TITLE IV POWERS OF CORPORATIONS

CORPORATE POWERS AND CAPACITY (Sec 36) Kinds: 1. Express those expressly authorized by the Corporation Code and other laws, and its AOI 2. Incidental those that are necessary for corporate existence; powers which a corporation can exercise by the mere fact of its being a corporation 3. Implied those that can be inferred from or reasonably necessary for the exercise of the express powers. Classification of Implied Powers: a.) Acts in the usual course of business; b.) Acts to protect debts owing to the corporation; c.) Acts which involve embarking in a different business usually to collect debts out of profits; d.) Acts to protect or aid employees; e.) Acts to increase business GENERAL POWERS & CAPACITY 2 Sources of Express Powers: a.) Those enumerated in Sec. 36, generally; b.) Purpose clause of the AOI, specifically 1. To sue and be sued; 2. Succession by its corporate name for the term of its existence; 3. Adopt and use a corporate seal; 4. Amend its AOI; 5. Adopt by-laws not contrary to law, morals or public policy and to amend or repeal the same; 6. Issue or sell stocks (stock corporations) or to admit members (non-stock corporations); 7. Purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with all types of properties;

8. Enter into merger or consolidation; 9. Make reasonable donations; 10. Establish pension, retirement and other plans for the benefit of its directors, trustees, officers and employees; and 11. Such other powers as may be essential or necessary to carry out its purpose/s as stated in the AOI. OTHER POWERS: 1. Extension or shortening of corporate term (Sec 37); 2. Power to increase or decrease capital stock/Power to incur, create or increase bonded indebtedness (Sec 38); 3. Power to deny pre-emptive right (Sec 39); 4. Sell, dispose, lease, encumber all or substantially all or corporate assets (Sec 40); 5. Power to acquire own shares (Sec 41); 6. Invest corporate funds in another corporation or business or for any other purpose other than the primary purpose (Sec 42); 7. Power to declare dividends out of unrestricted retained earnings (Sec 43); 8. Power to enter into management contract (Sec 44). ULTRA VIRES acts performed by a corporation in excess of its corporate powers and which are generally not binding on the corporation.

An ultra vires act is merely voidable which may be enforced by performance, ratification, or estoppel, while an illegal act is void and cannot be validated. Requisites for valid ratification of an ultra vires act: 1.) Act or contract must be consummated, not merely executory; 2.) Creditors are not prejudiced, or all of them have given their consent; 3.) Rights of the public or the State are not involved; and 4.) All the stockholders must give their consent.

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Rules on the effects of ultra vires acts: 1.) A wholly executor ultra vires contract or act cannot be enforced nor can damages be recovered for its breach; 2.) A wholly executed ultra vires contract or act shall not be interfered with as between the parties or persons whose rights are derived therefrom; but the State can always question said contract or act; 3.) When an ultra vires act is executed on one side but executor contract on the other side who received benefits therefrom, recovery can be had by the former; and 4.) The title of the corporation to property cannot be questioned on the ground that it acquired the property through an ultra vires contract of transfer.

POWER TO EXTEND OR SHORTEN CORPORATE TERM (Sec 37) Requirements: a.) Majority vote of the BOD/T; b.) Written notice of the proposed action and the time and place of meeting shall be served to each stockholder or member either by mail or personal service; c.) Ratification in a meeting by 2/3 of the OCS or 2/3 of the members, as the case may be. This actually requires the amendment of the AOI; meeting must be duly called for the purpose; dissenting stockholders may exercise appraisal right. The extension of corporate life cannot be made within the 3-year liquidation period, because that would constitute new business. POWER TO INCREASE OR DECREASE CAPITAL STOCK; INCUR, CREATE OR INCREASE BONDED INDEBTEDNESS (Sec 38) Requirements: a.) Majority vote of the members of the BOD/T;

b.) 2/3 vote of the OCS or the members, as the case may be, in a meeting duly called for the purpose with notice previously given; c.) Certificate of said corporate act shall be signed by majority of the members of the Board and the Chairman and Secretary of the stockholders meeting; Corporate act shall take effect from and after SEC approval. d.) Certificate must be accompanied by the Treasurers Affidavit certifying compliance with the 25%-25% requirements as to stock subscription. No decrease in capital stock shall be approved by SEC if it will prejudiced corporate creditors; Bonds issued by the corporation shall be registered with SEC which is given the power to determine the sufficiency of the terms of such bonds. Note Well: a.) When a corporation increases capital stock, stockholders are entitled to a PRE-EMPTIVE RIGHT to subscribe to a sufficient number of shares in order to maintain their previous relative strong power. The corporation must give the stockholder a reasonable period within which to exercise such right. b.) Dissenting stockholders cannot exercise the right of appraisal in this case. POWER TO DENY PRE-EMPTIVE RIGHT (Sec 39) Pre-emptive Right the shareholders right to subscribe to all issues or disposition of shares of any class in proportion to his present stockholdings, the purpose being to enable the shareholder to retain his proportionate control in the corporation and to retain his equity in the surplus. Pre-emptive right not available in the following: 1.) Shares to be issued to comply with laws requiring stock offering or minimum stock ownership by the public;

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2.) Shares issued in good faith in exchange for property needed for corporate purposes; 3.) Shares issued in payment of previously contracted debts; 4.) In case the right is denied in the AOI. DISPOSITION OF ALL OR SUBSTANTIALLY ALL CORPORATE ASSETS Requirements: a.) Majority vote of the members of the Board; b.) 2/3 votes of the OCS or members, as the case may be, in a meeting called for the purpose. Dissenting stockholder may exercise their right of appraisal. Despite approval by the stockholders or members, it is not mandatory for the Board to continue with the disposition. Note Well: a.) 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. b.) Disposition of properties in the regular course of the business does not need approval by or authority of stockholders or members. POWER TO ACQUIRE OWN SHARES (Sec. 41) - For legitimate business purposes and subject to the condition that there be unrestricted retained earnings to cover the shares purchased or acquired. Instances when corporation may buy its own stocks: 1.) To complete fractional shares; 2.) To collect indebtedness or in case of delinquency sales; and 3.) The exercise of right of appraisal.

