeng ibagsak, only itaas. Pwede bang everybody should be present ? What is the practical effect? Tyranny of minority. All he needs to do is absent himself from the meeting. All corporate proposals will be held in

Why is that? To allow directors to vote by proxy will be to violate a principle in corporation law, directors are chosen on the basis of their personal qualifications. SH voted for them on account of their personal qualifications. To allow this will subvert the intentions of the SH. Substitute somebody not elected by SH to _______ [perform the functions of a board member?]. HOWEVER, a law may be passed to provide that directors may attend and vote by proxies. E.g. Charters of several SUCs: They are not private corporations, they are government instrumentalities but they also have boards. In their charters, nakalagay na ex officio member the Chairman of Senate/House Committee on Education. Senator/Congressman member may attend meetings through/by representatives. Di naman nila pwede attendan

Sec. 25. Corporate officers, quorum. - Immediately after their election, the directors of a corporation must formally organize by the election of a president, who shall be a director, a treasurer who may or may not be a director, a secretary who shall be a resident and citizen of the Philippines, and such other officers as may be provided for in the by-laws. Any two (2) or more positions may be held concurrently by the same person, except that no one shall act as president and secretary or as president and treasurer at the same time. The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and the by-laws of the corporation. Unless the articles of incorporation or the by-laws provide for a greater majority, a majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of corporate business, and every decision of at least a majority of the directors or trustees present at a meeting at which there is a quorum shall be valid as a corporate act, except for the election of officers which shall require the vote of a majority of all the members of the board. Directors or trustees cannot attend or vote by proxy at board meetings.

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the abeyance. Minority will control the board. Hindi nakalagay sa batas na bawal yun. Ang tingin ng mga mambabatas, no businessmen in their right minds will adopt such kind of a provision making absolute majority as the quorum of the board. You will be surprised, later on in your practice, assuming you ll be lawyers. There are joint venture corporations. To ensure no change happen without consent of all joint venturers, nirerequire na sila ay represented. As if saying they should all be present. Hindi mashadong impossibleng mangyari. AOI may provide for a quorum which is absolute majority. Kaya no qualification there in the law. DELIBERATION For the meeting to be a valid meeting, the members of the board attending the meeting should be able to deliberate. Dapat madinig nila arguments ng bawat isa. For every proposal, they ll be sufficiently informed in considering how to cast his vote. Concrete example: Today, technology becomes obsolete faster than we can learn them. Nung araw ang aking computer ay 86kilohertz lang, ngayon gigahertz na. Yung ambagal mag-isip, parang kayo. Directors of corporation is scattered worldwide, US: Tokyo, HK, Sydney and PH. May they conduct a board meeting? Teleconferencing. If there s no such thing, nasa Philippines, there are 5 members of the board. Ron is one of them. I have proposal here, I will call Oliva. Okay sila pareho. Ron Garcia was able to talk to each and every member of the board. May Ron simply pass around a resolution to be signed by the other members? They already agreed on that. It s not a valid resolution because there s no deliberation. The board did not deliberate, si Ron and to each of the members. Several deliberations but the board as a body never deliberated on his proposal. Eh sa corporation namin ganyan ginagawa. Kasi nga may presumption of regularity. That can be questioned and the person will succeed when brought to court. What if scattered worldwide? Asked in SEC when DLC was still commissioner. Pwede yan because the reason for them to meet is simply to deliberate. For as long as there s opportunity to deliberate, the requirement of meeting is satisfied. Teleconferencing facility: Guy in Tokyo can hear what the other members of the board will say, as if they re all present in the same place. DI kailangan video, kailangan audio lang. Makakareact sila freely sa sinasabi ng isa t isa. SEC issued that opinion, members of the board may conduct meeting by teleconferencing. Eh san ang venue ng meeting nila? Is that material? When is it material? Wala naman eh. They can meet anywhere diba. In the deliberation, are there rules for the deliberation of the board? The board is free to adopt its rules of procedure. Bylaws usually have Roberts Rules of Procedures. In college, we studied parliamentary procedure. Kaya kapag student conference, naasar sila sa College of Law. There are only two universities in the Philippines. There are only two colleges in UP. College of Law and the rest. VOTING After the deliberation, the board has to dispose the pending matter. How does the board do it? Taking of a vote. Voting ha. Walang word na votation sa dictionary. Pag may naglagay niyan sa Scrabble, walang ganyang word. Atenista lang gumagamit niyan. How do the board of directors vote? There are many manners of voting. 1. Viva voce voiced vote. You ll see that in Congress. Those who are in favor, Aaaaaaye. Those who are not say Naaaaaaay. Neheheehey. The speaker determines who won in the voting. The Ayes have it. Malakas lang sumigaw ang mga bumoto ng Aye. In board meetings, presiding officer does not. What DLC does: Is there any objection? Being none, the proposal is adopted.

BUT if duda those who are in the nays, what is their remedy? Under Roberts, before the vote is announced, any member of a deliberative body may ask for a division of the house. There are two forms: a. Raising of hands speaker pa rin ang magdedetermine kung ano ang mas marami. Baka nga may dalawa pa ang nakataas jan. b. Division of house by peres (?) TELLERS! practice originated in the house of commons in England. Mas maliit kaysa sa atin, walang seatplan ang members of parliament. They have bleachers, pews in church. Leather upholstery color green. Raised one after the other. Hall divided into two sets. Central part to the right and left. One end will be seat of speaker, the other is the throne of the Queen where she stays when she addresses the house of commons. Korean proceeding is sapakan. Same happens in England. They heckle the speaker and throw things to each other. Thatcher was PM when DLC was there. Oxford Chem grad. Nobody dare heckle her. Rostrum which is a bookstand. Speaker has no gavel but batuta, pamukol ata. Nakawig pag formal session. Teller counts and tells the speaker! Mr. Speaker I will tell! If you don t believe that the count is accurate, you can ask for a roll call vote. Voting may take all day esp when they explain their votes. Explain for audience (grand standing) OR for the record. Gilbert Teodoro s mom does the same. Insert in the records. What number of votes is necessary for corporate proposal to be adopted? Majority of those present provided there s quorum. y Illustrate: If number of members in the AOI is 10, board has quorum on 6. How many votes necessary to adopt a corporate act? 4 votes shall be necessary to approve or adopt a corporate act. S25. y Only one EXCEPTION to that rule: election of the officers which will require a majority of all the members of the board. This brings us to certain ramifications/nuances of computations of numbers. Look at S25 again. Number as fixed in the articles. Maliwanag yan. Now go to the latter part of that paragraph. Go to S44: approved by the board of directors: walang nakalagay na majority jan. Go to S38: approved by majority vote of the board: Magkakaiba ba yan? Natural. Iba ibang formula oh. Tandaan this! Spoonfeed. Siguro konting bobo lang kayo. Di kayo makakarating ng 3rd year kung super bobo kayo. 2 lang diyan ang maliwanag. 1. Approved by the board Majority of those present when there s quorum 2. Majority of numbers as fixed in the article Majority of all the members of the board if that s a different number as fixed in the AOI. When does that happen? Namatay yung 2. So can this refer the actually serving without reference to the vacant seats in the board. E.g. number is 10, 2 yung patay. So 8. Majority of the 8.

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What did SEC say about this? There are only 2: a. As fixed in the AOI b. Majority of those present when there s quorum Therefore, this phrase majority of all the members of the board must also refer to as fixed in the AOI. Majority of the board = approved by the board Suppose a director owns 50% of the outstanding capital stock of the corporation. Can he say that since I own the corporation, I should have more votes! Can they say that director will cast more votes than another director. Can we classify directors so that one class will have more votes than another class of directors? Not allowed under Phil law. Director can cast only one vote. All directors have the same voting rights. Pwede ba secret balloting like BOR? How do we characterize an abstention? A case reached the SC involving our University before Martial Law. This involved the election of Dean of College of Education. Salvador Lopez v Ericta. Ericta belong to Class 39 class of Marcos. Alumnus of this college. ST Lopez was at the time president of UP. San sha nakatira? Executive house. ST Lopez was the last to live there. Deanship became vacant and there were two contenders. Consuelo Blanco and Reyes. BOR cannot elect somebody nominated by the president. Presidents will nominate, BOR will either approve or reject. Acting dean or OIC. Nomination and confirmation. Lopez nominated Dean Blanco. When it was deliberated and voted upon, with 11 members. Result of votation (I thought don t use this word?!): 5 in favor to confirm appointment of Dean Blanco, 3 voted against, 3 abstained What vote was necessary for him? 6 BOR: having failed to garner necessary votes, appointment was not approved. Consuelo Blanco: I should have been proclaimed winner. 3 abstained should be counted with me. Their intention is to be bound by the prevailing side. Should be considered that she was able to get majority of the members of the board? J. Makalintal for SC who became CJ during Martial Law (classmate din ni Marcos): Ah hindi naman. Not because they abstained, they go along with the prevailing sides. Look at the records as to the intention of those who abstained. According to the court after reading the deliberation, they came to a conclusion that they just abstained for delicadeza but was actually against. Tama ba yung ginawang yun ng court?! Ang samang decision. Very bad! But this bad decision has a parallel milieu in the political scene. Hindi talaga kilala ang abstention dati. It was only during the first election after ML. Ninoy Aquino wanted to boycott the election. It s a farce. We should not give it an iota of credibility. Let s not participate! COMELEC chair was Perez of Nueva Vizcaya. Batch 51. Classmate of Aguido Agbayani. TV interview. Chairman, what can you say sa boycott? Constitutional right but they can go to jail. Blame Raul Manglapus. In the opposition. In the new constitution that SC declared ratified. Suffrage is not only a right but also a duty. To enforce it as duty, OEC provides for penalty if he does not register and vote. Manglapus inserted that. Position niya: When he ran as congressman, he lost by less than 200 votes. 10 bus sa distrito niya. Libre excursion ng 7am kaya hindi nakaboto mga botante niya. 600 votes. Hurting from such a defeat, when he became a constitutional commission delegate, yan ang kanyang proposal. Abstention is a vote in itself. Applying this to Salvador Lopez v Hon. Vicente Ericta. Court has no power to dictate how a director voted. Simple lang ang test, what s the required number of vote for a corporate act to be approved. If it did not attain that number, that proposal is lost. Continue next year! Kung milyon milyon tayo, hindi nila tayo kayang ikulong! Ah hindi, ischedule natin yan. You can all go to jail in 6 years. So dahil mautak si Apo Leony, sabi ng opposition: Instead of boycott, abstain na lang kayo. How to do that: write abstain on your ballot. Ang tanong ngayon: Is abstention a vote?

7 January 2011
The ruling in ST Lopez v Ericta is in DLC s opinion, incorrect. The court has no business interpreting how an abstention or the effect of an abstention. A member of the board, abstains simply because he doesn t want vote to be recorded as negative or affirmative. Was the case ahead of its time? No, because there are also similar cases in the US. Political aspect: Problem on how abstention should be interpreted. It was not considered as a vote as can be gleaned from argument of Dean Consuelo Blanco. Those who abstained commit that they will go along with the prevailing side. Their number should therefore be counted in favor of the prevailing side. An abstention is by itself as a vote. By that time, the court could only see in black and white, either voted against or in favor. Nothing in between. If this problem comes up today, I doubt ruling in Lopez will be sustained by court. It will not be applied because with the political scene, it s considered as a vote in itself. This happened during Martial Law years when Marcos called an election. Ninoy still in prison, so the opposition was campaigning for boycott. Best is for people to boycott. Nobody show up in the polls for the international media to see. Interview with COMELEC chair Velez who said that It s okay because it s their right. Consequence and penalty for boycotting election under OEC is rd imprisonment. Idea of Senator Manglapus. See 3 to the last paragraph in the other column. Is abstention a vote? Yes. It was decided by SC in one of the cases. Abstention is by itself a vote. In the light of that development in the political scene, the logic is applicable to a corporate board meeting. Abstention cast by a director is a vote in itself. Court has no business characterizing an abstention. Whether negative or affirmative vote.

call notice in a valid meeting venue Board of directors acting as a body express implied by required number of votes quorum majority qualified majority

Corporate decision

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Zachary v Millin There s a problem in notice. Hindi pwede casual meeting converted immediately to a corporate meeting. In another case which the member was removed, it was deemed a waiver. (?) S25:
y y

GENERAL RULE: They [board of directors] cannot delegate their powers. If they are allowed, it has to be in the confines of S35. Dapat executive committee with three members who are members of the board. This is the ONLY provision allowing the board to delegate its powers of management. Sino gagawa ng executive committee? May the board of directors by resolution adopt a creation of execom? Board cannot create an execom. How is it done? Under S35, it s created in the AOI or bylaws. When they create it, members of execom cannot be members of board. Why? If you allow execom to have all its members as non-members of board, it will violate S23 which provides that the powers of board are exercised only by board of directors. There s only one exception: when the code (not AOI nor bylaws) provides otherwise. If we allow the AOI or bylaws to create an executive committee whose members are non-members of the board, we are violating S23. Allowing another entity to exercise power of the board. Ano ginawa sa S35: allowed to delegate PROVIDED the delegate is an execom created by bylaws. Who creates the bylaws? SH. Later on, board of directors may create it if the power to amend bylaws is given to the board. It s allowed under S48. Board of directors may amend the bylaws by creating an execom. Bylaws may create an EXECOM which may exercise the powers of the board but no less than three members of the execom should be members of the board. Illustrate through a problem: Bylaws created an executive committee with 7 members. Is it allowed? 7 members? Yes. Nothing written in S35 that maximum number (minimum is three). May the bylaws provide for an execom with 7 members, of them only 3 are members of the board? Is that executive committee validly created, bylaws provide that executive committee has 7 members, 3 of whom come from the members of the board. GM, corporation sec and treasurer. Not okay because you can circumvent S23. Largely of nonmembers of the board. An executive committee is a mini-board. Why is it allowed? In a corporation with big number of members, mustering a quorum is always a problem. General principle of corporation law prohibits reduction of quorum beneath simple majority. Cannot delegate either since bawal din. Ano compromise? Allow a miniboard to be created, to be called the executive committee. As a miniboard, it has power to decide for the corporation as if it were the board of directors. To address the quorum requirement, executive committee will have smaller number. PERO hindi uubra na ang uupo sa executive committee ay hindi members of the board. Not having been elected by SH as members of the board. That s why SEC issued an opinion in 1981: All the members of the executive committee should be members of the board. Pwede ba na 2 lang na members of the board ang executive committee? No. Because S35 said not less than 3 members of the board. Minimum number is three. You can t have an executive committee with a number of members less than three. The executive committee, what are their rules? E.g. 15 total number of board members as fixed. Majority is 8.

Quorum may be increased to a greater number. unless AOI provides for a greater majority May provide for a greater number of quorum, but NOT lesser. Pwede 2/3 or but not reduced to less than simple majority.

Is that prohibited? Simply because S25 provides that it can provide for a greater, it is implied that AOI or bylaws cannot provide for a smaller number. May the AOI/bylaw provide for a vote requirement lesser or greater than simple majority as provided in S25? E.g. In this corporation the vote of 2/3 of members present where there is a quorum. Hindi pwede taasan/babaan. Why? Because there is only one exception to that rule. It s provided in the same section. Except election of officer I have called your attention earlier on the difference for formula required for election of officers and determining a quorum. y Determining: majority of all the members of the board as fixed in the articles y Election: wala yung as fixed in the articles Are they the same or are they different? When framers of law use a different formula, it was intentional. It was intentional because there s a difference. y SEC interpretation: There s no difference. Ayaw lang nila maging redundant ang wording ng S25. y DLC: Doesn t remember having discussed the difference in formula during the committee deliberation of the code. May the bylaws or articles provide that directors may attend or vote by proxy? Last paragraph says that they may not. Pero pwede ba nakalagay sa Articles yan? Not allowed. SH have elected board members on the basis of their personal qualifications, hindi yan transferable. How many votes when they vote to adopt a corporate proposal? How do they vote? One director is entitled to one vote. POEA admin not his batchmate. Okay? Ano ng okay. Walang okay.

Executive Committee
May the board delegate powers of management? In political law, we follow a doctrine/principle potesta delegata non potes delegare power delegated may not be delegated to another. It s a political law. Does it apply to private matters like corporation law? If you have read the Corporation Code which I required you to do, you should have seen the answer right away. Where was that? The answer is in S35. Whenever you read a provision, dapat niyo tatanungin, what is the mechanism? Since Corporation Code is common law in origin, it has underlying principles and assumptions which need not be put in law because general principle insofar as the particular area concerned. If general rule is one of delegation, there s motive for S35.

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In the excom, provided in the AOI, ginawa nilang 5. Yung members of excom who are all members of the board. What is their quorum now? Nothing mentioned in S35 as to how the excom shall meet. No vote requirement or quorum. Those are the details which should be provided in the bylaws creating the excom. So if you ll be the one doing the bylaws, you should include additional provision in the AOI. Assuming wala, what do we apply? Apply by analogy all the rules applicable in the board. Majority of the number of members as fixed in the bylaws. Apply all provisions applicable to the board by analogy because the excom is a mini-board of directors. What if excom decides and then next month, entire board of directors meets? Can the latter amend/repeal the decision adopted by the excom? Also, how about the reverse, full board meets and adopted a corporate act, may the excom repeal/reverse/modify the decision taken by the full board a week earlier? There are limitations. Exceptions in S35: (1) approval of any action for which shareholders' approval is also required; e.g. S20 (disposition of assets); amendment/repeal of bylaws, S42 (investment in another business/corporation); (2) the filing of vacancies in the board; (3) the amendment or repeal of by-laws or the adoption of new by-laws; (4) the amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable; and (5) a distribution of cash dividends to the shareholders. --? Hindi rin pwede ang stock dividend (S43 must be approved by 2/3 of outstanding capital stock. Excom cannot make papel here) Sir what if they pingpong? To prevent this from happening, full board may prevent excom from amending/repealing a particular corporate decision. They have to spell that out expressly in the resolution. E.g. this corporate act cannot be repealed/amended by the excom. Underline the word express which by its express terms is not amendable or repealable. Dapat maliwanag. Otherwise, the excom has power to amend or repeal it. What powers may the excom exercise? S35 says: on such specific matters within the competence of the board, as may be delegated to it in the by-laws or on a majority vote of the board therefore, there are two sources of powers. 1. On such specific matters within the competence of the board They may not grant excom a blanket authority. SEC will disapprove it as contrary to S35. 2. Delegation by the board from time to time of specific powers specific modifies the powers, whether enumerated or specified in the board. board of directors cannot delegate in general. It must be specific powers. Board of directors may only delegate within its competence. If they do not have power, with more reason excom does not have power. What dividend may the executive committee declare? Three kinds of dividends: cash, stock, property y Cannot declare cash prohibited in S35 y Cannot declare stock prohibited in S43 (SH approval) y May declare property, BUT delegation of the board of directors and bylaws must authorize the executive committee to make such declaration AGAIN: The executive committee may not have a member who is not a member of the board of directors. Otherwise, it would be violation of S23 (corporate principle that only board of directors elected by SH may exercise powers of corporation). One exam question in previous classes: The board of directors by unanimous vote created an executive committee for the purpose of making a study on whether or not an investment in another business is feasible. The executive committee was composed by non-members of the board. After its creation, it went into its business of making a study and came out with a report favorably indorsing the investment. Was the creation of the executive committee valid? Valid. Pangalan lang yung executive committee. Nagkataon lang na tinawag na executive committee. Hindi naman sha magpeperform ng function ng board. BUT if they make a body to be called a stirring committee (taga-stir lang yun) but the resolution actually allowed it to exercise powers of the board, the creation is invalid. What they sought to create was an executive committee although by a different name. It s not the name that will determine WON it falls under S35. It s the function it was given in the resolution or bylaws. Look at the powers granted it. Hindi ko na itatanong yan sa exam. Second rate like Noy s appointees. They can float on their own weight, feather weight. What can t executive committee do? Fill up a vacancy in the board. How does executive committee act? Majority of all its members. Not in a meeting where there is a quorum SEC ruling: as fixed in the bylaws. So kung 5 yung members, 3 votes are necessary to approve a corporate act. Remember the vote requirement and may it be modified in AOI and bylaws? No, because S25 provides for only one exception i.e. election of corporate officers. Board lang pinag-uusapan natin, hindi SH. ERGO, when you see the bylaws of a corporation that provides for a higher vote requirement for its board to approve a corporate act, what do you say? This provision of the bylaws is contrary to law, specifically S25. What is the reason there s only one exception to the rule on vote requirement? Laging majority of quorum to approve a coprate act. You can t change in the bylaws. Only one exception. Look at S35, if the intention of law is to allow a number to be increased or decreased, the law should have provided, in the case of quorum, greater quorum pero di babaan. S52 (SH meetings) unless otherwise provided There s an implied prohibition since there s only one exception: When officers are elected (i.e. majority of all members of the board). Favorite ko ito. May naisip na akong mahirap na tanong. Board cannot delegate its powers. Somehow we apply the political principle, delegated power cannot be delegated to another. Does the board exercise delegated power? Yes. By the corporation. the powers do not belong to the board but to the corporation. Who gives? The creator of corporation through express legislation in S23. Next level of control: Belongs to CORPORATE OFFICERS. Bat sila biglang nagkaron ng control? We have to be practical. Board of directors cannot run day to day affairs of the corporation. It s taken care of by the corporate officers. Technically, Board will simply adopt a policy/general decision for the corporation to take. In the implementation of this general direction, corporate officers are given enough discretion to do what is necessary to carry out the policy adopted by the court. Meron silang elbow room. In the exercise of this discretion, officers are exercising certain degree of control in the management of the corporation. In the interpretation and implementation of policies adopted by the board, corporate officers exercise limited latitude (not wide) of discretion.

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Who are the corporate officers? Even the SC is confused about this. Nobody in the SC at the time of those decisions were promulgated had a deeper understanding of the Corporation Law. Is the EVP a corporate officer? Siguro naman. Nung pinabasa ko sa inyo ang Corporation Code, apat lang ang nakamention. The president, secretary, treasurer and chairman of the board (somebody other than the president). They are corporate officers by express provision of the law. What about the EVP provided for in the bylaws? It depends. Where? If the bylaws or the AOI (if position is provided for there) as the case may be, classifies the position as a corporate office, then the person occupying the position must be a corporate officer. HOWEVER, if articles or bylaws as the case may be, does not classify the position as a corporate office, then it s not a corporate officer. What is he? Merely an employee or perhaps a contractor (lease of service). Tandaan this! Why you need to remember this? Educate the judges, the NLRC and SC. Case: PAL VP dismissed from his job by the management by reason of loss of confidence. VP files illegal dismissal case with LA. May jurisdiction ba ng NLRC? What if corporate secretary removed? May he file illegal dismissal case? Who elects the corporate sec? The board of directors. Does he have term of office? Walang nakalagay sa batas, but the bylaws may provide for a term. Suppose bylaws is silent, it s indefinite. He will serve at the pleasure of the board. Illegal dismissal ba yun? Must there be a ground for a corporate sec to be removed as such? Walang nakalagay sa corporation code because as corporate secretary, his tenure depends on the confidence the board reposes on him. When board loses confidence, the board may remove the secretary. Does not give a term of office. Code does not give security of tenure, he serves at the pleasure of the board. When there is term, it becomes a contract. Can they put grounds for corporate secretary to be removed from office? Yes. If no reason given, board need not have reason to remove its corporate secretary since it is a position of confidence. The moment board loses its confidence, it has right to replace its secretary. When board binds its hands for removal by providing grounds, then the board and corporation are bound. They can no longer invoke the provision of code allowing the board and corporation to remove a corporate officer. Corporate secretary has been in the corporation for 5-10 years, may he file case with the NLRC for illegal dismissal? Read Espino case. Next meeting. Who will remove? Board of directors. Power to appoint is also power to remove. Since board of directors is given power to appoint corporate officers, then it also has power to remove any of them. How about the corporation s VP? Is he corporate officer? Depends on WON by laws classifies his office as corporate office, otherwise he is a mere employee. If the VP is an employee, then the relationship is one of EER and the Labor Code applies. Any dispute is within the exclusive jurisdiction of NLRC. HOWEVER, if position is classified in bylaws as corporate office, no EER. The relationship is a contract of lease of service. Labor Code provisions do not apply. The employee is contract of service, without security of tenure. Contract of engagement is one that applies to him. HOWEVER in Espino v PAL, decision penned by Bart Carale when he was NLRC chair. Part owner daw kasi. Lahat ng corporate officers are appointed by board of directors. Ke employee ke corporate officers. Bakit napunta sa president? Dinelegate lang kasi ng board of directors. Appointment is subject to confirmation by the board, otherwise undue delegation of power. Allow president to exercise powers of the board. So those distinctions pronounced by the SC are all wrong. Corporate office only if clasisfed in the bylaws. It s not a contract of employment but lease of service which is found in the Civil Code. Pag hindi corporate officer, it s an EER and labor contract. Beautiful qualification on exception to this rule. Leslie Espino, son of the former chief of staff of AFP, rose from the ranks. Senior or executive VP next to the president. In the bylaws of PAL, it s classified as corporate office. Tinanggal by loss of confidence. Leslie Espino filed a case before NLRC EER is present. NLRC said: We have no jurisdiction us because it s not EER but corporate office his position. Therefore, serves at the pleasure of the board of directors, which can for the flimsiest of reasons may remove for any reason. Dean Carale (magaling pala to): Hindi ganun ganun lang yun. Leslie should be considered as wearing two hats at the same time: corporate officer and employee. Otherwise, corporation can easily circumvent security of tenure provision of the constitutional. They can just make a rank and file employee a corporate officer. If the r&f does not accept office, he can be charged of insubordination. Naturally, they r&f will accept because that s promotion. Carale is born a teacher. Pag di yan nagmumura, hindi sha yan. Buti nga ako hindi ko kayo minumura, sinasabi ko lang na bobo kayo. Bylaws of the corporation may create as many offices and classify those offices as corporate officers. Corporate officers are also encountered in service of summons. Dapat responsible corporate officers to acquire jurisdiction on the person of the corporation. So you have to check to whom sheriff serves it. You can t let him do his work. Turuan niyo yung sheriff pag corporation ang defendant kung kanino niya iseserve. Last level of control: STOCKHOLDERS They exercise residual powers of control. In the affairs of the corporation. Bakit sila may ganon? Natural because they re the ones who provided the corporation its capital. In what instances are the SH allowed to exercise this procedural powers of control. TANDAAN THIS. Make taga to your batoks. SH exercise

10 January 2011
Who are the corporate officers? Mentioned in the code, president is chairman of the board in the absence, it may also be secretary treasurer Term of office of officer? At the pleasure of the board Removed at what ground? Loss of confidence; law does not provide any ground, may be by the flimsiest ground

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residual powers of control only in those instances expressly required by law. If you cannot point to a provision of the law, requiring SH approval for the validity of a corporate act, SH approval is not necessary. Pag wala nakalagay sa batas, hindi kailangan. How do SH give their consent to those instances where the law requires their consent? They have to give it as a body in a meeting. They will be acting as a body. Without a meeting, they cannot act as a body. General rule ito. Without a meeting, can t act as a body. Cannot act as body unless they meet. There is one exception: in the case of amendment to the articles in general. S16. Referendum (written assent) amendment of AOI. SH approval is only needed when required by law. What do you need for SH approval? 1. Act as a body When they act as a body? a. Valid meeting What are requirements for this? i. Valid call ii. Notice iii. Venue iv. Quorum b. Required number of votes Depending on provision of law i. Majority ii. Simple majority iii. 2/3 Why in general ? There are special amendments which can only be approved by SH in a meeting: y S18 increase or decrease of authorized capital stock cannot be done by referendum y Shortening or lengthening of the corporate life (?) What may be done in referendum? Change in name S16 2 kinds of SH meeting 1. Regular happens at least once a year aka general annual SH meeting (S50) What s the recourse against president? Demanda him for breach of duty, then pray for the calling of meeting by fixing the date thereof. Kakasuhan mo pa sha. But the case in the Phil may last for 5 years, then 5 years din kayong walang meeting. Baka yun pa nga ang gusto ng president, diba. Lawyers are not afraid of cases. Although the best lawyers is no case lawyer. Pejorative for no case lawyer. Best lawyer are those whose clients have no cases in court as plaintiff or defendant. So pag di niyo kami nakikta sa court, hindi ibig sabihin non hindi kami magaling! Magaling kami! Prof. Dakila Castro best trial lawyer UP Law has produced. Wag na sir, baka matalo kita. Short but substantive arguments so the stenographer can catch it. Time and manner of calling and conducting regular/special meeting: In the absence of provision on how regular meetings are called, the president directs the calling of a meeting. He instructs the secretary to send out the notice for the regular meeting. Can the bylaws say the time, date and venue so that no call is necessary? E.g. The SH shall meet without need of call on the 1st Friday of January of every year at 3 PM afternoon at the principal office of the corporation. Manner of calling din naman ang no need of call. It may be legally possible or feasible BUT not practical. What if there s a calamity, how are we supposed to meet? Who calls the meeting? Should there be a call for a regular meeting? A notice has to be sent. Notice has to be written. So if the word written has no underline, you have a problem. You are not smart after all. Only in your mind that you are smart. Not so required for meetings of the board. Dito sa SH dapat written. Who will send the notice then? Alangan naman the computer prints on its own and then send it to everyone. Somebody has to do it. Who will make the utos? Can SH meet without notice? Therefore, no call. Can they put in bylaws the annual SH meeting of SH of this corporation shall be held on the first Friday of month of Jan every year. Should there be notice, they know when, although they do not know where? Under the law, the SH cannot meet anywhere, unlike the board who can meet anywhere. They must meet at the principal office of the corporation. Where is principal office? Whatever address is written on the AOI. Can they transfer their meeting kasi maliit lang ang principal office e.g. can only hold three standing SH? They can transfer the meeting provided it s within same city/municipality. Metro Manila shall be considered a city or municipality. How many Metro Manila? 15 cities and 2 municipalities all in all. Even if QC the principal office, they can have the meeting in Makati. Who will say where the meeting is? May bylaws provide for time and venue? Look at S47. Number 2: nawala na yung place. PROBLEM: President does not want to call a meeting. He doesn t want to send a notice. If he doesn t, SH won t be able to meet. 2 years na hindi pa tumatawag ng meeting yung president. Can officious ordinary SH send notice to other SH? No, because under the general principle of corporation law, only president through corporate secretary can send notice.

May bylaws provide for regular meetings more frequent than once a year? Yes, because while there s no express provision allowing it, no reason why it can t be allowed. Is there an implied prohibition? If by doing it, run afoul some corporation law principles or provisions of the code which DLC cannot find. Therefore, no express allowance and no express prohibition, regular SH meeting can be done more than once a year. Maski dalawa or apat ang regular meetings of the board, isa lang dapat jan ang general annual SH meeting. Why? Because that s the point of reference to the terms of office of the directors. 2. Special anytime deemed necessary or as provided in the bylaws.

Look at S50: Suppose bylaws do not provide the date of annual SH meeting, when shall it be held? Any date in April as determined by board of directors. The board will fix it. Not any date. Must be any date in April. Not March, December or February.

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BUT in order to provide a remedy in case corporate officers charged with duty to call meeting have refused to call the meeting, you should provide for an alternative manner in such an eventuality. Look at S50 4th paragraph. We cannot use that in all cases because remedy available only when no person authorized to call a meeting. When there s a person authorized to call is there BUT refused to call a meeting. Pag wala lang president like namatay in an airplane crash. No one will call. Only then we can use 4th paragraph. But to make that iwas, ilagay na sa bylaws so no more need to file a petition with the SEC. Compare that with S28 provision. In case of removal A special meeting of the SH must be called by secretary OR written demand Remedy in case of removal. It only shows that there has to be a call. Whenever a SH meeting is to be held, there has to be a call. IN case of removal, manner of calling is provided in S28 in case secretary/president has refused to (instruct secretary) call meeting. By laws should have manner for calling a SH meeting in case president has refused to call meeting or there is no president to call the meeting. Lagi nandito ang problema. Find it out in practice. Punyetang president does not call a meeting. Applying the case of Abejo v De la Cruz, it s from the very beginning (Chapter 1). Government regulation of corporations. Shempre hindi niyo binasa. ISSUE: There was an issue before as to WON a dispute is an intracorporate dispute because if it is, exclusive jurisdiction to settle it is with SEC. The courts have no jurisdiction over the dispute. But WON intracorporate is not easy to determine. FACTS: Telco (Pocketbell) was a family corporation owned by the Abejos. One of the owners/major SH was an old woman (spinster). Isang araw, biglang may nagpunta sa corporate secretary showing deed of assignment (actually it was a certificate of stock duly indorsed at the back by the owner) signed by spinster. Transferred all her shares to corporation to third party presenting the deed of assignment. What did he want? Record the deed of assignment/transfer/conveyance of shares, cancel the certificate in name of old woman, new one issued to the assignee indicated at the back of certificate of stock. Corporate secretary wants to verify it first. Called his president boss who doesn t want to record. Matatalo akong president next election. Corporate secretary to third party: Didn t allow because nawala daw ang certificate ni old woman. Baka nakaw lang ito. Humingi muna kaw ng authorization/certification from stockholder of record i.e. spinster owner certifying you as her atty in fact. Kayo kaharap nung nagbayad, kami hindi. Transferee cannot find the old woman to get her authorization. Dinala na ata sa US. Third party now files a case with SEC to compel secretary to make the transfer (essentially comply with his requests as enumerated above) Corporate secretary: MTD on ground that SEC has no jurisdiction because not intracorporate. Complainant is not even a SH yet! SEC: We have jurisdiction! SC through Teehankee: SEC has jurisdiction over the dispute even if not intracorporate dispute. How? Hindi lang naman intracorporate dispute fall under SEC s juri. Action to compel corporate officer to perform ministerial duty is within SEC s jurisdiction under 902-A. Jurisdiction and CONTROL over all corporations organized under it. Therefore, it can compel corporation officer to perform ministerial. Is the recording ministerial? Yes, on the part of corporate secretary. Under the law, moment cert of stock presented duly indorsed at the back. That s all need to make him issue new. How about in the case of meeting? In case AOI/bylaws indicate date of annual SH meeting, ayaw tumawag ng president? Or threatening not to call SH meeting on the date specified in the bylaws? Can you go to SEC? Is it a ministerial duty on part of president? If yes, does SEC has jurisdiction to order Pres to call a meeting? Is it an intra-corporate dispute? Certainly it is. Matter between SH and a corporate officer involving corporate matters. That s definition of corporate dispute in Viray v CA. Not all disputes in corporation is intracorporate. It should involve [1] corporate matters and [2] application of corporation law principles in the settlement of dispute. Under the new law, jurisdiction over corporate dispute transferred to regular courts. BUT jurisprudence, not all RTC acquire jurisdiction over intracorporate dispute. Only commercial courts. So meron pa rin gamit yung WON intracorpo dispute: Just to determine which RTC may take juris. Only RTC as commercial courts. Pag ii-finile sa SEC: Ayaw na nila ng trabaho. They will release this decision: We decline to acquire jurisdiction over this dispute. File it before appropriate RTC. Abejo v Dela Cruz: The word control was removed in the new law in the Securities Regulation Code. Jurisdiction and Supervision na lang ang naiwan. Maski sa enforcement of ministerial duty, wala na rin sa amin. SPECIAL MEETINGS: Hindi nakalagay kung kailan. Only as may be necessary NOTICE It should be written. What should be seen there? Agenda? S47 No. 2 only says time and manner and S50 written notice must be sent nothing said on what should be mentioned there. Should they put the agenda? The law does not tell us what the contents are. HOWEVER, if the meeting is annual SH meeting. It cannot be without agenda because the agenda should be the election of incoming members of the board. Yun ang nakalagay by law. Yun ang ginagawa dun. Pero sa special, kailangan meron agenda. Para saan ba ang special meeting? Purpose must be reflected in the notice why the special meeting is being called. When must it be given? At least 2 weeks prior to meeting. Pwede ba habaan yung two weeks? Yes, unless different period Pwede ba shorter? At least is relevant. Can you make bawas? Campos says you can because covered by qualification unless otherwise provided in the bylaws . It [notice] may be waived expressly or impliedly by any SH. Can the waiver be provided in bylaws? We waive notice for regular SH meetings? Camposes say: malikot utak mo. Law cannot provide for all possibilities. The answer is in interpretation. How do you interpret it? Possibilities not covered by law shall be settled by interpretation. How will you apply it? Siguro hindi na mangyayari yun. Hindi practical na ganun ang iprovide sa bylaws. The period may be shortened or extended PROVIDED notice is not absolutely done away with. To do away completely with sending of notices is violation of due process. SH not given notice may claim violation of DP. They were deprived of proprietary right without DP which is unconstitutional. WAIVER in S50 applies to meetings which were held and for which a SH was not served a notice but he may waive at having been served notice either expressly or impliedly (i.e. attends the meeting).

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Who presides at SH meeting? Under S54: it is the president May president as presiding officer given to another corporate officer e.g. Chairman of board? Yes, if provided in bylaws. What if president/presiding officer was absent, WON justified, who will preside? Apply by analogy. Body. Who calls meeting to order? There must be a provision in the bylaws. Written in the conducting. Under S47 No. 2 conducting the meeting e.g How the meeting will proceed in case president/bylaw designated presiding officer is not present. What is usually written there? The corporate officer who is ranking next - Chairman of the board, corporate secretary, any incumbent member of the board may call the meeting to order and preside therein until SH have chosen one of them as the presiding officer. Called to order na. For it to proceed, there must be quorum. QUORUM S52: NB it s a new provision. - Why? Because it was not needed back then. Nung dinagdag nila ito, gumulo ang batas. - Why? Because in a corporation, there may be two classes of shares. Voting and non-voting. In the computation of the code in S52, it s on the basis of the outstanding capital stock as defined in S137. All shares of stocks issued under binding subscription agreements. Quorum should be on the basis of outstanding capital stocks. What if ganito ang nangyari: OUTSTANDING CAPITAL Stock 1. Voting 100 shares 2. Non-voting 500 shares 600 shares What is the quorum now? 301. Sa madaling sabi, kahit umattend lahat ng voting, wala pa ring quorum. Kailangan pa ring umattend ang mga non-voting eh hindi nga sila entitled to vote. Bat pa papa-attendin? Kaya nga mali eh! y Pag walang matter that SH will decide allowing non-voting shares to decide to vote, hindi dapat kasama sa quorum. Kaya mali ang S52 and it has to be suppressed from the code. y Not only that, maski pa may quorum, since majority sila, vote requirement to approve a corporate act, not refer to quorum but outstanding capital stock. y Kaya it s not in the old Corporation Law since it s useless for them to meet if no required number to approve the corporate act to be decided in the meeting. y They just meet to pass condolences to express demise on death of a director. Expression of corporate support to a moral etc. Yung mga walang corporate act necessary to implement it. S52 is only correct if it is qualified. OCS entitled to vote in the meeting Our discussion on quorum applicable to board of directors is also applicable to SH meetings. What s the principle? When a meeting had a quorum when it was convened, the quorum is presumed to subsist until the adjournment of the meeting UNLESS quorum was raised in the meeting. Kung aalis kayong lahat to reduce the number of quorum, walang magreraise. Talo pa rin. So mag-iwan ng isa to raise issue on the quorum. Problema lang yun pag nag-iwan kayo ng isa, may quorum pa rin. Logan v Louie Johnson exception: When the group of SH left because not allowed to speak during deliberation leaving those who remained below quorum, but nobody raised the question, those who left may question the validity of meeting may raise the validity later on IF deprived of right to speak in the meeting. As if saying may karapatang to walk out if deprived of SH rights in that SH meeting. Who attends the SH meeting? Can one person attend pero may quorum? Shares of stock. The SH is just a representative of the share. Therefore, if more than majority of shares is owned by single SH, then that single SH may attend and hold his own SH. Technically pwede yun pero para shang tanga. SH are just mere representatives. Exam question: May AOI/bylaws of corporation reduce the number of quorums below simple majority? E.g. 10% of OCS entitled to vote may be enough for quorum. Answer: Look at S52: Unless otherwise provided in the code pwede babaaan, pwede taasan? y Decrease: Pwede ba mag-approve ng corporate act? Wala rin naman sila maaapprove? Lahat ng corporate act the basis of vote requirement is OCS not quorum, unlike board meetings whose requirement is majority of quorum is enough. PERO sa SH meeting: All corporate acts requiring SH, the vote requirement is always on the basis of OCS. Never on the basis of the quorum. Not majority of the quorum, always majority of OCS. Maski 10% of quorum, they can meet but not approve anything. y Increase: e.g. of the OCS. Ibang usapan ito. Quorum is in attendance ang 2/3 and we can approve amendment of AOI BUT not meet because the quorum . Can you increase then? Pwede increase the quorum to and cannot discuss amendment to AOI even if 2/3 present. Can bylaws provide: all shares must be represented before pwede ba yun? Absolute ito. Bylaws said 100% represented. There are two views: 1. Used by joint venture corporation. There are two parties, 6040. Stipulate: Whenever major decisions are to be approved, all shares must be represented. So far no one questioned pa rin. There is a need to this provision so that all partners are given ample opportunity to protect their interest whenever major decision is to be taken. DLC s point: Nakakita na sha ng ganito. SEC allowed. 2. Tyranny of minority. All they have to do to defeat majority is to not attend. When they don t the meeting will not proceed. 3. Proponents: Katangahan nila yun. Sila pumili nun. Let them suffer. Is fixing the venue mandatory? Yes. Director cannot attend a directors meeting by proxy. BUT a SH are given the right to attend by proxy. Specifically allowed in S58. Parang magaanak sa binyag. May the bylaws prohibit voting by proxies, provide that SH must vote personally? General principle of corporation law that SH may not be deprived of right to attend and vote at SH meetings by proxy. Any provision of bylaws depriving him of this right is violation of DP. Deprivation of property without DP. How to proxy? Saka na yan sa Devices affecting corporate control VOTE REQUIREMENT

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What is the vote requirement? Specified in the law that requires SH approval before a corporate act is valid and effective. Majority of the outstanding capital stock. If it says 2/3 then so be it. May the AOI/bylaws reduce or increase the vote requirement? Illustration: S40 on disposition of assets requires 2/3 of OCS. Can we make bawas to simple majority, or increase to ? Pang-thesis ito. Or is the provision of the law mandatory? May naalagay ba jan sa S42 na unless bylaw provides otherwise ? Wala. Power to declare dividends, may unless otherwise provided? Wala rin. Vote requirement is mandatory? Bylaws or AOI cannot provide higher or lower. (Cf page 46: you can increase, but not reduce. But again cf page 50. So ano na ba talaga??) S38 for instance, increase/decrease of capital stocks. Wala ring qualification kasi nga mandatory. That s the existing interpretation. AOI or bylaws cannot modify the vote requirement. What can they provide in bylaws? S47: Required quorum and MANNER of voting. It does not include voting requirement. It s COUNTING of votes. DLC has seen AOI of a joint venture corporation, almost all, where certain acts require greater voting requirement than what is provided for in the code. Hindi inobjectan ng SEC. They allowed the incorporation of the corporation. Where then can we put that [justify]? One of the venturers owns 70% of the OCS and the other JV owns 30% stake. Since malaki yung stake ng 70%, lagi talo yung 30% kung 2/3 lang yung vote requirement. In order to protect 20, they required for a higher voting requirement in certain corporate acts. Higher than 2/3 (which is 66%) for the protection of the partner whose interest is 30%. Hindi ko alam ano justification ng SEC for that. Hanapan niyo ng justification. No express prohibition so baka pwede irn. Not discussed in Campos. Two kinds of shares: voting and non-voting. Where to compute the vote requirement? Of course, vote requirements computed using shares entitled to vote as the base. Ergo, if the nonvoting SH are not allowed to vote in a particular corporate act, number of NVS should not be included in computation of quorum AND vote requirement. E.g. S43 on declaration of stock dividend 2/3 of OCS which shall not include non-voting SH. Why? Because it s not in S6 1-8 (where even the non-voting are given the right) memorize the enumeration in S6 (nonvoting are given the right to attend and vote). OCS there refers only to voting as provided for in S6 last paragraph. voting requirement. Bigger than provided for what is in the law: i.e. majority and two thirds. The reverse is difficult to justify. DLC has not seen any AOI or bylaws requiring voting less than majority. That would be violative of principle that vote of majority is necessary for approval of corporate act.

INSTANCES WHEN SH/MEMBERS ACTION IS NECESSARY?

In what instances is SH approval necessary? 1. ELECTION OF DIRECTORS Management of corporation is given by law exclusively to the board of directors but who chooses the members of board of directors? The power to elect members of the board is given to the SH only through election of members of board that SH participate in the management of corporation. They manage the corporation by choosing who will anage the day-to-day affairs of the corporation. When does the election of directors take place? During the annual SH meeting which in turn is fixed in the bylaws or AOI. If the date is not so fixed, annual SH meeting shall be held on any date of april to be fixed by board of directors. Since regular annual SH meeting is to be held, the requirements for valid SH meeting should be complied with for that meeting validly elected members of board. *Nokia tune Acoustic* S24 present either in person or representative. The owners of majority of the capital stock. Does this refer to voting and non-voting or just voting shares of stock? Only voting. Because election is not one of those enumerated in S6 where non-voting are given the right to attend. The quorum required for election of directors is majority of the outstanding capital stock entitled to vote. How do they elect the directors? Manner of voting under S24, the election must be by ballot if requested by any SH or member. If there is no request, how do they elect the directors? Pwede namang nakalagay yan sa bylaws. Look at S47 No. 7, nakalagay naman jan. Wait. Hindi ata. If the bylaws are silent, SH in the meeting, they determine how it will be elected. Mahirap mag-elect ng viva voce or raising of hands. NB Ang bumoboto sa director ay shares of stock. SH is just the representative of the shares he owns in the corporation. Therefore, every share of stock casts a vote for all the directors to be filled up. The position of the director to be filled up. If there are 5 directors to be elected, a share may elect five directors to fill up the post. Can he write just one name in those five positions? Called cumulative voting - manner of electing directors. Share is given a number of votes equivalent to a number of directors to be elected. A share of stock is entitled to cast 5 votes. The number of votes given to shares of stock may be given to a number of directors but he may also give his votes to just one candidate. He may distribute the number of votes a share is entitled to cast to some of the candidates, varying numbers but extremely a shareholder may cast all the votes his shares of stocks is entitled to to just one candidate. Reason in giving shareholders cumulative voting in choosing directors of corporation:

14 January 2011
WON the voting requirement may be changed in the bylaws: There is no clear prohibition in the Code. They can take off any implied reason to make the voting requirement mandatory, then it would seem that the voting requirement may be increased in the AOI or in the bylaws. Increasing the voting requirement would be advantageous to all SH because every SH will be given importance in the adoption of corporate acts requiring SH s approval. Carrying it to extreme: Bylaws may provide for unanimous or absolute majority for approval. Tyranny of minority but that tyranny has been approved by the majority themselves upon approval of the extraordinary

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y

To help the minority elect at least one seat in the board. If all shareholders in the minority will cumulate all their votes to just one candidate, that lone candidate may win and take a seat in the board. To increase chances of minority in getting representation in the board.

cast a fraction of a vote. EXCEPTION: Law expressly authorizing the SH to cast a fraction of a vote. In the Philippines, what do we have? Is there a provision in the code allowing SH to cast a fraction? None. BUT on the contrary, there is a provision which impliedly prohibits a SH from casting a fraction of vote. S56
Voting in case of joint ownership of stock. - In case of shares of stock owned jointly by two or more persons, in order to vote the same, the consent of all the co-owners shall be necessary, unless there is a written proxy, signed by all the co-owners, authorizing one or some of them or any other person to vote such share or shares: Provided, That when the shares are owned in an "and/or" capacity by the holders thereof, any one of the joint owners can vote said shares or appoint a proxy therefor.

May the AOI or bylaws do away with cumulative voting? May it deprive SH of their right to cumulative voting? NO. Bylaws may not deprive because it is for the protection of minority. Can the minority waive it? Of course, mere non-usage is waiver. But they can always invoke it. Implied from the provision in the case of non-stock corporation as provided in S24 Unless otherwise provided in the articles of incorporation
or in the by-laws, members of corporations which have no capital stock may cast as many votes as there are trustees to be elected but may not cast more than one vote for one candidate.

If GR is to allow to do away with, then no need for this provision for non-stock corporation. But since doing away in cumulative voting is provided as an exception, then it would appear that this is mandatory in case of a stock corporation. As well as in non-stock corporation. Mali ata? NON-STOCK: rule is absence of cumulative voting. As a GR: no cumulative voting. Members will exercise only when provided in the articles or bylaws. GR rule in case of stock corporation does not apply to nonstock because of this exception in S24. They only get cumulative voting when expressly provided in the AOI or bylaws. So what is the GR in case of stock corporation? Cumulative voting. That s why the law has to state what happens in case of non-stock. If it s silent, then cumulative voting is also always allowed in non-stock. Cumulative voting is always the general rule. Can AOI do away with the cumulative voting? DLC says no coz for the protection of minority and only them can waive them. How? By not cumulating their votes in favor of a single candidate which they can do anytime. It s mandatory. May a SH cast a fraction of a vote? Case of Mapua Institute of Technology where I went for HS. Tomas Mapua, architect who designed Manila City Hall and post office and founded the school. Inherited by his 6 children. Children split into two groups with let s say 100 share for all three. So one group has 100 and the other has 100, too. Board of directors is 5. Who controls the board controls the corporation. Who controls in case of 5 members? Those who have 3 members. So para maka-elect ng tatlo, group 1 divided his 300 votes into three team members. A 34 B 33 C 33 D 33.3 E 33.3 F 33.3

How implied prohibition? If the law allows a SH to cast a fraction, there s no need for S56. Co-owner will simply cast the fraction of his ownership as his vote. Kung tatlo kayo may-ari, e di tig-11/3 kayo. Kailangan isa lang boto niyo. Therefore, they need to come to agreement on how the SH will cast its vote. NB S55 when share of stock is pledged or mortgaged, who is entitled to attend for and vote on the shares? Of course, the pledgors/mortgagor because they remain the SH of record. UNLESS the pledgee/mortgagee given such right in writing which is recorded on the appropriate corporate books. Authorization in S55 is nothing but a proxy. So we can remove that but they still included it. Wala namang masama.

Qualifications and Disqualifications of Directors

Who may run for director? Under the law, there are minimum nd qualification for the member of the board. S23 2 par:
Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be members thereof. A majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines.

2 requirements under S23: 1. Owner of at least 1 share of stock Not just an owner but standing in his name on the books of the corporation. Nakalista as shareholder of the corporation.

A won. And also DEF won. ISSUE: WON a SH may cast a fraction of a vote in favor of a SH running for director? SEC: Purely legal issue, Commissioners pointed to DLC for resolution. DLC said: Follow the rule in the US, being the parent material of the Corporation Code. US GENERAL RULE: A SH may not

Suppose a SH owns 1 share of stock which is a preferred share/nonvoting? Is he entitled to run and be voted for in the election? y Prof. Gonzalo Santos who was SEC commissioner said pwede because the law did not qualify WON share of stock is voting or non-voting. y DLC disagrees with all due respect. It is absurd for somebody who cannot attend at the meeting where directors are to be elected and then be elected himself. In case of preferred shareholder, SH gives up his right to participate in the management of the corporation. He gave up right to vote and participate in election of directors, yet we allow him to manage the corporation by becoming a director. Same lang yan in case of LGU. You can t be mayor if you re not registered as a voter of the city/municipality where you seek to run. That is my opinion which is the correct opinion. Only voting shares of stocks are entitled to run and be elected as director of the corporation. Ni hindi nga siya notified to attend the meeting. Hindi maiboto sarili pero pwede iboto ng mga kasama niya!

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May a minor be a SH of the corporation? Natural pwede. No prohibition for minors. E.g. inherited shares of stock in SMC when he was 6 yo. BUT May he run and be voted for as director? Nakalagay ba sa batas na dapat of age, hindi naman diba? According to SEC, no. If a minor cannot administer own affairs, absurd if we allow him to administer the affairs of another. Minor is disqualified from running as director of the corporation. May an alien be a director? There is no prohibition in the code as a general rule for an alien to run for director. Special laws prohibit foreigners from owning shares of stocks in corporation and from managing the affairs of the corporation. We have to follow those. E.g. Constitution provisions: Aliens can t own land if not 60-40. What if the board, can it be 80% foreigner, 20% Filipino: bawal under anti-dummy law. Foreign interest in the corporation is just equal to the management in the corporation. Management of telecom: 70% Filipino ang management. Management of mass media: 100% Filipino 2. Majority of directors are residents S23: it used the word must . This is mandatory because the law does not want a meddler to run the affairs of the corporation. If you don t have stake is a meddler. In Tagalog, miron. Hopia. Sa teks, panggulo ka lang. Law requires person to have genuine interest, stake in the corporation. Pwede bang mere nominee ? I want to do my business as a corporation but I don t want business partners. I will make pakiusap to my girlfriend and the three other people. You four will be my nominees. Yes, that is allowed. Walang bawal dun. A corporation may be owned in reality by one person. All the other directors are just mere nominees. TAKE NOTE: Consider later on in fixing liability of one corporation. Papasok yung lifting of corporate veil. To have nominees in organizing a corporation is not prohibited by law. To qualify as directors: One share of stock standing in their name of each one of them in the corporate books. What are those shares called? Qualifying share Aside from qualification, there are also disqualifications for directors are provided in S27.
No person convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or a violation of this Code committed within five (5) years prior to the date of his election or appointment, shall qualify as a director, trustee or officer of any corporation.

