CORPORATION LAW

ON PAST TOPICS: FOR SUBMISSION ON 13 MARCH 2018

1. What are the consequences of a corporation having a separate personality separate and
distinct from its stockholders with regard to—
a. Property – the property acquired by the corporation is deemed a property of the
corporation itself as a distinct legal entity and not of the stockholders or
members.
b. Obligations
c. Rights
d. Constitutional rights – corporations are entitled to a right to due process, the equal
protection of the law, and the right against unreasonable searches and seizures.
It is not entitled to certain constitutional rights such as political or purely
personal rights not only because it is an artificial being but because it is a mere
creature of the law.
e. Torts – a corporation becomes liable for torts committed by an officer or agent
under the express direction or authority of the stockholders or members acting
as a body.
f. Nationality -

2. Explain how a corporation as an artificial being is subject to limitations inherent because of

its nature, as to—
a. Actions – a corporation may bring civil and criminal actions in its own name in the
same manner as natural persons.
b. Criminal Liability – a corporation cannot be held liable for a crime committed by its
officers since it does not have the essential element of malice. Except if by
express provision of law, the corporation is held criminally liable, in such cases,
it is he responsible corporate officers that would be criminally liable.
c. Moral damages – the general rule is that a corporation is not entitles to moral
damages because it has no feelings, no emotions, no senses. However, the SC
held in one case that a corporation may validly complain for libel or any other
form of defamation and claim for moral damages because Article 2219 (7) did not
qualify as to whether the plaintiff is a natural or juridical person.

3. Explain the grandfather rule.

- The grandfather rule is one of the methods in determining the nationality of a
corporation. In this rule, the nationality of the stockholders is material or critical
in determining the nationality of a corporation or its compliance with our laws in
permissible foreign investments. Under this rule, the stocks that are owned by or
registered in the name of the foreigners are sorted out and added to determine if
they meet the allowable maximum percentage of foreign ownership in
nationalized business.

4. What is the doctrine of piercing the veil of corporate entity? Give examples of cases when
the doctrine of piercing the veil of corporate entity may be applied.
- The doctrine that a corporation is a legal entity distinct from the persons
composing is a theory introduced for purposes of convenience and to serve the
ends of justice. But when the ceil of corporate fiction is used as a shield to defeat
public convenience, justify wrong, protect fraud, or defend a crime, this fiction
shall be disregarded ad the individuals composing it will be treated identically.
5. What are the elements that must be present to justify the piercing of the veil of corporate
fiction on the ground that the corporation is a mere alter ego?
- 5.1 Control, not mere majority or complete stock control, but complete dominion,
not only of finances but of policy and business in respect to the transaction
attacked so that the corporate entity as to this transaction had at the time no
separate mind, will, or existence of its own.
5.2 Such control must have been used but the defendant to commit fraud or
wrong in contravention of plaintiff’s legal rights
5.3. The aforesaid control and breach of duty must proximately cause the injury
or unjust loss complained

6. Give examples of fully or partly nationalized corporations—

a. Where no foreign stockholder is allowed –
(1) Mass media except recording
(2) Practice of all professions
(3)
b. Up to 20% foreign equity
c. Up to 25% foreign equity
d. Up to 40% foreign equity
e. Up to 60% foreign equity

7. What are the instances when non-voting shares may vote?

- Sec. 6 of the Corporation Code provides that the holders of non-voting shares
may nevertheless be entitled to vote on the following matters:
a. Amendment of the articles of incorporation
b. Adoption and amendment of by laws
c. Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporate property.
d. Incurring, creating or increasing bonded indebtedness
e. Increase or decrease in capital stock
f. Merger or consolidation of the corporation with another corporation or other
corporations
g. Investment of corporate funds in another corporation or business in
accordance with the code
h. Dissolution of the corporation.

8. What are the limitations on the issuance of “no par value” shares?
- Section 6 of the Corporation Code provides that no par value shares may not be
issued for a consideration less than five pesos per share. Also, it provided that
banks, trust companies, insurance companies, public utilities, and building and
loan associations shall not be permitted to issue no-par value shares.