TRUST FUND DOCTRINE: The capital stock, property and other assets of the corporation are regarded as equity in trust for the payment of the corporate creditors. Basis of Trust Fund Doctrine a.) Sec. 43 the corporation can declare dividends only out of unrestricted retained earnings. b.) Sec. 122 no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities.

POWER TO INVEST FUNDS IN ANOTHER CORPORATION OR BUSINESS FOR NON-PRIMARY PURPOSE (Sec. 42) Requirements: a.) Majority vote of the BOD/T; b.) Ratification by 2/3 of OCS or 2/3 of the members, as the case may be. Right of appraisal may be exercised by dissenting stockholders. Note: Where the investment is reasonably necessary to accomplish the primary purpose, a board resolution is sufficient. POWER TO DECLARE DIVIDENDS (Sec. 43) GR: Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-in capital stock. Exceptions: 1.) When justified by definite corporate expansion projects or programs approved by the board; 2.) When the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its consent and such consent has not yet been secured; or 3.) When it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is a need for special reserve for probable contingencies. Form of Dividends: a.) Cash Dividend can be declared by the board only

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b.) Property Dividend may be payable in bonds or in stock

of another corporation c.) Stock Dividend declared by the board but requires the approval of 2/3 of the OCS at a regular or special meeting duly called for such purpose; cannot be issued to nonstockholders even for services rendered POWER TO ENTER INTO MANAGEMENT CONTRACT (Sec 44) Requirements: a.) Resolution of the board; and b.) Majority vote of the OCS or members, as the case may be, in a meeting called for the purpose. DERIVATIVE SUIT - An action brought about by minority shareholders in the name of the corporation to redress wrongs committed against the corporation, for which the directors refuse to sue - A remedy designed by equity and has been the principal defense of the minority shareholders against the abuses of the majority. Requisites for filing: a.) Party bringing suit should be a shareholder as of the time of the act or transaction complained of; b.) He has extinguished intra-corporate remedies, i.e., has made a demand on the board of directors for the appropriate relief but the latter has failed or refused to heed his plea; and c.) Cause of action actually devolves on the corporation, the wrongdoing or harm having been caused to the corporation and not to the particular stockholder bringing the suit. BY-LAWS rules of action adopted by a corporation for its internal government and for the regulation of conduct, and prescribe the rights and duties of its stockholders or members towards itself and among themselves in reference to the management of its affairs. FUNCTIONS: 1. Supplement the AOI; 2. Provide for details not important enough to be stated in the AOI; 3. Continuing rule for the government of the corporation and the individuals composing it; 4. Define the rights and duties of corporate officers and directors/trustees and of stockholders/members towards the corporation and among themselves; 5. Source of authority for corporate officers and agents of the corporation. REQUISITES FOR THE VALIDITY OF THE BY-LAWS: 1. Must not be contrary to law nor with the Corporation Code; 2. Must not be contrary to morals and public policy; 3. Must not impair the obligations of contracts Amendments to the by-laws cannot impair the obligation of existing contracts or any vested right, e.g., the right of an employee to security of tenure cannot be adversely affected by any amendment in the by-laws, hence his services can only be terminated for causes provided for by law. 4. Must be general and uniform; 5. Must be consistent with the charter or AOI; and 6. Must be reasonable, not arbitrary or oppressive. ADOPTION OF BY-LAWS REQUIRED VOTES:

TITLE V BY-LAWS
Law3 Private Corporations Atty. Jonathan B. Tambol

A. If adopted prior to incorporation must be signed and

approved by all the incorporators and filed with the SEC together with the AOI. B. If adopted and filed after incorporation affirmative vote of the SHs representing at least a majority of the OCS or majority of the members (non-stock) shall be necessary; it shall be signed by the SHs/members voting for them. A copy thereof duly certified by a majority of the D/T and countersigned by the secretary of the corporation shall be filed with the SEC which shall be attached to the original AOI Effectivity upon approval of the SEC Effect of non-filing within the required period Failure to submit the by-laws within 30 days from incorporation does not automatically dissolve the corporation. It is merely a ground for suspension or revocation of its charter after proper notice and hearing. The corporation is, at the very least, a de facto corporation whose existence may not be collaterally attacked. CONTENTS OF BY-LAWS (Sec. 47) 1. Time, place and manner of calling and conducting regular or special meetings of the directors/trustees; 2. Time and manner of calling and conducting regular or special meetings of the stockholders/members; 3. Required quorum in meetings of stockholders or members and the manner of voting therein; 4. Form of proxies of stockholders and members and the manner of voting them; 5. Qualifications, duties and compensation of directors, trustees, officers and employees; 6. Time for holding the annual election of directors or trustees and the mode or manner of giving notice; 7. Manner of election of appointment and the term of office of all officers other than directors or trustees; 8. Penalties for violation of the by-laws;