Kung sumobra ang director na residente sa mga nanalo, who will be disqualified? Non-resident garnering lowest number of votes. Who will take over? Depend on the bylaws of corporation. We can say there that who is the next qualified among the candidates will take the seat. OR we can just have election again for the one director. How to complete the number of directors is a function of the bylaws. In the absence of bylaw provisions, how to fill up? SH in the meeting where they elected members of the board may decide through resolution how the disqualified director will be replaced. O and G decided to buy one share of stock. But since they don t trust each other, register the certificate in both our names. One share of stocks in G and O s names. Who between them may run as director? Oliva? Garcia? Both at the same time? y Camposes have no answer. y DLC s opinion (which is the correct opinion) nobody is qualified to run. None of them has a share of stock registered in his name. It must be registered to nobody but his name. If we allow the two of them will become directors but they only have one shares of stocks. Take it to the extreme: What if 10 sila owning it, they could all run! What if 10 shares of stocks but all ten shares recorded in their names, can they run together at the same time? SEC has no categorical ruling yet. BUT they have a ruling that implies that they cannot run. Not one of them has a share standing in his name. All ten shares stand in names of two of them. IMPLIED ruling na hindi pwede because BUT if they are spouses, SEC will allow them to. HOW? They have commonality of interest especially when shares of stocks are conjugal. Mas mali! It is owned by the conjugal partnership which is a separate patrimony. Civil law principle: Until dissolved, none of them is a coowner of a specific property. Bihira nakakaalam ng argument na yun, ako lang nagdidiscuss. SEC will always allow them to run. Technically no. there must be one share standing in the name of nobody but the candidate. Mashado daw akong harsh. But no big deal. May AOI provide for additional qualification? Pwede diba. S47. Kung pwede magdagdag, pwede magbawas? Can we say that it s not required to be owner of at least one share of stock? NO. If you look at

2 kinds of violations here: 1. Criminal conviction for an offense or crime punished by another law. It must be a criminal case. NB What is important or material in this conviction is not penalty actually imposed by court but the penalty imposable. Because it used the word punishable. IF punished by lifetime imprisonment, but only 6 years using ISL, covered pa rin sha. It is what is imposable penalty. 2. Violation of the corporation code committed within five (5) years prior to the date of his election or appointment What is the violation here? Conviction ito? Pwede bang hindi criminal but administrative violation of the code? Pwedeng administrative dahil conviction yan basta may penalty. Padidisqualify natin yang punyetang yan. Bigla kang makakasingil ng malaki. Suppose he was convicted of an administrative charge for violation of rules/regulation promulgated by SEC? Kasama ba yun? Is the rule/regulation promulgated by SEC part of the Corporation Code? Let s look at S143
The Securities and Exchange Commission shall have the power and authority to implement the provisions of this Code, and to promulgate rules and regulations reasonably necessary to enable it to perform its duties hereunder, particularly in the prevention of fraud and abuses on the part of the controlling stockholders, members, directors, trustees or officers. (n)

Rule promulgated by SEC also carries penalty. But that s administrative only. Usually limited to disqualification of a person. Kung nadisqualify sha ngayon, meron pa ba sha disqualification for 5 years? The prevailing ruling is that all rules and regulations promulgated by SEC implementing the Corporation Code are integral parts of the

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corporation code. Any violation of those rules and regulations is considered a violation of the Code. Can they add disqualification in the AOI or bylaws? In Gokongwei v SEC: the court held that yes, they may add disqualifications. SMC adopted a bylaw provision disqualifying a SH from being elected as director if that SH has a controlling interest in another corporation engaged in competing business. Gokongwei got disqualified. SC said it s valid exercise of corporate power. Qualification in S47 No. 5 includes a negative qualification which is a disqualification. See Tax2 bluebook for lowbatt parts S10 incorporator may be natural person. Director natural person. May not attend by proxy. For some reason, partnership (although allowed to own) may now run/voted for as director. 1. 2. 3. Manner of voting Qualification Disqualification unless sa S23. Unlike in the case of trustees non-stock corporation in case of S92. They shall have term of 3 years. But when you look at S23, trustees din naman yan diba? S23 board of directors or trustees to be elected from among the
holders of stocks the board of trustees of non-stock corporations, which may be more than fifteen (15) in number as may be fixed in their articles of incorporation or by-laws, shall, as soon as organized, so classify themselves that the term of office of one-third (1/3) of their number shall expire every year; and subsequent elections of trustees comprising one-third (1/3) of the board of trustees shall be held annually and trustees so elected shall have a term of three (3) years

S92

You won t find any other provision in the Code giving the director a longer term. The question here is: May the AOI/bylaws of corporation provide for a term of directors longer than 1 year? No prohibition kasi if Remember discussion on holding of annual SH meeting which is supposed to be held every year kaya nga annual. What is to be done in that meeting to elect the members of the board? Kasi nga 1 year ang term. Pwede namang maghold ng annual SH meeting but they won t elect director until the second year if the term is two years. DLC has not seen AOI provided for a term longer than 1 year. Not aware of any SEC ruling on the subject matter. Some writers believe that the 1 year term is mandatory. Unless a different term is expressly allowed. This can be gleaned from S92. The term is three years UNLESS AOI/bylaws provide otherwise. Hence, when the AOI of a non-stock corporation is silent as to term of director, the term of trustees should be 3 years sa S92. Kaya lang may S23. We shall discuss that problem later on when we reach non-stock. Just trying to help you find GR. Is this 1-year term of office mandatory or not? Bakit parang hindi important ang terms of office longer than 1 year? Hold-over provision in S23. If they fail to elect incoming directors because of lack of quorum, the incumbent members will continue til the corporation succeeds at electing their successors It would seem there is no express provision for a corporation to provide for a term longer than 1 year. 1 year from when? When do we count the 1 year? Date the directors are supposed to be elected. Illustrate through example: General annual SH meeting is fixed in the articles on the last Saturday of January of every year. The terms of office of incumbent directors shall expire on that day. Should be held. Unfortunately, no quorum was mustered on the meeting. Since there s no quorum, the meeting cannot proceed to elect incoming. That meeting has to be postponed to a later date. In the meantime, incumbent members of board will hold-over. The meeting was reset to the last Saturday of May. They held the meeting on that day, finally quorum was made. Incoming members were elected and they will have a term of one year. One year from when? Last Saturday of May when they were elected? No, only counted from the last Saturday of January, the day their term is supposed to commence. If we don t reckon from Last Saturday of Jan, magbabago ang general annual SH meeting natin to complete May electee s term. Even if they haven t served for one whole year. That rule is not specified in the code but that s how it should be interpreted. The director s term of office commences from the date the annual SH meeting is supposed to be held. That s why if you look at S47,

In a corporation where there are distinct interests, may they choose directors from among themselves? E.g. 3 groups in Corporation X y Group A: 60% shares of stocks y Group B: 30% shares of stocks y Group C: 10% shares of stocks o Percentage of holding entitled to vote. This usually happens in a JVA. Can they say that for 10 board of directors, A is entitled to 6, B 3 and C 1; and then all SH belonging to group will meet and elect from among themselves? This is not pwede. All directors must be elected AT LARGE by all the SH of outstanding capital stocks in an SH meeting. How to accomplish this set-up without violating the law? Nomination process. Only those in the nomination. A nominates 6, B 3 and C 1. Unless nominated by nominating committee, di pwede tumakbo. At the end of the day, same thing is achieved but the board of directors are still elected at large. Hindi pwede ilagay sa group A kayo kayo lang. bawal yan. In the Philippines, proposal is to make a federal state. Dismemberment of corporation is bawal.

17 January 2011
In S24 members of board, elected by SH with voting rights May the AOI and bylaws provide for shares without voting rights and yet give those preffered shares without voting rights the right to cast a vote to elect the directors? Bear the question in mind til we reach classification of shares.

Term of Office of Directors of Corporation

What is the term of office of a director? If you look at S24: who shall hold office for one (1) year until their successors are elected and qualified. 1 year with a provision for holdover. May the AOI provide for a term longer than 1 year? Pwede ba 2 years ang term of office of directors in your corporation? Walang nakalagay na

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No. 7: The manner of election or appointment and the term of office of all officers other than directors or trustees; bylaws may not provide for term of office of the directors. No. 5: The qualifications, duties and compensation of directors or trustees, officers and employees; walang sinabing term of office. Bylaws may not provide for term of office. Why? Because it would seem that the one year is mandatory. supposed to start from the date the annual SH meeting is supposed to be held. Bylaws yan, how about the AOI? May the AOI provide since dun naman talaga nakalagay ang term, hindi sa bylaws? Look at S14 No. 6: The number of directors or trustees, which shall not be less than five (5) nor more than fifteen (15); walang nakalagay na term of office. No. 7: The names, nationalities and residences of persons who shall act as
directors or trustees until the first regular directors or trustees are duly elected and qualified in accordance with this Code;

by SH, there is a general rule that SH are the ones who have the right to remove a director. On what ground may a director be removed? S28 does not provide for a ground. A director may be removed for whatever ground. The flimsiest of ground may be used to remove a director. Due process requirement in S28 is the vote requirement. The director must be removed by a vote of 2/3 of the OCS in a meeting called for the purpose. 2 requirements of DP for removal 4. Dapat may meeting and meeting duly called for a purpose of removing a director. 5. 2/3 of outstanding capital stock (OCS) Does it include non-voting SH? Of course not, because removal of director is not one of those instances where non-voting SH are required to attend. Wala sa S6, 1-8. Therefore, only voting SH have the right to attend and vote to remove a director. The meeting has to be called for the purpose. May be a regular or special meeting. REGULAR meeting: What do you think? If term of office is mandatory at one year and also the regular meeting is mandatory at one year. Bakit pa natin tatanggalin eh expire na rin ang term niya? What are the implications of this provision? 1. Regular meeting may be more than once a year 2. Director may have a term of more than 1 year. Since the law requires the meeting to be called for the purpose of removing a director, it is mandatory that the notice of meeting shall have an agenda. Dapat may agenda, if wala, meeting is not valid. For the notice to be valid, it must without doubt provide that the purpose of meeting is to remove a director. In fact may kaso yan. FACTS: Secretary sent out notices to SH of corporation with a written agendum. Purpose of the meeting: to reorganize the board and the corporation. In the meeting that was held, all the positions of the board were declared vacant. After resolution was approved, they proceeded to elect the replacements. ISSUE: Were replacements validly elected? HELD: The court said NO, because notice was defective. To remove a director, the notice must specifically provide that the notice of meeting was to remove the meeting. Reorganization of board/corporation may happen without necessarily removing a director. Non sequitur yang dalawang yan. Sir knows his Tariff Code. His senior partner had a case where a wealthy couple engaged in the construction business which does not get contracts domestically but in the Middle East. Malaki ang company. The couple was approached by a former beauty queen. Single but (chismis!) a mother. She set up a business of producing fashion jewelry and accessories. Pekeng jewelry. Hindi tunay. Tubog lang. She designs and then designs executed abroad. Her boyfriend, father of her child, who couldn t marry her because the guy was married. Parang soap opera. Naisip niya na to make the product different, let s turn it direct selling. You won t find it in the department stores. Only in her store and authorized distributors. She organized the corporation with 6 SH and directors. The Swiss guy she was dealing with in Switzerland came over to the Philippines, make me an industrial partner instead. Production outfit.

From S47, it would seem that the term of 1 year is mandatory. We can imply it from S47. Walang nakalagay dun na term of office of directors. Only officers other than meaning bylaws may not provide for term of directors. May problem din tayo jan because S47 also applies to trustees. Eh yung trustees pwedeng iba ang term, 3 or 5 (S108 re: educational corporation). Kaya hindi rin maliwanag. Sabi ko sa inyo, I haven t seen AOI which provide for a term longer than 1 year. PERO it would seem there s no express or implied prohibition. Hindi talaga implied because S47 also has trustees. What did the Camposes say? Wala silang sinabi re: longer than 1 year term of office. Inassume na mandatory yung 1 year.

Vacancies in the Board

When is there vacancy in the board? There are many causes of vacancy: 1. The first one is resignation of a member of the board. Resignation may be express OR implied. y Express: if the director has categorically tendered a resignation to the board of directors y Implied: the director has abandoned the office; not attended any meeting for a long time. That s considered abandonment and it is implied resignation 2. Expiration of the term while it creates vacancy, it allows the occupant to continue because of S23 holdover provision 3. Death/incapacity of a member 4. Creating of additional seats before 5, but by virtue of amendment, increased to 7. Upon approval of amendment by SEC, 2 seats are vacant and have to be filled 5. Removal Director may be removed from office - Governed by S28. Power to elect carries with it the power to remove 2. REMOVAL OF DIRECTORS May the board of directors expel a director? May bylaws provide that director may be expelled by the board for reasons enumerated in the bylaw? Take note that those grounds in the bylaws have been approved by the SH. GR: Only the SH may remove a director. - Why? Because the power of removal belongs to those who have the power to elect. Since the members of the board were elected

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Direct sellers stumbled upon Nepalese with business experience in the US. He became organizer of direct selling operation. In order to accommodate them as partners, they organized a corporation: Beauty queen, boyfriend, Swiss, Nepalese, wife of Nepalese and cousin of beauty queen (General Manager of Store). At first, business was very very profitable. After two or 3 years, nagdwindle the income. Swiss and Nepalese thought they were losing out on competitors because of limited design. They want to expand but beauty queen didn t have capital anymore so beauty queen asked the couple to invest in their business. Pinag-aralan nila the business and very profitable. So they want to invest. But conditioned upon control of the operation of corporation, how many shares? 51% of the shares. Beauty queen not selling out she only wants investment. Arrangement: in order to give control to this couple, sell 30% absolute of outstanding capital stock. 21% will come from their shares, in irrevocable proxies. So 51% yung mag-asawa. After implementation, corporation was reorganized. Resulting set-up: husband of construction couple became president of corporation, beauty queen, chairman of board, bf is vice chair. Wife of construction is treasurer. Nepalese was secretary and the Swiss etc were directors. 6 directors: BQ, BF, Nepalese, Swiss and construction couple. When control transferred to construction couple, they conducted an audit. Found out that corporation was losing money because Swiss and Nepalese were defrauding the corporation. Milking the corporation by hiding true cost of materials and inventories. Dahil sales si Nepalese, pati yun nadaya na rin. So president of corporation, construction husband wrote a letter to the two confronting them with the anomalies they uncovered and asking them to explain. Exchange of communication, accusation swapping. They came to a point that construction couple said he will call a SH meeting to remove you.
y y y

purpose of removing them. DLC attached the communication between the 2 directors and president. Maliwanag na nakalagay yung mga kasalanan nila. That was a notice and a written notice at that. They cannot say that they were not notified. ISSUE: Why does the law require that the notice specify that the purpose of the meeting was the removal of the director? It s Part of DP in order to give the director to be removed to defend himself. so that he may attend and defend himself. If you don t give notice that the purpose is to remove him. It s not in the formal notice but in the exchange of letters between rpesident and directors involved [2] WRONG. Look at S28.
Provided, That removal without cause may not be used to deprive minority stockholders or members of the right of representation to which they may be entitled under Section 24 of this Code.

GR: Law does not provide for cause EXCEPT: Minority director elected under S24 who may only be removed for a valid cause. Eh sino ba yun? Cumulative voting. Together, these two son of a gun owned only 15% of the OCS standing in their names. Yung 15% na yun, a portion na yun, ibinigay pa as irrevocable proxy. Even if they cumulate their votes, they will not win a seat. Not because cumulate but because majority voted for them. If they weren t voted by majority, hindi rin naman mananalo ng seat. Therefore, not the miniority directors referred to in S23. [3] Yes, that is allowed. Why? Kaya nga irrevocable proxy? Ano ba yun? As a GR: A special power of atty is revocable at will of the principal. EXCEPTION: Coupled with an interest that the SPA may be used against the principal who may not revoke it. Kaya nga irrevocable, precisely to be usable against principal himself. That s purpose of making SPA irrevocable. Principal cannot object because coupled with an interest. Irrevocable proxy given by SH in favor of construction couple, is that coupled with an interest? Yes! Hindi naman sila papasok dun kung wala yun. Nakita argument ko, nagsettle. Settlement: Buy out! Not every minority is protected in S28. While the law allows director to be removed without a cause, may the bylaws provide cause to remove director? If BL provide grounds providing cause, may SH remove a director without cause? Walang nakalagay sa batas. What is my humble opinion which is the correct opinion? When the bylaws provide for causes to remove a director, the SH waived their right to remove a director without a cause. In such case, therefore, a director may only be removed for a cause. A cause provided for in the bylaws. CHI: Pwede bang catch-all ground? In S28: which you should memorize by heart, kailangan may meeting. Therefore, a director may not be removed by referendum. Who will call the meeting? Maliwanag naman, secretary, diba?
A special meeting of the stockholders or members of a corporation for the purpose of removal of directors or trustees, or any of them, must be called by the secretary on order of the president or on the written demand of the stockholders representing or holding at least a majority of the outstanding capital stock, or, if it be a non-stock corporation, on the written demand of a majority of the members entitled to vote.

Swiss and Nepalese: You cannot do that! You defend yourself in the meeting! Senior Partner: Sent notice to all SH of this corporation for purpose of reorganizing board and corporation. DLC: Hindi mo nabasa yung kasong yun noh?

In the meeting which DLC s senior partner attended, resolution declaring all positions vacant. 3 members did not attend: Nepalese and wife and Swiss did not attend. Only BQ, BF, general manager and construction couple. After declaring vacant, elected a new set of directors. DLC came in. Dinemanda sila nung tatlo for damages, to declare election void because there was no proper notice. Removal was void, election of new officer is also void. GROUNDS: [1] Defective notice because failed to specifically state that the purpose of meeting was to remove a director/s [2] Swiss and Nepalese were minority of directors who cannot be removed without a cause. S28 does not provide for a cause, unless minority director [3] Shares of stocks given in proxies by the Swiss and Nepalese cannot be used against them. Construction couple used our own shares to remove us! Intracorporate dispute so filed with the SEC. Ayan kaso mo na yan sabi ng senior partner, eh wala kang magagawa pag binigay sayo. Kalaban ko si law office of my future wife against the valedictorian of our batch. DLC [1] Yes, the notice given by the corporate counsel my senior partner was defective. HOWEVER, while the formal notice was defective, there was in fact notice given for the holding of the meeting and it was for the

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This provision foresees the possibility of secretary being loyal to the director being removed who may be the president. President doesn t want to call meeting because he wll be removed. So ayaw magsend ng notices. Ano ang remedy? Pwede magpapirma ng demand yung interested SH to other SH and when majority of OCS has signed the written demand, thent he Secretary has no choice but to call it. What if despite the writtend demand from majoiryt of SH, hinid pa rin nagcall si Sec ng meeting?
Should the secretary fail or refuse to call the special meeting upon such demand or fail or refuse to give the notice, or if there is no secretary, the call for the meeting may be addressed directly to the stockholders or members by any stockholder or member of the corporation signing the demand.

When director is removed, vacancy is created. How to fill up vacancy? Filling up of vacancy is in S29. GR: A vacancy in the board may be filled up by the board if it still constitutes a quorum EXCEPTION: If vacancy is because of removal, creation of new seats (kailangan SH lang yan), expiration of term Illustration: Club Filipino in GH assuming it s a stock corporation, the term of office is 1year. Annual SH meeting is Feb 7. Bakit? Birthday ko yan!!! HOWEVER, come Feb. 7 failed to muster a quorum so the meeting was postponed to June 7, 2011. From Feb 7 June 7, a director dies (on March 7). How many directors are to be elected? 7. QUESTION: Does the board still has quorum? May the board fill up the vacancy occasioned by the death of one of the directors? NO. Why not? Because the cause of vacancy is not death. When the term has expired on Feb 7, it s already vacant. Hold-over lang yun, pero pwede na sila palitan kasi nga vacant. Although they still have quorum, they cannot fill up because the cause of vacancy is not the death BUT the expiration of term. In some corporations, that s what they do. Lalo na non-stock non-profit, walang umaattend jan. Walang quorum, walang holdover. Ini-schedule nila pag may resign. Kami na lang magpapalit kasi may quorum pa kami. Sabi ko bawal yan. It was raised to me when I was SEC commissioner, kaso sabi nung commissioners and other, you are correct BUT for practical purposes, maraming mababaldang company, they will have to stop operating dahil walang board. So incumbent trustees just rigodon. Sila ngayon nagdidikta kung sino papalit sayo. Contrary to principles of corporation law. Kawawa naman Club Filipino, all incumbent became incumbent elected by board to fill up vacancy at the time term have expired. Functioning directors were appointed by the board. Sige na, I will not release subpoena na lang. Let them bring this to the court. OR baka magkaron ng problem: S29 says may be may be filled by the vote of at least a majority of the remaining directors or trustees Underline may Scenario: Board still constitutes quorum after a member resigns, their term has not expired. Board may choose to fill up. But may it choose not to fill up the gap? Not under obligation. May choose not to fill, and just wait for the annual meeting. May the board instead of filling up vacancy, choose to call special meeting for election? Kaya nga may, the decision is with the board. If may choose to fill up, not to fill up or call a special SH meeting to elect the replacement director. May AOI/BL of corporation provide or deprive the board of this power? In this corporation, the board cannot elect/fill up vacancy even if board still constitutes a quorum? Pwede ba yun? To elect a member of the board is not a function of the board but of the SH. Ibinigay lang sa board yan for expediency in S29. But may the AOI deprive the board of this power? What is your take on this? S23: SH cannot deprive the board of its management prerogative. Doctrine of non-interference SH cannot interfere in the functions of board in the management of affairs of the corporation. To fill up the vacancy, is that a management function? To elect a member is a power of the SH. If at all, the board is given power for practical reasons.

Alternative way to call a meeting in order not to frustate the right of SH to remove the director.
Notice of the time and place of such meeting, as well as of the intention to propose such removal, must be given by publication or by written notice prescribed in this Code.

Bakit publication? Kasi hindi nila alam kung sino yun mga SH na papadalhan ng notice eh, kasi di ba yung secretary may hawak nun. May the bylaws provide or authorize the board to remove a member? AOI says: The board by a unanimous vote of all the members present in a meeting where there is a quorum, may expel a member. Pwede yan? May the SH delegate the power to remove a director to the board of directors or to any other committee? E.g. the SH were called to a meeting for the purpose of removing a director, but in that meeting, the evidence was not enough to convince the SH to vote for the removal of the director concerned? They passed a resolution to create a fact finding committee and for that FFC to remove a director the moment it was established that the director committed the acts complained of. Pwede yun? O kaya bumoto na SH, saying The director hereby charged with misbehavior is considered removed if the FFC will find for his culpability. Ang bumoto run ay more than 2/3. That was removal subject to a condition. Condition of what? FFC establishing the guilt of the director. Pwede ba yun? Any volunteer. May smart ba dito? As I mentioned earlier, there are two requirements for DP 1. valid meeting duly called for the purpose 2. 2/3 vote of the OCS ISSUES: [1] May SH delegate the power to remove to the board or the committee? No, because violation of DP requirement. Kailangan bumoto 2/3 to remove him. It s the determination of the SH and not determination of committee. Pag bumoto ang SH, nakapagsalita na ang director to be removed. Kailangan depensahan ang sarili niya. Pag dinelegate mo yan sa committee, ang tatanggal sa kanya ay ang committee, hindi 2/3 vote. They shall discuss it in meeting. [2] Invalid din. Dahil bumoboto na without evidence. Sufficiency of evidence should be factored in the vote of SH. Defense of director charged should be part of consideration of the vote. Nung bumoto sila, hindi nila alam yung mga yun. Elements of due process were not complied in these cases.

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May the SH to whom the power belongs in the first place deprive the board of the power to fill up the vacancy given them in S29? Baka lumabas sa exam yan. RESIDENCE REQUIREMENT: During time of incorporation, they satisfied it, but after, hindi na. Is it [residency] continuing requirement? No, essence of S23. The qualification should be a continuing qualification. You don t need a majority of total number of votes (that s not how the election of board happens) plurality lang yan. Pataasan ng ihi. Yung No. 1 director was counted as a resident. A - resident B - resident C - resident D - non-resident E - non-resident So they are in compliance with the requirements of the law. So kung nagkaganito na: A - non-resident B - resident C - resident D - non-resident E - non-resident F - resident Who do we disqualify here? D. Para dalawa lang ang non-resident. Who shall take his place? Depende kung sino sinabi ng bylaws. Kung wala, the SH shall decide how the vacancy shall decide. Problem is when they are already sitting as in scenario 1 tas A biglang naging non-resident. Do we disqualify E? Problem of implementation ito. A says You can t disqualify me coz I was the highest. If I were nonresident during election, hindi ako ang madidisqualify. But if you follow the logic that the director should continue to possess the qualification under S23, when he ceases to posses, then he should also cease. When it comes to residency, we ll have a problem of disqualification. Kaya hindi nilagay sa code kasi mahirap desisyonan. Ilagay na lang sa bylaws, kasama sa disqualification in S47. How about in the case of disqualification in the middle of term? E.g. director gets convicted by offense punishable by imprisonment of 6 years. Disqualification during the term Following the rule that director should possess all qualification and none of disqualify throughout the term, then disqualification that supervenes during term shall prevail. Loses share in the corporation. ARGUMENT AGAINST THIS: Code provides only for loss of all shares, but not for the other qualifications and disqualify. Why single out shares of stocks, the GR is the supervening loss of qualification will not affect position as director, the only exception is loss of ALL shares of stocks. You can argue that way. If GR is loss of qualification or disqualification will be automatic, then no need to provide loss of shares. So the GR is supervening disqualify does not affect, that s why the exception: loss of a qualified share. Angeles v Santos: Important case. Sir reading from Campos: Directly remove from doing fraudulent acts Instead of SH removing a director, he filed a case. Court cannot remove me, only the stockholders. Mali ito noon. Court cannot, upon petition of SH, order the removal of the director. Baka naman isa lang ang nagcocomplain. Don t impose will of one SH on the 2/3 of the SH the will of one of them. SEC now says: Remedy of receivership Acts of an erring director may be ratified by the SH. Court has no business removing a director upon the petition of just one. What s your remedy here? If director committed violation of Code or he was disqualified but SH elected him nonetheless, t he petition is a quo warranto. Administrative filed with the Court. Not the quo warranto in PubOff (filed by a person claiming a right to the position) but administrative QW. Any SH may file an action to question the qualification of the director, not only the losign candidate. y Camposes: Because of S31 and S34, pwede madisqualify ng SEC yung director. y DLC does not quite agree. SH can even ratify by 2/3. That s the same vote requirement for removal of director. Campbell v Leow s Inc: Important din pero di na maalala ni Sir If a SH appointed a proxy to attend the SH meeting, may that proxy run for director? No, his share does not stand in his name in the books of the corporation. Pagod na si Sir. Next meeting: Fundamental changes.

19 January 2011
Next type of corporate acts that require SH approval 3. FUNDAMENTAL CHANGES Change introduced in the corporation is one that affects the underlying consideration why a SH decided to invest in the equity of the corporation. Changes which are not fundamental do not require SH approval. While changes which are fundamental require to be approved by the SH. Law has enumerated what those fundamental changes are. Outside those enumerated in the law, there are no other changes which require the SH approval. Argue that the particular change is fundamental because it has an effect on the consideration that moved a SH invest in the equity of the corporation. No matter how we argue that argument will be useless because that change no matter however fundamental it may be, is still not enumerated in the law. Unless the law requires SH approval for the validity or effectivity of a corporate act, no such approval is necessary. What are those fundamental changes? Law enumerates those changes in S6 1-8.That s why you have to memorize S65 We shall discuss them one by one.

Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on the following matters: 1. Amendment of the articles of incorporation; 2. Adoption and amendment of by-laws; 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property; 4. Incurring, creating or increasing bonded indebtedness; 5. Increase or decrease of capital stock; 6. Merger or consolidation of the corporation with another corporation or other corporations;

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AMENDMENT OF THE ARTICLES OF INCORPORATION
AOI may be amended during the lifetime of the corporation. There are three types of amendments a. Deviation b. Insertion/addition c. Substitution All those types of changes are covered. The corporation may do any or all of those changes in its AOI.
y y

In the annual SH meeting which was duly convened, validly held because there was a quorum, one of the SH rose to speak. Mounted the mic and proceeded to propose an amendment to AOI. All SH who were emotionally charged agreed to amend that in meeting. Was the AOI validly amended? No, because proposal not done by the board. Requirement under S16. Aha. Eh pano yung nakalagay sa S51 last paragraph:
All proceedings had and any business transacted at any meeting of the stockholders or members, if within the powers or authority of the corporation, shall be valid even if the meeting be improperly held or called, provided all the stockholders or members of the corporation are present or duly represented at the meeting. (24 and 25)

Look at S14: The first item that appears there is name of corporation. May it be changed through amendment of AOI? Yes. May the purpose of the corporation be changed/amended? Yes. It may even change line of business. From the present line, it may choose to go to another line of business. Especially so when the present line of business is no longer profitable. Principal office may also be changed. From one municipality to another. In order to do so, the articles must be amended. Also true for No. 4. It may shorten or extend its term. This is also done through amendment of articles. No. 5 may be amended? No way. Fait accompli (an accomplished fact No. 6? Of course. Number of directors may be increased from what is existing to a bigger number. No. 7? Also cannot be changed No. 8? We can change the amount of authorized capital stock. It can be increased or decreased. All other matters in the AOI may be changed. The process of changing them is AOI. Amendment of the Articles is governed by S16. Amendments in general. It gives the procedure for changing articles to be amended. a. Majority vote of board b. At leat 2/3 of the OCS Only in S16 is the phrase written assent present. You will find that phrase only in S16. What do we mean by written assent ? It means voting by referendum. SH may ratify an amendment proposed by the board in a referendum. No meeting will be called. No meeting will be held for that amendment to be ratified. If we can draw an analogy where the constitution of our republic may be amended, the same is the process. Two step process: proposal and then ratification. y Proposal valid proposal by congress sitting as a constituent assembly, constitutional assembly or people s initiative y Assuming that the proposal to amend the constitutional has been validly submitted. Ratification in a plebiscite called and held for the purpose. Where will the proposal come from? Only from the board. Approved and ratified by 2/3 vote of the OCS

Kung lahat ay present/represented and no one objected, is the amendment of the AOI valid? Pag present lahat, lahat din ng directors present. If not (maski isang director absent), hindi mag-aapply ang provision na ito. DLC tried to make an argument in favor of validity of that kind of Standard Oil v Atty General: No formal resolution but the number of SH in that meeting will make adoption of that corporate act a mere formality, then it may be considered act of the board. Apply this by analogy. Present naman lahat ng directors and they didn t object. They should be considered to have conducted simultaneously a meeting and approve the proposal to amend the articles. y SEC ayaw tanggapin. You go to court. There always need to be board resolution. y DLC: Eh diba board resolution may be express or implied. In this case, implied yan. y Limit the argument, they may be present but the vote is not unanimous. SEC will only allow if all shares of stocks are all represented AND the amendment was approved unanimously. None of the directors voted against and then imply that the board held a meeting simultaneously with the SH and approved the proposal of the AOI. It has to be approved by 2/3 of the OCS. 2/3 vote include the non-voting SH? Yes, because amendment of AOI is one of those enumerated in S6 where non-voting are given right to attend and vote. Since kasama sila sa bilang (vote requirement), they are also included in the counting of quorum. SH approval is necessary because a fundamental change is considered to affect a consideration that supported the contract entered into with the corporation in subscribing to shares of stock. To change it will technically amount to a novation to that original contract of subscription. In civil law, the contract cannot be novated unless consented to by all the parties. Kaya tinatanong. Kasama sa consideration that supported the contract of subscription. Kung lahat ay dapat magbigay ng consent, why only 2/3, why not unanimous? Not practical. Corporation will be held hostage by a share of stock. It will be counterproductive. What about those who voted against the fundamental change? Since they did not give their consent, in some instances, they are allowed to get out of the contract. Return their investment in the corporation. What is the general principle here? The investment of a SH in the shares of stock will remain with the corporation until the dissolution of the corporation. Trust fund doctrine embodied in S122 last par: trust fund doctrine
Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities. (77a, 89a, 16a)

Investment of corporate funds in another corporation or business in accordance with this Code; and 8. Dissolution of the corporation. Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights.

7.

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Remember everything I make ngakngak here and you ll be excellent corporate lawyers. Ask my students who are in corporate practice. What are the exceptions for this general rule? Balikan ng investments is called Appraisal right Is appraisal right available to a dissenter to a proposal to amend the articles? It depends. It s not available to all amendments of the articles. S16: without prejudice to the appraisal right of dissenting stockholders in
accordance with the provisions of this Code, or the vote or written assent of at least two-thirds (2/3) of the members if it be a non-stock corporation. Underline the phrase in accordance with the provisions of this Code contain all provisions required by law to be set out in the articles of incorporation.

Why? In S81 - Applicable specifically to appraisal right.

How do we underscore? y If we inserted or added provisions, intercalated provisions in the existing AOI? We type the additional words in ALL CAPS, bold, and underline. To indicate that those words were added through the amendment. AMENDMENT y If we re removing something from existing text? Bold the letters, underline, then {brackets}. They are indicated as deleted. {deleted} y If substitution? Underline and bold the deleted word. Then following it is substitute wording, ALL CAPS, bold, and underline. {deleted} SUBSTITUTE For the SEC to compare the original and amended version, we also attach the original.
Such articles, as amended shall be indicated by underscoring the change or changes made, and a copy thereof duly certified under oath by the corporate secretary and a majority of the directors or trustees stating the fact that said amendment or amendments have been duly approved by the required vote of the stockholders or members, shall be submitted to the Securities and Exchange Commission.

Sec. 81. Instances of appraisal right. - Any stockholder of a corporation shall have the right to dissent and demand payment of the fair value of his shares in the following instances: 1. In case any amendment to the articles of incorporation has the effect of changing or restricting the rights of any stockholder or class of shares, OR of authorizing preferences in any respect superior to those of outstanding shares of any class, OR of extending or shortening the term of corporate existence; 2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets as provided in the Code; and 3. In case of merger or consolidation. (n)

Dun lang sa mga amendments na yun may appraisal right ang dissenting SH. To illustrate: Suppose the AOI is amended to change the name of the corporation. Someone vehemently opposed the change in name. He voted against the change in name. Is he entitled to appraisal right? Of course not. Why not? Because that amendment does not involve any of the effects enumerated in S81 No. 1. What are the examples of changes/amendments that will fall under S81? Extending or shortening of corporate term. Madali lang makita. Mahirap makita yung first two. Show you an example LATER. Para maitanong ko sa exam. When does it constitute sale of all or substantially all of the assets ? There is a definition for this. Corporation will be rendered incapable of continuing to engage in the business S20 (?) When does an amendment take effect? Last par of S16 is the controlling provision. The amendments shall take effect upon their approval by the
Securities and Exchange Commission or from the date of filing with the said Commission if not acted upon within six (6) months from the date of filing for a cause not attributable to the corporation.

this is called the Certificate of amendment of the AOI y Have it signed by all the board members y Notarized (otherwise, SEC will not accept) y Pay filing fee, and legal research fee (which goes to Bocobo) SEC shall examine: WON those amendments are in accordance with law. When you convince the examiner that everything is lawful, they will approve it. Where is approval printed? On the certificate of filing of amended articles. There s also the security paper with SEC seal signed by commissioner. When does it become effective? Upon approval by the SEC. Without that approval, AOI although approved, cannot take effect even as among the SH. What if SEC sits on the papers? Same problem experience under the 1935C. Pocketed the bill. This is called failure of an enrolled bill to become a law because the president refused to. Pocket veto by president of the bill by simply refusing it to sign into law. Remedy by the 1973: signed it into law within anti-pocket provision of 1973 constitution carried over to 1986 constitutional. May ganon din dito. There s antipocket rejection. 6 months for a cause not attributable to corporation. The last paragraph will not apply and the amendment will not take effect. Mahirap yang last paragraph na yan, if you have a contract/deal with a foreign investor, for an investor to recover investment, require number of years for pre-payment, but the remaining life of existing article is short for repayment. You have to approve the extension of the term. Ang tagal na, nasa SEC pa. Ayaw tanggapin ng SEC. After 6 months, how to invoke the S16? Isampal sa client. Certification that you have filed the amendment with the SEC. Not acted on your amendment more than 6 months after date of filing. Pag ako yung abogado ng kabila, wag tanggapin. Meron kasing defense ang SEC. There has to be an admission by SEC, a certification that the delay was not attributable to corporation. If it was, then 6 month automatic approval provision will not apply. Subukan niyong mag-apply ng ganong certificate, pag ginawa nila yun eh di inapprove na nila. Certification is self-serving. Singil ka ngayon.

Simpleng simple ang laman niyan pero grabe ang laman niyan. Malaki singil to interpret that paragraph. Learn the art of billing your client. Father of Cong. Rufus Rodriguez taught me my first lesson. Magkano ang magagastos. Take out two books. Thick book and codal. Depend on what kind of book you will use. Choosing thick, hindi makakaangal ng mataas na singil. Kaya puro makakapal libro ko sa opisina. Bili kagad ng makapal na libro sa bookstore. NB Under that last par. of S16, No amendment will take effect even as among SH of the corporation until the amendments were approved by the SEC. How does SEC approve the amendment? We have to submit S16 par 2 documents. The original and amended articles together shall

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Next meeting: move to the next fundamental change6. What will prevent SEC from rejecting the amendments despite lapse of 6 months, fault not attributable to corporation but to SEC. No procedure under the law to claim it, tuloy-tuloy ang review nila. Which one will prevail, automatic effectivity clause in the last paragraph or express rejection of SEC? That s the problem here. Hindi basta-basta yang paragraph na yan. Mahirap yan. Not only that. Assuming that the automatic effectivity clause in 16 is applicable, when does the amendment take effect? From the time the 6 month period has lapsed? No, retroact from date of filing? Kalokohan. Sana from the date of expiration of 6 month period. Wala ito sa original draft na aming pinag-aralan. The automatic effectivity clause is not really helpful. On what grounds may the SEC reject the amendments? S17: 1. That the articles of incorporation or any amendment thereto is not substantially in accordance with the form prescribed herein; 2. That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations; 3. That the Treasurer's Affidavit concerning the amount of capital stock subscribed and/or paid if false; 4. That the percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied with as required by existing laws or the Constitution. Last Par S17, does it apply to amendment? Definitely it applies to incorporation where a corporation is sought to be incorporated and that incorporation falls under the jurisdiction of another government agency, it has to obtain favorable recommendation. Will that provision apply to an amendment of the articles? Yes. Kaya nga sabi ng 17 ay or amendment. Malay ba ng SEC kung prejudicial yan sa public. Only the government agency tasked to regulate the business of the corporation will be able to determine. Once approved, there is a presumption that the amendment is valid. Presumption of regularity. You may invalidate it for being illegal. How do you question the amendment? In relation to a particular transaction implementing the amendment. If they won t be able to use it, why waste time going to Court. You can prevent the corporation from entering into that contract in pursuance of the amendment on the ground that such amendment is illegal. We may ask for injunction or prohibition with a prayer of PI and TRO. Remedy: Immediate remedy available to SH, while SEC is reviewing it, sumulat ka na sa Commission. Object to the approval of amendment because it is illegal. Nakalusot sa examiner. Ultimate remedy: complaint. Republic act on code of conduct. Public official has to act on application, complaint, transaction within a certain period of time. Padala ng sulat sa boss ng examiner. i.e. director of legal. Wag complaint, follow-up lang. Be very diplomatic. Mahihilot naman yan. Kung gusto mo ng combative agad, file-an mo na ng kaso. This practitioner is combative. Adoption and amendment of by-laws; Is appraisal right available? No. Why not?

21 January 2011
May the AOI increase or decrease the voting requirement for approval of amendments thereto? May it [AOI] provide that only a mere majority will be enough to approve an amendment to the AOI? Look at the opening sentence of S16. If we take the opening qualification to apply to all those requirements for the approval of amendments, there s only one exception to the requirement i.e. the Code. Not the AOI, not the bylaws, but only the code. OR a special law. The point is, S16 does not allow the AOI/bylaws to modify any of the requirements for the approval of an amendment. Some writers are of the view that the articles of a corporation may provide for a greater voting requirement but not for a less number of votes. Less than what is provided for in S16. Why? The reason why the law fixed the voting requirement to 2/3 is to protect the minority against oppression of the majority. Protection was given through an increased vote requirement. Not easy for mere majority to oppress the minority by amending the minority. It will not be that easy to amend the articles. So according to these writers, since the reason for higher vote requirement is protection of minority. Such protection will be achieved better if AOI will provide for a higher vote requirement but never for a lower vote requirement. Next corporate act requiring SH approval is S40:

SALE OR OTHER DISPOSITION OF ASSETS

In the amendment of AOI, why is an amendment of the AOI a fundamental change? It requires SH approval because it s a fundamental change. Why is an amendment of the AOI a fundamental change? When the SH invested in the equity of the corporation, it can be presumed that the AOI was one of the considerations that supported his decision to invest. How about in sale of all or substantially all of the assets? It requires SH approval because it must be a fundamental change. Why? NB Sale and disposition is defined to include any encumbrance, e.g. lease. Where is it provided? In S40 sell, lease, exchange, mortgage,
pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill

Suppose the corporation will mortgage all of its assets in favor of a bank in obtaining a loan to finance its aggressive expansion project. It has to expand its capacity because management decided to invade a foreign market. In order to supply the new market, it has increase/expand its
6

Other fundamental changes in S6 (where NVSH can vote) Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property; Incurring, creating or increasing bonded indebtedness; Increase or decrease of capital stock; Merger or consolidation of the corporation with another corporation or other corporations; Investment of corporate funds in another corporation or business in accordance with this Code; and Dissolution of the corporation

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production capacity. In order to expand, it needed money to acquire equipment, build structure, land where the structure is to be constructed, personnel and vehicle. In its decision, to obtain the loan where all assets are given as security, does it require SH approval? Yes, but there is an exception: Par 4 of S40:
Nothing in this section is intended to restrict the power of any corporation, without the authorization by the stockholders or members, to sell, lease, exchange, mortgage, pledge or otherwise dispose of any of its property and assets 1. if the same is necessary in the usual and regular course of business of said corporation OR 2. if the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of its remaining business.

Capital (AAC) to be the syndicate manager. AAC was the client of my law office. International finance construction. One of the conditions of WB window was for the loan to be fully secured or collateralized. Reynolds doesn t have that much collateral to give. But DLC said include everything in their inventory as security. Pwede yun. Nag-recompute sila, umabot. Corporation will mortgage LITERALLY all its assets, even the office ballpen is nakasangla. In the meeting where I suggested it, I was asked, Attorney, that will require SH approval because that is encumbrance of all assets of the corporation. NO sir, it will not, I am sure. This what the exception if the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of its remaining business. The P2B loan package was approved; Reynolds was able to draw all of the P2B. The plant in Dasma was set-up and became operational. The loan package/window gave the borrower a grace period. May gestation yan dapat. Later on, I was called again by the members of the syndicate of banks which ultimately obtained the biggest exposure in the package. Landbank. Reynolds has become bankrupt; we want you to liquidate Reynolds. Eh ako yung nagdocument ng P2B loan. Terms of conditions meeting is scrutinized line by line. Di ka makakasingil kung di ka patient. Many reasons for insolvency: Gumanda yung plastics and PVCs. After liquidation by DLC, PNB naman lumapit sakin. We have to rehabilitate AAC. Minalas lahat ng involved sa Reynolds. Yung nabibili niyo dito na Reynolds ngayon, di na dito yari yan. Australia na yan. For sale or disposition to be valid, it must be approved by majority of board and 2/3 of the OCS. Does the 2/3 vote include the non-voting SH? One of the instances enumerated in S6. Ergo in the meeting, all the SH are to be notified, voting and non-voting alike. In that meeting, for that meeting to approve the sale or disposition, at least 2/3 of the OCS must be present. Otherwise, they won t be able to approve. A SH who dissented from this decision, is he entitled to appraisal right? Yes, under S81 No. 2. A corporation was organized for the purpose of real estate development, this corporation buys tracks of land like Ayala Land for instance then develops that track of land by subdividing land by providing for roads and site development and sells the lots to buyers. This corporation used up all its available capital in buying tracks of land, after subdividing, what remains of his assets? Yung lupa na lang. Here comes Ayala Land saying Oy, katabi ka namin dito sa Nuvali. Sa Sta. Rosa. Kami na mag-develop niyan, we shall develop your lot. Maganda ang ofer ng Ayala Land, sabi ngayon ni XYZ we will sell all our lots. Sell the project to ayala land. Note that the project is only asset that XYZ has. When the entire project is sold to Ayala Land, will it require SH approval? No, because the sale is in the regular course of business. Maganda ang business pag nabebenta niya lahat. Magbenta ng inventory niya. Same is true when you are engaged in the manufacture of beer. That s good business to sell everything in stock. Sale of inventory is part of regular and ordinary course of business and therefore, not require SH. first exception to S40. If not regular course of business, you need approval from S40. Unless nd you fall in the 2 section. Proceeds used for the conduct of the remaining business.

Any corporation is selling all of its assets, I m sure it s clear to everyone that such disposition covers all of its assets. Lahat ibebenta, walang ititira. E.g. SMC will sell lock, stock and barrel all its beer breweries all over the country. Will it require SH approval? As a GR, yes because he will sell everything. The moment he does that, all his assets are S40. Sir, aside from breweries there are other properties. Maybe that s substantially all of the assets. If the sale is substantially all of the assets, it will also require SH approval. What is substantially all? S40, Par 2: A
sale or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated. definition of substantially all

Madaling intindihin ito when it comes to sale. When you sell everything, you won t be able to sell beer which is your primary purpose: to engage in the business of manufacturing beer. Other assets like shares of stocks, parcels of lands The problem here is mortgage, suppose corporation mortgages some of its properties. How do we know if the mortgage covers substantially all of its assets? Will the corporation be rendered incapable of continuing business operation by such mortgage? Mortgagor remains possessor of the properties. Mortgagee takes possession only when mortgagor defaults on the mortgage. How do we know whether a mortgage of some of the properties falls under S40 that will require SH approval? A mortgage or pledge is covered because when corporation defaults and later the mortgagee forecloses, the foreclosure will deprive the corporation of property and when deprivation will render the corporation incapable, the mortgage is a mortgage covering substantially all of the properties. It s not the act of constituting the mortgage, but the effect of the default of such mortgage. If the default will result in corporation not being able to continue with its business, such mortgage is covered by S40. What is the difference between pledge and mortgage? There s a presumption that you know that. When I came back from post-graduate studies, I joined the medium sized law firm, perceived expertise in international economic transactions. Lahat ng trabaho ng lawyer nasa yo, ultimo notary. Reynolds wanted to avail of a window opened by World Bank for countryside development. Lending facility extended by WB to industries which will stimulate growth in the country side. Reynolds want to expand its operation, demand for aluminum will increase and want to invade Malaysian markets. They have to expand their production capabilities. At that time they needed 2B to finance the expansion, to avail of this countryside development window of WB, relocate plant outside Metro Manila. No single bank at that time can lend the P2B kasi marami restrictions. Single borrower credit limit. Syndicate of banks was organized, relending from WB. Citibank etc will address one portion. They hired/invited All Asia

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After the SH have approved the sale, nagbago yung isip ng board. Ayaw na nila ibenta. Where the board changes his mind and decided not to push through with sale, a sale that has been approved by 2/3 of the SH, do you need SH approval again para di matuloy yung sale? Ano say niyo. Is there a provision in S40. That s in S40 Par 3: After such authorization or
approval by the stockholders or members, the board of directors or trustees may, nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, pledge or other disposition of property and assets, subject to the rights of third parties under any contract relating thereto, without further action or approval by the stockholders or members.

Good will is classified by law as an asset. Pero magkano ang value niyan? DLC as SEC commissioner, there was a movie producer na gustong magIPO (initial public offering) Movie Production Corporation (MPC) transferred assets to a holding company. They still have the equipment and personnel kasi gagawa pa ng pelikula. What are the assets transferred? 1. Film library (contains previously produced films e.g. Ligaya ang itawag mo sa akin, bato sa buhangin). Does it have value? Yes. FPJ s film lib. Every afternoon. P20M ang arkila dun. Intact ang kay FPJ. 2. Good will. The name of MPC ay tatangggalin ang pangalan tas ano kapalit ng assets? Shares of stocks of the holding company IPO can be used as a tool to defraud the public. MPC has the shares and then unload sa public. When he does that, out sha sa picture. Naicash na niya yung value ng film lib and good will. DLC has no objection if you encash the film lib. But how do you value the good will? What is the value of the film lib? DLC will approve provided convinced as to value of film lib and goodwill. Until then, I will object to approval of this transaction. Point is goodwill is an asset. Even under the law, it is an asset. The problem is valuation of that asset. E.g. S40 general rule: Change in the line of business. DLC has a client engaged in the business of pre-need. Eh wala na ang pre-need ngayon. Change of line of business means amendment of the AOI. It can be done on a single stock meeting. NB There s a difference between sale of assets and sale of corporation. Magkaiba yan. How do you sell the corporation? All the shares of stock of corporation will be sold to the buyer. What the buyer gets is the shareholdership or ownership of the shares of the corporation. Since sa kanya yun, sa kanya na rin lahat ng assets. Therefore, former SH will be out of the corporation. A new set of SH will come in. That is not covered by S40. S40 only gets assets. SH will remain as SH, they only sell the assets. They still have assets e.g. proceeds of the sale which he may use to engage in another business. Corporation will remain essential the same. Same capital structure and SH. Magkaiba kung shares of stocks ang ibebenta. We will discuss that more in detail when we reach corporate combinations. Ang ibinebenta dun ay shares. Lock, stock and barrel. Hindi assets. What if the SH doesn t think it s under the exceptions to S40? Court has to resolve that intracorporate dispute under Securities and Regulation Code. Remedies: Does sale and disposition of assets require SEC approval like amendments? S40 doesn t say so. BUT when the corporation is a registered corporation, they will have to report it because it s a material change which has to be reported to the SEC. registered status, it s in the corporate governance, Rules and Regulations promulgated by the SEC. No registered status (not covered by the rule) your remedy is to go to court as an intracorporate dispute.

Balik tayo sa S16 (amendment of AOI), nagbago ulit isip ng board, ayaw na iamend. Do they need SH approval? We compare S40 and S16. Walang ganun sa S16. Is there a similar provision? Later on, you have to be very very very observant. Hindi lahat pwede good corporate lawyer. Hindi comics ang Corporation Code. Wala sa S16 pero meron sa S40. What is the implication? If the GR is no need for SH approval for the board to disengage from the approved corporate act, why do you need the provision in S40. If that s the general rule, then we can t not put it in S40. Board may withdraw without that. Since that s not the GR, naglagay sila sa S40, dun lang nakalagay niyan. Wala rin sa S42 (investment in another corporation) Board of directors cannot withdraw from amendment without SH approval. To undo what has been approved requires SH approval. There s a similar provision in the appraisal right, but that s not in point. The sale or disposition may be approved by referendum? No. Maliwanag yung nakalagay na meeting duly called for the purpose what does this mean? Dapat nakalagay sa agenda, otherwise it s not called for the purpose. A SH may question the validity of the approval. Wait wait. Suppose one of the SH did not receive a notice or the notice was defective because not stated in the agenda that the purpose is to approve the sale of all/substantially all. Iisang share lang hawak niya, non-voting pa. I did not attend because not aware that that was the matter to be taken up in the meetng. May he file a case to question the act? May the corporate secretary say that it s a harassment suit? He is non-voting and even if he attended, it will not change the outcome of vote. Is that a valid argument for MTD? Not. Precisely that is his protection. Just one share of stock but if only you heard the anomaly behind that. All those other voters would have voted against him. Maski isa lang yun, it will not be justified to disregard his complaint simply because his number will not change outcome of voting. Kaya lang natin dinidisregard ang voting and meeting, other SH had they heard him would have changed their minds. If that s not the case, that can be demonstrated in court e.g. tatlo lang ang SH. That might not invalidate because futile exercise. That s the only purpose. Reason behind the law ceases, the law ceases. Counter the move of the son of a gun. Nothing but a harassment suit e.g. only three SH and the person has only 1 share of stocks. GOOD WILL How do we value a corporation s good will? Corporation has separate personality. As a GR, not entitled to moral damages because corporation has no feelings that may be wounded. Pero meron shang reputation. If that reputation is damaged, then the corporation is entitled to moral damages.

24 January 2011
Before we leave S40: Dissenting SH is entitled to appraisal right because of S81.

INVESTMENT IN ANOTHER BUSINESS OR CORPORATION

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We move on to S42: Investment in another corporation for business or any other purpose
Power to invest corporate funds in another corporation or business or for any other purpose. - Subject to the provisions of this Code, a private corporation may invest its funds in any other corporation or business or for any purpose other than the primary purpose for which it was organized when approved by a majority of the board of directors or trustees and ratified by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or by at least two thirds (2/3) of the members in the case of non-stock corporations, at a stockholder's or member's meeting duly called for the purpose. Written notice of the proposed investment and the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder shall have appraisal right as provided in this Code: Provided, however, That where the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in the articles of incorporation, the approval of the stockholders or members shall not be necessary. (17 1/2a)

If corporation will engage in a business or invest funds in another corporation for another purpose, it does not require SH approval because if other than allowed by AOI, it will be ultra vires. What is covered by S42? Only those investments in pursuance of a secondary purpose. Only that! Pag secondary purpose, (corporation now using the funds for secondary purpose). Whenever corporation will engage in a business in pursuance of a secondary purpose, it requires SH approval. Why? Ang alam ng SH, doon muna nila dapat ifocus ang resources ng corporation for the primary purpose. Allow only in pursuance for secondary purpose with the consent of the SH. 2/3 votes under S42. May kaso yan. Dela Rama v Ma-ao Sugar Central FACTS: Magulo ito. Corporation invested its excess corporate funds in buying securities issued by Ma-Ao Sugar Corporation. But is investment of corporate funds in securities a power of the corporation? It s just an investment for improving the yield for the excess funds of the corporation. Court said: Assuming that investment is just for the sake of investment and outside the purposes of corporation. Nonetheless, valid because ratified by 2/3 of OCS. DLC says: Mali yun. First we determine is WON investment is ultra vires or intra vires. Pag ultra vires, SH cannot ratify. For the investment to be valid, SH must first amend the articles. After amendment, then ratify the investment. Assuming it is intra vires, is the investment in pursuance of a primary purpose or secondary? If former, no requirement of SH approval. If latter, requires approval of 2/3 of OCS. Example: Bumili ng shares of stocks, but the shares of stock of the corporation is a business not covered by the primary, secondary or implied purposes of the corporation. Is that investment valid? Look at S36. Powers of a corporation. To purchase, receive, take or grant, hold,
convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transaction of the lawful business of the corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution; Kasama ba jan ang dealing with securities for the sake of

The corporation in pursuance of a primary purpose, the corporation may [1] engage in business OR [2] invest Investment of corporate funds a. by engaging in business i. in pursuance of a primary purpose intra vires (within corporate powers) ii. or another purpose ultra vires b. in [shares of stock of] another corporation i. primary intra vires ii. other purpose ultra vires If engage of business itself in pursuance of a primary purpose: such investment is within its corporate powers If the corporation will engage in business for a purpose other than primary/what is allowed in the AOI: then that will be ultra vires

Since investment of funds for a purpose other than what is allowed in the AOI is ultra vires, then corporation cannot enter into this transaction. See S457 If a.i. is intra vires, does it require SH approval? Which one requires SH approval to be effective? To engage in pursuance of a primary purpose, does it require SH approval? Of course not, see S42. Does not require. In a.ii, perhaps? No, under S45: corporation cannot invest funds for a purpose other than those authorized in AOI because that will be ultra vires. SH cannot ratify an ultra vires act. Where does S42 apply then? What investment requires SH approval to be valid? Engage its funds in another business or another corporation. That will be intravires, and not require SH approval.

improving the excess funds. Not necessarily to carry out the purpose but simply to improve yield of excess funds. Ma-Ao implication: Maski yan ay outside the primary/secondary purposes, outside the implied purposes or powers, if investment for the sake of investment ratified by 2/3 of the OCS, then that must be a valid investment. DLC opinion: To increase the yield of the excess funds of the corporation by investing the excess in instruments generally considered as ordinary investment is covered by the implied powers. Primary purpose nga yun. Such investment does not require SH approval. Whenever the corporation will invest excess funds in those instruments, do you need SH approval? Remember that a bank deposit is a loan to the bank, that s why the bank pays you interest for the money? Do you need SH approval? In Dela Rama, yes you need SH approval. Implication: Whenever corporation will make investment, it s not in pursuance of a primary purpose but only of a secondary purpose. Dela Rama v Ma-Ao: It s wrong. A secondary purpose is another line of business, BUT the power to improve the yield on excess corporate funds in an ordinary investment instrument is an exercise of a primary

Ultra vires acts of corporations. - No corporation under this Code shall possess or exercise any corporate powers except those conferred by this Code or by its articles of incorporation and except such as are necessary or incidental to the exercise of the powers so conferred. (n)

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purpose. No SH approval is necessary. That s what you really do. Board of directors does not ask for approval whenever they impose bonds in time deposits, government bonds. It s an implied power to improve the yield of excess funds. Not in pursuance of a secondary purpose. It s also in pursuance of a primary purpose. Even a simple savings accounts deposit is risky especially if it s a rural bank owned by Legacy. Who will determine what is riskier than ordinary? Power to invest in the securities of another corporation is in pursuance of a secondary purpose. Pero malabo yun. Hindi in pursuance of secondary, but purpose other than primary. Pwede siguro ganitong conclusion: An investment for the sake of investment that is for a purpose other than primary falls under S42. What we do now to be safe whenever a corporation will invest for the sake of investment in the securities of another corporation, we follow Dela Rama v Ma-Ao Sugar Central, submit the investment approval by the SH applying S42. BUT if you invest in the shares of stock of another corporation, not for the sake of investment, to participate in the business of the other corporation. It is ultra vires and cannot be ratified. It won t fall under S42. Naging compromise na lang yung Dela Rama. Gay s question: What if investment for the sake of investment eventually gave you control of the other corporation? It s not the investment that will make it ultra vires, but the purpose of the corporation. Purpose of the other corporation becomes immaterial (?). In practice, the intention is for the sake of investment OR to participate/engage in the business. If simply to invest, whether the purpose of the corporation we are investing in is in pursuance of primary/secondary/ultra vires, it s just for the sake of investment, valid if approved by 2/3. But if participate in business, engage in business, not primary or secondary, that s ultra vires that cannot be ratified. What the court is saying: When the purpose is for the sake of investment, it s not covered by the primary purpose under S42. where the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in the articles of incorporation, the approval of the stockholders or members shall not be necessary. An investment for the sake of investment is not reasonably necessary to carry out the purpose of the corporation, therefore it is valid only if approved by 2/3 of OCS. PROVIDED it s just for the sake of investment. When the investment requires a SH approval, does it include the nonvoting SH? Yes, it s included in S6, No. 7. 2/3 vote requirement for both numbers 3 and 7. Can you increase the 2/3 vote requirement (say ) or reduce (say )? Discussion on amendments applies. You may increase but not reduce to what is provided in the code. The vote requirement was made higher than simple majority for the protection of the SH specially the minority. To make it more difficult. Stability is the reason. Want the corporation to disable. Minority has the right to expect that their level of control in the corporation will remain the same. Rights will not be affected unless 2/3 vote have been mustered to effect change in the corporation. When you reduce that, it s violation of DP. Deprived the minority of property without DP. Taasan, majority can t complain because they allowed for that. Minority have no reason to complain because that s more advantageous to them. You can increase, but no reduce. Is dissenting SH entitled to appraisal right? S81 does not include it. BUT Yes, not because of S81 but of S42.

MERGER AND CONSOLIDATION

MERGER: 2 or more corporation will combine: one of them will become the surviving corporation, absorbing all the other combining corporation. y CONSOLIDATION: 2 or more corporation will combine, none of the constituent corporations will survive, but all of them will constitute a new corporation. More on this later.
y

For it to be effective, approved by majority vote of the board and approved and ratify of 2/3 of OCS, including even nonvoting SH.