9. What is your understanding of By-Laws? What are the requisites of valid By-Laws?
- The By-Laws of a corporation is the law that governs the internal affairs of the
corporation between and among the members of the corporate family.
- The requisites of valid By-Laws are:
1. It must not contravene the Law – because the by-laws shall not be contrary to
law, morals, or public policy
2. It must not contravene the Charter – because the corporation is a mere
creature of the law.
3. It must be reasonable and non-discriminatory
10. What are the specific powers of a corporation?
- Section 36 of the Corporation Code provides that every corporation incorporated
under this Code has the power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the
articles of incorporation and the certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions of this
Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend
or repeal the same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to sell
treasury stocks in accordance with the provisions of this Code; and to admit
members to the corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage
and otherwise deal with such 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;
8. To enter into merger or consolidation with other corporations as provided in
this Code;
9. To make reasonable donations, including those for the public welfare or for
hospital, charitable, cultural, scientific, civic, or similar purposes.
10. To establish pension, retirement, and other plans for the benefit of its
directors, trustees, officers and employees; and
11. To exercise such other powers as may be essential or necessary to carry out
its purpose or purposes as stated in the articles of incorporation.

11. What are the powers that cannot be exercised by or cannot be delegated to the executive
committee?
(a) Matters needing stockholder approval;
(b) Filling up board vacancies;
(c) Amendment, repeal or adoption of by-laws;
(d) Amendment or repeal of any resolution by the Board which by its express
terms is not amendable or repealable;
(e) Cash dividend declaration.

12. In the exercise of the powers of the corporation, enumerate: page 401, de Leon
a. The instances when concurrence of the stockholders representing 2/3 of the
outstanding capital stock (or 2/3 of the members) is necessary
b. The instances when concurrence of the stockholders representing majority of the
outstanding capital stock (or majority of the members) is necessary
c. The instances when the stockholders may act without board resolution.

13. What is a pre-emptive right? When is it not available?

- It is a right granted to the stockholders to be granted the first option to subscribe
to any opening of the corporation’s unissued capital stock, or to any increase in
the authorized capital stock.
- Pre-emptive right is not available when:
1. It is denied by the articles of incorporation or an amendment thereto;
 2. Stockholders have no more pre-emptive right to the issuance of shares from the
capital stock when:
2.1. It is issued in compliance with laws requiring stock offerings or minimum
stock ownership by the public
2.2. It is issued in good faith with the approval of the stockholders representing
at least 2/3 of the outstanding capital stock, in exchange for property
needed for corporate purposes
2.3. It is issued in good faith with the approval of the stockholders representing
2/3 of the outstanding capital stock, in payment of previously contracted
debt.

14. Who may declare dividends, and what are the conditions that must be present to declare
dividends?
- Section 43 of the Corporation Code provides that the board of directors may
declare dividends out of the unrestricted retained earnings which may be payable
in cash, in property, or in stock.
-

15. Can the board be compelled to declare dividends every year? State the exceptions, if any.
- Page 19

16. What are the instances when a corporation may acquire its own shares?

- Section 41 provides the instances where the corporation has the power to acquire
own shares provided that the corporation has unrestricted retained earnings in
its books to cover the shares to be purchased or acquired:
1. To eliminate fractional shares arising out of stock dividends
2. To collect or compromise an indebtedness to the corporation arising out of
unpaid subscription, in a delinquency sale, and to purchase delinquent shares
sold during sale
3. To pay dissenting or withdrawing stockholders entitled to payment for their
shares under the provisions of this Code.

17. Xerox Corporation is engaged in selling pencils on wholesale basis. It is merely renting a
bodega and 90% of its assets consist of its stocks of pencil. “A”, a school supply dealer,
purchased all the stocks of Xerox Corporation. Is the transaction a sale of substantially all
of the assets of the corporation requiring concurrence of stockholders representing 2/3 of
the outstanding capital stock?

18. In the election of Board of Directors, what are methods of voting available to stockholders?

(1) Straight voting – every stockholder may vote such number of shares for as many
persons as there are directors to be elected.
(2) Cumulative voting for one candidate – a stockholder is allowed to concentrate his
votes and give one candidate as many votes as the number of directors to be
elected multiplied by the number of his shares shall equal.
(3) Cumulative voting by distribution – a stockholder may cumulate his shates by
multiplying also the number of his shares by the number of directors to be
elected and distribute the same among as many candidates as he shall see fit.

19. What are the requisites for the removal of a director? How are vacancies in the Board filled
up?
 - For stock corporations, a director or trustee may be removed by a vote of the
stockholders holding or representing at least two-thirds (2/3) of the outstanding
capital stock. For non-stock corporations, the removal may be made by at least
two-thirds (2/3) of the members entitled to vote. Another requisite for the removal
of a director is that the removal shall take place either at a regular meeting of the
corporation or at a special meeting called for the purpose, and in either case,
after previous notice to stockholders or members of the corporation of the
intention to propose such removal at the meeting.
- Vacancies may be filled by the vote of at least a majority of remaining directors or
trustees, if still constituting a quorum. Otherwise, said vacancies may be filled by
the stockholders in a regular or special meeting called for that purpose.