9. In case of stock corporations, the manner of issuing certificates; and 10. Such other matters as may be necessary for the proper or convenient transaction of its corporate business. AMENDMENT/REPEAL/ADOPTION OF NEW BY-LAWS (Sec. 48) a.) With SHs/Members approval: 1.) Majority vote of the members of the Board; 2.) Majority of the OCS/members in a meeting duly called for the purpose b.) By the Board of Directors/Trustees: 2/3 of the OCS/members may delegate to the board the power to amend/repeal/adopt new by-laws Such power of the board may be revoked by majority vote of the OCS/members. The power to adopt the first original by-laws cannot be delegated to the BOD/T; only the power to adopt new bylaws that will supplant the old by-laws can be validly delegated. AOI vs. BY-LAWS: AOI Condition precedent in the acquisition of corporate existence

BY-LAWS

Nature Condition subsequent (absence merely furnishes a ground for the revocation of the franchise) Purpose Essentially a contract For the internal government between the corporation and of the corporation but has the SHs/members; between the force of a contract the SHs/members inter se; between the corporation and and between the corporation the SHs/members, and and the State between the SHs/members Time of execution Executed before May be executed after incorporation incorporation (may be filed simultaneously with the AOI)

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Amendment Amendment by a majority of May be amended by a the D/T and 2/3 of the majority vote of the BOD and OCS/members majority of the OCS/members

corporation are present or duly represented at the meeting. QUORUM OF MEETINGS (Sec. 52) - Unless otherwise provided for in the Code or in the ByLaws, a quorum shall consist of the stockholders representing a majority of the OCS or a majority of the members in case of non-stock corporations. A corporation may prescribe a greater voting requirement in its AOI or by-laws in order to protect the rights of the minority stockholders or members. Such higher number is also the number necessary to constitute a quorum. Once a quorum is called and the meeting was called to order, even if some people walked out and the people left are less than the majority, the proceedings will be valid so long as there is a quorum when the meeting was called to order. For stock corporations, the quorum referred to in Sec. 52 of the Corporation Code is based on the number of outstanding voting stocks. For non-stock corporations, only those who are actual, living members with voting rights shall be counted in determining the existence of a quorum during members meetings. Dead members shall not be counted. REQUIREMENTS OF A VALID MEETING: 1. Must be held at the proper place; 2. Must be held at the stated date and at the appointed time or at a reasonable time thereafter; 3. Must be called by the proper person: a.) The person/s designated in the by-laws have authority to call stockholders or members meeting. b.) In the absence of such provision in the by-laws, it may be called by a director or trustee or by an officer entrusted with the management of the corporation.

TITLE VI MEETINGS
KINDS OF CORPORATE MEETINGS 1. Meetings of stockholders or members: a.) Regular held annually on a date fixed in the by-laws, or if not fixed, on any date in April as determined by the board b.) Special held at any time deemed necessary or as provided in the by-laws 2. Meetings of directors or trustees: a.) Regular held by the board monthly, unless the bylaws provide otherwise b.) Special held by the board at any time upon the call of the president or as provided in the by-laws Where? anywhere in or out of the Philippines, unless the by-laws provide otherwise. Note: Whenever there is no person authorized to call a meeting, the SEC, upon petition of a stockholder or member, and on the showing of good cause, may issue an order to the petitioning stockholder or member directing him to call a meeting of the corporation by giving proper notice. PLACE AND TIME OF MEETINGS OF SHS/MEMBERS (Sec. 51) - In the city or municipality where the principal office of the corporation is located, and if practicable, in the principal office of the corporation. Even if the meeting be improperly held or called, any business transacted at such meeting shall be valid if within the powers or authority of the corporation, and provided that all the stockholders or members of the

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c.) A stockholder or member may make the call or order of the SEC whenever for any cause, there is no person authorized to call a meeting. d.) The special meeting for the removal of directors or trustees may be called by the secretary or by a SH/member. 4. There must be previous notice. Regular meeting written notice must be sent to registered SHs or members at least 2 weeks before the meeting Special meeting written notice must be sent at least one week 5. There must be a quorum. Note: The President shall preside at all meetings of the directors or trustees as well as of the stockholders or members, unless the by-laws provide otherwise. RULES ON MEETING/VOTING APPLICABLE TO CERTAIN KINDS OF SHARES 1. Delinquent shares shall not be entitled to vote. 2. Treasury shares have no voting rights while they remain in the treasury. 3. Fractional shares shall not be entitled to vote. 4. Escrow shares shall not be entitled to vote. 5. Unpaid shares, if not delinquent, are entitled to all the rights of a SH including the right to vote. MANNER OF VOTING A SH/member may vote: 1. Directly (in person); or 2. Indirectly, through representative a.) By means of a proxy; b.) By a trustee under a voting trust agreement; or c.) By executors, administrators, receivers, or other legal representatives duly appointed by the court. PROXIES (Sec. 58)