INCREASE AND DECREASE OF CAPITAL STOCK

In S38: For it to be valid, it must be approved by majority vote of the board and approved and ratify of 2/3 of OCS Non-voting SH? Yes, because no. 5 of S6. May the vote requirement be increased? Same discussion as above. Is the dissenting SH entitled to appraisal right? You see in the table of contents, amendment, sale, investment, merger, appraisal right. Why is that the arrangement? Is the dissenting SH in the decrease/increase entitled to appraisal right? NO. Because it is not one of those provided for in S81. And it is not given to a dissenting SH in S38. Is it not amendment of the AOI? It s where you put the authorized CS (No. 7 in the items) therefore, can we not consider that as amendment of AOI? If it were, and it has the effect in No. 1 S81, then dissenting SH is entitled to appraisal right in S81? Is the increase/decrease of authorized CS an amendment of the AOI? Increase/decrease of ACS: a. Amendment of the AOI? Yes, a special kind albeit. b. Does it have the effect under S81 No. 1? No. Although possible if there are 2 kinds of shares: voting and non-voting. If amendment, then why is it separate enumeration in S6? Amendment of AOI is No. 1. No. 5 is increase/decrease of ACS. Why is there need for separate enumeration? S16 is a rule on amendment, but why do you have a separate rule for increase/decrease of ACS? y Camposes said: Definitely, to change the ACS written in the AOI is to change the AOI, therefore amount to amendment of the AOI. While it is such, the law considers it as a special kind of amendment, treated specially/specifically/differently in S38. y DLC as the SEC commissioner encountered a difficulty (not really difficulty, but there is another term): If you will increase ACS, it will require you to come up with AOI with the incorporated amendment. Since you want to increase ACS, it will necessarily include 7th article, how much ACS is at the time of incorporation. E.g. 10 M nakalagay sa article. 8 article then says, of the 10M capital stock, it will be subscribed by the following: how much subscription of the original articles. 9th article says how much each paid for the subscription. If we change the original amount of ACS, by increasing from 10 to 20. Pano na yung 8th article? Di na sila magtutugma yung 8th and 7th. Papalitan pa ba yung 7th eh fait accompli na yun. Mawawala na yung original article. Don t require us to change what is in the original AOI. We simply file a certificate of increase to be attached on top of the original AOi to indicate an increase in the ACS. Original of the 7th article will not conflict wth the original of the 8th. kaya nga hiniwalay yan, lawmakers
th

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treated the increase/decrease a special kind of amendment which does not require actual amendment of what was written in the original amendment. Baguhin na lang tas lagyan ng parenthesis (as amended) If the increase/decrease is treated not as an amendment, then appraisal right is not available because not in S81. Neither does S38 provide appraisal right to dissenting SH. However if we treat increase/decrease as an amendment of the AOI, is he entitled to an appraisal right? AS general rule, no. The increase/decrease of ACS does not have the effect of No. 1 S81. It does not restrict rights of existing SH, create in favor of shares of stock/class of shares not enjoyed by existing SH, extending/shortening the term of the corporation. Why not have that effect? There is what you call SH preemptive right under S39. Whenever the corporation will increase ACS, the amount of shares that corporation is required to offer for subscription, those shares are entitled to be preempted by existing SH in proportion to their respective shareholdings. Since they have that, hindi nagbago mga karapatan. Purpose of preemptive right is to maintain the levels of control amongs SH in the corporation. Whenever shares of stock are to be issued, those shares of stock are subject to preemptive right to maintain level of control in the corporation. What if he does not have money to buy? We can t guarantee the share to him, that his level of control will remain the same. Don t tie up fortunes of corporation to fortunes of the SH. They are only given opportunity. If not able to seize because of personal restrictions, we cannot use tthat to let the corporation or other SH suffer the consequences. Because of S39 preemptive right, in reality there is no restriction, no change in rights of SH resulting from increase of SH. Hence, even if we treat increase as amendment of AOI it does not have effect in S81 No. 1. Kaya lang, DLC has expressed a view earlier that is a possibility might have the effect in S81 No. 1: if there are two kinds of shares in the corporation. voting and non-voting. Suppose corporation has two classes of shares, the corporation will issue voting shares as a result of an amendment of AOI, are all SH of record (voting and nonvoting) entitled to preempt those voting shares? Authorities say that since S39 does not qualify, then we can t prevent non-voting from voting. DLC says that will change. Dati rati they don t vote, but because of this increase, they will suddenly have voting shares. Dilution in the voting shares of the before the amendment. y DLC says this wll fall under S81 no. 1 in which case a dissenting SH, shall have appraisal right. y DLC-drafted AOI: As a consequence, if there are two classes of shares, inilalagay ni sir that non-voting shareholders are not entitled to preempt voting shares. If you see something wth a qualified right of preemption, to be issued or disposed by the corporation, either ako gumawa or kinopya ng ibang abogado ang ginawa ko sa mga corporation na hawak ko. If voting shares preempt non-voting, will that fall under S81? No, because voting shares won t preempt the non-voting shares. PLDT issues preferred shares to service subscribers. Mas marami ang preferred shares than common voting shares. While preferred shares are non-voting when it comes to election of directors, but voting when it comes to S6 instances 1-8. If voting preempt to the nonvoting share, madidilute yung mga nonvoting SH. Assuming they get diluted, is that an effect? Does that effect have prejudicial effect on NVSH? None. In the first place, alam nilang hindi sila boboto. Dilute non-voting insofar as fundamental changes are concerned. But DLC thinks indirect prejudice ito. Go back to preemptive right when we reach capital structure of the corporation.

ADOPTION, AMENDMENT, REPEAL OF BYLAWS

Look at S48 Adoption S46 You only need majority of the OCS. Do you need vote by the directors? Amendment But in amendment, it may take the form of a mere change in the existing or a total revision? In the latter case, that s adoption of new bylaws governed by S48. Majority vote of the board + 2/3 vote of the OCS Does it include non-voting shareholders? Yes, under S6 No. 2 Appraisal right given to dissenting SH? No, because it s not one of those instances enumerated in S81 giving a SH appraisal right. Neither S46 nor 48 give a dissenting SH appraisal right. AS GR, SH approval is necessary because change is fundamental. For the change to be effective, it amounts to novation of the original contract of subscription, therefore parties to the contract have to give their consent. Consent is obtained through vote in a meeting called for the purpose. If they don t give their consent, they can get out of the corporation by exercising the appraisal right. Why is there no appraisal right in increase/decrease of ACS and amendment of bylaws? Are they not to be considered so fundamental? Obviously, while fundamental in the sense that SH approval is necessary and NV shares are given right to vote, they are not given appraisal right. Law does not consider it so fundamental to give dissenting SH appraisal right but fundamental to require SH approval for effectivity. That s why that s how the topics are arranged in the Campos book. Repeal

APPRAISAL RIGHT
What is appraisal right? Right given to a SH to demand a return of his investment in the equity of corporation before the dissolution of the corporation. This is the exception to the trust fund doctrine: investment of a SH in the equity of the corporation cannot be returned to the investor/SH EXCEPT in case of dissolution OR in decrease of authorized capital stock (S122 last paragraph) 2nd instance is only added. But really the GR here is the first part. Why? Because the corporation is holding that investment in trust for the benefit of all the creditors of the corporation. Creditors who may have extended credit to the corporation upon their reliance on the existence of the capital contributed by the SH. For the protection of these creditors, law requires the corporation to hold on to the capital stock for the benefit of creditors until the corporation is dissolved. There are exceptions: One of this is exercise of appraisal right. When he is entitled to such, may demand a return of his investment in the equity of corporation before the dissolution of the corporation.

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When is he entitled to appraisal right? When he dissented from a corporate decision that requires SH approval for validity AND the law gives the dissenting SH the right of appraisal. When is a SH a dissenting SH? If SH abstained from the corporate decisions, may he exercise appraisal right? No, not a dissenter but abstainer. - S82 says who is a dissenter. Voted against the corporate action. He should have casted a vote against. Di pwede abstain or absent. DLC as member of interim BP: privilege to join assembly of legal luminaries. Sen. Tolentino has a distinct voice. Hihinto lahat ng tao sa corridor. Before the voting, Sen. spoke against the measure. An hour because of the flaws. Interpolation and debate. DLC as the presiding officer announced the result. Tumayo ulit. How was my vote recorded? Dissented. Change my vote into in favor of the measure. Secretary general, change the vote into affirmative in favor of the measure. Only affirmative votes may move for reconsideration. ANG GALING NUNG MAMA. I move for a reconsideration. Buti na lang magaling yung presiding officer. In relation to appraisal right, may a SH who voted in favor change his vote to avail of appraisal right? y First issue: If he can change is vote, up to when may he change it? In that meeting? After the meeting? Pwede ba magbago at all para maka-avail appraisal right? Obviously the code is silent. But S81 says that voting is presumed to have happened in that meeting from voting in favor to voting against. If that is allowed, he can get out of the corporation although in reality he is not against in collusion with the board of directors. Kala niyo nagyayabang lang ako, may relation yung kwentong yun. Fermin Caram, Sr. mga illiterate talaga kayo. Delegate in 1935 constitution. Before submitted for ratification, issue on his citizenship because parents were Syrian. Makapal ang balbas nun. In order to accommodate him, they provided in the 1935 a provision which made him instantly a Filipino citizen. Caram provision of the 1935 Constitution which you do not know obviously. My suspicion was confirmed. Member of interim BP, may junior sha na mukhang Syrian din with balbas but with Ilonggo accent. Debating with Sen. Tolentino: You have nothing to lose. You re just a young man, not even a lawyer. Requirements for exercise of appraisal right: 1. Voted against 2. Corporate decision gives to him appraisal right May the AOI increase the instances where appraisal right is available? No. because it s just an exception to the GR which is trust fund doctrine. Therefore, construe exception strictly. If not in the law, you may not add. How about the reverse, may the AOI decrease the number of instances where appraisal right is available? Not also because the right of appraisal is a property right. You can t remove the property right given by law. Nowhere in the law is the right allowed to be denied a SH in the AOI. Batas lang yan. How is the right exercised? By demanding, making a written demand on the corporation within 30 days after which vote was taken for payment of fair value of his shares. Does he need to have an amount as fair value of the shares? Not really because it s possible you don t know yet how much the corporation will offer you for the shares. What s important is you demand the fair value of shares, fair value may be determined later. Suppose Oliva owns 100 shares of stock of the corporation, in the meeting where the corporate proposal was submitted. Can he vote 50 in favor and 50 against? He wants to be on top of the fence, neither here nor there, doesn t want to make a stand. Dante Alighieri in Divine Comedy said the hottest place in hell in time of ___ in neutrality. Parang tumataya lang sa lotto. Nanalo bigla. Can he demand the appraisal right for the 50 shares which voted against? What is the issue here? Is he a real dissenter? What do you think is a special reason to compel him to do that, not prejudiced insofar as the 50 he voted against. Change the scenario: Voted everything against. So all his shares are dissenting, may he exercise his appraisal right insofar as 50% dissenting shares are concerned? Does it have to be all or nothing? Remember what we have said that in a SH meeting, it s the shares of stock that are voting. Shareholders are just representatives of the shares. Remember the irrevocable proxy case of the jewelry. Dissenter is the proxy. Definitely the proxy cannot exercise the appraisal right because he is not a stockholder. Irrevocable proxy cannot object to that because of pactum commissorium. Selling your shares back to the corporation when you are exercising appraisal right. You don t have to answer them now, maybe in the exam. SH failed to submit written demand within reglementary period from the date vote was taken. What s the effect? Waiver of the appraisal right. DLC has a case involving appraisal right. Dissenting SH submitted his written demand to exercise his appraisal right more than 30 days after the vote was taken. Corporation asked DLC (corporate secretary and legal counsel), no question that SH dissented in the corporate decision. As such, he is entitled to appraisal right. But submitted written demand more than 30 days after the vote was taken. Do we give him his appraisal right? Favor your client. What s my anwer: Ano ba gusto niyo? Kagatin niyo nga lang kung gusto niyo paalisin. Kung ayaw niyo ibalik, we may invoke S82. Want him out or stay. Allow na natin. UP graduate tayo diba. Suppose there s a SH who just bought shares of stock from stock market. Bakit niyo binayaran ng appraisal right yan, more than 2 months. Mananalo ba sha, sakin pa? Purchase of shares of stock under S41. Corporation may purchase its own shares of stock. Hindi naman appraisal right yan. Binili namin yan under S41. Marami pa shang kakaining bigas. What s the difference between purchase and appraisal right? No class on Wednesday.

28 January 2011
The issue in appraisal is how much the fair value of the share is. If there is no dispute as to value, the SH will accept the corporation will offer to pay for the shares. If there is a dispute, then there is a mechanism on how the dispute shall be resolved. It shall be determined and appraised by 3 disinterested person. This is arbitration. See S82. Suppose the dissenting SH is not yet fully paid. May a share of stock which is not yet fully paid exercise appraisal right? Of course, because under S72, subscribed shares not fully paid, which are not delinquent shall have all the rights of SH, one of which is to exercise appraisal right in case of dissent.

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How is that valued? Value the share as if the share is fully paid. Then we shall deduct from the proceeds the amount of the balance on the subscription. Why do we deduct the subscription balance? It will be used to fully pay the shares so that in the books of the corporation, the dissenting shares are fully paid. After paying the balance, the shares will become treasury shares under S9. In S82, however, payment to the dissenting SH cannot come from capital. It can only come from unrestricted retained earnings. Therefore, if corporation has no URE, the dissenting SH is not entitled to be paid. As yet, the dissenting SH will have to wait til the corporation has URE in its books. Until then, the dissenting SH is not entitled to be paid. Isn t that unfair to the dissenting SH who didn t want to remain from the corporation after he dissented from major policy decision, reason why he demanded FV of his shares. Di naman pala sha mababayaran cos the corporation has no URE. What is the effect whenever a dissenting SH chooses to exercise appraisal right? S83: from the time of demand for payment, all rights accruing to the dissenting shares, including voting and dividend rights, are suspended. The only right SH has when he opts to exercise appraisal right is the right to be paid the fair value of his shares. S83 provides two instances where the suspension of the rights is lifted. The effect of the demand will only terminate: 1. when the corporation ABANDONS the corporate action OR 2. the corporation has purchased the said shares. BUT WAIT, the moment I demand my appraisal right, I am no longer entitled to attend meetings, vote in the election. Then til the corporation has URE, I don t get paid. Unfair to the dissenting SH! BUT look at S84. There s an instance in S84 where the status of the SH is restored because his right as dissenting SH terminates. Or in the last paragraph of S83: if
the dissenting SH is not paid the value of shares within 30 days after the award (voting and dividend rights are immediately restored).

Ano malabo jan? Latter part of S84: have the right to all dividends declared before abandonment of act OR before disapproval of the act by the SEC. all those dividends will accrue. Suppose the reason is failure to pay because there is no URE. Pag dumating ang URE, will he get the dividends? y Counterargument: How can there be dividends when there are no URE? y Counterargument again: Pero marami kasing dividend declaration e.g. mandatory dividend declaration. Even in those shares where corporation has no URE. But they will only be paid when the corporation realizes URE in the future. Magkakaron din ng accrual yun. Hindi lang babayaran pero mag-aaccrue. Entitled ba sha dun? Kala niyo madali yan ha. Hindi. Kaya paborito ko yang appraisal right. How do we know that the corporation has already abandoned the corporate decision the dissenting SH voted against? Ganon katagal niya hinid iimplement for the SH to say that he corporation had already abandoned. There is URE, we have agreed on the fair value of the shares. Is it automatically paid? Is it necessary for the corporation to implement first the project before the dissenting SH is paid? May the corporation say We won t pay you yet ha. We re not sure if we re pushing through with the action anyway. Pwede ba yun? Sandali muna ha kasi baka hindi namin ituloy. Three months later, hindi pa makadecide. In the meantime, SH rights are suspended. Do we apply the 30 days in S83? Okay lang na sabhin na hindi pa iimpelement, but after 30 days, you should restore me to my rights. Yet, here, there s no award cos there s no dispute either. DLC: For as long as the SH is not paid, 30 days from the time he demanded to be paid, his rights should be restored. PROBLEM: In case of a dispute. In 2nd par of S82, if within a period of 60 days the date the corporate action is approved. The withdrawing SH and corporation cannot agree on the fair value. They are given 60 days to negotiate, if they don t agree within that time period, it will be submitted to arbitration BUT S82 didn t say how long the arbitration should last for the appraisers to come up with an award. Fixed period there is 30 and 60 = 90. BUT no mention how long the appraiser. Even if you say another 30 days, eh di 120 days. Tagal nun bago sha mabayaran. BUT the moment they agree, he must be paid. Whether agree or award, he must be paid within 30 days, otherwise, he should be restored to his rights. PROBLEM: If there is a dispute in 60 day negotiation, he is not paid but rights are also suspended. During the time dispute is with appraisers, rights are still suspended. After the award is made, corporation still has 30 days to pay. In those 120 days, his rights are suspended. Pag after 120 days, ay wala na kami URE, you can t be paid yet. Then that s when you get restored to all your rights as SH. QUESTION: May a dissenting SH compel the corporation to pay the fair value as agreed upon or as awarded by committee of appraisers? Yes, if the nonpayment of the corporation is without legal basis, SH may compel the corporation to pay the agreed valuation. How? Intracorporate dispute. It has to go to court. Look at the must the corporation wait for the implementation of project before the dissenting SH is paid? it s in S8, last sentence. Until when must the dissenting SH wait? If he is not getting paid, he may say, you re abandoning the decision to which I dissented so restore me.

KAYA LANG, the word used here is after the award. That word award has an antecedent in S82. When do you get an award? In case of dispute in the valuation and the dispute is resolved by a committee of appraiser. The decision of the committee of appraisers is the award referred to in S83. What if it was not referred because no dispute, so what is the award? PROBLEM: ____. Will he be restored to his rights as a SH? DLC says inadvertence na lang ang ginamit jan ang award. OR maybe we should instrument award to include as acceptance/agreement of the parties as to the fair value of shares. Can he withdraw as dissenting SH (since di naman ako mababayaran)? S84. No demand for payment under this Title may be withdrawn unless the
corporation consents thereto. If, however, such demand for payment is withdrawn with the consent of the corporation, or if the proposed corporate action is abandoned or rescinded by the corporation or disapproved by the Securities and Exchange Commission where such approval is necessary, or if the Securities and Exchange Commission determines that such stockholder is not entitled to the appraisal right, then the right of said stockholder to be paid the fair value of his shares shall cease, his status as a stockholder shall thereupon be restored, and all dividend distributions which would have accrued on his shares shall be paid to him.

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What is the period of time should lapse without the corporation having implemented the corporate act? ANOTHER ISSUE: When is the corporation considered to have implemented the act? E.g. dissented on the decision to invest in another corporation. Hindi na kailangan dalhin sa SEC yan. When do we consider a corporation as having implemented? Not necessarily mabebenta kagad. E.g. sale/dsipostion of all e.g. it started negotiation with a buyer, is that already implementation or must SH wait til deed of sale has been signed and executed. While the corporation and the SH have agreed as to the fair value. SH is not entitled to payment until there are URE. *Missed something here* Rights will be restored if within 30 days from agreement as to value, the corporation failed to pay. Marerestore naman sha. Pag nagkaroon ng URE in the future, can dissenting SH say bayaran na me Does his right to be paid subsist, and if it does, until when? Yes, for as long as the corporation has not abandoned the corporation decision dissented to, when he demands the fair value of the shares, his rights as the dissenting SH will subsist. When all the ingredients for him to be paid concur, then he may demand payment from the corporation. In the meantime that he is waiting for the corporation to have URE, can he transfer his shares to another? Look at S86: Within ten (10) days after
demanding payment for his shares, a dissenting stockholder shall submit the certificates of stock representing his shares to the corporation for notation thereon that such shares are dissenting shares. His failure to do so shall, at the option of the corporation, terminate his rights under this Title. If shares represented by the certificates bearing such notation are transferred, and the certificates consequently canceled, the rights of the transferor as a dissenting stockholder under this Title shall cease and the transferee shall have all the rights of a regular stockholder; and all dividend distributions which would have accrued on such shares shall be paid to the transferee. (n)

A dissenting SH is not yet paid, he transferred his shares to another person but the transferor disclosed that it s a dissenting share. The moment the corporation gets URE, you will get the fair value which has been agreed upon already. Annotated on the certificate is the status of the share as a dissenting share. The transferee bought and went to corporate secretary, saying I want you to transfer the shares in my name, BUT I want them to remain as dissenting shares so I can exercise appraisal rights later when the corporation has realized URE later. Corporate sec says: once it is transferred, I will have to cancel the dissenting status so you lose the appraisal right. Under S86, once cancelled, the annotation must also be removed. Transferee insists on the carry-over of retaining the right. Who between the two is correct? Nothing there saying about the carry over. One thing is sure, the dissenting shares may be transferred. The ultimate question: Once transferred, can the status of share as dissenting share be carried over? I will not answer this question and reserve it for the exam. Look at S86 closely. Pinagtalunan yan ng husto. Malikot ang utak. Look at S63 last paragraph: No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. (35) If shares of stock are not yet fully paid, the subscription price allowed him to pay the subscription price on installment. y When he paid the 50%, is he already a shareholder? Of course. y Can we put your name in the stock and transfer book? Of course. y Can he sell it to another person? Of course, he has an interest a proprietary interest over those shares of stocks. y BUT does he have a certificate? No, he can t even be issued with a certificate until there s balance. y What do you transfer to the transferee now? The interest in the subscription contract plus the deed of assignment. y Can you put the shares of stock in the transferor s name? No, because he has unpaid claims. Until fully paid, you cannot change the name. But as between the parties, the transfer is valid. But as far as the corporation is concerned, he cannot transfer shares of stocks which are not yet fully paid. y ERGO, kapag hindi pa fully paid ang shares, are they entitled to exercise appraisal right? Of course, S72. y How do we transfer the name to the corporation? We deduct the balance to make it fully paid, there is no more impediment to transfer it to the corporation and become a treasury shares under Sec. 9. In case of not yet fully paid shares of stocks, he has no protection (since no certificate yet). Transferee has burden of knowing/investigating the status of the share not yet certificated that he was buying. He has the onus of discovering the status of the share. Caveat emptor. That was the idea behind S86. EARLIER PROBLEM: You wanted to retain the dissenting status of the share being transferred. Sa exam na ninyo sasagutin ito. S85 is self-explanatory.

Magulo rin yan. Hindi yan madali. Why does the law require he shares to be submitted for annotation that those shares are dissenting? So that any transferee would be informed that the shares being offered to him for transfer, sale or whatever are dissenting shares. Natural, if it s dissenting, the corporation has a right to demand that the shares be surrendered and for the dissenting SH to accept payment and be released from the corporation. purpose of annotation: to alert the public that the corporation has a right to demand the surrender of the shares, transfer of the shares and for the SH/successor in interest to accept the fair value as agreed upon or as awarded by committee of appraisers. Kaya kung smart kayo, nakikita niyo dapat ang problema. What if the shares are not yet fully paid? He cannot have certificate of stocks. That s in S64: No certificate of stock shall be issued to a subscriber
until the full amount of his subscription together with interest and expenses (in case of delinquent shares), if any is due, has been paid.

If not fully paid, he cannot have certificate. If you are not yet fully paid, how can you comply with requirement of S86? True, you can t comply because you don t have anything to surrender. If you don t have the certificate, nothing to sell. Therefore, in that situation, the prejudice which the public is supposed to suffer if a member of the general public becomes a transferee of a dissenting share is not obtaining under the circumstances. What does it mean? Requirement of S86 only applies when applicable/proper. Apply in proper case i.e. when the certificate is issued because the subscription is fully paid. BUT it doesn t mean that a share of stock not yet fully may not exercise appraisal right simply because nothing to surrender yet and cannot comply with S86. If you look at S86 (this has been the subject of bar exam question). Magaling yung examiner, kaibigan ko kasi. Justice Bernabe. Look at S86:

OTHER INSTANCES REQUIRING SH ACTION

*Instances and not insurance

Declaration of stock dividend

For a declaration to be effective, approved by the 2/3 vote of the OCS under S43. Voting SH only. Because declaration of stock dividend is not

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one of the instances enumerated in S6 where even non-voting stocks are given the right to vote. y First question: Why the need for 2/3 approval in this case when SH approval is not required when the corporation will declare cash dividend? Wala. y Second question: Why don t we include the non-voting SH? More on this later. settled in the New CC. Framers of FC resolved the issue by prohibiting in the Philippines marriages by proxy. That s Article 4 or 5 of the FC. In a common law, the equivalent of agent is proxy. So the proxy s equivalent in Civil Law is agent. A proxy is an agent, because the proxy will perform a task on behalf of the SH. The SH is the person entitled to do an act but the SH will request another to do the act on his behalf. The proxy therefore is an agent, the SH is the principal. The relationship is agency. Therefore, the rules enshrined in CC on agency will also apply. What functions may the principal who is the SH request the proxy to perform? What does he give to the proxy? In Corporation Law, the SH simply gives the proxy the authority to cast votes at SH meetings. That is the SH right that is given to the proxy. Vote at SH meetings. If a SH is also a director of the corporation, may he appoint a proxy in case the director is not able to attend a director s meeting? No. Directors cannot attend and vote by proxy at board meetings. BUT SH may attend and vote by proxy in SH meetings. May the AOI deny SH the right to attend and vote by proxy? No. This is an exercise of a proprietary right and to deprive the SH of this right is deprivation of property without due process. Kaya lang kung isipin niyo, the corporation may deprive the share of voting rights, diba? Kung karapatang bumoto natatanggal sa share, why not the smaller right to attend and vote by proxy? Which is a bigger right: vote or to be represented and vote through a representative? Pag tinanggalan mo nga ng boto, irrelevant na ang proxy. Why not? Magkaiba kasi yun. We will learn that when we reach Classification of Shares As a rule, SH cannot be deprived of their right to vote by proxy. That general rule is implied from a provision of the Corporation Code in nonstock corporations in 2nd par of S89:
Unless otherwise provided in the articles of incorporation or the by-laws, a member may vote by proxy in accordance with the provisions of this Code. (n)

Management contracts
Why need SH approval? What vote is necessary? Majority of the board and majority of the OCS. Why majority and why 2/3 in declaration of stock dividend? Can the vote requirement be increased? Include the NVS? No. Why not? Is the dissenting SH entitled to appraisal right? Why not? Whenever you see numbers, you ask if you can change by increasing or decreasing the required number. May they change it in the AOI? You will be able to answer the question only when you know the reason behind the vote requirement. If you know the reason, you will be able to answer the question. Get the reason behind the law. Discipline we want you to get. Laging paper ni Sir ang unang binibigay. Mr. Concepcion, well done. In University of London, the professors only teach. The exams are given by external examiners. In Oxford, no classroom but the students only report to the chamber of the professor. Next meeting. Fixing the consideration for no-par shares.

31 January 2011
Fixing the consideration for no-par shares Fixing the compensation of directors
We ll go back to this when we reach Duties

DEVISES AFFECTING CONTROL

As we have discussed before, all the powers of the corporation are exercised in the board of directors. Therefore, he who controls the board, controls the corporation. How does one obtain control of the board? By installing a majority of the members of the board. He who has the majority of the members of the board has control of the corporation. Suppose a SH owns only a share of stock in the corporation. Is it possible for him to control the corporation? Yes, if he will employ successfully one of the many control devises. What are those devises affecting control? The Camposes enumerated 9. Deal with them one by one, later on find out that some of those included by the Camposes are not really devises affecting control.

In case of non-stock corporation, the members may be deprived of the right to vote by proxy. But that is allowed when the AOI or BL so provide. Ang GR nga dito ay they can t vote by proxies, even the members. So that must an exception to the GR. But the exception is allowed only in case of non-stock corporation. No similar provision in case of stock corporation. For what purpose is the proxy appointed? To vote the share. The authorization is given to the proxy to vote on the shares of the principal. How does a SH appoint his proxy? See S58:
Proxies shall in writing, signed by the stockholder or member and filed before the scheduled meeting with the corporate secretary. Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended. No proxy shall be valid and effective for a period longer than five (5) years at any one time. (n)

1.

Proxy device

Proxy is a common law term, not really used for civil law. Except for ninong and ninangs in binyag. Pwede ba ang marriage by proxy, is that allowed under Philippine Law. It was settled in the Family Code but not

Suppose the SH can t attend the meeting. Nagmamadali na ako, I can t make a written proxy anymore. So what he did is to call up by phone the corposec and said I won t be able to attend the SH meeting, but I will be sending over my oldest son to represent me and my shares. I can t send you a written proxy coz without time. Leaving for abroad in a

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few minutes. Naalala ko lang tong meeting na to. Kilala ni corposec si oldest son. In the meeting, the secretary allowed the son to represent the shares of the father and counted the votes of the son that he cast for the shares of the father. Natural may natalo after the election. The losing party wondered how come the SH was able to vote when he was abroad. No written proxy produced upon demand. So may the losing candidate ask for the removal of the votes cast by the absentee SH because the son was not duly authorized to attend/represent those shares for lack of written proxy? Can the votes cast by the son in order to change the outcome of the election? Pwede ba yun? What are the issues involved in the problem? Mandatory provision of S58 that the proxy must be in writing? There s no question that when the corposec refuses to honor a proxy which is not in writing, that corporate secretary would be well within his rights. SH has no cause of action when denied. The issue is when the unwritten proxy allowed to cast votes he is supposed to represent. Can you disregard the votes upon the instance of another SH. WON the requirement is mandatory? According to the SEC, in an opinion issued a long time ago, if nobody will complain, then the unwritten proxy, when allowed, shall remain a valid exercise. BUT when somebody complains, hindi uubra kasi mandatory. Otherwise, it would be so easy to cheat the elections. Should it be notarized? S58 does not require that it is notarized. BUT look at S47. Contents of bylaws:
The form for proxies of stockholders and members and the manner of voting them

may, may the corporation impose qualification as to who may be appointed proxies? E.g. Only SH of record may be appointed as proxies Pwede ba yun? I don t care to answer this question. Important is that you know there s such an issue. Can a minor be appointed as proxy? How many proxies may a SH appoint? Can he appoint 2 proxies to represent him for a share of stock? One share of stocks but appoint two proxies. Gastos yun kasi dalawa ang papameryendahin sa meeting. Is there anything said in S58? Mukhang wala no. May the corporation in the BL impose that restriction that a SH may appoint one proxy for one share, he cannot appoint more than one proxy for the share? Problem there with respect to venue and each share of stock is represented by three proxies. Buti sana kung magkakandungan sila. Another problem is when the three proxies for one share of stock, how will that share be voted if the three cannot agree? Apply by analogy provision on S55 on voting by shares of stocks jointly owned who must agree, otherwise, they cannot vote. If a SH has several shares of stock in the corporation, e.g. 10 shares. Can he appoint 10 proxies, one for each share of stocks? Or can he appoint for half the shares, and attend the meeting for the remaining half? Remember the fashion jewelry case. SH attend but a big part of their shares are irrevocable proxy to another SH. Eh di nakapirma na ng proxy ang SH with the name of the proxy in it. However, on the day of the meeting, proxy got sick. Boss will kill me if his shares of stocks don t get voted. May the proxy appoint a substitute? Look at provisions of CC on Agency. May an agent appoint a substitute? As a GR, yes UNLESS he is expressly prohibited by the principal. However, if he appoints an agent, he shall be liable for all the acts of the substitute. Art 1892 CC: The agent may appoint a substitute if the principal has not prohibited him from doing so; but he shall be responsible for the acts of the substitute: (1) When he was not given the power to appoint one; (2) When he was given such power, but without designating the person, and the person appointed was notoriously incompetent or insolvent. All acts of the substitute appointed against the prohibition of the principal shall be void. Can the proxy appoint his substitute? No. Proxy cannot appoint a substitute because the Code requires signed by the SH. The person appointed by the SH should have a proxy where his name is written and signed by the SH. If proxy appoints a substitute, who signs? The proxy? Then that would not be in compliance with the requirement in S58. What if the SH already foresee that the proxy might get sick, can he sign a proxy in the alternative? E.g. Oliva or Oposa. There will be no problem if only one of them showed up in the SH meeting. BUT there will be a problem when both of them showed up? Or lang kasi ang nakalagay. Sino ngayon ang papabotohin? That s why in BL of corporations, they don t usually allow in the alternative. What they allow is SUCCESSIVE. E.g. If Mr. Oliva cannot make it, then Mr. Oposa is appointed. It s now okay as to form since the SH has his signature there. May several SH appoint just one proxy? Of course. Yun nga ang control device dun. If you don t allow that, proxy cannot be a control device. What power may the proxy perform on behalf of the SH? Let s look at S58. Vote lang ang sinabi.

The BL therefore may prescribe additional requirements for the proxy to be valid. Form for proxies: Can the BL say that the proxy may be verbal? May the BL by authority of No. 4 S47 do away with the written requirement in S58? SEC has already answered this in the negative. BL may only add requirements for a valid proxy but it may not do away with the minimum requirement of validity in S58 that it has to be in writing. Who may be appointed as a proxy? Are the qualifications for a proxy? The law does not tell us who may be appointed proxy. BUT may the BL provide that the SH may appoint as proxy only another SH? So that makes a qualification: An outsider may not attend and vote at SH meeting as a proxy. Can it say that there is a qualification for the person of a proxy? If you will look at S47, it only says form for proxies Nothing is said about qualification of proxies. The word proxy is used in two senses: [1] may refer to the person OR [2] may refer to the document. E.g. Oliva is attending as a proxy saying I am Garcia s proxy . The term proxy used here is the first context. He is attending as a person/proxy representing Garcia the SH. Corporate Secretary now says: Ok, where is your proxy? The word proxy there refers to the document signed by the SH appointing him as a proxy. S47 does not expressly authorize a corporation to impose qualifications of the proxy. It only authorizes the corporation to impose requirements as to the form of proxies (the document, not the person). Be that as it

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Can you give the proxy rights other than voting in the proxy document? Yes. Wala namang bawal. Pwede naman pagsama-samahin yan in one document. But S58 only gives voting powers to the proxy. Even non-voting shares are entitled to appoint proxies in those meetings where they are given the right to attend and vote. They can also use proxies there. E di boto ang pinag-uusapan natin. What kind of vote? y Election of directors? Of course, that s why control device. y Other corporate acts requiring SH approval? Of course. May the SH specify in the proxy how his proxy will vote e.g. I give my proxy to Oliva to attend and vote my shares in the SH meeting to be held on Sat. He shall vote against the proposal to amend the AOI. Is that allowed? Like in any contract of agency, the principal has power to define the scope of agent s authority. Or you specify who the proxy will vote for in the election of board of directors. Since we are also governed by the provisions of the CC, then we can assume that CC applies in those situations where the Corporation Code do not provide. Assuming it s allowed to specify in the proxy document how the proxy will vote the shares, in violation of the instruction given by the SH, this son of a gun Oliva voted for different candidates. Yung dapat pinaboboto ni boss ay natalo. Kung babaguhin natin yung boto ni proxy, mananalo yung manok. Ay punyeta ka, bat mo binoto si Garcia di ba sabi ko si Oposa. The making of a corrupt public official. May the SH go to the corporation and request the corporation to recount the votes by removing the votes cast by Oliva in favor of Garcia and credit them in favor of Oposa? When the secretary obeys that request, the election outcome will be altered. Mananalo bigla si Oposa. Who will prevail? It depends who you are lawyering for! Honestly (actually legally) can that be done? The answer is no. Corporate secretary cannot do that because the other SH of the corporation were not privies to the contract of agency between SH and Oliva. Res inter alios acta. The remedy available to the SH are remedies in case of breach of contract of agency. Demanda niya for damages but not burahan or palitan ng boto. y Kung ako yung SH na nanalo, I will object. Ano pakialam ko sa contract and authority niyo. If you were the SH/principal s lawyers, you sue the corporate secretary bakit niya pinayagan. Maghahanap kayo ng idedemanda niyo! Hindi pwede niyong sabihin wala na kayong magagawa. Will that action prosper? DLC thinks no. Filing of proxy with secretary does not make him privy to the proxy. The filing of the proxy with the Secretary is just for the purpose of monitoring. Knowing who will attend and who will not. Who will attend by proxies and not by proxies. BUT it does not by anyway bind the sec, corporation or other SH to the instructions given by SH though may be written in the proxy. The remedy of the SH for breach of contract by the agent is for him to sue the agent for damages if such was suffered by the principal. How does a proxy become a controlling device? If a SH though owning just one share succeeds at obtaining proxies from enough number of shares, he might be able to elect himself and the other members constituting majority to the board of directors. Nakuha niya 80% of OCS. Since nominees niya lahat yan, parang sinabi mo na rin na kontrolado niya ang botohan sa board of directors. That s how proxy becomes a control device. In fact, many corporations are controlled through this proxy device. Group of Danding Cojuangco owns only 17% of SMC, but because the proxies they control, they are able to control the majority of the board. Yet, 17% lang yun. Kung 5 members are board, 20% is only 1 seat. Same is true with PLDT, kaunti lang hawak ng controlling interest, but because of the proxies they have, they control the board. May an intermeddler who is not a SH of the corporation control the corporation through proxy device? Yes, as long he can obtain enough number of proxies, he will be able to control the board of directors. May he sit in the board of directors? Nope, because he s only a proxy. Not a SH of record. For him to qualify as director, he must own at least one voting share of stock. Humanap sha kung pano makakakuha ng at least one voting share of stock that will be recorded in his name in the books of the corporation. Is the proxy entitled to compensation? Under the GR on agency, agency is presumed to be a compensation. Same is true with proxies. E.g. Taga-La Union goes to Legaspi, Albay to attend a meeting on your behalf. He must be compensated for his time. In practice, no one pays a proxy in corporation. Because if you are interested to get my proxy, baka nga ako pa dapat mong bayaran hayup ka. Bat ko ibibigay sayo tas magbabayad pa ako, eh magkakacontrol ka nga sa corporation. In reality, that does not apply even if provided in the CC. Walang proxy na naniningil ng bayad UNLESS the SH approached a somebody whom he trusts. Natural gagastusan kita. Especially if you are a lawyer. May metro ako sa opisina. Bill you for every minute you talk to me on the phone! Pinakain ka na sa EDSA Shang, sisingilin mo pa. Hindi nila pwedeng sabihin ididiscount yung lunch mo. Can you represent me in SG? OF COURSE. Airfare na hindi pwedeng hindi business class. Yung associate ko pwede, ako hindi. Hindi ka rin pwede sa pipitsuging hotel. Per diem. Tas time charges. Umaandar ang kanyang metro. Masarap ang buhay ng abogado. Kung magiging abogado kayo. Pagyayabang time na naman no. No, I m just trying to inspire you. I m regretting I have inspired so many students. Walang gusto mag-litigation. Corporate practice is not the glorified area of legal practice. Nasa courtroom. Makipag-espadahan ka sa lawyer of the other party. Before you embark on corporate practice, you go through all gamut of areas of law practice. I went through all those, before I specialized. I admonished the judge. Yes, I am admonishing the court. The court takes your admonition. Baka pinabili lang ng suka. Interview for NY Stock Exchange in Wall Street. Malamig. Pa-impress ka kunwari. Coat, tie, overcoat, gloves. Are you Atty. Concepcion? OMG you are just a kid! NY bar treaty with the Phil has expired. Petition lawyers. Called to the World Bank in Washington DC kaso wala nang pamasahe. Kung hindi ako umuwi, hindi niyo ako teacher. Kawawa naman kayo. Oh, tapos na yabang time. The law requires the proxy to be filed with the Corporate Secretary. The purpose of that requirement is fairness and fair play so that the other SH would know who among the SH are to be proxied. It has to be filed before the scheduled meeting. Technically, before called to order, a proxy may submit a proxy document. BUT in some big corporations, the BL provides for a cut-off date. So other SH would know who are the SH of record issued proxies at a certain time. Cut off is called the closing date which is usually fixed two months/month before the scheduled SH meeting.

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Why is there such a time? So the solicitors of proxies have time to approach other SH for proxy solicitation letters. In the closing date only SH of record as of that date are entitled to attend and vote at the meeting. E.g. Jan 30 then only SH of record are entitled to vote and attend. Jan 25 transfer for him to vote only at Feb 2, meeting on April. When Garcia goes to corposec to record the transfer, CorpoSec will decline to record because the books are already closed. So now the SH of record is still Oliva, so I will just get proxy, hindi na rin pwede kasi nga sarado na for transfer and proxy. Hindi predictable kung sino sino lalapitan mo at boboto. Baka bigla na lang magtransfer ng mga shares dahil nabili na. For fair play, they close the books. Only SH of record as of that date are entitled to attend and vote and the proxies have to be filed on or before the closing date. Remedy: paattendin si Oliva at gunpoint. revocable at the will of the principal unless coupled with an interest. Usually that happens when the SH appears in the meeting for which he earlier appointed a proxy. Nagbago lang bigla ang isip. Goes to the secretary, dumating na ba proxy ko? Burahin mo na, ako na aattend. Makacomply ba ang Corporate Secretary? Irrevocable yung proxy eh. If you were the corporate secretary who will you allow to attend? Depende kung sino ang kliyente mo. BUT what is the legally correct rule? NB Corporation has no privity of contract regarding the proxy. Therefore, WON valid interest coupled with agency / irrevocable is not the business of the corporate secretary. It s the SH and proxy s business. Who does he prefer now? SH! It s where he has privity of contract, not with the proxy. Corporate secretary should follow the SH. If the SH violates the agreement with the proxy, problema nila yun. Magdemandahan sila somewhere else. Follow the directive of SH of record. Corporate secretary cannot take directions from an outsider. Gay s question: What if the proxy is a forgery? Give the Secretary time to authenticate the proxy. In fact, some corporate BL have procedure and time for validation of proxies in case of registered companies. Right no longer arises from a contract but from a legal requirement that the proxy must be executed by the SH. You just remove the votes. In case an SH contests the proxy of another SH, what is his remedy? Can they ask for the postponement of the elections? Questionable signatures for instance. You object. Usually, they look if the outcome will change. If not altering, they just remove the votes. But if a sufficient number was removed and no quorum, kailangan ng TRO. At all meetings where election, there must be quorum. Intracorporate yan so regular courts have jurisdiction. Iba ang treatment pag registered with the SEC (publicly traded), on proxy solicitation and validation. Not applicable to ordinary corporation. Di ko na ituturo yan sa inyo, para magka-incentive kayo na mag-post grad outside the Philippines. For specialization na yan. Ordinary corporations are usually just families. Pwede yan tawag tawag lang yan. Mai: What if one of the proxies by an SH is from a competing corporation, can the other SH ask for the proxies disqualification? It has to be in the BL imposing qualification on the person of the proxy (it will be disapproved by a SEC). Usually naman open to the public ang mga SH meeting. May a corporation appoint a corporation as a proxy? No. The proxy is given to the representative of the corporation who is a natural person, not to a juridical entity. Doms: Conditional appointment of proxy? E.g. For all meetings I am absent, proxy may represent me as my proxy ? Why not. Pwede naman.

For how long/how many meetings may proxy vote the shares? S58 says valid only for meeting for which it is intended. UNLESS the proxy clearly provides otherwise, used only for that meeting. The proxy may only be used at the meeting the proxy was intended for. How do we know which meeting the proxy was intended for? Rule is that when the proxy is silent, intended for the meeting that will be held immediately after the execution of the proxy. To be more accurate, intended for that meeting where the proxy may attend immediately following the execution of that proxy. Isang meeting lang. Pwede ba marami? Yes. May that proxy be renewed or extended? Yes, but every renewal must not be longer than 5 years. So if you are given 8 years, it s valid only for the five years. Suppose the proxy is silent as to what the proxy may do, hindi sinabi kung 5 years ang binigay but did not say which corporate acts he may attend and vote. What is the rule? What are the meetings he may attend in case he s given proxy good for 5 years? In American practice, unless specified in the proxy, the proxy may attend and vote only at the election of directors. NOT amendment of AOI, approval of investment in another business/corporation, sale or disposition of all/substantially all assets. UNLESS the proxy provides otherwise. So if you want to make your proxy vote in all those corporate acts, you must put it in the proxy document. y DLC not sure if there s a special Phil rule. In pari materiae yan. Doctrines adopted in the States may be used. Compare S58 and S59 on voting trust. 5 years lang din ang maximum sana. HOWEVER, there s an EXCEPTION when the voting trust is required as a condition for obtaining a loan payable beyond the 5-year voting trust agreement. There s no such exception in S58. In case of proxies, no exception. So what do they do now? Can you put in the proxy document This proxy shall be valid for a period of 5 years commencing Jan 1, 2000 ending Dec. 31, 2005. However it is automatically renewed for another period of five years. y Is automatic renewal clause in the proxy allowed? Usually, automatic renewal clause in irrevocable proxies because coupled with interest which subsist longer than five years. Otherwise, marerevoke ang proxy, no saysay his security device. Is that allowed under the law? DLC has not seen any jurisprudence in Phil law. In US there s no 5 year limitation. NB The provisions of the CC on Agency will apply, especially in case of revocation. How may the shareholder revoke the proxy given to the proxy? What do we apply? General principles of agency which states that an agency is

2.

Voting Trust

Oliva has no SH. He was able to get proxy from the matron SH. Nakuha niya lahat. He is the king maker of the corporation. He always elects the controlling number of the board of directors. Year in year out, he is the king maker of the board. Punyeta, king maker lang ako palagi but can t be king! Sawa na ako maging king maker! Can you make me king of the corporation? Can he become director or president of the corporation although no share of stock of the corporation? Yes, that s the function of the voting trust.

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For a fee, I can make you president even without share of stock. Instead of proxy by the matrons, they give you voting trust. What is voting trust? In civil law, there are two components of ownership. Naked or legal title and beneficial title. In both common law and civil law, we can divorce those to components. Give one to other and then another to another. In voting trust, we divorce the ownership of the shares. Legal title goes to the voting trustee while the beneficial title is retained by the SH. Pag sinabing voting trustee having the legal title, the shares of stock will be transferred in his name as trustee. As trustee, having legal title over the shares, is he qualified to run for director? YES. That was one of the areas of controversy settled by the new corporation code. Under the old, a trustee in a voting trust agreement though holding title to the share of stock was not allowed to run, be voted for or sit as a director. Must own at least one share of stock in his own right. Tinanggal yan under the new code. Why? To allow a voting trustee who is holding legal title not in his own right but as trustee to qualify for director. Reform introduced by the new corporation code. Nakalagay yan sa Campos. Document/agreement that will implement the separation of two components of ownership: voting trust agreement (hereinafter, VTA) What rights are given to the trustee and what rights are retained by the beneficial owner? What does S59 say? conferring upon a trustee or
trustees the right to vote and other rights

law institution. If you will look at our CC, there is a title devoted to trusts. Pero mashadong kaunti yung provisions. Pahinging CC. Title V of the NCC and it has a (n) because it wasn t there in the old CC.
Art. 1442 The principles of the general law of trusts, insofar as they are not in conflict with this Code, the Code of Commerce, the Rules of Court and special laws are hereby adopted.

A trust is a special relationship between the trustor and the trustee on the one hand and between the trustee and the beneficiary and between the trustor and beneficiary on the other hand. In trust, there are three interests. The person who creates the trust is the trustor/settlor. Owns the property and divorces the components into two: legal title and beneficial ownership. Gives the title to another party called the trustee who shall hold the property for the benefit of a 3rd party, the cestui que trust/beneficiary. Trustor may be the beneficiary. The original owner separated legal title giving to a trustee and he retained the beneficial title. The trustee therefore, holds legal title for the benefit of the beneficiary who is also the trustor. If you have read the annotations of Philippine civil law writers on trusts, you will be disappointed. Wala silang sinulat kasi. Hindi mashadong pinagtutuunan ng pansin. There are two primary types of trust: express and implied. y Express ay talagang pinagkasunduan. y Implied results from the acts/intentions of the parties without having expressly agreed to create a trust. To DLC s mind, a trust relationship is a special kind of agency where the trustee is an agent. But he s not merely an agent, it s always coupled with an interest in favor of the trustee. So in a voting trust, legal title is given to a trustee. Beneficial ownership is retained by the SH. S59 seeks to regulate the creation of VT because it might violate the provision of RPC on illegal combinations in restraint of trade. For a VT to be effective and enforceable, a certified copy of such agreement shall be filed with SEC and the corporation. Who will certify the copy of the VTA? Not the SH nor the trustee dahil nakapirma na sila dun. Not Notary Public dahil may acknowledgment certificate na yan. So who will certify? If the provision said that a certified copy filed with SEC, it s the corposec who will certify upon his receipt and then transmit to the SEC. But that s not the case. It says with the corporation AND the SEC. Baka naman yung RTC which has jurisdiction over the commission of the notary public? Mashadong farfetched yan to include the court here. When a VTA is executed, and has been filed with the corporation and with the SEC, has the SEC power to disapprove or to disallow the VTA? Is the filing with the SEC ministerial? May the SEC reject the VTA? Nowhere in S59 is approval of the SEC a condition for the effectivity of the VTA. It didn t say when approved by the SEC like in the bylaws which shall be effective only when approved by the bylaws. What is the purpose of filing with the corporation and with the SEC? Filing with the corporation y to notify the corporation that legal title over shares of SH had already been transferred to a voting trustee in accordance with a voting trust agreement y to notify other SH of the corporation of the existence of such VTA. Why? Because any other SH who may become interested to be a trustor in favor of the same trustee may join the VTA. Any other SH may transfer his share to the same trustee upon

S58 only says voting, walang OTHER Rights.

What are those other rights that may be given to a trustee? GR The VTA is the law between the parties. Kung ano yung nakalagay sa voting trust, yun ang ating susundin, unless illegal. Exercise of appraisal right, whatever right a SH may be entitled to we shall go there later. Ihohomework ko sa inyo yan. y Basahin ulit ang corporation code from S1 to last and tell me what are those other rights that a SH may give to a VT. Pag nasagutan niyo yan, imposibleng bumagsak kayo sa Corp. There are nitty-gritties which have to be complied with by the trustee and by the SH for the validity and enforceability of a VT. Under S59, what are the requirements? In writing, notarized, specify the terms and conditions, certified copy filed with the Corporation and the SEC. y What will make the contract unenforceable? Not being notarized or not being filed with the SEC? Hindi naman tatanggapin ng SEC kung hindi notarized. But it really is the filing with the SEC and corporation that will make the contract effective and enforceable. NB that a VTA may lend itself to the creation of combinations in restraint of trade, monopolies. In the US, it s violative of the anti-trust laws, like what happened in the Standard Oil v Atty. General. We don t have that law but we have a crude precursor in our RPC which is illegal combination in restraint of trade. These VTA may become a means to commit that crime so you need to file it with the SEC. it has to be open with the public so that there s transparency.

2 February 2011
HAPPY BIRTHDAY, PHOEBE CORAZON!!!
What is the relationship between trustee and SH in a VTA? Trust is the juridical relationship where___ at common law. In fact, it s a common

60
the same condition stated in the VTA and thereupon be bound by the provisions of same agreement. More on this later. We go back to the purpose of filing. Filing with the SEC y not only to notify the SEC about the existence of the document (VTA) but to make available to the public the VTA for public scrutiny so that if the VTA creates an illegal combination, that will be discovered and proper remedy may be instituted. Para lang mabulgar sa publiko. y What if SEC examiner thinks it s illegal combination in restraint of trade, does he have power to reject? DLC s opinion: since the law does not give power to reject it, tatanggapin niya lang yun. BUT if the examiner is convinced, SEC will file the necessary proceeding kung kinakailangan. But what they usually do is write to the parties informing them of the finding that the agreement is violative of the illegal combination provision of the RPC. Kung hindi nila iwiwithdraw, SEC will forward the VTA with its reports of findings to the prosecutor s office. Kayo na bahala kung maghahabla kayo. How is transfer of legal title in favor of the trustee effected? Surrender the certificate of stock of the shares covered by the VTA. Why surrender? Kasi tinatangal niya yung title sa pangalan nya. Since that s the case, the certificate has to be cancelled and new one issued in favor of trustee. Name of the SH has to be cancelled in the books. Share shall be recorded as having been transferred to the trustee. So that the public dealing with certificite would know that the trustee has the shares in his name not in his own right but as a trustee. The law requires that new certificate has to indicate that the certificate is in the name of trustee as a trustee. Baka kung pangalan ng lang ng trustee, baka ibenta niya. Trustee ka lang pala, punyeta ka bat mo binebenta to? What about the SH who created the voting trust agreement, what s his evidence that he has beneficial ownership? Voting trustee shall issue voting trust certificate. Bakit ganon? So that the SH/beneficial owner, may transfer his beneficial ownership to anybody. Voting trust certificate shall be transferrable is same manner and effect as certificate of stock. If you are smart, you should have spotted a problem. Suppose the share of stock is not yet fully paid, therefore, no certificate of stock yet. What s the issue now? May a SH whose shares are not yet fully paid create a voting trust? Naitanong ko na sa exam dati yan. You go back to S63: No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. But there is also S72: Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a stockholder. Collide ngayon ang 72 and right to make a voting trust agreement in S59. But since he couldn t comply with requirements of S59, and cannot transfer unfully paid shares in the books? DLC opinion, which is the most important opinion in this class: Whether right or wrong, you put this in your bluebook. Ako magchecheck eh! Saka na kayo mag-isip ng ibang sagot. For the same reason in the case of appraisal right, the provision on surrender of certificate will only apply if the share is already FULLY PAID and is certificated. BUT if not yet fully paid and not yet certificated, then the provision on surrender of shares will not apply. The law does not require the performance of an impossible act. Even if not fully paid, SH may still create voting trust. What about last par of S63? Non-transferrable eh itatransfer mo sa pangalan ng trustee? DLC: transfer in S63 refers only to an absolute transfer aka transfer of absolute ownership. Why is transfer of shares in the books of the corporation when the corporation has an unpaid claim on the share prohibit in the first place? Mawawalan ng habol ang corporation sa transferee. What if the SH transfer the shares to a bankrupt party, precisely to avoid having to pay the balance of the subscription. Mapupurnanda ang claimants of the corporation. Mere transfer lang. Last paragraph of S63 applies only to absolute transfers. Walang sinabi si Campos dito. I have pointed out to you the 5 yr limit on the life of a voting trust when we discussed proxies. The life of a proxy is valid only for five years. Our issue then during discussion of proxies was the automatic renewal provisions on proxies. It hasn t become an issue but lawyers do that already. Here in VT, there is also a five year limitation on the life of a VTA. HOWEVER, it also has provision on renewal AND there s an exception which allows the agreement to live longer than 5 years. i.e. in case of VT specifically required as a condition in a loan agreement. Magic words here are specifically required and condition without which or sine qua non condition for the loan extension. In which case the VT will be for a period longer than 5 years but will automatically expire upon full payment of the loan. Mahirap itong last part na ito no! The assumption of last part of sentence is that the loan payable longer than 5 years, therefore VTA may be valid beyond 5 years, pero pag nag-extend ng 5 years at nabayaran na ang full loan, automatically disappear the VT. Can it be 20 years? Mukhang pwede. Walang maximum limit. Loan is payable in 20 years. How about in case of prepayment. 10 years loan but on the fourth year, the entire balance was prepaid. So fourth year pa lang, tapos na. How about the voting trust, is it still valid til the fifth year? Answer depends on intention of the parties which may be embodied in the contract. Kung talagang tied up lang ang VT in the repayment of the loan, even if 3 years, the VT should also be gone. The problem in law is only in loan agreement. Revolving credit line is a loan. ERGO if the contract involves obligation other than loan, hindi magapply yung extension of period beyond 5 years. What are obligations other than loan? Equipment payable on installment is not loan. Sale and then unpaid balance? What if it s just rent? Natanong na rin sa exam yan. Pero hindi ko na itatanong kasi dinidiscuss ko na. RJ raises the issue of revolving credit line. DLC: Who provides it? The bank. Who executes the VTA? SH who is accommodated by the bank. Collateral niya yung kanyang shares of stocks. You look at the provision of CB. Some security arrangements not allowed for certain transactions. If you will go to corporate practice, hindi kayo makakaiwas sa mga areas and practice na ito. So you need four volumes of manual from CB. Also the rulings and opinions of Monetary Board. BIR also has its own opinions. Isa lang na institution ang complete niya. SGV. Not even the BIR can compile all those. Muntik ko na maging project yan when Liwayway Chato was Commissioner of BIR, height of sir s Tax

61
practice. Continuing project that will do nothing but compile BIR regulations. Gamit na gamit yang dalawang yan. Wala daw silang pera. Eh wala ring pera si DLC. Pagawa na lang natin sa Law Center. Sa ngayon, nakikiusap pa kami sa SGV. Talagang tutok sila jan, walang ibang ginawa kung collect, compile, with annex and index. Since 20 years ago. In practice, you will be amused that the room is very wide to escape coverage of law. You must be very creative. Yun ang binabayaran sa lawyer. May magaling at may naggagaling-galingan lang. Any other SH may transfer his share to the same trustee Nakita nung SH on file yung VTA and he thought it was nice so he wants in. May the trustee and the other trustors/SH who created the VTA refuse? Ayaw namin sayo, punyeta ka mahirap kang kausap! Kung pwede pala magrefuse, bat pa ilalagay ang provision na ito. It s a contract therefore consensual. Why does this provision exist? What is the implication of the insertion of this provision in this paragraph? Does this mean the trustee cannot refuse another SH also interested to join? The trustee, how is he changed when he dies? Or may he resign? May we even remove him at will? In proxy, the solution is easy. Consider the proxy as an ordinary contract of agency. There are provisions in the CC on how the contract of agency shall be terminated. What about in VTA? Ayaw na natin sa pagmumukha ng trustee. How do we replace him? The contract is the law between or among the parties. The trust agreement therefore may provide for instances or grounds for the removal of a trustee. May also provide for the manner to replace a trustee. It may also provide for the scope of authority of the trustee. Suppose the VTA is silent as to the following matters? Apply Art. 1442. General principles of trust apply. Trustee may be removed under the general principles of trust. Ganito usually ang nakalagay. Kung ano man yun, hahanapin na lang kasi ayaw nating humaba ang kontrata. Relationship between trustee and SH-trustor is fiduciary character. One of trust. The moment the benefiricary trustor loses his confidence in the trustee, the trustee may be removed. BUT this is not a uniltateral agreement so the trustee agrees because he gets benefit out of his giving legal title over the shares. Therefore, hindi rin payag na basta tanggalan ng kanyang right under the VTA. So kinacraft ang VTA to include the grounds for trustee s removal. When those grounds are enumerated, the trustee cannot be removed except for those grounds. But usually, there s a catch-all in the ground. Maski ano kasalanan niya, pwede tanggalin. It also provides the replacement procedure in case of resignation, death and removal. So the drafting of VTA, pinag-aaralan yan. Hindi yan bastabasta kinukuha sa form book. You have to sit down with two sides to find out what their intentions are in creating the VTA. Usually para hindi humaba ang VTA, merong MOA which shall recite all the intentions. VTA is just an implementation so that when the VTA becomes subject of dispute, always refer to the MOA which tells in minute detail what the expectations and intentions of the parties were at the time VTA was entered into. Kung hindi kayo naliliwanagan, sorry na lang. Baka lang kasi maitanong ko sa exam. Case in the Campos book: No matter what the parties call the contract, it will remain a VTA if the features of the VTA are intended to be created between them. Maski ano itawag nila jan. For that relationship of VT to be effective, it has to comply with the filing requirement with the corporation and with the SEC. Otherwise (i.e. no filing because it s not called VTA), hindi rin effective. In practice, your next problem is how to attack a VTA? If you are not party to the VTA, do you have standing to sue and question the validity of the TA?
y

Kung krimen yan, may standing ka. Lagi kang may standing. Complainant ka lang jan. If a crime was committed in the creation of the VTA, you will just be a complainant/witness. But if it s not crime and the VTA is not filed with SEC and the trustee voted in a SH meeting. Can we say that do not count the vote of the trurstee because not filed with SEC? SEC Opinion: Yes, because every SH has right to invoke S59.

