Documente Academic
Documente Profesional
Documente Cultură
A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence. A corporation, being a creature of law, "owes its life to the state, its birth being purely dependent on its will," it is "a creature without any existence until it has received the imprimatur of the state acting according to law." A corporation will have no rights and privileges of a higher priority than that of its creator and cannot legitimately refuse to yield obedience to acts of its state organs. (Tanyag v. Benguet Corporation) A corporation has four (4) attributes (!) ($) (&) (4) "t is an artificial being# %reated by operation of law# 'ith right of succession# (as the powers, attributes, and properties as expressly authorized by law or incident to its existence.
%orporations which have capital stoc) All other private corporations (*&) divided into shares and are authorized to distribute to the +ne where no part of its income is holders of shares dividends or distributable as dividends to its allotments of the surplus profits on the members, trustees or officers. (*,-) basis of the shares (*&) .rimarily to ma)e profits for its shareholders /ay be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes li)e trade, industry, agricultural and li)e chambers, or any combination thereof. (*,,) 'hatever incidental profit made is not distributed among its members but is
Purpose
Distribution of Profits
used for furtherance of its purpose. A+" or by0laws may provide for the distribution of its assets among its members upon its dissolution. 1efore then, no profit may be made by members. Co#position Scope of ri$%t to !ote 2toc)holders 3ach stoc)holder votes according to the proportion of his shares in the corporation. 4o shares may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares, and as otherwise provided by the %ode. (2ec. 5) /ay be denied by the A+" or the by0 laws. (2ec. ,8) /ay be authorized by the by0laws, with the approval of and under the conditions prescribed by the 23%. (2ec. ,8) /embers 3ach member, regardless of class, is entitled to one (!) vote 647322 such right to vote has been limited, broadened, or denied in the A+" or by0 laws. (2ec. ,8)
1oard of :irectors or ;rustees, 1oard of ;rustees, which may consist consisting of 90!9 directors < trustees. of more than !9 trustees unless otherwise provided by the A+" or by0 laws. (Sec, 92) or :irectors < trustees shall hold office for 1oard classified in such a way that the ! year and until their successors are term of office of !<& of their number elected and =ualified (2ec. $&). shall expire every year. 2ubse=uent elections of trustees comprising !<& of the board shall be held annually, and trustees so elected shall have a term of & years. (Sec. 92) +fficers are elected by the 1oard of :irectors (2ec. $9), except in close corporations where the stoc)holders themselves may elect the officers. (2ec. 8-) +fficers may directly elected by the members 647322 the A+" or by0laws provide otherwise. (2ec. 8$)
Ter# of trustees
irectors
E(ection of officers
P(ace of #eetin$s
Any place within the .hilippines, if >enerally, the meetings must be held provided for by the by0laws (2ec. 8&) at the principal office of the corporation, if practicable. "f not, then anyplace in the city or municipality where the principal office of the corporation is located. (2ec. 9!)
>enerally non0transferable since membership and all rights arising therefrom are personal. (owever, the A+" or by0laws can provide otherwise. (2ec. 8?) See Sec. 94.
CIR VS. CLUB FILIPINO (5 SCRA 321; 1962) FACTS: Club Filipino owns and operates a club house, a sports complex, and a bar restaurant, which is incident to the operation of the club and its gold course. The club is operated mainly with funds derived from membership fees and dues. The !" see#s to tax the said restaurant as a business. $%&': The Club was organi(ed to develop and cultivate sports of all class and denomination for the healthful recreation and entertainment of its stoc#holders and members. There was in fact, no cash dividend distribution to its stoc#holders and whatever was derived on retail from its bar and restaurants used were to defray its overhead expenses and to improve its golf course. For a stoc# corporation to exist, ) re*uisites must be complied with: +,- a capital stoc# divided into shares +)- an authority to distribute to the holders of such shares, dividends or allotments of the surplus profits on the basis of shares held. !n the case at bar, nowhere in the A.! or by/laws of Club Filipino could be found an authority for the distribution of its dividends or surplus profits.
and composing the corporation and who are signatories thereof C%aracteristic natural persons excludes corporations and partnerships may be more than !9 for non0stoc) corp. except educational corp. does not prevent the Aone0man (person) corporationB wherein the other incorporators may have only nominal ownership of only one share of stoc)# not necessarily illegal
Nu#ber
of legal age ma@ority should be residents of the .hilippines residence a re=uirement# citizenship re=uirement only in certain areas such as public utilities, retail trade ban)s, investment houses, savings and loan associations, schools
,/ )/ 0/ 1/ 2/
+rganize and establish a corporation %omply with re=uirements of corporation code %ontribute capital<resources /ode of use of capital<resource and control<management of capital<resource distribution<disposition of capital<resource (embodied in constitutive documents)
CO00ENTS
brings together persons who become interested in the enterprise aids in procuring subscriptions and sets in motion the machinery which leads to the formation of the corporation itself formulates the necessary initial business and financial plans and, if necessary, buys the rights and property which the business may need, with the understanding that the corporation when formed, shall ta)e over the same.
A+" C the treasurerDs affidavit duly signed C ac)nowledged must be filed w< the 23% C the corresponding fees paid failure to file the A+" will prevent due incorporation of the proposed corporation C will not give rise to its @uridical personality. "t will not even be a de facto corp. 6nder present 23% rules, the A+" once filed , will be published in the 23% 'ee)ly 1ulletin at the expense of the corp. (23% %ircular E 4, !8,$).
Process a) 23% shall examine them in order to determine whether they are in conformity w< law. b) "f not, the 23% must give the incorporators a reasonable time w<in w<c to correct or modify the ob@ectionable portions. Grounds for re ection or disappro!al of A"#$ a) A+" <amendment not substantially in accordance w< the form prescribed b) purpose<s are patently unconstitutional, illegal, immoral, or contrary to government rules C regulations# c) ;reasurerDs Affidavit is false# d) re=uired percentage of ownership has not been complied with (2ec. !-) e) corp.Ds establishment, organization or operation will not be consistent w< the declared national economic policies (to be determined by the 23%, after consultation w< 1+", 43:A or any appropriate government agency 00 .: 8?$0A as amended by .: !-9,, 2ec. 5 ())) :ecisions of the 23% disapproving or re@ecting A+" may be appealed to the %A by petition for review in accordance w< the F+%.
Certificate of Incorporation *i(( be issue if8 a) 23% is satisfied that all legal re=uirements have been complied with# and b) there are no reasons for re@ecting or disapproving the A+".
"t is only upon such issuance that the corporation ac=uires @uridical personality. (2ee 2ec. !8. %ommencement of corporate existence) 2hould it be subse=uently found that the incorporators were guilty of fraud in procuring the certificate of incorporation, the same may be revo)ed by the 23%, after proper notice C hearing.
3ssential to its existence since it is through it that the corporation can sue and be sued and perform all legal acts A corporate name shall be disallowed by the 23% if the proposed name is either (!) identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law# or patently deceptive, confusing or contrary to existing laws. (2ec. !,)
($)
L9CEU0 OF T:E P:ILS" VS" CA (219 SCRA 610) ;he policy underlying the prohibition against the registration of a corporate name which is Aidentical or deceptively or confusingly similarB to that of any existing corporation or which is Apatently deceptive or patently confusingB or Acontrary to existing laws is !. the avoidance of fraud upon the public which would have occasion to deal with the entity concerned# $. the prevention of evasion of legal obligations and duties, and &. the reduction of difficulties of administration and supervision over corporations. Purpose C(ause
A corporation can only have one (!) primary purpose. (owever, it can have several secondary purposes. A corporation has only such powers as are expressly granted to it by law C by its articles of incorporation, those which may be incidental to such conferred powers , those reasonably necessary
to accomplish its purposes C those which may be incident to its existence. %orporation may not be formed for the purpose of practicing a profession li)e law, medicine or accountancy
Principa( Office
must be within the .hilippines specify city or province street<number not necessary important in determining venue in an action by or against the corp., or on determining the province where a chattel mortgage of shares should be registered cannot specify term which is longer than 9? years at a time may be renewed for another 9? years, but not earlier than 9 years prior to the original or subse=uent expiry date 647322 there are @ustifiable reasons for an earlier extension. names, nationalities C residences of the incorporators# names, nationalities C residences of the directors or trustees who will act as such until the first regular directors or trustees are elected# treasurer who has been chosen by the pre0incorporation subscribers<members to receive on behalf of the corporation, all subscriptions <contributions paid by them. amount of its authorized capital stoc) in lawful money of the .hilippines number of shares into which it is divided in case the shares are par value shares, the par value of each, names, nationalities and residences of the original subscribers, and the amount subscribed and paid by each on his subscription, and if some or all of the shares are without par value, such fact must be stated for a non0stoc) corporation, the amount of its capital, the names, nationalities and residences of the contributors and the amount contributed by each $9G of $9G rule to be certified by ;reasurer paid up capital should not be less than .9,??? %lasses of shares into w<c the shares of stoc) have been divided# preferences of C restrictions on any such class# and any denial or restriction of the pre0emptive right of stoc)holders should also be expressly stated in said articles. "f the corporation is engaged in a wholly or partially nationalized business or activity, the A+" must contain a prohibition against a transfer of stoc) which would reduce the Hilipino ownership of its stoc) to less than the re=uired minimum.
Ter# of E'istence
Incorporators an Directors
Capita( Stock
Ot%er #atters
An& corporation #a& be incorporate as a c(ose corporation; e'cept8 a) mining or oil companies# b) stoc) exchanges# c) ban)s# d) insurance companies# e) public utilities# f) educational institutions# C g) corporations declared to be vested w< public interest
4o. A corporation organi(ed under a statute subse*uently declared invalid cannot ac*uire the status of a 5de facto6 corporation unless there is some other statute under which the supposed corporation may be validly organi(ed. $ence, in the case at bar, the mere fact that the municipality was organi(ed before the statute had been invalidated cannot conceivably ma#e it a 5de facto6 corporation since there is no other valid statute to give color of authority to its creation.
HALL v. PICCIO +29 SCRA 533; 1969) !n the case of $all v. 9iccio, where the supposed corporation transacted business as a corporation pending action by the S%C on its articles of incorporation, the Court held that there was no 5de facto6 corporation on the ground that the corporation cannot claim to be in 5good faith6 to be a corporation when it has not yet obtained its certificate of incorporation.
NOTE8 ;he validity of incorporation cannot be in=uired into collaterally in any private suit to which such corporation may be a party. 2uch in=uiry must be through a =uo warranto proceeding made by the 2olicitor >eneral. (2ec. $?)
(:e facto J has status of Ide @ureD corpo, except separate personality against 2tate, provided all re=uisites are present)
EMPIRE vs. STUART +46 Mich. 482, 9 N.W. 527; 1881) Company was sued on a promissory note. !ts defense was that at the time of its issuance, it was defectively organi(ed and therefore could not be sued as such. The Corporation cannot repudiate the transaction or evade responsibility when sued thereon by setting up its own mista#e affecting the original organi(ation.
LOWELL-WOODWARD vs. WOODS +104 !". 729; 1919) Corporation sued a partnership on a promissory note. The latter as defense alleged that the plaintiff was not a corporation. .ne who enters into a contract with a party described therein as a corporation is precluded, in an action brought thereon by such party under the same designation, from denying its corporate existence.
ASIA BANKING VS STANDARD PRODUCTS +46 #hi$. 145; 1924) The corporation sued another corporation a promissory note. The defense was that the plaintiff was not able to prove the corporate existence of both parties. The defendant is estopped from denying its own corporate existence. !t is also estopped from denying the other6s corporate existence. The general rule is that in the absence of fraud, a person who has contracted or otherwise dealt with an association is such a way as to recogni(e and in effect admit its legal existence as a corporate body is thereby estopped from denying its corporate existence. CRANSON VS IBM +234 M%. 477, 200 A. 2% 33 ; 1964) ! : sued Cranson in his personal capacity regarding a typewriter bought by him as 9resident of a defectively organi(ed company whose Articles were not yet filed when the obligation was contracted. ! :, having dealt with the defectively organi(ed company as if it were properly organi(ed and having relied on its credit instead of Cranson6s, is estopped from asserting that it was not incorporated. !t cannot sue Cranson personally. SALVATIERRA VS GARLITOS +103 #hi$. 757; 1958) Salvatierra leased his land to the corporation. $e filed a suit for accounting, rescission and damages against the corporation and its president for his share of the produce. ;udgment against both was obtained. 9resident complains for being held personally liable. $e is liable. An agent who acts for a non/existent principal is himself the principal. !n acting on behalf of a corporation which he #new to be unregistered, he assumed the ris# arising from the transaction. ALBERT VS UNIVERSITY PUBLISHING CO., INC. +&!". 30, 1965)
:ariano Albert entered into a contract with <niversity 9ublishing Co., !nc. through ;ose :. Aruego, its 9resident, whereby <niversity would pay plaintiff for the exclusive right to publish his revised Commentaries on the "evised 9enal Code. The contract stipulated that failure to pay one installment would render the rest of the payments due. 3hen <niversity failed to pay the second installment, Albert sued for collection and won. $owever, upon execution, it was found that <niversity was not registered with the S%C. Albert petitioned for a writ of execution against ;ose :. Aruego as the real defendant. <niversity opposed, on the ground that Aruego was not a party to the case. The Supreme Court found that Aruego represented a non/existent entity and induced not only Albert but the court to believe in such representation. Aruego, acting as representative of such non/existent principal, was the real party to the contract sued upon, and thus assumed such privileges and obligations and became personally liable for the contract entered into or for other acts performed as such agent. The Supreme Court li#ewise held that the doctrine of corporation by estoppel cannot be set up against Albert since it was Aruego who had induced him to act upon his +Aruego=s- willful representation that <niversity had been duly organi(ed and was existing under the law.
Affirmative vote of stoc)holders representing at least ma@ority of outstanding capital stoc) (2toc) %orp.) or members (4on02toc)) /ust be signed by stoc)holders or members voting for them
(!) "n the principal office of the corporation # and ($) 2ecurities and 3xchange %ommission +nly upon the 23%Ds issuance of a certification that the by0laws are not inconsistent with the %orporation %ode.
Specia( corporations8 1y0laws and<or amendments thereto must be accompanied by a certificate of the appropriate government agency to the effect that such by0laws < amendments are in accordance with law.
ban)s or ban)ing institutions building and loan associations trust companies insurance companies public utilities educational institutions other special corporations governed by special laws
Contents of /&-(a*s 0 2ub@ect to the provisions of the %onstitution, this %ode, other special laws, and the articles of incorporation, a private corporation may provide in its by0laws for !) $) &) 4) 9) 5) -) ,) 8) the time, place and manner of calling and conducting regular or special meetings of the directors or trustees# the time and manner of calling and conducting regular and special meetings of the stoc)holders or members# the re=uired =uorum in meetings of stoc)holders or members and the manner of voting herein# the form for proxies of stoc)holders and members and the manner of voting them# the =ualifications, duties and compensation of directors or trustees, employees# officers and
the time for holding the annual election of directors or trustees and the mode or manner of giving notice thereof# the manner of election or appointment and the term of office of all officers other than directors or trustees# the penalties for violation of the by0laws# in the case of stoc) corporations, the manner of issuing certificates# and
!?) such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs.
FLEISCHER V. BOTICA NOLASCO CO. +47 #hi$. 583; 1925) As a general rule, the by/laws of a corporation are valid if they are reasonable and calculated to carry into effect the ob8ective of the corporation and are not contradictory to the general policy of the laws of the land. <nder a statute authori(ing by/laws for the transfer of stoc#, a corp. can do no more than prescribe a general mode of transfer on the corp. boo#s and cannot 8ustify an restriction upon the right of sale. GOVT. OF P.I. V. EL HOGAR '( ! p)*+i(i*" i" the ,-.$!/( !$$*/i"0 the 12%, ,- +*te *3 !,(*$4te m!5*)it-, t* c!"ce$ (h!)e( +!$i67
4o. !t is a patent nullity, being in direct conflict with Sec. ,>? of the Corp. &aw which prohibits forced surrender of unmatured stoc#s except in case of dissolution. '( ! p)*+i(i*" i" the ,-.$!/( 3i8i"0 the (!$!)- *3 6i)ect*)( +!$i67 @es. Since the Corporation &aw does not prescribe the rate of compensation, the power to fix compensation lies with the corporation. '( ! p)*+i(i*" )e94i)i"0 pe)(*"( e$ecte6 t* the 1*!)6 *3 %i)ect*)( t* */" !t $e!(t # 5,000 (h!)e( +!$i67 @es. The Corporation &aw gives the corporation the power to provide *ualifications of its directors. CITIBANK, N.A. v. CHUA (220 SCRA 75) 3here the S%C grants a license to a foreign corporation, it is deemed to have approved its foreign/enacted by/laws. Sec. 1A of the Corporation Code which states that by/laws are not valid without S%C approval applies only to domestic corporations. A board resolution appointing an attorney/in/fact to represent the corporation during pre/ trial is not necessary where the by/laws authori(e an officer of the corporation to ma#e such appointment.
LOYOLA GRAND VILLAS v. CA (276 SCRA 681) !SS<%: 3hether the failure of a corporation to file its by/laws within one +,- month from the date of its incorporation, as mandated by Art. 1A of the Corporation Code, results in the corporation=s automatic dissolution. "<&!4B: 4o. Failure to file by/laws does not result in the automatic dissolution of the corporation. !t only constitutes a ground for such dissolution. +C3. Ch4"0 ! 1i* +. 'AC, 163 SCRA 534) !ncorporators must be given the chance to explain their neglect or omission and remedy the same.
2ince corporate property is owned by the corporation as a @uridical person, the stoc)holders have no claim on it as owners, but have merely an expectancy or inchoate right to the same should any of it remain upon the dissolution of the corporation after all corporate creditors have been paid. %onversely, a corporation has no interest in the individual property of its stoc)holders, unless transferred to the corporation. Femember that the liability of the stoc)holders is limited to the amount of shares.
SAN JUAN STRUCTURAL & STEEL FABRICATORS v. CA (296 SCRA 631) A corporation is a 8uridical person separate and distinct from its stoc#holders or members. Accordingly, the property of the corporation is not the property of its stoc#holders or members and may not be sold by the stoc#holders or members without express authori(ation from the corporation=s oard of 'irectors. !n this case, the sale of a piece of land belonging to :otorich Corporation by the corporation treasurer +Bruenberg- was held to be invalid in the absence of evidence that said corporate treasurer was authori(ed to enter into the contract of sale, or that the said contract was ratified by :otorich. %ven though Bruenberg and her husband owned CC.>AAD of :otorich, her act could not bind the corporation since she was not the sole controlling stoc#holder. STOCKHOLDERS OF F. GUAN ON V. REGISTER OF DEEDS (6 SCRA 373) 9roperties registered in the name of the corporation are owned by it as an entity separate and distinct from its members. 3hile shares of stoc# constitute personal property, they do not represent property of the corporation. A share of stoc# only typifies an ali*uot part of the corporation=s property or the right to share in its proceeds to that extent when distributed according to law and e*uity, but its holder is not the owner of any part of the capital of the corporation. 4or is he entitled to the possession of any definite portion of its property or assets. The act of li*uidation made by the stoc#holders of the corp of the latter6s assets is not and cannot be considered a partition of community property, but rather a transfer or conveyance of the title of its assets to the individual stoc#holders. Since the purpose of the li*uidation, as well as the distribution of the assets, is to transfer their title from the corporation to the stoc#holders in proportion to their shareholdings, that transfer cannot be effected without the corresponding deed of conveyance from the corporation to the stoc#holders. !t is, therefore, fair and logical to consider the certificate of li*uidation as one in the nature of a transfer or conveyance.
CARAM V. CA +151 SCRA 373; 1987) The case of the unpaid compensation for the preparation of the pro8ect study. The petitioners were not involved in the initial stages of the organi(ation of the airline. They were merely among the financiers whose interest was to be invited and who were in fact persuaded, on the strength of the pro8ect study, to invest in the proposed airline. There was no showing that the Airline was a fictitious corp and did not have a separate 8uridical personality to 8ustify ma#ing the petitioners, as principal stoc#holders thereof, responsible for its obligations. As a bona fide corp, the Airline should alone be liable for its corporate acts as duly authori(ed by its officers and directors. Branting that the petitioners benefited from the services rendered, such is no 8ustification to hold them personally liable therefor. .therwise, all the other stoc#holders of the corporation, including those who came in late, and regardless of the amount of their shareholdings, would be e*ually and personally liable also with the petitioner for the claims of the private respondent. PALAY V. CLAVE +124 SCRA 640; 1983) The case of the reliance on a default provision of the contract granting automatic extra/8udicial rescission. The court found no badges of fraud on the part of the president of the corporation. The .' had literally and mista#enly relied on the default provision of the contract. As president and controlling stoc#holder of the corp, no sufficient proof exists on record that he used the corp to defraud private respondent. $e cannot, therefore, be made personally liable because he appears to be the controlling stoc#holder. :ere ownership by a single stoc#holder or by another corporation of all or nearly all of the capital stoc# of a corporation is not of itself sufficient ground for disregarding the separate corporate personality. MAGSAYSAY V. LABRADOR +180 SCRA 266) The case of the assignment by Senator :agsaysay of a certain portion of his shareholdings in S< !C granting his sisters the right to intervene in a case filed by the widow against S< !C. The words Ean interest in the sub8ect,E to allow petitioners to intervene, mean a direct interest in the cause of action as pleaded, and which would put the intervenor in a legal position to litigate a fact alleged in the complaint, without the establishment of which plaintiff could not recover. $ere, the interest, of petitioners, if it exists at all, is indirect, contingent, remote, con8ectural, conse*uential and collateral. At the very least, their interest is purely inchoate, or in sheer expectancy of a right in the management of the corporation and to share in the profits thereof and in the properties and assets thereof on dissolution, after payment of the corporate debts and obligations.