20. What is the doctrine of corporate opportunity?

- Under this doctrine, a director, by virtue of his office, acquires for himself a
business opportunity shich should belong to the corporation, thereby obtaining
profits to the prejudice of such corporation, is guilty of disloyalty and should,
therefore, account to the latter for all such profits by refunding the same,
notwithstanding that he risked his funds in the venture.

21. Who is an interlocking director? – An interlocking director is a director, or are directors

of one corporation is/are also director/s in another corporation. What are the rules
governing interlocking directorship—
a. if the interests of the interlocking director in the corporations are both substantial –
these contracts are valid provided that the contract is not fraudulent and the
contract is fair and reasonable under the circumstances (Sec.33, CC)
b. if the interest of the interlocking director in one of the corporations is nominal while
substantial in the other
- The contract is voidable at the option of such corporation, unless all the
following conditions are present:
(1) That the presence of such director or trustee in the board meeting in which the
contract was approved was not necessary to constitute a quorum for such
meeting;
(2) That the vote of such director or trustee was not necessary for the approval of
the contract;
(3) That the contract is fair and reasonable under the circumstances;
(4) That in case of an officer, the contract has been previously authorized by the
board of directors.

22. What are the exceptions to the rule that directors, trustees or officers of a corporation are
not solidarily liable with corporation they represent? Sec.31

23. Who are self-dealing directors/ trustees/ officers? What are the rules when there is a self-
dealing director/ trustee/ officer in a corporation? Sec. 32

24. Ang-ang Corporation is engaged in the business of printing books. Around 70% of its
assets consists of cash in the bank, 25% printing machines and the remaining 5% office
equipment and supplies. Ang-ang Corporation plans to sell the machines. Can it be
considered sale of substantially all of the assets of the corporation?

25. Archie, as owner of a certain number of shares of stock in Eks Corporation, entered into a
voting trust agreement with Bluto. On the basis of the voting trust agreement, Bluto
 announced his desire to run for a seat in the Board of Directors of Eks Corporation.
Charlie, another stockholder, objected and questioned the eligibility of Bluto to be a director
of Eks Corporation. Is Charlie’s contention correct? Why?

26. What is your understanding of treasury shares? Are said shares considered—
a. Issued? Yes, these sharess have been issued and fully paid for
b. Fully paid?
c. Outstanding?
d. Entitled to dividends? Treasury shares are no entitled to dividends because
dividends cannot be issued by the corporation to itself
e. May treasury shares be distributed to the stockholder by way of dividends? If so, how
would you classify the dividend— cash or stock dividend?
- Treasury shares may be declared as property dividend to be issued out of the
retained earnings previously used to support their acquisition provided that the
amount of the retained earnings has not been subsequently impaired by losses.

NEW/ CURRENT TOPICS: FOR SUBMISSION ON 20 MARCH 2018

1. What are the valid considerations for subscription agreements?

- The consideration for the issuance of stock may be any or a combination of any
two or more of the following:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation and
necessary or convenient for its use and lawful purpose at a fair valuation equal to
the par or issued value of the stock issued;
3. Labor performed for or services actually rendered to the corporation
4. Previously incurred indebtedness of the corporation
5. Amounts transferred from unrestricted retained earnings to stated capital
6. Outstanding shares exchanges for stocks in the event of reclassification or
conversion.

2. What are watered stocks. Give examples of watered stocks. What is the liability of directors or
officers who consented to its issuance?
- Watered stock is stock issued not in exchange for its equivalent either in cash,
property, share, stock dividends, or services, (see Sec. 62.) It includes stock:
(1) issued without consideration (bonus share); or
(2) issued as fully paid when the corporation has received a lesser sum of money
than its par or issued value (discount share); or
(3) issued for a consideration other than actual cash, such as property or
services, the fair valuation of which is less than its par or issued value; or
(4) issued as stock dividend when there are no sufficient retained earnings or
surplus (see Sec. 43.) to justify it
- Sec. 65. Liability of directors for watered stocks. — 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.
3. How are shares of stocks transferred?
Shares of stock so issued are personal property and may be transferred by delivery of
the certificate or certificates endorsed by the owner or his attorney-in-fact or other
person legally authorized to make the transfer. No transfer, however, shall be valid,
except as between the parties, until the transfer is recorded in the books of the
corporation showing the names of the parties to the transaction, the date of the transfer,
the number of the certificate or certificates and the number of shares transferred.
In the case of De los Santos, et al. vs. MacGrath, et al., G.R. No. L-4818, 28 February
1955, the Supreme Court interpreted the provisions of Section 63 of the Corporation
Code. The Supreme Court held that any voluntary transfer of shares of stock in a
corporation that is represented by a certificate of stock must strictly comply with the
following conditions:
a. There must be delivery of the certificate;
b. The share must be indorsed by the owner or his agent; and
c. To be valid to the corporation and third parties, the transfer must be recorded in the
books of the corporation.