May refer to: 1. The written authority given by one person to another so that the second person can act for the first; 2. The person authorized by an absent SH or member to vote for him at a SHs or members meeting; 3. The instrument which evidences the authority of the agent. REQUIREMENTS FOR VALIDITY: (WSF-V5) 1. In writing; 2. Signed by the SH/member concerned; 3. Filed before the scheduled meeting with the corporate secretary; 4. Valid only for the meeting for which it was intended, unless otherwise provided in the proxy; 5. No proxy shall be valid and effective for a period longer than 5 years at any one time. The right to vote by proxy may be exercised in any of the following instances: 1. Election of the board of directors or trustees; 2. Voting in case of joint ownership of stock; 3. Voting by trustee under voting trust agreement; 4. Pledge or mortgage of shares; 5. As provided for in its by-laws Nota Bene (Note well): Stockholders or members may attend and vote in their meetings by proxy (Sec. 58); BUT directors cannot do so. Directors must always act in person (Sec. 25). EXTENT OF AUTHORITY 1. General proxy confers a general discretionary power to attend and vote at annual meetings 2. Limited proxy restricts the authority to vote to specified matters only and may direct the manner in which the vote shall be cast

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WHO MAY PROXY - A stockholder or member may appoint any person he sees fit to represent him. - Since a proxy acts for another, he may act as such although he himself is disqualified to vote his shares. - The same person may act as proxy for one or several stockholders or members. - Directors or trustees cannot attend or vote by proxy at board meetings but they may act as proxies in stockholders meetings. VOTING TRUSTS (Sec. 59) Voting Trust Agreement an agreement whereby one or more stockholders transfer their shares of stocks to a trustee, who thereby acquires for a period of time the voting rights (and/or any other rights) over such shares; and in return, trust certificates are given to the stockholder/s, which are transferable like stock certificates, subject, however, to the trust agreement. LIMITATIONS: a.) Cannot be entered into for a period exceeding 5 years at any one time except when it is a condition in a loan agreement, however, said contract shall automatically expire upon full payment of the loan. b.) The agreement must not be used for purposes of fraud. c.) It must be in writing and notarized and specify the terms and conditions thereof. d.) A certified copy of the agreement must be filed with the corporation and with the SEC. e.) The agreement shall be subject to examination by any stockholder of the corporation. f.) Unless, expressly renewed, all rights granted in the agreement shall automatically expire at the end of the agreed period. VOTING TRUSTS VS. PROXY Voting Trusts

Nature Trustee votes as owner rather Proxy holder votes as agent than as mere agent Notarization Agreement must be notarized Proxy need not be notarized Legal title Trustee acquires legal title to Proxy has no legal title to the the shares of the transferring shares of the principal SH Manner of voting Trustee may vote in person or Proxy must vote in person by proxy unless the agreement provides otherwise Actions allowed Trustee is not limited to act at Proxy can only act at a any particular meeting specified stockholders meeting (if not continuing) Restrictions on voting A trustee can vote and A proxy can only vote in the exercise all the rights of the SH absence of the owners of the even when the latter is stock. present. Period Must not exceed 5 years at any Usually of shorter duration one time except when the although under Sec. 58 it same is made a condition of a cannot exceed 5 years at any loan one time Separability of ownership and voting right Voting right is divorced from Right to vote is inherent in or the ownership of stocks inseparable from the right to ownership of stock Revocability Agreement is irrevocable Revocable anytime except one which is coupled with interest

TITLE VII STOCKS AND STOCKHOLDERS

Proxy

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Ways 1. 2. 3.

to become a Stockholder of a corporation: Subscription contract with the corporation; Purchase or acquisition of shares from existing SHs; and Purchase of treasury shares from the corporation.

SUBSCRIPTION CONTRACT (Sec. 60) - Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed The subscribed shares need not be paid in full in order that the subscription may be valid. The subscription contract is a consensual contract that is perfected upon the meeting of the minds of the parties. The name of the subscriber is recorded in the stock and transfer book, and from that time, such subscriber becomes a SH of record, entitled to all the rights of a SH. Until the stocks are fully paid, it continues to be a subsisting liability that is legally enforceable. KINDS OF SUBSCRIPTION CONTRACT: a.) Pre-incorporation subscription Sec. 61 b.) Post incorporation subscription entered into after the incorporation for the acquisition of unissued stock c.) Conditional one which is subject to a condition, which may be a past event unknown to the parties or a future, uncertain event d.) Absolute not subject to any condition and the subscriber becomes liable on the subscription and acquires the rights of a SH from the time it is accepted e.) Subscription with a special term one where the corporation agrees to do something, the fulfillment of which not being a condition precedent to the accrual of a liability of the subscriber or the acquisition of the rights of a stockholder. PRE-INCORPORATION SUBSCRIPTION (Sec. 61) - One entered into before incorporation which constitutes a binding contract among the subscribers.

Irrevocable for a period of at least 6 months from the date of subscription unless: a.) All of the other subscribers consent to the revocation, or b.) The incorporation fails to materialize. It shall likewise be irrevocable after the submission of the AOI to the SEC.

STOCK OPTIONS - A privilege granted to a party to subscribe to a certain portion of the unissued capital stock of a corporation within a certain period and under the terms and conditions of the grant exercisable by the grantee at any time within the period granted

UNDERWRITING AGREEMENT - An agreement between a corporation and a third person, termed the underwriter, by which the latter agrees, for a certain compensation, to purchase a stipulated amount of stocks or bonds, specified in the underwriting agreement, if such securities are not purchased by those to whom they are first offered. CONSIDERATION FOR STOCKS (Sec. 62) Valid Considerations in Subscription Agreements: 1. Cash actually received; 2. Property, tangible or intangible, actually received and necessary or convenient for its use and lawful purposes REQUISITES: a.) The property is actually received by the corporation; b.) The property is necessary or convenient for its use and lawful purposes; c.) It must be subject to a fair valuation equal to the par or issued value of the stock issued; d.) The valuation thereof shall initially be determined by the incorporators or the board of directors; and

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e.) The valuation is subject to the approval by the SEC. 3. Labor or services actually rendered to the corporation; 4. Previously incurred corporate indebtedness; 5. Amounts transferred from unrestricted retained earnings to stated capital; 6. Outstanding shares in exchange for stocks in the event of reclassification or conversion Note: Shares of stock shall not be issued in exchange for promissory notes or future services. However, there is no prohibition on the use of checks, bills or notes in payment of the cash consideration. SOURCES OF CORPORATE CAPITAL a.) Funds furnished by shareholders; b.) Borrowings; and c.) Profits and stock dividends SHARES OF STOCK - Interest or right which owner has in the management of the corporation, and its surplus profits, and, on dissolution, in all of its assets remaining after the payment of its debt. CERTIFICATE OF STOCK - Paper representation or tangible evidence of the stock itself and of the various interests therein REMEDIES WHERE CORPORATION REFUSES TO ISSUE CERTIFICATE: (SM-DR) 1. Suit for specific performance of an express or implied contract; 2. Petition for mandamus; 3. Suit for damages where specific performance cannot be granted; 4. Rescind contract of subscription and recover the consideration paid

ISSUANCE OF THE CERTIFICATE OF STOCK (Sec. 64) Requisites: 1. The certificate must be signed by the President or VicePresident, countersigned by the secretary or assistant secretary; 2. Must be sealed with the seal of the corporation; 3. Certificate must be delivered; 4. The par value, as to par value shares or full subscription as to no par value shares must first be fully paid; BASIS: Doctrine of Indivisibility of Subscription subscription is one, entire, indivisible and whole contract, which cannot be divided into portions. 5. Original certificate must be surrendered where the person requesting the issuance of a certificate is a transferee from the stockholder. ACTIONS BY STOCKHOLDERS OR MEMBERS: 1. Derivative Suit 2. Individual Suit 3. Representative Suit

TITLE VIII CORPORATE BOOKS AND RECORDS

BOOKS TO BE KEPT; STOCK TRANSFER AGENT (Sec. 74) 1. Book of all business transactions; 2. Book of minutes of all meetings of SHs/members; 3. Book of minutes of all meetings of D/T; 4. Stock and transfer book, in case of stock corporations. Corporate Records required by the SEC to be kept and/or registered: 1. Books of Account; 2. List of Stockholders or Members; and 3. Financial Records. Persons given the right to inspect Corporate Books: 1. Any D/T/SH/member;

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2. Voting trust certificate holder; 3. SH of a sequestered company; and 4. Beneficial owner of shares Rights of stockholders to corporate books and records: 1. Right of inspection; 2. Right to demand a list of SHs; 3. Right to demand a detailed auditing of business expenditures; 4. To examine books of the corporations subsidiary; 5. Right to financial statements. (Sec. 75) Limitations on the Right of Inspection: a.) Must be exercised during reasonable hours on business days; b.) Person demanding the right has not improperly used any information obtained through any previous examination of the books and records of the corporation; and c.) Demand is made in good faith or for a legitimate purpose. Remedies if Inspection Denied: a.) Mandamus; b.) Damages; c.) Criminal Suit

MERGER - a union whereby one or more existing corporations are absorbed by another corporation which survives and continues the combined business CONSOLIDATION union of two or more existing corporations to form a new corporation called the consolidated corporation SOME REASONS WHY CORPORATIONS UNITE: 1. To meet minimum paid up capital required by government regulations; 2. For better profits; 3. For better business opportunities; 4. For better corporate image. PROCEDURE FOR MERGER/CONSOLIDATION: 1. Approval of plan by the board of directors or trustees 2. Submission to stockholders or members for approval 3. Execution of formal contract (Articles of Merger/Consolidation) 4. Submission to SEC for approval 5. Conduct of hearing by SEC 6. Issuance of certificate by SEC Note: The plan may still be amended before the same is filed with the SEC, however, any amendment thereto must be approved by the majority vote of the board members or trustees of the constituent corporations and affirmed by the vote of 2/3 of the OCS or members. SECS APPROVAL AND EFFECTIVITY OF MERGER OR CONSOLIDATION (Sec. 79) General Rule: When one corporation buys all the shares of another corporation, this will not operate to dissolve the other corporation and as the two corporations still maintain their separate corporate entities, one will not answer for the debts of the other. EXCEPTIONS as to non-assumption of Liabilites: 1. If there is an express assumption of liabilities;

TITLE IX MERGER AND CONSOLIDATION

Common Forms of Corporate Combinations: 1. Sale of assets; 2. Lease of assets; 3. Sale of stock; 4. Merger; 5. Consolidation

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2. If there is a consolidation or merger; 3. If the purchase was in fraud of creditors; and 4. If the purchaser is merely a continuation of the seller. LEGAL EFFECTS OF MERGER/CONSOLIDATION: 1. There is automatic assumption of liabilities of the absorbed corporation or constituent corporations which are dissolved. 2. The absorbed or constituent corporations are ipso facto dissolved by operation of law without necessity of any further act or deed but there is no winding up or liquidation of their assets for the surviving corporation automatically acquires all the liabilities of the constituent corporation. 3. Permits the transfer of the assets to the purchaser and the distribution of the consideration received in a single operation. 4. Involve exchanges of properties, a transfer of the assets of the constituent corporations in exchange for securities in the new or surviving corporation but neither involves winding up of the affairs of the constituent corporations in the sense that their assets are distributed to the stockholders. 5. Dissolution of the constituent corporations cannot be made to retroact to a date prior to the ratification of the SHs but the transfer of the assets and liabilities of the constituent corporations could be made effective retroactively as of the date the said board of directors so resolved. 6. Consent of the creditors not necessary.

Even if there is a statement of capital stock, for as long as there is no distribution of retained earnings to its members, the corporation is non-stock. Any profit which it may obtain as an incident to its operations shall, whenever necessary or proper, be used in furtherance of the purpose/s for which it was organized.

TITLE XI NON-STOCK CORPORATIONS

CONCEPT (Sec. 87) - A non-stock corporation is one where no part of its income is distributable as dividends to its members.

PURPOSES (Sec. 88) Non-stock corporations may be formed or organized for: 1. Charitable 2. Religious 3. Educational 4. Professional 5. Cultural 6. Fraternal 7. Literary 8. Scientific 9. Social 10. Civic service Or similar purposes like: 1. Trade 2. Industry 3. Agricultural 4. And like chambers Or any combination thereof. RULES ON CONVERSION 1. Stock to non-stock corporation may be made by mere amendment of the AOI - The effect of this is that after the conversion, the SHs now become the members of the non-stock corporation and thus will no longer have any pecuniary interest in the corporation. Neither are they entitled to any share in the profit that may be obtained out of the operations or activities of the non-stock corporation. Hence, there is in fact no distribution by the stock corporation, by conversion, of its assets to its stockholders.

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2. Non-stock to stock corporation cannot be converted

by mere amendment of its AOI because the conversion would change the corporate nature from non-profit to monetary gain What the corporation should do is to dissolve itself and its members may decide to organize a stock corporation.

NON-STOCK Nature Has capital stock, divided into Does not have shares and may shares and with authority to not distribute profits to its distribute dividends to its members stockholders Meeting/Voting of members/SHs SHs and directors must act in a Members may be allowed by meeting, except where a mere the by-laws to vote by mail or assent is sufficient or a formal other similar means meeting unnecessary Manner of voting Cumulative voting is available Cumulative voting not in the election of directors available unless otherwise provided in the AOI/by-laws Proxy SHs may vote by proxy Members may be deprived of the right to vote by proxy in the AOI/by-laws Non-transferability of membership SHs may transfer their shares Members cannot transfer their membership unless allowed by the AOI/by-laws Directors/trustees Directors cannot exceed 15 in Trustees may exceed 15 in number number Term of Director/trustee Term of a director is 1 year Term of a trustee is 3 years; 1/3 of the Board shall be elected annually

STOCK VS. NON-STOCK STOCK

Election of officers Officers are elected by the Officers may be directly BOD elected by the members unless otherwise provided in the AOI/by-laws Place of meeting SHs meetings shall be held in By-laws may provide that the city or municipality where members of a non-stock principal office of corporation corporation may hold their is located, and if practicable in meetings at any place within the principal office the Phils.

TITLE XII CLOSE CORPORATIONS

- Special kind of stock corporation 1. Whose articles of incorporation should provide that: a.) The number of SHs shall not exceed 20; b.) Issued stocks are subject to transfer restrictions, with a right of preemption in favor of the SHs or the corporation; and c.) The corporation shall not be listed in the stock exchange or its stocks should not be publicly offered; or 2. Whose stocks, at least 2/3 of the voting stocks or voting rights of which are not owned or controlled by another corporation which is not a close corporation. Non-compliance with any of the requirements shall not make the corporation a close corporation within the meaning of the Corporation Code. CHARACTERISTICS: 1. SHs may act as directors without need of election and therefore are liable as directors;

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2. SHs who are involved in the management of the corporation are liable in the same manner as directors are; 3. Quorum may be greater than mere majority; 4. Transfer of stocks to others, which would increase the number of SHs to more than the maximum are invalid; 5. Corporate actuations may be binding even without formal board meeting, if the SH had knowledge or ratified the informal action of the others; 6. Pre-emptive right extends to all stock issues; 7. Deadlocks in board are settled by the SEC. on the written petition by any SH; and 8. SH may withdraw and avail of his right of appraisal. N.B.: Special rules are provided for close corporations because it is essentially an incorporated partnership. ORDINARY STOCK CORPORATION vs. CLOSE CORPORATION ORDINARY STOCK CLOSE CORPORATION CORPORATION Articles of Incorporation Need only contain the general Must contain the special matters enumerated in Sec. 14 matters prescribed by Sec. 97, of the code aside from the general matters in Sec. 14 (failure to do so precludes a de jure close corporation) Ownership of stocks Its status as an ordinary stock 2/3 of its voting stock or voting corporation is not affected by rights must not be owned or the ownership of its voting controlled by another stock or voting rights corporation which is not a close corporation Classification of directors Its articles cannot classify its Its articles may classify its directors directors Election/appointment of officers Corporate officers and Its articles may provide that

employees are elected by a any or all of the corporate majority vote of all the officers or employees may be members of the board of elected or appointed by SHs directors Management Business of the corporation is May be managed by the SHs if managed by the board of the AOI so provide, but they directors are liable as directors Pre-emptive right Subject to the exceptions Subject to no exceptions found in Sec. 39 unless denied in the articles Appraisal right May be exercised by a SH only May be exercised and in the cases provided in Secs. compelled against the 81 and 42 of the Code corporation by a SH for any reason Purchase of its own shares Must always be made from the In case of an arbitration of an unrestricted retained earnings intra-corporate deadlock by the (except as regards redeemable SEC, the corporation may be shares) ordered to purchase its own shares from the SHs regardless of the availability of URE Remedy of arbitration Not a remedy Available remedy in case the directors or SHs are so divided respecting the management of the corporation Note: The following cannot be a close corporation: (BIMPOSE) a.) Banks; b.) Insurance companies; c.) Mining companies; d.) Public utilities; e.) Oil companies; f.) Stock exchanges; g.) Educational institutions;

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h.) Other corporations declared to be vested with public

interest VALIDITY OF RESTRICTIONS ON TRANSFER OF SHARES (Sec. 98) It is mandatory for the AOI of a close corporation to provide that all of the issued stocks of all classes be subject to one or more restriction. The restriction on transfer is in the nature of a right of first refusal in favor of the SHs which can be waived by the SH, if the latter fails to exercise the option to purchase within the period stated in the articles and bylaws. Any transfer made should not result in exceeding the number of SHs as allowed by the Code. Note: Under Sec. 99, good faith is not a defense because there is a conclusive presumption of knowledge of the restriction. EFFECTS WHERE STOCKHOLDERS ARE MANAGERS (Sec. 100) 1. No longer necessary to elect directors; 2. SHs concerned shall be deemed the directors; 3. SHs shall have the same liabilities as directors; 4. To the extent that the SHs are actively engaged in the management or operation of the business and affairs of a close corporation, the SHs shall be held to strict fiduciary duties to each other and among themselves; and 5. The SHs shall be personally liable for corporate torts unless the corporation has obtained reasonably adequate liability insurance. DEADLOCKS (Sec. 104) - Arise when the directors or SHs are so divided respecting the management of the business and affairs of the corporation that the votes required for any corporate action cannot be obtained and as a result, business and

affairs can no longer be conducted to the disadvantage of the SHs generally In this case, the SEC shall have the power to arbitrate the dispute and in the exercise of such power, the SEC shall have the authority to: a.) Cancel or alter any provision in the articles of incorporation or by-laws; b.) Cancel, alter or enjoin any resolution of the corporation; c.) Direct or prohibit any act of the corporation; d.) Require the purchase at their fair value of shares of any SH either by any SH or by the corporation regardless of the availability of URE; e.) Appoint a provisional director; f.) Dissolve the corporation; or g.) Grant such other relief as the circumstances may warrant.

TITLE XIII SPECIAL CORPORATIONS

EDUCATIONAL CORPORATION - A stock or non-stock corporation organized to provide facilities for teaching or instruction - A favorable recommendation of the DEPED/CHED is essential for the approval of its AOI and by-laws. - It is primarily governed by special laws and suppletorily by the provisions of the Code. NON-STOCK EDUCATIONAL CORPORATION vs. EDUCATIONAL CORPORATION Non-stock Educational Educational Corp. Corp. Governing Law Governed by the provisions on Governed by special laws and non-stock corporations and by the general provisions of suppletorily by the provisions the Corporation Code

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on stock corporations Nature A special corporation which may be stock or non-stock Number of trustees Number of board of trustees Number of trustees should not may be more than 15 be less than 5 but not more than 15 Term of office of BOT 3 years 5 years A non-stock corporation

The extinguishment of the corporate franchise and the termination of corporate existence; the complete destruction of the corporation and within contemplation of the law, is equivalent to its death.

RELIGIOUS CORPORATION - Composed entirely of spiritual persons and which is organized for the furtherance of a religion or for perpetuating the rights of the church or for the administration of church or religious work or property. It is different from an ordinary non-stock corporation organized for religious purposes. - The Corporation Code does not require any religious group to be registered as a corporation but if it wants to acquire legal personality, its members should incorporate under the Corporation Code. KINDS: 1. Corporation Sole a special form of corporation, usually associated with the clergy, consisting of one person only and his successors, who is incorporated by law to give some legal capacities and advantages 2. Religious Societies a non-stock corporation governed by a board but with religious purposes. It is incorporated by an aggregate of persons, e.g. religious order, diocese, synod, sect, etc. 3. Ordinary Non-stock Religious Corporation

METHODS OF DISSOLUTION (Sec. 117) A. Voluntary 1.) Application for dissolution with SEC: a.) Where no creditors are affected; b.) Where creditors are affected; 2.) Shortening of the corporate term by amending the articles of incorporation B. Involuntary 1.) Expiration of the corporate term; 2.) Failure to organize and commence business within 2 years from the date of issuance of the certificate of incorporation (Sec. 121) 3.) Legislative dissolution; 4.) Quo warranto suit against a de facto corporation; 5.) Minority stockholders suit for dissolution on justifiable grounds; or 6.) SEC dissolution, upon complaint and after notice and hearing, on the following grounds: a.) Corporation was illegally organized; b.) Continuous inactivity (subsequent to incorporation, organization and commencement of business) for at least 5 years; c.) Serious dissention in the corporation; d.) Commission by the corporation of illegal or ultra vires act or violations of the Code. EFFECTS: 1. Transfer of legal tile to corporate property to the SHs who become co-owners thereof; 2. Continuation of corporate business merely as an association without juridical personality;

TITLE XIV DISSOLUTION

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3. Conveyance by the SHs of their respective shareholdings toward the creation of a new corporation to continue the business of the old; 4. Reincorporation of the dissolved corporation by re-filing new articles of incorporation and by-laws; 5. The corporation continues as a body corporate for 3 years for purposes of winding up; and 6. Cessation of corporate existence for all purposes upon the expiration of the winding up period of 3 years. VOLUNTARY DISSOLUTION WHERE NO CREDITORS ARE AFFECTED (Sec. 118) Requirements: 1. Majority vote of the board of directors or trustees; 2. Resolution adopted by the affirmative vote of the SHs owning at least 2/3 of the OCS or at least 2/3 of the members at a meeting called for such purpose. VOLUNTARY DISSOLUTION WHERE CREDITORS ARE AFFECTED (Sec. 119) Requirements: 1. Petition shall be filed with the SEC; 2. Signed by a majority of its board of directors or trustees or other officers having management of its affairs; 3. Verified by its president or secretary or one of its directors or trustees; 4. Shall set forth all claims and demands against it; 5. Resolved upon by the affirmative vote of the SHs representing at least 2/3 of the OCS or by at least 2/3 of the members at a meeting called for that purpose. CORPORATE LIQUIDATION (Sec. 122)

N.B.: A dissolved corporation continues to be a body corporate for 3 years from the time it is dissolved for the purpose of liquidation or winding up its corporate affairs. The termination of the life of a juridical entity does not by itself cause the extinction or diminution of the rights and liabilities of such entity nor those of its owners and creditors alike. (Sec. 145) METHODS: 1. By the corporation itself through its board of directors/trustees; 2. By a trustee to whom the corporate assets have been conveyed; and 3. By a management committee or rehabilitation receiver appointed by the SEC. Note: a.) The 3-year period of liquidation does not apply to methods 2 and 3 as long as the trustee or the receiver is appointed within the said period. b.) But the word trustee as used in the corporation statute must be understood in its general concept which could include the counsel to whom was entrusted the prosecution of the suit filed by the corporation. c.) The board of directors may also be permitted to complete the corporate liquidation by continuing as trustees by legal implication. d.) The question as to the right of priority of a claimant against the assets of a corporation that is being dissolved and liquidated becomes of importance only when the assets of the corporation are not sufficient to pay all claims. LIQUIDATION vs. REHABILITATION

Liquidation the process by which all the assets of the corporation are converted into liquid assets (cash) in order to facilitate the payment of obligations to creditors, and the remaining balance, if any, is to be distributed to the SHs or members.

LIQUIDATION Connotes a winding up or settling with creditors and

REHABILITATION Nature Connotes a reopening or reorganization

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debtors Continuity of corporate life Winding up process so that Contemplates a continuance of assets may be distributed to corporate life in an effort to those entitled restore the corporation to its former successful operation

Philippines, on whom any summons and other legal processes may be served in all actions or other legal proceedings against the foreign corporation. GROUNDS FOR REVOCATION OF LICENSE 1. Failure to file annual reports required by the Code; 2. Failure to appoint and maintain a resident agent; 3. Failure to inform the SEC of the change of residence of the resident agent; 4. Failure to submit copy of amended articles or by-laws or articles of merger or consolidation; 5. A misrepresentation in material matters in reports; 6. Failure to pay taxes, imposts and assessments; 7. Engage in business unauthorized by SEC; 8. Acting as dummy of a foreign corporation; and 9. Not licensed to do business in the Philippines. DOCTRINE OF ISOLATED TRANSACTIONS - Foreign corporations, even unlicensed ones, can sue or be sued on a transaction or series of transactions set apart from their common business in the sense that there is no intention to engage in a progressive pursuit of the purpose and object of business transaction. INSTANCES WHEN A FOREIGN CORPORATION MAY SUE IN THE PHILIPPINES WHETHER OR NOT LICENSED TO DO BUSINESS: 1. To seek redress for an isolated business transaction; 2. To protect its corporate reputation, name, and goodwill; 3. To enforce a right not arising out of a business transaction, e.g., tort that occurred in the Philippines; 4. When the parties have contractually stipulated that Philippines is the venue of actions; 5. When the party sued is barred by the principle of estoppel and/or principle of unjust enrichment from questioning the capacity of the foreign corporation; and 6. Recovery of misdelivered property.

TITLE XV FOREIGN CORPORATIONS

Formed, organized or existing under any law other than those of the Philippines and whose laws allow Filipino citizens and corporation to do business in its own country or state. (This definition espouses the incorporation test and the reciprocity rule and is significant for licensing purposes.)

APPLICATION TO EXISTING FOREIGN CORPORATION (Sec. 124) - It is not permitted to transact or do business in the Philippines until it has secured a license for that purpose from the SEC and a certificate of authority from the appropriate government agency. APPLICATION FOR A LICENSE (Sec. 125) Reasons why a license is important: 1. To place them under the jurisdiction of the courts; 2. To place them in the same footing as domestic corporations; and 3. Protection for the public in dealing with said corporations. RESIDENT AGENT (Secs. 127-128) - An individual, who must be of good moral character and of sound financial standing, residing in the Philippines, or a domestic corporation lawfully transacting business in the Philippines, designated in a written power of attorney by a foreign corporation authorized to do business in the

Law3 Private Corporations

Atty. Jonathan B. Tambol

Law3 Private Corporations

Atty. Jonathan B. Tambol