3hile a share of stoc# represents a proportionate or ali*uot interest in the property of the corp, it does not vest the owner thereof with any legal right or title to any of the property, his interest in the corporate property being e*uitable and beneficial in nature. Shareholders are in no legal sense the owners of corporate property, which is owned by the corp as a distinct legal person.
MARVEL BLDG. CORP. V. DAVID +94 #hi$. 376; 1954) The fact that: certificates in possession of Castro were endorsed in blan#F Castro had enormous profits and had motive to hide themF other subscribers had no incomes of sufficient magnitudeF and directors never metF
shows that other shareholders may be considered dummies of Castro. $ence, corporate veil may be pierced.
issues. There was no clear cut delimitation between the personality of ;acinto and the corporation.
ASIONICS PHILS. v. NLRC (290 SCRA 164) A corporation is invested by law with a personality separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related. :ere ownership by a single stoc#holder or by another corporation of all or nearly all of the capital stoc# of a corporation is not of itself sufficient ground for disregarding the separate corporate personality. 3here there is nothing on record to indicate the 9resident and ma8ority stoc#holder of a corporation had acted in bad faith or with malice in carrying out the retrenchment program of the company, he cannot be held solidarily and personally liable with the corporation.
to be the actual owner of the business without regard to the rights of the stoc#holders. Iillarama even admitted that he mingled the corporate funds with his own money. These circumstances negate Iillarama=s claim that he was only a part/time Beneral :anager, and show beyond doubt that the corporation is his alter ego. Thus, the restrictive clause with 9antranco applies. A s%&&%" '() *!+ '(,% -s% !. ( /!"#!"(+% %*+0+) (s ( '%(*s !. %v(10*2 +3% !b&02(+0!* !. 30s /!v%*(*+. W3%"% +3% C!"#!"(+0!* 0s s-bs+(*+0(&&) +3% (&+%" %2! !. !*% !. +3% #("+0%s +! +3% /!v%*(*+ !" +3% "%s+"0/+0v% (2"%%'%*+, 0+ /(* b% %*4!0*%1 ."!' /!'#%+0*2 50+3 +3% /!v%*(*+%%.
Close Corporations
CEASE V. CA +93 SCRA 483; 1979) The Cease plantation was solely composed of the assets and properties of the defunct Tiaong plantation whose license to operate already expired. The legal fiction of separate corporate personality was attempted to be used to delay and deprive the respondents of their succession rights to the estate of their deceased father. 3hile originally, there were other incorporators of Tiaong, it has developed into a closed family corporation +Cease-. The head of the corporation, Cease, used the Tiaong plantation as his instrumentality. !t was his business conduit and an extension of his personality. There is not even a showing that his children were subscribers or purchasers of the stoc#s they own. DELPHER TRADES V. CA +157 SCRA 349; 1988) The 'elpher Trades Corp. is a business conduit of the 9achecos. 3hat they really did was to invest their properties and change the nature of their ownership from unincorporated to incorporated form by organi(ing 'elpher and placing the control of their properties under the corporation. This saved them inheritance taxes. This is the reverse of CeaseF however, it does not modify the other cases. !t stands on its own because of the facts.
28
(!) if the subsidiary was formed for the payment of evading the payment of higher taxes ($) where it was controlled by the parent that its separate identity was hardly discernible (&) parent corporations may be held responsible for the contracts as well as the torts of the subsidiary
28 )%at are t%e criteria b& *%ic% t%e subsi iar& can be consi ere a #ere instru#enta(it& of t%e parent co#pan&>
!. $. &. 4. 9. 5. -. ,. 8. !?. !!. the parent corp. owns all or most of the capital stoc) of the subsidiary. the parent and subsidiary have common directors and officers the parent finances the subsidiary the parent subscribes to all the capital stoc) of the subsidiary or otherwise causes its incorporation the subsidiary has grossly inade=uate capital the parent pays the salaries and other expenses or losses of the subsidiary the subsidiary has substantially no business except with the parent corp. or no assets except those conveyed to or by the parent corp. in the papers of the parent corp. or in the statements of its officers, the subsidiary is described as a department or division of the parent corp. or its business or financial responsibility is referred as the parentDs own the parent uses the property of the subsidiary as its own the directors or the executives of the subsidiary do not act independently in the interest of the subsidiary but ta)e their orders from the parent corp. in the latterDs interest the formal legal re=uirements of the subsidiary are not observed
GARRETT VS. SOUTHERN RAILWAY +173 F. S4pp. 915, :.%. ;e"". 1959) This case involved a 3or#ers Compensation claim by a wheel moulder employed by &enoir Car 3or#s. The plaintiff sought to claim from Southern "ailway Company, which ac*uired the entire capital stoc# of &enoir Car 3or#s. 9laintiff contended that Southern so completely dominated &enoir that the latter was a mere ad8unct or instrumentality of Southern. The general rule is that stoc# ownership alone by one corporation of the stoc# of another does not thereby render the dominant corporation liable for the torts of the subsidiary, unless the separate corporate existence of the subsidiary is a mere sham, or unless the control of the subsidiary is such that it is but an instrumentality or ad8unct of the dominant corporation.
!n the case, it was found that there were two distinct operations. There was no evidence that Southern dictated the management of &enoir. !n fact, evidence shows that :arius, the manager of the subsidiary, was in full control of the operation. $e established prices, handled negotiations in C As, etc. &enoir paid local taxes, had local counsel and maintain a 3or#men6s Compensation Fund. There was also no evidence that &enoir was run solely for the benefit of Southern. !n fact, a substantial part of its re*uirements in the field of operation of &enoir was bought elsewhere. &enoir sold substantial *uantities to other companies. 9olicy decisions remained in the hands of :arius. $ence, the complaint against Southern "ailway was dismissed. KOPPEL VS. YATCO +77 #hi$. 496; 1946) This case involved a complaint for the recovery of merchant sales tax paid by Joppel +9hilippines-, !nc. under protest to the Collector of !nternal "evenue. Although the Court of First !nstance did not deny legal personality to Joppel +9hilippines-, !nc. for any and all purposes, it dismissed the complaint saying that in the transactions involved in the case, the public interest and convenience would be defeated and would amount to a perpetration of tax evasion unless resort was had to the doctrine of Edisregard of the corporate fiction.E The facts show that CC.2D of the shares of stoc#s of J/9hil were owned by J/<SA. J/ 9hil. acted as a representative of J/<SA and not as an agent. J/9hil. also bore alone its own incidental expenses +e.g. Cable expenses- and also those of its KprincipalL. :oreover, J/9hil6s share in the profits was left in the hands of J/<SA. Clearly, J/9hil was a mere branch or dummy of J/<SA, and was therefore liable for merchant sales tax. To allow otherwise would be to sanction a circumvention of our tax laws and permit a tax evasion of no mean proportion and the conse*uent commission of a grave in8ustice to the Bovernment. :oreover, it would allow the taxpayer to do by indirection what the tax laws prohibit to be done directly. LIDDELL & CO. VS. CIR +2 SCRA 632; 1961) &iddel :otors !nc. was an alter ego of &iddel M Co. At the time of its incorporation, C>D of the &iddel !nc.6s stoc# belonged to Fran# &iddel. As to &iddel :otors, Fran# supplied the original capital funds. The bul# of the business of &iddel !nc. was channeled through &iddel :otors. Also, &iddel :otors pursued no other activities except to secure cars, truc#s and spare parts from &iddel !nc. and then sell them to the general public. To allow the taxpayer to deny tax liability on the ground that the sales were made through another and distinct corporation when it is proved that the latter is virtually owned by the former or that they were practically one and the same is to sanction the circumvention of tax laws. YUTIVO VS. CTA +1 SCRA 160; 1961) Southern :otors was actually owned and controlled by @utivo as to ma#e it a mere subsidiary or branch of the latter created for the purpose of selling vehicles at retail. @utivo financed principally, if not wholly, the business of Southern :otors and actually exceeded the
credit of the latter . At all times, @utivo, through the officers and directors common to it and the Southern :otors exercised full control over the cash funds, policies, expenditures and obligations of the latter. $ence, Southern :otors, being a mere instrumentality or ad8unct of @utivo, the CTA correctly disregarded the technical defense of separate corporate identity in order to arrive at the true tax liability of @utivo. LA CAMPANA VS. KAISAHAN +93 #hi$. 160; 1953) The &a Campana Baugau 9ac#ing and &a Campana Coffee Factory were operating under one single business although with ) trade names. !t is a settled doctrine that the fiction of law of having the corporate identity separate and distinct from the identity of the persons running it cannot be invo#ed to further the end subversive of the purpose for which it was created. !n the case at bar, the attempt to ma#e the two businesses appear as one is but a device to defeat the ends of the law governing capital and labor relations and should not be permitted to prevail.
"t must be noted, however, that the contract must be adopted in its entirety# the corporation cannot adopt only the part that is beneficial to it and discard that which is burdensome. /oreover, the contract must be one which is within the powers of the corporation to enter, and one which the usual agents of the company have express or implied authority to enter.
M/ARTHUR V. TIMES PRINTING CO. +48 Mi"". 319, 51 N.W. 216; 1892) !t is not a re*uisite that a corporation=s adoption or acceptance of a promoter=s contract be expressed, but it may be inferred from acts or ac*uiescence on the part of the corporation, or its authori(ed agents, as any similar original contract might be shown. The right of agents to adopt an agreement originally made by promoters depends upon the purposes of the corporation and the nature of the agreement. The agreement must be one which the corporation itself could ma#e and one which the usual agents of the company have express or implied authority to enter into.
CLIFTON v. TOMB +21 F. 26 893; 1921) 3hatever may be the proper legal theory by which a corporation may be bound by contract +ratification, adoption, novation, a continuing offer to be accepted or re8ected by corporation-, it is necessary in all cases that the corporation should have full #nowledge of facts, or at least should be put upon such notice as would lead, upon reasonable in*uiry, to #nowledge of the facts. CAGAYAN FISHING DEV. CO. v. SANDIKO +65 #hi$. 223; 1937) A promoter could not have acted as agent for a corporation that had no legal existence. A corporation, until organi(ed, has no life therefore no faculties. The corporation had no 8uridical personality to enter into a contract. A$(* (ee C!)!m +. CA the the the the
;he fact of bringing an action on the contract has been held to constitute sufficient adoption or ratification to give the corporation a cause of action.
BUILDERS DUNTILE CO. v. DUNN +229 -. 569, 17 S.W. 26 715; 1929) 3hen the corporation was formed, the incorporators too# upon themselves the whole thing, and ratified all that had been done on its behalf. Though there was no formal assignment of the contract to the corporation, the acts of the incorporators were an adoption of the contract. Therefore the corporation has the right to sue for damages for the breach of contract. RI AL LIGHT V. PSC +25 SCRA 285; 1968) The incorporation of +:orong- and its acceptance of the franchise as shown by this action in prosecuting the application filed with the Commission for approval of said franchise, not only perfected a contract between the municipality and :orong but also cured the deficiency pointed out by the petition. The fact that :orong did not have a corporate existence on the day the franchise was granted does not render the franchise invalid, as :orong later obtained its certificate of incorporation and accepted the franchise.
WELLS VS. FAY & EGAN CO. +143 <!. 732, 85 S.:. 873; 1915) !ndividual promoters cannot escape liability where they buy machinery, receive them in their possession and authori(e one member to issue a note, in contemplation of organi(ing a corporation which was not formed. +see Campos= notes p. )2>/)2C-. The agent is personally liable for contracts if there is no principal. The ma#ing of partial payments by the corporation, when later formed, does not release the promoters here from liability because the corporation acted as a mere stranger paying the debt of another, the acceptance of which by the creditor does not release the debtors from liability over the balance. $ence, there is no adoption or ratification. HOW & ASSOCIATES INC. VS. BOSS +222 F. S4pp. 936; 1963) The rule is that if the contract is partly to be performed before incorporation, the promoters solely are liable. %ven if the promoter signed Eon behalf of corporation to be formed, who will be obligor,E there was here an intention of the parties to have a present obligor, because three/fourths of the payment are to be made at the time the drawings or plans in the architectural contract are completed, with or without incorporation. A purported adoption by the corporation of the contract must be expressed in a novation or agreement to that effect. The promoter is liable unless the contract is to be construed to mean: ,- that the creditor agreed to loo# solely to the new corporation for paymentF or )- that the promoter did not have any duty toward the creditor to form the corporation and give the corporation the opportunity to assume and pay the liability. 8UAKER HILL VS. PARR +148 C*$*. 45, 364 #. 26 1056; 1961) The promoters here are not liable because the contract imposed no obligation on them to form a corporation and they were not named there as obligorsHpromissors. The creditor/plaintiff was aware of the inexistence of the corporation but insisted on naming it as obligor because the planting season was fast approaching and he needed to dispose of the seedlings. There was no intent here by plaintiff/creditor to loo# to the promoters for the performance of the obligation. This is an exception to the general rule that promoters are personally liable on their contracts, though made on behalf of a corporation to be formed.
%/"0E' T ere are t,o %2) genera! re*triction* on t e po,er o. t e corp. to ac4uire an+ o!+ propertie*'
;o establish pension, retirement and other plans for the benefit of its directors, trustees, officers and employees# and ;o exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in its articles of incorporation.
A sale is deemed to substantially cover all the corporate property and assets if such sale renders the corporation incapable of continuing the business or accomplishing the purpose for which it was incorporated.
Ac=uisition of its own shares. (2ec. 4!) "nvestment in another corporation or business. (2ec. 4$) :eclaration of dividends. (2ec. 4&) 3ntering into management contracts. (2ec. 44)
I#p(ie Po*ers
6nder 2ec. &5, a corporation is given such powers as are essential or necessary to carry out its purpose or purposes as stated in the articles of incorporation. ;his phrase gives rise to such a wide range of implied powers, that it would not be at all difficult to defend a corporate act versus an allegation that it is ultra vires. A corporation is presumed to act within its powers and when a contract is not its face necessarily beyond its authority# it will, in the absence of proof to the contrary, be presumed valid.
"esolution adopted by the company to open a post office branch at the mining camp and to assume sole and direct responsibility for any dishonest, careless or negligent act of its appointed postmaster is 4.T <&T"A I!"%S because the act covers a sub8ect which concerns the benefit, convenience, and welfare of the company6s employees and their families. 3hile as a rule an ultra vires act is one committed outside the ob8ect for which a corporation is created as defined by the law of its organi(ation and therefore beyond the powers conferred upon it by law, there are however certain corporate acts that may be performed outside of the scope of the powers expressly conferred if they are necessary to promote the interest or welfare of the corporation. CARLOS v. MINDORO SUGAR CO. (57 SCRA 343, 1932) The .' of the 9hil Trust Co. adopted a resolution which authori(ed its president to purchase at par and in the name of the corp. bonds of :SC. These bonds were later resold and guaranteed by 9TC to third persons. 9TC paid plaintiff the corresponding interest payments until ;uly ,, ,C)> when it alleged that it is not bound to pay such interest or to redeem the obligation because the guarantee given for the bonds was illegal and void. $eld: The act of guaranty by 9TC was well within its corporate powers. Furthermore, having received money or property by virtue of the contract which is not illegal, it is estopped from denying liability. %ven if the then prevailing law +Corp. &aw- prohibited 9TC from guaranteeing bonds with a total value in excess of its capital, with all the :SC properties transferred to 9TC based on the deed of trust, sufficient assets were made available to secure the payment of the corresponding liabilities brought about by the bonds. GOV9T v. EL HOGAR (50 #hi$ 399; 1932) (;hi( c!(e i( !" e8!mp$e *3 h*/ the imp$ie6 p*/e)( c*"cept m!- ,e 4(e6 t* 54(ti3- ce)t!i" !ct( *3 ! c*)p*)!ti*".) A *uo warranto proceeding instituted by the Bov=t against %l $ogar, a building and loan ass=n to deprive it of its corp. franchise. ,. %l $ogar held title to real property for a period in excess of 2 years in good faith, hence this cause will not prosper. ). %l $ogar owned a lot and bldg. at a business district in :anila allegedly in excess of its reasonable re*uirements, held valid bec, it was found to be necessary and legally ac*uired and developed. 0. %l $ogar leased some office space in its bldg.F it administered and managed properties belonging to delin*uent S$sF and managed properties of its S$s even if such were not mortgaged to them.
$eld: first two valid, but the third is ultra vires bec. the administration of property in that manner is more befitting of the business of a real estate agent or trust company and not of a building and loan ass=n. 1. Compensation to the promoter and organi(er allegedly excessive and unconscionable. $eld: Court cannot dwell on the issue since the promoter is not a party in the proceeding and it is the corp. or its S$s who may bring a complaint on such. 2. !ssuance of special shares did not affect %l $ogar=s character as a building and loan ass=n nor ma#e its loans usurious. A. Corporate policy of using a depreciation rate of ,G D per annum is not excessive, bec. accdg. to the SC, the by/laws expressly authori(es the .' to determine each year the amount to be written down upon the expenses of installation and the property of the corp. ?. The Corp. &aw does not expressly grant the power of maintaining reserve funds but such power is implied. All business enterprises encounter periods of gains and losses, and its officers would usually provide for the creation of a reserve to act as a buffer for such circumstances. >. That loans issued to member borrowers are being used for purposes other than the bldg. of homes not invalid bec. there is no statute which expressly declares that loans may be made by these ass=ns solely for the purpose of bldg. homes. C. Sec. ,?0 of the Corp. &aw provides that Eany personE may become a S$ on a bldg. and loan ass=n. The word EpersonE is used on a broad sense including not only natural persons but also artificial persons. BISSEL v. MICHIGAN SOUTHERN ( 22 N= 258; 1860) Two railroad corporations contend that they transcended their own powers and violated their own organic laws. $ence, they should not be held liable for the in8ury of the plaintiff who was a passenger in one of their trains. $eld: The contract between the two corporations was an ultra vires act. $owever, it is not one tainted with illegality, therefore, the accompanying rights and obligations based on the contract of carriage between them and the plaintiff cannot be avoided by raising such a defense. PIROVANO v. DELA RAMA STEAMSHIP 6:; P30& <<= , >:=?7 This case involved the issue of whether or not the defendant corporation performed an ultra vires act by donating the life insurance proceeds to the minor children of 9irovano, the deceased president of the defendant company under whose management the company grew and progressed to become a multi/million peso corporation.
$eld:
4..
The A.! of the corporation provided two relevant items: K+,- to invest and deal with moneys of the company not immediately re*uired, in such manner as from time to time may be determinedF and +)- to aid in any other manner any person, association or corporation of which any obligation or in which any interest is held by this corporation or in the affairs of prosperity of which this corporation has a lawful interest.L From this, it is obvious that the corporation properly exercised within its chartered powers the act of availing of insurance proceeds to the heirs of the insured and deceased officer. HARDEN v. BENGUET CONSOLIDATED (58 #hi$ 141) A contract between enguet and alatoc provided that enguet will bring in capital, e*pt. and technical expertise in exchange for capital shares in alatoc. $arden was a S$ of alatoc and he contends that this contract violated the Corp.&aw which restricts the ac*uisition of interest by a mining corp. in another mining corp. $eld: $arden has no standing bec. if any violation has been committed, the same can be enforced only in a criminal prosecution by an action of *uo warranto which may be maintained only by the Attorney/Beneral.
4c5
:o* e(ecte 4Sec. 2') ;he formula for determining the number of shares needed to elect a given number of directors is as follows N O P x 4! 4Q! Q!
N O being the number of shares needed to elect a given number of directors P O being the total number of shares present or represented at the meeting 4! O being the number of directors desired to be elected 4 O being the total number of directors to be elected 4 5 :o* re#o!e 4Sec. 23) 1y a vote of the 2(s holding or representing at least $<& of the outstanding capital stoc), or by a vote of at least $<& of the members entitled to vote, provided that such removal ta)es place at either a regular meeting of the corporation or at a special meeting called for the purpose. "n both cases, there must be previous notice to the 2(s < members of the intention to propose such removal at the meeting. Femoval may be with or without cause. (owever, removal without cause may not be used to deprive minority 2(s or members of the right of representation to which they may be entitled under 2ec. $4 of the %ode. 4e5 :o* !acanc& fi((e 4Sec. 24) ;. vacancy +ue to re-ova! or e<piration o. ter-' /ust be filled by the 2(s in a regular or special meeting called for that purpose.
meeting duly called for the purpose, or in the meeting authorizing the increase of if so stated in the notice of the meeting.
A!! ot er vacancie*'
/ay be filled by the vote of at least a ma@ority of the remaining directors or trustees, if still constituting a =uorum.
&ote' 4f5
:irectors or trustees so elected to fill vacancies shall be elected only for the unexpired term of their predecessors in office.
:o* co#pensate 4Sec. 50) ;. provi+e+ in 0y2!a,*' ;. not provi+e+ in 0y2!a,*' ;hat compensation stated in the by0laws. :irectors shall not receive any compensation other than reasonable per diems, as directors. >o,ever, compensation other than per diems may be granted to directors by a ma@ority vote of the 2(s at a regular or special stoc)holdersK meeting.
&ote' "n no case shall the total yearly compensation of directors, as such directors, exceed !?G of the net income before income tax of the corporation during the preceding year. (g) /atters re=uiring 1oard of :irectorsK action su%sequent discussion under &uties of &irectors and Controlling
%i) ;n genera! %Sec. "1) %ii) Bu*ine** 5u+g-ent ru!e %iii) 7ea!ing* ,it t e corporation %Sec. "2) %iv) Contract* 0et,een corporation* ,it inter!oc)ing +irector* %Sec. "") (v) (vi) 4i5 7i*!oya!ty %Sec. "4) 1atere+ *toc)* %Sec. 6$)
E'ecuti!e Co##ittee 4Sec. 57) See *u0*e4uent +i*cu**ion un+er Boar+ Co--ittee*.
RAMIRE VS. ORIENTALIST CO AND FERNANDE +38 #hi$. 634; 1918) !n this case, the board of directors, before the financial inability of the corporation to proceed with the pro8ect was revealed, had already recogni(ed the contracts as being in existence and had proceed with the necessary steps to utili(e the films. The subse*uent action by the stoc#holders in not ratifying the contract must be ignored. The functions of the stoc#holders are limited of nature. The theory of a corporation is that the stoc#holders may have all the profits but
shall return over the complete management of the enterprise to their representatives and agents, called directors. Accordingly, there is little for the stoc#holders to do beyond electing directors, ma#ing by/laws, and exercising certain other special powers defined by law. !n conformity with this idea, it is settled that contracts between a corporation and a third person must be made by directors and not stoc#holders. LOPE VS. ERICTA +45 SCRA 539; 1972) !n this case, the oard of "egents of the <niversity of the 9hilippines terminated the ad interim appointment of 'r. lanco as 'ean of the College of %ducation by not acting on the matter. !n the transcript of the meeting which was latter agreed to be deleted, it was found out that the .", consisting of ,) members, voted 2 in favor of 'r. lanco=s appointment 0 voted against, and 1 abstained. The core of the issue is 3.4 the 1 abstentions will be counted in favor of 'r. lanco=s appointment or against it. The SC held that such abstentions be counted as negative vote considering that those who abstained, 0 of which members of the Screening Committee, intended to re8ect 'r. lanco=s appointment. ACHARY VS. MILLIN +294 Mic. 622; 1940) The issue in this case is regarding the validity of the director=s meeting at the company=s laboratory on 'ecember >, ,C0? wherein Nachary was removed as president of the company. Nachary that he was not notified of the meeting thus, the action was void. .n the other hand, the defendants contend that the notice re*uirement was waived by Nachary=s presence at the meeting. The SC held that the validity of the meeting was not affected by the failure to give notice as re*uired by the by/laws, provided that the parties were personally present. Since all the parties were present at the meeting of 'ecember >, and understood that the meeting was to be a directors= meeting, then the action ta#en is final and may not be voided by any informality in connection with its being called. PNB VS. CA +83 SCRA 238; 1978) The action was brought by the mortgagor +Tapnio- against 94 for damages in connection with the failure of the latter=s board of directors to act expeditiously on the proposed lease of the former=s sugar *uota to one Tua(on. The Supreme Court held that while the 94 has the ultimate authority to approve or disapprove the proposed lease since the *uota was mortgaged to 94 , the latter certainly cannot escape liability for observing, for the protection of the interest of the private respondents, that degree of care, precaution and vigilance which the circumstances 8ustly demand in approving or disapproving the lease of the said sugar *uota.
4a5 0ini#u# set of officers an t%eir 3ua(ifications 4 Sec. 27) ;he minimum set of officers are (!) president (who shall be a director)# ($) secretary (who shall be a resident and Hilipino citizen)# and (&) treasurer (who may or may not be a director) ;he by0laws, however, may provide for other officers. Any $ or more positions may be held concurrently by the same person, except that no one shall act as (a) president and secretary, or (b) president and treasurer at the same time. 4b5 Dis3ua(ifications 4Sec. 28) 0 %onviction by final @udgment of an offense punishable by imprisonment M 5 yrs. 0 4c5 Riolation of %orporation %ode committed within 5 yrs. prior to the date of election or appointment
Liabi(it& in $enera( 4Sec. 51) See +i*cu**ion un+er 7utie* o. 7irector* an+ Contro!!ing Stoc) o!+er*. .
4 5 Dea(in$s *it% t%e corporation 4Sec. 52) 0 >enerally voidable (See +i*cu**ion un+er 7utie* o. 7irector* an+ Contro!!ing Stoc) o!+er*)
FIRST PHILIPPINE INTERNATIONAL BANK & RIVERA v. CA +&!"4!)- 24, 1996) The authority of a corporate officer in dealing with third persons may be actual or apparent. The doctrine of Eapparent authority,E with special reference to ban#s, was laid out in #)46e"ti!$ 1!"> +. CA (223 SCRA 350) where it was held that: A ban# is liable for the wrongful acts of its officers done in the interest of the ban# or in the course of dealings of the officers in their representative capacity but not for acts outside the scope of their authority. A ban# holding out its officers and agents as worthy of confidence will not be permitted to profit by the frauds they may thus be enabled to perpetrate in the apparent scope of
their employmentF nor will it be permitted to shrin# from its responsibility for such frauds, even though no benefit may accrue to the ban# therefrom. Accordingly, a ban# is liable to innocent third persons where the representation is made in the course of its business by its agent acting within the general scope of his authority even though, in the particular case, the agent is secretly abusing his authority and attempting to perpetrate a fraud upon his principal or some other person for his own ultimate benefit. Application of these principles is especially necessary because ban#s have a fiduciary relationship with the public and their stability depends on the confidence of the people in their honesty and efficiency. Such faith will be eroded where ban#s do not exercise strict care in the selection and supervision of its employees, resulting in pre8udice to their depositors. YU CHUCK V. KONG LI PO +46 #hi$. 608; 1924) The power to bind a corporation by contract lies with its board of directors or trustees. Such power may be expressly or impliedly be delegated to other officers and agents of the corporation. !t is also well settled that except where the authority of employing servants or agents is expressly vested in the board, officers or agents who have general control and management of the corporation=s business, or at least a specific part thereof, may bind the corporation by the employment of such agents and employees as are usual and necessary in the conduct of such business. Those contracts of employment should be reasonable. Case at bar: contract of employment in the printing business was too long and onerous to the business +0/year employmentF shall receive salary even if corp. is insolvent-. THE BOARD OF LI8UIDATORS V. HEIRS OF MA$IMO KALAW +20 SCRA 987; 1967) Jalaw was a corporate officer entrusted with general management and control of 4AC.C.. $e had implied authority to ma#e any contract or do any act which is necessary for the conduct of the business. $e may, without authority from the board, perform acts of ordinary nature for as long as these redound to the interest of the corporation. 9articularly, he contracted forward sales with business entities. &ong before some of these contracts were disputed, he contracted by himself alone, without board approval. All of the members of the board #new about this practice and have entrusted fully such decisions with Jalaw. $e was never *uestioned nor reprimanded nor prevented from this practice. !n fact, the board itself, through its acts and by ac*uiescence, have laid aside the by/law re*uirement of prior board approval. Thus, it cannot now declare that these contracts +failures- are not binding on 4AC.C.. AMBOANGA TRANSPO V. BACHRACH MOTORS +52 #hi$. 244; 1928) A chattel mortgage, although not approved by the board of directors as stipulated in the by/laws, shall still be valid and binding when the corporation, through the board, tacitly approved and ratified it. The following acts of the board constitute implied ratification:
,. %r*uiaga is one of the largest stoc#holder, and was the all/in/one officer +he was the 9resident, B:, Attorney, Auditor, etc.). Two other directors approved his actions and expressed satisfaction with the advantages obtained by him in securing the chattel mortgage. 0. The corporation too# advantage of the benefits of the chattel mortgage. There were even partial payments made with the #nowledge of the three directors. ACUNA V. BATAC PRODUCERS COOPERATIVE MARKETING ASSOCIATION +20 SCRA 526; 1967) Acuna entered into an agreement with Ierano, manager of 9".C.:A, in which the former would be constituted as the latter=s agent in :anila. Acuna diligently went about his business and even used personal funds for the benefit of the corporation. 'uring the face/to/face meeting with the board, Acuna was assured that there need not be any board approval for his constitution as agent for it would only be a mere formality. &ater on, the board disapproved the agency and did not pay him. The SC ruled that the agreement was valid due to the ratification of the corp. proven by these acts: ,. $e was assured by the board that no board approval was necessary. ). $e delivered 9 )G,GGG, performed his wor# with the #nowledge of the board. 0. 'ue to ac*uiescence, the board cannot disown or disapprove the contract.
1oard Committees
;he 1y0laws of the corporation may create an executive committee, composed of not less than & members of the 1oard, to be appointed by the 1oard. ;he executive committee may act, by ma@ority vote of all its members, on such specific matters within the competence of the board, as may be delegated to it in either (!) the 1y0laws, or ($) on a ma@ority vote of the board. (owever, the following acts may never be delegated to an executive committee (!) ($) (&) (4) approval of any action for which shareholdersK approval is also re=uired# the filling of vacancies in the board (re.er to Sec. 29)# the amendment or repeal of by0laws or the adoption of new by0laws# the amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable# and (9) a distribution of cash dividends to the shareholders.
HAYES V. CANADA, ATLANTIC AND PLANT S.S CO., LTD. +181 F. 289; 1910) !n this case, the %xecutive Committee: a- removed the Treasurer and appointed a new one b- fixed the annual salary of the members of the %xecutive Committee
c- amended the by/laws by giving the 9resident the sole authority to call a stoc#holder=s meeting and a board of directors meeting d- amended the composition of the %xeCom by limiting it to 8ust ) persons. W!( the(e !cti*"( +!$i67 4o, because the %xecutive Commmittee usurped the powers vested in the board and the stoc#holders. !f their actions was valid, it would put the corp. in a situation wherein only two men, acting in their own pecuniary interests, would have absorbed the powers of the entire corporation. EFull powersE should be interpreted only in the ordinary conduct of business and not total abdication of board and stoc#holders= powers to the %xeCom. EF<&& 9.3%"SE does not mean unlimited or absolute power.
Stoc6,olders or Mem%ers
"n the following basic changes in the corporation, although action is usually initiated by the board of directors or trustees, their decision is not final, and approval of the stoc)holders or members would be necessary (!) ($) (&) (4) (9) Amendment of articles of incorporation# "ncrease and decrease of capital stoc)# "ncurring, creating or increasing bonded indebtedness# 2ale, lease, mortgage or other disposition of substantially all corporate assets# "nvestment of funds in another business or corporation or for a purpose other than the primary purpose for which the corporation was organized# (5) Adoption, amendment and repeal of by0laws# (-) /erger and consolidation# (,) :issolution of corporation "n all of these cases, even non0voting stoc)s, or non0voting members, as the case may be, will be entitled to vote. (Sec. 6)
BOARD OF DIRECTORS AND ELECTION COMMITTEE OF SMB VS. TAN +105 #hi$. 426; 1959) :eeting was invalid for lac# of notice. y/laws provide for a 2/day notice before meeting. :arch )A posting not enough for :arch )> election.
JOHNSTON VS. JOHNSTON +61 2.<. N*. 39, 6160; 1965) As a general rule, a *uorum at a stoc#holders= meeting, once reached, cannot be nullified by a subse*uent wal#out.
$owever, the proceedings can be nullified if the wal#out was for a reasonable and 8ustifiable cause. !n this case, F. &ogan ;ohnston, who owned andHor represented more than 2GD of the corporation=s outstanding shares, was prohibited from voting the shares of the Silos family +which he had validly purchased- and of the minor children of Albert S. ;ohnston +of whom he was guardian- on the ground that such shares must first be registered in the names of the wards, thereby prompting the wal#out. The Court of Appeals held that the wal#out was neither unreasonable nor un8ustifiable. !t noted however that there was no formal declaration of a *uorum before the withdrawal from the meeting by F. &ogan ;ohnston. PONCE VS. ENCARNACION +94 #hi$. 81; 1953) <pon good cause, such as a Chairman of the oard failing to call a meeting, either by his absence or neglect, the Court may grant a stoc#holder the authority to call such a meeting. DETECTIVE AND PROTECTIVE BUREAU VS. CLORIBEL +26 SCRA 225; 1968) The Corporation &aw says that every director must own at least one +,- share of the capital stoc# of the corporation. GOKONGWEI VS. SEC +89 SCRA 336; 1979) Section ), of the Corporation &aw provides that a corporation may prescribe in its by/ laws the *ualifications, duties, and compensation of its directors. A stoc#holder has no vested right to be elected director for he impliedly contracts that the will of the ma8ority shall govern. Amended by/laws are valid for the corporation has its inherent right to protect itself.
RO$AS V. DELA ROSA +49 #hi$. 609; 1926) <nder the &aw, directors can only be removed from office by a vote of the stoc#holders representing )H0 of subscribed capital stoc#, while vacancies can be filled by a mere ma8ority. A director cannot be removed by a mere ma8ority by disguising it as filling a vacancy. ANGELES V. SANTOS +64 #hi$. 697; 1937) Court may appoint a receiver when corporate remedy is unavailable when board of directors perform acts harmful to the corporation. Benerally, stoc#holders cannot sue on behalf of the corporation. The exception is when the defendants are in complete control of the corporation. CAMPBELL V. LEOW9S INC. +134 A. 26 852; 1957)
The stoc#holders have an implied power to remove a director for cause. %ven when there is cumulative voting, stoc#holders can still remove directors for cause. DELA RAMA V. MA-AO SUGAR CENTRAL CO, INC. +27 SCRA 247; 1969) A corporation may use its funds to invest in another corporation without the approval of the stoc#holders if done in pursuance of a corporate purpose. $owever, if it is purely for investment, the vote of the stoc#holders is necessary.
VOTIN.
P(e $ors; #ort$a$ors; e'ecutors; recei!ers; an a #inistrators 4Sec. 77)
0 .ledgors or mortgagors have the right to attend and vote at stoc)holdersK meetings. 3<ception' "f the pledgee or mortgagee is expressly given by the pledgor or mortgagor such right in writing which is recorded on the appropriate corporate boo)s. 0 3xecutors, administrators, receivers and other legal representatives duly appointed by the court may attend and vote in behalf of the stoc)holders or members without need of any written proxy.
Poo(in$ a$ree#ent - .ooling agreements refer to agreements between $ or more 2(s to vote their
shares the same way. ;hey are different from voting trust agreements in that they do not involve a transfer of stoc)s but are merely private agreements between $ or more 2(s to vote in the same way. 0 2ec. !??, par. $ of the %orporation %ode provides for pooling and voting agreements in close corporations. Although there is no e=uivalent provision for widely0held corporations, Sustice and .rof. %ampos are of the opinion that 2(s of widely0held corporations should not be precluded from entering into voting agreements if these are otherwise valid and are not intended to commit any wrong or fraud on the other 2(s that are not parties to the agreement.
Non-!otin$ s%ares (Sec. 6) - .referred or redeemable shares. ITF s%ares An Eor s%ares (Sec. $6) 0 Any one of the @oint owners can vote said shares or appoint a proxy thereof.
filed before the scheduled meeting with the corporate secretary. <nless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended. 4o proxy shall be valid and effective for a period longer than five +2- years at any one time. Ch!)!cte)? agency relationshipF revocable at will +by express revocation, by attending the meeting- and by death, except when coupled with interest or is a security. IN RE GIANT PORTLAND CEMENT CO. +21 A.26 697; 1941) %ven if stoc#s are sold, the stoc#holder of record remains the owner of the stoc#s and has the voting right until the by/law re*uiring recording of transfer in the transfer boo# is complied with. Thus, a proxy given by the stoc#holder of record even if he has already sold the shareHs of stoc# remains effective. STATE E$ REL EVERETT TRUST V PACIFIC WA$ED PAPER, (159 A.@.R. 297; 1945) The general rule is that a proxy is revocable even though by its express terms it is irrevocable. The exceptions are: +a- when authority is coupled with interestF +b- where authority is given as part of a security and is necessary to effectuate such a security. !t is coupled with interest when there is interest in the share themselves +such as a right of first refusal in case of sale- and the rights inherent in the shares +such as voting rightsF capacity to obtain ma8ority-. DUFFY V LOFT (17 %e$. Ch. 376, 152 A. 849; 1930) 3here a stoc#holder6s meeting was validly convened, the proxies must be deemed present even if the proxies were not presented, provided: +a- their existence is establishedF +b- the agents were so designated to attend and act in S$6s behalfF +c- the agents were present in the meeting.
28 Is it !a(i for t%e corporation to pa& t%e e'penses for pro'& so(icitation> A "n the case of Fosenfeld v. Hairchild 3ngine and Airplane %orp. ( 128 &.3. 2+ 291# 19$$), it was held that in a contest over policy (as opposed to a purely personal power contest), corporate directors have the right to ma)e reasonable and proper expenditures, sub@ect to the scrutiny of the courts when duly challenged, from the corporate treasury for the purpose of persuading the 2(s of the correctness of their position and soliciting their support for policies which the directors believe, in all good faith, are in the best interests of the corporation. ;he 2(s, moreover, have the right to reimburse successful contestants for the reasonable and 0ona .i+e expenses incurred by them in any such policy contest, sub@ect to li)e court scrutiny. (owever, where it is established that such monies have been spent for personal power, individual gain or private advantage, and not in the belief that such expenditures are in the best interest of the stoc)holders and the corporation, or where the fairness and reasonableness of the amounts allegedly expended are duly and successfully challenged, the courts will not hesitate to disallow them.
!n a contest over policy, as compared to a purely personal power contest, corporate directors have the right to ma#e reasonable and proper expenditures. "eason: in these days of giant corporations with vast numbers of S$6s, if directors are not allowed to authori(e reasonable expenses in soliciting proxies, corporate business may be hampered by difficulty in procuring *uorumF or corporations may be at the mercy of persons see#ing to wrest control for their purposes if the directors may not freely answer their challenge. ut corp expense may be disallowed by courts where money was shown to have been spent for personal power, individual gain or private advantage, or where fairness and reasonableness of amount spent has been successfully challenged.
:oting 0rust
A Roting ;rust Agreement (R;A) is an agreement whereby the real ownership of the shares is separated from the voting rights, the usual aim being to insure the retention of incumbent directors and remove from the stoc)holders the power to change the management for the duration of the trust.
Ad!antages
Accumulates power. 2mall shareholders are given the chance to have a representation in the 1+: or at least a spo)esperson during stoc)holdersD meetings. %ontinuity of management. /ore effective than proxies because it is irrevocable. 3nsures that the re=uired number of stoc)holders is met thereby facilitating smooth corporate operations.
&isad!antages
2toc)holders give up rights (voting and na)ed title) 2usceptible to abuse 4ot used in widely held corporations
;ig,ts gi!en up %+ t,e s,are,older in a :0A in e9c,ange for t,e fiduciar+ o%ligation of t,e trustee$
Roting rights .roprietary rights<na)ed title<legal ownership "ncidental rights such as to attend meetings, to be elected, to receive dividends)
(!) A R;A is prepared in writing, notarized, and filed with the corporation and 23%. ($) ;he certificates of stoc) covered by the R;A are cancelled and new ones (voting trust certificates) are issued in the name of the trustee<s stating that they are issued pursuant to the R;A. (&) ;he transfer is noted in the boo)s of the corporation. (4) ;he trustee<s execute and deliver to transferors the voting trust certificates. (&ote t at t e*e certi.icate* * a!! 0e tran*.era0!e in t e *a-e -anner an+ ,it t e *a-e e..ect a* certi.icate* o. *toc).) (9) At the end of the period of the R;A ( or t e .u!! pay-ent o. t e !oan to , ic t e ?TA i* -a+e a con+ition, a* t e ca*e -ay 0e ), in the absence of any express renewal, the voting trust certificates as well as the certificates of stoc) in the name of the trustee<s shall be deemed cancelled and new certificates of stoc) shall be reissued in the name of the transferors.
EVERETT V. ASIA BANKING +49 #hi$. 512; 1926) This case illustrates how ITA can give rise to effective control and how it can be abused. .riginal stoc#holders can set aside the ITA when their rights are trampled upon by the trustee. MACKIN, ET AL. V. NICOLLET HOTEL +25 F. 26 783; 1928) !nvalidating circumstances of a ITA are: 3ant of consideration Ioting power not coupled with interest Fraud !llegal or improper purpose
NIDC V. A8UINO +163 SCRA 153; 1988) A ITA transfers only voting or other rights pertaining to the shares sub8ect of the agreement, or control over the stoc#. Stoc#holders of a corp. that lost all its assets through foreclosures cannot go after those properties. 94 /4!'C ac*uired those properties not as trustees but as creditors.
&isad!antages$ !. possibility of disagreement thus the need for an arbitration clause $. there is no compelling reason for stoc)holders to act together
)%at ri$%ts oes a s%are%o( er $i!e upE retain *it% a poo(in$ a$ree#ent>
2hareholders retain their right to vote because the parties are not constituted as agents. (owever, the will of the parties may not be carried out due to non0compliance with the pooling agreement.
RINGLING v. RINGLING +29 %e$. Ch. 318, 49 A. 26 603; 1946) Benerally, agreements and combinations to vote stoc# or control corporate fiction M policy are valid if they see# without fraud to accomplish only what parties might do as stoc#holders and do not attempt it by illegal proxies, trusts or other means in contravention of statutes or law. BUCK RETAIL STORE v. HARKERT +62 N.W. 26 288; 1954) Stoc#holders6 control agreements are valid where it is for the benefit of corporation where it wor#s no fraud upon creditors or other stoc#holders and where it violates no statute or recogni(ed public policy. MC8UADE v. STONEHAM +189 N.:. 234; 1934) An agreement among stoc#holders to divest directors of their power to discharge an unfaithful employee is illegal as against public policy. Stoc#holders may not by agreement among themselves control the directors in the exercise of the 8udgment vested in them by virtue of their office to elect officers and fix salaries. CLARK v. DODGE +199 N.:. 641; 1936) !f the enforcement of a particular contract damages nobody/not even the public, there is no reason for holding it illegal. Test is 3.4 it causes damage to the corporation and stoc#holders.
).
"f A has !?? shares and there are 9 directors to be elected, he shall multiply !?? by five (e=uals 9??) and he can vote the 9?? for only one candidate.
0.
Cu#u(ati!e !otin$8 "f A has !?? shares, there are 9 directors to be elected, and he only 4#u(tip(e can i ates5 wants to vote for two nominees, he can divide 9?? votes between the two, giving each one $9? votes.
:o* to co#pute !otes nee e to $et a irector e(ecte b& cu#u(ati!e !otin$8
,. Fre&=s for#u(a (minimum no. of votes to elect one director) NO E of shares re=uired PO E of outstanding votes TO E of directors to be elected N O U PUU Q ! TQ! ). /aker B Car&=s for#u(a (minimum no. of votes needed to elect multiple directors) NO E of shares re=uired PO E of shares represented at meeting :O E of directors the minority wants to elect :DO total E of directors to be elected NO P x : Q ! :K Q !
/"0ES
7evels playing field or at least ensures that the minority can elect at least one representative to the board of directors (1+:) %annot of itself give the minority control of corporate affairs, but may affect and limit the extent of the ma@orityDs control 1y0laws cannot provide against cumulative voting since this right is mandated by law in 2ection $4.
0.
Re ee#ab(e
share is purchased or ta)en up by the corporation upon the expiration of a fixed period (2ec. ,)# right to vote may be restricted (2ec. 5)
/"0ES
2toc) can also be both preferred and redeemable. 3ven though the right to vote of preferred and redeemable shares may be restricted, owners of these shares can still vote on certain matter provided for in 2ec. 5. 23% re=uires that where no dividends are declared for three consecutive years, in spite of available profits, preferred stoc)s will be given the right to vote until dividends are declared.
GOTTSCHALK V. AVALON REALTY +23 N.W. 26 606; 1946) 9rovision granting right to vote to preferred stoc# previously prohibited from voting, constitutes diminution of the voting power of common stoc#. 9rovision in the articles of incorporation granting holders of preferred stoc# right to vote in case of default in payment of dividends after ;uly ,, ,C2, was construed as denial by necessary implication of the right to vote even prior to ;uly ,, ,C2,.
According to @o)ong,ei v*. S3C, aside from prescribing =ualifications, by0laws can also provide for the dis=ualification of anyone in direct competition with the corporation.
SHERMAN & ELLIS VS. INDIANA MUTUAL CASUALTY +41 F. 26 588; 1930) Although corporations may, for a limited period, delegate to a stranger certain duties usually performed by the officers, there are duties, the performance of which may not be indefinitely delegated to outsiders.
(/(S(AA :"0#/G A/& B(";(M ;EB(#;EME/0S (Sec. 27@ 48 Cfor close corporationsD)
"ncreases veto power of the minority in some cases. "n exchange for the numerical ma@ority in the 1+:, minority can as) for a stronger veto power in ma@or corporate decisions.
BENITENDI VS. KENTON HOTEL +60 N.:. 26 829; 1945) A re*uirement that there shall be no election of directors at all unless every single vote be cast for the same nominees, is in direct opposition to the statutory rule that the receipt of plurality of the votes entitles a nominee to election. +See Sec. )1-
"e*uiring unanimity before the .' can ta#e action on any corporate matter ma#es it impossible for the directors to act on any matter at all. !n all acts done by the corporation, the ma8or number must bind the lesser, or else differences could never be determined nor settled. The State has decreed that every stoc# corporation must have a representative government, with voting conducted conformably to the statutes, and the power of decision lodged in certain fractions, always more than half, of the stoc#. This whole concept is destroyed when the stoc#holders, by agreement, by/law or certificates of corporation provides for unanimous action, giving the minority an absolute, permanent and all/inclusive power of veto. The re*uirement of unanimous vote to amend by/laws is valid. .nce proper by/laws have been adopted, the matter of amending them is no concern of the State.
De!ice Fa!orab(e To8
/"4+F";P assures them of representation on the board /"4+F";P so long as they hold more common stoc) as opposed to the ma@ority who holds more preferred stoc)
Li#itations
%anDt give minority control of corp. affairs .referred and redeemable stoc) can still vote on certain matters as provided in 2ec. 5 or as may be provided by the corp.
Restriction on transfer of s%ares Gapp(icab(e on(& to c(ose corporations Prescribin$ 3ua(ifications for irectors6 foun er=s s%ares 0ana$e#ent contracts
/AS+F";P they can choose See Sec. 98 whether to )eep or release shares and they can prevent opposition from ac=uiring shares /AS+F";P theyDre the ones who can prescribe the =ualifications in the by0laws /AS+F";P allows them to delegate certain functions and duties without losing control over the corporation Lualifications must be reasonable and do not deprive minority of representation on the board %annot exceed five years 1+: must retain control over corp. policies 1+: must have power to recall contract
Unusua( !otin$ an 3uoru# /"4+F";P gives them stronger veto power in certain corp. affairs re3uire#ents
(eld monthly, unless otherwise provided in the by0laws. (Sec. $") At any time upon call of the president or as provided in the by0 laws.
/ust be sent at least ? a& prior to the scheduled meeting, unless otherwise provided by the by0laws. &ote' &otice -ay 0e ,aive+ e<pre**!y or i-p!ie+!y. %Sec. $")
):ERE8 2UORU08
Anywhere in or outside the .hilippines, unless the by0laws provide otherwise. >enerally, a ma@ority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a =uorum for the transaction of corporate business. (Sec. 2$) 3<ception*' (!) "f the A+" or by0laws provide for a greater ma@ority# ($) "f the meeting is for the election of officers, which re=uires the vote of a ma@ority of all the members of the 1oard
):O PRESIDES8
/otice$ 'ritten, and sent to all stoc)holders or members of record at least , *eeks prior to the meeting, unless a different period is re=uired by the by0laws. SPECIAL8 At any time deemed necessary or as provided in the by0laws.
/otice$ 'ritten, and sent to all stoc)holders or members of record at least ? *eek prior to the meeting, unless otherwise provided in the by0laws. &ote' ):ERE8 &otice o. any -eeting -ay 0e ,aive+ e<pre**!y or i-p!ie+!y 0y any S> or -e-0er. %Sec. $0)
"n the city of municipality where the principal office of the corporation is located, and if practicable in the principal office of the corporation. /etro /anila is considered a city or municipality. (Sec. $1)
2UORU08
>enerally, a =uorum shall consist of the stoc)holders representing a ma@ority of the outstanding capital stoc), or a ma@ority of the members. 3<ception' "f otherwise provided for in the %ode or in the by0laws.
):O PRESIDES8
):AT IS T:E EFFECT IF A STOCH:OLDERIS 0EETIN. IS I0PROPERL9 :ELD OR CALLED> >enerally, the proceedings had and<or any business transacted shall be void. (owever, the proceedings and<or transacted business may still be deemed valid if (!) 2uch proceedings or business are within the powers or authority of the corporation# and ($) All the stoc)holders or members of the corporation were present or duly represented at the meeting. (Sec. $1)
):EN DOES LIA/ILIT9 ON T:E PART OF DIRECTORS; TRUSTEES OR OFFICERS ARISE> "n general, liability of directors, trustees or officers arises when they either (!) willfully and )nowingly vote for or assent to patently unlawful acts of the corporation# or ($) are guilty of gross negligence of bad faith in directing the affairs of the corporation# or (&) ac=uire any personal or pecuniary interest in conflict with their duty as such directors or trustees.
"n such cases, the directors or trustees shall be liable @ointly and severally for all damages resulting therefrom suffered by the corporation, its stoc)holders or members and other persons. 'hen a director, trustee or officer attempts to ac=uire or ac=uires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which e=uity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which would otherwise have accrued to the corporation. (Sec. "1) "n addition to this general liability, the %orporation %ode provides for specific rules to govern the following situations (!) ($) (&) (4) 2elf0dealing directors (Sec. "2) %ontracts between interloc)ing directors (Sec. "") :isloyalty to the corporation (Sec. "4) 'atered stoc)s (Sec. 6$)
):AT HIND OF DILI.ENCE IS EDPECTED OF DIRECTORS> :irectors are expected to manage the corporation with reasonable diligence, care and prudence, i.e. the degree of care and diligence which men prompted by self0interest generally exercise in their own affairs. ;hus, they can be held liable not only for willful dishonesty but also for negligence. Although they are not expected to interfere with the day0to0day administrative details of the business of the corporation, they should )eep themselves sufficiently informed about the general condition of the business.
):AT FACTORS S:OULD /E CONSIDERED IN DETER0ININ. ):ET:ER REASONA/LE DILI.ENCE :AS /EEN EDERCISED> ;he nature of the business, as well as the particular circumstances of each case. ;he court should loo) at the facts as they exist at the time of their occurrence, not aided or enlightened by those which subse=uently too) place. (7itwin v. Allen)
OTIS AND CO. VS PENNSYLVANIA RAILROAD CO. +155 F. 26 522; 1946) !f in the course of management, the directors arrive at a decision for which there is a reasonable basis and they acted in good faith, as a result of their independent 8udgment, and uninfluenced by any consideration other than what they honestly believe to be for the best interest of the railroad, it is not the function of the court to say that it would have acted differently and to charge the directors for any loss or expenditures incurred. !n the present case, the bond issue was ade*uately deliberated and planned, properly negotiated and executedF there was no lac# of good faithF no motivation of personal gain or profitF there was no lac# of diligence, s#ill or care in selling the issue at the price approved by the Commission and which resulted in a saving of approximately PC: to the corporation. MONTELIBANO VS. BACOLOD-MURCIA MILLING CO. +5 SCRA 36; 1962) The acolod/:urcia :illing Co. adopted a resolution which granted to its sugar planters an increase in their share in the net profits in the event that the sugar centrals of 4egros .ccidental should have a total annual production exceeding one/third of the production of all sugar central mills in the province. &ater, the company amended its existing milling contract with its sugar planters, incorporating such resolution. The company, upon demand, refused to comply with the contract, stating that the stipulations in the resolution were made without consideration and that such resolution was, therefore, null and void !, i"iti*, being in effect a donation that was 4$t)! +i)e( and beyond the powers of the corporate directors to adopt. This is an action by the sugar planters to enforce the contract. The terms embodied in the resolution were supported by the same cause and consideration underlying the main amended milling contractF i.e., the premises and obligations underta#en thereunder by the planters, and particularly, the extension of its operative period for an additional ,2 years over and beyond the thirty years stipulated in the contract. As the resolution in *uestion was passed in good faith by the board of directors, it is valid and binding, and whether or not it will cause losses or decrease the profits of the central, the court has no authority to review them. They hold such office charged with the duty to act for the corporation according to their best 8udgment, and in so doing, they cannot be controlled in the reasonable exercise and performance of such duty. !t is a well/#nown rule of law that *uestions of policy or of management are left solely to the honest decision of officers and directors of a corporation, and the court is without authority to substitute its 8udgment of the board of directorsF the board is the business manager of the corporation, and so long as it acts in good faith, its orders are not reviewable by the courts.
LITWIN 6ROSEMARIN ET. AL., INTERVENORS7 VS. ALLEN ET. AL. +25 N.=.S. 26 667; 1940) FACTS: Alleghany Corp. bought terminals in Jansas City and St. ;oseph. !t needed to raise money to pay the balance of the purchase price but could not directly borrow money due to a borrowing limitation in its charter. Thus, it sold :issouri 9acific bonds to ;.9. :organ and Co. worth P!.:. ;.9. :organ, in turn, sold P0: worth of the bonds to Buaranty Trust Company. <nder the contract, the seller was given an option to repurchase at same price within six months. $%&': .ption given to seller is invalid. !t is against public policy for a ban# to sell securities and buy them bac# at the same priceF similarly, it is against public policy for the ban# to buy securities and give the seller the option to buy them bac# at the same price because the ban# incurs the entire ris# of loss with no possibility of gain other than the interest derived from the securities during the period that the ban# holds them. $ere, if the mar#et price of the securities rise, the holder of the repurchase option would exercise it to recover the securities at a lower price at which he sold them. !f the mar#et price falls, the seller holding the option would not exercise it and the ban# would sustain the loss. 'irectors are not in a position of trustees of an express trust who, regardless of good faith, are personally liable. !n this case, the directors are liable for the transaction because the entire arrangement was improvident, ris#y, unusual and unnecessary so as to be contrary to fundamental conceptions of prudent ban#ing practice. @et, the advice of counsel was not sought. Absent a showing of exercise of good faith, the directors are thus liable. WALKER VS. MAN, ET. AL. +253 N.=.S. 458; 1931) FACTS: Frederic# Southac# and Alwyn all loaned Avram P)GT evidenced by a promissory note executed by Avram and endorsed by &acey. The loan was not authori(ed by any meeting of the board of directors and was not for the benefit of the corporation. The note was dishonored but defendant/directors did not protest the note for non/paymentF thus, &acey, the indorser who was financially capable of meeting the obligation, was subse*uently discharged. $%&': 'irectors are charged not with misfeasance, but with non/feasance, not only with doing wrongful acts and committing waste, but with ac*uiescing and confirming the wrong doing of others, and with doing nothing to retrieve the waste. 'irectors have the duty to attempt to prevent wrongdoing by their co/directors, and if wrong is committed, to rectify it. !f the defendant #new that an unauthori(ed loan was made and did not ta#e steps to salvage the loan, he is chargeable with negligence and is accountable for his conduct. STEINBERG VS. VELASCO +52 #hi$. 953; 1929) FACTS: The board of directors of Sibuguey Trading Company authori(ed the purchase of 00G shares of stoc# of the corporation and declared payment of 90T as dividends to stoc#holders. The directors from whom 0GG of the stoc#s were bought resigned before the board approved the purchase and declared the dividends. At the time of purchase of stoc#s and
declaration of dividends, the corporation had accounts payable amounting to 9C,)1, and accounts receivable amounting to 9,),2,), but the receiver who made diligent efforts to collect the amounts receivable was unable to do so. !t has been alleged that the payment of cash dividends to the stoc#holders was wrongfully done and in bad faith, and to the in8ury and fraud of the creditors of the corporation. The directors are sought to be made personally liable in their capacity as directors. $%&': Creditors of a corporation have the right to assume that so long as there are outstanding debts and liabilities, the .' will not use the assets of the corporation to buy its own stoc#, and will not declare dividends to stoc#holders when the corporation is insolvent. !n this case, it was found that the corporation did not have an actual ,*"! 3i6e surplus from which dividends could be paid. :oreover, the Court noted that the oard of 'irectors purchased the stoc# from the corporation and declared the dividends on the stoc# at the same oard meeting, and that the directors were permitted to resign so that they could sell their stoc# to the corporation. Biven all of this, it was apparent that the directors did not act in good faith or were grossly ignorant of their duties. %ither way, they are liable for their actions which affected the financial condition of the corporation and pre8udiced creditors. BARNES V. ANDREWS +298 F. 614; 1924) A complaint was filed against a corporate director for failing to give ade*uate attention +he relied solely on the 9resident6s updates on the status of the corp- to the affairs of a corporation which suffered depletion of funds. The director was not liable. The court said that despite being guilty of misprision in his office, still the plaintiff must clearly show that the performance of the director6s duties would have avoided the losses. 3hen a business fails from general mismanagement, business incapacity, or bad 8udgment, it is difficult to con8ecture that a single director could turn the company around, or how much dollars he could have saved had he acted properly. FOSTER V. BOWEN +41 N.:. 26 181; 1942) Cushing, a director and in charge of leasing a roller s#ating rin# of the corp, leased the same to himself. :inority stoc#holders filed suit against owen, the corporation=s 9resident, to recover for company losses arising out of an alleged breach of fiduciary duty. owen was held to be not liable because: +,- Cushing=s acts were not actually dishonest or fraudulentF +)- Cushing performed personal wor# such as #eeping the facility in repair which redounded to the benefit of the company and even increased its incomeF +0- owen did not profit personally through Cushing=s leaseF and +1- the issue of the possible illegality of the lease was put before the oard of 'irectors, but the oard did not act on it but instead moved on to the next item on the agenda. Absent any bad faith on owen=s part, and a showing that it was a reasonable exercise of 8udgment to ta#e no action on the lease agreement at the time it was entered into, owen was not liable.
LOWELL HOIT & CO. V. DETIG +50 N.:. 26 602; 1943) &owell $oit filed action against directors of a cooperative grain company for an alleged willful conversion by the manager of grain stored in the company facility. The court said that the directors were not personally liable. There was no evidence that the directors had #nowledge of the transaction between the manager and &owell $oit. The court will treat directors with leniency with respect to a single act of fraud on the part of a subordinate officerHagent. ut directors could be held liable if the act of fraud was habitual and openly committed as to have been easily detected upon proper supervision. To hold directors liable, he must have participated in the fraudulent actF or have been guilty of lac# of ordinary and reasonable supervisionF or guilty of lac# of ordinary care in the selection of the officerHagent. BATES V. DRESSER +40 S.Ct.247; 1920) Coleman, an employee of the ban#, was able to divert ban# finances for his benefit, resulting in huge losses to the ban#. The receiver sued the president and the other directors for the loss. The court said that the directors were not answerable as they relied in good faith on the cashier6s statement of assets and liabilities found correct by the government examiner, and were also encouraged by the attitude of the president that all was well +the president had a si(able deposit in the ban#-. ut the president is liable. $e was at the ban# dailyF had direct control of recordsF and had #nowledge of incidents that ordinarily would have induced scrutiny.
approval of the contract# (&) ;he contract is fair and reasonable under the circumstances# (4) "n the case of an officer, the contract has been previously authorized by the 1oard of :irectors. "n the event that either of or both conditions (!) and ($) are absent ( i.e., t e pre*ence o. t e +irectorCtru*tee ,a* nece**ary .or a 4uoru- an+Cor i* vote ,a* nece**ary .or t e approva! o. t e contract), the contract may be ratified by a $<& vote of the +%2 or all of the members, in a meeting called for the purpose. Hull disclosure of the adverse interest of the directors or trustees involved must be made at such meeting. DOCTRINE A director of a corporation holds a position of trust and as such, he owes a duty of loyalty to his corporation. "n case his interests conflict with those of the corporation, he cannot sacrifice the latter to his own advantage and benefit. As corporate managers, directors are committed to see) the maximum amount of profits for the corporation. ;his trust relationship "is not a matter of statutory or technical law. "t springs from the fact that directors have the control and guidance of corporate affairs and property and hence of the property interests of the stoc)holders." %Pri-e 1 ite Ce-ent Corp. v. ;AC, 220 SCRA 10"# 199")
PALTING V. SAN JOSE PETROLEUM +%ec. 17, 1966) The articles of inc. of respondent included a provision that relieves any director of all responsibility for which he may otherwise be liable by reason of any contract entered into with the corp., whether it be for his benefit or for the benefit of any other person, firm, association or partnership in which he may be interested, except in case of fraud. SCA This is in direct contravention of the Corp &aw, of the traditional fiduciary relationship between directors and the S$. The implication is that they can do anything short of fraud, even to their benefit, and with immunity.
&ote' T i* ca*e ,a* +eci+e+ in 1966 un+er t e Corporation 6a,, , ic provi*ion* on *e!.2+ea!ing +irector*. a+ no
MEAD V. MCCULLOUGH +21 #hi$. 95; 1911) Iss-%A validity of sale of corp. property and assets to the directors who approved the same. Ben "ule: 3hen purely private corporations remain solvent, its directors are agents or trustees for the S$. %xception: when the corp. becomes insolvent, its directors are trustees of all the creditors, whether they are members of the corp. or not, and must manage its property and assets with strict regard to their interestF and if they are themselves creditors while the insolvent corp is under their management, they will not be permitted to secure to themselves by purchasing the corp property or otherwise any personal advantage over the other creditors.
%xception to %xception: A director or officer may in good faith and or an ade*uate consideration purchase from a ma8ority of the directors or S$ the property even of an insolvent corp, and a sale thus made to him is valid and binding upon the minority. !n the case at bar, the sale was held to be valid and binding. Company was losing. 1 directors present during meeting all voted for the sale. They li#ewise constitute ma8ority of S$. Contract was found to be fair and reasonable. PRIME WHITE CEMENT CORP. V. IAC +220 SCRA 103; 1993) 9rime 3hite Cement Corp. +through the 9resident and Chairman of the oard- and Ale8andro Te, a director and auditor of the corporation, entered into a dealership agreement whereby Te was obligated to act as the corporation=s exclusive dealer andHor distributor of its cement products in the entire :indanao area for 2 years. Among the conditions in the dealership agreement were that the corporation would sell to and supply Te with )G,GGG bags of white cement per month, and that Te would purchase the cement from the corporation at a price of 9 C.?G per bag. "elying on the conditions contained in the dealership agreement, Te entered into written agreements with several hardware stores which would enable him to sell his allocation of )G,GGG bags per month. $owever, the oard of 'irectors subse*uently imposed new conditions, including the condition that only >,GGG bags of cement would be delivered per month. Te made several demands on the corporation to comply with the dealership agreement. $owever, when the corporation refused to comply with the same, Te was constrained to cancel his agreements with the hardware stores. 4otwithstanding the dealership agreement with Te, the corporation entered into an exclusive dealership agreement with a certain 4apoleon Co for mar#eting of corporation=s products in :indanao. The lower court held that 9rime 3hite was liable to Te for actual and moral damages for having been in breach of the agreement which had been validly entered into. .n appeal, the Supreme Court held that the dealership agreement is not valid and enforceable, for not having been fair and reasonable: the agreement protected Te from any mar#et increases in the price of cement, to the pre8udice of the corporation. The dealership agreement was an attempt on the part of Te to enrich himself at the expense of the corporation. Absent any showing that the stoc#holders had ratified the dealership agreement or that they were fully aware of its provisions, the contract was not valid and Te could not be allowed to reap the fruits of his disloyalty.
/"4+F";P F673
P32. :irectors and officers have an obligation to the stoc)holders individually as well as collectively. 4+. :irectors and officers owe no fiduciary duty at all to stoc)holders, but may deal with them at armDs length. 4o duty of disclosure of facts )nown to director or officer exists. 4ondisclosure constitute constructive fraud.
2.3%"A7 HA%;2 :+%;F"43 "; :3.34:2. 'here special circumstances or facts are present which ma)e in ine=uitable to withhold information from the stoc)holder, the duty to disclose arises, and concealment is fraud. "n the case of Go6ong)ei !. SEC (,8 2%FA &&5# !8-8), the 2upreme %ourt, =uoting from the 62 case of Pepper v. 6itton %&?, 6.2. $890&!&# !8&8) stated that a director cannot, "by the intervention of a corporate entity violate the ancient precept against serving two masters V (e cannot utilize his inside information and his strategic position for his own preferment. (e cannot violate rules of fair play by doing indirectly through the corporation what he could not do directly. (e cannot use his power for his personal advantage and to the detriment of the stoc)holders and creditors no matter how absolute in terms that power may be and no matter how meticulous he is to satisfy technical re=uirements. Hor that power is at all times sub@ect to the e=uitable limitation that it may not be exercised for the aggrandizement, preference, or advantage of the fiduciary to the exclusion or detriment of the cestuis."
SINGER VS. CARLISLE +27 N.=.S. 26 190; 1941) !n this case, it was held that the general allegations in the complaint of conspiracy of the directors to obtain corporate opportunity were deficient. The complaint should state specific transactions.
'irectorship in ) competing corporations does not in and of itself constitute a wrong. !t is only when a business opportunity arises which places the director in a position of serving two masters, and when, dominated by one, he neglects his duty to the other, that a wrong has been done. IRVING TRUST CO. VS. DEUTSCH +79 @. :6. 1243; 1935) Fiduciary duty applies even if the corporation is unable to enter into transactions itself. LITWIN V ALLEN +25 N.=.S. 26 667; 1940) !n this case, it was held that the common stoc# purchased by the defendants wasn6t a business opportunity for the corporation. $aving fulfilled their duty to the corporation in accordance with their best 8udgment, the defendant directors were not precluded from a transaction for their own account and ris#.
#nterloc6ing directors
):AT IS AN INTERLOCHIN. DIRECTOR> An interloc)ing director is one who occupies a position in $ companies dealing with each other. ):AT IS T:E RULE ON CONTRACTS INVOLVIN. INTERLOCHIN. DIRECTORS> 3<cept in ca*e* o. .rau+, and provided the contract is fair and reasonable under the circumstances, a contract between $ or more corporations having interloc)ing directors shall not be invalidated on that ground alone. ;his practice is tolerated by the %ourts because such an arrangement oftentimes presents definite advantages to the corporations involved. (owever, if the interest of the interloc)ing director in one corporation is substantial (i.e., *toc) o!+ing* e<cee+20D o. t e 9CS) and his interest in the other corporation or corporations is merely nominal, he shall be sub@ect to the conditions stated in 2ec. &$, i.e., for the contract not to be voidable, the following conditions must be present (!) ;he presence of the self0dealing director or trustee in the board meeting for which the contract was approved was not necessary to constitute a =uorum for such meeting# ($) ;he vote of such self0dealing director or trustee was not necessary for the approval of the contract# (&) ;he contract is fair and reasonable under the circumstances# (4) "n the case of an officer, the contract has been previously authorized by the 1oard of :irectors. "n the event that either of or both conditions (!) and ($) are absent ( i.e., t e pre*ence o. t e +irectorCtru*tee ,a* nece**ary .or a 4uoru- an+Cor i* vote ,a* nece**ary .or t e approva! o. t e contract), the contract may be ratified by a $<& vote of the +%2 or all of the members, in a meeting called for the purpose. Hull disclosure of the adverse interest of the directors or trustees involved must be made at such meeting.
&ote' ;he "nvestment (ouse 7aw prohibits a director or officer of an investment house to be concurrently a director or officer of a ban), except as otherwise authorized by the /onetary 1oard. "n no event can a person be authorized to be concurrently an officer of an investment house and of a ban) except where the ma@ority or all of the e=uity of the former is owned by the ban). (..:. !$8, 2ec. 5, as amended) ;he "nsurance %ode li)ewise prohibits a person from being a director and<or officer of an insurance company and an ad@ustment company. (2ec. !,-)
GLOBE WOOLEN CO. V. UTICA GAS & ELECTRIC +121 N.:. 378; 1918) :aynard, president and chief stoc#holder of Blobe but nominal S$ in <tica Bas, obtained a cheap, ,G/year contract for <tica to supply power. :aynard did not vote during the meeting for the approval of the contract. C!" <$*,e (ee> t* e"3*)ce c*"t)!ct7 The Supreme Court held that Blobe could not enforce the contract and that said contract was voidable at the election of <tica. !t was found that based on the facts of the case, the contract was clearly one/sided. :aynard, although he did not vote, exerted a dominating influence to obtain the contract from beginning to end. The director/trustee has a constant duty not to see# harsh advantage in violation of his trust.
APPLICA/ILIT9 OF CO0PENSATION8 On(& to future an NOT past ser!ices" 0ADI0U0 A0OUNT ALLO)ED /9 LA)8 ;otal yearly income of the directors shall not exceed !?G of the net income before income tax of the corporation during the preceding year (2ec. &?)
GOVBT OF THE PHILIPPINES VS. EL HOGAR FILIPINO +50 #hi$. 399; 1927) The compensation provided in sec. C) of the by/laws of %l $ogar Filipino which stipulated that 2D of the net profit shown by the annual balance sheet shall be distributed to the directors in proportion to the attendance at board meetings is valid. The Corporation &aw does not prescribe the rate of compensation for the directors of a corporation. The power to fix it , if any is left to the corporation to be determined in its by/laws. !n the case at bar, the provision in *uestion even resulted in extraordinarily good attendance. BARRETO VS. LA PREVISORA FILIPINA This action was brought by the directors of defendant corporation to recover ,D from each of the plaintiffs of the profits of the corporation for ,C)C pursuant to a by/law provision which grants the directors the right to receive a life gratuity or pension in such amount for the corporation. The SC held that the by/law provision is not valid. Such provision is ultra vires for a mutual loan and building association to ma#e. !t is not merely a provision for the compensation of directors. The authority conferred upon corporations refers only to providing compensation for the future services of directors, officers, and employees after the adoption of the by/law in relation thereto. The by/law can=t be held to authori(e the giving of continuous compensation to particular directors after their employment has terminated for past services rendered gratuitously by them to the corporation. CENTRAL COOPERATIVE E$CHANGE INC VS. TIBE +33 SCRA 596; 1970) The *uestioned resolutions which appropriated the funds of the corporation for different expenses of the directors are contrary to the by/laws of the corporationF thus they are not within the board=s power to enact. Sec. > of the by/laws explicitly reserved to the stoc#holders the power to determine the compensation of members of the board and they did restrict such compensation to actual transportation expenses plus an additional 90G per diems and actual expenses while waiting. $ence, all other expenses are excluded. %ven without the express reservation, directors presumptively serve without pay and in the absence of any agreement in relation thereto, no claim can be asserted therefore. FOGELSON VS. AMERICAN WOOLEN CO. +170 F. 26. 660; 1948) A retirement plan which provides a very large pension to an officer who has served to within one year of the retirement age without any expectation of receiving a pension would seem
analogous to a gift or bonus. The si(e of such bonus may raise a 8ustifiable in*uiry as to whether it amounts to wasting of the corporate property. The disparity also between the president=s pension plan and that of even the nearest of the other officers and employees may also be in*uired upon by the courts. KERBS VS. CALIFORNIA EASTERN AIRWAYS +90 A. 26 652; 1952) This is an appeal filed to en8oin the California %astern Airways from putting into effect a stoc# option plan and a profit/sharing plan. The SC held that the stoc# option plan was deficient as it was not reasonably created to insure that the corporation would receive contemplated benefits. A validity of a stoc# option plan depends upon the existence of consideration and the inclusion of circumstances which may insure that the consideration would pass to the corporation. The options provided may be exercised i" t*t* immediately upon their issuance within a A month period after the termination of employment. !n short, such plan did not insure that any optionee would remain with the corporation. 3ith regard to the profit/sharing plan, it was held valid because it was reasonable and was ratified by the stoc#holders pending the action.
C(ose Corporations
2ec. 8- provides that the A+" of a close corp. may specify that it shall be managed by the stoc)holders rather than the 1o:. 2o long as this provision continues in effect 4o stoc)holderDs meeting need be called to elect directors# >enerally, stoc)holders deemed to be directors for purposes of this %ode, unless the context clearly re=uires otherwise# 2toc)holders shall be sub@ect to all liabilities of directors. ;he A+" may li)ewise provide that all officers or employees or that specified officers or employees shall be elected or appointed by the stoc)holders instead of by the 1o:.
Hurther, 2ec. !?? provides that for stoc)holders managing corp. affairs ;hey shall be personally liable for corporate torts (unli)e ordinary directors liable only upon finding of negligence) "f however there is reasonable ade=uate liability insurance, in@ured party has no right of action v. stoc)holders0managers
A 2(<director is still entitled to vote in a stoc)holderDs meeting even if his interest is adverse to a corporation. 1ut a stoc)holder able to control a corp. is still sub@ect to the duty of good faith to the corp. and the minority. .ersons with management control of corporation hold it in behalf of 2(s and can not regard such as their own personal property to dispose at their whim. T e ... act* are !ega!' ;ransfer of managerial control through 1o: resignation C seriatim election of successors if concomitant with the sale and actual transfer of ma@ority interest or that which constitutes voting control# :isposal by controlling 2( of his stoc) at any time C at such price he chooses
T e ... are i!!ega!' 2elling corp. office or management control by itself, that is 4+; accompanied by stoc)s or stoc)s are insufficient to carry voting control# ;ransferring office to persons who are )nown or should be )nown as intending to raid the corporate treasury or otherwise improperly benefit themselves at the expense of the corp. ("nsuranshares %orp. R. 4orthern Hiscal)# Feceiving a bonus or premium specifically in consideration of their agreement to resign C install the nominees of the purchaser of their stoc), above and beyond the price premium normally attributable to the control stoc) being sold#
INSURANSHARES CORP. V. NORTHERN FISCAL CORP. +35 F. S4pp. 22; 1940The corp. is suing its former directors to recover damages as a result of the sale of its control to a group +corporate raiders- who proceeded to rob it of most of its assets mainly mar#etable securities. Are previous directors who sold corp. control liable7 @es, they are under duty not to sell to raiders. .wners of corp. control are liable if under the circumstances, the proposed transfer are such as to awa#en a suspicion or put a prudent man on his guard. As in this case, control was bought for so much aside from being warned of selling to parties they #new little about, and also from fair notice that such outsiders indeed intended to raid the corp.
"f corp. becomes insolvent, directors are deemed trustees of the creditors and should therefore manage its assets with due consideration to the creditorDs interest. "f directors are also creditors themselves, they are prohibited from gaining undue advantage over other creditors.
UICHICO v. NLRC +<.R. N*. 121434, &4"e 2, 1997) !n labor cases, particularly, corporate directors and officers are solidarily liable with the corporation for the termination of employment of corporate employees done with malice or in bad faith. !n the instant case, there was a showing of bad faith: the oard "esolution retrenching the respondents on the feigned ground of serious business losses had no basis apart from an unsigned and unaudited 9rofit and &oss Statement which had no evidentiary value whatsoever.
):AT IS A STOCH AND TRANSFER /OOH> (Sec. :$) A stoc) and transfer boo) is a record of all stoc)s in the names of the stoc)holders alphabetically arranged. "t li)ewise contains the following information "nstallments paid and unpaid on all stoc) for which subscription has been made, and the date of any installment# A statement of every alienation, sale or transfer of stoc) made, the date thereof, and by whom and to whom made# 2uch other entries as the by0laws may prescribe
;he stoc) and transfer boo) shall be )ept in the principal office of the corporation or in the office of its stoc) transfer agent, and shall be open for inspection by any director or stoc)holder of the corporation at reasonable hours on business days. ):AT IS A STOCH TRANSFER A.ENT> (Sec. :$) A stoc) transfer agent is one who is engaged principally in the business of registering transfers of stoc)s in behalf of a stoc) corporation. (e or she must be licensed by the 23%# however, a stoc) corporation is not precluded from performing or ma)ing transfer of its own stoc)s, in which case all the rules and regulations imposed on stoc) transfer agents, except the payment of a license fee, shall be applicable. ):O IS T:E CUSTODIAN OF CORPORATE RECORDS> "n the absence of any provision to the contrary, the corporate secretary is the custodian of corporate records. %orollarily, he )eeps the stoc) and transfer boo) and ma)es the proper and necessary entries. (Torre*, et a!. v*. CA, $-, 2%FA -8&# !88-)
are sub@ect to scrutiny# and F3/3:"A7 A dissatisfied 2( may avail of this right as a preliminary step towards see)ing more direct and appropriate remedies against mismanagement.
(9) 6pon order of a competent court in cases of unexplained wealth under FA &?!8 or the Anti0>raft and %orrupt .ractices Act (5) 6pon order of the +mbudsman
$. &.
1elief in good faith that a corp. is being mismanaged may be given due course even if later, this is proven unfounded. "f motive can be clearly shown as inimical to corp., right may be denied.
E!er& irector; trustee; stock%o( er; #e#ber may exercise right personally or through an agent who can better understand and interpret records (impartial source, expert accountant, lawyer). As to VTA8 both voting trustee and transferor S: of parent corp" o!er subsi iar&8 "f the two are operated as 23.AFA;3 entities &9 rig t o. in*pection
"f they are +43 A4: ;(3 2A/3 with respect to management and control, and inspection is demanded due to mismanagement of subsidiary by the parentDs directors who are also directors of the subsidiary 1it rig t o. in*pection "f the subsidiary is wholly0owned by the parent, and its boo)s C records are in the possession and control of the parent corporation
.'H.fficers may deny inspection when sought at unusual hours or under improper conditions. ut they cannot deprive the stoc#holders of the right altogether. !n CA , by/law provided that the inspection be made available only for a few days in a year, chosen by the directors. This is void. GON ALES V. PNB +122 SCRA 490; 1983) B ac*uired , share of stoc# purposely to be able to exercise right to inspection with respect to transactions before he became a S$. B not in good faith. $is obvious purpose was to arm himself with materials which he can use against the ban# for acts done by the latter when B was a total stranger to the same. "ight not available here. VERAGUTH V. ISABELA SUGAR CO. +57 #hi$. 266; 1932) There was nothing improper in the secretary6s refusal since the minutes of these prior meetings have to be verified, confirmed and signed by the directors then present. $ence, Ieraguth has to wait until after the next meeting. GOKONGWEI V. SEC +Ap)i$ 11, 1979) The law ta#es from the S$ the burden of showing impropriety of purpose and places upon the corporation the burden of showing impropriety of purpose and motive. Considering that the foreign subsidiary is wholly owned by S:C and therefore under its control, it would be more in accord with e*uity, good faith and fair dealing to construe the statutory right of Bo#ongwei as petitioner as S$ to inspect the boo#s and records of such wholly subsidiary which are in S:C6s possession and control.
In i!i ua( suits 0 wrong done to stoc)holder personally and not to other stoc)holders %e<. 1 en rig t o. in*pection i* +enie+ to a *toc) o!+er) C(ass suit 0 wrong done to a group of stoc)holders %e<. Pre.erre+ *toc) o!+er*G rig t* are vio!ate+) Deri!ati!e suit 0 wrong done to the corporation itself
%ause of action belongs to the corp. and not the stoc)holder 1ut since the directors who are charged with mismanagement are also the ones who will decide '+4 the corp. will sue, the corp. may be left without redress# thus, the stoc)holder is given the right to sue on behalf of the corporation. An effective remedy of the minority against the abuses of management An individual stoc)holder is permitted to bring a derivative suit to protect or vindicate corporate rights, whenever the officials of the corp. refuse to sue or are the ones to be sued or hold the control of the corp. 2uing stoc)holder is merely the nominal party and the corp. is actually the party in interest. A 2( can only bring suit for an act that too) place when he was a stoc)holder# not before. (Bitong v. CA, 292 SCRA $0")
&) 4)
EVANGELISTA VS. SANTOS +86 #hi$. 387; 1950) The in8ury complained of is against the corporation and thus the action properly belongs to the corporation rather than the stoc#holders. !t is a derivative suit brought by the stoc#holder as a nominal party plaintiff for the benefit of the corporation, which is the real party in interest. !n this case, plaintiffs brought the suit not for the benefit of the corporation=s interest, but for their own. 9laintiffs here as#ed that the defendant ma#e good the losses occasioned by his mismanagement and to pay them the value of their respective participation in the corporate assets on the basis of their respective holdings. 9etition dismissed for venue improperly laid.
REPUBLIC BANK VS. CUADERNO +19 SCRA 671; 1967) !n a derivative suit, the corporation is the real party in interest, and the stoc#holder merely a nominal party. 4ormally, it is the corp. through the board of directors which should bring the suit. ut as in this case, the members of the board of directors of the ban# were the nominees and creatures of respondent "oman and thus, any demand for an intra/corporate remedy would be futile, the stoc#holder is permitted to bring a derivative suit. Should the corporation be made a party7 The %nglish practice is to ma#e the corp. a party plaintiff while the <S practice is to ma#e it a party defendant. 3hat is important though is that the corporation should be made a party in order to ma#e the court=s ruling binding upon it and thus bar any future re/litigation of the issues. :is8oinder of parties is not a ground to dismiss the action. REYES VS. TAN +3 SCRA 198; 1961) The importation of textiles instead of raw materials, as well as the failure of the board of directors to ta#e actions against those directly responsible for the misuse of the dollar allocations constitute fraud, or consent thereto on the part of the directors. Therefore, a breach of trust was committed which 8ustified the suit by a minority stoc#holder of the corporation. The claim that plaintiff ;ustiniani did not ta#e steps to remedy the illegal importation for a period of two years is also without merit. 'uring that period of time plaintiff had the right to assume and expect that the directors would remedy the anomalous situation of the corporation brought about by their wrong/doing. .nly after such period of time had elapsed could plaintiff conclude that the directors were remiss in their duty to protect the corporation property and business. BITONG v. CA (292 SCRA 503) The power to sue and be sued in any court by a corporation even as a stoc#holder is lodged in the oard of 'irectors that exercises its corporate powers and not in the president or officer thereof. !t was ;AJA=s oard of 'irectors, not Senator %nrile, which had the power to grant itong authority to institute a derivative suit for and in its behalf. The basis of a stoc#holder=s suit is always one in e*uity. $owever, it cannot prosper without first complying with the legal re*uisites for its institution. The most important of these is the,*"! 3i6e ownership by a stoc#holder of a stoc# in his own right at the time of the transaction complained of which invests him with standing to institute a derivative action for the benefit of the corporation.
Capita( Structure
):AT IS 0EANT /9 CAPITAL STRUCTURE> ;his refers to the aggregate of the securities 00 instruments which represent relatively long0term investment 00 issued by the corporation. ;here are basically $ )inds of securities * are* o. *toc) and +e0t *ecuritie*.
CONSTANCY
:AA(E
Hixed in the Ralue not A+", and fixed in the indicated in A+", and the stoc) therefore not certificate. indicated in /ay be sold the stoc) at a value certificate. higher, but .rice may not lower, be set by than that 1+:, 2(Ds fixed in the or fixed in A+". the A+" eventually. :epends if :epends if 4o voting 6sually denied itDs common itDs common rights for as voting rights. or or preferred. long as such preferred. stoc) remains in the treasury (2ec. 9-)
:"0#/G ;#G<0S
6sually %an vote only vested with under certain the exclusive circumstances right to vote
&9T3' 9n!y pre.erre+ an+ re+ee-a0!e * are* -ay 0e +eprive+ o. t e rig t to vote. %Sec. 6, Corporation Co+e) 3BC3PT;9&' A* ot er,i*e provi+e+ in t e Corporation Co+e. H &o2par va!ue * are* -ay not 0e i**ue+ 0y t e .o!!o,ing entitie*' 0an)*, tru*t co-panie*, in*urance co-panie*, pu0!ic uti!itie*, 0ui!+ing A !oan a**ociation %Sec. 6)
PreEincorporation su%scription
F673 'hen a group of persons sign a subscription contract, they are deemed not only to ma)e a continuing offer to the corporation, but also to have contracted with each other as well. ;hus, no one may revo)e the contract even prior to incorporation without the consent of all the others. ):EN IS A PRE-INCORPORATION SU/SCRIPTION IRREVOCA/LE> !) Hor a period of at least 5 months from the date of subscription#
3BC3PT;9&S'
(!) unless all of the other subscribers consent to the revocation# or ($) unless the incorporation of said corporation fails to materialize within the said period or within a longer may be stipulated in the contract of subscription
period as
$) After the A+" have been submitted to the 23% (2ec. 5!)
UTAH HOTEL CO V. MADSEN +43 At!h 285, 134 #!c. 557; 1913)
Sec 00) in express terms confers powers upon the stoc#holders Kto regulate the mode of ma#ing subscriptions to its capital stoc# and calling in the same by/laws or by express contract.L Since it may be done by express contract, this shows that it was intended that a contract to that effect may be entered into even before the corporation is organi(ed, and the contract agreement is enforced if the corporation is in fact organi(ed.
PostEincorporation su%scription
&9T3' 6nder the %orporation %ode, there is no longer any distinction between a subscription and a purchase. ;hus, a subscriber is liable to pay for the shares even if the corporation has become insolvent.
&)
"ssuance of shares in payment of a previously contracted debt (2ec. &8) 'hyY (a) ;he obligation is extinguished outright# (b) %orporation does not have to shell out money to fulfill its obligations# (c) /oney that would have otherwise been used for interest payments can be channelled to more productive corporate activities.
&ote' ;n &o*. %2) an+ %"), *uc act* re4uire approva! o. 2C" o. t e 9CS or 2C" o. tota! -e-0er*.
#n Close Corporations
"n close corporations, the preemptive rights extends to A77 stoc) to be issued, including re0 issuance of treasury shares, 3BC3PT if provided otherwise by the A+". (Sec. 102). 4ote that the limitations in 2ec. &8 do not apply.
capital stoc# then outstanding, when the privilege can be exercised consistently with the ob8ect which the disposition of the additional stoc# is legally designed to accomplish. !n the present case, every S$ of the ban#, for each of the shares, was to receive , ,H) shares of the stoc# co. +share in exchange for property-. !t would not be feasible to consummate a transfer based upon such consideration if the preemptive right were to be held enforceable with respect to every new issue of stoc# regardless of the ob8ect of the disposition.
MERRITT-CHAPMAN & SCOTT CORP. VS. NEW YORK TRUST CO. +184 F. 26 954; 1950)
!f the corporation is allowed to declare stoc# dividends without ta#ing account of the warrant holders +who have not yet exercised their warrant-, the percentage of interest in the common stoc# capital of the corporation which the warrant holders would ac*uire, should they choose to do so, could be substantially reducedHdiluted. Thus, the corporation is wrong in contending that a warrant holder must first exercise his warrant before they may be issued stoc# dividend.
<+%rid securities
1ecause preferred shares and bonds are created by contract, it is possible to create stoc) which approximates the characteristics of debt securities. (ybrid securities, as the name implies, therefore combine the features of preferred shares and bonds. :etermining the true nature of the security is crucial for tax purposes. ;he American courts use the following criteria
+,- "s the corporation liable to pay bac) the investor at a fixed maturity dateY +)- "s interest payable unconditionally at definite intervals, or is it dependent on earningsY +0- :oes the security ran) at least e=ually with the claims of other creditors, or is it subordinate
to themY
):AT IS T:E NATURE OF T:E SECURIT9 AND T:E PA90ENT 0ADE> /ONDS F<A0 #S PA#&= 0" F<"M PA#&= F<E/ PA#&= /A0(;E 0AGA1#A#0H MA0(;#0H &A0E= ;A/I "/ &#SS"A(0#"/ "nterest %reditor0investor 'hether the corporation has profits or not 3xpense %an be deducted for tax purposes Pes :ividends 2toc)holder +nly if there are profits 4ot an expense %A44+; be deducted 4o STOCH
Fan)ed together with other 2uperior to stoc)holders, corporate creditors inferior to corporate creditors
JOHN KELLY VS. CIR TALBOT MILLS VS. CIR +326 A.S. 521; 1946)
!n the Jelly case, the annual payments made were interest on indebtedness +therefore, a bond is held- because there were sales of the debentures as well as exchanges of preferred stoc# for debentures, a promise to pay a certain annual amount if earned, a priority for the debentures over common stoc# and a definite maturity date in the reasonable future. !n the Talbot :ills case, the annual payments made were dividends and not interest +therefore, shares are held-, because of the presence of fluctuating annual payments with a )D minimum, and the limitation of the issue of notes to stoc#holders in exchange only for stoc#. esides, it is the Tax Court which has final determination of all tax issues which are not clearly delineated by law.
!t must be noted that these criteria are not of e*ual importance and cannot be relied upon individually. %.g. treatment accorded the issuance by the parties cannot be sufficient as this would allow taxpayers to avoid taxes by merely naming payments as interest.
+,- debtor0corporation +)- creditor0bondholder +0- trustee representative of all the bondholders
previously incurred indebtedness by the corporation# amounts transferred from unrestricted retained earnings to stated capital# outstanding shares exchange for stoc)s in the event of reclassification or conversion
):AT FOR0S ARE UNACCEPTA/LE> future services promissory notes value less than the stated par value
:O) IS T:E ISSUED PRICE OF NO-PAR S:ARES FIDED> "t may be fixed as follows (!) "n the A+"# or ($) 1y the 1+: pursuant to authority conferred upon it by the A+" or the by0 laws# or (&) "n the absence of the foregoing, by the 2(s representing at least a ma@ority of the outstanding capital stoc) at a meeting duly called for the purpose (Sec. 62) IF T:E CONSIDERATION FOR S:ARES IS OT:ER T:AN CAS:; :O) IS T:E VALUE T:EREOF DETER0INED> "t is initially determined by the incorporators or the 1oard of :irectors, sub@ect to approval by the 23%. (Sec. 62)
)atere Stocks
):AT IS )ATERED STOCH> 2toc)s issued as fully paid up in consideration of property at an overvaluation. +ftentimes, the consideration received is less than the par value of the share. &9T3' &o2par * are* CA& 0e ,atere+ *toc)' , en t ey are i**ue+ .or !e** t an t eir i**ue+ va!ue a* .i<e+ 0y t e corp. in accor+ance ,it !a,.
):AT ARE T:E )A9S /9 ):IC: )ATERED STOCH CAN /E ISSUED> (!) ($) >ratuitously, under an agreement that nothing shall be paid to the corporation# 6pon payment of less than its par value in money or for cost at a discount#
(&) (4)
6pon payment with property, labor or services, whose value is less than the par value of the shares# and "n the guise of stoc) dividends representing surplus profits or an increase in the value of property, when there are no sufficient profits or sufficient increases in value to @ustify it.
):AT IS T:E LIA/ILIT9 OF DIRECTORS FOR T:E ISSUANCE OF )ATERED STOCH> :irectors and officers who consented to the issuance of watered stoc)s are *o!i+ari!y !ia0!e with the holder of such stoc)s to the corp. and its creditors for the difference between the fair value received at the time of the issuance and the par or issued value of the share. ;he liability will be to all creditors, whether they became such prior or subse=uent to the issuance of the watered stoc). Feliance by the creditors on the alleged valuation of corporate capital is immaterial and fraud is not made an element of liability. &9T3' ;n t e P i!ippine*, it i* t e *tatutory o0!igation t eory t at i* contro!!ing %c.. Sec. 6$).
PRIVATE TRIPLE$ SHOE V. RICE & HUTCHINSTC CL > DTRIPLE$ SHOE V. RICE & HUTCHINSD +72 A.@.R. 932; 1930)
!n this case, the stoc#s issued to the 'illman faction were no par value shares, the consideration for which were never fixed as re*uired by law. $ence, their issuance was void. :oreover, the stoc#s were issued to the 'illmans for services rendered and to be rendered. Future services are not lawful consideration for the issuance of stoc#.
PRIVATE MCCARTY V. LANGDEAUTC CL > DMCCARTY V. LANGDEAUD +337 S.W. 26 407; 1960)
:cCarty agreed to purchase shares of a corp. with a downpayment of only P)G, with the balance due to be evidenced by a note. :cCarty failed to pay a big portion of the balance. The Court affirmed the 8udgement against :cCarty for the balance due on the contract. :cCarty contends that the contract is void. ut the law only prohibits the issuance of stoc#. !f it is understood that the stoc# will not be issued to the subscriber until the note is paid, the contract is valid and not illegal. !f a security such as a note, which is not a valid consideration, is accepted, the law does not say that such note, or the stoc# issued for it, shall be void. 3hat is void by express provision of law is the fictitious increase of stoc# or indebtedness. The law was designed for the protection of the corporation and its creditors. !t emphasi(es the stoc#holder6s obligations to ma#e full and lawful payment in accord with its mandate, rather than furnish him with a defense when he has failed in
that obligation. !ts purpose is to give integrity to the corporation6s capital. 4one of these ob8ects would be promoted by declaring a note given by a subscriber for stoc# uncollectible in the hands of a bona fide stoc#holder.
PRIVATE BING CROSBY V. EATONTC CL > DBING CROSBY V. EATOND +297 #. 26 5; 1956)
A subscriber to shares who pays only part of what he agreed to pay is liable to creditors for the balance. $olders of watered stoc# are generally held liable to the corporation6s creditors for the difference between the par value of the stoc# and the amount paid in. <nder the misrepresentation theory, the creditors who rely on the misrepresentation of the corporation6s capital stoc# are entitled to recover the KwaterL from holders of the watered stoc#. "eliance of creditors on the misrepresentation is material. $owever, under the statutory obligation theory, reliance of creditors on the capital stoc# of the corporation is irrelevant. (;t -u*t
0e note+ t at ere in t e P i!ippine*, it i* t e *tatutory o0!igation t eory , ic i* prevai!ing.)
%3F;"H"%A;"+4 ;(A; person named therein is a holder or owner of a stated number of shares in the corporation. "4:"%A;32 !. )ind of shares $. date of issuance &. par value, if par value shares 2ignatures of the proper officers, usually president or secretary, as well as the corporate seal
13AF2
A/+64; "2263:
Hor no more than the number of shares authorized in articles of incorporation# excess would be void
Unpai Subscriptions
6npaid subscriptions are not due and payable until a call is made by the corporation for payment. (Sec. 6:) An obligation arising from non0payment of stoc) subscriptions to a corporation cannot be offset against a money claim of an employee against the employer. (Apo+aca v. &6RC, 1:2 SCRA 442) Interest on all unpaid subscriptions shall be at the rate of interest fixed in the by0 laws. "f there is none, it shall be the legal rate. (Sec. 66)
!t was held that the call was void for lac# of publication re*uired by law. Such publication is a condition precedent for the filing of the action. The ruling in 9oi(at does not apply since the company here is solvent.
!t was held that the transfer is effective only between Co and 4ava and does not affect the corporation. The F4! C4" ruling applies. @i"0!-e" <4$3 does not apply because, unli#e in &ingayen Bulf, no certificate of stoc# was issued to Co.
Effect of e(in3uenc&
):AT IS DELIN2UENT STOCH> 4Sec. 6:) 2toc) that remains unpaid &? days after the date specified in the subscription contract or the date stated in the call made by the 1oard. ):AT ARE T:E EFFECTS OF DELIN2UENC9> !. $. ;he holder thereof loses all his rights as a stoc)holder except only the rights to dividends# :ividends will not be paid to the stoc)holder but will be applied to the unpaid balance of his subscription plus costs and expenses. Also, stoc) dividends will be withheld until full payment is made. 2uch stoc)holder cannot vote at the election of directors or at any meeting on any matter proper for stoc)holder action. 2toc)holder cannot be counted as part of the re=uired =uorum. 2toc)holder cannot be voted for as director of the corporation.
&. 4. 9.
):AT IS T:E PROCEDURE FOR T:E CONDUCT OF A DELIN2UENC9 SALE> (Sec. 68) (!) Issuance of /oar reso(ution ;he 1+: issues a resolution ordering the sale of delin=uent stoc), specifically stating the amount due on each subscription plus all accrued interest, and the date, time and place of the sale. &ote' T e *a!e * a!! not 0e !e** t an "0 +ay* nor -ore t an 60 +ay* .ro- t e +ate t e *toc)* 0eco-e +e!in4uent. 4,5 Notice of sa(e an pub(ication 4otice of the date of delin=uency sale and a copy of the resolution is sent to every delin=uent stoc)holder either personally or by registered mail. ;he notice is li)ewise published once a wee) for $ consecutive wee)s in a newspaper of general circulation in the province or city where the principal office of the corporation is located. 4-5 Sa(e at pub(ic auction "f the delin=uent stoc)holder fails to pay the corporation on or before the date specified for the delin=uency sale, the delin=uent stoc) is 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, costs of advertisement
and expenses of sale, for the s#a((est nu#ber of s%ares or fraction of a s%are" 4@5 Transfer an issuance of certificate of stock ;he stoc) so purchased is transferred to such purchaser in the boo)s of the corporation and a certificate of stoc) covering such shares is issued. "f there is no bidder at the public auction who offers to pay the full amount of the balance on the subscription and its attendant costs, the corporation may bid for the shares, and the total amount due shall be credited as paid in full in the boo)s of the corporation. ;itle to all the shares of stoc) 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 %ode. &ote t at t i* i* *u05ect to t e re*triction* i-po*e+ 0y t e Co+e on corporation* a* regar+* t e ac4ui*ition o. t eir o,n * are*. %See t e +i*cu**ion un+er 7ivi+en+* an+ Purc a*e 0y Corporation o. it* 9,n S are*.) CAN A DELIN2UENC9 SALE /E 2UESTIONED> (Sec. 69) Pes. ;his is done by filing a complaint within 5 months from the date of sale, and paying or tendering to the party holding the stoc) the sum for which said stoc) was sold, with interest at the legal rate from the date of sale. 4o action to recover delin=uent stoc) sold can be sustained upon the ground of irregularity or defect in the notice of sale, or in the sale itself of the delin=uent stoc) unless these re=uirements are complied with.
+,- Fi(e an affi a!it in trip(icate *it% t%e corporation" ;he affidavit must state the
following
+a+b+c+d-
%ircumstances as to how the certificates were 27:# 4umber of shares represented# and 2erial number of the certificate 4ame of issuing corporation
+)- T%e corporation *i(( pub(is% notice after the affidavit and other information and
evidence have been verified with the boo)s of the corporation, ( &ote o,ever t at t i* i* not-an+atory. T e corporation a* t e +i*cretion to +eci+e , et er to pu0!i* or not.) ;he notice will contain the following information (a) (b) (c) (d) 4ame of the corporation 4ame of the registered owner# 2erial number of the certificate# 4umber of shares represented by the certificate#
(e) 3ffect of expiration of ! year period from publication and failure to present contest within that period.
+0- SLD certificate is re#o!e fro# t%e books if after one year from date of last
publication, no contest is presented. &9T3' +ne0year period will not be re=uired if the applicant files a bond good for ! year. (4) T%e corporation *i(( t%en issue ne* certificates" (owever, if a contest has been presented to the corporation, or if an action is pending court regarding the ownership of the 27: certificate, the issuance of the new certificate shall be suspended until the final decision by the court. &9T3' S ou!+ corporation i**ue ne, certi.icate* ,it out t e con+ition* 0eing .u!.i!!e+ an+ a t ir+ party prove* t at e i* t e rig t.u! o,ner o. t e * are*, t e corporation -ay 0e e!+ !ia0!e to t e !atter 3?3& ;I it acte+ in goo+ .ait . &9T3' 3ven i. t e a0ove proce+ure ,a* .o!!o,e+, i. t ere ,a* .rau+, 0a+ .ait , or neg!igence on t e part o. t e corporation an+ it* o..icer*, t e corporation -ay 0e e!+ !ia0!e.
TRANSFER OF S:ARES
:O) ARE S:ARES OF STOCH TRANSFERRED> 1y delivery of the certificate<s indorsed by the owner or his attorney0in0fact or other person legally authorized to ma)e the transfer. (Sec. 6") ):AT ARE T:E RE2UISITES FOR A VALID TRANSFER> (!) :elivery# ($) "ndorsement by the owner or his attorney0in0fact or other persons legally authorized to ma)e the transfer "ndorsement of the certificate of stoc) is a mandatory re=uirement of law for an effective transfer of a certificate of stoc). (RaKon v. CA, 20: SCRA 2"4) (&) Fecording of the transfer in the boo)s of the corporation ( *o a* to -a)e t e tran*.er va!i+ a* again*t t ir+ partie*) 6ntil registration is accomplished, the transfer, though valid between the parties, cannot be effective as against the corporation. ;hus, the unrecorded transferee cannot en@oy the status of a 2( he cannot vote nor be voted for, and he will not be entitled to dividends.
A corporation, either by its board, its by/laws or the act of its officers, cannot create restrictions in stoc# transfers.
upon the boo#s of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate, and the number of shares transferred. All transfers of shares not so entered are invalid as to attaching or execution creditors of the assignors, as well as to the corporation and to subse*uent purchasers in good faith, and indeed, as to all persons interested, except the parties to such transfers.
would be made 9resident of the corporation after the purchase. "ivera assured her that he would sign the stoc# certificates because A#asa#o was the real owner. $owever, after the sale was consummated and the consideration paid, "ivera refused to ma#e the indorsement unless he is also paid. Tsuchiya, et al. attempted several times to have the shares registered but were refused compliance by the corp. They filed a special action for mandamus and damages. The Supreme Court held that mandamus was improper in this case since the shares of stoc# were not even indorsed by the registered owner who was specifically resisting the registration thereof in the boo#s of the corporation. The rights of the parties would have to be threshed out in an ordinary action.
UNAUT:ORI1ED TRANSFERS
*orged 0ransfers
A corporation does not incur any misrepresentation in the issuance of a certificate made pursuant to a forged transfer. "t can always recall from the person the certificate issued, for cancellation. "n case where the certificate so issued comes into the hands of a bona fide purchaser for value from the original purchaser, the corporation is estopped from denying its liability. "t must recognize both the original and the new certificate. 1ut if recognition results to an over0issuance of shares, only the original certificate may be recognized, without pre@udice to the right of the bona fide purchaser to sue the corporation for damages.
+,- The facts of the case 8ustify the conclusion that she was negligent. She delivered the certificate, which was endorsed in blan#, to Campos without having ta#en any precaution. She did not as# the atangas :inerals to cancel it and instead, issue another in her name. !n failing to do so, she clothed Campos with apparent title to the shares represented by the certificate. y her misplaced confidence in Campos, she made possible the wrong done. She was therefore estopped from asserting title thereto for it is well/settled that Kwhere one of the innocent parties must suffer by reason of a wrongful or unauthori(ed act, the loss must fall on the one who first trusted the wrongdoer.L +)- The sub8ect certificate is what is #nown as a street certificate. <pon its face, the holder is entitled to demand its transfer into his name from the issuing corporation. The ban# is not obligated to loo# beyond the certificate to ascertain the ownership of the stoc#. A certificate of stoc#, endorsed in blan#, is deemed *uasi/negotiable, and as such, the transferee thereof is 8ustified in believing that it belongs to the transferor.
Co((atera( Transfers
2hares of stoc) are personal property. ;hus, they can either be pledged or mortgaged. (owever, such pledge or mortgage cannot have any legal effect if it is registered only in the corporate boo)s. 'here a certificate is delivered to the creditor as a security, the contract is considered a pledge, and the %ivil %ode will apply. "f the certificate of stoc) is not delivered to the creditor, it must be registered in the registry of deeds of the province where the principal office of the corporation is located, and in case where the domicile of the stoc)holder is in a different province, then registration must also be made there. "n a situation where, the chattel mortgage having been registered, the stoc) certificate was not delivered to the creditor but transferred to a bona fide purchaser for value, it is the rule that the bona fide purchaser for value is bound by the registration in the chattel mortgage registry. "t is said that such a rule tends to impair the commercial value of stoc) certificates.
*3 c*"(tit4ti"0 ! ch!tte$ m*)t0!0e i( "* $*"0e) +!$i6 i" +ie/ *3 the Ci+i$ C*6e p)*+i(i*" 6e3i"i"0 (4ch !( ! p$e60e.
Although shares of stoc) are as a rule freely transferable, membership in a non0stoc) corporation is personal and non0transferable, unless the articles of incorporation or by0laws provide otherwise. ;he court may not strip him of his membership without cause. (Sec. 90)
DIFFERENTIATE /ET)EEN CAS: DIVIDENDS AND STOCH DIVIDENDS" Cas% Di!i en Votin$ re3uire#ents for issuance Effect on stock e(in3uent 1oard of :irectors Stock Di!i en 1oard of :irectors Q $<& +%2
2hall be applied to the unpaid 2hall be withheld from the balance on the subscription delin=uent stoc)holder until
plus costs and expenses. Can t%is be issue E'ecuti!e Co##ittee> b& 4o. (Sec. "$)
his unpaid subscription is fully paid. 4o, since this re=uires 2( approval. (Sec. "$)
NIELSON v LEPANTO +26 SCRA 540; 1968) Stoc# dividends are issued only to S$s This is so because only stoc#holders are entitled to dividends. A stoc# dividend really adds nothing to the interest of each stoc#holderF the proportional interest of each stoc#holder remains the same. !f a stoc#holder is deprived of his stoc# dividends / and this happens if the shares of stoc# forming part of the stoc# dividends are issued to a non/stoc#holder / then the proportion of the stoc#holder=s interest changes radically. Stoc# dividends are civil fruits of the original investment, and to the owners of the shares belong the civil fruits.
FRO0 ):ERE CAN DIVIDENDS /E SOURCED> :ividends can be sourced only out of the unrestricted retained earnings of the corporation. Unrestricte retaine earnin$s is defined as "the undistributed earnings of the corporation which have not been allocated for any managerial, contractual or legal purposes and which are free for distribution to the stoc)holders as dividends." (S3C Ru!e* @overning Re+ee-a0!e an+ Trea*ury S are*, 1982) Retaine earnin$s has been defined as "net accumulated earnings of the corporation out of transactions with individuals or firms outside the corporation." (Si--on*, S-it , Li--e!, ;nter-e+iate Accounting, 19::, e+. P. 6"$) ;he term implies the limitation that no corporation can declare dividends unless its legal or stated capital is maintained. "t does not include premium on par stoc) i.e. difference between par value and selling price of stoc) by corp since this is regarded as paid0in capital# but 23% allowed declaration of stoc) dividends out of such premiums transactions involving treasury stoc)s which are considered expansions and contractions of paid0in capital# donations as additional paid0 in capital# increase in value of existing assets, being merely unrealized capital element
"f subscribed shares have not been fully paid, the unpaid portion of subscribed capital stoc) is an asset, and as long as the net capital asset (after payment of liabilities) including this unpaid portion is at least e=ual to the total par value of the subscribed shares, any excess would be surplus or earnings from which dividends may be declared. (owever, if a deficit exists, subse=uent profits must first be applied to cover the deficit. Festrictions on dividend distribution include
1+:Ds appropriation of certain earnings for certain purposes# Agreements with creditors, bondholders and preferred 2(s re=uiring retention of certain percent of corporate earnings to protect their interest and to secure redemption of their securities upon maturity# 23%0imposed restrictions pursuant to law, li)e those imposed on ban)s and insurance companies# Festriction on the retained earnings e=uivalent to the cost of treasury shares held by the corporation, which is lifted only after such shares are reissued or retired (Sec. 19$, P7 612)
BERKS BROADCASTING v CRAUMER +52 A.26 571; 1947) 'ividends can only be declared only from the surplus, i.e. the excess in the value of the assets over the liabilities and the issued capital stoc#. To do otherwise would be illegal The ob8ect of the prohibition is to protect the creditors in view of the limited liability of the S$s and also to protect the S$s by preserving the capital so that the purposes of the corp. may be performed. Surplus must be bona fide i.e. founded upon actual earnings or profits and not to be dependent for its existence upon a theoretical estimate of an appreciation in the value of the company6s assets. The prohibition does not apply, however, to stoc# dividends because creditors and S$s will not be affected by their declaration since they do not decrease the company6s assets.
SO0E RULES ON DIVIDEND DECLARATION8 1. 1+: has discretion whether or not to declare dividends and in what form. 3<ception' 2toc) dividends, in which case a $<& vote of +%2 is necessary.
(owever, such discretion cannot be abused and the 1+: cannot accumulate surplus profits unreasonably on the excuse that it is needed for expansion or reserves. 2. 1+: should declare dividends when surplus profits of the corporation exceed !??G of the corporationKs paid0in capital stoc). E9ceptions$ (a) 'hen @ustified by definite corporate expansion pro@ects or programs approved by the 1oard# (b) 'hen creditors prohibit dividend declaration without their consent as a condition for the loan, and such consent has not yet been secured# (c) 'hen retention is necessary under special circumstances obtaining in the corporation, e.g. when there is a need for special reserve for probable contingencies. (Sec. 4") 4. 5. ;he corporation may be sub@ected to additional tax when it fails to declare dividends, thereby unreasonably accumulating profits. (See Sec. 2$, &;RC) ;he dividends received are based on stoc) held whether or not paid. (owever, if the stoc)s are delin=uent, the amount will first be applied to the payment of the delin=uency plus costs and expenses# stoc) dividends will not be given to a delin=uent 2(.
KEOGH v ST. PAUL MILK +285 N.W. 809; 1939) The mere fact that a large corporate surplus exists is not enough to warrant e*uitable interventionF the test is good faith and reasonableness of the policy of retaining the profits. $owever, where dividends are withheld for an unlawful purpose O to deprive a S$ of his right to a 8ust proportion of the corporation=s profit, the court may compel the corporation to declare dividends. DODGE v FORD MOTOR CO +170 N.W. 668; 1919) This case involves an action against the Ford :otor Company to compel declaration of dividends. At the time this complaint was made, Ford had concluded its most prosperous year of business, and the demand for its cars at the price of the previous year continued. 3hile it had been the practice, under similar circumstances, to declare larger dividends, the corporation refused to declare any special dividends. The oard 8ustified its refusal to declare larger dividends on the expansion plans of the company by erecting a smelting plant, but maintaining the selling price of its cars +instead of reducing it as had been the practice in previous years-.
The plaintiffs contend that such a proposal would be tantamount to the business being conducted as a semi/eleemosynary +or charitable- institution instead of a business institution. The court pointed out that a business corporation is organi(ed and carried on primarily for the profit of S$s. The discretion of the directors is to be exercised in the choice of means to attain that end and does not extend to a change in the end itself O reduction of profits or to devote profits to another purpose. 3hile the Court noted the capable management of the affairs of the corporation and therefore was not convinced that the motives of the directors were pre8udicial to the company=s interests, it li#ewise noted that the annual dividends paid were very small in relation to the profits that the company had been ma#ing. !t therefore affirmed the amount fixed by the lower court to be distributed to the stoc#holders. N*te? #)*3. &!ci"t* i( *3 the *pi"i*" th!t /h!t h!ppe"e6 i" thi( c!(e i( p*((i,$e 4"6e) the p)e(e"t C*6e, e+e" /ith*4t ch!"0i"0 the A2'.
Preference as to Di!i en s
Feview discussion under )inds of stoc).
BURK V. OTTAWA GAS & ELECTRIC CO. +123 #!c. 875; 1912)
An action was brought by the preferred S$s of .ttawa against the directors of .ttawa to +,- re*uire the directors to account for all the property and assets of the corporation, +)- declare
such dividends from the net profits of the business of such co. as should have been declared since , ;an. ,CGA, and +0- restrain the officers and directors during the pendency of the action from paying out any of the money or disposing of the assets of the company except such amounts as should be necessary to pay the actual necessary current expenses of conducting the business of the corporation. The .' maintained that the corporation=s funds were exhausted by expenditures for the extension of the co6s plant, hence it was unable to declare dividends. %xpenditures were said to be necessary and for the betterment of the plant. We)e the c*)p 34"6( /e)e /)*"034$$- 6i+e)te6, !"6 /e)e p)e3e))e6 SF( e"tit$e6 t* 6i+i6e"6(7 The case was remanded to the trial court, with instructions to ma#e further findings to protect the preferred S$s in their rights. The fair interpretation of the contract between .ttawa and its S$S is that if in any year net profits are earned, a dividend is to be declared. To hold otherwise, meaning if the .' had absolute discretion when to declare dividends and when not to, when the corporation has funds for such dividends, would result in temptation to unfair dealing, giving one party the option to pay the other or not. !n the case at bar, the accumulated profits would be lost forever since the dividends were non/cumulative. 9referred S$s, however, are not generally creditors until dividends are declared. !n the case at bar, if dividends should have been declared to such S$s, they are considered creditors from that time.
C9: Corp., having a surplus of P)C,GGG, declared a AD cash dividend payable in four installments. The first installment was paid by the oard after which an error was discovered in the computation of the assets: from the initial recogni(ed surplus of P)C,GGG to PA,GGG. :ainly for this reason, the oard adopted a resolution rescinding the dividends payable on the three other installments despite the solvency of the corp and the existence of ample funds to pay said dividends. The original 9 was $umber, a S$, and was substituted by :c&aran, the administrator of his estate when he died. The defendant corp maintained that there was no valid declaration of dividends because the corporation failed to set aside funds to pay for the same. A cash dividend, properly declared, cannot be revo#ed by the subse*uent action of the corp. for by its declaration, the corp had become the debtor of the S$ and it goes without saying that the debtor cannot revo#e, recall or rescind the debt or otherwise absolve itself from its payment by a unilateral action or without the consent of the creditor. Thus, the rescission by the .' of the subse*uent installments was of no force. 'ividends are defined as portions of profitsHsurplus funds of the corp. which have been actually set apart by a valid board resolution or by the S$ at a corp. mtg. for distribution among S$ according to their respective interests. The mere declaration of the dividend, without more, by competent authority under proper circumstances, creates a debt against the corporation in favor of the stoc#holders the same as any other general creditor of the corporation. y the mere declaration, the dividend becomes immediately fixed and absolute in the stoc#holder and from henceforth the right of each individual stoc#holder is changed by the act of declaration from that of partner and part owner of the corporate property to a status absolutely, adverse to every other stoc#holder and to the corporation itself, insofar as his p)* )!t! proportion of the dividend is concerned.
FOR ):AT PURPOSES CAN A CORPORATION AC2UIRE ITS O)N S:ARES> 4Sec" @?5 !. $. ;o eliminate fractional shares arising out of stoc) dividends# ;o collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delin=uency sale, and to purchase delin=uent shares sold during said sale# ;o pay dissenting or withdrawing stoc)holders entitled to payment for their shares under the %orporation %ode %Apprai*a! Rig t).
&.
):AT ARE T:E RE2UISITES FOR T:E EDERCISE OF T:E APPRAISAL RI.:T> 4Sec. 32) (!) 2( must have voted against he proposed corporate action# ($) 'ritten demand on the corporation for payment of the fair value of his shares# (&) 2uch demand must have been made within &? days after the date on which the vote was ta)en# (4) 2urrender of the stoc) certificate<s representing his shares# (9) 6nrestricted retained earnings in the boo)s of the corporation to cover such payment. ):AT IS T:E EFFECT OF DE0AND FOR PA90ENT IN ACCORDANCE )IT: T:E APPRAISAL RI.:T> 4Sec. 35) All rights accruing to the shares, including voting and dividend rights, are suspended in accordance with the %orporation %ode, e<cept for the right of the 2( to receive payment of the fair value thereof. 2uch suspension shall be from the time of demand until either (!) abandonment of the corporate action involved# or ($) the purchase of the said shares by the corporation. (owever, if said dissenting 2( is not paid the value of his shares within &? days after the award, his voting and dividend rights shall immediately be restored. ):AT ARE T:E DUTIES OF T:E DISSENTIN. STOCH:OLDER IN RELATION TO T:E EDERCISE OF T:E APPRAISAL RI.:T> ;he dissenting 2( must submit the certificates of stoc) representing his shares to the corporation for notation thereon that such shares are dissenting shares within !? days after demanding payment for his shares. Hailure to do so shall, at the option of the corporation, terminate his rights under ;itle N of the %orporation %ode. (Sec. 86)
):AT ARE T:E EFFECTS OF TRANSFER OF T:E CERTIFICATES /EARIN. T:E NOTATION T:AT T:E9 REPRESENT DISSENTIN. S:ARES> "f the certificates are conse=uently cancelled, the rights of the transferor as a dissenting 2( cease and the transferee has all the rights of a regular stoc)holder. All dividend contributions which would have accrued on the shares will be paid to the transferee. (Sec. 86)
A0END0ENTS OF C:ARTER
The charter of a private corporation consists of its articles of incorporation as well as the Corporation Code and such other law under which it is organi(ed.
):AT ARE T:E LI0ITATIONS ON T:E PO)ER TO A0END> .6F.+23 R+;3 (!) must be legitimate $<& of +%2 < membership
;he appraisal right must be recognized in case the amendment has the effect of changing rights of any stoc)holder or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class, or extending or shortening the term of corporate existence. 3xtension of corporate term cannot exceed 9? yrs. in any one instance A copy of the amended articles should be filed with the 23%, and with the proper governmental agencies, as appropriate (e.g., in the case of ban)s, public utilities, etc.) +riginal and amended articles should contain all matters re=uired by law to be set out in said articles. An amendment to increase<decrease capital stoc) as well as to extend<shorten corporate term cannot be made under 2ec. !5, but must be made under 2ec. &-0&,, respectively, both of which re=uire a meeting# and
($) (&)
(4) (9)
(5)
CAN
T:E
SEC
DISAPPROVE
T:E
PROPOSED
;he same grounds as for the disapproval of the original articles ( Sec. 1:) 4ot substantially in accordance with the form prescribed by the %ode# .urpose(s) patently unconstitutional, illegal, immoral, or contrary to government rules and regulations# ;reasurerDs Affidavit concerning amount of capital stoc) subscribed<paid is false# Fe=uired percentage of ownership of capital stoc) to be owned by citizens of the .hils. has not been complied with as re=uired by the %onstitution or existing laws# Absence of a favorable recommendation from the appropriate government agency.
Effecti!it+ of amendment
Amendments ta)e effect only from the approval by the 23%. (owever, such approval or re@ection must be made within six months of filing of amendment# otherwise
it shall ta)e effect even w<o such approval (as of the date of filing), unless cause of delay is attributable to the corporation. (Sec. 16)
Special amendments
C ange in corporate terThe Code allows a corporation not only to extend but also to shorten its term of existence. As in the case of increaseHdecrease of capital stoc#, change must be approved at a members6Hstoc#holders6 meeting by )H0 of the membersHoutstanding capital stoc#.
+,- All issued stoc) of all classes should be held by not more than $?# +)- All issued stoc) shall be sub@ect to one or more specified restrictions on
transfer permitted by law#
+0- %orporation should not be listed in the stoc) exchange or ma)e any public
offering of its stoc). "f any of these are deleted, then the corporation will cease to be a close corporation and will lose the special privileges of such corporations. ;hereafter, it will be governed by the general provisions of the %ode. 2ince such amendment involves a change in the nature of the corporation, even non0voting stoc)s are given a voice in the decision. A stoc)holdersD meeting is re=uired and a $<& vote must approve the amendment, unless otherwise provided by the articles of incorporation.
DISSOLUTION 0o es of Disso(ution
:O) 0A9 A CORPORATION /E DISSOLVED>
+,- Fai(ure to or$aniKe an co##ence business (Sec. 22)# +)- Cessation of business for L &ears (Continuou* inoperation# Sec. 22)# +0- E'piration of ori$ina(; e'ten e ; or s%ortene ter#6
forth all claims and demands against the corporation, and the fact that the dissolution was approved by the 2(s with the re=uisite $<& vote. ($) Fi'in$ of ate b& SEC for fi(in$ of ob7ections to petition "f the petition is sufficient in form and substance, the 23% shall fix a date on or before which ob@ections thereto may be filed by any person. Date8 not less than &? days nor more than 5? days after the entry of the order (&) Pub(ication of or er 1efore the date fixed by the 23%, the 23% order shall be published and posted accordingly. Ne*spaper8 +nce a wee) for & wee)s in a newspaper of general circulation published in the municipality or city where the corporationKs principal office is situated, or there be no such newspaper, in a newspaper of general circulation in the .hilippines Hor & consecutive wee)s in & public places in the city or municipality where the corporationKs principal office is situated
Postin$8
4@5 :earin$ of t%e petition for isso(ution 6pon 9 days notice, given after the date on which the right to file ob@ections to the order has expired, the 23% shall proceed to hear the petition and try any issue made by the ob@ections filed. "f no ob@ection is sufficient, and the material allegations are true, the 23% shall render @udgment dissolving the corporation and directing such disposition of its assets as @ustice re=uires. &ote' T e S3C -ay appoint a receiver to co!!ect *uc a**et* an+ pay t e +e0t* o. t e corporation.
+b- Luo 'arranto proceedings (See Sec. $0, P7 9022A an+ Ru!e 66, Ru!e* o.
Court. Previou*!y, t e S3C a+ e<c!u*ive 5uri*+iction over 4uo ,arranto procee+ing* invo!ving corporation. 8n+er t e Securitie* Regu!ation Co+e or RA 8:99, o,ever, t e 5uri*+iction o. t e S3C over a!! ca*e* enu-erate+ un+er Sec. $ o. P7 9022A ave 0een tran*.erre+ to t e Regiona! Tria! Court*. ;he $roun s for involuntary dissolution of a corporation under 4uo ,arranto proceedings are (!) 'hen the corporation has offended against a provision of an act for its creation or renewal# ($) 'hen it has forfeited its privileges and franchises by non0user# (&) 'hen it has committed or omitted an act which amounts to a surrender of its corporate rights, privileges or franchises# (4) 'hen it misused a right, privilege or franchise conferred upon it by law, or when it has exercised a right, privilege or franchise in contravention of law (P&B v. CI;, 209 SCRA 294# 1992) (4) S%ortenin$ of corporate ter# (Sec. 120) &9T3' T e *i-p!e*t an+ -o*t e<pe+ient ,ay o. e..ecting +i**o!ution i* 0y * ortening t e corporate ter- an+ ,aiting .or *uc terto e<pire.
Effects of Disso(ution
):AT ARE T:E EFFECTS OF DISSOLUTION> %orporation ceases to be a @uridical person and conse=uently can no longer continue transacting its business. %orporate existence continues for & years following dissolution for the ff. purposes only
NOTE that the subse=uent dissolution of a corporation #a& not remove or impair any right or remedy in favor of or against, nor any liability incurred by, any corporation, its stoc)holders, members, directors, trustees or officers. (Sec. 14$)
CLEMENTE V. CA +242 SCRA 717) The termination of the life of a 8uridical entity does not by itself cause the extinction or diminution of the right and liabilities of such entity nor those of its owners and creditors. !f the 0/year extended life has expired without a trustee or receiver having been expressly designated by the corporation itself within that period, the board of directors or trustees itself may be permitted to so continue as EtrusteesE by legal implication to complete the corporate li*uidation. !n the absence of a board of directors or trustees, those having any pecuniary interest in the assets, including not only the shareholders but li#ewise the creditors of the corporation, acting for and in its behalf, might ma#e proper representations with the S%C, which has primary and sufficiently broad 8urisdiction in matters of this nature, for wor#ing out a final settlement of the corporate concerns.
E9ecutor+ contracts
;he prevailing view is that executory contracts are not extinguished by dissolution. 2ec. !49 of the %ode states that "4o right or remedy in favor of or against any corporationV.nor any liability incurredVVshall be removed or impaired either by the subse=uent dissolution of said corp. or by any subse=uent amendment or repeal of this %ode or of any part thereof."
Li3ui ation
):AT IS LI2UIDATION> (Sec. 122) 7i=uidation, or winding up, refers to the collection of all assets of the corporation, payment of all its creditors, and the distribution of the remaining assets, if any, among the stoc)holders thereof in accordance with their contracts, or if there be no special contract, on the basis of their respective interests. ):AT ARE T:E 0ET:ODS OF LI2UIDATIN. A CORPORATION> AND ):O 0A9 UNDERTAHE T:E LI2UIDATION OF A CORPORATION> !. Li3ui ation b& t%e corporation itse(f t%rou$% its boar of irectors Although there is no express provision authorizing this method, neither is there any provision in the %ode prohibiting it. $. Con!e&ance of a(( corporate assets to trustees *%o *i(( take c%ar$e of (i3ui ation. "f this method is used, the &0year limitation will not apply provided the designation of the trustees is made within said period. ;here is no time limit
within which the trustee must finish li=uidation, and he may sue and be sued as such even beyond the &0year period unless the trusteeship is limited in its duration by the deed of trust. (See &atG! A0aca Corp. v. Pore, *upra) &. Li3ui ation is con ucte b& t%e recei!er *%o #a& be appointe SEC upon its ecreein$ t%e isso(ution of t%e corp" b& t%e
As with the previous method, the three0year rule shall not apply. (owever, the mere appointment of a receiver, without anything more, does not result in the dissolution of the corporation nor bar it from the exercise of its corporation rights. FOR :O) LON. 0A9 T:E LI2UIDATION OF A CORPORATION /E UNDERTAHEN> >enerally, a corporation may be continued as a body corporate for the purpose of li=uidation for & years after the time when it would have so dissolved. (Sec. 122) (owever, it was held in the case of C!e-ente v. CA %*upra) that if the &0year period has expired without a trustee or receiver having been expressly designated by the corporation itself within that period, the 1+: itself may be permitted to so continue as "trustees" by legal implication to complete the corporate li=uidation. ):AT CAN AND S:OULD /E DONE DURIN. T:E PERIOD OF LI2UIDATION> 4Sec. 122) 4?5 4,5 4-5 4@5 %ollection of corporate assets and property# %onveyance of all corporate property to trustees for the benefit of 2(s, members, creditors, and other persons in interest# .ayment of corporationKs debts and liabilities# :istribution of assets and property
EDCEPTION8
):AT :APPENS IF AN ASSET CANNOT /E DISTRI/UTED TO T:E PERSON ENTITLED TO IT> Any asset distributable to any creditor or stoc)holder or member who is un)nown or cannot be found shall be escheated to the city or municipality where such assets are located. (Sec. 122)
TAN TIONG BIO V. CIR +<.R. N*. @.15778; Ap)i$ 23, 1962)
The creditor of a dissolved corp. may follow its assets, as in the nature of a trust fund, once they pass into the hands of the stoc#holders. The dissolution of a corp. does not extinguish the debts due or owing to it. An indebtedness of a corp. to the government for income and excess profit taxes is not extinguished by the dissolution of the corp. The hands of government cannot, of course, collect
taxes from a defunct corporation, it loses thereby none of its rights to assess taxes which had been due from the corporation, and to collect them from persons, who by reason of transactions with the corporation hold property against which the tax can be enforced and that the legal death of the corporation no more prevents such action than would the physical death of an individual prevent the government from assessing taxes against him and collecting them from his administrator, who holds the property which the decedent had formerly possessed. Thus, petitioners can be held personally liable for the corporation=s taxes, being successors/in/interest of the defunct corporation.
(&)
(4) (9)
Z ;he p(an of istribution of assets may be adopted by a ma@ority vote of the 1oard of trustees and approval of $<& of the members having voting rights present or represented by proxy at the meeting during which said plan is adopted. "t must be noted that the plan of distribution of assets must not be inconsistent with the provisions of ;itle N" of the %ode.
CORPORATE CO0/INATIONS
+,- /erger (A Q 1 O A) +)- %onsolidation (A Q 1 O %) +0- 2ale of substantially all corporate assets and purchase thereof by another
corporation#
+1- Ac=uisition of all < substantially all of the stoc) of one corporation from its
2(s in exchange for the stoc) of the ac=uiring corporation
;. con*o!i+ation' t e con*o!i+ate+ corporation +e*ignate+ in t e p!an o. Con*o!i+ation. ($) ;he separate existence of the constituent corporations shall cease, except that of the surviving or consolidated corporation. (&) ;he surviving or consolidated corporation shall possess all rights, privileges, immunities and powers and shall be sub@ect to all the duties and liabilities of a corporation organized under the %orporation %ode.
(4) ;he surviving or consolidated corporation shall thereupon and thereafter possess all the rights, privileges, immunities and franchises of each of the constituent corporations# 4L5 All property (rea! or per*ona!) and all receivables due on whatever account (inc!u+ing *u0*cription* to * are* an+ ot er c o*e* in action) , and all and every other interest of, or belong to, or due to each constituent corporation, shall be deemed transferred and vested in such surviving or consolidated corporation *it%out furt%er act or ee " (5) ;he surviving or consolidated corporation shall be responsible and liable for all the liabilities and obligations of each of the constituent corporations in the same manner as if such surviving or consolidated corporation had itself incurred such liabilities or obligations# and any pending claim, action or proceeding brought by or against any of such constituent corporations may be prosecuted by or against the surviving or consolidated corporation. (&ote' T e -erger or con*o!i+ation +oe* not i-pair t e rig t* o. cre+itor* or !ien* upon t e property o. any *uc con*tituent corporation*.)
LO ANO V. DE LOS SANTOS +274 SCRA 452) Consolidation becomes effective not upon mere agreement of the members but only upon issuance of the certificate of consolidation by the S%C. There can be no intra/corporate nor partnership relation between ) 8eepney drivers= and operators= associations whose plans to consolidate into a single common association is still a proposal.
):AT ARE T:E RULES .OVERNIN. 0ER.ER OR CONSOLIDATION INVOLVIN. A FOREI.N CORPORATION LICENSED IN T:E P:ILIPPINES> 4Sec. 152) A foreign corporation authorized to transact business in the .hilippines may merge or consolidate with any domestic corporation if such is permitted under .hilippine law and by the law of its incorporation. ;he re=uirements on merger or consolidation as provided in the %orporation %ode must be complied with. 'henever a foreign corporation authorized to transact business in the .hilippines is a party to a merger or consolidation in its home country or state, such foreign corporation shall file a copy of the articles or merger or consolidation with the 23% and the appropriate government agencies within 5? days after such merger or consolidation becomes effective. 2uch copy of the articles must be duly authenticated by the proper officials of the country or state under the laws of which merger or consolidation was effected. "f the absorbed corporation in such a merger < consolidation happens to be the foreign corporation doing business in the .hilippines, it shall file a petition for withdrawal of its license in accordance with 2ec. !&5.
):AT ARE T:E RE2UIRE0ENTS> 4Sec. '0) (!) /a@ority vote of 1+: Q $<& vote of +%2 or members at a meeting duly called for the purpose# ($) %ompliance with the laws on illegal combinations and monopolies &ote, however, that after such approval by the 2(s, the 1+: may nevertheless, in its discretion, abandon such sale or other disposition without further action or approval by the 2(s. ;his, of course, is sub@ect to the rights of third parties under any contract relating thereto.
+,- "f the disposition is necessary in the usual and regular course of business# or +)- "f the proceeds of the disposition be appropriated for the conduct of its
remaining business (2ec. 4?) IS T:E APPRAISAL RI.:T AVAILA/LE TO DISSENTIN. STOCH:OLDERS> Pes. (owever, it must be stressed that this right is generally available only to dissenting stoc)holders of the se((in$ corporation, not the purchasing corporation. (;t can 0e argue+, t oug , t at in in*tance* , erein t e purc a*e con*titute* an inve*t-ent in a purpo*e ot er t an it* pri-ary purpo*e, *toc) o!+er*G approva! o. *uc inve*t-ent i* nece**ary, an+ anyone , o o05ect* t ereto ,i!! ave t e apprai*a! rig t un+er Sec. 42. )
E'c%an$e of stocks
"n this method, all or substantially all the stoc)holders of the "ac=uired" corporation are made stoc)holders of the ac=uiring corporation. 'ith the exchange, the ac=uired corporation becomes a subsidiary of the ac=uiring corporation. Although this method does not combine the $ businesses under a single corporation as in merger and sale of assets, from the point of view of the ac=uiring (parent) corporation, there is hardly any difference between owing the ac=uired corporationKs business directly and operating it through a controlled subsidiary. "n fact, the parent
corporation would have the power to buy all the subsidiaryKs assets and dissolve it, achieving the same result as in the other methods of combination. (Ca-po* A Ca-po*)
FOREI.N CORPORATIONS
):AT IS A FOREI.N CORPORATION> %Sec. 12") A corporation formed and organized under laws other than those of the .hilippines, regardless of the citizenship of the incorporators and stoc)holders. 2uch corporation must have been organized and must operate in a country which allows Hilipino citizens and corporations to do business there. ;n ti-e* o. ,ar' Ior purpo*e* o. *ecurity o. t e *tate, t e citiKen* ip o. t e contro!!ing *toc) o!+er* +eter-ine* t e corporation/* nationa!ity.
IN ):AT )A9S CAN A FOREI.N CORPORATION DO /USINESS IN T:E P:ILS"> (!) 'holly0owned subsidiary# or ($) 1ranch office# or (&) Soint venture with a local partner.
&ote' Retai! tra+e i* no !onger re4uire+ to 0e 100D Ii!ipino2o,ne+ on account o. t e Retai! Tra+e 6i0era!iKation Act. CLN-,LN E2UIT98 "nter0island shipping (R.A. 19":, Sec. 8)
.rivate recruitment %ontracts for construction and repair of locally0funded public wor)s 3<cept' Pu0!ic ,or)* t at ,ou!+ .a!! un+er t e Bui!+2 9perate2Tran*.er 6a,, a* ,e!! a* t o*e t at are .oreign2.un+e+ CMN--MN E2UIT98 AMN-@MN E2UIT98 Advertising +ther industries.
):AT IS T:E SO-CALLED O.RANDFAT:ER RULEO> 'here a domestic corporation which has both .hilippine and foreign stoc)holders is an investor in another domestic corporation which has also both .hilippine and foreign stoc)holders, the so0called "grandfather rule" is used to determine whether or not the latter corporation is =ualified to engage in a partially nationalized business, i.e. by determining the extent of .hilippine e=uity therein. 6nder present 23% rules, if the percentage of Hilipino ownership in the first corporation is at least 5?G, then said corporation will be considered as a .hilippine national and all of its investment in the second corporation would be treated as Hilipino e=uity. +n the other hand, if the .hilippine e=uity in the first corporation is less than 5?G, then only the number of shares corresponding to such percentage shall be counted as of .hilippine nationality. (See S3C Ru!e pro-u!gate+ on 28 Ie0. 196:, cite+ in 9pinion M 18, Serie* o. 1989, 7epart-ent o. (u*tice, +ate+ 19 (anuary 1989.) /"0E$ T e rea+er ,ou!+ 0e ,e!!2a+vi*e+ to cro**2re.erence t i* +e.inition o. t e =gran+.at er ru!e= ,it a tru*te+ co--entary.
Additional information as may be necessary or appropriate to enable the 23% to determine whether the corporation is entitled to a license to transact business in the .hilippines, and to determine and assess the fees payable# :uly executed certificate under oath by authorized official<s of the @urisdiction of the companyKs incorporation, attesting to the fact that the laws of the country of the applicant allow Hilipino citizens and corporations to do business therein, and that the applicant is an existing corporation in good standing# 2tatement under oath of the president or any other person authorized by the corporation showing that the applicant is solvent and in good financial condition, and setting forth the assets and liabilities of the corporation within ! year immediately prior to the application.
4-5 Certificate fro# appropriate $o!ern#ent a$enc& &9T3' Certain *ector* *uc a* 0an)ing, in*urance, etc. re4uire prior approva! .ro- t e govern-ent agencie* concerne+. %Sec. 1:)
+nce the licensee ceases to do business in the .hilippines, these deposited securities shall be returned, upon the licenseeKs application and proof to the satisfaction of the 23% that the licensee has no liability to .hilippine residents or the .hilippine government. &ote' Ioreign 0an)ing an+ in*urance corporation* are t e e<ception* to t i* re4uire-ent.
Effects of License
Fai(ure
to
Secure
SEC
+,- ;he corporation will not be permitted to maintain agency in the .hilippines# +)- ;he corporation will be sub@ect to penalties and fines# +0- ;he corporation will not be permitted to maintain or intervene in any action before
.hilippine courts or administrative agencies# it can be 263:.
#solated transactions
ATLANTIC MUTUAL V. CEBU STEVEDORING +<.R. N*. 18961; A40. 31, 1966)
A foreign corp. engaged in business in the 9hil. can maintain suit in this 8urisdiction if it is duly licensed. !f a foreign corp. is not engaged in business in the 9hil., it can maintain such suit if the transaction sued upon is singular and isolated, in which no license is re*uired. !n either case, the fact of compliance with the re*uirement of license, or the fact that the suing corp. is exempt therefrom, as the case may be, cannot be inferred from the mere fact that the party suing is a foreign corp. The *ualifying circumstance, being an essential part of the element of the plaintiff6s capacity to sue, must be affirmatively pleaded. !n short, facts showing foreign corporation6s capacity to sue should be pleaded.
Curing of defect
.ublication of a general advertisement# &9T3' 8n+er t e Co+e o. Co--erce, t e pu0!ication o. an a+ i* pri-a .acie evi+ence %or at !ea*t create* a pre*u-ption) o. +oing 0u*ine** in t e P i!ippine*.
/aintaining stoc) of goods for processing by another entity in the .hilippines# %onsignment of e=uipment to be used in processing products for export# %ollecting information in the .hilippines# .erforming services incidental to an isolated contract of sale 3<a-p!e' ;n*ta!!ing -ac inery *o!+ 0y a .oreign corporation to a P i!ippine 0uyer
):AT IS T:E TEST OF DOIN. /USINESS IN T:E P:ILIPPINES> 'hether or not there is continuity of transactions which are in pursuance of the normal business of the corporation. (/etholatum v. /angaliman)
F:C had appointed ;aime Catuira as its agent with authority to execute %mployment Contracts and receive, on behalf of the corp., legal services from, and be bound by processes of the 9hil. Courts, for as long as he remains an employee of F:S. !f a foreign corp. not engaged in business in the 9hil., through an Agent, is not barred from see#ing redress from courts in the 9hil., that same corp. cannot claim exemption done against a person or persons in the 9hil..
NOTE8 6nder Sec" ?,; Ru(e ?@ of t%e ?JJC Ru(es of Ci!i( Proce ure , the term "doing business" has been replaced with the phrase " %as transacte business;O thereby allowing suits based on isolated transactions.
&egal capacity to sue may be understood in two senses: +,- That the plaintiff is prohibited or otherwise incapacitated by law to institute suit in the 9hil. Courts, or +)- although not otherwise incapacitated in the sense 8ust stated, that it is not a real party in interest. The Court finds that the &aras were transacting with :&F fully aware of its lac# of license to do business in the 9hils., and in relation to those transactions had made payments and the spouses are estopped to impugn :&F=s capacity to sue them. The rule is that a party is estopped to challenge the personality of a corp after having ac#nowledged the same by entering into a contract with it. The principle is applied to prevent a person contracting with a foreign corporation from later ta#ing advantage of its noncompliance with the statutes, chiefly in cases where such person has received the benefits of the contract.
PACIFIC VEGETABLE OIL V. SINGSON +<.R. N*. 7917; Ap)i$ 29, 1955)
This is an action instituted by the plaintiff, a foreign corporation, against the defendant to recover a sum of money for damages suffered by the plaintiff as a conse*uence of the failure of the defendant to deliver copra which he sold and bound himself to deliver to the plaintiff. 'efendant filed a motion to dismiss on the ground that the plaintiff failed to obtain a license to transact business in the 9hil and, conse*uently, it had no personality to file an action. F!( !ppe$$!"t t)!"(!cte6 ,4(i"e(( i" the #hi$ippi"e( i" c*"temp$!ti*" *3 $!/7 Contrary to the findings of the trial court, the copra in *uestion was actually sold by the defendant to the plaintiff in the <S, the agreed price to be covered by an irrevocable letter of credit to be opened at the an# of California, and delivery to be made at the port of destination. !t follows that the appellant corporation has not transacted business in the 9hil in contemplation of Sec. A> and AC which re*uire any foreign corporation to obtain a license before it could transact business, or before it could have personality to file a suit in the 9hil.. !t was never the purpose of the &egislature to exclude a foreign corporation which happens to obtain an isolated order of business from the 9hil., from securing redress in the 9hil. Courts, and thus, in effect, to permit persons to avoid their contracts made with such foreign corp.. The lower court erred in holding that the appellant corporation has no personality to maintain the present action.
AETNA CASUALTY & SURETY CO. VS. PACIFIC STAR LINE +80 SCRA 635; 1977)
Aetna as subrogee of !. Shalom sued 9acific Star &ine +9S&-, the common carrier for the loss of &inen M Cotton piece goods due to pilferage and damage amounting to <SP),0GG.GG. 9S& contends that Aetna has no license to transact insurance business in the 9hilippines as gathered from the !nsurance Commission and S%C . !t also argues that since said company has filed ,0 other civil suits, they should be considered as doing business here and not merely having entered into an isolated transaction.
ased on rulings in :entholatum and %astboard 4avigation, the Supreme Court held that Aetna is not transacting business in the 9hilippines for which it needs to have a license. The contract was entered into in 4ew @or# and payment was made to the consignee in the 4ew @or# branch. :oreover, Aetna was not engaged in the business of insurance in the 9hilippines but was merely collecting a claim assigned to it by consignee. ecause it was not doing business in the 9hilippines, it was not sub8ect to Sec. A>/AC of the Corporation &aw and therefore was not barred from filing the instant case although it had not secured a license to transact insurance business in the 9hilippines.
As a rule, @urisdiction over a foreign corporation is ac=uired by the courts through service of summons on its resident agent. "f there is no assigned resident agent, the government official designated by law can receive the summons on their behalf and transmit the same to them by registered mail within !? days. ;his will complete the service of the summons. 2ummons can also be served on any of the corporationKs officers or agents within the .hilippines. %See Sec. 128# Ru!e 14, Sec. 12, Ru!e* o. Court. &ote t at , i!e Sec. 128 pre*uppo*e* t at t e .oreign corporation a* a !icen*e, Ru!e 14 +oe* not -a)e *uc an a**u-ption.) 4ote that if there is a designated agent, summons served upon the government official is not deemed a valid process. Sohnlo ;rading case holds that the service on the attorney of an H% who was also charged with the duty of settling claims against it is valid since no other agent was duly appointed. 2ervice on +fficers or Agents of an foreign corporationDs domestic subsidiary will only vest @urisdiction if there is sufficient ground to disregard the separate personalities.
GENERAL CORPORATION OF THE PHILIPPINES VS UNION INSURANCE +87 #hi$. 313; 1950) Beneral Corporation and :ayon investment sued <nion !nsurance and Firemen6s Fund !nsurance +FF!- for the payment of ,) marine insurance policies. The summons was served on <nion which was then acting as FF!6s settling agent in the country. At that time, it was not yet registered and authori(ed to transact business in the 9hilippines.
'((4e? %i6 the t)i!$ c*4)t !c94i)e +!$i6 54)i(6icti*" *+e) FF'7 @es. The service of summons for FF! on its settling agent was legal and gave the court 8urisdiction upon FF!. Section ,1, "ule ? of ".C embraces <nion in the phrase, Kor agents within the 9hilippinesL. The law does not ma#e distinctions as to corporations with or without authority to do business in the 9hilippines. The test is whether a foreign corporation was actually doing business here. .therwise, a foreign corporation doing business illegally because of its refusal or neglect to obtain the corresponding authority to do business may successfully though unfairly plead such neglect or illegal act so as to avoid service and thereby impugn the 8urisdiction of the courts.
(!) All claims which have accrued in the .hilippines have been paid, compromised and settled# ($) All taxes, imposts, assessments, and penalties, if any, lawfully due to the .hilippine >overnment or any of its agencies or political subdivisions have been paid# and (&) ;he petition for withdrawal of license has been published once a wee) for & consecutive wee)s in a newspaper of general circulation in the .hilippines.
%Sec. 1"4)
'(A; AF3 ;(3 >F+64:2 H+F F3R+%A;"+4 +F 262.342"+4 +H A 7"%3423 +H A H+F3">4 %+F.+FA;"+4Y (!) ($) (&) (4) Hailure to file its annual report or pay any fees as re=uired by the %orporation %ode# Hailure to appoint and maintain a resident agent in the .hilippines as re=uired# Hailure, after change of resident agent or of his address, to submit to the 23% a statement of such change# Hailure to submit to the 23% an authenticated copy of any amendment to its A+" or by0laws or of any articles of merger or consolidation within the time prescribed by the %ode# A misrepresentation of any material matter in any application, report, affidavit or other document submitted by such corporation pursuant to ;itle NR# Hailure to pay any and all taxes, imposts, assessments or penalties, if any, lawfully due to the .hilippine government or any of its agencies or political subdivisions# ;ransacting business in the .hilippines outside of the purpose<s for which such corporation is authorized under its license# ;ransacting business in the .hilippine as agent of or acting for and in behalf of any foreign corporation or entity not duly licensed to do business in the .hilippines# or Any other ground as would render it unfit to transact business in the .hilippines.
(9)
(5)
(-) (,)
(8)
3ducational corporations other than government0run institutions are governed first by special laws, second, by the special provisions of the %orporation %ode, and lastly, by the general provisions of the %orporation %ode. (Sec. 106) At least 5?G of the authorized capital stoc) of educational corporations must be owned by Hilipino citizens, and %ongress may re=uire increased Hilipino e=uity participation therein. (1it t e e<ception o. e+ucationa! in*titution* e*ta0!i* e+ 0y re!igiou* group* an+ -i**ion 0oar+*, , ic are not *u05ect to t i* e4uity re4uire-ent.) (owever, control and administration of educational institutions must be vested exclusively in citizens of the .hilippines. (Art. B;?, Sec. 4 %2), 198: Con*titution) ;his means that no alien may be elected as a member of the 1+: nor appointed as .rincipal or officer thereof. +nce a school, college or university has been granted government recognition by the :3%2, it must incorporate within 8? days from the date of such recognition, unless it is expressly exempt by :3%2 for special reasons. (Act 2:06, Sec. $) "n addition, it must file a copy of its A+" and by0laws with the :3%2. 'ithout the favorable recommendation of the :3%2 2ecretary, the 23% will not accept or approve such articles. (Sec. 10:, Corporation Co+e)
Re(i$ious corporations
+Sec. 109.116)
Feligious corporations are governed by ;itle N""", %hapter "" of the %orporation %ode and by the general provisions of the %ode on non0stoc) corporations insofar as they may be applicable. (Sec. 109)
C(ose Corporations
%Sec. 96210$)
):AT ARE T:E RE2UISITES OF A CLOSE CORPORATION> (Sec. 96) A close corporation, within the meaning of the %orporation %ode, is one whose articles of incorporation provide that (!) All the corporationKs issued stoc) of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons not exceeding $?# ($) All the issued stoc) of all classes shall be sub@ect to one or more specified restrictions on transfer permitted by ;itle N"" of the %ode# and (&) ;he corporation shall not list in any stoc) exchange or ma)e any public offering of any of its stoc) of any class. &ote*' A narrow distribution of ownership does not, by itself, ma)e a close corporation. (San (uan Structura! an+ Stee! Ia0ricator* v. CA, 296 SCRA 6"1) A corporation shall not be deemed a close corporation when at least $<& of its voting stoc) or voting rights is owned or controlled by another corporation which is not a close corporation.
CAN A CORPORATION T:AT IS NOT A CLOSE CORPORATION /E A STOCH:OLDER IN A CLOSE CORPORATION> P32, provided that said corporation owns less than $<& of voting stoc) or voting rights. ):AT ENTITIES 0A9 NOT /E OR.ANI1ED AS CLOSE CORPORATIONS> 4 Sec. 96) /ining +il 2toc) 3xchange 1an) "nsurance .ublic 6tilities 3ducational "nstitutions %orporations declared vested with public interest
DISTIN.UIS: CLOSE CORPORATIONS FRO0 RE.ULAR CORPORATIONS" C(ose Corporation No" of stock%o( ers 0ana$e#ent 0eetin$s 2uoru# an Votin$ Pre-e#pti!e ri$%t /u&-back of s%ares Reso(ution of ea (ocks 4ot more than $? (Sec. 96) %an be managed by the stoc)holders (Sec. 9:) ORe$u(arO Corporation 4o limit /anaged by 1oard of :irectors
/ay be dispensed with (Sec. 101) Actual meetings are re=uired. >reater =uorum and voting re=uirements allowed. (Sec. 9:) 3xtends to all stoc), including:oes not extend to treasury treasury shares (Sec. 102) shares. /ust be M par value (Sec. 10$) 23% has the power to arbitrate disputes in case of deadloc)s, upon written petition by any stoc)holder. (Sec. 104) ;his includes the power to appoint a provisional director, as well as to dissolve the corporation. /ay be petitioned by any>enerally re=uires a $<& vote of stoc)holder whenever any of thethe stoc)holders and a ma@ority acts of the directors or officers orvote of the 1+:. those in control of the corporation is illegal, fraudulent, dishonest,(&ote o,ever t at in ca*e o. oppressive or unfairly pre@udicial toinvo!untary +i**o!ution un+er the corporation or any stoc)holder,Sec. 121, a corporation -ay 0e or whenever corporate assets are+i**o!ve+ 0y t e S3C upon being misapplied or wasted. (Sec. .i!ing o. a veri.ie+ co-p!aint 10$) an+ a.ter proper notice an+ earing.) /ay be [ par value
Disso(ution
):AT IS A PROVISIONAL DIRECTOR> 4Sec. 10') A provisional director is an impartial person who is neither a stoc)holder nor a creditor of the corporation or of any subsidiary or affiliate of the corporation, and whose =ualifications, if any, may be determined by the 23%. (e is not a receiver of the corporation and does not have the title and powers of a custodian or receiver. (owever, he has all the rights and powers of a duly0elected director of the corporation, including the right to notice of and to vote at meetings of directors, until such time as he shall be removed by order of the 23% or by all the stoc)holders. (Sec. 104) CO0PARE APPRAISAL RI.:T AND )IT:DRA)AL RI.:T IN CLOSE CORPORATIONS" 4Sec. 107)
)it% ra*a( Ri$%t ;ype of involved corporation %lose corporation Hor any reason (Sec. 10$)
Appraisa( Ri$%t "Fegular" corporation +nly the grounds enumerated in 2ec. ,! and 2ec. 4$ /ay be [ par or issued value
'hen availed of
0isce((aneous Pro!isions
+Sec. 137.149)
;he 23% has the power to issue rules and regulations reasonably necessary to enable it to perform its duties under the %ode, particularly in the prevention of fraud and abuses on the part of the controlling stoc)holders, members, directors, trustees or officers. (Sec. 14") 'henever the 23% conducts any examination of the operations, boo)s and records of any corporation, the results thereof must be )ept strictly confidential, unless the law re=uires them to be made public or where they are necessary evidence before any court. (Sec. 142) All domestic and foreign corporations doing business in the .hilippines must submit an annual report to the 23% of its operations, with a financial statement of its assets and liabilities and such other re=uirements as the 23% may impose. (Sec. 141) 4o right or remedy in favor of or against, nor any liability incurred by, any corporation, its stoc)holders, members, directors, trustees or officers, may be removed or impaired by the subse=uent dissolution of said corporation or by any subse=uent amendment or repeal of the %ode. (Sec. 14$) Riolations of the %orporation %ode not otherwise specifically penalized therein are punishable by a fine of not less than . !,???.?? but not more than . !?,???.?? or by imprisonment for not less than &? days but not more than 9 years, or both, in the discretion of the court. "f the violation is committed by a corporation, the same may be dissolved in appropriate proceedings before the 23%. (Sec. 144)