4. What are the basic rights of shareholders?

(1) Right to attend and vote in person or by proxy at stockholder's meetings (comments
under Sees. 50, 58.)
(2) Right to elect and remove directors (Sees. 24, 28.)
(3) Right to approve certain corporate acts (see comments under Sec. 52.)
(4) Right to adopt and amend or repeal the by-laws or adopt new by-laws (Sees. 46,48.)
(5) Right to compel the calling of meetings of stockholders when for any cause there is
no person authorized to call a meeting (Sec. 50, last par.)
(6) Right to issuance of certificate of stock or other evidence of stock ownership and be
registered as shareholder (see comments under Sec. 63.)
(7) Right to receive dividends when declared (see comments under Sec. 43.)
(8) Right to participate in the distribution of corporate assets upon dissolution (see
comments under Sees. 118-119.)
(9) Right to transfer of stock on the corporate books (see comments under Sec. 63.)
(10) Right to pre-emption in the issue of shares (see comments under Sec. 39.)
(11) Right to inspect corporate books and records (Sec. 74.)
(12) Right to be furnished the most recent financial statement upon request and to
receive a financial report of the corporation's operations (Sec. 75.)
(13) Right to bring individual and representative or derivative suits (infra.)
(14) Right to recover stock unlawfully sold for delinquency
(Sec. 69.)
(15) Right to enter into a voting trust agreement (Sec. 59.)
(16) Right to demand payment of the value of his shares and withdraw from the
corporation in certain cases (see comments under Sees. 41 and 81.); and
(17) Right to have the corporation voluntarily dissolved, (see comments under Sees.
118-119.)

5. What are the obligations of a stockholder?

1. Liability to the corporation for unpaid subscription;
2. Liability to the corporation for interest on unpaid subscription if so required by the bylaws;
3. Liability to the creditors of the corporation for unpaid subscription;
4. Liability for watered stock;
5. Liability for dividends unlawfully paid;
6. Liability for failure to create corporation
6. May a stockholder bring suit to compel the corporate secretary to register valid transfer of
stocks? To be valid and binding on the corporation and 3 rd parties, is the attachment or
mortgage of shares of stock required to be registered in the corporation’s stock and transfer
books?

- In case of wrongful refusal of the corporate secretary to record the transfer, specific
performance and mandamus are the common remedies within the law that may be
availed of to compel the registration. (SEC Opinion, Feb. 12,1993.)
- The requirement that the transfer shall be recorded in the books of the corporation
to be valid as against third persons has reference only to absolute transfers or
absolute conveyance of the ownership or title to a share.
Consequently, the entry or notation on the books of the corporation of pledges and
chattel mortgages on shares is not necessary to their validity (although it is
advisable to do so) since they do not involve absolute alienation of ownership of
stock (Monserrat vs. Ceron, 58 Phil. 469 [1933]; Chua Guan vs. Samahang
Magsasaka, Inc., 62 Phil. 472 [1935].) To affect third persons, it is enough that the
date and description of the shares pledged appear in a public instrument. (Art. 2096,
Civil Code.) With respect to a chattel mortgage constituted on shares of stock, what
is necessary is its registration in the Chattel Mortgage Registry. (Act No. 1508 and
Art. 2140, Civil Code.

