Professional Documents
Culture Documents
Sources of Assets:
1. liabilities
2. capital stocks
3. retained earnings
Where expenses exceed net income, the net is equal to net loss.
Deficit means that the assets which have been taken by the owners have been increased.
The trust fund doctrine is for the benefit of the creditors against the corporation.
Creditors and stockholders are both lending money for the company.
Law governs the relationship of the stockholders with the corporation – Corp Law
- On what level is it found? Intra-corporate level
- What primary law governs in this level?
The trust fund doctrine is built by the courts. Clearest law on the matter: Sec 22 of the Corp Code
How are the stockholders disadvantaged? The assets of the corporation are treated as a trust for the
benefit of the creditors.
During the life of the corporation, what are the effects of TFD?
What are not covered by TFD? assets that represent the unrestricted retained earnings
Application of TFD:
1. When the assets which are returned to the stockholders are taken from CS, the status of such distribution
is void. Exception: when there is a proper reduction of the capital stock
2.
3.
4. when corporation insolvent
- insolvency: assets are not enough to cover for liabilities
- all assets are held by the Board for the benefit of the creditors
- upon dissolution, who’s first in line?
- Creditors
- Partners w/ respect to credit extension
- Partners w/ respect to income rights
- Partners w/ respect to the contribution
Subscription receivables become due and demandable despite what is stipulated about them
Is it lawful for a corporation to make donations? – Generally, donations are against the TFD, except when it
is reasonable
Why is it void? It takes away assets which are for the creditor or the stockholders
4 Qualities of the Corporation – which one of the 4 does TFD protect? Limited liability
Unlimited liability – liable not just to the extent of his investment; businessand non-business assets are also
at stake
Is there statutory basis for limited liability? Sec 2 (juridical entity) of the Corp Code
Limited liability rule is a logical consequence of strong and juridical personality – True
Limited liability is the norm, unlimited liability is the aberration (deviation) – False
- limited liability/no liability is the aberration
Unlimited liability is where mortals dwell; limited liability is where magic happens
Aberration hurts the creditors, it takes from the creditors what they could do
Centralised management – makes the corporation different from the sole proprietor
Everything that goes in is reinvested
Scenario 1: They paid the 100M to the stockholders. It is void, must be returned
Scenario 2: Cash dividends (earnings of stockholders) were given from retained earnings – valid
Who has the right to the retained earnings? Creditors and stockholders
When the corporation makes money, the money is for the stockholders.
When the corporation loses money
What is the difference between one who shares with the gross income and one who shares in the net
income? Latter bears the risk of ownership
Deficit – stockholders take it ‘in the chin’, how? When CS is wiped out, capital is worthless
Those who share in the gross income - no risk, no right to participate in the dividends, they should not be the
ones to absorb the dividends
Ong Yong vs Tiu
- casual breach is not a basis for recissin
- substantial breach
- division of property
Naked title – usufruct
Trust
Implied Trust
TFD is panoramic.
ARTICLES OF INCORPORATION
Articles – incorporators
- stockholdrs
BY-LAWS
By-laws
– does not represent the relationship between the corporation and the State
General Rule: By-laws are valid and binding upon issuance of SEC certificate
Exception: when the SEC, without fault of the corporation, had failed to act upon the process of certification
AOI
- contractual relationship between corporation and parties who deal with the corporation
- obligatory force
One who enters in a contract of loan is bound to know the terms/provision of AOI – TRUE
- AOI is a public document, represents the contractual relationship: element of consent
- corporation + third party: w/n it can give consent
- ability of the corporation to bind itself
- goes into the consent of the party you are dealing with
- cannot be immune to the corporation’s acts: doctrine of limited power
- by-laws: public document, but not binding on people who deal with the corporation
WHY?
19 January 2011
Fiduciary – arises not because the law says so but because of their relationship
Compensation – outside of the by-laws, how can one legally receive compensation?
- granted by vote of majority of stockholders representing capital stock
Does the board owe fiduciary duties to the stockholders? YES. – power to remove, power to appoint
- relationship is fiduciary, therefore revocable
- appointment by election by the stockholders: revocable by removal (2/3 of outstanding capital stock)
- principal-agent relationship? NO
- not agents: principal should be the one to give power
- they have fiduciary duties but they are not mere agents of the stockholders because a director’s primary
purpose is the maximization of profits (sec 23, centralized management)
Duty of Obedience
- agent is supposed to act upon instruction of the principal, within scope of authority delegated to him
- sec 23: grants full power to directors to act for stockholders, Board shall prevail (business judgment
rule/centralized management)
- trustee-beneficiary relationship (Stockholders – beneficiaries)
- to exercise ownership for the benefit of the stockholder (sec 23)
- trustee – legal/title, beneficiary – beneficial title
- BOD do not owe the duty of obedience to stockholders
BOD duties:
- duty of loyalty
- duty to inform
- duty of obedience (owed to the corporation, not to the stockholders)
- duty of diligence
Unless otherwise provided in this Code, the corporate powers of all corporations formed under this
Code shall be exercised
Election of Directors
- annually he has to renew or prove again that he can do his duties
- to stand a chance to be reelected (good governance)
-
Qualifications:
1. must own at least one share in capital stocks in his name
- nominal? Nominal consideration – real consideration – nothing!