Yung trustee, can he run as president and director of the corporation? Yes, because he holds legal title in the share. The name of the trustee is recorded in books as owner of the legal title to the share. In the old Corporation Law, voting trustee is not allowed to run for director because of the deleted phrase in his own right Reason for suppression: Give the voting trustee legal right to run for director. Kaya nagiging control device. Si Oliva nilokoloko lang ang matronang SH naibigay tuloy ang mga voting trust. Miron lang nung una, ngayon king of the corporation na. 2nd to the last par was inserted to prevent technicalities that may arise when a dispute arises between the trustee and the beneficiary.
Unless expressly renewed, all rights granted in a voting trust agreement shall automatically expire at the end of the agreed period, and the voting trust certificates as well as the certificates of stock in the name of the trustee or trustees shall thereby be deemed canceled and new certificates of stock shall be reissued in the name of the transferors.

The shares of stock have been cancelled in name of SH. In the books of corporation, shares are listed in the name of trustee. When the trustee and beneficiary fights, how to return the shares of stock in the name of beneficiary the original SH. Ayaw pumirma ni trustee at lumipad to US and there died. - How can original SH recover his shares? In the absence of the 2nd to the last par, he ll need to go to court. Kaya meron na ngayon nun. Last, yung homework niyo. What are those other rights that may be given to a trustee in a voting trust agreement? These other rights must be conferred. What can he confer? 1. Right of inspection Unless so conferred, does he have the right to do it as legal title owner? In case the VTA provides for the conferment, how about the beneficial owner, does he have right to inspect? Meron din, hindi nawawala yun. 2. Appraisal right This must also be expressly conferred to the trustee in the VTA. BUT There s a problem here. Pag nag-appraisal right yung trustee, isusurrender ang mga certificate, what does he surrender, pano yung beneficial title holder? Pang-exam na lang siguro ito. Pero ang sinasabi natin, pwede. Kasi inauthorize mo sha. 3. 4. Preemptive right is also one. There s another one.

RJ s question: Can the bylaws provide for the rights which can be given through VTA? No, that s restriction of freedom to contract. As a GR, only law can restrict rights of SH in dealing with their shares. This is internal between the trustee and the beneficiaries. Can they ask for the invalidation of the VTA simply because trustee having a sufficient number of shares to dominate the board has transferred his right to VTA to a competitor? Sa totoo lang, if the competitor bought shares of stock, magagawa niya yun instead of VTA

62
which is cheaper. Kung may pera, mamili na lang sha. SH can sell to anybody, even if competitor. As a rule, we can t do that. BUT Gokongwei v SEC in case of SMC, they disqualified by bylaw provision for the running of director the people representing interests in competition with the corporation. You don t invalidate the VTA, but make a bylaw provision disqualifying for director if representing interest in competition with the business of the corporation. Tender offer to be discussed in detail when we reach Securities. Marami di nakakaintindi nito. devices affecting control. But devices to keep controlling interest in power. RESTRICTIONS ON TRANSFERS OF SHARES Restrictions are in the AOI so we amend the AOI. To do so, you need control. PRESCRIBING QUALIFICATION OF DIRECTORS; FOUNDER S SHARES Only device to keep controlling interest in power. Disqualify the enemies para us lang nakaupo. UNUSUAL VOTING AND QUORUM REQUIREMENTS same thing. BUT it is double-bladed. Pag mataas mashado, minority becomes powerful. All they have to do is not attend the meeting. Also the same pag quorum requirement is high. Tapos na ang proposal pag bumoto ang isang miniority. It may become a device to keep controlling interste in power on a case to case basis. MANAGEMENT CONTRACT I also don t know how it becomes a control device. Entered into by the corporation with another entity for the latter to manage the business of the corporation. But it presupposes control of an interest in the group of a corporation that will hand over management to the third party. presupposes control. Pwede rin sabihin na it s just a device to keep controlling interest in power. To DLC s mind therefore, only three devices affecting control: Proxy, VTA and SHA Mr. Pelaez: Should SHA be in writing? As GR: Contract need not be in writing to be enforceable and valid. EXCEPTIONS: Require compliance with for its validity and enforceable. What contracts must be notarized? Donation of immovable (must be notarized) DLC: Wala kayong natutunan. Kinakabahan ako! What is the effect when requirement under the law is not complied with? Unless law specifically says invalid, hindi invalidated ang contract. Innominate contracts are valid as between parties even if has no name. You do, I do. Ang sama ng dating. Do mo ko, do kita.

4 February 2011
3. POOLING or VOTING AGREEMENT
(Stockholders Agreement) See page 80 of Magic Notes. The corporation and other SH were not privies to the SH agreement Oliva entered into with group of SH. What is the remedy now? They can t have specific performance. It should now be rescission plus damages. But before the meeting, can they compel by specific performance the undertaking to vote for a single slate? Can the court compel the SH to honor his agreement and cast his votes in accordance thereto? Kung hindi sumunod si Oliva, icocontempt ba sha? Nakacast na ang vote niya eh! There s a case. Ringling v Ringling: They can enforce by specific performance. The court will order not the SH but the corporate secretary to cast the votes of the SH in accordance with the agreement. It can be done by specific performance BEFORE the breach is committed. AFTER the casting, it will prejudice third parties who were not privies to the agreement. In practice, gamit na gamit yang SH agreement especially when the project is a joint-venture. Pag JV, there usually are SH agreement wherein it is spelled out who will elect who, how many will sit in the board. For as long as nothing in SH agreement is contrary to law, court will uphold the validity of the agreement.

CUMULATIVE VOTING
For DLC, it s not really a device affecting control. Bec it will simply give minority interest the chance to elect at least one director. Pano magiging control yun eh one director lang yun. This is available to everybody. Manner of casting votes in election of director.

CLASSIFICATION OF SHARES
Not also a control device. Even before we classify shares, we need control of the corporation in the first place. You can only amend AOI to classify shares if you already have control of the corporation. Siguro, Camposes meant at the time that corporation control was not yet in issue, there are SH who have bad intentions. So nagpaclassify na ng shares. But actually, classification of shares may be considered as a device for the controlling interest to hold on to power. Yan naman ang device to keep power to themselves. In power na tayo, para di tayo mapalitan, let s change the AOI and classify the shares. Issue only non-voting shares. Tayo lang ang may voting shares. Only us will be able to run the affairs of the corporation. That s also the restriction on transfer of shares, not

63 CHAPTER VIII: Duties of Directors and Controlling Stockholders

DUTIES OF DIRECTORS
Duties of directors are in S31. Hindi sinabi sa section but impliedly, they do have duties. For breach of duty, there is a corresponding liability. Duty of obedience: who willfully and knowingly vote for or assent to patently unlawful acts of the corporation Duty of diligence: who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation Duty of loyalty: attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation It says there vote for . Eh sir, nag-abstain nga po ako. I thought it was unlawful so I abstained. Are you absolved of the breach of duty? I even voted against! Will that absolve you? There s a body of AmJur that because of duty of diligence, director s duty to question a patently unlawful act does not end upon casting of vote against it. Otherwise, if he lets that be, he will fall under assenting to. Pag wala kang ginawa to protect the corporation s interest, you are considered to have assented to a patently unlawful act. Therefore, you are still in breach of duty. This is not arguably illegal. This is patently unlawful. The duty of the director does not end in his casting a vote against it. He has to do more than casting a vote to resist it. Otherwise, he shall be considered to have assented to that unlawful act. In the Philippines, hindi mashadong gamit itong duties of directors. In fact, bihirang kaso itong S31. In case a director is in breach of his duty, what is the effect? May kulong ba if in breach of duty? Is there criminal liability? I want to direct your attention to S144.
Violations of any of the provisions of this Code or its amendments not otherwise specifically penalized therein shall be punished by a fine of not less than one thousand (P1,000.00) pesos but not more than ten thousand (P10,000.00) pesos OR by imprisonment for not less than 30 days but not more than 5 years, or both, in the discretion of the court. If the violation is committed by a corporation, the same may, after notice and hearing, be dissolved in appropriate proceedings before the Securities and Exchange Commission: Provided, That such dissolution shall not preclude the institution of appropriate action against the director, trustee or officer of the corporation responsible for said violation: Provided, further, That nothing in this section shall be construed to repeal the other causes for dissolution of a corporation provided in this Code.

DUTY OF OBEDIENCE
Every director should pay his master. The director is an agent, has a fiduciary relationship with principal who is the corporation. The director therefore must obey only the orders of his corporation. Sir, eh pano magbibigay ng order ang corporation which is without physical existence? Many things in law are just make believe. Since corporation is a creature of the law, it cannot harbor, hatch, cannot implement an act which is contrary to law. Cannot give any order that is contrary to law because the corporation is a creature of the law. The corporation is programmed under the law to give nothing but an order consistent with law. Program na yun. ERGO, if an act which is illegal was committed in the name fo the corporation, that illegal act is not the act of the corporation. Hindi pwedeng nakaprogram ang corporation dahil puro lawful lang orders nun. Whose act is it? Act of the director. The corporation is programmed not to give an unlawful order. Every order of the corporation must be a lawful order. When do we say that a director has breached his duty of obedience? Nakalagay sa S31. y Underline: patently unlawful act What does that mean? I m sure you know what the word patently means. What does patent mean? Maliwanag pa sa sikat ng araw na unlawful yung act. Nakikita sa mukha. Para mo na ring sinabing walang kaduda-duda na illegal yung act. If a director willfully and knowingly vote for or assent to a patently unlawful act, he is in breach of duty. y Underline willfully knowingly and then encircle yung AND. Hindi lang dapat OR. Magkasabay. Why are there such requirements? Framers of law know that there are acts which are arguably lawful. May duda. If there s doubt that it s illegal, not really breach of duty. Matapos sabihin sayo yung duda, sasabit din kayo. Why? Because it s not enough that there s doubt. Director has duty of diligence. You have to be diligent to ensure that though there is a doubt, mas malakas ang position that it s lawful. Therefore, you need to get legal opinion so you have kakampi. If you did not do it, papasok naman yan sa negligence.

Sabi ni Salonga, it depends if the unlawful act is criminal. If it is and it is imputed as act of director, the director will incur the criminal liability. E.g. nag-import ng shabu. Pag napatunayan na importation was done in the name of corporation, do we sue the corporation for criminal liability? Naconvict, sino na papasok sa kulungan? This is the new school of thought. A corporation may also be criminally liable and in case pronounced guilty, since it cannot go to jail, it must be fined and it can pay the fine. Magulo pa yun. Mas okay yung classical theory that a corporation cannot commit a crime. Every crime committed in its name is committed by person representing himself as acting on behalf of the corporation. Suppose the act is illegal but not criminal. Not penalized by any other law. How about S144? It s penalized under the Corporation Code. DLC s opinion (which is the correct opinion) hindi ganon ang intention of S144. It s far from the intention of the framers of the code. A breach of duty in S31 may be penalized by imprisonment. It s not the intention there. The violations of the code are violations of acts required to be done under the law, not because of a private interest but because of public concern. Pero kakaunti naman yun. Baka siguro, dapat irepeal ang S144. I cannot recall any case for criminal liability for a mere breach of duty. BESIDES, if you will look at S31, what s the consequence whenever a director breaches a duty? It only says shall be liable jointly and severally for all damages resulting therefrom That s the only effect under S31 resulting from his breach of duty. BUT if the illegal act is criminal act. Liable din yung director not under S31 BUT under the law making the act criminal. Of course, damages have to be proven in court. He who alleges to have suffered damages must prove the injury and the extent of the injury.

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Kaninong damage? Who is injured? Suffered by the corporation, its SH and other person. May problema tayo jan. We follow the principle that directors owe these three duties to the corporation NOT to the SH. That s the general principle of corporation law. These three duties are owed by the directors to the corporation and not to the SH. There s one exception: case of Strong v Rapide. This is a Philippine case that reached the US SC. That case is a landmark case in US corporation law. Pag nagbasa kayo ng corporation law written by American courts. Hindi pwedeng wala yang kasong yan. What s the doctrine? Exception to that rule that the directors owe those three duties not to the SH. EXCEPT when there are special facts. This is the special facts doctrine. WON facts are special enough to warrant an exception is address to the sound discretion of judge. It s allowed in common law because common law courts have equity jurisdiction. In case of S31, they already added something here. A SH therefore who suffered damage from a breach of duty is entitled to recover his damages from the erring director. Writers would say: Yes, a SH may suffer collateral damage. Dapat director should breach his own duty to the corporation. However, when he breached, there s collateral damage to SH. Then that SH is entitled to damages under S31. The problem is how the SH will enforce his damages against the director. What is his personality to complain if the duty is owed to the corporation? DLC says: S31 is the basis of his personality to sue for damages. But for him to be entitled to damages, he must show that the director breached his duty to the corporation and the damage suffered by SH or third party was a mere collateral damage resulting from the breach of duty. Suppose the corporation was able to prove damages, as a consequence of breach of duty on the part of an erring director. Court says: the corporation was able to prove damages in the amount of P15M. The erring director is hereby ordered to indemnify the corporation that amount. Director will now pay P15M because the judgment became final and executory. Kanino mapupunta yung P50M? Sa corporation because it s the corporation which claimed the damages. Can the director say Okay, I pay P50M, but since I m SH, I will deduct what I should get as a SH. That was a controversy in US before. The director pays but deducted his share. That s wrong. Because you are entitled only to the dividend. Here in the Phil, DLC s opinion: we should not meddle, join the dispute in the US. Our principle here is that director and SH is not entitled to anything from the corporation except for dividends. Until declaration of dividends, you can t collect anything. When you pay damages, you can t deduct because it s not dividend. They re not automatically declared as dividends, not entitled to reduce the amount pertaining to him as SH. Latest pronouncement of SC: nakaattend ng MCLE ko ang researchers nila. Tama ang decision nila. Those damages paid to the corporation, are they available for distribution as dividends? Assuming they are, when the dividends are declared, is the erring director entitled to get his share? Sakin galing yan. Kaya kayo nagka-dividend dahil nagbayad ako. Oo nga, may kasalanan ka kasi. Pwede ba sha kumuha? DLC opinion: Yes. Walang forfeiture of dividend as penalty under S31. In US, there are two lines of cases. One they allowed the director. The other, director was not allowed. The second line of cases that is the correct one. Don t allow deduct from damages he is ordered to return his dividend.

DUTY OF DILIGENCE
Guilty of gross negligence or bad faith in directing the affairs of the corporation

Called bonus pater familias good father of a family. Directors are charged with responsibility to direct the operation and affairs of the corporation. Kung malulugi or kikita ng malaki, dahil yan sa decision nila. y What words should you underline? gross negligence it can t be simple negligence. And also or bad faith Why not simple negligence? Baka wala nang magdirector ng company. Running a business for profit always entails taking of risks. The bigger the risks, the bigger the profits. So the conservative investors eh mashadong conservative din ang kita. Pero okay na kasi sa kanila yun. Pero may mga risk-takers din. The moment na pumatok ang risks na tinake nila, translate yun to bigger profits for the corporation. BUT while the directors are given the authority to take risks in running the affairs/business of the corporation, the directors should not be reckless in taking risks, not only risk of their own but all the other SH as well. There s a human relations side. Sana kung pera mo lang mawawala pag nalugi. Tangay down the drain even the money of other SH. They should have due diligence, take calculated and reasonable risks. Taking of a risk may be considered simple negligence. You can t sue for breach of duty for taking a risk because it s a business decision. Can SH say, mali ang decision niyo, hindi dapat ganun. Ganito dapat! May the SH sue a director to recover the damages on behalf of the corporation for taking a wrong decision? What s the GR here? Not needed that every decision of the director is right. Kaya lang nasabing mali kasi nalugi na. Nung ginagawa nila ang decision na yan, alam na nilang malulugi sila, pwede na. Bad faith yun. At the time the decision was being taken, hindi maliwanag na malulugi, may malaking pag-asa na kikita, later on nalugi, may a SH sue to recover damages on the ground that director erred in deciding a business call? No. that s what you call business judgment rule Wait, what s that? All decisions in the board are taken by the board. SH cannot make pakialam. Running the business belongs to the board. The court has no business substituting its judgment for the business judgment taken by the board. Otherwise, the courts can become the managers of the business. Judges are always looking back. They don t have forward judgment. They don t see the market condition, data, etc. A director cannot be held liable for making a business judgment. That s our GR. What are the exceptions? When they are grossly negligent OR in bad faith. That s the only instance where they can be in breach of duty. In the Philippines, it s very common to have a very rich investor who will invest in shares of stock of the corporation and then elect his nominees in the board. These nominees, natural kung ano idikta ng principal, ganun din ang boto nila. The controlling interest has a duty. Sha ang tatamaan pag lahat ito ay sumunod lang sa kanya and the decision given to nominees was grossly negligent/bad faith.

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Yes, they can be sued in their personal capacity? Of course. But they have recourse, they can sue their principal. When you become lawyers, firms will ask you to sit in board of corporation as nominees of important clients. Director ka, papapirmahin ng resolution adopting a corporate resolution. Diniktahan ka lang ng client, pipirma ka. Otherwise, mawawala yung account. Pumayag ka lang kung merong INDEMNITY AGREEMENT. Whatever damages awarded against me for a decision which was requested by the client, the client shall be the one liable for it. Kung malaking-malaki na potential liability mo, wag ka papayag na indemnity agreement lang. Humingi na rin ng SURETY who shall pay it and will make habol your client. Nung teacher ko sha, wala akong kinain kundi mura. Bastard. Bastard. Yes sir, yes sir. Carino brutal. You bastard KBL. When I was SEC Commissioner, may problema sha. Naging nominee, director tapos liable for damages worth P20M. Nominee ka lang jan, di mo kasalanan. INGAT KAYO JAN. You can be personally liable. Wag mashado malakas ang loob. Yang paper minutes na yan. Ingat din. Corporate secretary. Secretary certificate in a meeting that was did not take place. Under oath. Corporate secretary na wala kayong minutes na nakapirma sila lahat. Papirmahin niyo yan. Gagawa ka na lang rin lang ng kasalanan, gawa ka ng back-up. Sign everyone else. Protect your career. Dalawang alumni na batch 80 na nakakulong ngayon dahil corporate secretary sila. Pyramid scam corporation. Student ko yun, hindi ata nakinig sakin. Suppose Oliva is not a nominee of anybody. Bought his own shares of stock but his shares are not enough to make himself a director. He wanted to become a director so he ran, naipanalo with the help of votes given by other SH. But in the board, he s always absent. Always vote in favor prevailing party. Swing vote. In the US, there s a liability. Duty to inform himself of matters important to the running of the corporation. he should read reports, attend meetings and if it can be shown that it is his failure to be so informed that he cast the vote that resulted to the loss of corporation, he is liable for breach of duty. Gross negligence. Wala ka naman palang intention na mag-aral, magdischarge ng functions of director, bat ka nangahas kung walang kakayahan mamalakad ng corporation, never dream. NEVER ASPIRE TO BE A DIRECTOR. If you do so and corporation suffered damages bec of negligence in not performing diligently, you are liable for damages. Wala niyan dito. Baka in the future. Wala pa nga yung breach of duty. Lakas ng loob tumakbo eh hindi marunong bumasa at sumulat. Wala naman ganung qualification. Akala nila hindi ka maglalakas loob sumabak. interest and that of the corporation, he chooses his personal interest over that of the corporation. In short, for there to be disloyalty, dapat may conflict situation. Conflict between interest of the corporation, third party and the interest of director opposite to interest of the corporation. To be loyal, the director must always choose interest of corporation over all other interest. If he doesn t, guilty of disloyalty. That s the general principle: conflict situation: The Corporation Code however, gives us the conflict situations. Dahil 4:20 na, gagawin na lang nating homework yan. Read the code again. Identify the situations which present conflict of interest between interest of corporation and that of the directors. Pag nailista niyo lahat ng conflict situations, imposibleng bumagsak kayo. Iisa-isahin niyo yan. Perfecto Fernandez. Kabisado namin ang Consti. Yun nga lang, 1973. Obsolete naman bigla. Look at each and every section what those conflict situations are.

9 February 2011
HAPPY BIRTHDAY, FRANCES YANI!!!
S31 gives us the duty. How the duty is breached? There are requirements. A director acquires a personal or pecuniary interest. The interest is in conflict with corporation. The corporation suffers from such breach of duty, the director is liable for damages. We have discussed last meeting that whenever a director chooses his interest over that corporation, he is disloyal. The corporation code enumerates certain instances where conflict of interest is present. Let us discuss them one by one.

1.

Self dealing director

Dealing with himself. What comes to mind when you hear the word dealing? Deal parang contract no. When will this happen. When will a director be dealing with himself. Tumatawa ka, masama nasa isip mo. It happens when a director proposes a contract with his corporation. Is a director prohibited from contracting with his corporation? No. It does not necessarily follow that a director unduly takes advantage of his corporation whenever he enters into a contract. It s not always like that. In fact, that s a rare situation. CK s campaign: If we re a corporation, she s our promoter. Hahahahahahahaha During Sir s time, Prof. Sanidad was COMELEC Chair. While they were canvassing the votes, the lights went off. When they lighted the candles, the ballot boxes do not look the same anymore. Si Oliva. Tuwang tuwa si Garcia na self-dealing si Oliva. Contract corporation to give the corporation to give it maximum advantage. Bagsak presyo, minimize the profit to help the corporation realize bigger profit from the project. But this is not always the case. Some directors take advantage of his corporation by proposing contracts which are disadvantageous to the corporation and unduly advantageous only to the director. Because of this reality, the code does not prohibit the director from contracting with his corporation. HOWEVER, the contract of a director with his corporation under S32 is voidable. That s GR: Whenever a director enters into contract with a corporation, his contract is voidable. Why is this self-dealing? Why is there a conflict of interest? There is a conflict of interest because a director who proposes a contract has a

DUTY OF LOYALTY
Like in first duty of obedience, obedience to his master, he must be loyal to his corporation. Parang Noynoy yan, kayo ang boss ko! Senators don t realize that when you are there investigating, ipamumukha sa kanila na public servants. Kala nila kasi mga hari sila dun. Pinatawag ako as an expert. Ayaw maniwala sa opinion na tama. Walk-out ako. Papatawag kayo tas hindi maniniwala. They want to define securities itong dating chairman ng senate committee nakabasa ng kaso na may definition ng security tas inadapt niya. Not the definition of security, it has none. It is only definition of one: investment contract. Patay na yung Senador na yun. Pero iniwan niya yung mali niya sa batas. Ayaw mag-budge. Isampal niyo yung batas. Kala nila alam nila lahat. Nagdudunung-dunungan. Pati tender offer di rin nila alam. Di mainitindihan kahit ipaliwanag mo, parang ikaw. The director must be loyal to his master the corporation. When is he disloyal? A director is guilty of disloyalty when confronted with his own

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pecuniary interest flowing from such contract and if that interest is disadvantageous to a corporation, the director will be choosing his interest over that of his corporation. Dapat hindi niya gugulangan his corporation. But if he does, through his contract, then he is disloyal. He advanced his own interest to the prejudice of his own corporation. There is a conflict. Why self-dealing? Because the director is part of the board that approves the contract. There is a temptation for him to vote in favor of his contract. Pag pinagbobotohan ang contract niya, self-dealing na sha. When a man contracts with himself, what is it called? Autocontract. Is that contract valid? No. You can contract with the devil but cannot contract with yourself. But in a corporation, the director is only one of the members of the board, but if his presence in the board meeting is necessary for the meeting to have a quorum, mejo delikado na sha. More so, if he voted in favor of his contract and his vote was the vote that garnered the required number for the contract to be approved. If we remove his vote, the majority is not achieved. How do we ratify? Since voidable, it can be ratified. Under S32, the contract becomes valid if three conditions are obtaining under the circumstances. a. The presence of the director of the self-dealing director in the board meeting was not necessary to constitute a quorum b. vote of such director or trustee was not necessary for the approval of the contract; c. contract is fair and reasonable under the circumstances First requirement: There s not much issue there. Did we include him in the number of the quorum. If we did and removing him reduces it to non-quorum, the contract is not valid. Second requirement: without his vote, majority would not have been reached, e di hindi rin valid yung contract. What is difficult here is third requirement: Malabo na nga yung fair, Malabo pa yung reasonable, lalo pang pinalabo ng circumstances. What may be fair under this circumstance may be very unfair under another. It s very subjective. There reason why it s there para may trabaho ang abogado. Sayang naman ang ginagasto niyo ditto kung hindi kayo magkakakaso. Ayan, ayan may kaso kayo diyan. If all three are present/obtaining under the circumstances, the contract is valid. Pag yung 1 2 3 na yun present lahat, the contract is valid, NOT voidable. When one of those three is absent, the contract is voidable. Since it is voidable, what is the effect of the contract being voidable? a. It may be set aside. b. OR It may be ratified. How is the contract ratified? It may be ratified by the vote of SH representing at least 2/3 of the OCS in a meeting called for the purpose. Dapat merong underline yung called for the purpose when you call for the meeting, it should be written in the agenda, otherwise, ratifiacation shall not be effective. Does the 2/3 voting requirement included NVS? No, because ratification of a contract by a self-dealing director is not one of those instances enumerated in S6 giving NV SH the right to vote. Suppose ang wala eh yung No. 3. Present both 1 and 2 but it s not fair and reasonable under the circumstance? No, a contract by self-dealing director cannot be ratified if it s not fair and reasonable under the circumstances. Does it mean that the contract is invalid/void? Of course not. The contract is still voidable. It may be set aside but it cannot be ratified. Anytime, it can be set aside. How is the voidable contract set aside? There are two remedies for this. a. Remedies within the corporation (aka intracorporate remedy ) a SH may perhaps file a complaint with the board to complain about the contract with another director that is disadvantageous to the corporation. Board may change its mind, confronted with such complaint and withdraw from the contract.

What if the board does not like to set aside the contract? The SH himself may have the right to bring the matter outside of the corporation through an intracorporate dispute filed with the regular courts. More on this when we reach derivative suits. Setting aside the contract is necessary for the contract to lose force. For the contract to cease being enforced. Why? Because there s presumption of regularity. Presume that the contract is valid. Every time the board takes a vote, the vote taken by them is presumed to have been done properly and regularly. Therefore, there s presumption of validity to action adopted by the board in the meeting. Against this presumption, there s where we shall complain under S32. Board member can complain. Pano yun kung bumoto rin sha? Sometimes contracts have duration longer than one year. So we enter into a contract today dully approved by the board, opposed by one of the members. Next year, iba na composition of the board, they may question it since the contract is a continuing contract. Since the contract is voidable, does it have a prescriptive period to question contract or set it aside? Do we apply CC provisions on prescription? Kasi kapag written contract, what is the prescriptive period? To enforce = 10 years. Vote taken in the meeting where the contract is ratified, may itself be set aside? Niratify na ng mga SH, pinapaset-aside pa natin. Why? Vote will only be effective if there is full disclosure of director s adverse interest. Hindi niya sinabi lahat ng totoo. Fraud was committed. Since there s fraud, misrepresentation then vote taken in meeting where self-dealing contract was ratified may be set aside. If you look at first paragraph of S32: voidable at option of such corporation ergo, the cause of action belongs to the corporation. Who decides for the corporation to set aside the voidable contract? The board of directors. Eh nakaupo rin din yung self-dealing director. May pabaon at welcome. President of corporation in Makati after serving Ayala Corporation for 15-20 years, magkano tinatanggap, 40M. Yun ang retirement pay ng president of Ayala Corporation. yung ating chief of staff, magkano yung tinanggap ni Angie? 50M. Nasisindak lang tayo sa halaga. Kung hindi tayo naka-object, hindi tayo masaya dito. Kailangan opposition tayo palagi. High time to think about general s compensation. Let s make it legal. Otherwise, itatago lang talaga nila. Balae pa man din ni Sir Labitag yun.

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Suppose the director, instead of himself proposing contract to his corporation, uses another corporation where he has an interest. That corporation is the one that proposes contract with his corporation, is that covered by S32? No, because S33. apply. Kung ang nagpopropose is corporation where interest of director is substantial. Dun sha titiba, dun malaki ang profit na makukuha. For same parity of reasoning, when the interests of interlocking director in both corporations are nominal, S33 will not apply either. Suppose director is trustee in non-stock corporation (NSC) which will contract with a stock corporation where he has a substantial interest? Will S33 apply? If you look at that S33, it did not say director OR TRUSTEE. Only director. There is danger in this director of corporation taking undue advantage of non-stock corporation where he sits as trustee. Gagatasan nila yung non-stock. Hindi pwedeng walang remedy. y DLC opinion: S33 will also apply. In case of stock corporation proposing contract to a non-stock corporation and there is an interlocking director or trustee. Which is substantial and nominal since non-stock corporation has no OCS? DLC opinion: in case of non-stock corporation, the interest of trustee is ALWAYS nominal. Because he s not supposed to derive any profit from his interest in the NSC. Therefore, his interest in the NSC must always be nominal. It cannot be substantial. What if both NSC with interlocking trustees contracting with each other, will S33 apply? By parity of reasoning, parehong nominal interest, therefore, S33 will not apply. What if reverse. NSC where he is trustee proposes contract to stock corporation where he is interlocking director? Hindi rin kasi nga nominal lang sha sa NSC.

2.

Interlocking directors

Contract with corporation with interlocking directors. Directors of first are also directors of 2nd. When these two corporations enter into contract with each other, they are covered by S33. Iba na ang wording ng S33.
Except in cases of fraud, and provided the contract is fair and reasonable under the circumstances, a contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone

What are the grounds? Fraud and disadvantage. Unfairness of the contract to the corporation. Those are the two grounds to set aside the contract. It won t be invalidated, not say set aside. Invalidated means annulling it. The question is since the contract may be avoided if fraudulent, not fair and reasonable under circ, may the contract be ratified? Walang nakalagay about ratification in S33. Meron lang provision jan if the interest of the interlocking director in one corporation is
substantial and his interest in the other corporation or corporations is merely nominal, he shall be subject to the provisions of the preceding section insofar as the latter corporation or corporations are concerned.

NB it s not the contract that is subject to the requirements but the DIRECTOR. Dun kasi sa S32, there s a provision on ratification. But here in S33, no such provision on ratification. Mararatify ba yun? y DLC opinion: Yes, the requirements for validity in S32 or the requirements for ratification in S32 should also apply to interlocking directors in S33. S33 defines substantial interest. For purposes of determining whether S33 applies, an interlocking director should have an interest exceeding 20% of the OCS. Less than that, his interest is nominal. 20% of the OCS does it include the NVS? Hindi ito botohan ha. Because S6 only pertains to voting. Here it s not botohan. Only determining if interest is substantial. S137 defines what OCS is. Includes all shares, voting and non-voting. All outstanding. In the 20%, do we compute that on the basis of shares including the NVS? Magulo ulit ang SC decisions jan. For purposes of applying the nationality requirement in the constitution for ownership of private land, NEDA opinion said that 40% of the OCS in constitution is limited to voting shares. Since only them participate in the management. Therefore the 40% max requirement/60% minimum requirement refers only to voting requirement. Silverio Tan (valedictorian of UP Law 1982) on why 40% nationality requirement should include even NVS. There is now a pending case on SC with PLDT issue on WON exceeds 40% equity of foreigners. One of the issues is how to compute the 40%. Include PLDT s NVS? Yang nominal and substantial also has issue. If the interlocking director has substantial interest in one corporation and nominal in the other, substantial in one and nominal in the other. Will S33 apply right away? No. It will only apply when it is the corporation where director has substantial interest is the one proposing the contract to the corporation where he has nominal interest. If the other way around, S33 will not

3.

Fixing compensation of directors and officers

GR: They re not entitled to compensation as a director. Why? Privileged na nga sila. Not all SH can participate in the management of the affairs of the corporation. Pera din naman nila yung minamanage nila. Why compensate them for managing their own investment? What are the exceptions? S30
8

Can a SH who is not director be president? NO, president must always be a director. President may be given compensation, not as a director but as president. E.g. He has to ride a plane to attend a meeting. Directors are entitled to a reasonable per diem. What is per diem? Per day. Reasonable allowance for expenses. When is it reasonable? Cover the expense to the director in attending a SH meeting. What is the cost for the director in attending the meeting?

Compensation of directors. - In the absence of any provision in the by-laws fixing their compensation, the directors shall not receive any compensation, as such directors, except for reasonable per diems: Provided, however, That any such compensation other than per diems may be granted to directors by the vote of the stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholders' meeting. In no case shall the total yearly compensation of directors, as such directors, exceed ten (10%) percent of the net income before income tax of the corporation during the preceding year.

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a. Fare. Pamasahe na hindi masahe. From the Spanish word pasahe. Ticket or cost of your transportation. Novel - Passage to India. Hindi niyo nabasa dahil illiterate kayo. Accommodation. San sha maghohotel? Sa Sogo. We took our lady classmates to motel. We had a field trip with mirrors all over. Glass showers. Octopus. Tuwang tuwa sila. When you re a lawyer, you should know what a motel looks like. Yayain niyo na mga classmates niyo na dalhin kayo dun. Excursion lang! Spends 5 hours looking at the financial giving expert opinion on business matters. Shouldn t you also pay for his time? If he didn t attend in the board meeting, he should have been in his law office working on clients requirements for P5,000/hr. Maliit lang yun. Pang-associate lang yun. Pag ako, triple na nun. business. PEZA in Mactan Island during Marcos time. The family corporation not interested in the proposition because they didn t have cash and not willing to liquidate their assets for cash. They also don t want capital call. Everything was recorded in the minutes. His classmate s dad who was also an alumnus of the college decided to just put up his own corporation and find his own funds for the opportunity. Tumabo ng husto yung negosyo kaya kinuwestiyon ng mga kapatid yung corporation. Dapat daw kasali rin sila dahil it was a business opportunity stolen from the corporation. DLC (as the best lawyer) wrote to the siblings Cebuano lawyer using the minutes as proof that the classmate s dad offered it to the corporation s board of directors beforehand but had been rejected. Therefore, it can no longer be considered as stolen business opportunity. Tiklop yung kabilang side. Hindi tuloy nakasingil si Sir, as a courtesy to his classmate. Unlike doctors who don t charge professional fee when their patient is another lawyer, if lawyers lawyer for a lawyer, they charge double. In another case in the Campos book: A member of the board was accused of having stolen the corporation s business opportunity. Director interposed as a defense the fact that his corporation could not have entered into the business opportunity for financial incapacity. New York Supreme Court ruled that the director cannot be the judge on a corporation s financial capability to take on the business. There are other ways in which the corporation may find its funding: it may enter into a JVA, issue additional shares or it may even borrow money. The court held that the director stole the business opportunity from the corporation and therefore he must refund the profits realized therefrom.

b.

c.

Let s say Washington Sycip is in your board. One hour of his time is a fortune. Do we pay him what he s supposed to earn per hour? Gusto man natin pero wala pera ang corporation. - What am I telling you? The per diem allowance, the director of the board is entitled to get should be reasonable taking into consideration not only cost of the director but also cost of the corporation. Di pwede na mamulubi ang corporation mabayaran lang ang director. In SanMig Corporation, the per diem of director attending is hundreds of thousands. If you attend MWSS, mas malaki! Dapat kinuha ko na lang yung MWSS. Pero buti na lang di ako napunta dun kundi nasama ako sa imbestigashon. Blessing in disguise. While the directors are not entitled to a compensation for services rendered to the corporation, the SH may give their directors compensation. Talagang tuwang tuwa sila sa directors nila dahil ang laki ng kita. Ang laki ng dividends. SH want to give them rewards. SH want to give compensation. Compensation need not be monthly salary. Year-end bonus may also qualify as such. LOWBAT. How do the SH give this compensation to their directors? They may: a. amend the bylaws to institutionalize the compensation OR b. give it on an ad hoc basis depending if the financial performance is good. How did this become a conflict of interest? The director may be tempted to manipulate the financial statements in such a way to reflect an increased profit so that his 10% will also increase. He may want to make the SH believe that business is doing well so that they will give him his rewards.

11 February 2011
QUESTION: What is the prescriptive period for recovering the profits? Case of action given by law. Since Corporation Code does not provide, DLC applies provision of the CC. In case cause of action given by law, not provide prescriptive period, then use 5 years. A different law is use when the cause of action is a liability arising from crime. Enforcement of a criminal liability, the prescriptive period is provided for in RPC for felonies defined and penalized therein. Suppose criminal act is defined and penalized in special law which does not provide for prescriptive period to enforce a criminal liability, what law to be used? It s not the CC.

5.
nd

Use of insider information

4.

Stealing of business opportunity

The 2 par of S31 gives us another conflict of interest situation. A director is an insider because of his position, becomes privy to info not available to SH in general.
When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation.

When does a director steal a business opportunity? A director may only steal business opportunity if the opportunity belongs to the corporation. He may not steal what the corporation does not have. When does an opportunity belong to the corporation? When the corporation may lawfully engaged in the business under AOI. So you always look at the AOI. When is the director guilty of stealing? When he engages in the business himself without offering it first to the corporation. More so if he concealed the business opportunity. So far, DLC has just handled one case involving this provision. Case by his classmate who hails from a rich Cebuano family engaged in real estate

He must account for all the profits S31 liable jointly and severally for all damages. Ninakaw niya nga yung business opportunity pero nalugi naman sha. Gumamit sha ng insider info pero nalugi rin. Since lugi, ano kalimutan na lang yan? Yan na ang karma niya. Pero palalagpasin na lang ba natin yun?

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Yung S31 first par, director shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. Whenever there s breach of duty and that breach of duty damage the corporation, that erring director is liable. Kaya nga nalugi, hindi sha magaling mag-business. During the time malakas yung product, had the corporation been given opportunity to operate the business, they would have profited from it a lot. Ano ba ang mga fad ngayon? Zagu. Gonuts. Natapos na yung fad for the product, may the corporation still recover damages from the director who lost money seizing the business opportunity for himself? y DLC opinion: Yes, dahil hindi pwedeng palampasin na lang yung kasalanan niya. Although in the US, there are contrary opinions supported by cases. Nakarma na, nalugi na. That should be considered enough punishment for the director. Portia wants to exact a pound of flesh. Yung mga Hudyo went down in history as usurers, ruthless, heartless. Pero totoo naman kasi yun. Pejorative kapag sinabihan kang Hudyo. If you look at the law as too exacting not to allow a breach to passed unpunished, would have earned money, entitle it to claim damages under the first par of S31. Can bylaws include this as grounds for removal from office? Of course. No ground provided in the Corporation Code. But the bylaws may be provided as ground. These violations of duties may be ground for removal. When corporation provides ground for removal of director without a ground. Pwede nga ba ang catch-all ground? DLC: If you are lawyer for the corporation, you provide a catch all ground as if there are no grounds. Yung mga kliyente akala nila abogado rin sila. Mas magaling pa sayo. Pwede yan Iaccommodate kita pero ako pa rin ang masusunod. Pag ayaw sumunod sakin, time to part ways. Find yourself a new lawyer. Train your clients to wait for you. Read Strong v Rapide. FACTS: Americans agrarian unrest in Southern Luzon decided to expropriate vast tracts of friar lands for distribution to qualified farmer. Isa sa tinamaan jan ay vast tract of land owned by corporation. Negotiation took place between corporation, as represented by president and the government as to the just compensation. Itong president who s already aware of the events. SH who got tired of waiting, pag inofferan mo na bibilhin yung shares of stocks, ibebenta na. President employed people offering to buy shares of stocks of SH. Bagsak yung presyo. Basement price. Parang Phylin s (?) basement. Bargain store sa east coast US. Concealed from the SH that he s the one buying. Agents did not disclose to SH they approached that they were offering to buy for the president. President bought almost all the outstanding shares. Lumabas yung payment for property, sino kukuha? Yung president na lang. Mrs. Strong learned in the course of her investigation, masama ang loob. Naghinala sha. After some sleuthing, discovered na niloko sila ng President. Action against president for breach of duty. - Philippines SC: You cannot run after director for breach of duty because the duty is owed by the directors in favor of the corporation, not in favor of the SH. Directors don t owe SH any duty. - US SC: A classic example of a proof to the dictum pronounced by Oliver Wendell Holmes, law is what the judge says it is. SC taking pity on the poor widow SH created an exception to that doctrine: When there are special facts which will impose on the director the duty observe good faith in favor of the SH, then he shall be liable. If you look at an American textbook in corporation law, they call that doctrine as special facts doctrine exception to the rule that duties of the directors are owed to the corporation and not to SH. PERO inilagay rin yan ng Campos sa using inside information. If you apply S31, 2nd par, we don t need special facts doctrine. In inside information, huli na sha kagad dun. HOWEVER, that s begging the question. Insider information is a breach of duty in favor of the corporation. There ll only be liability if the insider info prejudiced the corporation. That s still very unsettled. The Camposes are harping on the additional wording of S31 (damages resulting therefrom suffered by the corporation, its stockholders or members and other persons). If you look at the way Camposes presented that case: every use of insider info by a director for his own pecuniary benefit, is ALWAYS a breach of duty Lagyan natin ng ePass ang UP. Property naman natin yan, pwede natin lagyan ng toll. Kung walang bumili, okay lang. ang purpose is not revenue but reduce noise and air pollution in the campus. Wear and tear of roads and crowding. DLC s mind: Whenever a director uses an insider information for his pecuniary benefit, he is already in breach of duty, regardless of WON injury is suffered by the corporation. Walang damage sa corporation, but rd rd there s damage to 3 party. 3 party can recover his damages applying st 1 par of S31. In breach of duty ka na, basta you use it for your pecuniary benefit, you are already in breach of duty. Damage to the corporation is already rd immaterial. If 3 party like a SH for instance is one damnified by rd wrongful use of insider info, pwede shang kasuhan nung 3 party for damages. Opinion lang naman ni Sir, later on pag nakita ko students ko in Makati. Hindi ako nanalo pero at least may argumetno naman ako.

DUTY OF CONTROLLING INTERESTS

As I have mentioned before in relation to S34, itong theft of corporate business opportunity ay napapatawad by 2/3 vote. Eh di yung may control ng 2/3 of the OCS entitled to vote, ang lakas ng loob magnakaw ng corporate business opportunity, all he will do in case of issue is to ratify. Let;s ratify my pagnanakaw of corporate business opportunity. Teka sandali lang. General principle of common law: When somebody is wronged, the injured party shall not be left without a remedy. He has to be given justice. Kaya ginawa rin ng judges ang duty of the controlling interest. Duty to observe good faith in running the affairs of the corporation. In favor of the minority interest AND the general public. Transacting general public includes many special laws PD 902-A. But as to minority SH, they can enforce this duty of the controlling interest. Di pwede na lahat ng kasalanan ay papatawarin. BUT in reality, this corporate problem is pera pera lang ang pinagaawayan dito. Since that s the case, mas medaling lutasin. Kung babae ang pinag-aawayan, mahirap lutasin. Ano pag-aawayan na hindi pagkakasunduan. Collection po ng Lego. What the minority usually does which is not happy the way the controlling interest has been running the show is to sell out. Punyeta kayo, buy out niyo na lang kami kesa magdemandahan tayo at mag-ubusan ng resources at tayo lang naman

70
ang kikita. Some lawyers who are not graduates of UP, they are the ones who abet people who fight out in court. Sila yung sulsol. Sila nagsasabong. Dun sila kasi kumikita. That s not true na sa away lang tayo kikita. Abogado na hindi magaling ay Atty. No Case. Pejorative. Hindi magaling na abogado. Kumbaga sa gagamba, hindi ka batikan. ANG HUGE NG GAGAMBA NI SIR. May a corporation refuse the right of inspection to a SH? GR: No. Any officer, director or SH of a corporation who refuses to allow any SH the right of inspection shall be liable for damages and criminal offense under S144. Remember our discussion on S31, WON a breach by a director of duty is criminally punishable under S144? Somewhere in the code, there s written what is penalized as a crime in S144. Ito yun. Walang nakalagay sa S31 na punishable ang violation of duty under S144. BUT this refusal to allow inspection without a valid reason is punishable as a crime under S144. Actually, may nawala sa S144. It should not have been worded to include every violation of the code. Limited only to violations specifically penalized as a crime by the particular provisions of the code. Kaya lang naging very general ang wording ng code. Ganun ang interpretation natin jan in light of S74. Right of every SH to inspect. That s the GR. May the corporation validly refuse inspection from the SH? Yes. There are instances when inspection may be refused. Reading from 3rd par:
Any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder or member of the corporation to examine and copy excerpts from its records or minutes, in accordance with the provisions of this Code, shall be liable to such director, trustee, stockholder or member for damages, and in addition, shall be guilty of an offense which shall be punishable under Section 144 of this Code: Provided, That if such refusal is made pursuant to a resolution or order of the board of directors or trustees, the liability under this section for such action shall be imposed upon the directors or trustees who voted for such refusal: and Provided, further, That it shall be a defense to any action under this section that the person demanding to examine and copy excerpts from the corporation's records and minutes has improperly used any information secured through any prior examination of the records or minutes of such corporation OR of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand.

14 February 2011
HAPPY BIRTHDAY, MA. CARMENCITA!!!

CHAPTER IX: Right of Inspection

The theory of corporation law requires SH to surrender the power of management to the board of directors. SH have no right to interfere in the manner the board of directors is running the affairs of corporation. in case of abuses of the board, the remedy amenable to SH is removal. And in case those abuses amounted to breach of duty, then all the directors guilty of breach will be liable under S31. BUT that is on the assumption that the SH have become aware of the abuses committed by the members of the board. How will the SH discover the abuses? In the Phil, madaling makita yan. Yung GM niyo ay biglang bumili ng Expedition. San niya kaya kinuha yung pera pambili non? Most likely mag-iinvestigate ang mga SH. Kung ang mga board of directors ay biglang naglipatan ng residence sa Forbes Park and being driven around in Mercedes Benz limousine, magtatanong yung mga SH. Malaki ata kita ng directors pero wala tayong dividend. BUT that s enough simply because the directors have displayed. Coffee delivery girl makes a scene. Maraming absent, dahil ba Valentines? Walang mga roses ang mga girls. And Ron does not know who Snufflelafagus is. In order to allow SH to protect interest in the corporation, the Corporation Code gives them a tool or instrument to discover abuses. Or to verify charges of abuses. That is the right of inspection. It is now enshrined in the code. What will be inspected? The books or records of the corporation may be inspected. y Lahat lahat ba ng libro? Only those books which are required by law to be kept by the corporation. y What are these books? 1. Record of all business trans 2. Minutes of SH meetings 3. Minutes of board meetings 4. Stock transfer book What about detailed records of expenditures like receipts? Not available in general. BUT later on when you subpoena the documents supporting the books/records of transactions, kailangan na yan. SH are also entitled to a financial statement upon request of a SH. The corporation shall furnish the most recent financial statement which shall include a balance sheet and a profit or loss statement showing in reasonable detail its assets and liabilities and the results of its operations. These records of business transaction shall be open to inspection by an SH at reasonable place and time, may demand copies but at his expense. REASON: Allow SH the opportunity to examine the financial status of a corporation to discover for themselves how the board has been running the affairs of the corporation.

These are the defenses of the corporation against SH who wants to exercise the right to inspect. There are people who use this right to harass the corporation. Bibili ng one share of stock esp if traded in stock exchange. Buy one share in the open market and then demand inspection of corporate books and records. Nagbabakasakaling may makitang anomalous. Fishing expedition. Ihaharass niya ngayon yung corporation. He may send them letter asking to set aside a questionable deed or maybe blackmail the directors. Make public what he discovered in his inspection. So medyo maingat tayo diyan. If this will happen in India, they keep five books. Government, SH, wives (pinakamaliit yun), bangko (window dressed), board will use (tunay). Mahirap maging accountant sa India. In the Philippines, we re not supposed to do that. In practice, a corporation has to come up with an annual financial statement. If the paid up capital of corporation is more than P50,000, it has to be certified by an independent CPA. Less than that, certified under oath by the treasurer, financial officer or comptroller. But that financial statement must be the same financial statement corporation must file in BIR, PSE (if traded in securities market), SEC and other government agencies which will regulate the business. Hindi tatanggapin nang hindi nakakatatak sa SEC or BIR. Por dios, por santo. San kami mauuna? Receiving province sa SEC, then BIR then again SEC. Insofar as improperly use of records of OUR corporation the corporation officers know of the improper. Alam natin yun dahil tayo yung nagrereklamo. Is it necessary to file case for insider info under S31? Kailangan bang kasuhan muna for damages yung SH for there to be improper use? S74 does not require that SH be first sued for improper

71
use. Kailangan ba bigyan ng sulat/complaint about the improper use? No such requirement either. The improper use therefore is a determination of the corporation. WON there was improper use before by the SH shall fall within the determination by the officers of the corporation. Pag kinuwestiyon yan ng SH whose right to inspect was refused, there will now be intracorporate dispute. Corporation has to prove that there was indeed improper use. If there was indeed, then corporation is justified in refusing the requested inspection. If wala before, court will order to allow inspection of books. What constitutes improper use? Should there be damages resulting to corporation? In US, actual damage is not necessary. Potential damage is enough. The use is improper if it has a potential effect of damaging the corporation whether the damage is good will, reputation or business. All kinds of injuries are included in improper use. Kasi kung noon, what you are preventing here is to make him succeed in using the corporation. Good thing his improper use did not produce damage. The basis of prohibition for refusal of subsequent use is the propensity or dangerous tendency to use info against the corporation. May history na, kaya pwede na ibawal. The initial determination of WON the past use of information was improper will fall on officers of the corporation. In case improper use is disputed by SH, it will become intra-corporate dispute? Pwede bang SEC na lang since ministerial yan? DLC used to have a client, former politician. Replaced by Marcos incumbent politicians. Became president of local subsidiary of international airline company. Client was president of company. When Marcos was deposed an new group of powerful businessmen became dominant, bigla na lang nakareceive ng telephone call si client from corporate secretary. New group of investors will come in and intend to buy you out. Why??? I m not investor here because of Marcos, but as investor in equity of the corporation. May check na nung nag-usap sila kay sir. When a carrot is dangling in front of the horse, the decision making is accelerated. QUESTIONS: I don t want to agree in this case. Pero check na. Idedeposit ko ba? Sure. Willing to sell out but not satisfied with this compensation, and not just cash. This is just partial payment. I still attend board meeting. I attend, per diem. I want to know if they implemented this buy out scheme. I haven t signed a deed of assignment. How do we pressure them? Maraming paraan jan. DLC wrote letter to corporate secretary copy furnished SEC demanding the inspection of books of corporation. Settlement na lang. Allowed to remain as a subsidiary. I won t pay in cash, I got paid in kind. I married his daughter. Pinapapanalo yung byenan niya sa golf at mahjong. Bayaran niyo yung caddie. Under 902-A, SEC has absolute supervision, control and ___ over all Harana by barong clad Oliva and his braderz. DLC: Oh ayan may roses na kayo and then Ron gets pimped to this really hot chick who cracked some lame joke about Tekken. Carcar s hotness level meter plummeted. STOCK AND TRANSFER BOOK The corporation is also required to keep the STOCK AND TRANSFER BOOK (STB) which contains the names of all the SH of the corporation alphabetically arranged. The installments paid and unpaid from which subscription has been made. The STB shall be kept in When a stock is getting sold, buyer will most likely inquire about the status of the share of stock being sold. So pupunta yung potential buyer of the share sa corporation and look at the STB. Is this certificate genuine? Maybe we bought this in Recto. Some corporation keeps photos of SH pero bihira ata yun. Naisangla or pending litigation yung share. If they have OCS, corporation has reasonable grounds to expect that many people will come to verify. After the transaction has pushed through, next time around, verifier will be registering the deed of assignment and perhaps request cancellation and issuance of the new one. Ang daming trabaho non. If too many transactions, andaming nakapila. If you are a businessman, there is a business opportunity in that. I will do that service for the corp for a fee. That service is provided for by stock and transfer agents. They hold the books of the corp. Verifiers of shares of stock go there. Ergo, nasa kanila rin yung cert of stocks of the corporation. That's an activity which can be given to another entity. We call that entity the stock and transfer agent. Corporations no longer usually do. Tatanga lang yun. So to make the cost of corporation smaller and for it to be profitable to stock and transfer agent. Offer the service to other corp. STA will be servicing 10-15 corporations and that's the only business activity that the entity will engage in. Increasingly a business transaction is towards paperless transaction. Difficult to handle hard copies. In time we will require lot of space to keep all those hard copies. Management of the hard copies. Employ people who will find and retrieve. Kaya magastos magkeep ng hard copies. So increasingly businessmen see the cost effectiveness of a paperless transaction The STB function may be done away without when it gives the function to another entity. Kailangan lang, the STA to engage in the business has to be duly licensed by the SEC. SEC has rules on registration of transfer shares primarily those rules are applicable to STA but because of BP 268 (amendment to the corporation code which is BP 68). All rules and regulations applicable to STA except payment of license fee are applicable to a corporation which does the function. Kung ayaw niya ok lang but the corporation doing the function is subject to all rules promulgated by SEC applicable to STA. In another case handled by DLC, siblings fight over the corporation organized by their parents. The older one is always in the US so when he gets back, he only gets his dividends. It s the younger one who runs the show in the Phil. When the mother died later on, the elder one wondered how much their parents left behind. Younger brother elusive on the queries of the elder brother. Long story short, nag-away. DLC is counsel for the younger brother. Older brother hired the valedictorian of sir s class. Intermission number: CK s flower delivery from Snufflelopfagus. Sumulat yung abogado demanding inspection. Nakaattend daw ata ng lecture ni Sir. Written demand indicated the time date of the inspection. DLC said that his client cannot refuse the demand. Do you have a ground? No.

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Remember this: Improper use of records or info obtained through the exercise of inspection. From any other means, not covered by S74. Kaya lang, there s another one. The legitimate purpose. When is it legitimate? When the corporation has initial privilege of determining WON the purpose is legitimate or illegitimate. Against the requesting SH may be challenged. The challenge shall be in courts as an intracorporate dispute. What is legitimate? Yun bang legitimate is the same as legal? Of course not. When something is legitimate, justifiable. The reason is reasonable and justifiable. Pero kung dahilan niya is something which will be contrary to good customs, moral, public policy, hindi pwedeng iallow. Younger bro said wala tayong grounds. You cannot refuse that otherwise that s a criminal offense. You cannot refuse. Who holds the records btw? The employee. May sakit? Baka lang may sakit yung tayong yun. Pagdating ng araw ng inspection, may sakit nga. Kung absent sha, pano bubuksan yung filing cabinet? We have to postpone. Sulat sha, I m very very sorry. Cannot allow because the company will have a planning seminar on that day. On the third round, sarado kasi may bomb threat sa kabila. Kinordon yung buong area. Kasalanan ba namin yun? Nabwisit na yung classmate ko so he considered the failure of the corporation to allow inspection as intentional so he filed a case with the court to compel inspection of the books. Yun pala. Sa totoo lang wala shang shares of stocks, we were just nominees. My brother is the prodigal son and indorsed in blank to my mother. Hindi ko na ididisclose para makakasingil ako. Covenant with past students. If you were my student, your consultation with me is free. BUT almost all my projects were given by my former students. Ginagawa akong director. Hindi ko lang alam kung may aasahan ako kay Oliva. Ending: They were able to settle the case. Sir came up with a Solomonic settlement. Charge your management fee. You are entitled to that if you manage the corporation. You older brother pay. What is reasonable management fee? Unquantifiables. Business judgment has a value. 60-40 split. 10% difference is the management fee. Di nabayaran si sir. Balasubas pala talaga. Hanggang ngayon di pa fully paid. 2 billion property. 10% is 200 M. atty fee is 20M. okay lang yan. Makakarma din yan. CORPORATE RECORDS Something about the financial statement. Why it is very important but since it has to be disucessed side by side with capital structure, later na lang yan. Who may exercise the right? A SH of record. How about transferee of the SH of record? Until the transfer is recorded in the books, the transfer is not binding against the corporation. The corporation therefore shall be well within his right to refuse inspection when the requesting party is not a SH of record. BUT there are exceptions to this rule created by courts in the exercise of their equity urisidciton. EXCEPTIONS: 1. When the transfer although not recorded is known and recognized by the corporation. Because actual knowledge is equivalent to registration. There s a case. Not recorded by the corporation recognized the transfer. The transferee although not recorded by the books. Is allowed to inspect the books of the corporation. Voting trust agreement. Voting trust and beneficiary has the right to exercise. Express provision of S59.