7. What is a derivative action and what are its requisites?

- A derivative suit is thus defined as one brought by one or more stockholders or
members in the name and on behalf of the cor- poration to redress wrongs
committed against it or to protect or vindicate corporate rights, whenever the
officials of the corpora- tion refuse to sue, or are the ones to be sued, or hold
control of the corporation
Before a stockholder or member may sue in behalf of the corporation, the
following requisites must exist:
(1) There must be an existing cause of action in favor of the corporation, as where
the board of directors (or trustees) wastes or dissipates the funds of the
corporation, fraudulently disposes of its property, or perform ultra vires acts
(Angeles vs. Santos, 64 Phil. 697 [1927].) and not in favor of the particular
stockholder bringing the suit;
(2) The stockholder or member must first make a demand upon the corporation or
the management to sue, unless such a
demand would be futile or useless (Reyes vs. Tan, 3 SCRA 198 [1961]; Pascual vs.
Del Saz Orosco, 19 Phil. 82 [1911].), and the corporation refuses or fails to sue
notwithstanding such demand. This is known as exhausting intra-corporate
remedies;
(3) The stockholder or member must have been such at the time of the
objectionable acts or transactions, as well as at the time the action was filed and
during the pendency of the action (Gochan vs. Young, 354 SCRA 207 [2001].),
"unless such transac- tions continue and are injurious to him or affect him
especially or specifically in some other way
(4) The action must be brought by the stockholder or mem- ber in the name and
for the benefit of the corporation.

8. What is a voting trust?

- Voting trusts. — One or more stockholders of a stock corporation may create a
voting trust for the purpose of conferring upon a trustee or trustees the right to
 vote and other rights pertaining to the shares for a period not exceeding five (5)
years at any one time

9. What are the limitations on right to vote?

10. What is an appraisal right and what are the instances where it may be exercised?

- 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)

11. What are the remedies of corporations to enforce payment of stocks?

Extra-judicial sale at public auction.
Judicial action
Collection from cash dividends and withholding of stock dividends

12. What are the procedures for collection and delinquency sale of stocks?
- Sec. 68. Delinquency sale. — The board of directors may, by resolution, order the
sale of delinquent stock and shall specifically state the amount due on each
subscrip- tion plus all accrued interest, and the date, time and place of the sale
which shall not be less than thirty (30) days nor more than sixty (60) days from
the date the stocks become delinquent.
- Notice of said sale, with a copy of the resolution, shall be sent to every delinquent
stockholder either person- ally or by registered mail. The same shall furthermore
be published once a week for two (2) consecutive weeks in a newspaper of
general circulation in the province or city where the principal office of the
corporation is located.
- Unless the delinquent stockholder pays to the corporation, on or before the date
specified for the sale of the delinquent stock, the balance due on his
subscription, plus accrued interest, cost of advertisement and expenses of sale,
or unless the board of directors otherwise orders, said delinquent stock shall be
sold at public auction to such bidder who shall offer to pay the full amount of the
balance on the subscription together with accrued interest, cost of advertisement
and expenses of sale, for the smallest number of shares or fraction of a share.
The stock so purchased shall be transferred to such purchaser in the books of
the corporation and a certificate for such stock shall be issued in his favor. The
remaining shares, if any, shall be credited in favor of the delinquent stockholder
who shall likewise be entitled to the issuance of a certificate of stock covering
such sharesShould there be no bidder at the public auction who offers to pay the
full amount of the balance on the subscription together with accrued interest,
costs of advertisement and expenses of sale, for the smallest number of shares
or fraction of a share, the corporation may, subject to the provisions of this Code,
bid for the same, and the total amount due shall be credited as paid in full in the
books of the corporation. Title to all the shares of stock covered by the
 subscription shall be vested in the corporation as treasury shares and may be
disposed of by said corporation in accordance with the provisions of this Code

13. What are the effects of stock delinquency?

- Holders of stock declared delinquent by the board of directors for unpaid

subscriptions (Sec. 67.) are not entitled to vote or to representation at any
stockholders' meeting. (Sec. 71.) But they may act as proxies for stockholders
whose shares are not delinquent

14. Distinguish merger from consolidation.

- In merger, two or more corporations unite, one corporation which remains in
being, absorbing or merging in itself the other which disappears as a separate
corporation while in consolidation, two or more corporations unite, giving rise to
a new corporate body and dissolving the constituent corporations as separate
corporations.

15. What are the effects of merger or consolidation? Sec. 80, CC

16. What are the procedures for merger or consolidation? Page 470, de Leon

17. What are the effects of non-use of corporate charter and continuous inoperation of
corporation? Sec. 22

18. What are the modes of dissolution of a corporation? Explain each.

(1) Voluntary Sec. 118, 119, 120, CC
(2) Involuntary Sec 121, CC

19. Using the twin-characterization test, explain what constitutes “doing business” in the
Philippines for foreign corporations.