- Why is at least one share is required? – to avoid directors that are strangers
to the corporation
2. Majority of the directors/trustees organized under the Corp. Law must be residents
-
Disqualifications:
1. must not have been convicted by a crime of conviction within 5 years prior to election
2. has not committed any violation of the Corp. Code
Gokongwei Case
- qualifications and disqualifications provided in the law are minimal
- Board can provide more, governed by the by-laws
- by-laws are void if they are unreasonable or discriminatory
- must not be written in a simple board/civil court resolution or house rules, it must be in the articles of
incorporation, by-laws, law
Removal
- Removal may be with or without cause: 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 the Code
If duty of obedience is violated, the contract is void. (first ultra vires act: outside powers of corporation)
Contracts of corporation that are void – ultra vires
First Ultra Vires – does the court favour it?
Duty of Loyalty
– any officer or director who acquires personal interest or pecuniary interest in conflict with his duties are
solidarily liable for damages to the corporation, its stockholders and its members
- level of relationship where it is weakest: intra corporate level
- corp has no concern if contract is entered in third party, corp is stranger to the contract (doctrine of
relativity)
- is duty of loyalty relevant in extra-corporate level? NO
- if director/officer violates his duty, the contract is valid as to agent, director/officer is liable solidarily to the
corp
Doctrine of corporate opportunity
- business opportunity: he is liable to give to the corporation all the earnings/profits (obligation), he absorbs
all the losses
Duty of diligence – 3 grounds: Is it cast in stone? NO. You can gather from jurisprudence, etc
Duty of Loyalty
Implied trust:
1. constructive
2.
When breach has been committed, what will the director do? Return the profits.
Sec 23: all business conducted, all property, controlled and held by the Board
- all powers controlled by Board, they have discretion
- UNLESS otherwise provided: sec 34: ratification is an exception
- the board has discretion for ratification
Voting of the stockholders to remove from office: primary, not just ratificatory
Trustees: non-remunerative, why? Because they volunteer to do good, not for money
Trustee: holder of property for a beneficiary, public good, charitable purposes
Directors/Trustees: can be elected, can be remunerated, can be removed by stockholders
Ultra Vires 3rd type: contract is void even if the public is involved
Freedom to contract, provided that it is not against law, public policy, etc
Intra-corporate in character
General rule: agents are not personally liable for the acts he did in the scope of his authority
- he is a stranger to the contract (relativity)
- EXCEPT: when he acts in bad faith, gross negligence and when he binds
himself to be personally liable.
It is within the discretion of the board of directors; a business is a risk, board is not expected to know
everything (not a guarantee of profitability)
NON-STOCK CORPORATIONS
2. Tests:
a. purpose: must be found in charter, eleemosynary purpose (charitable, educational, literary, etc)
b. prohibition on distribution of profits(sec 87 of Corp Code) – prohibition in articles and by-laws
- there is no profit, but there is compensation
- can not have a an objective that isn’t charitable or religious
Finals tip: is it lawful for a NSCorp to change it’s purpose? YES and NO. Yes to those who agreed and no
those who did not.
CONVERSION TO STOCK CORPORATION
You cannot just amend the AOI
FOUNDATIONS
Not different to NS Corps
Technical term that has been derived under derived laws
It has guidelines
- You cannot spend more than 25k
- upon dissolution, upon paying its liabilities, must be transferred to another charitable institutions
Charitable Contributors
Educational Corps
Religious Corps
- corporation sole
- acquisition of land
- acquisition and disposition of land
- all corps have a term except for religious corps
Cooperatives
Stock – dictated by profit
Non-stock – charitable
Cooperatives – self-help
STOCKS
Subscription agreement is a genus of sale
Bilateral, reciprocal contract, onerous
Sec 63 – intra-corporate
- covers encumbrance of shares
Rights of Stockholders:
1. right to vote
2. right to dividends
3. pre-emptive right
4. right to issue of certificate of stock
5. right to transfer properties
6. right to file derivative suit
Net assets – upon dissolution, the fiduciary relationship between the corp & creditors arises
Main obligation of corporation to creditors: make sure they first liquidate
Right to Dividends
- from capital stock
- system of declaration of unrestricted retained earnings: business judgment rule
- cash dividends: board resolution
- stock dividends: can be declared by the board but requires ratification of 2/3 of OCS – why?
Forms of Dividends:
Cash
Property
Stock
Reasonable Restrictions
1. reasonable as to period (30-120 days)
2. as to execution
3. as to process
Treasury shares – issued and fully paid for, but subsequently reacquired by the issuing corporation by
purchase, redemption, duration or through other lawful means
Proxy
- agent of stockholder
- contract/instrument (agency)
- essentially revocable