2.

How about the proxy in case of proxy agreement? Let s assume that coupled with an interest so proxy was properly captioned as irrevocable proxy. Does he have the right of inspection? NO. Nothing said in the law (S74). Not SH of record, and it was not a transfer. What if shares are pledged? Wala ring nakalagay sa S55 In case of pledged
or mortgaged shares in stock corporations, the pledgor or mortgagor shall have the right to attend and vote at meetings of stockholders, unless the pledgee or mortgagee is expressly given by the pledgor or mortgagor such right in writing which is recorded on the appropriate corporate books.

Is this right available to not fully paid shares? Yes. Unless SH has been declared delinquent, that SH has the right to demand inspection. What are the remedies of SH when the right is refused? Sampahan ng kaso as intracorporate dispute for mandamus. When sir was at the SEC, old lawyer appeared and filed mandamus to compel secretary to allow inspection. Umappear sila. Public official lang daw ang subject of mandamus. Obviously not a corporate law practice. To compel a corporate officer to perform a MINISTERIAL or LEGAL duty is compelled by ADMINISTRATIVE MANDAMUS in reality equivalent to specific performance of a duty which is in the nature of a contract. One of the effects is for the corporate secretary to perform his ministerial duty. Abejo v Dela Cruz. OR he may file a criminal case under S144. REMEDIES recap: 1. Specific performance 2. Criminal case 3. Damages

73 CHAPTER X: Derivative Suits

After EXERCISING right of inspection, SH discovered many anomalous transactions entered into by the board. Since those contracts were not fair and reasonable under the circumstances, this contract must be set aside because source of burden on resources of the corporation. Ano gagawin niya? To set aside the contract, who will do that for the corporation? It s the board right? Inaprubahan nga yung transaction, they will most likely not set aside that if the same board composes it now. Maglulumpasay na lang ba ang SH? Hindi. He can file action to annul the contract through a derivative suit. Wala ito sa code. This is judge made remedy for a SH who feels defrauded by the board of directors. Homework dahil pagod na si Sir: Read the comments of Camposes on derivative suits and there s a passage here. What are the requirements for the SH to bring and maintain a derivative suit? has to decide. BUT if the board has refused to file the action, then a SH may bring the action on behalf of the corporation against the director. The cause of action of SH is derived from cause of action of the corporation. The COA of the SH is a derivative of the COA of the corporation. When the court is convinced of the validity of the claim and ruled in favor of the SH, thereby awarding damages who will received the damages awarded by the court in the case? Not the SH because he is not the owner of the COA. Whatever damages are awarded will be given to the real party in interest? And who is that? The corporation. The SH spent for the action, hired a lawyer to represent, filing fees in court, prosecuting the case against director or third party, if he wins that case for the corporation, is he entitled to reimbursement of his costs? Of course. Kaya nga sha nag-file kasi may injury, then nung napatunayan yung injury, sha naman yung naging injured. Natalo sha sa kaso. Entitled to reimbursement? Hindi. The director who is being sued by the SH, is he entitled to use corporate funds to defend himself in the suit brought by the SH? We will answer that later. When a derivative suit is filed in court, how do we caption the case? This is a procedural complication. The SH filed a case, since it is a derivative suit, the real party in interest is the corporation. Can he put the plaintiff: Corporation as represented by the SH against the director/third party. If that is against the director in his personal capacity, corporation was not impleaded. The director made sumbong to the corporation upon knowledge. Breach of duty then damages. Prayer to set aside the K entered into by the board with me. Corporation said wait lang he is praying for the annulment of the contract, when the court grants that, maapektuhan ang operations of the corporation. May the corporation intervene? Eh diba sha nga yung plaintiff na nilagay ni SH. Now the directors who want to resist the SH s DS, how will they do that when they are not impleaded? Not included in the rule. What is the best practice on this? In sir s handled cases, what he did was: Petitioner or complainant is the SH on behalf of the corporation, so that the records won t be bungled when the directors intervene on behalf of the corporation. Always implead the board of directors and the third party (if any) so that the board will not intervene because they are already demandado. Not included in the interim rules of ____, one of this is the rules on derivative suit (DS). In order to clarify in the very caption of the case that he is bringing the case not in personal capacity but as SH in a derivative suit, ilagagay dun yung on behalf of the corporation VS. third party and XYS corporation tas ilagay mo dun panagalan nila isa isa. They will answer not on behalf of the corporation but as member of the board. No need to file a motion to intervene. Are all SH of record allowed to bring a DS on behalf of the corporation? GR: NO, because we follow the requirements/conditions that wil qualify a SH to bring a DS. Requirements relating to Derivative Suits 1. SH at the time the act complained of occurred.

16 February 2011
If you read the book written by some authors, some of them wrote that derivative suit is only available only against directors or shares of directors. Therefore the cause of action is against a third party, this principle does not apply. Campos spouses said in page 823 A corporation s right to sue is correlative to its right not to sue. Unless an equitable basis for intervention be shown, an individual SH has no more right to challenge by a derivative suit against a third party. But the GR there is the decision to sue or not to sue belongs to the board. If the board has decided not to sue a third party in order to claim damages for breach of contract or to enforce by specific performance an obligation of third party under the K, that decision is management prerogative, and the SH may not interfere with that management prerogative. BUT of course, there s an EXCEPTION: When the decision of the board rd not to sue was taken in bad faith. E.g. kamag-anak ng president yung 3 party na isusue or they received kickbacks. In case there s an equitable basis or there is justification or the SH will suffer injury, or where the directors in BF in deciding not to sue. Those are equitable grounds to allow a SH to file a DS on behalf of the corporation. I am not surprised why the Rules of Court on DS were drafted in the manner it was drafted. Mali yung premise so mali rin yung rules. Kala nila yung derivative suit is available only to directors or officers. Of course not. NB Why is it called derivative? When you say derivative, it is derived from. It is derivative because cause of action does not belong to SH but to the corporation. In rules of CivPro, whenever a complaint is filed in court, it has to be filed on behalf of the real party in interest. Somebody filing a case not in behalf of real party in interest has no standing in court. When the cause of action belongs to corporation, then only the board of directors as a general rule will have the authority to bring the action in court. e.g. If director is in breach of duty, then contract with the director has to be annulled. The contract is a self-dealing contract. The action to annul the K belongs to corporation, therefore to annul it in court, the board

5 years ago the transaction happened. Then you discovered it and decided to file. Hindi ba harassment yan? For a SH to file a DS, he must be a SH not only at the time the DS brought in court BUT also at the time the act complained of occurred.

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If you were SH before but you transferred your shares of stocks now, can you complain on behalf of the corporation? No, you lost all your shares so no personality at all. When there is prejudice or wrong done to SH, hindi pwedeng walang remedy. EXCEPTION: Although not SH at the time occurred, considered an injured party, because the act that happened in the past is continuing or has continuing impact, and so the damage is felt. Effects of the act complained of are continuing. 2. Exhaustion of intra-corporate remedies What could those cases be where we sue the third party to recover damages for the corporation which will not mean involvement of the corporation in the case? Parang wala no. kaya lang nagkaCOA ang SH, kasi ayaw nila magsampa ng kaso. Kaya nga lagi defendant ang board of directors jan. Pag-isipan pa natin. Di ko lang maalala ngayon. Page 824: Derivative suits must now be filed with the SEC instead of the regular courts, unless they involve third persons. DLC: Hindi na totoo yan. Jurisdiction of SEC over intracorporate dispute transferred to regular courts by Securities and Regulations Code. When SC made the intra-corporate dispute resolution, I was never invited. Atenista gumagawa niyan ngayon.
In case of derivative suits all cases falling under these rules shall be decided in a summary proceeding. May nagtanong na student ko, is it not unfair when the derivative suit is filed against a third party. If that is an intra-corporate dispute, okay na summary proceeding. But if there is a third party involved, how will it become a summary proceeding. Rights adjudicated by the court not according in the procedure he is entitled under ordinary CivPro rules. DLC says: If the derivative suit is intra-corporate, that s the only time when the rules apply. When is it intra-corporate? When the derivative suit is filed against a director, SH or officer. BUT if derivative suit against third party, the interim rules on intracorporate dispute resolution will not apply. Because it is not intra-corporate. It s not a derivative suit which is at the same time an intracorporate dispute.

Why exhaustion? The SH must give the corporation through its board of directors a chance to redeem itself. Sir reading from Campos: a. Removal is part of the intracorporate remedies. b. Ratify unless illegal Page 822 According to prevailing view, corporation should be made a party in a derivative suit, either as plaintiff or defendant y DLC: bat ko sha gagawing defendant? Eh sha nga yung pinanggalingan ng cause of action? When a DS is filed in court and intracorporate remedies were not exhausted, that s a ground to dismiss the complaint. Nakatie up yun, intracorporate dispute resolution. No cause of action for failure to meet condition precedent. EXCEPTION: Where intracorporate remedies is a useless exercise because it will entail delay. Wala ring mangyayari. Page 822: One of the significant issues DLC s humble opinion: The belief/view of Camposes should be qualified. A director, remember, we always include the board of directors as defendant. - Why? Because they refused to commence a proceeding against a director or third party. So if it s the third party we are suing, we are suing that third party because board of directors has refused to bring the action on behalf of the corporation. That s the board s decision. Therefore, the members are now defendants. They will resist the action brought by SH and try to convince the court that the refusal is justified. When they win, they are entitled to reimbursement because directors should be given the right to defend their position at the expense of the corporation. Because the decision was taken not on their own behalf but the decision was taken on behalf AND for the benefit of the corporation. So if they defend the position not to sue the third party or action to annul self-dealing contract of a director, they will defend the validity of the K, fair reasonable under circumstances, doing it not for the benefit of themselves but the corporation. They therefore has right to use corporate funds to defend a board decision. BUT IF it s not a board decision that s involved? When do you have a board decision? [1] ratification of contracts, disloyalty [2] self-dealing contracts Is ratification not the SH? Yes. But who calls the meeting for ratification and then submit the contract for ratification? It s the board of directors. DLC opinion: When the basis of the complaint is personal to a director or to a third party who does not involve the directors to defend their position or what they did, hindi sila entitled to reimbursement.

May nagcomment: They taught us in ALS, derivative suit is necessarily intra-corporate because it may only be brought against director, not against a third party. DLC: ano bang book gamit niyo dun? Hindi si Campos no? They don t know the qualification of the rule. Then reads from Pages 823-824: Since the idea of derivative suit Another angle, the decision to sue or not to sue is a business judgment, suppose the DS is brought against erring director, maliwanag pa sa sikat ng araw na yan ay hindi business judgment. Pag director ang idedemanda, hindi na business judgment? That s a business call. Wag na nating idemanda, malaki pa mawawala satin jan. Researchers from UP Law are not educating the justices. Mai: May the SH enter into settlement with the board of directors? DLC: What is the ultimate purpose for bringing the suit? SH s ultimate purpose in bringing the suit is siopaoooooooo. If the ultimate goal of the SH is to recover the damages to the corporation, DLC thinks that settlement may be had as to the amount of damages the corporation is entitled under the circumstances. Most likely yun ang pagtatalunan natin eh. A compromise agreement may be entered into between the SH and the third party. but since the members of the board are also parties, they also need to participate in the approval of the compromise entered into. RJ: Can a holder of voting trust institute a DS? DLC: What is the GR in CivPro? What a person can do in person, he may do through an agent. There are exceptions i.e. things which cannot be done through an agent e.g. filing of complaint for legal separation/declaration of nullity of marriage/voidable marriage. Those complaints have to be filed by the party himself. In case of DS, the legal title is given to a trustee, may the VTA give the trustee the right to file a DS? Is that one of the rights? Why not. Inauthorize na nya. There s SPA. Meron bang pagbabawal sa rules for it to be done through an agent. Your trustee there becomes an agent.

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18 February 2011

Abby: Can the beneficiary file DS if his trustee does not want to? DLC: All they have to do is authorize if not in the trust document. They can meet again. Problem here is in a trust arrangement where there are many trustees, di pwede na ikaw lang ang magdedecision. Bound himself in a collective action. So all you have to do is get out of the trust relationships. The problem is not insurmountable. Oposa: What if voting trust is coupled with interest so trustee refuses to file the DS? DLC: Violation by the trustee of his duty in favor of his beneficiaries, VTA is different from irrevocable proxy. Possibility of the proxy using the proxy against the interest of the owner. But here, it s not only agency but trust arrangement for the benefit of the beneficiary. Between benefit of beneficiary and coupled interest of the trustee, the former is paramount because relationship is fiduciary. In the irrevocable proxy, the relationship is not necessarily fiduciary. Therefore, if required to file derivative suit and refuse, that s disloyalty and disobedience which is a ground for terminating the powers of trustee. How about a subsidiary, may the SH of a subsidiary bring an action on behalf of the mother corporation? May kaso yan, hindi kasi kayo nagbabasa. Holmes v Camp. Pwede. The general principle at common law is that an injured party should not be left without a remedy. There cannot be an injustice committed and then helpless. The civil law concept damnum absque injuria, does not exist in common law. Though in a way meron, no need to be intentional. Accident. Lumilipad yung gansa sa langit, nalaglag, basag ang ulo ni Oliva. Owner of the gansa. Local government. CK: Is the ratifying SH estopped from filing a DH when it later on became injurious? DLC: You look so happy, so fulfilled. What did you do to the flowers? Do this in light of duties of controlling SH. OR enjoin the continuation of the act because of the injury the minority will suffer, invoke here the duty of the controlling interest. How will you claim your entitlement to the duty? You don t need DS, but just prove that you are minority and being prejudiced intentionally and wrongfully by the controlling interest. TAPOS NA ANG BOOK 1. WE WILL PROCEED TO BOOK 2 ON FRIDAY. Hindi yun volume 2. Part 2 lang yun. When do you say that it s volume or part 2? Bunch of illiterates. Tingnan mo kung may acknowledgment, preface. But if wala, continuation lang. Trivia lang yun ha.

CHAPTER XI: Financing the Corporation; Capital Structure

SOURCES OF FINANCING
As a backgrounder, a private corporation is organized engaged in business. For it to engage in business, it must have resources to use in the business. In simpler terms, all the resources that the corporation requires are expressed in terms of money. Assign monetary values so that the totality of corporation s resources is expressed in terms of money Where will the money of the corporation come from? 1. Contribution of the SH/Investment of the SH in the corporation. This is called equity. 2. Funds given by accommodation to the corporation. This may come from lenders. 3. Donations 4. Later from income generated from the business of the corporation (aka profits ) Discuss them one by one. 1. EQUITY

Totality of the resources which the corporation has is called capital. In economics, what are the factors of production? Capital, land, labor and entrepreneurship. Pero dito sa corporation law, everything which has value owned by the corporation is capital. Those are assets of the corporation. The capital received by the corporation from investment of SH is called capital stocks it is the capital received by the corporation in exchange for its shares of stocks. Capital raised from shares of stocks. What are shares of stocks? You still remember our discussion on steps in organizing a corporation. The first step there is promotion, then registration. One of the things that must be prepared for registration is the AOI. One of the items that must be contained therein is the authorized capital stock of the corporation. Authorized capital stock. You go to Sections 14 and 15. S14 No. 8 says:
If it be a stock corporation, the amount of its authorized capital stock in lawful money of the Philippines, the number of shares into which it is divided, and in case the share are par value shares, the par value of each, the names, nationalities and residences of the original subscribers, and the amount subscribed and paid by each on his subscription, and if some or all of the shares are without par value, such fact must be stated;

S15 No. 7 says:

SEVENTH: That the authorized capital stock of the corporation is ................................................. (P......................) PESOS in lawful money of the Philippines, divided into ............... shares with the par value of ................................... (P.......................) Pesos per share.

Yun kasing ownership of corporation, the unit of ownership is called a share of stock. That s the smallest unit into which the totality of interest in the corporation is divided. S14 has added another word to the term authorized since kanina capital stock lang. Ngayon may authorized na. There are three words in that term. I m sure you know what capital is. Anything of value which the corporation owns is capital. Pag dinagdag ang capital stock, it is now the resource the corporation received in exchange for its shares of stocks.

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Bakit resource? Pwede naman kasi hindi pwede pera ibayad, pero iexpress na lang natin sa pera. Raised through issuance of shares of stocks. Ngayon authorized na. Bakit authorized? Because the law puts a ceiling on the amount of money a corporation may raise from the issuance of its shares, beyond this authorized amount, the corporation cannot raise from the issuance of its shares. Pwede bang lumaki pa yung capital ng corporation than the authorized capital of stocks. PERO yung capital stock i.e. the amount of money raised from issuance of shares cannot go beyond the authorized. If you read the books, that s how they explain it but that s not accurate either. Mali kasi yung authorized capital stocks expressed in money. The ACS should be in terms of number of shares. Because the shares of stock may be issued for varying amounts of considerations. At incorporation, the share of stock shall be issued at par. If the par value is P1, at incorporation the shares of stock shall be paid P1 by the original subscriber. But later on, when the business picks up and becomes successful, the value of share in market will go up. Therefore, corporation will not issue additional shares for a price at par. Hindi iiissue yan at par. The corporation will issue shares of stocks at a premium. Pag natanggap nila yug premium, lalaki sa ACS yung capital na naraise from shares. Eh di bawal. ACS na lang tawagin yan sa practice. ACS written in the AOI P100,000 divided into 1000 shares with a par value of P100 each. Usually ganyan yung statement of what the ACS of a corporation is. At incorporation, is the corporation required that the entire P100,000 ACS to be fully paid? Only 25% of the ACS must be subscribed. Should all those subscribed be fully paid? Only 25% of the subscribed is required to be paid. So kung P100,000 yan, pwedeng at incorporation only 500 shares (50% ang subscribed) at the P50,000 (P25,000 ang paid up). ACS P100,000 divided into 1000 shares with a par value of P100 each OCS P50,000 Paid up P25,000 Increase our capacity some more. We need additional money. 40M ang net worth but cash on hand is P5M because P35M is tied up with inventory and fixed assets. The corporation needed P20M more in order to buy bigger site elsewhere to put up a new factory. What are the sources available to corporation? Utang: borrowing money entails some cost. E.g. interest, collateral registration requirements etc To reduce on the cost of money expense, the board may say to just sell additional shares of stocks from the 500 unissued shres ACS P100,000 divided into 1000 shares with a par value of P100 each OCS P50,000 Paid up P25,000 Unissued

500 shares 300 shares more

30M

Magkano ibebenta ang 300 shares na yan? At par at P100 per share? P30,000 lang yun. Hindi ba nahihibang sila kung book value niyan ay P80,000. Shempre, ibebenta nila yan P80,000 book value or even bigger since the corporation is now profitable. Kung at P100,000 nila ibebenta yan, P30M kagad ang mareraise nilang funds. How much capital will the corporation now have with each share of stock? P30,025,000 Pero di ba ACS nya lang ay P100,000. Di ba naexceed na niya yan? Define ACS: maximum amount of capital which corporation may raise from its shares of stocks. So what now is the correct formula for expressing ACS? It should be in terms of number of shares. This is what is done when all shares of stocks are no par shares. That s S15. Number of shares lang ang ACS, hindi problem ang exceeding ang monetary value. No matter how much money a corporation is able to raise, it will not be material because the limit is number of shares. Hanggang diyan lang ang pwede mo ibenta. Purpose of ACS is to limit the capital the corporation may raise from its shares of stock. Pero hindi ganon ang ginawa nila so in terms of money. What is the accountant solution now? The premium (definition: any consideration in excess of par). All consideration received by the corporation from the issuance of shares in excess of par (i.e. premium) are considered as additional paid in. Not included in the paid up. Paid up is always limited to P100,000. The excess is additional paid in or surplus capital. ACS P100,000 divided into 1000 shares with a par value of P100 each OCS P50,000 Paid up (aka
Legal capital )

500 shares Issued na yung P50,000/500 shares. Ilan na lang ang unissued shares? 500 shares. Then after 5 years, when the corporation was already in business, nakabili na ng lupa, with factory. Everything will go in the books as assets. Therefore, by simply taking the values of all those assets, deducting all the liabilities, you will get the net worth of the corporation. if you divided the net worth on all the OCS, we can easily estimate the book value of every share of stock. Nung nabook value, looking at the total assets, P50M na. TA (total assets) 50M TL (total liabilities) 10M Net worth 40M Divide the 40M into 500 shares dahil sila lang naman ang maghahati-hati kung magliliquidate ngayon ang corporation. The resulting value is the book value of the share. 40M/500 shares = basta 8 yan. P80,000

Additional paid in

P25,000

500 shares 300 shares more

30,000

P30M LESS 30,000 = P29,970,000

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The accountants do this in order to make the PAID UP tally with the ACS. DLC opinion: The ACS should be in terms of number of shares. But since wala ako kakampi dati. Lahat ng accountants ayaw ng shares of stocks para madali i-book. Pag shares of stocks kasi, nahihirapan daw sila. Yet when all the shares are no par shares, that s how the ACS is written in the AOI. Not in terms of money but in terms of number of shares. What are par and no par shares? The shares of stocks into which the stocks of the corporation is divided may be par or no par. Where is par used? Golf. Pari passu Is there maximum par value? Wala rin. Par value is the amount/monetary value chosen by the corporation to denominate the value of a share of stock. Pano nila nakukuha yang value na yan? Wala, capricho lang talaga yan. Kung gusto mo ng P5, P5! Yung mga mining companies dati 5 centavos. Pero bawal na yun ngayon. Kung yun ngang P5 ibigay mo sa batang namamalimos ibabato pa sayo eh. Pero pwede naman wala. Pwede namang hindi bigyan ng value. What difference does it make kung meron at walang par value? If walang par value, the corporation must express capital stock in money. BUT if all shares of stocks are no par, then the ACS must be expressed in number of shares. Pwede bang may par at may no par? Yes, some shares can be par and some no par. BUT that must be clearly stated in the AOI. That s one difference. Second difference: When a share of stock is a par share, it cannot be issued by the corporation for a consideration less than par. S6 Par 3 Kalokohan yan: Corporation will issue additional shares of stocks because it needs additional funds. Why does it need additional funds? Business is so good, they need to expand. In most cases, business is so bad, they need additional fund to tide them over. When the second situation is obtaining, walang magpautang dahil may financial problem. What s paradoxical about it? The corporation is supposed to raise money from issuance of its shares. But can t do so because no one wants to buy share at P100. Di pwede ibenta ng P80 without violating the law. A par share cannot be issued at less than consideration. Solution: to give corporation more leeway in raising fund in leeway, they are allowed to issue shares of stocks which are no par. Remember: They can t make no par shares by mere resolution of board. They are classified in the AOI. If AOI does not provide no par shares, board cannot authorize the issuance of no par shares. They must first make shares in the AOI classified as no par shares. At incorporation, the ACS must be in the AOI, at least 25% of the ACS must be subscribed and at least 25% of the subscribed must be paid. Question: Yung subscription, does the law require that each and every subscription must be paid 25%? No. not necessarily each subscription is 25% paid up. What the law requires is the totality of the paid up must not be less than 25% of the subscribed shares. Some fully paid, while some just paid 5% or 10%. Not required that all shares must be 25% paid up. They can either classify the unissued shares into two. They can even increase the ACS. How about issued shares, can those be issued [by installment?]? Technically no. BUT there is a requirement when no par share is issued, it When a no par share is issued, it is deemed fully paid. It is not assessable. What does non-assessable mean? Additional amounts cannot be assessed as due on that share of stock. Pag par shares lahat yan, e.g. issuance of shares of stock at incorporation. Garcia and Oliva subscribed 100 shares each. Corporation now said, kinulang tayo pera. Every SH must pay an additional amount of consideration for their investment. Pwede ba yun? That s called capital call that is an assessment. Nagpapadagdag ng bayad ang corporation. Technically pwede but that s not done now BECAUSE their preemptive right (stock rights) will be rendered useless. BUT if corporation issues additional shares of stock, all SH are entitled to subscribe to pro rata number of shares issued. If wala shang pambayad, pwede niya itransfer yung kanyang stock right. Bibilhin ko for you. BUT if it s capital call, dagdagan tayo P100. Pano kung di ka makapag-bayad, problem pa ng corporation how your share will be treated. Madedeclara pang delinquent yung shares of stocks niya. Masusubasta pa yan. No par shares existing then issue par shares lower than book value? That s called watered shares of stocks ang tawag jan. Liable for the difference. Duty of diligence. Unang nagprejudice jan ang corporation. Why did we put unit in interest in the corporation? To facilitate transfer. The corporation issues shares of stock at incorporation. How does the corporation issue shares of stock? In the incorporation, wala bang working board so the issuance of shares to the original subscribers is actually a contract/agreement among the original subscribers of the corporation. They will agree how much of the ACS they will issue among the original subscribers. Then kung ilan ang subscription ng bawat isang original subscriber, sila din magkakasundo dun. As to the distrubiotn of shares issued at incorporation, they will file the AOI with the SEC. How about after incorporation when new shares of stocks are to be issued? Who decides on that? Look at S38. Sir kapag mag-iissue ng additional shares of stock from the unissued stocks, ano ang tataas? ACS? NO kasi hindi dumami ang shares of stocks. Ang tataas ay ang OCS and PAID UP. Whenever additional shares from unissued shares are issued, does it require SH approval? NO. S38 applies only to the increase or decrease of the AUTHORIZED capital stock. BUT if we only issue unissued stock from the existing ACS, SH approval is not necessary. BUT the no par share, is there maximum amount of consideration for it to be issued? No. Minimum amount? P5. It cannot be issued for a consideration less than P5. is considered fully paid. Hindi pwede hulugan ang no par share. ERGO, if the existing SH holding/owning par shares have unpaid balance in their subscription, the moment they reclassify, the difference must be immediately. y CHI: So ano consequence pag hindi nagbayad yung par shares converted into no par shares? Buy out the SH? If corporation reclassifies no par into par, is there minimum value that the corporation for the par shares? If you look at the Code, wala. BUT the SEC has issued a regulation. There is now the minimum amount of par value.

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Sino lang mag-aauthorize niyan? Only the board. Will authorize the issuance of additional shares from the unissued stock. When shares of stock are issued, magkikick-in ang preemptive right. What is preemptive right? The right of existing SH to subscribe to the pro rata number of shares to their respective holdings of SH everytime the corporation issues or disposes shares of stocks. What is the purpose? In order to maintain the levels of control in the corporation. before issuance, , 1/3 and 1/3. The same level should be maintained. Such level will only be maintained if all the SH will subscribed in the additional shares of stocks to be issued. What if walang pera yung isang SH so he didn t exercise preemptive right? What do you do to the preemptive right? This is why you have to spell this out in the AOI that you will draft for your corporation. e.g. 10 SH. 1 SH doesn t want to subscribe to additional shares to exercise preemptive right. Share pertaining to the SH, kanino mapupunta? There are two methods of computation AND this has to be spelled out in the AOI. FIRST METHOD: Does not recognize a right of the SH to the additional shares. It does not recognize interest over the additional issuance. What will happen there is like this: 100 shares to be issued with 10 SH. Each one owning 10 shares. Tatanungin ngayon sila. Who of you wants to preempt? Ang nagtaas ng kamay ay walo lang! yung dalawa ayaw na magdagdag ng investment. Only the 8 will get from the 100 since the interest is not recognized in the additional issuance. Sila lang ang entitled magpreempt sa 100 sahres. SECOND METHOD (which DLC thinks is fairer): Recognizes a right fo the SH in the additional issuance. Such right is called stock right May stock right sha na 10 shares. Pag mabili ang shares of stocks e.g. Jollibee. Stock market. Napabayaan ko na ang aking portfolio. Pag babagsak ang market, sayang ang oras. Ano ang magandang shares? SMC, PLDT, Jollibee, BDO. Jollibee is mixed. Isang cash, isang stock dividend. Lumaki ang holding ni DLC dahil declare nang declare. You have stock right but does not want. You can sell that, shempre mura lang since magbabayad pa ng subscription yung seller. Stock right has value if the issue is hot. When does it become hot? a. Good business b. Battle for control stock rights are bought Corporation will ask the SH. Who will get the stock right? When you say no, your share is available for corporation s disposal. OR they can give your right to another SH for a right of first refusal. THEREFORE, in the AOI it has to be clear how the preemptive right is exercise. Is the preemptive right, may the SH be deprived? Yes. That s S39. When is it denied? There are issuances which cannot be the subject of preemptive right. Exceptions to S39 a. Shares of stocks to be issued in compliance with law, requiring minimum stock ownership by the public o E.g. We are engaged in the business of insurance, 10% of the OCS is for the public. Pag pinreempt natin yun, we will never be able to comply with it b. Shares to be issued in good faith with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes o E.g. Corporation needed badly the vacant lot to its factory so that the flow of our operations is continuous. Bebenta ko not for cash but for shares of stocks. So the board of directors adopted resolution to pay owner of the lot. Can we preempt that? Natural hindi. PROBLEMATIC: in payment of a previously contracted debt o When debtor-corporation has big amount of debt and the creditor is willing to give a big discount provided it is paid in shares of stock. Kung yung creditor willing to accept cash as payment and they are willing to preempt all shares of stocks that will be issued for payment to creditors, why insist that the shares of stocks go to creditor when the SH preempt, we will also be able to raise money and pay creditor. SO THEREFORE, this will only happen whent hecreditor is not willing to settle the debt unless shares of stock. This will only happen when the debt is big.

c.

Whenever shares of stocks are to be preempted? Kailangan ba par value yung bayad? Kung magkano iissue yung shares of stocks, ganun din when stockholders will preempt. When treasury shares are issued, in close quotes: because treasury shares are not reissued but remain as issued shares of stocks although not outstanding. Treasury shares are disposed because they are property of the corporation. They are not issued but disposed. Whenever corporation will dispose treasury shares, are SH entitled to preemptive shares? Yes, look at S39 issuance OR disposition underline disposition. Cases decided by the SC during the regime of old corporation law. FACTS: corporation registered with SEC with ACS P100K divided into 1000 shares of P100 par value each. Only 50% subscribed, 50% thereof paid. Later the corporation through board of directors decided to issue additional shares from the unissued stock. In the issuance of the unissued stock, are the SH entitled to preemptive right? y SC said NO because it has been offered to you at incorporation. You were offered the entire 100% so nag-waive na kayo jan. y DLC: THAT is wrong. You don t offer all shares at incorporation. Nagtitira kayo talaga jan. So under the current law, SH of record are entitled to exercise preemptive right on ALL issues and disposition of shares WON the shares are part of the unissued ACS. Under the old case, if they can t preempt on unissued shares of stocks, when can they preempt? Only when AOI is amended to increase the ACS, the amount required to support the ACS are subject to preemptive right. BUT this is not true anymore.

21 February 2011
SHARES OF STOCKS; KINDS
There are two classes of shares. You should have noticed that when we encountered S6. Classification of shares. What is the difference between a CLASS and a SERIES? You encountered the different types of shares named in the code: S6 Preferred, voting and non-voting S7 founder s shares of stock S8 redeemable

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S9 treasury shares Is there a section for common shares? Pag meron, pakita niyo sakin. DLC not aware of any section in the code which mentions common shares. Pag meron kayong nakita, may additional points kayo. What are common shares? You have to know S6 by heart. Look at its first par: provided further that there shall always be a class/series of shares which have COMPLETE VOTING RIGHTS. Common shares is the class of shares that enjoys all the rights of SH and exposed to all the risks of the corporation s business. It is the class of shares which the corporation must have to begin with. So unless there is a classification of shares, all the shares which the corporation has are all common shares. They enjoy all the rights of a SH and they are exposed to all the risks of the business. If the corporation becomes bankrupt, then all the losses will be shared by all the common SH. Kung may dividend, all of them shall be entitled to a dividend. If the corporation is dissolved and something is left in the assets of the corporation, then all of them shall be entitled to share. If there is no one to entitled to be paid ahead of the others because all of them are common shares of stocks. All of them are entitled to vote, run and be voted for as directors, all the rights of a SH. Kasi nga diba common. The corporation however is allowed to classify its shares into different classes or series. What is the difference between a CLASS and a SERIES? Let s first talk about a class. How does a corporation make a class of shares? For shares of stocks to belong to a class, something must set these shares apart from the rest. If they are just the same with respect to rights and features, the difference will just be in name and not in substance. For there to be classification in shares, there must be a difference between the totality of the rights or restrictions that make them different. What are changes that will become the basis for making a class of shares apart from another class? That s written in S6. There are three bases for making distinctions. What are these? a. Rights b. Privileges c. Restrictions One may have a right/privilege/restriction not enjoyed by/imposed on the other. For the corporation to create a class, it has to be done in the AOI. Board of directors cannot by mere resolution create a class of shares. GENERAL RULE: The classification of the shares must be done in the AOI. Only the articles may classify shares. HOWEVER, in S6 which is a new provision, it does not say that the lassification of shares must be done through the AOI. What s merely written there is the difference for making classes of shares must be stated in the AOI. What must be stated in the AOI is the right/privilege/restriction which makes one class different from another. These led the Camposes to conclude that first sentence of the first paragraph taken with the 2nd par. The board of directors where authorized in the AOI Camposes said that the board of directors by resolution may create a class of shares provided that the right/privilege/restriction that will be given/imposed on these class of shares to be created in the board: [1] stated in the articles [2] authorized in the AOI to create the class In other words, AOI may say something like this: Board of directors is hereby authorized to classify shares of stocks of the corporation with the ff rights, privileges and/or restrictions. Since there s authority given to board to make a classification, board may classify shares of stocks and provide terms and conditions from what were enumerated in the AOI. In short, the board is authorized to make a mixture, find a mix of RPR. Board may use in creating a class. Walang bumabagsak sa class ko na masama ang loob dahil alam nila kung bakit sila bumagsak. Very very rare na walang bumabagsak. DLC disagrees with the Camposes. What is stated in the 2 par is not authority for the board to create. It simply allows the board to create SERIES. Kasi terms and conditions of preferred shares of stocks OR any series thereof. There is already classification in the AOI. There are preferred shares already. When you issue preferred shares of stocks, terms and conditions na lang ang iissue ng board, not the RPR anymore. Although this argument had never been used before. How can you classify shares without the SH intervention? BUT PERSONALLY, DLC disagrees with the Camposes. This is the rule being followed by the SEC. They will not allow it if the classification of shares is not authorized in the AOI. Only the terms and conditions e.g. multiples of 5, pay in full or installment. They cannot create class by mere board resolution. The class must be created in the AOI. That s the rule that SEC observes. BUT we cannot discount the force of the argument given by the Camposes in their book. It s written in the book. The AOI may authorize the board. RIGHTS as a basis of distinction or classification. What is included here? a. Voting right. One class has it, the other doesn t. Definitely, there s distinction there. b. Preemptive right. Certain classes of shares may be deprived of preemptive right PRIVILEGE a. Preference to dividends when corporation has earnings available for distribution as dividends, this class will be paid first. If all earnings consumed by this class, the other class will not have dividend this year b. At liquidation after all liabilities are paid, the first who will be given is this class. If walang matira, all other classes won t have anything. RESTRICTION a. Transferability b. No voting right th c. Ownership i.e. only relatives within 4 civil degree of consanguinity are qualified to be SH in this corporation. More on this later. Those three will become the bases for classifying share. At least have working knowledge on what makes one a class different from another. VOTING RIGHTS A class may be deprived of voting rights. We can do that, but surely when a class is non-voting, the shares are nonetheless allowed to vote in instances enumerated in S6. San sila hindi bumoboto? Election of directors. ERGO, they cannot be voted for either. Why are the shares of stocks allowed to be deprived of voting rights? Because they received a privilege in exchange for the voting right.
nd

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What is this privilege? Privilege not enjoyed by the common shares. Since they have a privilege, although there are restrictions, they have privilege in return. What are the privilege received? Quid pro quo situations a. Preference as to dividends b. Preference at liquidation Can we not give them privilege but deny voting rights? Di pwede. The law says that no share may be deprived except those classified and issued as preferred OR redeemeable. We cannot classify it as preferred but no preference. It s not the name that classifies it as preferred. You cannot say that the corp has two classes, but the preferred has no privilege but just restriction without any preference/privilege given. This is invalid and SEC will not allow this. There must be something to justify the restriction. Who is your common shareholders in this case? Founders will become the class of shares which enjoys all the rights of a share. Preferred right which became common. Is that not violation of the rule that only preferred shares may be deprived of voting right? After the 5 year period is over, it loses exclusive right to vote. All shares now become common shares. But during the 5yr period, the founders shares would deprive the common shares their voting right. Is that allowed? Yes. This is what the phrase unless otherwise provided in the Code Founders shares therefore are preferred shares. They get a preference, but not deprived of voting rights. On the contrary, all the common shares deprived of voting rights during the 5 year period. Can the AOI say something like this: Corporation has two classes of shares: preferred and common. Preferred have no voting rights but entitled to dividend preference. If corporation has no dividends in three consecutive years, all the voting rights shifted to preferred shares until dividend is declared in which case voting right goes back to common shares. Is this allowed? Not allowed in the Code. Kailangan code lang ang exception. All preferred holders cast one vote, common shares 2 vote. Can it be that everybody is voting except that common shares have double votes than preferred? Wala pa nakita si Sir pero technically pwede. Can preferred be deprived of just one vote? Pwede nga tanggalin ng lahat, what more kalahati. If corporation failed to declare dividend in three consecutive years, preferred cast 2 votes, common gets 1 vote. Is this allowed? That you cannot be deprived a vote means cannot be deprived of a fraction thereof also, unless you are preferred. How is purchase of a common share of stock in S41 different from redemption in S8? Corporation for legitimate purpose its own share of stock, whether common or preferred. When corporation purchases its own share of stock, corporation is not returning the investment of the SH. In an ordinary purchase, what he is returning is the earnings. When corporation purchases it own shares of stock, the corporation may only use URE i.e tubo. So technically, the capital of the corporation remains intact. Walang napeprejudice na creditor or third party. Pag binili ng corporation yan, hindi pwede bibilhin without becoming fully paid in the books. E..g shares of stock subscribed by Oliva is just half paid. Corporation said that you already have conflict of interest by engaging in business competing, we shall just buy you out. No problem even if just 50%, we will just pay you the fair value of the shares using the URE. But since you have 50% utang, I will only pay the excess. The balance credited to corporation to make shares fully paid. So when corporation purchases it, in the books it is fully paid. Capital remains intact because they are only allowed to use URE. In redemption, maski walang tubo/lugi yung corporation but the period of redemption has arrived. It may use equity to buy the shares. REDEMPTION is exemption to trust fund doctrine. Return the investment coming from paid up capital. Redemption are of different types. a. Mandatory redemption under T&C of the shares of issuance, pag dumating yung araw of redemption, that should be mandatory to redeem the shares of stocks. Who will redeem? Of course the corporation. So when the period of redemption

REDEEMABLE SHARES
What if we classify redeemable, no preference? Can it be non-voting? Yes. What makes a class of shares redeemeable? When the AOI allows it to be returned/bought back by the corporation when redemption time comes. Is there something wrong with that? What difference does it make when the corporation buys back an ordinary common shares of stock which it is empowered under S41 (buy back shares of stock for legitimate purpose anytime provided there s URE)? What s the difference between redeemable and preferred? Redeemable enjoys a privilege i.e. not to be covered by the GR that the investment of a SH of a corporation will stay with the corporation until the corporation is dissolved. Pag bumili ka ng shares of stock ng corporation, you cannot receive your investment until corporation is dissolved. EXCEPTION here is redeemable shares. That is a privilege not enjoyed by the common shares. Therefore, redeemable shares are actually preferred shares. So all in all, there are only two kinds of shares: common and preferred. Redeemable shares is preferred, it s privilege is to get back the investment before the dissolution of the corporation. But since that is a privilege given to the class, the AOI must create the class. Since redeemable shares are given a privilege/preference, they may now be deprived of voting rights. Pwede ba na preferred and voting at the same time? Is it necessary for preferred to be non-voting? Does it follow that when a share is preferred, it has to be non-voting? NO. You can be voting and preferred at the same time and you are a class. Something sets you apart from other shares. You have a preference without any restriction. Pwede ba in a corporation, we divide the shares into 4 classes of shares? One enjoys this preference not enjoyed by another. The third will enjoy another preference. Fourth also have preference not enoyed by other. Hatiin din ang voting right. Amendment only for Class B. By laws only for Class A. Another class only for investment. In short, we split the corporate acts requiring SH approval among these four classes of shares. Can we do that? NOOOO. Because at all times, there must be a class of shares enjoying all the rights of the SH. Di pwede walang common at lahat ay preferred. Kailangan may common. There seems to be a problem with S7 founders shares. Pwedeng during the 5 year period, sila lang ang boboto. Sila lang ang tatakbo as directors. Then you deprive the other SH of their voting right.

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comes, he goes to corporation I am asking for payment. Please redeem my share. If mandatory, the corporation cannot say no. What if the corporation is luge, what to use to pay him? For this reason that SEC will not allow corporation to classify shares into mandatory redeemable share without requiring the corporation to set up a sinking fund. Since mandatory redeemable share, you need sinking fund so that you have money to pay redemption price which may be fixed or variable when redemption time comes. b. Redemption may be at the option of the corporation OR the SH. Not mandatory. Corporation may say that they will not redeem. SH cannot compel the corporation to redeem. SH cannot be compelled if they are the holder of the option. The option may belong to the SH or corporation. For cash or another type of share. This is now called hybrid redeemable share share din but another class. This is also called share conversion When the AOI have this feature (redeemable shares converted to common shares at the option of the SH) have at all times a number of common shares enough to cover the shares that will be converted into common shares. Pagdating ng conversion time, wala na kayong share of stock dahil naubos na ang common. This is why SEC regulates a lot for the protection of the investing public. So DLC subscribes to the view that classification has to be amended and pass through the SEC. who will require it to set up the sinking fund. Every classification of the shares done through the AOI in the original or through an amendment thereof. AOI says: Shares of stock of this corporation is divided into common and redeemable. Redeemable shall be issued and redeemed after 5 years from issuance. 5 years arrive and so the corporation paid Oliva the value of his share. Bumalik sa corporation yung redeemable. Is the share of stock a treasury share? What does SEC say? It depends. If those shares redeemed by the corporation are authorized in the AOI to be reissued, then those shares to be disposed of again are treasury shares. Otherwise, they do not become treasury shares, they retire. Redemption retires the share of stock and the corporation must amend the AOI to reflect the resulting reduction in its ACS. That s what the SEC ruling says ha. Becomes a treasury share when there s provision for the reissuance . Reissued is mejo mali for DLC. When fully paid and then reacquired, two things may happen: 1. Corporation used URE in redeeming the shares. When it does that, equity is not touched. Hindi natin ibinalik, ergo shares must go back to the corporation. When it does and allowed to be reissued, it became a treasury share which may be dipsoed of later. There s a provision allowing shares to be disposed of. 2. BUT if used equity in redeeming the shares because there s no URE but the date of redemption arrive so it just used the equity. How will it become treasury share? Hindi nga bayad in the books of the corporation since binalik ko yung bayad. Now, if it does not become a treasury share but there s provision in the AOI allowing to reissue it, how will it become a treasury share (binalik yung payment). Revert to the unissued stock? DLC advice to clients: If you issue a redeemable shares, draft the mechanic of redemption so you can address when it will become treasury/revert to unissued stock when there is a provision in the AOI allowing the shares to be reissued or disposed. Corporation has two classes: common and redeemable. Redeemed na yung redeemable. But the AOI has provision allowing the corporation to be reissued. When it is reissued, it is still redeemable or common na? Dapat maliwanag na nakalagay rin yan na maliwag sa AOI. When the redeemable shares are redeemed and become treasury shares or revert to unissued stock (depend on the source of redemption), they lose the character of redeemable shares and become common shares. So hindi talaga madali ang redeemable shares. Mahaba ang pinagdaanan ko jan. Wala yan sa kahit anong librong babasahin niyo. Convertible is redeemable, redemption is not cash. There are other classes which you may create in the AOI. Hindi lang sinabi sa Code ang special treatment. Gay: Will the rules on redeemable shares apply to convertible shares? Remember: Treasury shares are issued shares. Because someone has bought it. Na-reacquire lang ng corporation. When it is reacquired, will they go back to the unissued stock? No, they will become treasury shares. Eh issued na pala, may boto ba yung treasury shares during SH meeting? Nope. Maliwanag naman sa code yan. While in the treasury, they don t have voting rights. Malayo ang kinalalagyan nun. S57. Treasury shares shall have no voting rights as long as in the treasury. Do treasury shares have dividends? Wala rin, because it will amount to transferring the funds from left pocket to right. When shares are in the treasury, corporation owns the shares. If those shares will be given dividends, corporation is declaring dividends to itself. But S57 only talks

c.

Suppose redeemable share is redeemed by the corporation, what happens to the share? Go back to the corporation as an unissued redeemable share, treasury fund, may it be reissued as a redeemable share? After redemption, can I resell it? This requires us to go to the concept of treasury share. TREASURY SHARE: Look at S9. Shares of stocks which have been issued Sir may sinabing redemption o. Yes, redeemable share may become a treasury share in certain circumstances. Is treasury share a class of share? No, it s a condition of the share. If the share is preferred, fully paid the corporation reacquires it by purchase under S41, that preferred share becomes treasury. Oliva owns common share fully paid, corporation reacquired under S41, what becomes of it? Treasury share. Therefore, it s not a class of share. Being a treasury share is a condition. It may be preferred treasury share or common treasury share. S9 gives only three conditions for it to become a treasury share a. Issued share b. Fully paid for c. Subsequently reacquired d. BUT the SEC requires a fourth condition: under its AOI, the treasury shares may be disposed of again. Pwede ilabas ulit at ibenta sa isang SH. Why is there such additional condition? Let s go back to redeemable share.

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about voting rights. See S43: declare dividends from URE on the basis of the outstanding shares held by them. Are treasury shares outstanding? No, they are not. Look at S137. What is the definition of OCS? Total shares of stock issued under binding subscription agreements EXCEPT treasury shares. They are issued BUT not outstanding. That s why di sila kasali sa hatian ng dividend because they re not outstanding. You have to think of problems. Suppose the corporation reacquire the shares of stock for a higher amount than par? Purchase can only come from URE not the capital stock (aka paid up). Additional paid in will only be booked at the initial issuance. The moment it s fully paid and the corporation reacquired, the subsequent disposition is no longer paid in but treat it as property. RULE: UNLESS the restriction, privilege or the right appears in the AOI and in the certificate of stock, no such distinction shall be recognized. th Shares shall be considered as ordinary commons shares. (5 par, S6) Para maging iba yan, kailangan nakalagay sa AOI yung classification RPR and also in the certificate of stock. QUESTION: What if not yet fully paid? Okay lang. Pag nag-issue ng certificate of stock must appear also in the certificate of stock. Corporation reacquired shares of stocks, in the books of corporation, shares are fully paid, therefore the shares are treasury shares. Later the corporation needed money but this time, the value of shares of stock has gone down below par. When it disposes the SH, may it be sold at price less than par? Yes. What S6 prohibits is the ISSUANCE of share less than par. ISSUANCE of shares is different from DISPOSITION. ISSUANCE When is a share of stock issued? Share of stock is different from certificate. Issuance of certificate is different from issuance of share of stock. When is issuance of share done? Deemed issued. Additional requirement. Not enough that valid subscription contract has been sealed between corporation and SH. DLC opinion: Share will only be issued when the corporation has allowed the share covered by the subscription to exercise the rights of SH. Some writers believe that is automatic. DLC entertains possibility of some supervening event that prevent subscriber to exercise the right of a SH. More on this when we reach subscription contracts. What are preferences given to preferred shares? a. Preference as to dividends preferred, pag alam nating kulang, bakit pa magdedecalare. Naisip yan ng preferred kaya may naisip silang mandatory. So be it. Mandatory natin gagawin yan or else di kami mag-iinvest. Otherwise the corporation will not declare if the common will not receive anything. Hindi kasi bobo ang preferred. Kung merong URE, since the corporation cannot declare dividend if no URE. Ang dami dami pera, nabayaran kami 10% lang tas yung mga punyetang common, 110% ang dividend nila. Hindi gago ang preferred. Ay hindi participating kami! Ibibigay muna yung 10% nila tas kasali rin sila sa avilabe. Lagi sila may premium that s what happens now. Lagi silang may premium. Preferred are always participating. Whatever is the balance, still entitled to participate. Cumulative: Corporation cannot declare dividends when no URE. 3 years nang walang URE. Kawawa naman us preferred we have no dividends. On the 4th biglang may windfall. 10% lang ang preference. Reklamo naman ang preferred. Kahit participating pa rin. Maliit yan. Just the premium of 10% pero 3 years kaming nagtitiis. Preferred kami. Malaki bayad, hindi lang par. Plus premium pa yan. They are supposed to be paid every year at least their preference. If no URE for a particular year, that dividend will be considered a debt. When realized in the books, una babayaran sila cumulative dividend para hindi lugi ang preferred. Hindi na nga kami nagpaparticipate sa management, ganito pa kaliit makukuha namin. You can make your own mix/combo of all those types to come up with a different type of preference as to dividends. b. Preference upon liquidation

Happens when corporation goes bankrupt, or liquidates becomes term has expired. What do we do during liquidation? All assets of the corporation are gathered together and then liquidated i.e. convert to cash so readily distributable. Then after liquidating, pay all the debts/liabilities. Pag may natira, that s the liquidating surplus. That will be distributed among the SH as liquidating dividend. Some SH may be given priority in the liquidating surplus used first to return investment of the preferred SH. Pag nauubos nila yung surplus, wala na makukuha ang common SH. Preferred SH is not a creditor insofar as his preference is concerned? No. still as SH just entitled to preference in the corporation. He cannot offset. When does a person become a SH? Next meeting on Wednesday. Favorite ko tong part na ito. Ito talagang chapter na ito. Hanggang consideration. Itong volume 2 na ito. In practice, your life will revolve here.

28 February 2011
HAPPY BIRTHDAY MEECHUH!
How does one become a SH? One becomes a SH in two different points in time 1. Even before the corporation has been incorporated. The SH who are originally incorporating the corporation. They are the original subscribers. 2. Others become a subscriber of the corporation after the corporation has been registered with the SEC. they are postincorporation SH. a. Subscribing to the shares of stocks b. Acquiring issued shares of the corporation Whether post or pre-incorporation, one becomes a SH by subscribing to the shares of stocks of the corporation. Subscription, that is the word. To

Cumulative or noncumulative. Pag-aralan niyo na lang yan coz it will depend on the agreement. Board of directors will fix that. E.g. preference of 10%. Every time there s amount of money available for distribution, preferred will be given 10% of preferred shares of par value. Preferred shares always par value. Bawal under S6 na no par yan. Suppose we have URE for this year, the board declared dividend to the SH. Since the preferred enjoy 10%, they will be paid first 10% of the par. How much is that? Kaya lang nung binayaran sila ng P10, naubos yung amount available for distribution as dividend. The common will no longer receive anything. Of course, that is theoretical but that never happens in real life. Natural alam natin magkano pera. Alam natin mapupunta sa

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become a SH, the person must subscribe to the shares of stock of the corporation. in the post-incorporation scenario, one becomes a SH by either by subscribing to the shares of stocks OR by acquiring issued shares of the corporation. Is a deed of assignment a deed of sale? Yes. What law governs the deed of assignment of a right? Sales diba? Bakit ganon ang caption. Why not deed of sale? Kasi ang subject of sale is tangible goods. Lahat ng nahihipo. Pag di nahihipo, hindi sale. Pag intangible right ang subject, deed of assignment. BUT if you will look at CC provisions, rules on sale will apply to contract so it s also a sale. Para lang makita nating hindi nahihipo ang ibinenta, deed of assignment. So the TS are not subscription contracts anymore. The contract now is SALE, the caption is ASSIGNMENT. What difference does it make when you subscription and deed of assignment of TS? Kung wala pinagkaiba yan, sinasayang lang natin ang laway natin ditto. Of course, there s a lot of difference between the two. 1. As to the price of disposition May an UNISSUED SHARE which has par value be sold at price less than par? No May a TREASURY SHARE be sold at price less than par? Yes, it may be sold at less than par if that is fair value of share.

SH

Preincorporation subscription (primary acquisition)

original subscribers subscription

subscription

Postincorporation

acquisition of issued shares (secondary acquisition)

sale conveyance/tr ansfer donation

ORIGINAL SUBSCRIBERS. We have discussed who these are in the formation of corporation. When does one become a subscriber? Subscription is defined in S60.
Subscription contract. - Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed shall be deemed a subscription within the meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or some other contract. (n)

The prohibition in S62 applies only to issuance. Stocks shall not be issued for a consideration less than the par or issued price thereof. What was the word used here? Issued and not disposed Where is the disposed provision? S9: Such shares may again be disposed of for a reasonable price fixed by the board of directors. 2. Remedy available when the balance has become delinquent. In case of subscription contract and the balance has not been paid and the shares have become delinquent, one of the remedies available to corporation to recover the balance is DELINQUENCY SALE under S68. Delinquency sale is applicable only to delinquent shares covered by a subscription contract. When the shares have been disposed of because they are TS. Pwede sila ibenta ng hurnalan (on installment basis). Hindi nakabayad on the balance. To recover the balance, may the corporation recover through delinquency? No, applies only to subscription contracts. So how do you collect acquired shares ? Later on there will be more distinctions, pag naalala ko. Kaya important malaman WON the shares were acquired through a contract of subscription.

So whenever there is a binding contract for the acquisition of the unissued shares of stocks, there is a subscription contract. What word is important/material in S60 that you must underline? Garsha says issued eh wala namang issued dun. The magic word there is unissued When is a share unissued or issued? What difference does it make? Is there a difference? The moment a share of stock has been acquired by a subscriber and a subscriber was allowed to exercise the rights of a SH, the shares are deemed issued. Just to provide you with an example, the corporation issued shares of stocks to Mr. Garcia under the valid subscription contract for which Ron paid the full amount. Share of stocks therefore standing in the books in the name of Ron are fully paid. Later on, because of some conflict of interest problems, the corporation under S41 purchased all the shares of Ron. Ron sold all his shares back to the corporation. The corporation was able to do that because at the time it had URE in its books. What happens to those shares of Ron which were purchased by the corporation? They become treasury shares under S9. These treasury shares (TS) when there is an election of directors, do we include in the computation of the OCS to determine the number of quorum? No, that is S137. In the definition of OCS, TS are excluded. They are not outstanding. BUT while TS are not outstanding, those TS are still issued shares. Hence, later on when the corporation is in need of additional capital, may the corporation dispose the TS? Yes, it is allowed in S9. What do we call the contract when the TS are to be acquired by third party from the corporation? Subscription contract? No, because they are not unissued shares but issued shares but not outstanding. Therefore, when those TS are released for ownership again, the contract is one of sale. Because a TS is property of the corporation, kaya nga binebenta. Caption of the contract is deed of sale. This shows when you are UP grad or not.

ACQUISITION OF ISSUED SHARES E.g. The corporation has been existing for 10 years, a SH owning shares of stock transfers his shares to another either by sale or donation or by inheritance. The transferee, does he become a SH? Of course. How did he become a SH. He did not subscribe. How? By acquiring issued shares of stocks through a deed of conveyance. Nakuha niya kasi, natransfer. That is what we call transfer. Wag na lang conveyance. Para mas maganda. (Mas maganda yung conveyance, IMHO) Acquisition of the shares of stock in the secondary market. SUBSCRIPTION OF ORIGINAL SUBSCRIBERS Wala pa yung corporation at shares of stocks, nagsubscribe na sila. How can there be shares of stock when the corporation has not yet been registered with SEC? But committed to shares of stock when the corporation is registered with the SEC? Can they withdraw from the subscription? Under S60: GR is they cannot.

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Post incorporation subscription, can the subscriber withdraw from the subscription? Wala pa sa pera ginagastos na to make money. May darating na pera si Oposa from lola. Paid the downpayment but then lola s money did not arrive. I won t give P1M to this kumag. What will Oposa pay for the balance on his subscription when the money didn t come? Can he go back to the corporation and say that he wants to withdraw. That remedy is not in the law. If you look at the law, the remedy is for a corporation to collect the balance on the subscription. But there is nothing in the law which gives a subscriber a remedy if he wants to revoke/rescind from his subscription. Ang meron lang withdrawal allowed in the code is on pre-incorporation subscription. For post-incorporation subscription. Let s analyze the reasons. Inconsistent contrary principles of contract. Walang ground to revoke in the CC. Even if you apply ordinary rules of contract, he does not have any remedy. The remedy will be in favor of the corporation in case he defaults for whatever reason, the contract will have to collect on the balance. May a corporation be a subscriber to shares of stocks? Yes. May a minor be a subscriber to shares of stocks? Yes, however the minor may not run for a director. There s already an SEC ruling to that effect. Because the minor who cannot administer own state of affairs, should not be given right to administer state affairs of another entity. To do so would be absurd.

NATURE OF SUBSCRIPTION CONTRACT

What is the nature of subscription contract? There must be at least 2 parties, you can please yourself but you cannot contract with yourself. Who are the parties in a contract of subscription? The corporation and the subscriber. Corporation commits to issue in favor of subscriber a certain number of stocks in exchange for consideration.

Pre-incorporation subscription
In the case of pre-incorporation subscription, who are the corporation that s party to subscription contract eh wala pa nga sila diba? In reality, there s a contract among all the original subscribers. They contract among themselves. Kasunduan natin to ha, join together to form a corporation, walang iwanan dito. Contract among themselves. But since this is a contract, they are bound by it. This is strengthened by S61 which provides that a pre-incorporation subscriber cannot withdraw from his contract without the consent of all the other subscribers.
A subscription for shares of stock of a corporation still to be formed shall be irrevocable for a period of at least six (6) months from the date of subscription, unless all of the other subscribers consent to the revocation, OR unless the incorporation of said corporation fails to materialize within said period or within a longer period as may be stipulated in the contract of subscription: Provided, That no pre-incorporation subscription may be revoked after the submission of the articles of incorporation to the Securities and Exchange Commission.

6 months. BUT suppose, after 6 months lapsed, corporation still hasn t been registered, can he withdraw without consent of all the others? Yes. Exception to the exception: AOI has already been submitted to the SEC. Kung naisubmit na, but one of the subscribers wants to withdraw, and his withdrawal was allowed with the consent of all the other subscribers? Yes. Kung gusto ng ibang subscribers, they can t do anything. This provision is for the benefit of the nascent corporation and other original subscribers because if we allow him to withdraw and his withdrawal will result to reduction of required amount of subscription and paid-up capital, then the registration of the corporation will be frustrated. Sandali muna, nandun na eh. For their benefit, the law disallows withdrawal from the subscription when the AOI have already been submitted to the SEC. PERO kung pumapagayag naman lahat, why not. E.g. my mother is sick, I need my money na. We won t be affected since even if we return, we still have the minimum requirements. 25% subscribed and 25% paid up. All they ll have to do is withdraw AOI from the SEC, say may babaguhin lang po kami saglit! at ibabalik naman ng SEC yan. Buburahin the name of the withdrawing subscriber then return it again to SEC. Prohibition since it s benefit for the other original subscribers, they may waive it. In fact, nag-meeting kunwari yung mga original subscribers, pag pinawalan natin sha, we will fall below 25%, they can always do that. Prohibition therefore in S61 when the articles have already been submitted to the SEC is not absolute. By authority of Prof. Conception. What if the subscription contract allows withdrawal on the condition that someone will take over/substitute? Yes. No public policy violated therein.

Post-incorporation subscription

85 CHAPTER XII: Consideration

FORM OF CONSIDERATION
What consideration is sufficient? What consideration is allowed for the issuance of a share? Look at S62. 1. 2. Actual cash paid to the corporation; Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued; Labor performed for or services actually rendered to the corporation; Previously incurred indebtedness of the corporation; Amounts transferred from unrestricted retained earnings to stated capital; and Outstanding shares exchanged for stocks in the event of reclassification or conversion. Issuance of a share may be subject to the suspensive condition stipulated in the subscription contract. What is prohbitied is when corporation allowed Oposa to exercise the rights of a SH pending encashment or payment of the PN. Yun ang bawal. When he is allowed to exercise the rights of SH, the shares are issued. You put his name in the stock and transfer book. Binigyan mo sha ng dividend na pinambayad niya sa PN niya sa corporation. Ginisa sa sariling mantika = saut in your own fat. Announcers of TV and radio. Ang bagyo ay itinatayang (with accent on the first syllable). Bet is a forecast. Walang tagalog equivalent ang forecast. Nearest analogous word we can think of is bet. It s somewhere there in the Pacific. Baughin na rin ang accent ng Pangalawang Pangulo. Ano na ng kaganapan jan? Pangyayari kaganapan. Kaganapan ng isang babae. There is a difference between the issuance of a share issuance of a certificate and perfection of a contract of subscription. A contract of subscription is valid for as long as all the elements of a valid contract are present. BUT simply because it was validly entered into does not mean that the shares of stocks are automatically issued. It is only issued when the corporation receives the cash in exchange of the PN. Same is true with check. If check paid as consideration, the subscription contract is perfectly valid. But until the cash proceeds of check are received by the corporation, the shares are not yet issued. Kayan nga S62 says shall not be issued if you read Dean CSV s annotation to this S62, mashadong complicated his explanation. Accountant rin kasi sha. Since the contract of subscription was perfectly valid, we can enforce by specific performance the obligation of subscriber under the contract i.e. to pay the amount represented by the PN on the day stipulated in the PN. SUPPOSE the subscription contract was for a consideration payable on installment (teardrops, paiyakan ang bayad). Is that allowed? May contracts of subscription be paid on installment? Natural. Kaya nga may shares of stocks not yet fully paid. Pwede naman na yung shares of stocks are issued not for the full payment but just for part payment. When you say part payment, how would the mechanics go? Siguro, the subscriber will pay a down payment, and then the balance payable at certain dates OR on call of the board of directors. As to when they call depend on the financial circumstances of the corporation. Some corporations haven t called the balance on the shares of stocks for 20 years. Pwede namang nakasulat rin sa subscription contracts kung kelan payable yung balance. Pwede bang may PN din yung balances? Yes. Aren t the shares of stocks issued on the PN in this case? No, may down payment naman eh. ISSUE: How big/small shall the DP be in order to allow the issuance of shares? Pwede ba piso? What is the rule? Look at S62: If the share is a par share, it cannot be issued for a consideration less than par. DLC says: That s our benchmark. The DP should be an amount less than par. ERGO, if that s a correct interpretation, hindi pwede na ang subscription 25% lang. Eh at incorporation the shares are issued at par. So ngayon, naghahatak tayo S62: full payment and incorporation 25%. How much must the DP be in order for the issuance of shares not to violate S62? When we say na may DP na piso, it s not covered by the prohibition on issuance of shares in exchange of PN. Walang PN, just

3. 4. 5. 6.

ACTUAL CASH Bakit may actual pa yan? There is such thing as cash substitutes in accounting. Hindi pwede yun dito. A check was issued. There are two kinds: manager s check and personal check. Manager s check was issued. Is the contract of subscription valid? Of course. Hindi ba kailangan actual cash ang consideration, eh check ang binayad. Until the corporation has received the cash proceeds of the check, the subscription contract is not perfected. We will have to wait until the check is encashed. KAYA LANG, may nakalagay jan sa S62 na Shares of stock shall not be issued in exchange for promissory notes or future service. Check is different from a PN. Bawal yung PN, but no prohibition on check. BUT no. 1 says actual cash. Suppose PN ang ibinayad. Oposa who s expecting P1M on his grandmother from paternal side since he s the favorite grandson. Kailangan niya na bumili ng shares of stock because the shares might go up. So in order to avail of the lower price. GF naman niya ang president of the corporation. Dapat sweetheart lahat tawag mo. 1000 shares of stocks. Payable one month from the date of issuance of shares. Nauntog si lola. Nakita ang PN ni Oposa in favor of the corporation as consideration for the 1000 shares of stocks. Past due na ito says the auditor. President is now under pressure to collect the PN or else she ll be in hot water. Legal counsel Garcia asked to file an action to collect. What action should that be? Specific performance. Abogado ni Mr. Oposa ay si Ms. Rodriguez. Motion to dismiss. The corporation has no cause of action because the contract of subscription is void under S62, the consideration being a PN. It is contrary to law and illegal. Under the CC, a contract which has for its consideration an unlawful object is void prohibited under S62. How will you rule on the MTD? ISSUE that judge must resolve: Is the contract of subscription void bec the consideration is prohibited by law? Is the subscription contract void? Ganyan yung exam ko before. Ang daming illiterate na hindi bumoboto. The contract is valid. That s why the action for a specific performance will proceed and prosper. BUT isn t there a prohibition in S62. What is the magic word you should underline in that paragraph? What should you underline in that paragraph? Issued. There s a difference in issuance of share and entering into subscription contract.

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balance/utang. DLC says: Pareho lang yun. PN means payable in the future. That s the import. Nakuha nio ba problema? Si Oposa siguro hindi, kasi lumabas. That s our two measurements: y S62 CONSIDERATION: Not less than par. Consideration is not the amount received by the totality of amount willing to receive. y AT INCORPORATION: paid up 25% must be paid up. The other SH may have paid 100% of theirs which can absorb the balance on those who paid less than 25% on their respective subscriptions. What s the smallest amount of money corporation must receive for it to issue, record the name and allow the subscriber to exercise rights of the SH? I tried to ask than in my past exams. No one was able to give a good answer. It s your homework. PROPERTY TANGIBLE/INTANGIBLE Boundary dispute between Quezon and CamNorte. Cam Norte lost in their fight in the lower courts. Pero naisip nung counsel ng CamNorte na pumunta sa Law Center and stumbled upon our group. DLC was the managing partner. Handled the case for CamNorte. Lawyers involved were Sereno, Sison, Labitag, Feliciano. Adopted by CamNorte as sons and daughters because we won the case in SC. Dun sa bayan niyo sinasalok lang ang ginto from the river bed. The sand in CamNorte is black. You can easily spot the gold nuggets naturally occurring with the black stone by just looking at it. Wala mashadong silica. What makes the sand sparkle is silica. Fools gold, silver easily seen. Obias runs biggest mining operation in Paracali. Ang masama jan, ang process of freeing gold from other metals. They use mercury so mataas ang mercury poisoning in Mt. Diwalwal which is actually a mountain of gold. Pipiko ka lang dun, makakakita ka ng nuggets. That s how bountiful it is there. Kaya nagpapatayan mga tao dun. Mr. Obias was able to cumulate his hoards of gold nuggets. Eh hindi sha nagbabayad ng tax so kailangan niya ngayon ibenta his nuggets. Baka daw magkaron ng problem eh wala shang permit to pan gold in the rivers. How do I launder these gold nuggets to turn them into cash? Friend ko naman si Ron who s now President of San Manuel Corporation. Oy Ron, I shall subscribe to P20M worth shares of your company. San bayad mo? Biglang inilabas ang ginto. Maski ipacheck mo pa pustiso makers. They will tell you this is good quality gold. Ron called the treasurer to draw up the subscription contract. Weigh the gold and valuate at P10,000/ounce. Match it with the number of shares using the FMV. After all the computation, Doms is now entitled to P5M shares of stocks. Fully paid! Kinuha yung gold ok! Is the subscription valid? Is the consideration allowed? In No. 2 of S62, the corporation is not allowed to accept all kinds of property as payment for its shares of stock. Only property which is necessary or convenient for its use or lawful purposes. Yun lang allowed to be accepted by the corporation. Diamonds and gold are not needed by the corporation who manufactures beer. Since the property cannot be accepted by the corporation as consideration, is the contract of subscription invalid? E.g. Doms said nagkamali ako, hindi pala P20,000/ounce ang price ng gold at the time I paid it to Ron. P40,000 pala. Luging lugi naman ako. May Doms file a case in court to recover the gold he paid because the gold is not one of those allowed by the code as consideration for the shares? Magkaiba yung issues: 1. Validity of the contract 2. Validity of the payment

Assuming mababawi ni Doms yung gold on the ground that the corporation has no use for the gold and should not have accepted it as payment. Pwede ba sha bweltahan ng corporation na, okay sige pero bayaran mo kami in cash. If you don t have cash, we sell gold so the proceeds will be applied for the payment of the subscription. UNANSWERED. LABOR PERFORMED FOR OR SERVICES ACTUALLY RENDERED TO THE CORPORATION Monetary value of the service could be used for payment of the shares of stocks. HOWEVER, hindi pwede future service. The same discussion with PN shall apply to future service. Racle invited by Ron to dance in his club. Magsasayaw lang ako sa club pero ang bayad ay shares of stock. Yes, pwede yun. Wala namang illegal kung magsasayaw si Racle sa club ni Ron. Hindi ko naman sinabing hubad magsasayaw. BUT Ron should not issue shares of stock to immediately make her an SH pending her rendering of the service. PREVIOUSLY INCURRED INDEBTEDNESS OF THE CORPORATION; AMOUNTS TRANSFERRED FROM UNRESTRICTED RETAINED EARNINGS TO STATED CAPITAL When does this happen? When the corporation declares stock dividend. The corporation will use URE to pay the value of the unissued stock that will be used for distribution to SH as dividend. So there are two steps in stock dividends: a. Determine blah blah __ b. Corporation will use the URE to pay shares of stock of the unissued stock for distribution to SH as stock dividends Binibili ng corporation his own shares of stocks from the unissued stocks then pay the fully paid shares of stocks to its SH as stock dividends. Natural, since the corporation pays itself with its own money, left to right pocket. Form the URE goes to equity since fully paid na yung shares of stock used to distribute stock dividends. Consideration is the amounts transferred OUTSTANDING SHARES EXCHANGED FOR STOCKS IN THE EVENT OF RECLASSIFICATION OR CONVERSION. In case of conversion, there are shares of stocks which are preferred. But the corporation said that the preferred shares are paid with 3 common shares of stocks. When the SH surrenders his preferred and he gets paid with 3 commons. The common came out from the unissued stock. What is the consideration of the 3 common? The consideration will be the outstanding share received by the corporation in exchange for the 3 common shares of stocks. In reality, not the shares, BUT the equity represented by the shares in the books. It has value in the books. Two processes involved here: Ibinalik shares of stocks ay the SH equity But no SH pay the equity to preferred as consideration from the common. Yung shares of stocks na lang ang nagbago. Same with reclassification. E.g. the AOI were amended. Reclassify the shares of stock in the process of increasing the ACS. In the ACS kasi, pwede increase yung ACS by simply increasing the par value. Pwede increase yung par value and the number of shares. But if you are holder of certificate with old and smaller par value. Shares of stocks issued in exchange from the unissued stock must be supported

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from consideration i.e. outstanding share issued which the SH had before the reclassification. Next issue: How much is a share of stock to be issued? What are the restrictions here? a. Par value share cannot be issued for a price less than par b. No par share cannot be issued for price less than P5. How much must a share of stock be issued for? What s written there in S65:
Any director or officer of a corporation consenting to the issuance of stocks for a consideration less than its par or issued value or for a consideration in any form other than cash, valued in excess of its fair value, or who, having knowledge thereof, does not forthwith express his objection in writing and file the same with the corporate secretary, shall be solidarily, liable with the stockholder concerned to the corporation and its creditors for the difference between the fair value received at the time of issuance of the stock and the par or issued value of the same. (n)

the actual value received which is WRONG. Why? Measurement should not be the par value but the FMV. Whenever a SH pays for the value of the shares and less than FMV, there is water. Will most likely include a comment that S65 is wrong. Par value should not be the benchmark in determining WON water was paid for the shares. It should be the FMV. Assuming that S65 is what we shall apply, the shortfall (value received is less than par). Suppose the directors issued shares of stocks at par at a time when the FMV of the shares has a premium of 20% in the par but ___ lang nila ng par, should you apply S65? Do you call the difference water? If you look at S65, it s not water. BUT may the corporation recover it? Of course. How? Through S31. Director must be guilty of breach of duty (duty of diligence) should not have issued shares of stocks at par when the FMV was at 20% premium. Mababawi yan sa director.

2 March 2011
PREEMPTIVE RIGHT TO SHARES
Every time corporation will issue or dispose shares of stocks, the SH of record are entitled to preempt. Just bear in mind that preemptive right may be denied not in the bylaws but in the AOI under S39. When a corporation will list its shares of stocks in the stock exchange for public subscription, the SEC and TSE will not allow the listing of shares unless preemptive right is denied to all SH in the articles because it will be absurd for SH to preempt shares of stocks that will be sold in the stock exchange. To avoid that problem, the SEC rules and Exchange rules will not allow listing of stocks unless preemptive right is denied in the AOI. There is a case reproduced in the Camposes. Ruling in this case is no longer true under the current Corporation Code. The factual scenario of this case was under the regime of the old corporation code. Under the new code, preemptive right applies not only in the increase of the capital stock but also to original capital stock AND all dispositions of shares. NEXT SOURCE OF FINANCING OF THE CORPORATION is BORROWING A corporation may borrow money and use the money for its operations. The corporation may borrow from two sources. It may borrow from individuals or it may borrow from the public. Pwedeng private or public borrowing. What is private borrowing? The corporation will borrow from a bank. It is a private borrowing from the bank approached by the corporation and the corporation. It may borrow from individuals like from the president of the corporation. It may also borrow from the public. Pano ginagawa yun? Through the issuance of bonds. Yung private borrowing, pwedeng secured OR unsecured. It is unsecured whether there is collateral/security given to insure payment of the loan. If the security is given, most likely the security is a real estate mortgage on properties belonging to the corporation or real rd property mortgage on property of 3 party given to accommodate the corporation. E.g. corporation has no property to mortgage BUT the president of the corporation is a wealthy person, so to secure the obligation of the corporation, president agreed to mortgage his own property for the corporation.
y

This is the liability of directors for watered stock. May masama rin ditto in S65. When the board issues a share of stock for a price less than par, that s called at a discount May violation ng S62 (not issued for stocks not less than par. 144) viniolate yung S62 by issuing shares of stock for a consideration less than par. Is there criminal liability there? Your guess is as good as mine but DLC not aware of prosecution for that act of directors. BUT there s civil liability under S65. Directors and SH who paid for a consideration less than par are solidarily liable for the balance. That s the civil liability. Why does the law call it watered stocks? Because there is water in the payment of the shares of stocks. Water, Generally it s free. Sea water is free. You can hakot water in the manila bay all you want. Before the scale is not high-tech. how to measure weight of goods during the ancient times. Scale talaga dalawa. Pag hawak na ni Lady Justice, symbol na ng legal profession. Yung sword pangtapyas ng ulo pag mas mabigat ang kabila. DLC called the attention of the SC. The case at bar. The case at bench. They insist na case at bar. Not the bench. Sumulat si DLC kay VV. Laughing stock. Bakit case at bar? Not to the benches of the bar practitioners. Not the bar and the bench. Bar of the scale. Dun ka tinitimbang. Kaya the case at bar, not the case at bench. Nakakatawa eh ah! Centuries old na yun then suddenly this justice will change to an obviously wrong usage! Tawa nga ng tawa si VV. To determine the weight of a material, compare it with a known or assigned weight. Do you know how 1 kilogram was defined scientifically? One second. Fahrenheit. Celsius changed it. Boiling is 100 and then freezing is 0. Everything is arbitrary. To keep the standard of 1kg uniform. We have to have an admitted sample. Platinum iridium metal block deposited in the Louvre Museum in France. Applying the method of determining values, there are shares of stock on one side of the scale whose value should be 10 pounds. Why is England money called pound? One pound is one pound of sterling silver. So when you get one pound of sterling silver isa lang yun. The value of this shares of stocks should be 20 pounds of sterling silver but you paid just one schilling. Bakit nagbalance yan. Nilagyan kasi ng water. Sinamahan ng water yung schilling! Libre naman kasi yung water. That s the historical origin of this term watered stocks. Ibinayad niya na may kasamang tubig. For the watered stocks, the directors, officers who responsible for the water sand the SH who paid the water are solidarily liable for the value of the water. BUT water as defined in S65 is limited to the value received by the corporation LESS than the par value. It s the difference of par value less

Pwede yun as accommodation mortgage. Security given on obligation of lender is on property of a third party.

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y y y

Pwede rin pledge e..g movable property belonging to the corporation. Pwede ring chattel mortgage (mortgage on movables belonging to the corporation) Pwede ring guaranty given by an officer of the corporation or a 3rd party who committed himself to perform the obligation of the corporation in case the corporation fails to pay. Pwede ring surety. Guaranty: obligation of guarantor is not primary but subsidiary. Guarantor is entitled to the benefit of excussion. Whereas surety s obligation is solidary with the principal debtor. His liability therefore is primary for the full amount of the oblig. Those are security interest which corporation may give a lender to secure a loan, or a liability.

banks who are members of the syndicate, an event during the life of the loan may be susceptible of different interpretations. One of the banks may interpret an event as event of default while the other banks won t. in case of event of default, one of the remedies available to creditor bank is to FORECLOSE the security. Pero 12 banks yan and only 1 bank thinks there is default. Magulo yan. How much is he entitled to foreclose? Can you foreclose only a proportionate part of your loan for the mortgage? 2 banks do not want to give the corporation an opportunity to cure the event of default BUT majority of the creditor banks are willing to borrower corporation chance to cure the defect/event of default. Mahahati sila ngayon. May gustong magforeclose, may ayaw magforeclose. To prevent that legal problem, the mortgage given by the corporation to secure the corporation is in the form of a mortgage trust indenture. Or in practice MTI or REMTI (real estate mortgage trust indenture) What s MTI? Parang isa lang ang magfoforeclose ng property, para isa lang ang kausap ng bangko, the rights of the creditors to the mortgaged property are transferred to a trustee. Their legal title to the receivable is given to the trustee (usually a trustee bank). Therefore, legal title as accessory contract/subsidiary will be owned by just one individual, trustee in a morthgage trust indenture. Since it s him who has legal title with the loan, sha lang ang pwede magdeclare ng event of default, only him can foreclose. Therefore, the banks members of the syndicate will be forced to sit down, meet and decide collectively. Hindi pwedeng kanya-kanya. MTI will spell out the rules that will govern the relationship between the creditors on the one hand and between the trustee and creditor-corporation as well. Who can you appoint as trustee? In the case of IKO group of trustee, all properties were registered in DLC s name as trustee for the bank. Pag corporation ang mag-aact as trustee, kailangan ng license from the CB. Called trust license BUT some of the banks have trust license. When you see a bank with a trust company, it has a trust license. Universal bank under law has that license. Because when CB approves application of the bank as universal bank, package deal na yun, license to do all things bank is there. Unibank. So before you have FEBTC (Far East Bank and Trust Company). Dahil may trust license, he can be a trustee. Trust license under CB law is when you manage property for another. May hawak kang assets which you manage for the benefit of a third party. Mortgage trust indenture began with a mortgage contract. But we modify it a little. Change the mortgagee. Dati marami ngayon isang trustee na lang ang mortgagee. Pero yung trust arrangement among the banks, no longer a separate contract. Include the agreement to create the trust in MTI. When the creditor corporation defaults on the loan, tatawag ng meeting si trustee. Trustee will call all the banks and report on the default committed by the borrower corporation. Trustee will ask the banks if an event of default shall be declared. If a cure shall be given and if no cure was forthcoming, WON foreclosure will be initiated. Banks will now decide by majority vote (which must be in the MTI). It may be raised but most of MTI seen by DLC are just majority. Trustee will foreclose for the benefit of the creditor-banks and financing corporations. There are problems also in connection with payments. Corporation doesn t want to meddle with payment. Lead bank is entitled to commission. Para ma-collect ang kanyang commission, there must be agreement on fiscal management of the loan. Corporation only pays to

It may loan without security which is now called unsecured. There s difference in treatment of those two types of debts when it comes to liquidation of the corporation. Magkakaron lang ng difference ang treatment between secured and unsecured pag bankrupt na yung corporation. When it is such, properties of corporation is no longer sufficient to cover all the liabilities of the corporation. Since liability is sufficient, there is an order of priority among the corporation. All its assets are enough to cover all those liabilities. Since kasha lahat ng assets niya, there s no priority. HOWEVER, there will still be a difference in enforcement of the obligation when the obligation is secured. Instead of the lender filing ordinary collection suit, the secured creditor has additional advantage of foreclosure. Insofar as proceeds of foreclosed property is concerned, the mortgage creditor will have priority. NB There is a provision in the code that requires SH approval whenever the corporation will mortgage all or substantially all of its assets. When is a mortgage considered mortgage of all/substantially all of its assets? When such mortgage will result to the corporation not being able to continue its operations in accordance with its AOI. Kasi kung magmomortgage lang ang corporation, the mortgaged property will most likely remain in the corporation before the foreclosure. Only at foreclosure that corporation will lose possession and enjoyment of property that was given as security. Bakit kailangan na ng approval when it s not yet foreclosure? It s impossible to give approval while you are already foreclosing. That contract exposes corporation to a risk of losing substantially all of its assets when the corporation defaults on its obligations. A private borrowing may be to an individual or a group of individuals. I think I mentioned to you earlier a syndication of loans. Sometimes, corporation needs amount of money that can t be provided by a single lender limit because of CB s regulations on reserve. Syndicated among several banks. The bank that will arrange the other financial institutions will most likely be the lead creditor/bank or manager of the syndicate. The amount of money that the corporation is applying to borrow will be distributed among the several banks and financial institutions willing to participate in the borrowing/lending. In the case of Reynolds which has been discussed to you before, there were 12 banks and financing institutions that will form a syndicate that will form P2B for Reynold s Philippines. It s still not public borrowing even if there are already 12 creditors lending. It s still private borrowing. The loan was extended to the corporation by a syndicate of individual lenders. Most likely, the banks will not lend that big amount of money without security. Meron kasing CB regulation for that (on how much money the bank can lend without security). With that big amount of lending, hindi pwede na walang security. Most likely the corporation will give security in favor of the banks. Kaya lang, if you are talking to 12

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the fiscal manager who is most likely the trustee in the MTI. Sa kanya magbabayad at sha rin ang sisingil. Sha rin ang magpapapamudmod at distribute among the different bank members of the syndicate. Madali yung concept diba? Ang madugo jan ay implementation. No two MTI are alike. Creditors have different requirements and views on how the security will be enforced. So every MTI has provisions concede to address particular requirements of the creditors-members of the indenture. You will sit down with the creditors. Sometimes mabubwisit ka dahil you start 9AM then it s 5PM di pa tapos. They expect you to give a clean and updated copy the next morning so dapat your law office has a shower and you bring your clothes there. When it s finalized, they expect to sign in a day s time. Isa pa yun. Yung execution copy niyan has to be prepared, if there are 12 banks, ganito kakapal with all the annexes. Due diligence yan dapat. Look at the signing copy for the last time. Groggy at sabaw ka na rin nyan. Initial the pages. Last page na lang ang boss. Dahil ako na ang boss ngayon, ako na ang huling pipirma. Don t forget that S40 might be applicable. Disposition of all/substantially all of assents. NB The two exceptions there: a. When the proceeds thereof b. In the ordinary course of business, in pursuance of the primary purpose Mas madugo: PUBLIC BORROWING This is an old institution available to corporations. It happened in England when it opened its trading routes to the east. And established the East India Co through the Cape of Good Hope in South Africa. High turbulent area. Two oceans meet there. How to demarcate the boundaries of the two oceans? Nagbabago yung current jan which the sailors are aware. What s their purpose of going to India? Spices. What particular spice do they like in Europe which do not grow there? Black pepper. Pag winter, mahirap kumain ng malamig na pagkain. Adds flavor. Guarded secret kung san nanggagaling yan. Alexander Great s reason for wanting to extend his empire to India, he extended the frontiers of his empire in search for the source of pepper. The trading for all these spices happens in Spice Islands in Moluccas near Singapore and Malaysia. To finance a trade between Europe and the Far East, the trader would need vast amount of money. You will have to commission a bapor. It takes months. So they need to put provisions in the ship. Pagkain like hamon because it has to be preserved foodums. Salaries of the sailors aboard must be paid. Also pay the insurance premium. Ano ng gusto ng mga taga-India? Opium. Pagbalik nila dami na nilang dalang plants, pepper and silk. Have you read the book Mutiny in the Bounty. Hindi niyo nabasa yun? Illiterate talaga kayooo!!! The ship is called Bounty. They will go to this island in the Pacific to get a bread fruit. Explorers that went to the Pacific saw this bread fruit. Pag yung fruit na malaki, chinop mo, may flesh na pag sinaing/prinito it s like bread. DLC tasted it when he went to Papua New Guinea. Parang langka. Rimas/camanse in local. If this grows in Europe, the hunger problem will be solved. But there was mutiny in the bounty. Mashado kasing mabagsik yung captain of the ship. It required a lot of money to fund the expedition. To raise the money, the venture was very risky. Isang barkong lubog lang, todas all your investment. Pano tayo magreraise ng ganyang kalaking pera. At that time, that was the easiest way to earn lots of profits. Sabi nila, ishare natin the burden to ordinary people. let s borrow from them. They first sold shares of stocks of the corporation. Ordinary people didn t want to be ka-sosyo because the investment may be lost. Better siguro kung utang na lang. so nagpautang sila sa corporation. This is how public borrowing happened. They announced to the whole of London, Nangungutang kami! Lahat ng gustong magpautang, kausapin kami! There ll be problem on documentation which we shall discuss later. Windfall business ito so the ordinary people from under their pillows, cookie jars and closets lent money to the expeditioners. Later on, business was good. Marami na gusto magpautang. Ayaw na mangutang ng corporation, gusto na shares of stocks. Later on, then shares of stocks na utang. Niloloko na lang pala sila sa kumukuha ng investments hoping that there will be a investment to them. Bursting of the _ (corporate?) bubble. This incident lead the parliament to regulate the security. That legislation had a special name: Blue Sky Legislation Why that name? Kasi yung security na kanilang ibinebenta ay piece of the blue sky. Empty naman pala your investment. The only thing you re selling a s piece of the blue sky. Let s see if you can get that. That option of borrowing from the public has been handed down to us and still with us and still a potent source of financing for the operation of the corporation. Pano ginagawa ang public borrowing? Dati inannounce nila kung sino magpapautang. But that will be cumbersome. Corporation puts up an office and all the willing lenders go there to give cash and the corporation will sign PN. Pano na lang kung biglang hindi nagbayad ang corporation on the public borrowing? All over the place, Cebu, Baguio. The corporation will be swamped with a multitude of sporadic cases all over the country, that s mahirap diba? Only the lawyers will earn from that. PN to be notarized by the lawyer. How does corporation borrow from the public? Through a bond float. Not flotation. There s no such thing. Floating of bonds. The corporation instead of drawing up as many PN as there are lenders, lalagyan niya na lang ng denomination the debt instruments. It may be 1000, 5000, 10000 or 150000. Denominated like shares of stocks. Buy one piece of the bond denominated P5000 if you want to lend P5000. If you want to lend P20,000 get four pieces of P5000. But usually just two denominations. Fixed terms and conditions of the bond. When you lend corporation money by buying the bond, it means you agree to the T&C of the bond issued. The bond is the certificate of indebtedness issued by the corporation. The bond may be secured or unsecured. In the Phil, when you say bond, it should be secured. Kaya nga bonded indebtedness. But a public borrowing may be unsecured cos the corporation does not want to give security. E.g. of unsecured debenture by corporation are the short/long term commercial paper. How are these two different? Time for maturity which is a CB regulation. Over 90 days, these are the allowable T&C. less than 90, these are the T&C. they are not called bond because they are not secured. Technically, you can only call bond those which are secured public borrowing. Secured dapat ang bond. What are the securities? When you see a bond issue, the T&C usually takes 3 months to draft. DLC works ____. LTCP are debentures because they are not secured. But usually bond issues talk about negative pledge which is a common law term. It s a

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commitment of the debtor not to constitute a security in favor of other creditors over its assets. A commitment not to give a pledge. Why do banks require this kind of commitment? So that the banks who will lend or bond issue will be in pari passu with all the creditors of the corporation. Walang lamangan. Debt of corporation will commit not to constitute any mortgage or lien over its assets while the bonds have remained unpaid. This is called negative pledge. It s not a security interest under the Philippine law. Therefore, that commitment does not make the loan secured. Hindi naman kasi talaga sha secured. BUT such negative pledge is considered security interest in the Art. 9 of ___ Code of the US. BUT HERE, no law to authorize you to register the loan as such. Register of deeds will not give you priority, you can only have enforcement via specific performance. Every bond therefore purchased by a third party is a debt obligation of the corporation. That bond is also usually a bearer instrument so that the bond is easily transferable. But isn t it utang of the corporation to the buyer of the bond? May the bond holder transfer it to another, will it require consent of the corporation? Under the CC can always transfer his rights to another without the consent of the debtor. However, if it was transferred over the objection of the debtor. The debtor will be freed from the accessory obligations e.g. guaranty, surety, mortgage. In order to make the bond freely transferable, it has to stipulate that the debtor consents for the transfer of the bond. Therefore, whoever the holder of the bond is the creditor of the corporation. PROBLEM: Since the bond is secured, what could be its securities? Real property mortgage, chattel mortgage. Kung sa syndicate of bonds, problem na yung foreclosure, magnify the problem a thousand fold in case of bank issue. In case of default of the corporation, who will foreclose? We also put MTI in the bond. PROBLEM: In case of MTI, for whose benefit is the trustee holding the title to the receivable. It s actually for the benefit of the bondholders. When they foreclose, the trustee goes to the bondholders. Who will choose the trustee? Not the bondholder. Wala pang bond holder, may trustee na tayo. Therefore, the creditor and the debtor corporation will choose that. When the bondholder buys bond issue wherein one of the terms is the MTI and then he agrees to be a party of the MTI and all other conditions rd of the bond issue? Parang stipulation in favor of 3 party. he consented to be party to that MTI. Kaya lang lahat ng MTI dun, all bond holders may remove the trustee through a meeting for grounds under general law of trust and a vote is provided for in the MTI. So the trustee in the MTI has a conflict of interest. Pinili sha ng creditors and debtors pero he is acting for the benefit of the beneficiaries. Kaya nga kailangan ng trust license. Someone should regulate the trustee because there inherently conflict of interest. In case of default on those bonds issued by the debtor-corporation, is alang magdedeclare ng default and isa lang ang magfoforeclose. Accessory contract to the bond issue. These bond issue has mechanics for payment, sometimes, all the amounts payable to the owner are payable at maturity. There are RTDs with intrest payable at maturity. Pwede rin naman na interests are payable annually if the bond issue is payable over a long period of time. Babayaran ngayon yung interest. Walang computers dati. Even the calculators may ganun. Walang baterya. Sir s slide rule story. Pano tayo magbabayaran ng interest. Nauso tuloy ang bond coupons. Like coupon bonds. Drawing ni sir. Everytime payable yung isang interest, ide-detach mo yung coupon then ibabalik sayo yung certificate, at babayaran ka. Like chits in a fair. Madali na ang accounting niyan. Hanggang maubos yan lahat. Bayad na ang lahat ng interest mo. Last you will surrender is the bond for the payment of the principal. Today we don t have that anymore. Paperless na lang. no more certificate when you buy a government bond. You will only get a certification receipt that you participated. If the corporation will perform this function, it has to have a big office to accommodate all people. it must even employ people who will take charge of paying and then checking all those certificates. Corporation should have big vault to keep the money if it s cash. Marami sila dapat check writers kung check. In order to avoid spending all those cumbersome transactions, they usually appoint banks. Nowadays, we choose bank with most number of branches. BPI kay sir. Mahal kasi yung MetroBank so BPI na lang tayo. They will manage now. The bond whenever the corporation will borrow money through a bond issue, we have to apply S38 that corporation cannot increase bonded indebtedness without approval of board majority and approval by 2/3 of the OCS. Does it include the NVSH? Look at S6. Yes, it s no. 4. Some writers in Corporation Law look at the definition of bonded indebtedness in Black s Law Dicitionary which pertains to secured indebtedness. For as long as the corporation will mortgage/secure an obligation, S38 will apply? DLC says it s not correct. Otherwise, no more need for S40. S40 includes lease etc and other disposition, S40 requires SH approval only when the encumbrance covers all/substantially all of the assets. If the interpretation that every debt requires SH approval, sana tinanggal na natin ang S40. Real intention of S38: Limit bonded indebtedness as a form of SECURED public borrowing. That s the definition of bonded indebtedness under S38. If the public borrowing is not secured, it is not bond which does not require SH approval because it s not secured/bonded public borrowing e.g. LTCP or STCP. In the Philippines, only blue chip companies can issue LTCP. Walang bibili niyan. Whenever the corporation will borrow money from the public, the corporation does not know either if the entire 2B will come from the payment of the investing public, the corporation may have to wait 3 years, before it s able to raise the entire 2B, investors will not come in hoards but in trickles. Time is of the essence when the corporation needs money. Big capital impact must be there. If you amass it in 3 years, walang manghahappen. Businessmen can smell money out of the need of the corporation to get cash. It leads to another collateral business i.e. UNDERWRITING (Bond issues) What is underwriting? A commitment of an entity to sell/distribute the bond issue of a corporation or a security may be a share of stock, LTCP (ordinary debenture - when we say DEBENTURE is unsecured). They will underwrite but of course, for a fee. We will help you sell bond but everytime we sell a bond, we get commission.

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Who buys the bonds? Corporation holding properties of third parties. They will pay the interest to the third parties. Like banks. Malaki ang yield niyan. Owner of money the bank yused in investing the securities. Security is just one of the invs4tmnets bank may used for its deposits. Underwriting naman is the expertise, they have so many clients/investors. Who are engaged in underwriting securities? Investment houses. Licensed din sila. There are two kinds of underwriting commitment: a. Best effort basis like consignment. I will distribute best efforts basis, P1M worth of bonds. Pag may nabenta ako, ibebetna ko proceeds less my commission. Kung wala, sorry na lang. wala ako commission. b. Firm basis WON underwriter sells it s considered sold so he pays up. Usually given by the ones who have active market like an insurance co. it has to use the premiums receipts of insured to make the money grow otherwise nothing to pay when there is a claim. They also have commission. The bond, since it s public, it amounts to public offering of a security, therefore, that public distribution of the bond is regulated under Revised Securities Code. It s called Securities Regulation Code. SRC. Bago na yan. It s the revised securities act. Wala na yun. SRC na. Dun naman sa securities, under the Revised Securities Act, the framework of regulation is different. It s one of merit. Before the government allows you to offer publicly your securities, you have to prove to the regulator is bound on sound public principles and no tendency defrauding the company. Merit regulation has been abandoned. Regulatory framework under securities regulation code which requires any entity to disclose everything about the security and corporation which are material for a prospective investor in deciding WON he will invest in the security. Marami ka ipapadisclose to the person offering the security. Investor should form his own disclosure materials and come up with his own disclose won on security is sound or not sound, an ultimately WON the investor will invest in the security. Iba na ang regulatory framework under SRC. Eh? Ano daw. No class on Fri. Bangkok Thailand. ASEAN Conference. payment by the board of directors. The Board has to pass a resolution fixing the date when the payment should be made. That is a call for payment. What happens if despite arrival of the date OR despite call of the board, the subscriber refuses OR fails to pay the balance? The answer is in S67. Magkakalayo diba? *insert entire section here* 30 days from the said date stipulated in the contract of subscription OR 30 days stated from the board call, no payment was made, the subscription becomes delinquent. All shares of stocks covered by the subscription become delinquent. What happens when those shares become delinquent? Those shares may be sold in a delinquency sale. Who calls such sale? Board of directors by a resolution ordering the sale of delinquency sales. It s nothing but a public auction of the shares of stocks to enforce payment of the balance. For the shares to become delinquent, must there be a demand from the board? For a debtor to be in default, there has to be a demand. What are the exceptions? Demand is waived in the contract. But in the absence of the stipulation, the demand is necessary to make the debtor in default. Until then, his prestation is not yet due and demandable. In S13 when a date is specified in the contract of subscription for the payment of balance, it would seem that subscriber incurs delay and therefore in default without need of demand. - Why? Because S13 says without need of call that s the equivalent of demand, call. 30 days from the date specified/stipulated in the contract for subscription and no payment was received, shares of stocks become delinquent. Pero kung may call, wala problem, may call eh. You received notice. On or before the date stated in teh call. 30 days from such date stated in the call and no payment was received by the corporation, the shares become delinquent. PROBLEM: A subsidiary of the NDC, nagsubscribe one foreign company to some shares of stock of a domestic corporation. balance was payable on date stipulated in contract of subscription, 30 days after the date, no payment was received by the domestic corporation. So the board met and ordered the holding of a delinquency sale. The foreign corporation tried to stop/enjoin the delinquency sale ordered by the board on the ground that they did not receive notice of demand for them to pay the balance. Citing CC of the Philippines, we are not yet in delay coz we did not receive a demand from the corporation to pay the balance. Pending that demand, not yet in default, if not yet default, not yet delinquent, ergo you cannot hold delinquency sale. ISSUE: Is there a need for demand to make them in default? DLC opinion: S13 says no need of call. S67 clearly says that failure to pay on such date shall render entire balance due and payable. Nowhere in S67 is notice to pay required. Delinquency occurs automatically, ipso facto. Ako lang nakakaintindi kay Magallona. Before a delinquency sale may be ordered by the board, they must first declare the shares delinquent. DLC says: Where is that requirement that shares of stocks be first declared delinquent? S68 is the declaration. When the board adopts resolution ordering the delinquency sale, that is at the same time the declaration of delinquency.

9 March 2011
How is payment of shares enforced? A subscription contract is an ordinary contract. For it to be valid, it must have all the elements of a valid contract and the consideration must be lawful and not contrary to morals or public policy. How does the corporation enforce payment of the balance on the subscriptions? Under S68, the corporation may conduct a delinquency sale. Under S70, the corporation may file an action in court for collection the balance on subscription is an amount owing to the corporation. The corporation may file an action in court for specific performance for the subscriber to pay the balance. That s what s provided for in S70. There are 2 remedies under the Corporation Code, the first is delinquency sale and the second is specific performance under S70.

EFFECT OF DELINQUENCY - DELINQUENCY SALE

The subscription contract may provide when the balance is due and payable. That s provided for in S13. without need of call when the contract of subscription does not provide for a date when the balance is due and payable, when is the balance payable? It is payable upon call for

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Tumama si Oposa! None of the above!!! 80 goes to Ron because his shares now are fully paid. He paid it with the 20 shares. Corporation cannot acquire it because it didn t. Fully paid nga diba? In reality, a delinquency sale is nothing but a forced sale done by the corporation on behalf of the subscriber. Only 1 bidder offering to pay P100,000 for all the shares of stocks. Corporation says go, we need it badly. The 100 shares will now become fully paid upon receipt of the corporation of the 100K balance. Deliver the shares to Oliva. What happens to Ron? Wala na. What happens to his DP P100k, is it not unjust enrichment? No, because it s a contract of investment. Nalugi na ang inverstment niya. During the time it wasn t delinquent, he might have received dividend. Able to participate even in the management of the corporation. Nalugi ka ng kalahati, sorry ka. The corporation may choose not to sell the shares of stock. Should there be no bidder at the public auction. Look at last par of S68. Should there be no bidder When the corporation bids, it s actually buying its own shares of stocks? Is that allowed? Of course, under S41 (Power to acquire own shares). Kaya lang in S41, there s a requirement that s not in S68. I.e. the URE. In case of delinquent shares, may a corporation bid for those shares if the corporation has no sufficient URE? Miss Accountant! DLC s humble opinion: We also apply S41. Hind ipwede maging treasury shares kung hindi fully paid. Para maging fully paid, corporation must receive actual value for the balance. Hindi pwedeng porke walang nagbid, magiging treasury share pero wala namang nareceive yung corporation na value. That will later on work as fraud to creditors of corporation. Kung wala, is corporation obliged to bid (assuming it has sufficient URE in its books)? No, corporation may bid. Since may lang yun, corporation may choose not to bid. Suppose there s a bidder offering to pay P100,000 for 100 shares, is the corporation obliged to sell on the lone bidder? S68 is silent. WON corporation may refuse to sell. y DLC s humble and correct opinion: Corporation may choose not to sell. Why? Because collection of balance is subject to the discretion of the board. They have other remedies - Court action. May the corporation instead of conducting a delinquent sale or filing action for specific performance, may the corporation file an action for rescission on contract of subscription plus damages? Agreed party has two remedies. Rescission plus damages. S70 tells us that specific performance is available to the corporation. How about rescission? May a corporation rescind the contract instead? As a GR no because that will work as a fraud on the creditors. Kung half lang binayaran ng SH so they won t pay the other half, they just rescind. When they do, they restitution pa. unless the amount paid by subscriber is equivalent to damages suffered by the corporation. SH and corporation may collude. Wag mo na i-delinquency sale, just rescind and then make my 50% damages. Quits na tayo. Sino na-defraud? The creditors. Normally when the corporation is suffering from financial or liquidity problems, corporation must first collect the balance on the subscription BECAUSE that s part of the trust fund. Where the creditors extended credit to the corporation, they

How does delinquency sale work to enforce payment of the balance? How can the corporation collect balance through delinquency sale? Corporation will sell at public auction the shares of stock. Suppose Ron subscribe to 100 shares of stocks. Paid a DP of 50% equivalent to P100,000 leaving a balance of 50% or P100,000. How much was the total consideration for the 100 shares? P200,000. How much is a share of stock? P2,000. Date for payment of balance not stipulated BUT the board passed a resolution making a call. Pay the balance on Feb. 7, 2011. Bakit Feb. 7? Birthday ni Sir. Hindi nagbayad si Ron nung birthday ko. Kelan ang 30 days non? March 9. On Mar 11, the board of directors met and ordered to sell the shares covered by Ron s subscription at a public auction. How many shares are to be sold at the public auction? Can Ron say that since I have paid the half, eh di, issue the certificate for 50 shares. The remaining 50 shares you sell at a delinquency sale? Not correct. Why? Because the 50% payment made by Ron was applied to all the 100 shares of stocks. Ergo, all 100 shares of stocks are not yet fully paid. When the balance was not paid, all the shares of stocks became delinquent. Can corporation say that they pity Ron and issued the 50 shares and sell only the 50? Hindi pwede yun. Bawal yun! That will work to defraud the corporation. That will be violation of a time honored principle in ObliCon, integrity of the obligation. As a GR, you cannot divide the obligation into parts. It has to be performed one whole. What are the characteristics of contract? Identity, integrity, ___. Hanggat di niyo nasasagot, di kayo papasa sa bar. Identity and integrity: same obligation, not substitute. It must be one whole performance. All the shares covered by subscription are all deliquent and to be sold at the delinquency sale. What do we do at the auction? The only purpose of the corporation is to recover the balance and interest due (if stipulated), not to profit from it. If the corporation incurred cost, the cost must also be included in the amount to be recovered from the proceeds of sale. How does the auction work? The corporation will offer the shares of stocks to anybody willing to pay the amount due and owing to the corporation. Presume that there were no interests and costs. P100,000 to be collected from Ron. Corporation says 100 shares to be sold at P100,000, bid na kayo! Bidding is always at a fixed amount. Oliva 100 shares for P100,000 Rodriguez 100 shares for P180,000 Oposa 50 shares for 180,000 Bustos 20 shares for P100,000 Hindi nangyayari to. Bakit sha hindi magbabayad kung malaki ang shares niya. What if walang magbid? Under S68, if you look at procedure for bidding, hindi pwede yun. Dapat fixed yung amount. Bustos will win because P100,000 just for 20 shares. Now he pyas that amount ot he corporation. Upon receipt, all the 100 shares become fully paid. Yun na lang ang balance and they received it from Bustos. They are now fully paid. 20 shares to be delivered to him. To whom does the remaining balance 80 goes? Multiple choice as practice for vote. a. Treasury shares b. Retired shares c. Corporation has to reissue them d. None of the above

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expected that the unpaid subscription will be collected bec that guarantees payment of loans. Kaya nga trust fund. When you rescind, release the subscriber to unpaid subscription liability, san kukuha ng pangsingil the creditors? Violation of the trust fund doctrine. This is the reason why rescission is not allowed as a remedy of the corporation. Rescission is not enforcement of collection. Rescission is removal of the obligation. The corporation will simply look for damages resulting from non-payment of the subvscriptin. Kaya lang may exceptions jan under American jurisprudence. Pwede ang rescission if it s more advantageous to the corporation. This happens when the corporation is already bankrupt. OR the corporation is already solvent and such rescission more beneficial ot the corporation. When corporation is bankrupt, rescission is no longer allowed as a remedy. BUT when the corporation is solvent, rescission is allowed when more advantageous to the corporation. Before the board has ordered the delinquency sales, what are rights of a DQ SH? S71 on effect of delinquency. When shares become DQ, those shares are not entitled to attend, vote, be voted for, all the rights of SH EXCEPT the right to receive dividends. Corporation declared dividends but Ron s shares are DQ. Will corporation pay his dividend? Katangahang malaki ng corporation yun. That s why in S43, ..any cash dividends due on DQ stocks shall first be applied to unpaid balance iapply muna his dividend to reduce the unpaid balance on the subscription. Suppose the declared dividends are stock dividends. S43 while stock dividends shall be withheld, until unpaid subscription is fully paid Hindi pwede i-offset or compensation because it needs to be of the same kind. Hindi pwede ang kalabaw sa kambing. Corporation shall withhold the stock dividend. Should we include the stock dividend in the DQ sale? Nagbabasa nga kayo ng magic notes dahil Wala kay Campos yan. Hindi kasali yun. Bakit? a. Stock dividends are not part of the subscription contract b. When stock dividends are paid, they are fully paid. Ergo, they can never be delinquent. But we can t compensate that with the unpaid balance. When we have DQ sale and no one bids, what should the corporation do now? The corporation will now file a court action. Wait sir, are those two remedies cumulative OR exclusive? S70 includes even DQ sale. ____ Handwritten notes ____ What is the FMV of shares? Law did not intentionally use market. Just fair value. In case of expropriation, deduct the benefit owner of land would receive from the expropriation consequence. Market value is one of indicators of fair value of shares. Judgment creditor may ask for execution. All properties of SH levied at execution. y What properties? Shares of stocks, stock dividend but not limited to full payment of subscription. Attach all properties not exempt from execution. What are these properties exempt from execution? If they know that value is less than par, no more DQ sale. Straight to action na writ of execution. What will apply? Ordinary provisions on movables. Matrona s brillante ring story. Ninakaw ng maid. Tas nag-road trip sila. Snack break in McArthur Hiway Caf Valenzuela. Nakita niya yung babae sa other table. Very politely, nilapitan niya. Nakita nya yung name niya sa engraving. Hindi na binalik ni matrona yung ring so demanda si babae from other table. Ruling: Original owner OR babae from the other table? Pwede mademanda si latter na Anti-Fencing. Si original owner matron naman, she can invoke CC unlawful deprivation of property in order to recover from anybody. When should he pay? Public auction. If not acquire from any 3 sources, you can recover without paying. Applicable in shares of stocks. There s a case nung panahon ng Hpaon. Si Dean Carale, buhay na non. Yung mga mayayaman, nasa malate. Along the beach, sea wall. When the Japanese bombed Manila on 7 Dec 1941, there s panic. Rich ones just fled. Madrigal s house was ransacked. Shares of stocks na lang natira. After the war, those SOS resurfaced. Not honored because reported as lost certificates. See Abejo v Dela Cruz. Endorsed at the back, owner reported that shares were stolen. Shares of stocks evidence of ordinary chose in action/movable property. No special treatment. HOWEVER, don t forget that our laws now replete with rules of equity. What are these rules? y As between 2 innocent parties, the one whose negligence caused damage shall bear it. E.g. Olive subscriber to shares of stocks, certificated but endorsed in blank (so that if he dies, wife will not have problems). However, secretary saw the certificates inside his unlocked drawers. Secretary transferred to Ron. Olive was innocent party without fault. So is Ron. BUT one of them is negligent. Even the proximate cause of loss. As between the two of them, he whose negligence was the proximate cause of loss or damage shall bear it. y No. 7 of S73: Publication at the expense of registered owner of certificate. Suppose treasury shares (TS) are disposed of by corporation on installment. Buyer of TS did not pay, can TS be sold on DQ shares? After sold to the buyer, no longer TS shares. Of the 10,000 shares, payable on date stipulated, Oliva failed to pay. May board of directors order that it be sold on DQ sale? No way. Subject of DQ sale is subscription contract. Only unissued shares of subscription contract, which by definition is binding agreements for issuance of shares of stocks. Disposition of TS is not issuance but sale of property. The remedy to collect balance of treasury shares: a. Constitute over shares o Chattel mortgage foreclose o Pledge foreclosure, no more recovery of balance b. Action for collection/specific performance c. Pwede na rescission. Cause no longer issuance of unissued shares Mai s question: Period for reporting lost/destroyed certificate? DLC: If they provide a period for reporting, what s the consequence? It s not a fight between corporation and SH but SH and 3rd party. why will

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corporation take cudgels for the stranger 3P? Perhaps, corporation would favor the 3P to makes shares attractive. Para di mawala ang velocity. ___End handwritten notes ___ Property dividend: Law in S43 is clear as to cash and stock dividends. What shall corporation do with the property? May the corporation sell the property? May it convert to cash the property? Later on when we reach the dividends, corporation cannot convert the property using cash from its funds. They can t sell it to become money and apply to the balance. No authorization by law. BUT they can do that by stipulation in a contract for subscription. In case of failure to pay the balance, cash div applied, stock div withheld, property div (in fact, include the stock div na rin) shall be sold and for this purpose, the corporation may apply the proceeds to the balance. Why does it have to be in the contract? So you won t have to pay the sheriff. When you execute writ of execution, magbabayad kayo. Dalawa bayad jan. May receipt and wala. Mahirap i-book yung wala. If they book that, liable for a crime in their home country. Crime for an American MNC to do corrupt business outside the US territory. So here, no more American corporation win in the contract. Chinese wins because they have many books. Bawal sa US maglagay. They just don t know which lawyer to get. Kaya lang may cost. I hope you won t become those lawyers in the future. Many of the lawyers who do this are graduates of this college. Matalino mashado. Nakakaisip ng paraano pano icicircumvent. What s the difference from sale at execution and DQ sale? In DQ sale, bidder cannot offer amount lower than balance. In execution, pwede. Kulang ba? Batakin yung ibang property. DQ shares are still part of the OCS, that s why it still receives dividends (only OCS are entitled to dividends). Suspended lang ang voting rights. Do we include the number of DQ shares in the computation of the quorum? Hindi na. hindi na entitled sila to attend. Mashadong giveaway ito. Hindi ko na itatanong sa exam. Sinasabi namin sa prof namin dati, Wala na bang ihihirap yung exam mo? Sayang pagod namin sa review. Ang dali mashado. Tulad ni Labitag. Hindi kami happy pag walang hirap. Okay lang samin na ang nilalait niyo kami. You will find out when you leave this college na yung mga nilalait niyo ang may pinakamarami kayong natutunan. Suppose shares of stocks that declared DQ belongs to a director. Nnanalong director pero di nagbayad ng kanyang balance. What happens to him? Right to attend board meeting? No more because all rts suspended except dividends. S71 says unless he pays the amounts. Pag nagbayad na sha ng DQ amount, does he become director again? Look at S23 ceases to be owner of at least one share does not aply because he stills own the stocks albeit delinquent. In S74, if he pays the amount, lose the effect of DQ. Will he resume the position as director? In S28, was he removed? No, kasi kailangan, 2/3 vote. So what do we gather from those provisions? May director reassume position after delinquency has been cured? DLC says mukha. S23 says ceases. Can he exercise preemptive right? Kalokohan! Wala nga pambayad ng balance, magpepreemptive right pa. not entitled to any rights of SH except right to dividends. One problem in preemptive right: suppose preemptive right gives him stock right which he can sell. Is the DQ SH entitled to stock right? Right to subscribe to certain number of shares is a right which may be assigned or transferred. Discussed this stock right during preemptive right. Appraisal right will not happen either because he cannot attend a meeting where he can vote against. But suppose he s a dissenting SH then refused to pay balance. Delinquent share while his shares are dissenting shares. Obligation does not cease when he became a dissenting share, signified in writing intention to avail appraisal right. Tumama yung demand for the payment of balance after he had dissented from a corporate act and after served notice that his shares are dissenting. Can the corporation say that we won t pay you appraisal right because you are DQ. Will it make a difference? Yes, different treatment for this. We have discussed this sufficiently. WHyyy!??!?!! Baltazar v Lingayen Gulf A subscriber cannot demand that certificates be issued corresponding to his payments. E.g. he already paid 50% but not DQ (time to pay the balance has not yet arrived), can he request to the corporation to issue him 50% of the shares subscribed? Not pwede because of S64 until full payment of his subscription GR: Hangga t may balance, you can t be issued with a certificate. Until subscription is paid in full, not a single share in the subscription may be certificated. y Why? a. Violative of the oblicon principle integrity of performance. It can t be made partial b. Dilute the right of corporation to recover the balance. Amount of shares to be DQ sale reduced by the amount issued. Work as fraud to creditors.

LOST OR DESTROYED CERTIFICATE

When a certificate is lost, cannot be found, what s the remedy of the SH in order to obtain proof of ownership of shares? There s a procedure in S73. Our typical problem here is who will shoulder the cost of the publication, and other costs required to be done before a new certificate is issued. Why is it a problem? The case of SMC. Being a listed company, SMC has a stock and transfer agent. Ron bought stock in the stock market through an agent. Sabi ni Ron sa stock broker niya, bibili ako SMC shares. When the sale was consummated by payment of the broker, receipt from broker is to be presented to stock and transfer agent and you will be issued with a certificate. BUT since Ron is rich, tawag tawag lang sa broker yan. Broker forwarded the sale to the STA of SMC who mailed the certificates to Ron who didn t receive the certificates. When he s looking for the certificates, nawala na. can t be found anymore, those have to be reconstituted or reissued. Comply with S73 but it has publication requirement. 3 consecutive weeks. Magastos yan. Approximately P7,500 (P2,500/publication). Who shoulders that cost? Ron says: why me? It wasn t my fault! STA says: Why us, we mailed it to you! We can t sue the postman/post office.

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Broker says we mailed it because you authorized us. If you didn t get it, it s not our fault. Kung gusto mo magkacertificate, ikaw magbayad. If you don t have certificate, you can t transfer shares of stocks to another. What if not lost but stolen? Ron subscribed to 10 shares of stocks placed inside his bag and then Oliva stole it. Since they re buddies, Oliva forged Ron s sig and approached the STA to transfer it into his name. Ron did not discover theft of his shares of stocks. Oliva went to Oposa to sell Ron s shares. Certified by the STA as genuine and so he paid good money and was granted with deed of assignments. Saka lang nadiscover ni Ron na nawawala yung certifs niya nung nasa pangalan na ni Tony. May Ron recover the certificates from Tony? Let us put this to a vote. He can recover. Certificate of shares of stocks is not a negotiable instrument. Due course holding provisions are not applicable. It s not a Torrens title, ergo, innocent purchaser for value in LRC is not applicable. Not negotiable documents of title is not applicable too. None of those three will apply. What shall we use? The ordinary provisions in the CC on movables. ____ Handwritten notes. _____

CHAPTER XIII: Dividends and Purchase by Corporation of its Own Shares

Is there a definition in the Code? Meron, di nga lang explicit. See S23. allotment of surplus profits on the basis of shares held. It s not defined in S43, elsewhere. No provision where this is categorically defined as dividends means but that s how it s defined under old Corporation Law. In short, dividends is the return on investment of subscriber is shares of stock of corporation. It s a return on investment. According to practice: come from profits realized/received of investment. Same is true from source of payment. Only paid from URE. Without it, it cannot do so. Declaration if without URE is illegal. What is URE? There are three words here. 1. EARNINGS What does this mean? Before it s not URE used but surplus profits What does profit mean? Defined to refer to profits generated/received from business operation. New code uses URE but not define. During deliberation, I asked this definition. SolGen Mendoza who was sponsoring this law said that it was advisable not to define it in law, but rather defer to the practitioners, so that their hands won t be so tied. Let practice define it. How does accounting practice define a corporation s earnings? When corporation engage in business, gross receipts less cost of sales will be ____ business operation.
y

y y

Corporation received donation from 3P, is that donation earnings? Material to know how these are classified? Computation of URE won t be available for distribution. Sabaw. Premium in issuance of shares par value is P1. Book value gone up. Corporation able to issue new shares of stocks at a premium at P100. Is the P99 earnings? If earnings, available for distribution as dividends. Otherwise, not. Action for rescission of contracts, besmirched reputation. P10M moral claim. Appraisal surplus i.e. increase in value of assets. (Used ___ to buy property in Muntinlupa). P1M to P100M because skyway is now finished. Difference between FMV and cost of acquisition, is that earnings?

No quarrel that profits realized from operation are earnings. But are they immediately available for distribution? No, it s not enough that there are earnings. It must be retained. 2. RETAINED After booking earnings, it will remain in books as earnings. E.g. Paid up is P100M YEAR 1 (nothing
but paid up)

Cost of sale 70M 40M 40M (do or die na ito)

Gross receipts 20M 30M 60M

Earnings (50M) (10M) 20M

2 3

Can he declare dividend this year? Not yet. It won t be retained because losses still have to be settled. Til hindi pa naibabalik yung 60M (net loss is 40M). Look at the whole pic (total financial position) settle to remove the losses before earnings may be retained in the books.

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Year 1: 100M: 50M used for capital expenditures (capex) e.g. land, building, equipment, vehicle. Hindi kasali ang raw materials. Amortize some of the properties over period of life. Balance sheet shall allocate cost, pero wag muna nating gawin yun. PLUS supplies worth 20M. For that particular year, losses is 50M. Year 2: Another 40M to produce services. 50M 40M = 10M 10M + 30M = 40 Baka sa 5 year na sha maka-declare. 3. UNRESTRICTED Even if retained, there might be restrictions. Two sources of restriction: a. Laws banks, insurance companies etc b. Contract one of the commitments as security for payment of loan is that no dividends will be declared til loan is fully paid Dividends can only come from URE. Without that, corporation can t declare dividends. Every distribution of dividend it is illegal. Therefore, pwede bawiin. You can sue the board. ___End handwritten notes ___
th

Note that S43 says paid in and not paid up because those two are different. What is the difference? The accountants, I have discussed this with you before, whenever a share of stock is issued at a premium. How to characterize the premium? The ACS is exceeded if that is to be considered . to prevent this from happening, what they do is the stated capital and legal capital . The premium is made an additional paid in, the par value is the paid up. The amount of capital that will correspond to the ACS is the paid-up. The excess is additional paid-in. that s the treatment. Additional paid-in. Pag nabayaran na lahat ng ACS, fully paid na. dalawa na ngayon. Paid up and paid in becomes the same with additional paid in. kasi yung paid up is the amount of money received by the corporation in exchange for the shares, not exceeding the par value given to the SOS. Kung 100M but not yet fully paid (only 50M paid yet), paid in is 100M. Yung sobra sa 100M is additional paid in. For the accountants, the excess premium is booked as additional paid in, why? Because it s still capital. The accountants treat the premium as capital. If that is capital, then it is not earnings. If not earnings, not available for distribution as dividend. BUT there is one author who disagrees with this treatment of the premium. Sino sha? Si Prof. Hector de Leon. That s the textbook they use in Ateneo. Pero unti-unti ginagamit na nila si CSV. Ano sabi ni Hector? Mukhang binago na under the new Corporation Code. Bakit? 1. Tinanggal na ung surplus profits as the source of dividends, it s now the URE. rd 2. Look at S6, 3 par proviso: Provided, further, That the entire consideration received by the corporation for its no-par value shares shall be treated as capital and shall not be available for distribution as dividends Why was there a need for this proviso to be inserted in S6? De Leon says that the effect of lack of this provision: the consideration received by the corporation in excess of the issued value should not be treated as capital. Ergo, in the case of a par share, the amount received by the corporation in excess of the par should not be treated as capital because no such provision in S6. This proviso is inserted because of an unwritten GR of the code i.e. payment for shares in excess of par should not be capital. If they are not capital, then they should be earnings. If earnings, available for distribution as dividend. So far, mag-isa pa lang jan si Hector. Wala pa shang kakamping writer. Even CSV who is also a CPAlawyer, not making kampi to him. The premium should be treated as capital, not earnings ergo not available for distribution as dividend. The prevailing view now is that premium is not earnings but part of the capital. It s booked as additional paid-in capital. Moral damages recovered by the corporation from winning a case against a third party, are those earnings? Available for distribution as dividends. How do classify this? Under old code it s not earnings because the earnings there is limited to those coming from business operations. If you ask me, how to classify? y DLC opinion: Even under the old code, this can be treated as earnings. The only reason it s entitled to a moral damages is because it has earned a reputation. Ergo, moral damages still arise from business operation. If it didn t operate, wala naman shang reputation to protect. Moral dagames available only when reputation of the corporation has been besmirched. It can therefore be classified as earnings, for distribution as dividends. Appraisal surplus: Encountered this in Club Filipino de Cebu v CIR. Club Filipino conducted a reappraisal of its assets. They saw that the present value of assets was more than the cost of acquisition. Value had already

11 March 2011
Assuming that there are URE in the books, are they obliged to declare dividends? No, declaration of dividends is discretionary on the part of the boards. However, the board may abuse this discretion by refusing to declare dividends for so many years despite existence ofURE in the books of the corporation. What is the remedy of a SH who hasn t received a return on his investments? First, there is a provision in the law which discourages retention of UREs beyond a certain level. Found in S43 2nd par. Look at the wording: surplus profits Wait wala pa pala tayo dun, but anyway let s proceed. Ang ginamit niya ay not URE but surplus profits which is used in the old law. That s the reason why in S3 which we looked at last meeting, the word used in defining/distinguishing a stock from a nonstock corporation is the same term surplus profits. The problem here is the difference in the definition of surplus profits in the old law and URE in the new law. Surplus profits defined in the old law as profit limited to profit realized from business operations. When your definition is like that, maraming hindi masasama sa computation ng dividends e.g. premium paid by subscribers whenever shares of stocks are issued at a premium, moral damages received by the corporation when it wins a case, donations from people who donated money/funds to the corporation. Kasi nga ganun ang definition ng surplus profits under the old law. That s why Justice Tinga when he was still a congressman. He was dean of UE Institute of Law. He s a CPA-lawyer, practitioner before he became a congressman and justice of court. He filed a bill to remove that surplus profits from the code. Highlighting the difference between the two BUT accountants considers surplus profits as used in the new code the same as URE.

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increased. The increase in value has been declared as stock dividends. Pwede ba yun? Usually only accountants discuss this but you will encounter this in practice. DLC have not met a former student who would not thank me for having taught about this? Can appraisal surplus be declared as dividends? No can do. The appraisal surplus is not an earning until the property is sold. Mare-realize mo lang yung value until ibenta mo. Until then, it can t be earnings. It s only footnote in the books. You don t book the amount. There are three forms of dividends. Cash, property and stock. You know very well that the board may declare stock dividends, but for it to be effective, it has to be ratified. Does the 2/3 vote requirement here include NVS? Of course not, not included in S6. Only those who vote to ratify a stock dividend declaration are only the voting shareholders? Why? Kasi, you are forcing the SH to increase the investment in the corporation. Pera na kasi dapat yung matatanggap nila but the corporation won t declare it as money but it will get the URE and change it stocks. Yung investment mo ay natali ulit sa corporation. Kaya kailangan ng SH approval. But why don t you include the NVSH? Yun ang ginawang decision ng mga lawmakers. This has to do with management and preferred SH has surrender its right to the management, they should not be included cash/stock dividend will be declared. Management decision na daw yun. Madali lang yung cash. The corporation has a choice. Declare the URE as cash, property or stock. Yung cash is the most popular kind of dividend. Representing cash payment of the dividend. Is it possible for a corporation to have URE and yet it has no cash on hand but in the books it has so many URE? Yes, pwede yun. 1M cash only but the books reveal 20M URE. Pwede kasi na nakatali yung kanyang cash to some hard assets/investments. Baka mamaya may ininvestan silang lupa or SOS. Walang cash but the value of investments will be included in the computation of URE. Even if without cash, you can declare dividends? Of course. y San kukunin yung pambayad? Nangutang. y E di nawala yung URE? Of course not, may papasok na cash pero may liability. Your URE will remain there. DLC so amazed that in the senate hearings, si Johnny Ponce Enrile lang nakaintindi nun. Ninong ko kasi yun. DLC respects only senator, guess who. Of course, borrowing money has costs. Interest will somehow reduce the URE available for distribution but it can t consume all the URE. Corporation may choose to declare property dividend instead. What property to declare as dividend? E.g. SMC so many beers produced. Pag kinuwenta natin his assets, it includes the inventory. The assets is in the beer, the inventory. Okay let s declare property dividends. Every share entitled to a bottle of beer. Declare na lang tayo promissory note as dividend? This is allowed, script dividend. Utang naman. PN is negotiable. You can transfer it. Liability of SMC. LTCP declared as dividend. Encash it by transferring to another. Bakit naman stock dividend? If property or cash, corporation will shell out money. But when it needs the money for expansion, or maintain a comfortable reserve wag muna tayo magdeclare. Kaso magrerevolution our SH we might lose in the next election. We haven t been declaring stocks for the past 5 yeARS. 2 steps in stock dividends: y Corporation will use cash to buy its own unissued stocks. The money will be transferred from URE to capital. y When transferred to capital, corresponding shares now fully paid and ready for distribution. Why will SH receive stock dividends? Kasi mataas ang value ng SOS in the stock market. Usually happens when the stocks are traded in the market. E.g. Jollibee and SMC. Mataas kasi ang value sa market. Imagine Jollibee nanganganak. Hahahahaha Good investments: Jollibee, PLDT, BDO. Pero yung Lopez Group of Companies bigla na lang bumagsak. Why will a stock dividend appease the SH? Kasi nga if the SH are traded in the market, yun ang ibebenta niya. Naging case yung stock dividend. If not traded in the market, illusory lang yun. Sana di na lang sila nagdeclare ng stock dividend. But for a stock dividend to be effective, it has to be approved by 2/3 vote of the OCS. Medium size law office story. Since corporation law and securities is DLC s specialty, they made him handle Metro Pacific. Contemporary in the college. A lady lawyer, one batch younger. We are paid for spending time reading. One of the terms: The corporation will use its additional paid in from issuing SOS to declare that premium as stock dividend. Hindi pwede to. How do you classify additional paid in as capital, then we cannot use it for dividend declaration? How do you classify it? Earnings or additional paid in? May SEC ruling kasi abroad ka nung lumabas yun. Additional paid in cannot be distributed as cash/property dividend but can be issued as stock dividend. Nalaglag ako sa upuan. Ikaw gumagawa ng ruling na ito no? Later on I became SEC commissioner. Hahaha. Conservative si DLC. We have to accommodate realities in the business. After 2 years in the SEC, this case resurfaced. Another corporation was applying to make use of the ruling of the SEC by converting its additional paid in into stock dividends. Another corporation applied for conversion of its additional paid in into stock dividends. Every time stock dividends are declared, not only does it requirement SH approval, it also requires SEC approval for registered companies. Pero kung ordinary company, hindi kailangan. It s also required not under S43 BUT under a rule implemented by the SEC. You apply for approval of stock dividend declaration. As usual, pag-uusapan yun sa Commission. Buti na lang at that time, the director of the SEC who recommended the approval by the commission of the conversion was still there. Magigrill ko na sha bakit niya inallow. So I asked him. How do you classify the additional paid-in. that would be the crux of the matter. Meat of the dispute. Either classify it as capital or classify it as earnings. If as earnings, then available for distribution as dividends. But if capital, never available for distribution whether cash, property or stock. Sir kasi when you allow a corporation to use its additional paid in for additional stock declaration, walang nawawala. Transferring from left to right pocket money remains with the corporation. no prejudice therefore. Jan ka mali. There s a prejudice. The SOS of the corporation has value. Therefore, if you sell it, the corporation should receive additional value. Value in addition to its capital. For the URE, corporation receives value in addition to its capital. URE is not capital. So you transfer it to capital.

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Nung lumabas nag SOS, corporation received consideration from shares of stocks. From earnings, it s now capital. But if capital becomes capital. When you declare SOS, naissue nang walang value nareceive ang corporation. There is where the prejudice comes in. dapat pinagkakitaan ng corporation. Ginisa mo yung corporation sa sarili niyang mantika, capital din ginamit mo. Creditors are prejudice because they expect that whenever shares of stocks are issued, additional value receive that will answer for the liabilities of the corporation. kung capital, walang additional value. Kung URE, magiging capital. Tama ka DLC, what shall we do this application? Talo ako sa botohan. Just vote me down. A very rare case where I lose in the commission. Nagpatalo na ako ditto. Pero mali talaga. If you classify as capital, you can t declare as dividend no matter what form. Magdidissent na lang ako. Accountants should come up with a categorical stand on this. I consulted with PICPA. You have to make a categorical stand. If capital, so be it. Pero pag capital dapat di available for distribution. So far, the rule hasn t changed. Additional paid in received from premiums in issuance of shares available for distribution as STOCK dividends, not cash not property. Kung di niyo gets, kabahan kayo kasi paborito ko yan. Stock split: necessarily entails amendment of the AOI. But that s a method of increase of ACS and use that as method of stock dividend declaration. Later on, you will see that it s a tool to tap capital through stock dividend when we go to increase in ACS. (something like that) Nobody but SH of record are entitled to receive dividends no matter what form. Nielsen v Lepanto Lepanto used to have a president by the name of Nielsen. Mashadong maganda ang service niya so to reward him, the board decided to declare stock/cash (di ko matandaan, cash nga yata) dividends and include Nielsen as one of the recipients. As president, Nielsen is a SH. But most likely he only has qualifying shares. But the dividend declared to him is so much more than his nominal share. SH questioned: you can t receive dividend more than what your SOS are entitled to received. SC: SH is correct. The amount of dividend you are entitled to receive must be in proportion to the SOS you are holding. You can t receive dividend just because you re an officer. Eh ang daling i-circumvent niyan. Bayaran muna sha ng reward charged to the URE. Then declare dividends from what remains of the URE. Baka nga stock yung gusto nilang ideclare kasi gusto nila maging SH si Nielsen. Ginugulangan nila yung SH. The SH must share in the value of the stock dividend to be paid to Nielsen, kaya nagreklamo yung mga SH. No way, not entitled to receive stock dividends more than proportion to his stocks in the OCS. Dividend declaration is discretionary on the part of the board. KAYA LANG, the board may abuse it. Daming URE no dividend declaration. Remedies of the SH: 1. Change the board. They can do this in the next election. Tatanggalin na namin kayo. Kaya lang kadalasan, ang nakikinabang sa malaking URE ay ang majority stockholding. No matter what election we do, talo palaig ang minority. Law has realized that so in S43, 2nd par prohibition: They can only retain til 100% of the paid in, this includes additional paid-in in the computation. If the paid in is 100M, the corporation may retain 100M URE without declaring dividend. Bawal iretain yung sumobra. What do you do with the excess? Declare as dividends. But since discretionary, what are the effects? a. Surcharge in tax b. Can they go to court in order to compel the board to declare dividends? There are two views i. YES. It s categorical. It s prohibited. S144 there is even criminal violation. But there are 3 exceptions in S43 ha. ii. Assuming wala sa exception and so much URE, are the directors criminally liable? We can try. Who knows? Sampahan nga natin yang punyetang yan sabi ni DLC pwede daw. Balitaan niyo na lang ako. Remember our discussion on who are the officers of the corporation. I discussed with you the case of PAL. This SC is gulong-gulo, hindi malaman kung kelan officer at kelan hindi. May bagong kaso sa Raul Palabrica. Baka student ko yung researcher niya. Natuto yung researcher na to. Wala pa akong tinuturo dito na mali! Mga two weeks ago siguro to. GR: SH cannot compel the board to declare dividends. EXCEPT: in violation of the prohibition in S43. S43 was designed to check unreasonable abuse of discretion on the part of the board. Ayaw magdeclare ng dividend maski napakaraming URE. Walang natanggap na returns on their investment. Taking note of the intention of the law, we can sue the board for dividends. When does right to dividends vest on the SH? How does the board declare dividends? Adopting resolution declaring dividends. Includea mount to be distributed to the SH. Pwede ba bawiin ng board ala Indian giver? Rules. After dividend declaration communicated to the SH, the right to dividend vests. That s the rule in the US and other common law jurisdiction. The moment na declare yun sa kanila, magvevest yugn right to dividend, no more bawian. There is one exception: when the declaration is illegal. Dapat talaga bawiin. Di pwede iimplement. When illegal? y If without number of votes y If without URE Since illegal, nobody acquires vested right over illegal thing. Pero kung hindi illegal, nagbago lang isip ng board, we can go to court to compel the corporation to declare the dividend as declared, nullify the resolution subsequently adopted by the board. Preference as to dividends already discussed Liability for illegal dividends Better if you can discover the dividends before distributed coz board can still withdraw, withhold, revoke the declaration. Pano kung naipamudmod na, pwede bang bawiin? Of course, illegal yung dividend. No right to keep it. Nagkaroon ng error ang computer in the computation of the URE. Lumabas sa computer, may positive, negative pala. Bawian yan. Walang URE. Halimbawa nakatanggap na kagad si Oliva ng P10K, nagastos ko na sa good time ni Garcia. Naubos ng isang gabi. Wala pang tatlong oras yan.

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Maski patayin niyo ako ngayon, wala kayong makukuhang P10K sakin. Hindi naman ako may kasalanan in the first place? Sino liable? The board of directors who willfully, knowingly assented to the patently unlawful act under S31. We can also say that this is gross negligence on their part in running the corporation. there is also legal basis in their liability as provided in S43. Hala wala naman. May liability on illegal dividends. Hanapin niyo. Baka naman kasong cited in Campos. Pagpasenshahan niyong marami akong nalilimutan dahil bumabata ako. Purchase of corporation of its own shares nadiscuss na natin yan. What s important here is URE. Nadiscuss na natin yan.

CHAPTER XIV: Amendments of Charter

AMENDMENT BY LEGISLATURE
Charter refers to AOI of the corporation. The charter of a corporation is amended not only by the corporation itself but by the state through a subsequent legislation. Sir, hindi ba that will be impairment of a vested right? Later on congress will pass a law which will run in conflict with the AOI, will that not amount to impairment of a vested right? No, because that is the amendment automatic of its charter by subsequent legislation is a term implied in the approval by the state of the AOI. Implied yun na approve natin ito but subject to modification by subsequent legislation. That s somewhere in the code. To create a corporation is a privilege. When a state authorizes privileges, the state may impose conditions for the continued exercise of the privilege. It s subject to subsequent changes in the law. When the law changes, the AOI may be changed accordingly. Ano yung exception to the rule? When it will impair vested rights of the same party. The corporation does not acquire a vested right for the continued right of a charter change. It will not remain the same. If there are vested rights, then those have to be honored. Ang problem is what are those vested rights? What are those rights which are vested, and therefore, not affected by subsequent amendment of the corporation code or passage by the legislature of a law which runs counter to the articles. That s a $64 quesiton. WON a third party, SH or corporation itself has acquired a vested right that is protected and therefore not affected by subsequent legislation. Kung wala shang vested right doon, it cannot claim protection. In your poli law, there is a discussion on what rights vest. GR: Contractual rights are vested. No law shall be passed impairing the obligation of contracts. Pero ito bang application for registration of a corporation that was subsequently approved by the SEC, is that a contractual obligation? DLC does not think so. WON the right is one that vests? When the right is an exercise of a privilege. It does not usually vest. So S145: No right or remedy in favor of or against any corporation, its
stockholders, members, directors, trustees, or officers, nor any liability incurred by any such corporation, stockholders, members, directors, trustees, or officers, shall be removed or impaired either by the subsequent dissolution of said corporation or by any subsequent amendment or repeal of this Code or of any part thereof. (n)

WON right is vested is a question that shall be resolved by principles of political or constitutional law. Hindi ko na linya yun. We also follow another principle, congress cannot pass irrepealable laws. All laws passed by congress were passed subject to that condition, subject to repeal. Even if it made irrepealable, it should come from the constitution. That would bind the congress but not its own laws. But we will not focus on that. Rather, on amendment of the charter BY the constitution itself. I had a problem with S148. Before the passage of old corporation law, no corporation in the Philippines. Because it s a common law institution. There s not corporation in civil law. Before Americans came here to colonize us, the laws in force in the country were Spanish laws. We didn t

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have corporation laws. We only had sociedades anonima. Ano sa English yan? Parang Da Vinci Code yan. Anonymous societies, bordering into secret societies. Maraming klase yang sociedades na yan. There was one sociedad na naiwanan. Hospital de Santiago de Compostela. Do you know who Santiago is? According to legend, he was St. James the Apostle. Nung nagbaba yung holy spirit during Pentecost Sunday, nakapagsalita sila ng ibang language. This Santiago de Compostela went to Spain. He has a shrine there. There s a pilgrimage you have to walk. DLC is planning to join that one of these days. The experience of walking from Madrid to somewhere else. Hindi pwedeng sumakay. Marami kang makikita along the way. It doesn t happen every year. Like the passion play in Germany. It s staged only every 10 years. Ito palang mga Kastila, kaya wala kang makikitang Kastila na mahirap at namumulubi sa Pilipinas. They have an organization called hospital. They give money to create/build up a fund that they will use to help a Spaniard in need of money. When a Spaniard goes bankrupt, they go there to ask for help, maybe in the form of a help. This hospital has its office beside Letran in the Dominican order. DLC: Anong school ang Augustinian? Oliva: St. Augustine s DLC: Sampalin kaya kita? Hahahahaha Jesuits is the only order with the fourth vow. Obedience, chastity, poverty. To defend the pope. Black pope story again. Behind the mysterious death of a pope is a Jesuit. The Jesuit. Makapal yung libro. Bat ba tayo napunta don? The hospital did not comply with the requirements of the old corporation law. Corporation code din hindi comply. So many assets. What to do with our assets? We want to sell one of the big assets fo the corporation. are we still authorized to sell. Since they have problem as to their status, they need a lawyer. A mahusay na abogado? Sino yun? Shempre yung partner ko. Akala niyo yabang portion na naman? What we did, I will no longer disclose. Power to amend its charter is inherent in every corporation registered and organized under the corporation code. How is amendment carried out? General provision on amendment embodied in S16 of the Corporation Code. For an amendment to be effective, proposed by majority vote of board of directors, ratified by at least 2/3 of the OCS and approved by the SEC. so three requirements. Di pwede kulang. ERGO, the SH cannot in a SH meeting simply move to amend the AOI and proceed to vote. Because there s no valid proposal. The proposal must originate from the directors. If we can draw an analogy, draw analogy from the manner our national constitution is amended. What is placed there? 2 step process: proposal and ratification. Valid way of proposing: [1] Congress sitting as a constituent assembly. [2] Through a constitutional convention. [3] System of people s initiative. When the proposal is valid, the next step is ratification. No constitution or any change thereof shall take effect unless ratified by a votes cast in a plebiscite. You still remember the case Javellana v Exec penned by CJ Roberto Concepcion who is from UST. There are 3 Concepcion in the SC, baka maging 4 pa. Yung pinsan ko. Landmark dahil sa kapalpakan. Matabuena Gan v Yap Dissenting from his own ponencia. Decisions with a footnote. Justice Fernandez called Don Ramon. Classmates of Marcos. Valedictorian of Marcos s batch. Marcos was salutatorian. Class of 39 has so many chief justices. Why dissent from your own ponencia? Fernando made singit that. San ka nakakita ng decision without dispositive portion? First batch of the graduate of this college produced the first president of the republic. Mar Roxas. Bat ba tayo napunta don? Para di kayo mabore.

AMENDMENT BY STOCKHOLDERS
Corporation may amend its AOI. There are INDISPENSABLE steps: 1. Proposal by the board 2. Approval by the SH 3. Approval by the SEC What may be amended? What are the contents AOI? They are enumerated in S14. Lahat ng nakalagay sa articles, pwede palitan EXCEPT the names of original subscribers, names of original incorporators and amount paid. Fait accompli or accomplished facts na yun. Everything else may be amended, including the name of the corporation. Pag binago yung pangalan ng corporation, will it result in change of personality of the corporation? Of course not, Ron may change from Ronaldo to Ron. Bryan ang gusto niya. In the case of Maria Carmen Hortigan, change of name unaccompanied by ____ will not result in the personality of the corporation. While S16 gives us the GR, there are amendments which are specifically governed by specific sections of the code. One of them is increase/decrease of ACS, reduction of capital stock, change in corporate term. May specific provisions applicable.

Limitations on power
There also are limitations on the power to amend. It must be for a legitimate purpose. As to when a purpose is legitimate will depend on circumstances obtaining at the time the amendment is adopted. The totality of the amendment shall be the basis in determining WON the purpose is legitimate. What am I telling you? It s a case to case basis. There s a procedure that has to be followed whenever AOI are amended. Dun sa 2nd par ng S16.
The amendments shall take effect upon their approval by the Securities and Exchange Commission or from the date of filing with the said Commission if not acted upon within six (6) months from the date of filing for a cause not attributable to the corporation.

Grounds for rejection of an amendment

Is the approval a ministerial duty on the part of the SEC? No, there are grounds for rejecting in S17. Whenever an amendment has the effect of changing the rights of existing SH, a dissenting SH may exercise appraisal rights under S81 BUT NOT if the amendment will not have any effect on the rights of existing SH. Restricting, changing rights, giving privilege or preference to another group.

Special Amendments
Concentrate on special amendments. One of them is that in S38. Increase or decrease of the capital stock.

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I have mentioned to you last session that the capital stock in S38 refers to ACS. Law is silent but it does not refer to OCS or paid up stock. Only an increase in the ACS is governed by S38. Only increase in the ACS requires approval by the SH. Does not require approval: increase in OCS. Whenever the authorized capital stock is increased, what are the requirements for such an increase to be valid? E.g. ACS now is 10M. he wants to increase ACS to 50M. What must the corporation do to effect a valid increase of its ACS? Before we go there, let s first ask. Why a corporation will increase its ACS? So the capital base will increase. That s the only reason. What for? To be able to acquire more money for expanding its operations. In order to make it more bankable. Otherwise, that s just window dressing the financial structure to make it more bankable and marketable. The real intention behind increasing ACS is to raise additional capital. What are the requirements? They are there found in S38.
Provided, That the Securities and Exchange Commission shall not accept for filing any certificate of increase of capital stock unless accompanied by the sworn statement of the treasurer of the corporation lawfully holding office at the time of the filing of the certificate, showing that at least twenty-five (25%) percent of such increased capital stock has been subscribed and that at least twenty-five (25%) percent of the amount subscribed has been paid either in actual cash to the corporation or that there has been transferred to the corporation property the valuation of which is equal to twenty-five (25%) percent of the subscription:

Everybody is in agreement that the wording of S38 is unfortunate. It is inadvertence. Nagkamali yung nagtype. Baka may nagtamper. Baka may nagpropose ng amendment sa floor babatukan ko yun. Every increase in ACS has to be supported by fresh capital. Where will that fresh capital come from? E.g. the scenario is like this. The corporation wants to increase its ACS, it needs it for window dressing. Kaya lang, whenever the ACS is increased, the SH have preemptive right. Oh, subscribe na you. New shares of stock created has the consequence of increase. SH may say ayaw na nila. Either do not push through with increase or offer the additional stocks to outsiders. Mahirap na bagong tao na naman. But suppose the corporation has URE, may it use the URE as a support in the ACS? But sir didn t you say fresh capital, is the URE capital? It s not even classified as capital but earnings. Can we use that? Pwede naman. How do we it? The corporation will amend its articles to increase ACS, then 25% of the additional capital stock shall be declared as stock dividend. The stock div will be paid from the URE. Use the URE for buying the shares. Not the existing shares but the new shares created by the increase in the ACS. Remember this ha! Conclusion: URE may be used to support the increase in ACS. How done? Declaring the URE as stock dividends, the stock dividend to come from the new shares created by the increase. This is what happened in Metro Pacific. They declared stock dividend is the additional paid in. they needed to increase their ACS to offer to the public in an initial public offering. Dapat maraming shares. To support the increase, it used the additional paid in coming from the increase. Sinampal naman ako bigla ng ruling from the SEC. Pag di natuloy project, wala akong bayad. DECREASE IN CAPITAL STOCK Sa stock dividend, may isa pang problem dun. Itatanong ko sana sa exam kaso mazezero lang kayo kaya idiscuss na lang natin. Can the stock dividend not be fully paid? Babayaran lang ng 25% tas idedeclare lang sa SH na walang 75%? If you allow it, lalaki yung stock that the URE may pay for distribution to the SH. Whenever stock dividends are issued, must the stock dividends be fully paid or can it be partially paid only? 4 accountants from big competing firms in Makati. Is there a requirement that a stock dividend be fully paid? I-research niyo, baka itanong ko sa exam. Like any homework I assigned, you didn t do. REDUCTION OF CAPITAL STOCK. Easy to understand why a corporation will increase its ACS. What is the reason to reduce its ACS? Many reasons: a. Consequence of retirement of redeemable shares. There has to be a corresponding decrease in the capital stocks. b. What if walang redeemable shares, everything common? What could be a reason? To write off losses. Why do you need to write off your losses? Til you write off your losses, you can t declare a dividend. If you amend articles to reduce capital stock to cover losses 20M, you can declare dividends if you have retained URE. Wag na natin gawan ng example. When the loss is written off, in the example I gave you, if the reduction is 40M, immediately, you have dividend available for distribution. Not only have you written off losses, you even had URE. E.g. Corporation has ACS of 10M, OCS of 5M, fully paid-up of 5M. The net losses in the books of the corporation is 1M. When the corporation

Original ACS 10M

OCS 25% = 8M Paid up

ACS 40M
4.5 M na lang because 8M already subscribed

NACS 50M
25% = 12.5M

25% of such increased capital has to be subscribed. 25% of the subscription has to be paid. Where to apply the 25%? 50 or 40? Sir s mushy moment with his wife. Kung sa 50M, occasion that the original will be sufficient to support the increase. 10M (10M additional for change) 20M -25% = 5M OC 6M 5M Kung sa new ACS, laging meron ka dapat bago. Such increased capital not of such increase in capital. Pero mali yun. Kaya nga hindi ganon ang interpretation ng SEC. The additional ACS increase must be subscribed, 25% of that subscription must be paid. RULE: Every increase in ACS has to be supported by a fresh capital coming in to the coffers of the corporation. Di pwedeng walang support yung additional capital stock. The 25% must be subscribed and 25% of the corporation must be fully paid. SEC will look at the additional capital. In that case, that must be 40M. 25% of that 10M. must be fully paid. Kung babasahin mo lang yung batas, mali yun.

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reduces its ACS to 4M, what is the effect? Ang subscription is 5M, sobra ka pa ng 1M, you return 1M. You still have 4M. what is the effect, you have no URE. 1M lang reduction. Pera of 4M, and 4M paid up too. Just enough to paid the new ACS. The paid up has to be intact all the time. You can t declare dividend til paid up is intact. But suppose reduce from 5M to 2M. Sobra pa tayo ng 2M. the sobra called reduction surplus, can you declare that? Is that allowed? didn t we say that equity can t be returned to SH til corporation is dissolved? True, but there are exceptions: [1] redeemable shares, [2] appraisal right, [3] S122 last par. On decrease in ACS
Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities.

The only reason why a corporation would decrease its capital stocks is to wipe out losses in order to restructure the financial position of the corporation. A decrease in ACS is done through an amendment of the AOI. Another reason for amending the AOI to decrease the ACS is when redeemed shares are retired. When those shares are retired, the corresponding decrease in the ACS has to be accomplished. Since a decrease in ACS will necessarily reduce the liability of existing SH., such may operate to prejudice claimants or creditors of the corporation in order to ensure that 3P are not prejudiced by such reduction, that is made as a condition for the approval of the amendment as provided for in S38.
provide further, if its effect shall prejudice rights of corporate creditors.

Paid up minus loss. Reduce the ACS and reduce the paid up too. Nagkaron ako ng reduction surplus of 1M (3M na lang ang ACS). That may be distributed as reduction surplus dividend. ISSUE here: Can we redo the subscription contract instead of fully paid yung paid-up, gawin nating 25% lang? So lalaki yung reduction surplus. Hindi pwede kasi in fraud of the creditors. Hindi na dapat papalabasin yung pera natin. Anyway, every decrease of the ACS has the tendency to defraud the creditors. That s why in S38 last par, there s a requirement there.
Provided, further, That no decrease of the capital stock shall be approved by the Commission if its effect shall prejudice the rights of corporate creditors.

How will SEC know that creditors are affected? SEC in its exercise of its powers to promulgate rules and regulations, requires that whenever amendments to reduce the ACS is filed with the SEC, the SEC will not act on the application until the fact of the amendment is published so that the SEC will not rely on representation by the corporation that such amendment will not prejudice corporate creditors. Most likely, corporation will make that representation in order to effect. Knowing propensity of Filipinos to perjure, SEC will not accept hook, line and sinker the representation that no corporation creditor will be prejudiced. SEC, as a last attempt, to ___ the impending amendment, shall order the publication of the amendment applied for. SEC has also come up with some exceptions to the rule. I know of one instance where the SEC accepted a written consent allegedly by the creditors to such a reduction of ACS. The corporation having submitted written consent of all creditors allowed the reduction of the ACS. SEC should guard against. Creditors will not likely to give consent will no longer be informed. Who knows what applications are pending in the SEC. Dapat i-publish din nila the written consent given by creditors. It will not suffice because self-serving on the part of the corporation. How will creditors who feel prejudiced by such decrease do the comment they learned about this amendment to decrease the ACS? They may file an opposition with the SEC that such amendment will prejudice their interest. Hindi in-approve ng SEC, what shall the company do now? s Last par of S122 I have already discussed. Is the creditor bound by the publication? They will only be bound if the proceeding is in rem as provided for in the law. SEC having required publication did not make the proceeding in rem. That was just a tool to aid the SEC in disseminating the information but the requirement of publication does not operate to make the proceeding in rem so as to bind the whole world. Only the law will make a proceeding binding against the whole world upon compliance with certain acts prescribed in the law. DLC thinks the creditor still has prejudice. The creditor may ask the SEC to disregard the order approving the reduction of the ACS so that all the SH will remain liable to the original amount of their subscription. SEC s addition of the requirement does not make it in rem. It s not the authority to determine WON the position is in rem. If the creditor was in fact prejudiced. Won a creditor was prejudiced by the reduction is a question of fact. He only feels unsecured. Praning lang.

Buti sana kung kilala yung creditors. Kung nanotify sila. So there s a requirement of publication so the creditors will be constructively notified. Whenever the corporation amends its AOI to reduce its capital stock, is there appraisal right for dissenting SH? Sa increase wala. Unless the increase will result to change in the rights of existing SH. Or such change will create a class of shares not enjoyed by existing. How about in the reduction, has a SH appraisal right? The answer is neither in S38 nor S81. A reduction will entitle a dissenting SH only if the reduction will change in the rights vis--vis each other. Definitely there will be a change in right but the right here must be vis--vis other SH. Akala niyo lang maliwanag yan. Change in corporate term The AOI is amended to shorten or extend the term of a corporation. done through an amendment, special amendment governed byS37. There are requirements. How different is S37 from S16? One difference DLC can see is the manner. Not governed by specific provision, may be approved by referendum. The amendment cannot be approved by a mere referendum. It must be a SH meeting called for the purpose. The dissenting SH has appraisal right under S37. Ordinarily in S16, a dissenting SH is not entitled to appraisal right. Exceptions.

16 March 2011
DECREASE IN CAPITAL STOCKS

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There are many remedies available to creditors. There s a law on FRIA. Parang naintindihan nila yung batas, akala lang nila yun. DLC in response to Mai s question: What will be the basis for the corporation to hold it? SEC will require in approving the reduction that reduction surplus be distributed. He was chairman of rehab committee of Victoria s Milling Corporation when it closed shop for financial reasons. Secretary of Finance inutusan ko. Boss na namin bigla. I asked him to make a rehabilitation plan where it wipe out its losses and create new shares. Necessarily has to amend articles in order to increase ACS. Wipe out losses in order to create new shares of stocks. They reduced the ACS to wipe out losses. To create additional paid in, the reduction surplus before it is distributed may be classified as additional paid in. APIC (additional paid in capital). When they created that, they used the APIC to support subsequent increase in the ACS. Reduce ACS and then create APIC. Multiply APIC by 16 kasi diba. Ganito yun: (draws diagram) ACS is 100M. Meron na silang 50M impairment of the capital. Their balance now is just 50M (assuming everything is fully paid) a claim in SEC with me. Wala ulit kumuwestiyon. Quedan is a negotiable document to title to sugar. Kumita at naibalik ang mga sugars. Pinag-agawan ng mga taipans. Kung hindi matibay ang prof niyo, ano pag-aagawan nila? Hindi naman sa pagmamayabang (pag sinabi mo ito, magyayabang ka talaga) 4 or 5 lang ang successful rehabilitation. 3 dyan, ako may hawak.

CHAPTER XV: Transfer of Shares

Transferability of the interest which the SH has in the corporation is one of the cornerstones that makes a corporation different from an ordinary partnership. In a partnership, the interest of a partner is not freely transferable. A partner is admitted to the partnership on the basis of his personal qualifications. This is the principle of delectus personae. A partner can transfer is share but not his partnership. You can assign your interest (bec that s also property), not the right to become a partner. To make a corporation better than a partnership, those who conceived corporation as a business organization did away with the delectus personae principle as a cornerstone feature of corporation, that interest which member of corporation has is made freely transferable: not only interest but even his membership in the corporation. Pag itiniransfer mo ang SOS mo, share holder ka na. Unlike in partnership you don t automatically step into the shoes of the transferor. That s the cornerstone of corporation: transferability of shares Since this is the cornerstone, general principles of corporation law prohibit a corporation from imposing restrictions on transferability of shares. That s unwritten rule but that s the general principle. I required you to read corporation code, may express provision prohibiting corporation from imposing restrictions? Walang express, pero puro implied. I think in S98 on close corporations. If you must have observed, S98 appears in the title on close corporations. This close corporation is a special animal in the corporate world. Dalawa silang special animals: corporation sole and the close corporation. Super special ang corporation sole. Archbishop of Manila becomes a corporation unto himself. But this close corporation is a corporation but a special kind because it can do many things which an ordinary corporation cannot. Marami nagagawa na hindi nagagawa ng ordinary corporation e.g.
y

ACS OCS Paid up Losses Balance on hand

100M 80M 50M 10M 40M

Reduce the ACS to 20M. magkano paid up? 40. The 20M became fully subscribed and fully paid up. May APIC na 20M. This APIC can now support an increase of 20M times 16 = 320M. kasi the 320M = 25% has to be subscribed and 25% of which fuly paid up. Actually 350 nga dahil may 20 pa. APIC created when ACS was reduced. ACS is 100 APIC ang capital ng 40-20 before distribution as reduction surplus. 20M becomes 340M (increase of 320M) 20M * 4 * 4 = 320 We don t need to fully pay because we re not declaring it as dividends. How did it use the APIC? They had a SH approval authorizing the corporation to use the reduction surplus as their payment to the new subscription. Because we didn t declare it as stock dividend. Asked all the SH in approving the amendment to reduce to apply APIC as their subscription to the new SOS in the resulting increase in the ACS. Yung mga magpapractice ng corporation. Tandaan niyo yung case na ito. There were two amendments: same documents and same meeting. WON you are a good corporate lawyer will depend on how creative you are. These amendments in order to be valid have to be approved by the 2/3 of the OCS. DLC issued order dispensing the requirement on ground of rehabilitation plan. Nagrereklamo ang ibang SH. Eh di go to court and question it, they didn t. Kasi kung kinuwestiyon nila. I did my best to revive this dying corporation. this is an extraordinary situation calling for extraordinary remedy. First successful rehabilitation that ever passed through the SEC. Or yung mga sugars covered by quedan eh nasa bodega ng Victorias. We need operating capital next crop to be harvested in 2 months time. Sell all those sugars so we have operating capital. Let the quedan holders file

In an ordinary corporation, may all the SH participate in the management? No. SH surrender their right to board of directors. In close, pwede walang board and SH may manage and direct the affairs of the corporation. this is a corporation without a board. S97 2nd par. In case of ordinary corporation, SH cannot group themselves and elect the board from among themselves. This is allowed in close corporation. S97 1st par No. 2

Why is there S98? If restriction is the GR, you don t need this provision. Precisely because restriction is a GR, it allows it to be there. Impose restrictions on the transferability of shares, only a close corporation but even then, even if S98 allows a close corporation to impose restrictions on transferability of shares, it cannot impose restriction more onerous than ROFR. Hanggang dun lang. a SH who wants to transfer his shares shall first offer his shares to existing SH. When accepted, he can t do.

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Obliged to sell to existing SH. Only when no existing SH is willing to buy a share thtat he is free to offer it to 3P outside the corporation. Restrictions are allowed only in case of close corporation, not in an ordinary open corporation. DLC: Dapat dito may D. Closed to a group not more than 20. Close here means sarado. Not exceeding 20. Ordinary corporations are open, nakabukas. So what s the GR: A corporation cannot impose restrictions on the transferability of shares. ERGO, every restriction imposed by the corporation is illegal. Therefore, it may be set aside in court as invalid. Yan ay kung naiintindihan ng judge ang ginagawa niya as many of the rules are not written. If you will practice corporation law, more than double the written rules are unwritten. Kaya pag nagbabasa ka nito, there should be an underlying general principle to which it relates. Fletcher on Corporations has 21 volumes. Hindi pwedeng basta basta na judge ang hahawak ng corporate matters. Kaya nga nasa SEC yan dati since they re supposed to specialized on regular courts. So SC designated commercial court. Nagpa-exam ako sa judges, bumagsak sila. Simple tanong ko di masagot. MM?MY. Oliva has 100 SOS in X corporation. Mag-aasawa sha eh. Sino gusto mo mapangasawa? Si Phoebe daw. Bihira ang nagkakatuluyan. Dean Pang and Mam B. Bakod na bakod yun. Kapatid kasi tingin namin, nakakawala ng interest. Met students in SH. Bakit parang hiyang hiya ka sa asawa mo? I need cash for my wedding ceremony. May papakainin kang di mo kilala. Gagastos kang malaki sa traje de boda. Sabi ng girls, dream of a lifetime. Pakasal ka with pomp and something. Aiai delas Alas in Tanging Ina. I need to liquidate some of my assets. So ibinenta niya ngayon his shares to Ron. Oliva said sayang these shares, mawawala sakin, mataas ang bayad ng dividends. Deed of assignment says: I m assigning my shares to Ron, PROVIDED Ron cannot transfer these shares to another without first offering me these shares. Right of first option/right of first refusal. What if? I am assigning all my interests in the 100 shares of stocks in X corporation to Ron. PROVIDED Ron cannot transfer the shares except to me. Is the restriction valid? Valid. The prohibition applies to the corporation. The corporation cannot impose restriction on the transferability of shares. In this case, who imposed the restriction? It s the SH. Corporation has nothing to do with the contract. MM?MY. If their consideration is illegal, the contract is illegal not because of transferability prohibition, but because the consideration is illegal. General provisions on contract law yan. Suppose the corporation will provide the following in its AOI. No SOS of this corporation shall be issued except to relatives within the 3rd degree of existing SH. Is that a valid provision of the AOI? NB that that provision has nothing to do with transfer. It is the issuance of a share. Hindi pa tinatransfer, iniissue pa lang. MM?MY. Look at provision of corporation on close corporation. Nandun ang sagot. S87 No. 1: for classification of sharesand qualficiations for owning or holding. Magkaiba yung restrictions on transfers and classifications for owning. The latter is for issuance of shares. Pag-isipan niyo yan. Hindi ko pa naitatanong sa exam iyan. Campos discussion here is in the close corporations. How is a share of stock transferred? There are two kinds, diba? What are the kinds of our shares of stocks? 1. Not yet fully paid 2. Fully paid a. Treasury (kasi nasa corporation na) b. Outstanding (nasa labas pa, owned by the SH)

SHARES WHICH ARE NOT YET FULLY PAID

A share of stock which is not yet fully paid is entitled to all the rights of SH under S72. For as long as those shares are not DQ, they enjoy all rights of a SH. May the subscriber of unpaid shares transfer his interest in the shares? Of course. Because that is property. It represents a proprietary interest. Therefore the subscriber can transfer his interest in the SOS which are not yet fully paid. Will transferee step into the shoes of the transferor? Will he become the new SH? No. Because of S63, last par. No shares of stocks against which
corporation holds any unpaid claim shall be transferable in the books of the corporation. Unpaid balance on the subscription is an unpaid claim which

the corporation has over the shares of stocks. What is the effect if the transfer cannot be effected in the books of the corporation? It is the transfer of the shares that will bind the corporation and the whole world. Unless it is recorded in books of corporation, it is no t binding against the corporation. (Whole world is not accurate) binding to all parties who have actual notice and privies except the corporation. It may have actual notice but unless in the books, it does not bind the corporation. What do you think is the reason? Last Fri, Sir was at the wake of his classmate s mother. Timmy Cruz. Singer. I love you boy. Oldie. In the wake, Jose Flaminiano was there. One of Erap s impeachment lawyer. Class of 1953. City fiscal of Manila. Yung matandang abogado, pag nakakita ng UP, magkukwento. Fan ni Danicon (yun din tawag sakin, parang student ko). Batchmate ko si JPE. He was the oldest member of his batch. Abad Santos asked them the reason behind live for 24 hours if intra-uterine life of less than 7 months. JPE: No reason, arbitrary on the part of the lawmakers. Many things in the law are arbitrary. Lahat na kasi ng sagot niyo ay mali na, ano pa sasabihin ko. No particular reason is a potential answer. Bat tayo napunta jan? Hindi ako nagkuwento nang walang konekshon. Parang si Mam Beth lang. Magkabatch nga. Corporation cannot record the transfer. Why does the law prohibit the recording of the transfer in the book when the shares transferred were not yet fully paid? Oposa!!! Pag sinabi mong arbitrary yung sagot, sasampalin kita!!! I don t know sir. Garcia. Who knows??! Bustos, magpasikat ka. The art of giving a good answer is to make it short. I m giving you a second opportunity. Why does the law prohibit the recording of transfer in the books when the shares are not yet fully paid? Because SH may transfer to an insolvent person to the prejudice of the corporation. Who will be defrauded in that case? The corporate creditors. Though in a way, also the other SH. But really, the corporate creditors because they

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lost an asset to run after in case assets of the corporation fall below their ____. The prohibition is in protection of creditors. In implementation of trust fund doctrine. Ayan, may pogi points ka na. The SEC when I was a commissioner, thought of how this provision is circumvented. How did SEC circumvent this prohibition? Since that last par of S63 is for the benefit of the creditors, the creditors may waive such benefit. How? By giving consent to such transfer. So what do corporations do now to transfer unpaid stock transfers? They get consent from all their creditors. They consent to the recording of the transfer. PERO kung ako abogado ng SH, pinpapirma ko lang client with a condition: We agree to record the transfer in the name of the transferee on the condition that the original subscriber remains liable to us for the unpaid balance. Pwede ba yun? That s called substitution of debtors. It cannot take place without the consent of all the parties. Unfortunately, the creditors are not parties to the subscription contract, yet the stipulation is for their benefit. In order to make it real protection on part of creidtors, inilagay na sa S63. Since that is for their benefit, creditor s consent is not supposed to be required under general provisions of CC on contracts, pwede nila iwaive the protection given them through a written waiver. DLC doesn t see anything wrong with that. Problem only is how to know that all the creditors have consented. All creditors not consented will not be bound by the recording, original subscriber remain liable. Transfer is not bound by the transfer as far as other SH are concerned, original subscriber remains the SH. Therefore, who is entitled to attend SH meeting? Vote at those meetings? Dividends? The original subscriber, not the transferee. This is insofar as corporation is concerned, BUT not as between transferor and transferee Ron is dating Annie (Bato na bakal pa) so he transferred his shares to Oliva at a discount (lower than the par value). Par value is P1000, sold at P500. Will the corporation record the transfer of the shares in the name of Oliva? No. May unpaid balance pa eh. Is the transfer valid when it s transferred for a consideration less than par? Prohibition applies to issuance of share by the corporation, not transfer of shares from on SH to another. In fact, pwede ko ipamigay for free. May Oliva attend meetings? No because he is not transferred. How can he vote? Irrevocable proxy. Can he run? No, because not stockholder of record. When corporation declares dividend, whose name? Ron pa rin Has Ron right to keep the check? No way. He now has obligation to transfer it to Oliva. Oy punyeta ka, akin yang dividend na yan. Kung ayaw ibigay, Oliva will have the right to compel him by court action to deliver to him the dividend. As between them, Oliva is the owner of the share. The transfer is valid and binding between them. May unpaid balance, who is liable to pay it? As far as the corporation is concerned, who will corporation send the notice to? Ron still. Ron then has duty to Oliva to forward to him the notice to Oliva is given opportunity to protect his rights. May the corporation refuse to accept payment on the ground that we do not know you, you re not our subscriber but Ron? Corporation has no right to refuse. That s in the CC. Anybody who has interest in discharge of obligation has right to insist payment. May right sha, he just needs to show his deed of assignment. May corporation ba na tatanggi sa pera? Yes, kasi minsan, it s no longer money but the corporate control. MM?MY.

Para wala tayo problem since lahat ng treasurer marunong sa corporation law, not all of them became my students. What we do is give SPA authorizing him to effect the payment. In fact, hindi lang yan. SH also give authorization to effect transfer of certificates in his name after the balance has been paid. Without that SPA, corposec will refuse. Baka daw kasi nakaw lang. baka fake lang yung pirma. But if with notarized SPA, the corposec and treasurer will be covered.

SHARES WHICH ARE FULLY PAID

There are two kinds of fully paid: a. Certificated b. Uncertificated (only us use this word) When shares are certificated, how do we transfer the shares? Law says endorsement + delivery. Certificate shall be endorsed by the SH and then he will deliver the certificate to the transferee. Under the law, transfer is effected. That s why if you still remember the case of Abejo v dela Cruz, diba mayroon dong isang transferee presenting his certificates duly endorsed at the back by the original SH of record. Sabi niya these certificates were assigned to me for a valuable consideration. See the certificates were endorsed in the back, obviously delivered to me because I am in possession. Corporate secretary: sorry sir but we received a report that said certificates were lost by the SH of record. We can only implement the instruction from our SH of record in light of a report that it was lost, we can t entertain you or else our SH of record with which we have contractual privity will sue us for damages. Bring him here or get SPA from him. Tinago na yung may-ari. Change the balance of control of the corporation. So what did the transferee do? Filed an action with SEC to compel the corporate secretary to record the transfer. MTD: assailed SEC s jurisdiction limited to intra-corporate dispute. No intracorporate dispute between petitioner and corporation because the form is not yet a SH of record of the corporation. Ano gagawin ko dito sa certificates na ito?? SC speaking through Teehankee. Sha ang unang justice na nakasuhan ng impeachment. Filed by a certain Ceniza. Correct decision ito maski Ateneo grad sha. The respondents are correct. This is not intra-corporation dispute bec petitioner is not yet SH of record. SEC has jurisdiction not because intracorporation but because seeks to enforce performance of the secretary of the ministerial duty. When requirements of law for transfer of shares, it becomes ministerial on part of secretary to record the transfer. Only two requirements here: endorsement of certificate and delivery of certificates. Since all requirements have been complied with, it becomes ministerial duty on part of secretary to report it. To compel the secretary to perform a ministerial duty is within the SEC s jurisdiction to supervise and ___ corporation. DLC: tinanggal na ngayon ang control. Requirements under Special Laws In the NIRC, Secretary is prohibited unless there s a certificate authorizing registration is presented from the BIR. Every transfer is a privilege for which excise tax is imposed by law. Transfer of certificate is a privilege; therefore, transfer tax is imposed under IRC. To enforce right of government to collect the tax, NIRC provides that secretaries, transfer agents are prohibited from effecting a transfer unless certificate

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authorizing registration is issued by BIR. BIR in turn will not issue that unless taxes due on transfer are paid e.g. STT (depend on WON traded and listed in the stockex), docstamps (DST on the transaction of assignment and on the issuance of the new certificate) Constructively issued n ayan. Due nga kagad yan. You have to present a certificate authorizing registration Hindin totoo na yun lang hihingin nila. Ano value/consideration of the transaction upon which the amount of tax will depend? Sa stock certificate hindi sinasabi kung magkano consideration. Kaya ang sabi sa printers, baguhin your form of certificates. It should indicate at the back the amount of consideration. There should also be a space for notarization. If not notarized, hindi papatulan ng BIR yan. If you re using the old form, no space for notarization and consideration. Ipapabago rin sayo ng BIR yan. Tax on the gain. How do we prove the gain? Selling price less cost of acquisition. Ano ang gain? How do we tax the gain? Cost of disposition less cost of acquisition but in no case lower than the book value. So the BIR will look at the corporation s book value. Consideration cannot be lower than the value. Some people who transfer unlisted shares, inaareglo ang financial statement to lower the book value of the shares. When there are two years and lower value of shares, saka ita-transfer. So when they compute, no tax is due because no gain. Cost of disposition is equal to cost of acquisition. Book value is less than cost of acquisition. Docstamp lang ang due. Suppose corporation needs money, president agrees to extend loan to the corporation. How do we book the loan to the corporation? If utang, there ll be problem because there are docstamps and also tax on the payment. Kung may interest yun, pati interest, liable for tax. Accountants book that as deposits for future subscriptions. Later on, if the utang booked is turned into subscription, there will be deed of assignment which will attract docstamp. MM?MY. Those are the requirements before a transfer may be reported in the books. And so I am warning all of you, if you become corporate secretary later on. Hindi pwedeng magrecord lang nang magrecord basta basta without certificate from BIR. It s an offense defined and penalized under the NIRC. By practice, the restriction allowed to close corporation and transfers. It should be not more onerous than right of first refusal. DLC saw that many corporations have included that restriction in the bylaws even though not classified as close corporation. Pano kaya pumapasa sa SEC yun? Kung ako gagawa ng dokumento, kung gusto ko ng ROFR, sharesholders agreement yan. SH agreement giving all SH of record the right of SH. Everytime SOS is issued, contract of subscription that the subscriber becomes a party to SH agreement to circumvent the restriction on transfer. Ganon ang DLC technique. Siguro it s now an evolving practice to allow ROFR. NB that the right of ROFR in S98 is limited to a purchase. Therefore, if I m donating, hindi na kailangan ibenta sa existing SH. I m giving this to my son. Although if you will look at S99 No. 6, term transfer as used in this section is not limited to transfer for value. It does not cover S98, only S99. Parang pareho lang din since nasa S99 din ang ROFR. We will go there when we reach close corporations.

COLLATERAL TRANSFERS
Certificate was used as a collateral to secure an obligation. Illustration of the application of this principle. Problem in the exam. Oliva has shares of stocks which are fully paid AND certificated. BUT he needs cash, so he borrowed money from the corporation. Assuming that the corporation has power to lend money to its SH, pinautang sha. Allow me to pay the loan on installment. Okay you will pay on a period of 1 year. Pay every month. So he was given a soft repayment scheme. 12 months monthly payment. Problem: since in constant need of cash, mukhang adik. Hindi nabayaran ang installment. Sabi niya hopeless na. The only remedy is to sell the shares. Sold his shares to Ron. Binayaran ngayon sha after the deed of assignment. Ron went to the corposec with deed and authorization from Oliva, isinasama na yan usually sa isang document. Ayaw ni corposec kasi may utang si Oliva. Til then, we won t transfer. Ron couldn t find Oliva anymore. Ron will be forced to pay the balance of the loan by Oliva. Sandal lang, I was not privy to the loan obligation, nothing appeared on the certificate. Has corporation right to refuse to transfer the certificate in the name of Ron on the ground that the loan is not yet paid? Has the corporation right to demand as condition for transfer that the balance first paid? That s the question I asked in the exam. Look at S63 last par. Look at the wording of the law. What is the antecedent here? Claim should be against the shares and not the shareholder!!! It will only be a claim on the shares of stock kung isinangla niya yung shares as collateral. That s how the exam is structured ha! You are tested on your ability to analyze the code. You read the code. Analyze each and every word! In S64, the corporation is prohibited from issuing a certificate to cover shares of stocks which are not yet fully paid. Why does the law prohibit the corporation from issuing certificate when the shares are not yet fully paid? In order to make a certificate of stock a credible document, check is negotiable instrument kuno. In reality, you can no longer negotiate a check. Banks won t honor indorsed checks. If payee is not depositor, banks will not accept it. That s why I stopped teaching Nego. Nung araw, the only alternative we have for cash is checks. Dati nga walang pera. Barter then silver and golds. Napakabigat non. Small pound of gold. Highway robbery pa kalaban mo jan. Who provided service as the first bankers? Knights Templar. Dahil marami silang gold from David s temple in Jerusalem. You need to pay in England when you are in France. Ano dala nila dati? Document signed with seal of Knights Templar in Paris to pay the gold. You deposit your gold in Paris with commission. Nagprint na sila ng pera. Who was the king who ordered the execution of last knights templar? Executed on Firday 13th. King of France owed them so much. He s being honored by the masons. What am I telling you? For a certificate of title any commercial document to acquire credibility to make use of corporation as business org, we have to make the document a credible document which the people transacting with document will put full faith and credit. Walang record, record. In order to repose or imbue the docuemtn with characteristics enough for people to impose full faith and credit. Don t issue certificate unless fully paid. Incorporate in S64. To lend full faith and credit to the certificate of stock. Kaya maski non-stock ganon din. You can t issue nonstock unless the non-stock is fully paid. When share is no par, hindi pwede issuehan ng certificate yan. S6. Ang pwede lang mag-installment ay par shares. No-par shares hindi pwede. Presumption in law (juris tantum) na fully paid. Nawalan tuloy ako tanong sa exam.

UNAUTHORIZED TRANSFERS discussed this in the lost ring story

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BUT the SEC has a way of circumventing that. No longer commissioner, informed by a former student who is lawyer in big Makati law firm. Allowed issuance of certificate which are not yet fully paid with the condition that all creditors will issue consent. NAKO! Mali na naman! Dun kasi sa recording of transfer, you protect creditors. But here, who do you protect? The transacting public. Creditors consented but what if you transfer the certificate. You won t say na oy may utang pa yan. Safeguard mechanism: certificate shall be with annotation that it s not yet fully paid. Eh bat nag-issue pa certificate? What is that for? Therefore the transferee is subject to payment of balance.

28 March 2011

CHAPTER XVI: Dissolution

The juridical personality of a natural person ceases or terminates when he dies. In case of a juridical person, the personality terminates upon dissolution. Dissolution therefore is termination of existence of a juridical person. When does dissolution take place? S117

CLOSE CORPORATIONS
According to Camposes, it s a pseudo-corporation, it s a de facto partnership in a corporate shell. The wolf in the red riding hood. It s not the presence of the characteristics of a close corporation that makes it a close corporation. This is the DLC position ever since E.g. If corporation has characteristics, is it necessarily a close corporation? Yes, if all characteristics in S96 are present. Talagang close corporation. But suppose not incorporated as a close corporation but ordinary open corporation, pwede ba yun? Kung nakalusot sa SEC, DLC thinks it s not the designation that controls. It s the characteristics given the corporation in the AOI that will corporation. NB All characteristics must be present. If only 2 are present, hindi rin pwede. Always remember Last sentence of 1st par: Notwithstanding the foregoing, There are also some forms of business which may not be incorporated as close corporation. S97 remember that. I should ask about this year.

Methods of dissolution. - A corporation formed or organized under the provisions of this Code may be dissolved voluntarily or involuntarily.

Voluntary if at the instance of corporation Involuntary if against its will. At the instance of anybody, upon the filing of a verified complaint, under S121.
Sec. 121. Involuntary dissolution. - A corporation may be dissolved by the Securities and Exchange Commission upon filing of a verified complaint and after proper notice and hearing on the grounds provided by existing laws, rules and regulations. (n)

On what grounds? Grounds provided by rules and regulations. Revised Securities Act PD 902-A Other special laws NB This is different from quo warranto action that SolGen may file in case of de facto corporation. In dissolution, it presupposes the valid creation of a corporation. But because of some violations, the corporation is dissolved. The action is filed with the SEC. it is the same with revocation of registration. When registration is revoked, the necessary consequence is dissolution of the corporation. to revoke the registration of corporation, grounds are provided for in the law. Under S121, the action need not be bought by SolGen, but upon the complaint of any individual. The complaint is filed not with the regular courts but under SEC under S121. This is not an intra-corporate dispute. The complainant is not required to have intra-corporate relations with the corporation. Since it s not necessarily an intra-corporate dispute, it s not one of those causes of actions transferred by Securities Regulation Code back to the regular courts. This cause of acting has remained with the SEC. How about voluntary dissolution? As I mentioned earlier, the dissolution is brought about by the corporation itself. It s upon its initiative that the corporation will dissolve. Under the Corporation Code, voluntary dissolution is classified into two. 1. Voluntary dissolution where no creditors are affected under S118 2. Voluntary dissolution where creditors are affected. Creditors are affected if the dissolution will prejudice the recovery of creditors. But if the dissolution will not affect the recovery by creditors, voluntary dissolution is governed by S118. Example: The corporation is not suffering from any financial problem. The corporation in fact is productive. But the owners of the corporation want to change line of business. Sawa na sila sa kagagawa ng beer so they do something else. Close shop and open a new business. But they will have to liquidate the assets of the old business, to be used as start-

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up capital of the new business. Idi-dissolve nila. If all the creditors of all business will be paid because there are more than enough assets remaining, such dissolution is governed by S118. Because the creditors are not affected in their recovery. But if the corporation, is insolvent, meaning its assets are not sufficient to cover all its liabilities. The dissolution of corporation will not necessarily affect the rights of creditors to recover on their credit. That dissolution is governed by S119. WON the creditors are affected, dissolution may be effected through 1, 2 or 3 methods. 1. First method: By the corporation simply adopting a dissolution resolution o Majority vote of board o 2/3 of the OCS including the NVSH because No. 8 of S6 When that resolution by board has been approved by the SH, is dissolution already effective? No. it requires approval by the SEC. After the resolution resolved had been approved, it will be filed with the SEC for SEC approval if it will not affect creditors under S118. But if it will affect creditors, it has to be filed as a petition under S119. How different are the two? y Both S119 and S118 has publication y Dissolution by shortening corporate term has no publication. BUT SEC fears that they may be cheated by the corporation. even if creditors will be affected, pababagsakin na lang sa S120. In order to prevent unscrupulous individuals from availing difference in treatment, SEC by its resolution requires publication even though mode of resolution is S120 shortening of amendment nonetheless. Redirect your attention to S37.
Power to extend or shorten corporate term. - A private corporation may extend or shorten its term as stated in the articles of incorporation when approved by a majority vote of the board of directors or trustees and ratified at a meeting by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members in case of non-stock corporations. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That in case of extension of corporate term, any dissenting stockholder may exercise his appraisal right under the conditions provided in this code. (n)

Dissolution Resolution Dissolution AOI amendment

Affects creditors No effect on creditors

via petition with the SEC

It should be read together with S120. The requirements therefore of S37 should be complied with when the mode of dissolution is through shortening of corporate term. After SEC has approved the dissolution, whether by petition because creditors are affected, what is the effect of such approval by the SEC. y If the mode is No. 1, then dissolution takes effect upon approval by the SEC. What is the effect of dissolution? Personality of corporation ceases. What happens to contracts the corporation may have entered into and those contracts are not yet fully performed either in one or both sides? E.g. Contract requires corporation to perform an obligation over a period of time, say 5 years. Corporation will dissolve in the middle of performance of the contract. That creditor will surely be affected by the dissolution. therefore, creditor should have informed the SEC about the existence of that contract which is still partly executory. It will be prejudiced, SEC must be considered in deciding WON the ___ the dissolution applied for. Corporation said no problem po, we have so much money we can arrange for delivery/performance of our obligation for the remaining year under the contract. Application was approved, corporation was dissolved. During the balance of the period of the contract, what is personality of the corporation to perform. That s why there s the winding up period of 3 years. Corporation is allowed 3 years to wind up its affairs. Same thing when it s the corporation that expects obligation from 3P. Dissolved na. gone out of existence. Meron pa shang 3 year winding up period. Take note that the 3 year is a winding up. Prohibited from entering into new contracts in pursuance of its business. Wala ka nang business so you can t get contracts to do business. It will be illegal and invalid contract. But all contracts needed for winding up its affairs are all allowed. e.g. insurance companies, appraisers, banks, suppliers. All those contracts are allowed basta winding up. 10 years yung contract so the unperformed balance is 6 years. 3 year lang winding up. How about the other 3 years not covered? The remedy is provided for in the law. S122 2nd par:
At any time during said three (3) years, the corporation is authorized and empowered to convey all of its property to trustees for the benefit of

via application with the SEC

Shortening of the term

affecting the creditors

deny application, convert to petition

no effect of creditors

approve

No need for AOI amendment, even if they still have 30 years remaining in the life of the corporation. Since it s a petition, there must be a proceeding under S119. Shortening if 50 years of existence. 30 year will come next year, we can amend articles by shortening the term to coincide with Dec. 31, 2011. Term of corporation will expire, and as a consequence of that expiration, corporation will be dissolved. Since the shortening may have an effect of affecting the creditors, SEC will look at the fact. Usually they will require publication so that the creditors will be affected. When SEC convinced that creditors will be affected, they will deny the application and ask them to convert to a petition. 2. Second method: Shortening of corporate term This is done by amendment. The corporation is deemed dissolved upon approval by the SEC. problem here is an amendment of the AOI may be approved by SEC through inaction under S16. 6 months after filing of amendment and SEC has not acted on amendment. The amendment is deemed approved. The amendment takes effect from time of filing, not from the lapse of 6 mos period. Mabuti nang mabuti if the new expiration of the term is beyond 6 months. If so, magre-retroact yung approval. Hindi naman pwede na mai-consider na dissolved at the time of filing because 6 months pa yung new term. The problem is when the termination is within the 6 month period. When is the corporation deemed dissolved? Sabi dissolved upon filing but the filing, the new end of term hasn t arrived yet. When it arrives, nagdi-dissolve na pero di pa approved yung dissolution resolution. Those are minor problems which DLC believes are not insurmountable.
th

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stockholders, members, creditors, and other persons in interest. From and after any such conveyance by the corporation of its property in trust for the benefit of its stockholders, members, creditors and others in interest, all interest which the corporation had in the property terminates, the legal interest vests in the trustees, and the beneficial interest in the stockholders, members, creditors or other persons in interest.

niyo dacion en pago. Here are the assets, here are the values. Instead of me disposing the assets, asset na lang ibabayad. That s what you put in the liquidation plan. Some creditors prefer to be paid in property. Dacion en pago, in English: dation in payment, wala sa dictionary yan. When the corporation is under liquidation, all claims against the corporation have to filed with the liquidator. When corporation is insolvent, mas mahirap yun. It means the assets are corporation are not sufficient to pay all the liabilities of the corporation in full. When the liability is 10M, the assets are only worth 2M. y Ano ngayon ang recovery ng mga creditors? 20% na lang. the government is one of the claimants, and it s claiming for unpaid taxes. Separation pay, benefits and wages of labors. Bank in whose favor mortgage is constituted on property where the plant is standing. y Do they have preference? Yes. The liquidator in such case has to observed and apply provisions of CC on preference of credits. KAYA LANG, may bagong batas. FRIA Financial Recovery and Insolvency Act. Not sure if that s the law na kasali ako sa gumagawa. There s a law filed in Congress, name of the bill was corporate recovery and insolvency law. Dati kasi ang corporate rehab, nasa PD 902-A. wala yan under Insolvency Law. Rehabilitation is provided for in PD 902-A. that fell under exclusive jurisdiction o fth eSEC. Available only to corporations and partnerships. When DLC was in the SEC, tumama yung Asian financial crisis some time in 1997. Dumami ngayon yung ifinile na petition sa SEC for corporate rehab. One of them was by PAL, Victorias Milling, and PNB. Some of our government lenders e.g. ADB, WB, IFC (lending arm ng WB). Babatukan ko kayo hindi lending institution ang IMF. It s the CB of the world. Created shortly before the close of WW2. Upon the call of apparent victor in that war i.e. USA. It was called and held at Bretonwoods, New Hampshire. Before that time, settlement of world obligation of countries was based on the gold standards. So dapat the countries, parity of money is tied up with the value of gold. E.g. the dollar, US government has a commitment that if you present the dollar in Fort Knox, dapat papalitan yan ng gold equivalent. Nasa Fort Knox yung gold equivalent for the money. Sa Bretonwoods, that s the start of removing the gold standard. Where is the value of currencies worldwide now pegged under Bretonwood Agreement? US Dollar. Charles De Gaulle (The Who? The Gold?) was president of France. New imperialist is US controlling the economy of the world. Exchange those dollar bills into gold. There s no gold there. Kennedy suspended the ___ of dollars to gold. Magandang specialization yan. International economic law. That s a course in post gradu programs of London School of Economics. Nasan na tayo? Nagyabang na naman kasi ako. I was the Benjamin so ako inutusan. Ayaw magpautang ng mga international lenders. Unless this corporate rehab becomes a settled matter. PAL made utang to buy new fleet of aircrafts. Biglang nag-default si PAL from amortization on EXIM bank loan. Nung nagde-default na sha, file with SEC for petition for corporate rehab. Consequence of corporate rehab proceeding, SEC issued stay order prohibiting all enforcement and actions anywhere. EXIM bank filed a proceeding in California to allow them to arrest airplanes when they land in the US or any country which is friendly to EXIM Bank. You ll hardly find any country which is not friendly. Pag nag-land yan, aarestuhin. Alam niyo na sa transpo yan. PAL s lawyer, guess who the lawyer was. Estelito Mendoza. Lawyers lawyer. Napakagaling na tao. Mas magaling sakin. He filed a motion with the CA high court to stay the proceedings using the stay order issued by the SEC as the basis. Nawindang CA lawyers over there. Wala tayo ganong body of laws. It s just a passage in the PD 902-A. so the lending institutions withheld releasing funds for the PH in accordance with loan agreements. Isa jan ang ADB na ayaw talaga mag-release. High level

Icoconvey nila yun. Pwede bang para di muuglo, we convey at the start of dissolution? Yes, it s allowed. It s done by appointment of trustee. Same resolution providing for the dissolution contains appointment of the trustee. That trustee is called the liquidator. All interests which the corporation has over properties will be conveyed to this trustee. All the liabilities as well are transferred, lahat ng utang you file with the liquidator. Bahala na sha magbayad dun. Convey all assets to the liquidator. Liquidator holds the legal title. This is called liquidation. The liquidation of a dissolved corporation. When that is done, you are actually making the 3 year winding up period irrelevant. In the hands of liquidator, wala na yung winding up period. The liquidator is now free to deal with those assets and there is no limit of 3 years. But may the liquidator enter into a contract continuing the business of the corporation, he cannot. Bawal na yun. Ang kanyang power is simply to effect an orderly liquidation of the corporation. Sino pwede iappoint? Entirely within the powers of the board UNLESS it is a petition for dissolution where creditors are affected. The creditors who are the beneficiaries may request that the liquidator be nominated by them. Para sa amin naman those assets so we nominate our liquidator instead. Pag yung appointed by the corporation, bumagsak pa yung 80% to 20% at nakuha na ng liquidator yung 60%. Kung amin yung liquidator, that s our own lookout. If the dissolution does not affect creditors, then the corporation has the right to nominate and in fact, the corporation will appoint the liquidator because no creditor is affected. Sino yung pwede iappoint as liquidator? Anybody. Including Prof. Concepcion. What will liquidator do? Obligation to gather all assets of the corporation. Everything of value has to be recovered by the liquidator so that those assets may be disposed of and proceeds apply to discharge the liabilities of the corporation. if the corporation is not insolvent, after all those assets are disposed of, we expect those proceeds to cover all the liabilities. Kapag nabayaran na lahat ng liabilities or provisions are made especially for contingent liabilities (liabilities to mature in the future). Approve na yung provisions, called provisioning. After provisioning may natira pa, to whom will that go? To the SH as their liquidating dividend. But the entitlement of the SH will depend on their preferences. Baka may preferred SH who are given preferences to liquidating dividend. Sila yung mauunang bayaran ng return on capital. Kung naubos nila, wala na mapupunta sa common. Maglupasay na lang sila kung gusto nila. NB that this is done by the liquidator in accordance with the liquidation plan. Pag nagsasara ang isang company, we have a closing out sale. Parang fire sale. Babalansehin ng liquidator yan. Do we do outright fire sale of all assets then apply all the proceeds? Pag finire sale mo yan, bagsak ang recovery value mo niyan. Pwede namna hindi mag-fire sale but program the dispotiion of assets. That might help improve the recovery from the disposition of those assets. Balance the assets, dispose everything at an auction or plan the disposition. That s the work of liquidator. That s the expertise. When to sell, what to sell, benta ba lahat to maximize recovery. Pwede rin as a method of paying creditors, gusto

110
meeting. Kailangan siguro, we should have rules and regulations implementing the corporate rehab provision of PD 902-A. SEC gumawa kayo ng rules. Ayaw nila ng trabaho, so sakin ipinasa. Rules on corporate recovery I made that. Kaya lang tinaransfer sa RTC from SEC. yung ginawang rules ni DLC, final say on WON the corporation will undergo rehab or not, but the creditors do not agree but the creditors. Creditors should called to a meeting and vote. Required number of votes reached, only time allowed to go on rehab. Without obtaining vote, corporation should not undergo rehab but dissolved. Wala kasi sa batas natin. The law says it s the SEC. If I do what is provided, knowingly promulgating a rule contrary to the enabling law. WB threatened to file a case against me. The remedy not with us but the Congress who has power to change the legal framework. Inilagay nila as a rider in the Securities Regulation Code. Nagalit jan si Joker Arroyo. Yung AJA which is linked with the CIA. Nilolobby yun AJI. US AID, transfer of jurisdiction from SEC to courts by mere rider in the SRC. Ako pa tinanong nila kung pano gagawin through Sen. Cayetano who was my boss before. Pagdating sa regular courts, wala rin silang rules. When the new rules were being discussed, SC formed a committee to come up with drafts of rules on corporate rehab but I was not invited. Ok lang naman. Kaso nung matapos na yung rules, CJ Davide. We were colleagues at the IBP. Magkasama kaming gumawa nitong BP 68. We followed closely your draft. Patay kasi hindi rin creditors magdedecide. Court pa rin. This time, instead na SEC, courts naman. Finally they filed a bill in congress, calling it Corporate Recovery and Insolvency Law. Hindi pa rin ako invited sa hearings at TWG until one day, received a call from committee. Oscar Moreno now governor of Misamis. Inviting you personally. 2-3 question pa lang tinatanong ko, nagkagulo na sila. In the eyes of Congressmen, congress lapses every three years. All bills not acted upon by congress are deemed vacated unless refilled. Then suddenly lumabas na ang FRIA, pero hindi ko pa nababasa. Baka sumama na naman loob ko. That s the law you will apply in case of corporate rehab. I wrote an article on corporate rehab in the Philippines which I presented to ADB meeting in Australia. It s in the website under my name. Published by Sota University in Japan. When the corporation undergoes rehab and rehab fails, the necessary consequence is liquidation. NB that preference of credits is irrelevant when the corporation is solvent. Kung solvent yung corporation, magiging irrelevant ang preference of credits. Pero kailangan pa rin ang liquidation plan kasi liquidation plan has nothing to do with application of proceeds. The half is plan on disposition of assets. Liquidator may be a single person or committee or even juridical entity like a bank performing a trust function. What is the effect when three year winding up period has expired and corporation has not conveyed its properties and liabilities to a trustee, what happens? Problem yun. Insofar as pending cases, e.g. corporation is the plaintiff, the case has been dragging on. Filed when the corporation was still doing business. In the middle of proceedings, corporation is dissolved. What happens to the case pending in court? Now since the plaintiff has gone out of existence, analogy, namatay yung natural person plaintiff. Notify the court and file motion for substitution of party. who substitutes? If there s a settlement proceeding, the estate represented by the administrator or executor will substitute. Kung walang settlement proceeding, who do we put as substitute parties, the heirs of the deceased plaintiff. The same thing if the decedent is the respondent. What if the corporation is plaintiff, and the corporation is dissolved? Apply the same rule. Notify the court of the dissolution and then the change of parties. Substitution by the trustee who may be the liquidator or whatever name he s called by the board. If it s not done, what happens to the pending case? The pending case has to abate because the plaintiff is no longer a party with standing in court. Standing is gone. Can they convey the assets to trustee after the three period (law says before the 3 year expires)? Nalimutan kasi nila i-convey sa trustee. DLC opinion: pwede naman. Wala naman magrereklamo diba? Pero kung wala. Or kung may magrereklamo, feeling ko dapat dumaan muna sa SEC. File a petition with the SEC for the appointment of liquidator. What do I use there? The power SEC has over corporations. This was asked in the bar when the examiner was former SEC Rosario Lopez. Three instances or how is corporation liquidation accomplished? Nasa suggested answers yan. Bilihin niyo sa law center. Pakitain niyo naman kami. Experts in the fields of law that were given the previous Sunday would gather in the Law Center. It s tasked by the SC to come up with answers to the bar exam question. Why does the SC require the law center to do that? We are required to give the suggested answers before the examiner checks, because he might fail his own exam. Once in a while, we d be joined by professors who teach in other law schools for the first time. Umaattend for the first time, baka sha yung examiner. In one poli law meeting, dumating si Perfecto Fernandez, sabi niya, I don t know who the examiner is but definitely he is the idiot. We didn t know the examiner was there. Hindi naman ako gumawa ng tanong na yan, sa chairman galing yan eh. The chairman was an idiot. I will not check if no question will be asked coming from a list. Can they appoint the trustee/liquidator after the 3 year period? Yes, but it has to be done by the SEC. They removed the control, but it still has supervision over all corporations registered with the SEC. In the case of Republic v Security Credit, a complaint was filed against a corporation, to dissolve that corporation for engaging in a business outside its powers. The security credit was performing the functions of bank without the necessarily license given by the CB. SC decision, normally a corporation should not be dissolved for violating provisions of law. Dissolutions of the corporation is an extreme penalty that can be likened to death penalty in case of individuals. Therefore, the penalty of dissolution should be meted out only when injunction is not available as a remedy to correct the wrong being committed by the corporation. Doon lang i-impose ang dissolution as a penalty, when no other remedy to be resorted to in order to enjoin violation of law for the commission of the wrongful act. But the court imposed dissolution as a penalty in this case. This corporation cannot continue doing business without violating the law (not organized as bank, unlicensed by CB but its actual business is banking). Hindi pwedeng i-enjoin lang kasi pag inenjoin lang, wala na shang ibang gagawin. Injunction was not an appropriate relief in this case, hence resorted to dissolution as penalty of that erring corporation. Camposes comments: Three methods of liquidation. Third method is conducted by receiver appointed by SEC upon its dissolution. FRIA limitation does not apply Footnote: Corporation Code S119. DLC: S119 only happens when creditors are affected. Court may appoint receiver. Why? Creditors may object to outright dissolution of the corporation because such may be more prejudicial to them. Ayaw na niya mag-business, bat pipilitin pa? Creditors may realize that it s better for the corporation to continue doing business because still

111
profitable, apply profits from operation to discharge and then after paid, surrender the corporation to SH. That s called receivership. Instead of running the business, pwedeng ibenta business as a going concern. They will have to convince the SEC that that is not only advantagoues to them but also prejudicial to other creditors. Di pwedeng buhayin natin sila at the expense of other creditors. Comment of Camposes is limited to receivers appointed under S119. DLC opinion: Powers of SEC is sourced not only in S119 but also in PD 902-A, in the exercise of power, the SEC may appoint even beyond the 3 year winding up period. Preference of credits no longer to be discussed. Presumption is adequately discussed in Credit Transactions. Distribute to SH as liquidating dividends. Sa totoong buhay, hindi nangyayari ang escheats. Mauubos lang sa expenses yan. If your accounts don t move for at least 1 year, it can be dead account. After certain number of years, the balance of the account has to be turned over to a bank dead turnover instead of the bank, it has to be in the bank. That s an escheat mechanism when it comes to bank deposits. Hindi na nangyayari yun, kasi may charge na. Service fee for keeping that amount in your account which has become dormant. Unless bilyon yun. Wala sila ituturn over sa bank. NB that dissolution of the corporation where creditors are affected is an insolvency proceeding. The insolvency law (Act 1956) does not provide for dissolution of a corporation, logically it won t. because the corporation, kaya niya gusto magfile under insolvency law is for the corporation to be freed from liabilities while allowing to do business under the same corporate personality. Individual muna, when he becomes bankrupt, file petition for insolvency under Act 1956, all he hast to do is convince the court that surrendering all the assets. Ito assets ko, ito utang. Hindi match. Assets < utang. Pero araw-araw akong sinusulatan ng collection lawyers. Tatapat sa bahay with microphone. Public shaming. Hoy magbayad ka ng utang mo, balasubas ka!!! No imprisonment for non-payment of debt kasi. To save the individual for embarrassment, file petition for insolvency in court. When this individual convinces the court that the list of assets is real without hiding anything, everything is my liabilities, hindi gawa-gawa lang. Declare insolvent and give discharge. Freed from liabilities. Wala nang pera except from tools of the trades. To allow him to start all over. After given discharge, tumama sa lotto. 150M. can the unpaid creditors in full recover? No more. Sorry na lang. Sobrang swerte dumapo sa akin, wala na akong utang. Kung hindi tumama sa lotto, same person will be allowed to start over. Act 1956: no discharge given to corporation. it s only given a sustained moratorium. Corporate creditors cannot make singil until distressed pa ang financial condition niya. No discharge is given. In insolvency therefore, the corporation is not dissolved. Kaya nga sha humihingi ng declaration is to allow to do and continue business under the same corporation. Impossible na idi-dissolve under A1956. Remedy of dissolution is unique to the corporation code. Hindi kasama sa naisama sa regular courts. I just don t know if my position has been modified by the FRIA. Case of Planters Bank v Consolidated Metal. Wala daw jurisdiction ang SEC for liquidation of the corporation. This is a wrong decision. Liquidation is just an effect of dissolution. Dissolution where creditors are affected falls within exclusive jurisdiction of SEC under S119. I just don t know if that wrong decision has been corrected in the FRIA. I still have to look. Ginamit yan sakin sa Legacy ni Delos Angeles. Yung namili ng mga Rural Banks. Companies filed petition with SEC, SEC dismissed on ground of lack of jurisdiction citing case of Planters Bank v Consol Metal. Congressional inquiry on this and I was one of the resource persons invited by Congress. It s not in PD 1956 or PD 902-A, but in S119 of the Corporation Code. Homework niyo kung binago nila ang batas under the FRIA.

112 CHAPTER XVII: Corporate Combinations

When you say combinations: 2 or more corporations unite or combine. When do they combine? If they will unify their corporate structure. Isa na lang. Old Corporation Law did not have these provisions on corporation combinations. But they were able to do it through other provisions in Corporation Law, one of them is through sale/disposition of all/substantially all the assets. X SH Assets Y SH Assets WON a combination follows the procedure outlined/prescribed in the corporation code may be material in determining liability retention. Or liability transfer. Kasi if it s a merger or consolidation, all the liabilities of the constituent corporation survive and are inherited in full by the surviving or the consolidated corporation. Pwede kasi gawin ng mga parties in order to acquire only the assets but not the liablities, pwede sila gumawa ng series of transactions in order to achieve combination pero ayaw ng liability. Diyan nakikita kung magaling ang lawyer. Gagawa ng legal engineering. A lawyer creates legal structures to accommodate, circumvent the law. To make what appears illegal appear legal. E.g. may prohibition for foreigners to own land. Gagawa ng dalawang corporation, land held by this corporation and the equipment and business owned by another corporation. but no matter what they erect in order to camouflage the real intention of the parties. The moment it appears that what the parties intend to achieve is a combination, we ll have to apply all the consequences of the corporation under the code. When you are lawyer for the creditor. Nagbenta, nadissolve. Para mahabol yung business. Show that the transaction was really to combine but simply avoided the inheritance of liability by erecting those structures. Important yan. Lalo na kung abogado ka ng creditor. To make the surviving/consolidated corporation liable. Show that what was intended was a combination. In combinations, ang problem jan ay valuation. That s 60% of problem in the combination. The merged/absorbed corporations , the SH of the absorbed corporation will be SH of the surviving corporation. what should you pay now to the shares of stocks of the surviving corporation? Ipambayad the shares of stocks hawak nila in the constituent corporation. shares of the surviving corporation so I now become SH of the surviving corporation. gano karaming shares ang palitan. How many shares of the absorbed will match the shares of stocks fo the surviving corporation. Ano ang palitan nila? Nandun ang issue ng valuation. Pwedeng 4 shares of stock of absorbed corporation are equivalent to one share of stocks of the surviving corporation. After determining the valuation, put in the AO merger or AO consolidation. Madugo yang issue na yang ng valuation. Kasi I was a SH of PCI. And then napunta sa Equitable. Kambyo ng shares. Napunta ulit sa BDO, kambyo ulit. Maski mawala ako dun to oppose, bayad ka na lang. let the independent directors and SEC do their job of ensuring that the merger was not to the prejudice of the SH of the constituent corporation. That s all you have to know about corporate corporation.

X decided to dissolve. Wag na tayo mag-business. I-cash na natin lahat ng investments natin. SH decided to sell all their assets to Corporation Y. See notebook. Was there combination here? No. because corporate structure did not unite. After the sale, the two remained distinct, independent entities. X remained a corporation, wala nang hard assets but they are now cash. It s still a corporation with SH. Later on X decided to dissolve. So cash was used for distribution as liquidating dividends to SH. SMC bought Balintawak Beer Brewery in Valenzuela. After dissolution, was there combination? Wala parin. Still not unified corporate structure. Suppose ang ibinayad ay hindi cash but shares of stocks. Is there corporate combination? Wala pa rin. X became a SH of Y but not unified corporate structure. Code regulates two types of combinations a. Merger b. Consolidation

MERGER
Two or more constituent corporation combine to form one single corporation in the entity of one of the constituent corporation as the surviving corporation. Surviving corporation will remain intact and all other constituent corporation will be absorbed in the corporate structure of surviving corporation.

CONSOLIDATION
Constituent corporation will all go out of existence. To be absorbed by just one corporation. Called the consolidated corporation new one formed to absorb all the constituent corporation. Parang phoenix rising from the ashes. The corporation code regulates those two types of combinations. Come to think of it, lahat naman ng combinations may be narrowed down to these two. The rest will just be modifications of either a merger or consolidation. In mergers, may mga recent mergers na nag-merge for instance ang Far East Bank with BPI. Sino ang nag-survive? BPI absorbed Far East Bank. Nag-merge ang Equitable Bank with PCI. BDO ang natira. Mas tax efficient ang merger kaysa sa consolidation. Expense and cost-efficient. May list tayo niyan in deciding what mode of combination to take. Special practice in corporation law. If you do post-grad to specialize here. Mergers and acquisitions. Yan ang kanyang course title. Madugo yan.

113 CHAPTER XVIII: Foreign Corporation

The only issue: Do we recognize as a judicial person a corporation that was organized abroad? Oh my. PrIL nightmare. Itong basong to, sinabi kong tao ka. Pero kung itong basong ito, dinala sa paris, can I tell Parisians, tao itong basong ito. Suppose in France, this glass is personified in France through legislation, will Philippines recognize it? It depends.
Sec. 123. Definition and rights of foreign corporations. - For the purposes of this Code, a foreign corporation is one formed, organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or state. It shall have the right to transact business in the Philippines after it shall have obtained a license to transact business in this country in accordance with this Code and a certificate of authority from the appropriate government agency. (n)

fabric. Nagsara na lahat ng textile mills natin. Wala na tayo competitive advantage when it comes to textile industries. Hahanap sha ng textile manufacturer. Dito tatahiin lahat ng fabrics. Competitor ang Sri Lanka, India, China, and Vietnam kasi mura mga labor dun. Garment subcontractor the designs and fabric. Bonded warehouse, kinucut na yung tela otherwise mapupunta sa Divisoria. 40% were rejected. 20% is not even break-even. Luge sha. Hindi papatol yung Filipiino subcontractor without letter of credit. Nung na-reject, idedemanda ang Filipino contractor. What are you in France, corporation or societe or partnership or single proprietor? Why? If single proprietor, no need for license to do business. According to my Paris lawyer, I am a limited partnership. Companie limite. Do partnerships need to get license? SEC ruling, foreign partnership are required to have license to do business. Was my client doing business in the Philippines? Mukhang oo. Before problem cropped up, 15 years na niya ginagawa yun. Season in and season out. No license to do business. See how inefficient our government is? Matataxan sana sha diba? DLC advice: Mukhang doing business kayo ngayon. We sue, since we don t have license, madidismiss tayo. Instead of running after Filipino compatriot, run after French bank. Pwede ba yun? We will try. Letter of credit was irrevocable but DLC saw that before bank cleared the LC, may lag between presentation for clearing and something else. May letter pala addressed to bank to stop payment of credit. Unfortunately, irrevocable. Even if irrevocable. Bring this up to authorities in France. Derogatory information. Nag-settle pero nawalan ako ng kaso sa France. Pero nakasingil ako. Don t forget the NIRC. It speaks of a representative office and a branch office. Separate tax treatment. Ask your tax profs the difference. Foreign corporations have choices/options: y Domestic subsidiary makes irrelevant the need for license. y Branch office y Representative office y Not set up any of the two at all Di ko na ituturo sa inyo yan. Just bear in mind that there s such a thing. What constitutes doing business? Marami yan. Yung isa sa mga kaso jan, the foreign corporation was sued, doing business but had no license. May that corporation answer the complaint filed against him? Yes, prohibited to sue but can defend itself. It cannot raise a counterclaim which is a suit. Prohibited from suing if no license to do business. How to acquire jurisdiction over foreign corporations? If with license, one of the requirements is specification of agents. If no license or not doing business, how to acquire jurisdiction over person of foreign corporation? San serve summons? OSG under the ROC. Ewan ko lang kung binago no. DLC not abreast with latest developments on this. It must be covered by CivPro.

There are two requirements: a. Under foreign law. If this paper cup is organized as a corporation, then it MAY be recognized in the Philippines as a juridical person. b. May dahil may isa pang requirement. Under French law, Philippine corporations are recognized AND allowed to do business there. We call this principle reciprocity. There are no corporations in France. Lahat ng European continents, lahat sila ay civil law countries. United Kingdom and Ireland. Lahat sila continent. Ang nasa continent na Europe ay lahat Civil Law. They were under Roman rule for a long time. Mamaya ko na sasabihin yung problem ko sa kanila. Assuming that this foreign corporation is recognized as a juridical entity in the Philippines because the two conditions are obtaining. Pag pumunta sila rito, pwede ba sila enter into contract? Of course. If the contract is breached by Filipino party, pwede bang magdemanda ang foreign corporation to ask relief? It depends. If the foreign corporation is doing business in the Philippines, it must have a license to do business. If without license to do business, it cannot sue. But can it be sued? Of course. However, if not doing business in the Phil, no requirement to do business. Pwedeng magdemanda because recognized as a juridical entity under S123. Crux of the matter: When is a corporation considered as doing business in the Philippines? y GR: Isolated transaction is not to be considered as doing business in the Philippines. y EXCEPTION: When isolated transaction is intended to be start of doing business. Exporting substantial portion of the foreign corporation. DLC had a French Jew woman client. Her business is in the fashion industry. All the designs of garments in the world. Almost all. Are conceived in Milan. Not in Paris. Lahat ng mga fashion houses ay nasa Milan. Design establishments eh talyer. Atelier in French. Nag-aamuyan talaga sila. Pare-pareho ang idedesign nila. Most likely ganon. My client went to Milan with a house of fashion designer. She ll get the design and some prototype. Dadalhin niya then to Bangkok. Kasi nandoon imamanufacture yung fabric. Hindi na tayo nagmamanufacture ng ganon

114 Special Corporations

1. 2. 3. Educational corporations Religious corporations Close corporations Berlin v Ramirez: happen in the archdiocese of Nueva Caseres in Bicol. Nueva Segovia is Ilocos. Group of Bishop Aglipay, Ilocano prelate, revolted from the Catholic Church. Father Jose Burgos from Vigan talaga nagsulsol jan. Supposed to be a brilliant theology student in UST. Kabirthday ko yan kaya magaling yan. Father Jose Burgos came from a wealthy family. Hindi pwede magpari ang anak ng mahirap. Bahay niya ay yung malaking bahay sa harap ng Vigan Cathedral. Sha yung secular. Two kinds kasi yung mga pari at madre: REGULAR belongs to an order/society. SECULAR doesn t belong to order. All the parishes in the country during Spanish time were headed by parish priests who were regular priests. Kanya kanyang dominion yan. Burgos champions the cause that parishes should be secularized. Nag-umpisa muna sha sa secularization. Nako filibuster ang paring itey. Erehe. Heretic! Yung dalawa niyang alalay na hindi alam ang ginagawa niya, nadamay sa pagkagarote sa kanya. During Bishop Aglipay s time, he seceded from the Roman Catholic church, ala Martin Luther to found his own church. Iglesia Independiente Filipina. Pero kung titingnan mo ang kanilang dogmas, the same with Catholic church except for two distinctions. No vows sa pari. Pwede magasawa. Wala ring vow of poverty. Hinidi lahat ng pari may vow of poverty, yung mga regulars lang. came to be known as Aglipayan Church under Obispo Maximo Gregorio Aglipay. Godfather of Ferdinand Marcos. Aglipayan sila. Kasama ni Bishop Aglipay. Isabelo delos Reyes. Mga ilokano sumama jan. parish priest in Nueva Caceres ang sumama jan. declared that this church is Aglipyaan. Arsobispo ng Nueva Caceres, sayo ba yang simbahan na yan? Karamihan kasi ng members dito Aglipayan na. What did archbishop of Nueva C do? file action in court to recover the church. MTD: What is the personality of the bishop? Of the catholic church? Case was brought in the name of Catholic Church represented by the bishop. SC: How dare you. Wala pang Pinas, may Catholic Church na. But there is an anomaly there. Catholic church is an organization. So church has to have a representative. So they recognized the archbishop. You cannot tell catholic church to register to SEC, blasphemous yan. Mortal sin yan to ask them to register. Kung yung representatives sila, ano na liability ng archbishop? Personally liable for contracts entered into in the name of the church? Mahirap yun. What form will the archbishop take? Compromise: Archbishop shall be considered as a corporation by himself. A corporacion sola in Spanish. He represents the organization but incurs no personal liability. If you will look at the SEC, there s no protestant sect organized as corporation sole. Most of them are organized as non-stock religious corporation. Merong board of trustees. Merong council of elders. Ang corporation sole na nakita ko ay archbishops at saka si Executive Minister of INC. Kung mababasa niyo yung Da Vinci Code, siguro mga 30% of what s written there is historical. Like what happened in the council of N. divinity of Christ was voted upon. It was called by Constantine the Great. Who was the pope at the time? No pope then yet. If you will read historical accounts, if you look at what Constantine the Great did, first pope of Catholic Church. Bishop Silvester but not the Pope. Constantine the Pope rallied all of them. Decide on impt matters. First organic pope. But the first is really Peter. Heresy headed by Bishop Bartolome Arius of Barcelona. Aryan heresy. He will say that JC is not a god. Went against another bishop of Alexandria in Egypt. God and man. Dumadami ang Catholics, they must be controlled. Hindi naman umattend lahat. Of the 800 bishops, mga 400 lang dumating. In the same council, they decided to reformulate the Apostle s Creed. Summary of faith of all Catholics. Description of JC. Kaya ang tawag sa apostle s creed ay Nicene Creed. Arian heresy is alive in the US. It s a church. United Church. If you will look at the dogma of INC, parang ganon eh.

EDUCATIONAL CORPORATIONS
The corporation code in providing for educational corporations simply settled the controversy of WON educational corporation should be allowed to incorporate as stock corporations. There was a strong lobby from organized sectors of our society to limit educational corporations to non-stock corporations. Now the corporation code settled the matter by allowing educational institutions to be organized as stock corporations. Then made provisions in case an educational institution is organized as a non-stock corporation. that s why if you will look at S108, that is a provision applicable to an educational institution organized as a nonstock corporation. BUT DLC doesn t know if that is still the case under the Education Act. Meron kasing ipinasa na education act sometime in 1992. You look at that law. May nakapagsabi sakin na the Education Act already prohibits organization of educational institutions as stock corporation. Of course, that prohibition can only be prohibitive in application. Cannot be applied to already organized as stock corporation. Check on that.

CLOSE CORPORATIONS
Classify as special corporation because it can do many things that an ordinary corporation cannot do

RELIGIOUS CORPORATIONS
There are two types 1. Corporation sole 2. Religious societies

Corporation sole
Not a new provision of the code. Meron na shang counterpart before in the old corporation law. That s why if you look at S110, corporation sole was carried over from S154 of old corporation law. This is to accommodate primarily the Catholic Church wherein the form of organization of Catholic church is one of dictatorship. Lahat ng pari, may vow of obedience to the superior. So kung hindi pwede mabuhay na may nagdidikta sa buhay mo, di ka pwede maging religious. Ke nasa pari or madre ka. May vow of obedience sila. Nga lang, if you can t follow, you can always get out. Unlike in a communist state. That s the reason why Catholic church is well organized and efficient. To enforce dictatorial style of church management, they created in the 10th/6th century the dogma of the infallibility of the Pope. May hierarchy yan, it starts with the parish priest. Then bishops. Then archbishop. Then pope. Walang jurisdiction ang cardinal. Cardinal is just a title, giving him privilege to participate in the selection of the pope. That process is called conclave sa Angels and Demons. They do it in the Sistine Chapel at the Vatican. Frescoes there painted by Michelangelo. When it comes to the diocese, it s the bishop who calls the shots. Archdiocese is the Archbishop. Archbishop controls the patrimonial affairs of the archdiocese. He decides on all patrimonial matters. Parish has to go to archdiocese for decisions. The archdiocese is headed by the archbishop. Who decides for the archdiocese? The archbishop. Halimbawa lumindol at nasira ang Manila Cathedral, somebody has to enter into a contract with contractor for the repair of Manila Cathedral. Who will represent the church in that contract? Kaya nga may kaso:

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Corporation code provides for the mechanism on succession, registration of person as corporation sole and assumption of successor as corporation sole. Basahin niyo na lang.

Non-Stock Corporations
As I have asked you to do, go section by section and asked yourselves if the section is applicable to a NSC. S1-S5 - Of course S6 - Non-voting members in a NSC. Look at S89. Walang broadened sa stock corporation. How do you do it? The preference given to shares is vote twice. Common shares just one. Wala na ako sasagutin. Exam na lang lalabas yan. Sa NSC, right to of member may be limited, broadened and denied. NVS in SC are allowed to vote in S6, is there a similar provision in case of NSC? Boboto rin ba yung mga non-voting members? Hindi niyo natanong sa sarili niyo yan no? Boboto ba yung mga non-voting members? Look at S87 last par. Yung pagboto ng mga non-voting members for S6 matters. Pertinent ba yun? Should there be preferred membership dahil may preferred shares ? There may be no mention, but there is no prohibition. Therefore, we might apply this provision of S6 being pertinent. How does one become a member? In case of SC, one may subscribe to the shares of stock of corporation which may have par value and paying the par value or the issued price as consideration. Sa kaso ng NSC, how does one become a member? Is there a subscription contract for membership. If there is, how much is the consideration? Pwede bang membership with par value? Pwede ba membership with no par value? Redeemable. Pwede ba may redeemable membership? Pwede ba merong founder membership? Bakit natin tinatanong? Kasi may provision in S87 2nd par. Meron bang treasury membership? Corporation Code s framework, ayaw nila makialam sa NSC. Kaya mashadong minimal ang provisions. What is the practice? Membership is left to the corporation to determine. The corporation will set the rules, terms and conditions for one to become a member. Pwede magdonate ng certain amount, you ll become a member of the NSC. In case of golf and country clubs, they do two things. Two structures. E.g. BCC, MGC, WWGC. Bakit ba Wack-wack yun? Golf Club Membership only: cannot utilize the facilities unless member or authorized by a member. All the facilities pag-aari ng golf club. But there s a NSC where you shall buy membership. But your membership pin the NSC does not give you the automatic membership in the golf club. Kailangan mo pa mag-apply. Pag rejected ka, ibenta mo na lang membership mo. With this structure, new structure developed to a stock corporation. buy a share here, qualified na sa membership. Para pwede na i-list sa stock market. May mga intricate relationship between stock corporation and non-stock golf and country club. Manila bay and yatch club. Pwede ba in the case of stock corporation, can you buy as many shares you want to buy for what is available for sale, if you want to buy all the 100,000 shares in the market, that will give you control in the election of the members of the board. But in NSC, can you buy 3 membership in your name? If you look at NSC as one purely for promotion or development of arts/sports, parang walang saysay. No rhyme nor reason why somebody will have to memberships. In those organizations, no matter how much contribution, entitle you only to be a member, period.

Religious societies
These are the orders. Jesuit, Franciscan, Dominicans. Dominicans, the order of preachers, own the Pontifical and Royal University of the Sto. Tomas. Hindi lahat ng catholic universities in the world are under the protection of the Pope. If you will look at their seal, there s the triple crown. Pope wears three crowns. Para masuot lahat yun. Sha na ang Miss Universe!!!! Sino ba nagrurule sa Europe dati? He ruled the world through Papal Bulls(hit). So nung nag-aaway ang Portugal and Espana sa colonization of new world, sabi ni Papa, ito ang demarcation niyo! Popes were forced to become warriors. Lumalaban sila sag era. May suot na armor, may espada at may kabayo to defend his possessions. In Italy, many cities there were under the possession of the Pope called papal possessions. Hindi lang sha pontifical, royal pa. binigya ng sovereign Spain when Philippines was still under the Spanish crown. Alam niyo story ni St. Dominic. Nagpipreach sha sa mga non-believers. Sinunog al the books except the one he s holding. Malaking story ang bible na yan. Achievement ni Constantine the great. Before the council of Nicaea, madaming evangelists. Kaya maraming gospels ang nawala. Nagtago sa dead sea, kaya nga may Dead Sea scrolls para yung apat lang ang matira. Si Constantine lahat may kagagawan niya. Dati kasi walang computer. No two bibles are alike because copied by hand. For a long time, wala silang makitang Aramaic, the original language it was written. King James translated from the Greek bible to English. Kung mag-study kayo ng theology and study the bible, you ll see there how it was edited. If you don t believe in those basic truths, you are not a Christian. Hindi ako atheist, I m a devout Catholic. They are also allowed to take the form of corporation, there are special provisions applicable to them if they incorporate. Sila yung mga orders. Jesuit order was organized by St. Ignatius Loyola who was once a soldier. But was injured in one battle so he had a handicap. Ordered organized by the pope in order to reconcile scientific developments with the Christian faith. Inquisition si Galileo Galilei. Scientific findings contradict the dogmas. Pag pinangalanan mong Darwin yung anak mo, may edict silang wag binyagan. Pano si Darwin Angeles? Eh pano naman yung Charles? Mangani-ngani sagutin ni si na nakalagay na po sa birth certificate yung Darwin. Sino sino yung mga unang pari na naging scientists, mga Jesuits. In addition to the three vows, only the Jesuits take a fourth vow to defend the pope. To defend the pope at that time, one has to be a warrior. Kaya may dala shang espada na i-ooffer sa pope. I am your defender. Nakaluhod. Ignatius is Latinized name. Inigo talaga pangalan niya.

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While member, you have right to vote unless AOI give a member no. of votes equivalent to money given to corporation. For every 100 peso contribution, you are entitled to one vote. Popularity contest. Ang beauty queen ay yung may pinakamaraming boto. Bibili ka ng balota. One of my youth leaders in Bicol had this as a contest. National head of Kabataang Bgy. Give him an award. Problem is cleanliness. Solution is beauty contest. Balota ay bao ng niyog. Isang boto. Hinakot lahat ng bao ng niyog sa bakuran. Nilagay sa isang lugar at ginawang uling. 2 projects at the same time. Beauty contest and cleanliness project. Walang sweldo ang mga kabataang barangay dati. Bat tayo napunta dun? Votes. If you will look at the provisions of the code, pwede kasi nga pwede i-broaden but it should be in the articles. Those who contributed more have bigger say in running affairs of the corporation. kaya nga binigay na ang membership sa NS corporation. S12 None in the corporation but there is in some special laws. Eg. If the NSC will incorporate as a foundation, there s a minimum capital foundation must have for it to qualify as a foundation. What is the minimum capital? P1M. bakit hindi capital stock? Kasi nga walang shares of stocks, capital stock come from contributions from grant of grantors or from government. At dahil walang ACS, wala na rin yung ACS. S14 When pertinent? Affidavit of treasurer? Yes. Pero yung affidavit of treasurer is to simple declare under oath how much capital was received by treasurer from contributions of incorporation and original members, breakdown of who and how much respective contributions were Officers maliwanag na applicable yan Last par of S25 (cannot vote by proxy) applicable yan. But look at S89, it does not modify last par of S25 kasi applicable yung latter to board of trustees, S89 is for the members. Election of the board of directors. What is the term of the directors under S23? 1 year. CF S92. Ano ba talaga ang term? 3 years. Multiples of three tas may staggering of term. What is the reason behind staggering? Para laging may quorum, laging may members na may quorum. Ano ba talaga? 1 year or 3 years? It depends on the articles. It may provide for 1 or 3 years. Suppose the AOI is silent, what is the term? What is the default provision? If you look at S92, it would seem that the default is 3 years. The practice in SEC, the default provision is 1 year. That s not in accordance with literal wording of S92. May cumulative voting ba sa NSC? Look at sentence after 2nd proviso. No DQ stock may be voted. Unless therwise provided in the AOI or bylaws . May cast as many votes. y As a GR: wala. That s the default. y EXCEPTION: The opening qualification of the sentence. If provided by the AOI or bylaws. Consistent yan sa S89. Right. Compensation Sa S30 bawal diba? Is there similar provision for trustees, are they prohibited from receiving compensation as such trustees? Dapat diba trustees and directors? Ano implication niyan? We use common sense which is not very common. Kung yung business na kumikita ng pera, bawal bayaran yung director. Eh bat babayaran ang trustees when the organization. Explain the concept of non-stock non-profit corporation: Organize kayo ng non-stock corporation, your purpose is to help indigent but deserving children acquire education through scholarship grants. To raise funds, you made a foculare. Religious societies that make furniture at a mark up. Then use the mark up for maintaining the organization. Gawa tayo furniture. Pag gumawa sila nun, bili ng materyales. All the factors of production. After computing and allocating the cost, may margin profit sila ngayon. Olive said bawal dahil NSNP tayo so dapat wala tayo profit. Tama ba si Oliva? Of course not. Pag sinabing non-profit, not mean na magpapalugi the corporation. it means no profit realized by the corporation is distributable to b e shared among the members. Precisely, kaya nga kailgnan kumita para may ma-sustain sa kanilang cause or purpose. Is the profit taxable? Depends on tax exemption applicable. Safest answer there. S33 with interlocking trustees and directors. I ve discussed this with you before. Disloyalty of a trustee? Wala ba nun? S35 executive committee in a NSC? Yes, kay nga gamit jan ay members of the board. To make it applicable equally to stock or non-stock. How about the powers delegated approval also required? Hindi sinabi na members , sinabi lang sH? Distribution of dividends? We shall apply the provision when pertinent. Eh hindi naman pertinent sa distribution of dividends, wala namang dividend sa NSC. S38 not applicable yung increase/decrease. Only 2nd part applies as to nd bonded indebtedness. See 2 to the last par. S41 Acquire own membership? BCC not record transfer if less than benchmark consideration. They ll have right to buy membership at price stated at transaction. Appraisal right in NSC? Babalik tayo sa trust fund: investment shall stay with corporation til dissolution. Same with membership? In a membership, may return ba? Hindi naman investment? May ROI ba yan? Pre-emptive right, whenever membership is issued? Nangyari sa WWCH. Hindi ganyan itsura niyan dati. Maliit lang and sprawling. Galvanized iron sheets roofing lang pero homey. Nasunog yan. Increase membership has implication. Under its AOI there are two kinds of membership: proprietary and non-proprietary. The latter are the only ones entitled to share in remaining profits of corporation after dissolution. Wackwack Country Club create more non-proprietary membership. After a series of meetings and heated debates, increased proprietary shares. Bumagsak ang value dahil more will share. From 20M to 10M and then finally, 5M. Pancit de Vino and Ben s Burger. Additional proprietary membership is there preemptive right under S39? Is it pertinent? Present document transfer at P350,000, Baguio CC will buy at lower than benchmark value. Tubig there is gold, raisin bread, potato and banana bread.

Officers
Board of Regents, Council of Elders, Board of Advisors, The Senate. Governing board in his School in England. University of London. Princess Royale. Princess Ann. Medieval yung mga robe namin. They will kneel before the royal princess and she will bestow the degree on them and put the hood on the candidate. During the time of Queen Victoria, the eldest daughter was Princess Royale.

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S55 can you mortgage/sangla membership? If you look at code, walang membership. Anything of value may be collateral. Pwede ba iforeclose. Sell golf and cc. NSC and then sell memberships. Can a membership be jointly owned? S56 says shares lang ito. Pertinent ba iyo? Proxies S89 In stock corporations, can they deny right to vote? No, corporation cannot deny right to vote by proxy. Look at S89 2nd par. May be denied in AOI in case of non-stock corporations. Voting trust in non-stock corporation In stock corporations, SH transfers legal title. May legal title rin sa membership because you have membership certificate. In the exam I asked, S90: all rights are personal. Can t transfer legal title to another. Golf and country club membership is transferrable because allowed in AOI. The same may also be said about voting trusts. Subscription contract What contract? By definition, hindi. Provisions of code on subscription contract not applicable in full. Only when pertinent. Is there pre-incorporation contract? Original members. Non-irrevocability is also applicable. Consideration: bahala na ang corporation S63 certificate of stock and certificate of membership Last part: May STB ba ang non-stock corporation? Gawin nating membership and transfer book. Pwedeng pang exam ito. Issuance of stock certificate. Suppose sold for consideration less than book value. May book value ba ang membership? Proprietary net worth ganyan. Trustee liable for water membership? Pwede bang installment? Pano kung di nakabayad, may DQ sale/DQ member? Lost destroyed certificate of membership Corporate books and records? Definitely no STA. but there s membership and transfer agent. Books to be kept: records or trustees. Right to inspection: natural. Appraisal right - When members pay contribution, they re not making investment, he s actually donating. BUT in case of proprietary membership, paparte sa lupa. Donative intent. But for advance the arts, there must be DLC doubts such intention in proprietary membership. S76 Merger and consolidation of 2 non-stock corporations? Yes allowed. In fact, if you look at S76 it says, directors and trustees. Of stock and non-stock corporation? SEC: No. one of the corporations must first be dissolve. Ticklish to sa SEC. consider first dissolved, technically, not combination anymore. Ayoko na pag-isipan yan. DISSOLUTION Specific rule section on distribution of assets. S94 and S95, basahin niyo na lang. You have to study ha. My exam will separate boys and men.