COMMERCIAL LAW | Atty. Karen Gaviola | Batch Invictus | I am the master of my fate: I am the captain of my soul.
BRIEF HISTORY
The first commercial law, the Corporation Law (Act 1459) was
enacted in April 1, 1906. Prior to that, there were no corporations in
the Philippines. What we had were partnerships and sociedad
anonima, a Spanish form of partnership. These were formed by
contract. With the enactment of the corporation law on 1906,
Congress applied the American concept of corporation in the
Philippines.
On May 1, 1980, the Congress enacted the Corporation Code (BP
68). Basically, the Corporation Code contains almost the same
provisions as the Corporation Law, with certain additions.
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.
The corporation that is defined in the Corporation Code, pertains
clearly to private corporations. These corporations are corporations
that are organized under the Corporation Code. Those that are not
organized under the Code are created and governed by special
laws.
What kind of business organization would you advise your client to
enter into? It depends.
Each type has its own advantages. In a sole proprietorship, you,
as the owner, control your own business. The disadvantage would
be limited capital since there is only one of you. Also, the sole
proprietor has no separate personality, so whatever liability incurred
by the business is the personal liability of the owner.
A partnership and a corporation are similar, in the sense that
they have separate personalities, separate from the persons making
up the organization.
They are different from each other. As to the manner of creation, a
partnership is created by mere consent because it is a contract
between the partners. So the moment the partners agree, there is
already a juridical personality. Corporations are also created by
contracts, but it is not the contract among the stockholders, but a
contract between the stockholders and the state. It cannot be
created by mere agreement by the shareholders because it needs
consent from the government.
A corporation has to be created with the consent of the State
through the SEC by issuing the certificate of incorporation. The
certificate of incorporation will now be the primary franchise of
the corporation, basically the birth certificate of the corporation.
The agreement between the State and the corporation will be
embodied in the Articles of Incorporation and the by-laws, also
known as your Charter documents.
Partnership v. Corporation
a. As to creation
- partnership is created by mere consent while the
corporation requires the consent of the State.
b. As to liability
- in a partnership, one of the partners must be a
general partner whose liability will be beyond his
contribution to the partnership. Stockholders have
limited liability, only liable up to the extent of their
capital contribution.
c. As to succession
- a corporation has the right of succession which means
that the corporation may still continue as a going
concern even if a stockholder transfer his shares, dies,
etc. On the other hand, any change in the partners
would dissolve the partnership.
d. As to transferability of interest
- the stockholders can transfer their shares without the
consent of the others unless they agree to the contrary.
In a partnership, if you sell your interest you need the
consent of all of the other partners.
e. As to governing law
- partnerships are governed by the Civil Code while
corporations are governed by the Corporation Code.
f. As to management
- all the partners have the right to manage the partnership
and bind the corporation. A stockholder cannot bind the
corporation. The corporation acts through its directors
for it to become liable.
It is harder to make and conduct a corporation since you need the
consent of the State and it is more costly in filing. You also need to
pay taxes for the issuance of each share. But it also has the
principle of limited liability of shareholders.
ATTRIBUTES OF A CORPORATION
1. It is a juridical entity having a separate and
distinct personality from its stockholders
2. It is created by operation of law
3. Right to succession
4. It has powers or attributes conferred by law or
incident to its existence
IT IS JURIDICAL ENTITY HAVING A SEPARATE AND
DISTINCT PERSONALITY FROM ITS STOCKHOLDERS.
While the stockholders compose the corporation, they are not the
corporation. Whatever is the liability of the corporation cannot be
the liability of the stockholders and vice versa.
However, this legal fiction cannot be used to perpetrate fraud. If
you do, then the court will have to pierce the veil of corporate
personality.
Piercing the veil of corporate personality
The stockholders can be held liable for the obligations of the
corporation.
The general rule is that there can be no piercing the veil of
corporate personality due to the principle that the corporation and
the stockholders are different from one another.
If all these requisites are present, then the Courts are authorized to
pierce the veil of corporate personality:
1. There must be control, not just control of the stock, but
complete dominion, not just of the finances but also of its
policy and business practice with respect to the
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.
2. Such control must have been used to commit a fraud or
wrong to perpetrate the violation of a statutory or other
positive legal breach of duty, or a dishonest and unjust
act in contravention of the plaintiff’s legal right.
3. The said control and breach of duty must have
proximately caused the injury or unjust loss complained
of.
Halley vs. Printwell, Inc.
Facts:
Halley was one of the stockholders of Business Media Philippines,
Inc. (BMPI) which was engaged in the sale of magazines and
brochures. BMPI engaged Printwell for the printing of its brochures
which is later sold to its customers but BMPI failed to pay its
obligations to Printwell. Printwell sued BMPI for payment. When
they examined the financials of BMPI, it found that BMPI had no
assets and that its stockholders had not fully paid their subscription.
For example, they subscribed P800,000 in capital but they only paid
around P180,000. There was an unpaid subscription amounting to
P620,000. Now, Printwell amended its complaint to include the
stockholders of BMPI to the extent of their unpaid capital
contribution. The stockholders of BMPI interposed the defense that
they cannot be held liable for the corporation’s liabilities because
the corporation has a separate and distinct personality from the
stockholders.
Ruling:
The Supreme Court said the argument is incorrect. Although a
corporation has a separate and distinct personality from its
stockholders, directors, or officers, such separate and distinct
personality is merely a fiction created by law. The corporate
personality may be disregarded, and the individuals composing the
corporation will be treated as individuals, if the corporate entity is
being used as a cloak or cover for fraud or illegality; as a
justification for a wrong; as an alter ego, an adjunct, or a business
conduit for the sole benefit of the stockholders.
Although in the complaint it cannot be seen that the stockholders
did anything wrong, or that they were trying to perpetrate a fraud
against Printwell, it was found that at the time they contracted with
Printwell, Halley and the other stockholders were the officers of the
corporation in charge of its operations. They approved the
transaction with Printwell and benefited from it. Thus, the Supreme
Court said that Printwell can go after the unpaid subscription of the
stockholders. But up to what extent?
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
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
Doctrine. Each stockholder is solidarily liable to the extent of their
unpaid contributions.
The Trust Fund Doctrine provides that all assets of the
corporation are reserved for the benefit of its creditors. The
obligation of each stockholder is a receivable of the corporation and
is part of its assets.
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
capital and not just pro-rata.
IT IS CREATED BY OPERATION OF LAW
Technically, it is created with the consent of the State, not really by
operation of law because there is only one law, the Corporation
Code, which allows the creation of the corporation. But when you
create individual corporations, that is now with the consent of the
state.
a. Right to Succession.
Even if there is a change, death, transfer of interest by a
stockholder, the corporation will continue for its full term which is
normally 50 years subject to renewal.
b. It has the powers and attributes conferred by law
or incident to its existence.
The powers of the corporation under the Corporation Code are
those which are expressly provided under the law and those which
are implied based on the purpose of the corporation. The Articles of
Incorporation will contain the primary and secondary purpose of
the corporation which are considered its express powers.
Anything that is not there but is related to those purposes will be
considered as an implied purpose, and that is within the authority
of the corporation.
But be careful when you draft an Articles of Incorporation. Usually
you can put under the secondary purpose all the powers that you
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,
but the BIR has ruled that if that purpose is in your secondary
purpose you will be considered as a real estate company.
If you are a real estate company that means that if you sell real
estate that is considered as an ordinary asset subject to VAT and
30% income tax. That is one of the rulings of the BIR during the
time of Henares. So for example you are a merchandising company,
you are selling goods, but in your secondary purpose you say there
that you have the power to sell real estate which is basically a
necessary power, you can be considered as real estate company. So
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
ordinary income tax if you sell that property.
So there are implications on the purposes that you put in your
Articles of Incorporation. So now we have to careful, you cannot
just put in there whatever you want, you have to be very specific.
So the powers of a corporation are determined by the purpose as
stated in its Articles.
CLASSES OF CORPORATION
Stock v. Non-stock
1. Stock corporation - the capital is divided into shares, and
it incorporated for the purpose of profit and distributing
such profit to its stockholders
2. Non-stock corporation – all other corporations which are
not classified as a stock corporation. It is one where no
part of its income is distributable as dividends to its
members, trustees, officers subject to the provisions of
the Corporation Code on dissolution.
They are not for the purpose of distributing profit, so they
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
1. Public corporation - created by the State through special
laws like GSIS, PAG-IBIG, HDMF, or by the Local
Government Code for the local government units
2. Private corporation - created by private persons under the
provisions of the Corporation Code
As to functions
1. Public corporation - government purposes and
2. Private corporation - profit-making purposes
As to place of organization under the Code
1. Domestic corporation - any corporation organized under
the Philippine laws
2. Foreign corporation - any corporation organized under
laws other than Philippine law
As to nationality of the corporation
1. Philippine National - owned by Filipinos. The stockholders
are Filipino citizens. A Philippine national corporation can
be domestic or foreign.
2. Non-Philippine National - if up to more than 40% of its
outstanding capital stock is owned and held by foreigners.
When we talk of a domestic corporation, we are not talking about
the nationality; we are only talking about the situs of incorporation.
When we talk about the nationality, we say it is a Philippine or non-
Philippine national.
As to relationship between the corporations
1. Parent corporation – or a holding company, is that
corporation which owns or controls the stock of another
corporation.
2. Subsidiary corporation - a corporation whose stocks are
owned or controlled by another corporation
3. Affiliate corporation - those corporations that are under
common control
Example: If corporation A owns majority shares of stock in
corporation B, A is the parent or the holding company and B is the
subsidiary. If corporation A is also the parent of corporation C,
corporation B and C are affiliates.
As to legal status
1. De jure corporation - one that is organized in accordance
with the requirements of law, a validly existing
corporation
2. De facto corporation - a corporation where there exist a
flaw in its incorporation. These three elements must exist
in order for a corporation to be considered as de facto:
a. There must be a valid law under which the
corporation may be incorporated
b. There must be an attempt in good faith to
incorporate
c. There must be an exercise or use of corporate
powers
Seventh Day Adventist Conference Church of Southern Phil.
v. Northeastern Mindanao Mission of Seventh Day
Adventist, Inc.
Facts:
There was this couple who donated their property to Seventh Day
Adventist Church in Bayugan. Later on they sold the property to
another Seventh Day Adventist Church in Northern Mindanao. A title
was issued under the name of the church in Northern Mindanao but
the donee (Bayugan) contested alleging the prior donation.
Ruling:
Supreme Court said that in order for there to be considered as an
attempt in good faith to incorporate, there must be a filing of
Articles on Incorporation with the SEC and the actual issuance of
the Certificate of Incorporation by the SEC. It must be actually
incorporated.
Here the Court said that in order to have a valid donation there has
to be a donee. But it was proven that the Seventh day adventist of
Bayugan never secured their Certificate of Incorporation from the
SEC. Bayugan was saying that even if there was no Certificate, they
are considered as a de facto corporation because there was really
an attempt in good faith to incorporate but the Supreme Court said
no, you are not a de facto corporation because you are lacking one
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.
And since Bayugan Church cannot be considered as a de facto
corporation, it cannot be considered an existing corporation
because it has no legal personality, hence, cannot be a donee.
Corporate existence
Begins only from the moment the certificate of incorporation is
issued by the SEC and no such certificate is issued to the petitioner
and they do not possess any juridical personality and as such they
had no personality to accept the donation.
OTHER CLASSIFICATIONS OF CORPORATIONS
Corporation by estoppel
A group of persons hold themselves out to the public as a
corporation and enters into contracts with third persons cannot later
on be permitted to say that they are not a corporation. Purely for
the protection of third persons who contract with this kind of
corporation.
Corporation by prescription
Corporations that are not really formally organized but has been
existing and recognized as such in a long period of time.
Recognition by memorial usage.
Close Corporations
Those which their articles of incorporation provides provisions that
there issued stock will not be held by more than 20 persons, subject
to a restriction in any of its transfers, and shall not list in any stock
exchange or make any public offering of any of its stock of any
class. These must actually be provided in the articles of
incorporation.
Educational Corporations
For educational purposes
Religious and Ecclesiastic Corporations
May either be Corporation Sole or Religious Sect.
Eleemosynary Corporations
That which is devoted to charitable purposes or supported by a
charity
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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.

INCORPORATORS V. CORPORATORS Preferred shares

Incorporators a. Preferred as to Assets – preferred in the distribution of

The persons who first formed the corporation. Incorporators are assets of the corporation in case of liquidation
always corporators, but corporators are not always incorporators
because incorporators refer only to those persons who first formed b. Preferred as to Dividends – preferred in the distribution of
the corporation and signed the Articles of Incorporation. Some dividends
incorporators stop being corporators after they sell their share but Kinds of Preferred Shares
they never stop being an incorporator because your name will
remain in the Articles of Incorporation of the corporation. 1. Cumulative shares – right to dividends in arrears

Corporators The declaration of dividends is always a

They are called stockholders in a stock corporation. They are called management prerogative. If your shares are
members in a non-stock corporation. preferred, it means that for every year that the company
did not declare dividends, each cumulative preferred
CLASSIFICATION OF SHARES shareholder will have an interest in those undeclared
dividends.
Section 6. Shares may be divided into different classes or series of
shares. Example: You are the holder of 10 P100 par cumulative
preferred shares, 5% dividends, that’s P5 x 10 shares =
Class of shares vs. Series of shares P50. In 2015, the corporation did not declare dividends.
Class is a bigger grouping of share. Within that class, you can have As a cumulative shareholder, you are not entitled to
as many series of shares. dividends. In 2016, the corporation still did not declare
dividends, you are still not entitled to dividends. However,
Example: Class A common shares. Within Class A common shares, in 2017, the corporation declared P500 dividends, you are
there may be series 1, 2, 3 - all having the same feature within the entitled to P150, P50 each from 2015, 2016, and 2017
same class. because you are holding cumulative preferred shares. You
have an interest in the dividends in arrears of the
Within each classification, you can have different classes. Within a corporation.
class, you can have different series. You cannot compel the corporation to declare dividends,
but when it does, you have the right to dividends in
The incorporators determine the classification of the shares in the arrears. You get to be paid first.
Articles of Incorporation.
2. Non-cumulative shares
Can they issue preferred shares?
No. They cannot just issue preferred shares because the Articles In the same example, if your preferred shares are non-
only allow for common. If they want to issue preferred shares, they cumulative, you are only entitled to P50 from the P500
need to amend their Articles of Incorporation and include therein dividend declared. You have no right to the dividends in
preferred shares. arrears.

General rule: Doctrine of Equality of Shares
Based on Section 6 of the Corporation Code
Each share of stock shall be equal in all respects to every
other share.
If the Article of Incorporation provides for common and preferred
shares, as a general rule, each of these types of shares shall have
the same qualities. They will have the same rights and obligations,
except if the Articles provide otherwise. If the Articles are
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
indicated, they are presumed to have the same rights and
obligations.
3. Participating shares – those which after they get their
share of the dividends, they still participate in the sharing
of dividends of the common stockholders.
In the example, if the declaration is P500, the preferred
stockholders got their P50, there is now P450 to be
distributed supposedly among the common stockholders.
If you are holding participating preferred shares, you also
get to participate in the P450 on top of the P50 preferred
dividend.
4. Non - participating shares - Once you get your
preferred shares, that’s it. In the example, the P450 now
belongs to the commons stockholders.

PRIMARY CLASSIFICATION OF SHARES Cumulative participating preferred shares

It is allowed. You get P150, then get a share in the P350 with the
5. Common or Preferred common stockholders.
6. Par value or No par value
7. Voting or Non-voting If the Articles are silent, the preferred shares are classified as non-
8. Founder’s cumulative and non-participating by virtue of the Doctrine of
9. Redeemable Equality of Shares. All shares are deemed to have equal rights.
10. Convertible
11. Treasury ACCORDING TO PAR VALUE
12. Shares in Escrow
Par value shares
COMMON AND PREFERRED SHARES Those which has a value stated in the Articles of Incorporation

Common shares No par value shares

Ordinary shares distributed in a 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.
No value stated in the Articles of Incorporation. When they are
issued, they are deemed fully paid. There is no such thing as an
unpaid subscription if you have no par value shares.
Under Section 6 of the Corporation Code, when you are issuing no
par value shares, they are deemed fully paid and non-assessable.
So the holder of the shares shall not be liable to the corporation or
to the creditors of the corporation in respect of the value of the
shares because these are deemed fully paid.
But in Par value shares you can have paid and unpaid portion.
Example:
You are buying 10 shares at 5 pesos each = 50 pesos
Paid in = 25 pesos
Unpaid = 25 pesos
But if you are buying no par value shares, you are considered to
have paid the subscription in full. No unpaid subscription.
SHARES BASED ON VOTING RIGHTS
This is important in terms of nationalized companies.
Voting shares
Entitle the holders to vote in the election of directors
Non-voting shares
Does not entitle the holders to vote except for those instances
provided by law. Only preferred or redeemable shares may be
deprived of their voting rights
Scenario: A client wanted to incorporate in the Philippines
but they wanted to own land. We advised them that they
cannot own land unless they are a 60-40 company. If all are
common/voting shares, is it possible to classify the 40%
common shares (foreign owned) as class A with 2 votes per
share and the other 60% (Filipino owned) as class B with 1
vote per share?
Not allowed. Voting privilege is always determined by the number of
shares subscribed or 1 share: 1 vote
Instances wherein non-voting shares are allowed to vote:
Gamboa v. Teves (MR)
The Philippines does not have totally non-voting shares because
even the non-voting shares are required to vote in these substantial
matters.
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other
disposition of all or substantially all of the corporate
property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock; (Redundant,
requires amendment of the articles)
6. Merger or consolidation of the corporation with another
corporation or other corporations;
7. Investment of corporate funds in another corporation or
business in accordance with this Code; (Redundant,
requires amendment of the articles) and
8. Dissolution of the corporation.
Difference between voting and non-voting shares
Power to elect the Board of Directors
FOUNDER’S SHARES
Shares given to incorporators which may be granted certain rights
and privileges not available to other owners of stocks except that if
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
REDEEMABLE SHARES
Shares which may be issued as provided in the articles of
incorporation. These may be purchased or taken up by the
corporation upon the expiration of a fixed period regardless of the
existence of the unrestricted retained earnings in the books of the
corporation and upon such other conditions as may be stated in the
articles
As a general rule, is a corporation allowed to purchase its
own shares even if the corporation don’t have redeemable
shares?
Allowed, provided it has sufficient unrestricted retained earnings
Why would anyone want to put redeemable shares in their
articles when the corporation is allowed to purchase shares
anyway, and it becomes treasury shares?
Because if you are buying redeemable shares, you don’t need to
have unrestricted retained earnings, you can buy anytime, provided,
the terms and conditions of the redemption should be provided in
the articles.
When you are purchasing ordinary shares, it’s allowed but
is always subject to the condition that the corporation
should have a sufficient retained earnings. If you don’t
want to go through that condition because you want the
buy-back to be a sure thing, then you need to put a
redeemable share as one of the classification of your shares
in your articles. Why?
Because having a redeemable shares will give the corporation the
right to redeem the shares even if it does not have sufficient
unrestricted retained earnings.
Regardless of the availability of UNRESTRICTED RETAINED
EARNINGS, the corporation has the right to buy back the
redeemable shares. That is the difference between a REDEEMABLE
SHARE and a TREASURY SHARE.
CONVERTIBLE SHARES
These are shares that are convertible or changeable by the
stockholders from a one class to another class for a certain price
and within a certain time.
Convertible Preferred Shares
Shares that are preferred but they can be converted to COMMON
SHARES. That is permissible under the law BUT you have to provide
the RIGHT TO CONVERT of such shares in the Articles of
Incorporation.
The conversion of shares is a 2-step process:
1. Provide the Right to Convert in the AOI.
2. When you do convert, you need to amend the AOI to
provide for the issuance or addition (for example) of new
common shares and delete the convertible preferred
shares as you no longer have those class of shares once
conversion takes place.
TREASURY SHARES
Shares issued by the corporation which are subsequently redeemed
or bought back by the corporation. It is not really a classification
but more of a STATUS OF A SHARE.
What can it do with the shares that it redeemed or bought
back?
It can retire the shares. In this case, it must amend the AOI as the
Authorized Capital Stock decreases, or it can keep the shares for
subsequent issuance. No amendment is required.
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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.
SHARES IN ESCROW
Technically it is not a classification of a share. It can be any type of
share where there is a restriction on transfer. It is not really a class
but more of a status of a share.
This normally happens when the company wants to list or wants to
go public. PSE has a rule that for those shares which are issued
within 1 year from the time that you will go public; it needs to be
put in escrow for 6 months. If you bought your shares today and
the company goes public within 1 year from the time you bought,
you cannot sell your shares for 6 months. You need to put it in
Escrow – you have to deposit your shares to a 3rd-party agent to
ensure that you can never sell it.
INCORPORATION and ORGANIZATION OF A PRIVATE
CORPORATION
You need to have incorporators. They sign the AOI. They need to
be natural persons. Partnerships and Corporations cannot be
incorporators.
Does that mean that corporations are not allowed to invest
in an unformed corporation or a corporation that is still to
incorporate?
Example: Foreign Client wants to put up a BPO business but it
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
initial investment of the corporation? Foreign client does not want
to invest in his personal capacity, what is your advice?
o You put in PHP 100 capital, let’s say at PHP 1 per share, you
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
company. That company is not an incorporator. It is
permissible under the law because it is the 5 persons who are
the incorporators who signed the Articles of Incorporation; the
company will not be signing, but it can be an investor, a
stockholder, as long as it is not an INCORPORATOR.
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.
However, it will not be one of the INCORPORATORS who will
sign the AOI. This simply means that the Incorporators need
not be the ones who will have to give the 25%-25%
requirement as they are ONLY REQUIRED TO HAVE AT LEAST
1 SHARE EACH.
Because remember 25% of the Authorized Capital Stock (ACS) must
be subscribed and 25% of the Subscribed must be paid-up. The 25
is part of his 95 investment.
The incorporators need not be the persons who give you your 25-25
requirement because they are only required to have 1 share each.
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
persons who sign the Articles of Incorporation.
REQUISITES TO BECOME AN INCORPORATOR
1. Must be of Legal Age
2. Majority must be residents of the Philippines
3. Must not be less than 5 and not more than 15
4. Must own or be a subscriber of at least 1 share
Must be of Legal Age
The Article is a contract so they must have the capacity to contract.
Majority must be residents of the Philippines
There is no requirement that the incorporators must be Filipino
citizens. All that the law requires is that majority must be residents.
The requirement on citizenship is only required when you are
dealing with a nationalized company.
Not less than five (5) not more than fifteen (15)
incorporators
Partnership Corporation
Partners are two or more Incorporators not less than 5 not
(can be 100) more than 15.
Stockholders can be 1million persons
Must own or be a subscriber of at least 1 share
Incorporator is required to have at least 1 share. So even if there is
a billion peso company the incorporators can invest at least 5 pesos
(1peso per share).
CORPORATION’S TERM
50 years. Unless sooner dissolved or the period is extended for
another 50 years.
When you become corporate secretaries take a look at the
corporate term of your companies because this is most often
neglected. Once you have 5 years left in your corporate term you
should already apply for an extension thru the amendment of your
articles of incorporation.
CAPITAL STOCK
Authorized Capital Stock
It is the capital provided for in the Articles of Incorporation.
Ordinarily the AOI will say that the Authorized Capital Stock (ACS)
of the Corporation is P 10,000,000.00 divided into 10,000,000
common shares at par value of 1 peso per share.
Subscribed Capital
Need not be equal to your ACS. All that the law requires is that
when you incorporate, your subscribed capital has to be at least
25% of your ACS. This is the minimum requirement.
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.
Paid-up Capital
It is the portion of your subscribed capital that has been paid. Not
all of your subscribed is required to be paid up.
Example: 2.5M (Subscribed) 25% of this should be paid up i.e. P
625,000.
Normally when you say capital it pertains to your subscribed capital.
Even if it is not fully paid-up that is already considered as issued or
outstanding capital stock.
Outstanding Capital Stock
This are the total shares subscribed or issued to your stockholders
whether or not fully or partially paid taking out your treasury
shares. These are the capital stocks which are in the hands of your
stockholders.
Even if not yet fully paid you can already exercise all the rights of a
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
in the election of directors. Is it the 2.5M (Subscribed) or the 625K
(Paid-up)? It’s the 2.5M. Even if not yet fully paid, the holders of
the subscribed but unpaid capital stocks is already entitled to all the
rights of the stockholder. For dividend distribution, it’s 2.5Mbecause
you look at your subscribed, not your paid-up.
Exception: Delinquent shares because once the shares are
declared delinquent, all the rights pertaining to that share is
suspended.
The requirement of the law is that at least 25% of the authorized
capital has been subscribed, 25% of the total subscription has to be
paid-up. The balance will be payable on a date fixed in the
subscription agreement. If there’s no date fixed, it depends on
when the BOD will make the call.
If the BOD makes the call and you don’t pay, then your shares will
become delinquent.
You are the lawyer of a company with a fully paid 2.5M
subscribed shares out of 10M authorized capital. Your
Corporation President wants to buy back 1.5M of your
outstanding shares. You President goes to you and asks you
if you can do it. Is it allowed?
It is allowed.
The 25-25% requirement is only mandatory in two instances:
1. When you incorporate
2. When you increase your authorized capital stock
The 25-25 requirement you only look at the increase. If you have
5M authorized capital and you want to add 2, you only look at the
25% of the 2 million. Not 25% of 7M. Other than that, the
corporation is not required to maintain the 25-25% requirement.
Note: Any decrease will have to comply with the trust fund
doctrine.
TRUST FUND DOCTRINE
The capital stock, property and other assets of the corporation,
regarded as equity in trust for the payment of corporate creditors.
So the subscribed capital is a trust fund for the payment of the
debts of the corporation which the creditors have the right to look
up to satisfy their credit. This doctrine is the underlying principle for
the following provisions of the Corporation Code:
o Distribution of capital assets in case of amendment
o Redeemable shares
o Dissolution
o Section 41 on treasury shares – where it says that you
cannot purchase your own shares unless you have the
sufficient unrestricted retained earnings
o Section 122 in the distribution of assets in case of
liquidation where there needs to be a strict procedure on
which person gets paid first. It is always the stockholders
who get paid last.
In the case of Halley vs. Printwell, the SC said that the Trust
Fund Doctrine does not pertain only to the subscription of the
stockholders. Any asset that was given or returned by the
corporation to its stockholders are covered by the trust fund
doctrine. So regardless of the fully payment of the subscription,
meaning I am paid in full and then the corporation distributed
dividends and as a result of that dividends distribution, the creditors
cannot anymore collect – then the creditors can go after that asset
distribution. In fact this is the reason why the law provides that you
cannot distribute dividends unless you have sufficient unrestricted
retained earnings.
Clarification: For example the 5 million which was fully subscribed
and fully paid, and then there is an increase of 2 million. Do you
really have to shell out the 25% of the 2 million? