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The first commercial law, the Corporation Law (Act 1459) was - a corporation has the right of succession which means
enacted in April 1, 1906. Prior to that, there were no corporations in that the corporation may still continue as a going
the Philippines. What we had were partnerships and sociedad concern even if a stockholder transfer his shares, dies,
anonima, a Spanish form of partnership. These were formed by etc. On the other hand, any change in the partners
contract. With the enactment of the corporation law on 1906, would dissolve the partnership.
Congress applied the American concept of corporation in the
Philippines. d. As to transferability of interest
On May 1, 1980, the Congress enacted the Corporation Code (BP - the stockholders can transfer their shares without the
68). Basically, the Corporation Code contains almost the same consent of the others unless they agree to the contrary.
provisions as the Corporation Law, with certain additions. In a partnership, if you sell your interest you need the
consent of all of the other partners.
A corporation is an artificial being created by operation of law,
having the right of succession and the powers, attributes and e. As to governing law
properties expressly authorized by law or incident to its existence.
- partnerships are governed by the Civil Code while
The corporation that is defined in the Corporation Code, pertains corporations are governed by the Corporation Code.
clearly to private corporations. These corporations are corporations
that are organized under the Corporation Code. Those that are not f. As to management
organized under the Code are created and governed by special
laws. - all the partners have the right to manage the partnership
and bind the corporation. A stockholder cannot bind the
What kind of business organization would you advise your client to corporation. The corporation acts through its directors
enter into? It depends. for it to become liable.
Each type has its own advantages. In a sole proprietorship, you, It is harder to make and conduct a corporation since you need the
as the owner, control your own business. The disadvantage would consent of the State and it is more costly in filing. You also need to
be limited capital since there is only one of you. Also, the sole pay taxes for the issuance of each share. But it also has the
proprietor has no separate personality, so whatever liability incurred principle of limited liability of shareholders.
by the business is the personal liability of the owner.
ATTRIBUTES OF A CORPORATION
A partnership and a corporation are similar, in the sense that
they have separate personalities, separate from the persons making 1. It is a juridical entity having a separate and
up the organization. distinct personality from its stockholders
2. It is created by operation of law
They are different from each other. As to the manner of creation, a 3. Right to succession
partnership is created by mere consent because it is a contract 4. It has powers or attributes conferred by law or
between the partners. So the moment the partners agree, there is incident to its existence
already a juridical personality. Corporations are also created by
contracts, but it is not the contract among the stockholders, but a IT IS JURIDICAL ENTITY HAVING A SEPARATE AND
contract between the stockholders and the state. It cannot be DISTINCT PERSONALITY FROM ITS STOCKHOLDERS.
created by mere agreement by the shareholders because it needs
consent from the government. While the stockholders compose the corporation, they are not the
corporation. Whatever is the liability of the corporation cannot be
A corporation has to be created with the consent of the State the liability of the stockholders and vice versa.
through the SEC by issuing the certificate of incorporation. The
certificate of incorporation will now be the primary franchise of However, this legal fiction cannot be used to perpetrate fraud. If
the corporation, basically the birth certificate of the corporation. you do, then the court will have to pierce the veil of corporate
The agreement between the State and the corporation will be personality.
embodied in the Articles of Incorporation and the by-laws, also
known as your Charter documents. Piercing the veil of corporate personality
The stockholders can be held liable for the obligations of the
Partnership v. Corporation corporation.
a. As to creation The general rule is that there can be no piercing the veil of
corporate personality due to the principle that the corporation and
- partnership is created by mere consent while the the stockholders are different from one another.
corporation requires the consent of the State.
If all these requisites are present, then the Courts are authorized to
b. As to liability pierce the veil of corporate personality:
- in a partnership, one of the partners must be a
general partner whose liability will be beyond his 1. There must be control, not just control of the stock, but
contribution to the partnership. Stockholders have complete dominion, not just of the finances but also of its
limited liability, only liable up to the extent of their policy and business practice with respect to the
capital contribution. transaction attacked and must have been such that the
corporate entity as to this transaction had at the time no
separate mind, will or existence of its own. It is not the
corporation that is acting but the stockholders through
the corporation.
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COMMERCIAL LAW | Atty. Karen Gaviola | Batch Invictus | I am the master of my fate: I am the captain of my soul.
Halley vs. Printwell, Inc. Even if there is a change, death, transfer of interest by a
stockholder, the corporation will continue for its full term which is
Facts: normally 50 years subject to renewal.
Halley was one of the stockholders of Business Media Philippines, b. It has the powers and attributes conferred by law
Inc. (BMPI) which was engaged in the sale of magazines and or incident to its existence.
brochures. BMPI engaged Printwell for the printing of its brochures
which is later sold to its customers but BMPI failed to pay its The powers of the corporation under the Corporation Code are
obligations to Printwell. Printwell sued BMPI for payment. When those which are expressly provided under the law and those which
they examined the financials of BMPI, it found that BMPI had no are implied based on the purpose of the corporation. The Articles of
assets and that its stockholders had not fully paid their subscription. Incorporation will contain the primary and secondary purpose of
the corporation which are considered its express powers.
For example, they subscribed P800,000 in capital but they only paid
around P180,000. There was an unpaid subscription amounting to Anything that is not there but is related to those purposes will be
P620,000. Now, Printwell amended its complaint to include the considered as an implied purpose, and that is within the authority
stockholders of BMPI to the extent of their unpaid capital of the corporation.
contribution. The stockholders of BMPI interposed the defense that
they cannot be held liable for the corporation’s liabilities because But be careful when you draft an Articles of Incorporation. Usually
the corporation has a separate and distinct personality from the you can put under the secondary purpose all the powers that you
stockholders. can think of, especially those which are listed in the Corporation
Code and one of those powers is to own, sell or possess real estate,
Ruling: but the BIR has ruled that if that purpose is in your secondary
purpose you will be considered as a real estate company.
The Supreme Court said the argument is incorrect. Although a
corporation has a separate and distinct personality from its If you are a real estate company that means that if you sell real
stockholders, directors, or officers, such separate and distinct estate that is considered as an ordinary asset subject to VAT and
personality is merely a fiction created by law. The corporate 30% income tax. That is one of the rulings of the BIR during the
personality may be disregarded, and the individuals composing the time of Henares. So for example you are a merchandising company,
corporation will be treated as individuals, if the corporate entity is you are selling goods, but in your secondary purpose you say there
being used as a cloak or cover for fraud or illegality; as a that you have the power to sell real estate which is basically a
justification for a wrong; as an alter ego, an adjunct, or a business necessary power, you can be considered as real estate company. So
conduit for the sole benefit of the stockholders. your real estate can never be converted into capital asset even if it
is already idle or not in use and you will be liable for VAT and
Although in the complaint it cannot be seen that the stockholders ordinary income tax if you sell that property.
did anything wrong, or that they were trying to perpetrate a fraud
against Printwell, it was found that at the time they contracted with So there are implications on the purposes that you put in your
Printwell, Halley and the other stockholders were the officers of the Articles of Incorporation. So now we have to careful, you cannot
corporation in charge of its operations. They approved the just put in there whatever you want, you have to be very specific.
transaction with Printwell and benefited from it. Thus, the Supreme So the powers of a corporation are determined by the purpose as
Court said that Printwell can go after the unpaid subscription of the stated in its Articles.
stockholders. But up to what extent?
CLASSES OF CORPORATION
In this case, there was an unpaid subscription of P620,000 and their
liability to Printwell was around P200,000. The lower court said that Stock v. Non-stock
it should be pro-rated among the stockholders, but the Supreme
Court said that it must not be pro-rated because of the Trust Fund 1. Stock corporation - the capital is divided into shares, and
Doctrine. Each stockholder is solidarily liable to the extent of their it incorporated for the purpose of profit and distributing
unpaid contributions. such profit to its stockholders
The Trust Fund Doctrine provides that all assets of the 2. Non-stock corporation – all other corporations which are
corporation are reserved for the benefit of its creditors. The not classified as a stock corporation. It is one where no
obligation of each stockholder is a receivable of the corporation and part of its income is distributable as dividends to its
is part of its assets. members, trustees, officers subject to the provisions of
the Corporation Code on dissolution.
According to the Supreme Court, there is no legal basis to pro-rate
because each stockholder is liable to the full extent of his unpaid They are not for the purpose of distributing profit, so they
capital and not just pro-rata. are not allowed to distribute profits to their members.
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COMMERCIAL LAW | Atty. Karen Gaviola | Batch Invictus | I am the master of my fate: I am the captain of my soul.
As to organizers and governing law Seventh Day Adventist Conference Church of Southern Phil.
v. Northeastern Mindanao Mission of Seventh Day
1. Public corporation - created by the State through special Adventist, Inc.
laws like GSIS, PAG-IBIG, HDMF, or by the Local
Government Code for the local government units Facts:
2. Private corporation - created by private persons under the There was this couple who donated their property to Seventh Day
provisions of the Corporation Code Adventist Church in Bayugan. Later on they sold the property to
another Seventh Day Adventist Church in Northern Mindanao. A title
As to functions was issued under the name of the church in Northern Mindanao but
the donee (Bayugan) contested alleging the prior donation.
1. Public corporation - government purposes and
Ruling:
2. Private corporation - profit-making purposes
Supreme Court said that in order for there to be considered as an
As to place of organization under the Code attempt in good faith to incorporate, there must be a filing of
Articles on Incorporation with the SEC and the actual issuance of
1. Domestic corporation - any corporation organized under the Certificate of Incorporation by the SEC. It must be actually
the Philippine laws incorporated.
2. Foreign corporation - any corporation organized under Here the Court said that in order to have a valid donation there has
laws other than Philippine law to be a donee. But it was proven that the Seventh day adventist of
Bayugan never secured their Certificate of Incorporation from the
As to nationality of the corporation SEC. Bayugan was saying that even if there was no Certificate, they
are considered as a de facto corporation because there was really
1. Philippine National - owned by Filipinos. The stockholders an attempt in good faith to incorporate but the Supreme Court said
are Filipino citizens. A Philippine national corporation can no, you are not a de facto corporation because you are lacking one
be domestic or foreign. element. An attempt in good faith is only existing is there is filling
AND there is issuance of the Certificate of Incorporation by the SEC.
2. Non-Philippine National - if up to more than 40% of its And since Bayugan Church cannot be considered as a de facto
outstanding capital stock is owned and held by foreigners. corporation, it cannot be considered an existing corporation
because it has no legal personality, hence, cannot be a donee.
When we talk of a domestic corporation, we are not talking about
the nationality; we are only talking about the situs of incorporation. Corporate existence
When we talk about the nationality, we say it is a Philippine or non-
Philippine national. Begins only from the moment the certificate of incorporation is
issued by the SEC and no such certificate is issued to the petitioner
As to relationship between the corporations and they do not possess any juridical personality and as such they
had no personality to accept the donation.
1. Parent corporation – or a holding company, is that
corporation which owns or controls the stock of another OTHER CLASSIFICATIONS OF CORPORATIONS
corporation.
Corporation by estoppel
2. Subsidiary corporation - a corporation whose stocks are A group of persons hold themselves out to the public as a
owned or controlled by another corporation corporation and enters into contracts with third persons cannot later
on be permitted to say that they are not a corporation. Purely for
3. Affiliate corporation - those corporations that are under the protection of third persons who contract with this kind of
common control corporation.
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COMMERCIAL LAW | Atty. Karen Gaviola | Batch Invictus | I am the master of my fate: I am the captain of my soul.
General rule: Doctrine of Equality of Shares 3. Participating shares – those which after they get their
Based on Section 6 of the Corporation Code share of the dividends, they still participate in the sharing
of dividends of the common stockholders.
Each share of stock shall be equal in all respects to every
other share. In the example, if the declaration is P500, the preferred
stockholders got their P50, there is now P450 to be
If the Article of Incorporation provides for common and preferred distributed supposedly among the common stockholders.
shares, as a general rule, each of these types of shares shall have If you are holding participating preferred shares, you also
the same qualities. They will have the same rights and obligations, get to participate in the P450 on top of the P50 preferred
except if the Articles provide otherwise. If the Articles are dividend.
silent, even if shares are classified as common and preferred, class
A-Z, series 1-100, but the qualities of each type of share are not 4. Non - participating shares - Once you get your
indicated, they are presumed to have the same rights and preferred shares, that’s it. In the example, the P450 now
obligations. belongs to the commons stockholders.
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COMMERCIAL LAW | Atty. Karen Gaviola | Batch Invictus | I am the master of my fate: I am the captain of my soul.
No value stated in the Articles of Incorporation. When they are REDEEMABLE SHARES
issued, they are deemed fully paid. There is no such thing as an
unpaid subscription if you have no par value shares. Shares which may be issued as provided in the articles of
incorporation. These may be purchased or taken up by the
Under Section 6 of the Corporation Code, when you are issuing no corporation upon the expiration of a fixed period regardless of the
par value shares, they are deemed fully paid and non-assessable. existence of the unrestricted retained earnings in the books of the
So the holder of the shares shall not be liable to the corporation or corporation and upon such other conditions as may be stated in the
to the creditors of the corporation in respect of the value of the articles
shares because these are deemed fully paid.
As a general rule, is a corporation allowed to purchase its
But in Par value shares you can have paid and unpaid portion. own shares even if the corporation don’t have redeemable
shares?
Example: Allowed, provided it has sufficient unrestricted retained earnings
You are buying 10 shares at 5 pesos each = 50 pesos
Paid in = 25 pesos Why would anyone want to put redeemable shares in their
Unpaid = 25 pesos articles when the corporation is allowed to purchase shares
anyway, and it becomes treasury shares?
But if you are buying no par value shares, you are considered to Because if you are buying redeemable shares, you don’t need to
have paid the subscription in full. No unpaid subscription. have unrestricted retained earnings, you can buy anytime, provided,
the terms and conditions of the redemption should be provided in
SHARES BASED ON VOTING RIGHTS the articles.
This is important in terms of nationalized companies.
When you are purchasing ordinary shares, it’s allowed but
Voting shares is always subject to the condition that the corporation
Entitle the holders to vote in the election of directors should have a sufficient retained earnings. If you don’t
want to go through that condition because you want the
Non-voting shares buy-back to be a sure thing, then you need to put a
Does not entitle the holders to vote except for those instances redeemable share as one of the classification of your shares
provided by law. Only preferred or redeemable shares may be in your articles. Why?
deprived of their voting rights Because having a redeemable shares will give the corporation the
right to redeem the shares even if it does not have sufficient
Scenario: A client wanted to incorporate in the Philippines unrestricted retained earnings.
but they wanted to own land. We advised them that they
cannot own land unless they are a 60-40 company. If all are Regardless of the availability of UNRESTRICTED RETAINED
common/voting shares, is it possible to classify the 40% EARNINGS, the corporation has the right to buy back the
common shares (foreign owned) as class A with 2 votes per redeemable shares. That is the difference between a REDEEMABLE
share and the other 60% (Filipino owned) as class B with 1 SHARE and a TREASURY SHARE.
vote per share?
Not allowed. Voting privilege is always determined by the number of CONVERTIBLE SHARES
shares subscribed or 1 share: 1 vote
These are shares that are convertible or changeable by the
Instances wherein non-voting shares are allowed to vote: stockholders from a one class to another class for a certain price
and within a certain time.
Gamboa v. Teves (MR)
The Philippines does not have totally non-voting shares because Convertible Preferred Shares
even the non-voting shares are required to vote in these substantial Shares that are preferred but they can be converted to COMMON
matters. SHARES. That is permissible under the law BUT you have to provide
1. Amendment of the articles of incorporation; the RIGHT TO CONVERT of such shares in the Articles of
2. Adoption and amendment of by-laws; Incorporation.
3. Sale, lease, exchange, mortgage, pledge or other
disposition of all or substantially all of the corporate The conversion of shares is a 2-step process:
property; 1. Provide the Right to Convert in the AOI.
4. Incurring, creating or increasing bonded indebtedness; 2. When you do convert, you need to amend the AOI to
5. Increase or decrease of capital stock; (Redundant, provide for the issuance or addition (for example) of new
requires amendment of the articles) common shares and delete the convertible preferred
6. Merger or consolidation of the corporation with another shares as you no longer have those class of shares once
corporation or other corporations; conversion takes place.
7. Investment of corporate funds in another corporation or
business in accordance with this Code; (Redundant, TREASURY SHARES
requires amendment of the articles) and
8. Dissolution of the corporation. Shares issued by the corporation which are subsequently redeemed
or bought back by the corporation. It is not really a classification
Difference between voting and non-voting shares but more of a STATUS OF A SHARE.
Power to elect the Board of Directors
What can it do with the shares that it redeemed or bought
FOUNDER’S SHARES back?
It can retire the shares. In this case, it must amend the AOI as the
Shares given to incorporators which may be granted certain rights Authorized Capital Stock decreases, or it can keep the shares for
and privileges not available to other owners of stocks except that if subsequent issuance. No amendment is required.
they are given the exclusive right to vote and be voted for in the
election of directors, that right is only limited to 5 years
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COMMERCIAL LAW | Atty. Karen Gaviola | Batch Invictus | I am the master of my fate: I am the captain of my soul.
You need to have incorporators. They sign the AOI. They need to Must own or be a subscriber of at least 1 share
be natural persons. Partnerships and Corporations cannot be Incorporator is required to have at least 1 share. So even if there is
incorporators. a billion peso company the incorporators can invest at least 5 pesos
(1peso per share).
Does that mean that corporations are not allowed to invest
in an unformed corporation or a corporation that is still to CORPORATION’S TERM
incorporate?
50 years. Unless sooner dissolved or the period is extended for
Example: Foreign Client wants to put up a BPO business but it another 50 years.
wants the business to be the one to invest, what should you advise
since a corporation cannot be an incorporator? Can it join in the When you become corporate secretaries take a look at the
initial investment of the corporation? Foreign client does not want corporate term of your companies because this is most often
to invest in his personal capacity, what is your advice? neglected. Once you have 5 years left in your corporate term you
should already apply for an extension thru the amendment of your
o You put in PHP 100 capital, let’s say at PHP 1 per share, you articles of incorporation.
get 5 shares at PHP 1 each, you give it to 5 natural persons
and the remainder of the shares (95) will be to the investor CAPITAL STOCK
company. That company is not an incorporator. It is
permissible under the law because it is the 5 persons who are Authorized Capital Stock
the incorporators who signed the Articles of Incorporation; the It is the capital provided for in the Articles of Incorporation.
company will not be signing, but it can be an investor, a Ordinarily the AOI will say that the Authorized Capital Stock (ACS)
stockholder, as long as it is not an INCORPORATOR. of the Corporation is P 10,000,000.00 divided into 10,000,000
common shares at par value of 1 peso per share.
o The corporation’s name will still be in the AOI. It still has to
pay up the 25% of the 25% Subscribed Capital Stock. Subscribed Capital
However, it will not be one of the INCORPORATORS who will Need not be equal to your ACS. All that the law requires is that
sign the AOI. This simply means that the Incorporators need when you incorporate, your subscribed capital has to be at least
not be the ones who will have to give the 25%-25% 25% of your ACS. This is the minimum requirement.
requirement as they are ONLY REQUIRED TO HAVE AT LEAST
1 SHARE EACH. Example: 25% of 10M is 2.5M pesos Subscribed Capital Stock. If
you want to subscribe 5M, 7.5M, or even the whole 10M it’s okay.
Because remember 25% of the Authorized Capital Stock (ACS) must
be subscribed and 25% of the Subscribed must be paid-up. The 25 Paid-up Capital
is part of his 95 investment. It is the portion of your subscribed capital that has been paid. Not
all of your subscribed is required to be paid up.
The incorporators need not be the persons who give you your 25-25
requirement because they are only required to have 1 share each. Example: 2.5M (Subscribed) 25% of this should be paid up i.e. P
625,000.
You will see the name of the corporation in the Articles but it will
not be acting as an incorporator because the incorporators are the Normally when you say capital it pertains to your subscribed capital.
persons who sign the Articles of Incorporation. Even if it is not fully paid-up that is already considered as issued or
outstanding capital stock.
REQUISITES TO BECOME AN INCORPORATOR
Outstanding Capital Stock
1. Must be of Legal Age This are the total shares subscribed or issued to your stockholders
2. Majority must be residents of the Philippines whether or not fully or partially paid taking out your treasury
3. Must not be less than 5 and not more than 15 shares. These are the capital stocks which are in the hands of your
4. Must own or be a subscriber of at least 1 share stockholders.
Must be of Legal Age Even if not yet fully paid you can already exercise all the rights of a
The Article is a contract so they must have the capacity to contract. stockholder. In determining how much is the capital or how much is
your share in the corporation, don’t limit it to the paid-up capital.
Look at the Subscribed or Outstanding Capital Stock.
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COMMERCIAL LAW | Atty. Karen Gaviola | Batch Invictus | I am the master of my fate: I am the captain of my soul.
Example: You are deciding the number of shares entitled to vote Clarification: For example the 5 million which was fully subscribed
in the election of directors. Is it the 2.5M (Subscribed) or the 625K and fully paid, and then there is an increase of 2 million. Do you
(Paid-up)? It’s the 2.5M. Even if not yet fully paid, the holders of really have to shell out the 25% of the 2 million? Yes you really
the subscribed but unpaid capital stocks is already entitled to all the have to shell out. Every time you increase, you have to subscribe
rights of the stockholder. For dividend distribution, it’s 2.5Mbecause 25% of that increase and pay up 25% of that increase.
you look at your subscribed, not your paid-up.
Exception: Delinquent shares because once the shares are Are you allowed to increase your authorized capital while
declared delinquent, all the rights pertaining to that share is you have not fully subscribed to your existing authorized
suspended. capital?
Yes, you are allowed. You don’t need to fully subscribed your
The requirement of the law is that at least 25% of the authorized existing authorized capital before you increase your authorized
capital has been subscribed, 25% of the total subscription has to be capital.
paid-up. The balance will be payable on a date fixed in the
subscription agreement. If there’s no date fixed, it depends on Example: If you have 5M authorized capital and 3M subscribed
when the BOD will make the call. leaving 2Munsubscribed, then you increase 2M. Is that allowed?
Yes. For your 2M increase, 25% of that must be subscribed
If the BOD makes the call and you don’t pay, then your shares will (50,000) and 25% of that must be paid-up (12,500).
become delinquent.
You can just get that from the unissued portion, are you required to
You are the lawyer of a company with a fully paid 2.5M first fully subscribed? The SEC said no because if you want to
subscribed shares out of 10M authorized capital. Your increase your authorized capital stocks then by all means increase it
Corporation President wants to buy back 1.5M of your and pay the filing fee to the SEC. Whereas, if you just use your
outstanding shares. You President goes to you and asks you unissued, there’s no need to pay filing fees because that’s already
if you can do it. Is it allowed? been paid for and you don’t need the SEC approval.
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COMMERCIAL LAW | Atty. Karen Gaviola | Batch Invictus | I am the master of my fate: I am the captain of my soul.
Place where principal office of the corporation is to be of stocks, or where there is no stock, from among the members of
located; the corporation, who shall hold office for one (1) year until their
Must be specific and include unit number, building name, street successors are elected and qualified.
name, barangay and city. This is to prevent fly-by night corporation.
Qualifications of a Director and Trustees
For convenience purposes, if you want to move and as long as 1. He must be a holder of at least one share.- The share
you’re within the same city, you can just file a general information must be recorded under the director’s name in the Stock
sheet to show your new address. No need to amend articles. and Transfer Book of the corporation.
2. Majority of the directors must be residents of the
Original Subscribers Philippines.
A corporation can become an original subscriber as long as it is not 3. Not convicted by final judgment of an offense punishable
an incorporator. Only natural persons are allowed to be by imprisonment exceeding 6 years or a violation of the
incorporators. But a corporation can be a subscriber and can’t be an Corporation Code, committed within 5 years before the
incorporator. date of his election.
4. He must be of legal age.
LIFE OF A CORPORATION 5. He must possess other qualifications as may be
A corporation is considered alive when the SEC issues the certificate prescribed in the by-laws of the corporation.
of incorporation. The life of the corporation starts at the date of the
issuance of the certificate of incorporation. That is the time you How are directors elected?
start counting the 50 years. In the election of directors, there must be present, in person or in
proxy, the owners of the majority of the outstanding capital stocks
The certificate of incorporation is now considered as the primary (or, if non-stock, majority of the members entitled to vote).
franchise of the corporation.
TN: Only stocks with voting rights. Non-voting stocks are not
If the corporation wants to engage in another business, ordinarily, it allowed to vote in the election of the directors.
does not need any other permits. But if it wants to engage in
regulated industries like banks, insurance, they need to get There must be a quorum. The majority of the outstanding capital
secondary franchise (i.e. BSP, Insurance Commission, SEC). stock must be present for the election of the directors.
What happens if you incorporated but you did not start your How will the stockholders vote? Every stockholder entitled to vote
business? Under Sec 22, if you did organize and commence shall have the right to vote the number of stocks standing at the
transaction within 2 years from your incorporation, your corporate time fixed in the by-laws in his own name, or where the by-laws are
powers will cease and the corporation is deemed to be dissolve. silent, at the time of the election.
If you commenced your transaction, but you stopped? The law says The by-laws can say that “The stockholders who are entitled to vote
that if you are inoperative for a period of 5 years, it is a ground for in the meeting are only those who own shares at least 30 days
suspension or revocation of your franchise. before the date of the annual stockholders meeting.” That 30 days
before should be your record date.
What is the difference between the two?
In the first, if you did not commence business within 2 years from For publicly-listed companies, it is necessary to set the record date.
the issuance of certificate of incorporation, it is automatically Because if they allow those stockholders who own shares to vote
deemed dissolved. Whereas, in the second, the SEC will need to on the meeting date, they will really never know since the stocks
conduct hearings before it can declare that your certificate has been change hands all the time.
revoked. There has to be an issuance from the SEC revoking your
certificate. It is merely a ground for revocation. But it’s alright to reckon it from meeting date if you are a close
company since the stockholders don’t constantly change. But for
AMENDMENT OF THE ARTICLES OF INCORPORATION publicly-listed companies, they normally set a record date.
BOARD OF DIRECTORS AND TRUSTEES If on meeting date, the stockholder no longer owns any shares, but
on record date he had 1M shares, he can still vote 1M shares since
Sec. 23. The board of directors or trustees. - Unless otherwise the reckoning point is the shares owned on record date.
provided in this Code, the corporate powers of all corporations
formed under this Code shall be exercised, all business conducted
and all property of such corporations controlled and held by the
board of directors or trustees to be elected from among the holders
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COMMERCIAL LAW | Atty. Karen Gaviola | Batch Invictus | I am the master of my fate: I am the captain of my soul.
Example: If outside of these three reasons and the remaining board still
100,000 shares constitutes a quorum, then yes, they can fill in the vacancy without
5 vacancies in the board having to resort to stockholders’ meeting.
————————————-
= 500,000 votes Aside from directors, you also need to elect the officers of the
corporation. Stockholders elect the directors, the directors elect and
How will the 500,000 votes be distributed? appoint the officers.
a. The law provides that it can be distributed per
seat/vacancy, i.e. 100,000 votes each per nominee; or BASIC OFFICERS IN THE CORPORATION CODE
b. All votes can be given to only 1 nominee.
1. President
Can the votes be divided among: 2. Treasurer
3. Corporate Secretary
A. 3 nominees? Yes.
B. 2 nominees? Yes. Are the officers required to be stockholders?
C. Can it be divided into 7 seats if there are 7 nominees for 5 seats?
Yes. But it would render your votes useless because you gave votes General Rule: They are not required to be stockholders.
to all.
Exception: President. Because he is required to be a director and
Does the distribution have to be equal? to be a director, you need to be a stockholder.
No, it doesn’t have to be 100,000 per nominee. The stockholder
who has 500,000 votes can distribute 250,000 votes to Nominee A, The law requires the secretary to be a resident and a citizen of the
150,000 votes to Nominee B, 100,000 votes to Nominee C, etc. Philippines. SEC Rules requires the treasurer to be a resident of the
Philippines.
You don’t want them to elect someone in the board, you can
actually compute how much shares you can give in order to assure Concurrent positions are allowed as long as not president and
you your nominees in the board. But normally, you can actually secretary or president and treasurer at the same time.
shut out the other party if you hold majority of the shares,
otherwise, you have to make sure that you’re getting the most for Can you provide in your articles and by-laws that you don’t
your votes. It’s not important that you get all the seats, what is want to have your stockholders’ meeting all the time?
important is you get majority of the seats. When the directors vote, No. The 1 year term is fixed.
they don’t vote unanimously, they vote based on the majority.
When directors or trustees hold a meeting, it is required that there
Even unpaid shares will be counted in the voting. As long as your should be a quorum.
shares are subscribed, even if not yet fully paid, you can vote those
shares. The problem is, if your shares are already delinquent. QUORUM
Meaning, there was already a call for the payment and you did not
pay, so the directors declared your shares as delinquent. In which When do you have quorum?
case, you are no longer allowed to vote the shares. There is quorum when the majority of the number of board of
directors as fixed in the articles are present. When you have a
Earlier we said that it’s the stockholders who can vote in the quorum, the directors can now validly transact business.
election and who can elect the members of the BOD. But there are
instances when the director themselves can fill in the vacancy in the In order to get approval of any particular transaction, what you
board. Because it’s actually tedious to call a meeting of the need is only the majority of the directors present, provided that you
stockholders, especially if you have a big corporation because your have a quorum.
stockholders can be all over the Philippines. And remember the rule
that when the stockholders have a meeting, it has to be in the Situation
principal place of business of the corporation. It should only ideally If your articles says that you have 5 board of directors:
be done once a year, during the annual stockholders’ meeting.
If 3 directors attend the meeting, that is already majority. You have
Outside of the annual stockholders’ meeting, if there is a vacancy in a quorum. If during the meeting, they approve corporate acts but
the board because one director resigned, the other directors can fill one director objected and only 2 approved. There is approval
in the seat. Provided, that the other directors still constitute because, for the approval, you only need the majority of the
a quorum. So, if there is a vacancy in the board and the remaining directors present, provided, that you already have a quorum.
directors still constitute a quorum, they can be the ones to elect
another member of the board. If four directors appear do you have a quorum? Yes. If two
objected, you do not have a valid act because you do not have the
Exceptions to the above rule majority of the directors present.
1. Reason for the vacancy is due to the removal by the If two directors appear in the meeting do you have a quorum? If
stockholders of the director. The removal is done in a two of them approved, unanimous, is that valid? No. Remember, if
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COMMERCIAL LAW | Atty. Karen Gaviola | Batch Invictus | I am the master of my fate: I am the captain of my soul.
three appeared and two approved, that’s a valid act. Because in attended? Yes, because the law does not say that it has to be
order to have a valid approval, you also need to have a quorum attendance, it has to be the vote of the majority of the directors.
first.
Business Judgment Rule
To have a quorum, you look at the number of directors in the Under the business judgment rule, which is followed by our courts,
articles. Majority of that is your quorum. Once you have those any decision made by directors in the regular course of the
numbers in the meeting, you can have a quorum and you can have performance of their duties, are considered as valid and the
a valid meeting. Now once you have a valid meeting, in order to directors cannot be held liable for them.
approve a corporate act, you only need majority of those present
even if it’s less than the majority stated in the articles. Courts have no authority to supplant the judgment of the directors
because, precisely, the directors are supposed to be elected on the
Attendance/Voting by Proxy basis of their expertise with regards to the operations of the
Directors or trustees cannot attend or vote by proxy, only corporation.
stockholders can attend meetings by proxy. This is because
directors are elected based on their knowledge and business So, the business judgment rule states that the questions of policy or
experience. Directors will always have to attend in person. This is management are left solely to the honest decision of the officers
why the SEC allowed for BOD meeting to be done by video and directors of a corporation. The courts cannot substitute their
conference as long as they are in person, not by proxy. judgment for the judgment of the board. As long as it acts in good
faith and in the regular course of business, the board’s acts are not
Stockholders on the other hand, since they are allowed to attend by reviewable by the courts or by the SEC. And the directors cannot be
proxy, they are not allowed to meet by video conference because held liable to the stockholders in performing such acts, even if the
they can always send a representative. acts result to a loss to the corporation.
In determining your election of officers, if you have 5 directors and For example, you have a director who cancelled the contract
3 directors present, you have a quorum. Ordinarily vote of 2 is between a corporation and one of its clients. Later on, that director,
allowed but for the election of officers, you need a vote of 3 forming another business by himself, entered into the same
because it is majority of the number. But is it okay that only the 3 contract with that client of the corporation. That director was held
liable for conflict of interest.
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COMMERCIAL LAW | Atty. Karen Gaviola | Batch Invictus | I am the master of my fate: I am the captain of my soul.
Exception to the Corporate Opportunity Rule But always there has to be disclosure of the adverse interest so that
Exception to this rule is if his act is ratified by the stockholders when the stockholders ratify, they do so with open eyes. There has
owning or representing at least 2/3 of the capital stock of the to be a disclosure of the adverse interest of the self-dealing and
corporation because that means that the ultimate beneficiary of the that the contract must always be fair and reasonable.
corporation (which would be its SHs) have agreed to the director’s
taking of the opportunity for himself. Once there is ratification then Note: You can dispense with the 2 procedural requirements
the director can validly enter into that business opportunity. (quorum and votes for approval) but not with the substantive
requirement that the contract must be fair and reasonable, it cannot
SELF-DEALING DIRECTORS be dispensed with.
Self-dealing means that the director contracts with the corporation. INTERLOCKING DIRECTORS
The director enters into a contract or transaction with the
corporation. Is it allowed? How would you differentiate self-dealing directors with
interlocking directors?
General Rule: In self-dealing directors, you have the corporation dealing with the
Self-dealing between the director and the corporation is valid if it individual director. Interlocking, on the other hand, you have a
complies with the following requirements under the Corporation corporation dealing with another corporation and both of those
Code:1. necessary
The presence
meeting intowhich
constitute
of such
the acontract
director
quorumorwas
fortrustee
such
approved
meeting;
in the
wasboard
not corporations have a common director. That is an interlocking
director transaction,
1. Quorum is majority of ALL the board of directors stated in
the Articles of Incorporation. Rule on interlocking Directors
The general rule is that the contract with an interlocking director is
2. The self-dealing director presence must not be necessary valid. The exception is when the contract is fraudulent.
in order to constitute a quorum.
If the interlocking director has substantial interest in one
3. If there 5 directors and 3 appears, you have a quorum. corporation and nominal interest in another corporation. In which
But if 1 of the 3 is the self-dealing director, then case the law says, the corporation where that director has a
automatically no. 1 is out. minimal interest, you have to comply with section 32 (quorum and
approval requirements).
4. 5 directors and 4 appears including the self-dealing
director, you still comply with requirement no. 1 because Why do you think the law distinguishes between an
you can still have a quorum even without the presence of interlocking transaction where the director holds equal
the self-dealing director. interest in both companies and an interlocking director
2. the
The approval
vote of such
of the
director
contract;
or trustee was not necessary for transaction where one is minimal and one is substantial?
5. Given that the presence of the director was not necessary It can lead to conflict of interest. The tendency of the director
for there to be a quorum, so there are 4 directors, then concerned will be of course to favor the corporation where he has
the act was voted upon and in the approval 3 directors substantial interest because he will get the most benefit there.
approved. One of the directors who approved is the self- Whereas, for the corporation where he as a minimal interest,
dealing director. Allowed or not allowed? What do you chances are his benefits there will also be minimal.
need for valid corporate action given that there is a
quorum? MAJORITY of the directors PRESENT. So, if there If one is substantial and the other is minimal, as far as that minimal
are 4 directors present, how many do you need to have a corporation is concerned, you have to comply with the rules for self-
valid corporate action? You need 3. dealing directors.
6. If 1 of the 3 who approved is the self-dealing director, do When can you say that the holding of a director is
you comply with the 2nd requirement? No because without substantial?
that vote of the self-dealing director you will only have 2 If it exceeds 20% of the outstanding capital stock.
approvals and that is not sufficient to give you the majority
vote. If both corporations substantial, no problem. If both corporation
minimal, no problem. The problem will arise if there is now an
7. But if all 4 approved, then that is considered compliance imbalance, one is substantial the other one is minimal in which case
with the 2nd requirement because even if you take out the you have to comply with the rules on self-dealing corporation.
vote of the self-dealing director you still have sufficient
number of votes to approve the corporate action. 1. The presence of such director or trustee in the board
3. circumstances;
The contract and is fair and reasonable under the meeting in which the contract was approved was not
8. Because the officer actually does not vote to approve. It’s necessary to constitute a quorum for such meeting;
the directors who vote to approve. 2. The vote of such director or trustee was not necessary for
the approval of the contract;
9. Once you have the approval, then the contract with the 3. The contract is fair and reasonable under the
officer is already be considered valid. circumstances; and
4. In case of an officer, the contract has been previously
authorized by the board of directors.
11
COMMERCIAL LAW | Atty. Karen Gaviola | Batch Invictus | I am the master of my fate: I am the captain of my soul.
Why is it as a rule, directors can be removed by the a. Express powers- those which are expressly listed in the
stockholders? Corporation code and Articles of incorporation.
b. Implied powers – those which are necessary for the
We go back to the essence of the relationship between the exercise of the express powers.
directors, corporation and the stockholder. c. Incidental powers – those which are incidental to the
existence of the corporation.
Bernas v. Cinco, GR No. 163356-57 July 1, 2015
Sec. 36, CCP lists down the general powers of the corporation. To
Facts: sue and be sued, succession, adoption and use of coporate seal,
amendment of articles, adoption of bylaws, issuance and sale of
The case is about Makati Sports Club where in this case, there is a stocks to subscribers and sale of treasury shares, adopt plan of
certain group that had been managing the sports club. And then merger or consolidation, make donations, establish retirement plans
there were rumor that the group was mismanaging and certain for the benefits of its directors, and any other power which may be
funds were missing. The oversight committee which is made up of necessary to achieve the purpose of the corporation.
12
COMMERCIAL LAW | Atty. Karen Gaviola | Batch Invictus | I am the master of my fate: I am the captain of my soul.
POWERS NOT FOUND IN SECTION 36 Preemptive rights on the other hand, it is the corporation who
disposes not the stockholders. It is the corporation who issues the
1. Power to extend or shorten the corporate term shares not sale or transfer of the share. Even if the articles is silent,
2. Power to increase/decrease capital stock there is preemptive rights.
3. Power to deny pre-emptive right
4. Power to sell, dispose, lease, and encumber all or If the articles is silent for a Right of First Refusal there can be no
substantially all of the corporate assets of the Right of First Refusal.
corporation.
5. Power to acquire their own shares of stock If the corporation is the one issuing the shares from its unissued
6. Power to declare dividends (through the BOD) so long as capital stocks, then you have preemptive rights. If stockholder
the corporation has unrestricted retained earnings. selling his shares and there is an agreement that there should be a
7. Power to enter into management contracts ROFR then you have Right of First Refusal, but that is not
preemptive rights and it needs to be expressly agreed upon.
POWER TO EXTEND OR SHORTEN THE CORPORATE TERM
Does preemptive right apply to reissuance of treasury
The term is part of your articles, when you amend the term, you stocks?
must also amend the articles (Majority of the board & 2/3 of the There are different thoughts, the most prevalent is that preemptive
Outstanding Capital Stock). rights only apply if the issuance is from the unissued capital stock, it
does not apply to shares which has already been issued.
POWER TO INCREASE/DECREASE CAPITAL STOCK Remember, treasury stocks are already issued but not outstanding
shares. Preemptive rights which has not been previously issued.
You also need to amend your articles (Majority of the board & 2/3
of the Outstanding Capital Stock). For increasing, you need to In fact there is another issue on preemptive rights, that if for
comply with the 25-25 requirement. example, the shares sold are from the unissued capital stock which
has been previously offered to the stockholders but no one bought,
POWER TO DENY PRE-EMPTIVE RIGHT. and when it is sold again, even if it from the unissued capital stock,
preemptive rights will no longer apply, because effectively the
It is the right to subscribe to new issuance of share by the stockholders already waived their right when it was first offered.
corporation in proportion of the shareholding of the director. The
purpose of this right is to prevent diminution of a particular Example: The BOD is issuing additional stocks of 500k shares at 1
stockholder because it may diminish his control in the corporation. peso per share, stockholders bought but only up to 300k, there is
200k unissued, the corporation then now sell it to the third person.
Example: A,B,C has 300 shares and they increase the shares to The stockholders can no longer say that they have preemptive
200 shares and agreed that only A and B will subscribe for the 200 rights under this school of taught. Even if unissued share, you are
shares for 100 each. So, instead of C having 1/3 control, C will only not allowed to exercise your preemptive rights because you already
have 1/5 control of the corporation. Effectively instead of having waived it.
1/3rd share he has no 1/5th it is diluted, he loses control, that is
not fair. In order to prevent such situation, the corporation is With a 10M Authorized capital stock, if you want to increase that to
required to offer preemptive rights to its stockholder. 15M pesos, you need to amend your articles. So, when you amend
your articles, you need majority of the BOD and 2/3 of the
If the articles of incorporation is silent, that means, the stockholder outstanding capital stock. And of course, you need to comply with
enjoy preemptive rights. But a corporation has the power to deny the 25-25% requirement.
preemptive rights by amending the articles and expressly providing
therein that preemptive rights are denied. If denied, that means It’s another matter when the corporation will just increase its issued
that the corporation can issue shares without first offering the capital. Issued capital or subscribed capital is different from its
shares to its existing stockholders. However, but because the denial authorized capital. The authorized capital is the maximum capital
requires amendment of AOI, that means you must comply with the that the corporation will have.
votes necessary to amend the articles, which is majority of the BOD
and 2/3 of Outstanding capital stock. If you want to increase your maximum capital, you amend. For
example, if your authorized capital is 10 million, you have 5 million
There are instances that even if preemptive rights are not denied, subscribed that means you have 5 million unsubscribed.
they are not applicable, even if not expressly denied, in section 39:
What is the requirement in order to issue the unsubscribed
- Shares to be issued in compliance with laws requiring portion?
stock offerings or minimum stock ownership by the You only need to have majority of BOD, you do not need
public; or stockholder’s approval for this. The issuance of shares from the
existing but unsubscribed authorized capital stock only needs the
- to shares to be issued in good faith with the approval of approval of the majority of the BOD. This is the part where you
the stockholders representing two thirds (2/3) of the need the preemptive right. Because there is no stockholder’s
outstanding capital stock, in exchange for property approval, so you need to give the stockholders time to determine if
needed for corporate purposes or in payment of a they want to maintain their proportion. But of course, as I
previously contracted debt. mentioned you do not to amend your articles here because you are
still within your ACS. So you don’t need to amend you articles.
13
COMMERCIAL LAW | Atty. Karen Gaviola | Batch Invictus | I am the master of my fate: I am the captain of my soul.
Do you need SEC approval? According to the SC, under this Business Enterprise Transfer Rule,
You need to report to the SEC under the Securities and Regulation even if on paper what appears is merely a sale of the assets of the
Code. You have to show that the issuance is actually an exempt company but if what the buyer is really acquiring is not just the
transaction or an exempt security under the SRC otherwise, the SEC assets of the seller but the business of the seller including its
will require you to register the issuance under the SRC. So you will customers, goodwill, then it is not just a simple asset purchase, it is
need to register, you need to file form 10-A because the exempt actually a business acquisition. You are acquiring not just the asset
transaction are in section 10 of the SRC. And you need to show but the business. And when you are acquiring the busines of course
where in what exempted transaction it falls. No need for SEC you are not just acquiring the assets but also the liabilities of that
approval but you need to report to the SEC. And this the instance business. That is the essence of the business transfer rule.
where SEC will not accept your report if you don’t show your waiver
of preemptive right. If you don’t show your waiver, the SEC will not When the sale is completed, under the business enterprise transfer,
accept your report and you will be penalized for failure to comply the seller is left with nothing. It cannot continue its business
with the regulations. anymore because its business has already been transferred to the
buyer.
Note: Preemptive right is given by law and right of first refusal is
made by contract. Preemptive right is for issuance by the The SC explained that under Sec.40, the sale, lease, exchange or
corporation of unissued shares, right of first refusal is the sale or disposition of all or substantially all the corporate assets including
transfer by an existing stockholder of his own stockholdings. its goodwill. This provision does not contemplate an ordinary sale of
the corporate asset, it is actually as if the buyer is going to continue
THE POWER TO SELL, DISPOSE, LEASE, AND ENCUMBER the business of the seller. It is not just an asset transfer but it is
ALL OR SUBSTANTIALLY ALL OF THE CORPORATE ASSETS actually a business acquisition.
OF THE CORPORATION.
In order for this exception, the business enterprise transfer rule to
Y-I Leisure Philippines, Inc., Yats International Ltd. And Y-I apply, there has to be an acquisition of all the assets including the
Clubs And Resorts, Inc, v. James Yu goodwill of the selling corporation. And there must be an intention
to continue the business of the selling corporation. Such that this
The Nell Doctrine states that as a general rule, when all or rule will not apply if the sale of the entire property and asset is only
substantially all of the assets of the corporation are transferred to in the regular course of business.
another entity, the transferee corporation should not be held liable
for the liabilities or obligations of the transferor. There is just a sale In fact, if the sale is only in the regular course of business of the
of assets but no transfer of liability. selling corporation, you do not need to have stockholders' approval.
Only BOD approval is required. Or if the proceeds of the sale or
The doctrine admits of 4 exceptions: other disposition of the property and asset will be appropriated for
a. when the transferee expressly or impliedly assumes those the conduct of the remaining business.
liabilities;
b. when the transfer amounts to a merger or consolidation; If you take a look at this 2 exceptions, it will show you that the
c. when the transferee corporation is a mere continuation of selling corporation intends to remain in business. It is only doing
the business of the transferor corporation; and ordinary course of its operations when it sells the assets.
d. when the transaction is fraudulently entered into to escape
liability. But if it shows that the selling corporation has already disposed all
of its assets such that it cannot continue in business anymore, the
One of the defenses of Y-I Leisure was that the transaction was SC said that you apply the business transfer rule. And it is not just a
not entered into fraudulently. But the SC said that the exception sale of the assets but you also transfer the liabilities.
applicable was the third one and a cursory reading of it would
reveal that fraud is not a requisite for it to apply. That is why Yu Under this rule, is fraud necessary in order to transfer?
should be allowed to go after the properties acquired by Y-I Fraud is another exception. It has nothing to do with this exception
Leisure. business enterprise transfer.
The exception where the acquiring corporation is a mere What about if the parties, like in this case, agreed that the seller will
continuation of the business of the selling corporation is what the be the one responsible for the payment of the creditors? That the
SC called as Business Enterprise Transfer Rule. It means that seller, which is the normal case, should keep the buyer free and
when a corporation transfers all or substantially all of its properties, harmless from any claim or obligations resulting from the transfer of
it is not only transfering discrete properties of its business but its the assets? Is that a valid agreement? It is a valid agreement.
entire business and that includes the liabilities.
However, in this case it does not apply to Yu because he was not a
There is a transfer of all its business when, in relation to Section 40 party to the memorandum of agreement. So as to Yu, the debtor is
of the Corporation Code which states that a transfer of all or still MADCI. But since it’s called a free and harmless clause where it
substantially all of the properties should render the transferor is embodied in the MOA where Sangil undertook to pay the refunds
unable to continue operating its stated purpose. of the shares, but as to Yu since he is not a party to this MOA, to
him he should still be able to treat MADCI as the debtor. But since
What is the reason why in case of the business enterprise MADCI already divested itself of its properties then it can go to the
transfer, the corporation is saying that you are not just petitioner by virtue of the Nell Doctrine. But since by virtue of this
transferring your assets even if in reality you are just free and harmless clause, the petitioner should be able to go after
buying the asset, you are not just transferring your asset Sangil if it wishes to do so.
but you are transferring your liabilities as well?
The SC mentioned that the purpose of this section is for the Atty: If the buyer and seller has an agreement that the seller will
protection of the creditors of the transferor such that they should keep the buyer free and harmless from any obligation and liabilities
not be left holding the bag, so to speak, once the transferor divests arising from the transfer, that agreement is actually a valid
itself of all its properties leaving the creditors with no other agreement. But it is only valid between the parties who had the
recourse but to go after the transferee. agreement. Since the creditors are not parties to that agreement,
then the creditors are not bound. As far as the creditor is
14
COMMERCIAL LAW | Atty. Karen Gaviola | Batch Invictus | I am the master of my fate: I am the captain of my soul.
concerned, it can go after the buyer under the exception of the Nell If there is a stock dividend and my share in the dividend is 100
Doctrine. In this case, the Supreme Court said you have a valid free shares, then that means that my subscribed capital becomes
and harmless clause but it does not apply to your creditor as they P60,000. If the total subscribed capital of the corporation is
are not a party to your agreement. So the creditor can still go after P500,000 and it declares dividends at P100,000, the total
the buyer, the buyer can go after the seller by virtue of the free and subscribed becomes P600,000. Now if I have P50,000 at 500 shares
harmless clause. at P100/share and I do stock split my shares will remain at P50,000
but this time my number of shares will be 2000 shares at
In order to apply the business enterprise transfer rule, you have to P25/share. So you split the number of shares thereby dividing the
comply with two requisites. In order to be exempt, one of the par value per share. There is no change in subscribed capital, there
exceptions from the Nell Doctrine where you don’t transfer liability is no change in the subscribed capital of the corporation, and what
is when the transferor corporation sells all or substantially all of its changes is the number of outstanding shares, not the amount just
assets and the transferee continues the business of the transferor the number, and the par value per share.
corporation. If this is the case, there is a business enterprise
transfer and you acquire not just the assets but also the liabilities of When there is stock dividend, the subscribed capital increases of
the transferor. the stockholder and the total capital of the corporation. When there
is stock split, the number of shares changes but the total subscribed
THE POWER TO ACQUIRE THEIR OWN SHARES OF STOCK. capital stays the same because it is the par value that changes.
Reverse stock split on the other hand will increase your par value
In which case, the shares they acquire become treasury shares. If and decrease the number of shares. There is no change again in
you are buying through Sec. 41, then you have to comply with the the subscribed capital as what changes again is the number of
requirement that there should be sufficient unrestricted retained shares and the par value per share.
earnings. Retained earnings is accumulated profits, which is assets
minus liabilities minus legal capital (subscribed capital). Whatever is What is the basis for the amount of dividends that a
remaining that is your retained earnings. Corporations can only stockholder can receive?
acquire their own shares if they have sufficient unrestricted retained It is the subscribed shares even if it is not paid up. In determining
earnings. how many shares are entitled to dividends, you take a look at the
subscribed shares.
They have also the power to invest corporate funds in another
corporation or business or any other purpose. If the investment is Now, unpaid shares are also entitled to dividends, except if they
only part of the ordinary business of the corporation, let say the become delinquent. If the shares are delinquent, they are still
corporation has excess funds so for now it bought shares purely for entitled to cash dividends but the amount will be applied with the
liquidity purpose which it can immediately sell if it needs money, unpaid shares. Any stock dividends will be held until you have fully
that does not require the procedure required in Sec. 42. If it is in paid your subscription.
the ordinary course, then that is not required to be approved by the
stockholders. The approval of BOD is sufficient. Now, there is an incentive for corporations who give dividends.
Because corporations are prohibited from retaining more than
But if the investment changes the purpose of the corporation, the 100% of their paid-in capital stock. Take note, it is the PAID IN, not
requirements under Sec. 42 must be complied with, BOD approval the subscribed capital stock.
and 2/3 of the OCS because if you are investing in another
corporation/business/purpose then you are changing the primary So if your subscribed is 2.5 Million but your paid-in is only 2 Million,
purpose of your corporation. So you need to amend the Articles of the amount of retained earnings that you can keep is up to 2
Incorporation. Million. We take a look at the paid-in, not the subscribed.
POWER TO DECLARE DIVIDENDS SO LONG AS THE And, if you fail to comply with this requirement, the SEC can
CORPORATION HAS UNRESTRICTED RETAINED EARNINGS. penalize you. Normally, the penalty is P10, 000 for every year that
you had more than 100% of your paid-in capital.
The law provides of three kinds of dividends: cash, property and
stock dividend. If you are issuing stock dividends, you need the Exception to declaring of dividends
approval of the stockholders. For the other two, BOD approval is What the corporations normally do is, if at the end of the year, if
sufficient. their retained earnings are more than their paid-in capital, what
they will do is that they will have:
These are not the only dividends a corporation may issue. It may
issue also promissory notes, liabilities or even bonds as dividends. 1. extension programs or projects,
Such as scrip dividends which are promissory notes or promise of 2. loan agreements which prohibit them from declaring
the corporation to pay cash or assets in a predetermined future dividends
time. That is also an allowable dividend. Corporations can also issue 3. retention is necessary under special circumstances in the
treasury shares as dividends which become property dividends corporation.
because when you say stock dividend it must come from unissued
and authorized capital stock. Thus, if you have a fully subscribed If you have these three, or any of them, you can actually reserve a
authorized capital stock, then you may no longer issue stock portion of your retained earnings. This becomes your reserved
dividends anymore. Distribution of treasury stock is not a stock retained earnings which you are not allowed to declare as
dividend but a property dividend. dividends. This is your reserved or restricted retained earnings
because dividends declared are from unrestricted retained earnings.
Stock dividend vs stock split
A stock split is an increase in the number of shares of the How does a corporation declare dividends?
corporation without increasing the authorized or event he
subscribed capital of the corporation. There is no change in the Except for declaring stock dividends where you will need the
amount but it only changes the number of shares. If I am holding stockholders’ approval, you only need a Board Resolution to declare
500 shares of P100/share, then my total stockholding is P50,000. dividends.
15
COMMERCIAL LAW | Atty. Karen Gaviola | Batch Invictus | I am the master of my fate: I am the captain of my soul.
Now, there are three dates that you have to look at when you are approval of at least ⅔ of the outstanding capital entitled to vote of
declaring dividends. You have the: the managed corporation.
But, this can only be done with the approval of majority of its BOD Contents of the by-laws:
and its stockholders. Majority only (of stockholders) because it is a. Time, place, manner of calling the meeting for directors
only a contract. There is no need to amend your article. and officers.
b. Time, place, manner of calling the regular stockholders
Exception meeting.
If where the stockholders representing the same interest of both c. Required quorum which is the majority of all the
the managing and the managed corporation own and control more members of the board or the majority of all outstanding
than ⅓ of the total outstanding capital stock entitled to vote the stocks that is only a minimum requirement. The company
managing corporation; OR majority of the members of the BOD of can actually prescribe a greater majority. In fact, there
the managing corporation also constitute a majority of the members are some by-law provision which we call as super minorty
of the BOD of the managed corporation, in which case you need the provision. The quorum, will require not just the majority
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COMMERCIAL LAW | Atty. Karen Gaviola | Batch Invictus | I am the master of my fate: I am the captain of my soul.
of the members of the board but for a director elected by means by postage or cause for transmission properly address or if
the minority stockholders be present. In other words, there no address then those that re reasonable under the
there will no quorum if the minority director is not circumstance such that the notice should have arrived if properly
present. Or, not just in the quorum but also in the send.
approval, that at least one director from the minority
must vote to approve the action. Non-approval of the It does not include the act of receiving but only the act of sending.
minority director will not lead to a valid majority vote So once you send it then there is proper notice then the stockholder
from the board. Is that allowed? Yes, just put it in the by- cannot say that they were not notified. The officer is only
laws. mandated to notify in the stockholders meeting in the post, the fact
d. Form of the proxies of the stockholders and the manner that the stockholder did not received does not invalidate meeting.
of voting them. Such that sending is different from service, if congress wanted
e. The qualifications, duties, and compensation of directors, service then it should put the word service instead.
trustees, officers and employees.
⇒ In the Gokongwei case, they said that the Clearly, respondents are only mandated to notify petitioner by
stockholder of a competitor company cannot be depositing in the mail the notice of the stockholders’ special
a director in their company, is that allowed? meeting with the postage or cost of transmission provided and the
Yes, but it is a different matter if you say that name and address of the definition of “send” under the Black law
Mr. A cannot be a director of this company. Dictionary, the term “receipt” only has the effect of proper sending
Limitations and qualifications must be when a mail matter is received in the usual course of transmission.
applicable to all and not only to specific
persons; it must not be discriminatory. Who is authorized to call the meeting?
f. Time for holding the annual election of directors and A person designated in the by-laws. If no person is authorized, then
trustees. the SEC upon petition by any stockholder or member can give
g. The manner of the election and appointment of all proper notice of meeting.
officers other than directors and trustees.
h. Penalties for violation. Manner of issuing stock Exception
certificates. And such other matters. Notice for removal of directors, it has to be done by corporate
secretary upon the order of the president or by stockholder holding
Whether you are following calendar year. Your accounting period the majority of the outstanding capital stock.
ends December 31 or you can do fiscal year if your accounting
period ends in any twelfth month period other Dec. 31. You have to In Bernas v Cinco, if the corporate secretary will not send notice
put that in your by-laws. you are not without recourse because the law allows you go to SEC.
That you cannot take the law on your own hands.
How do you amend your by-laws? By majority of the Board of
Directors and the Majority of the Outstanding Capital Stock. Place of Meeting
If its stockholders meeting the meeting shall be done in the city or
If the stockholder wants to delegate to amend the delegation municipality of the principal place of business, you cannot hold in
should be approved by 2/3 votes. Then revocable by majority votes any other place. That is why stockholders are allowed to appear in
under section 48. proxy, if they cannot attend they can still be represented.
MEETINGS If the calling of the stockholder meeting, notice and the place is not
properly complied with then the meeting is not valid as we have
Kinds seen in the Bernas v Cinco case. But if all the stockholders are
1. Regular Meeting present in the meeting and there is a defect procedure then the
2. Special Meeting meeting is still valid provided that all stockholders are present or
duly represented.
Regular meeting
Refers regularly schedule special those that are called for specific Quorum
purpose. For stockholder meeting, that is once a year or also called Unless otherwise provided in the by-laws, the quorum shall majority
as annual or general stockholders meeting on a date fixed in the of the OCS. But again you can have the super minority quorum.
by-laws.
Most of the by-laws I’ve seen the quorum is not majority but 2/3 of
Special meeting the OCS that is still consider super minority because if you are 49%
This is done as may be necessary. For example you have annual that is minority and the 51% that is majority. The 51% is majority.
stockholder meeting on the 1st Friday of Monday May, but you want Supposedly the 51% can call a meeting by itself because there is
to increase your ACS but it is not yet 1st Friday of May, then you can already a quorum except for those specific acts where 2/3 approval
call for a special meeting. is required, but you can change the quorum requirement in the by-
laws by making it 2/3 instead of majority. You can even go further
Notice requirement in meetings and say “provided that there shall be no quorum unless the holders
a. Regular meeting - at least two weeks prior the meeting of Class B common shares are present during the meeting”. Those
because it is for you to know in advance where the are what we call the super minority provisions.
meeting shall take place and give more time to prepare
the stockholder, It is the president who will preside in the
b. Special meeting - it may be anytime because there is director/stockholder’s meeting.
emergency then 1 week shall suffice.
Attendance in stockholder’s meeting can be in person or by proxy.
Guy v Guy G.R No. 184068 April 19, 2016 – In person meaning it is the stockholder himself who attends the
meeting. Only stockholders on record date are allowed to attend. If
Meaning of “sending a notice” you are a transferee of a share but your acquisition was not yet
You have to look at the ordinary meaning of send. Send means you recorded in the stock and record book, you cannot attend the
deposit the notice in the mail or deliver for transmission in the usual meeting.
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COMMERCIAL LAW | Atty. Karen Gaviola | Batch Invictus | I am the master of my fate: I am the captain of my soul.
Example: A bought the shares of B but the name of A was not yet
recorded in the stock and transfer book, A cannot the meeting. B
can attend because his name is still in the stock and transfer book.
The corporate secretary is not supposed to transfer the shares in
the stock and transfer book until you can present the certificate
authorizing registration from the BIR, and this takes time; that is
why you should make the seller execute an irrevocable proxy to
protect the rights of the buyer.
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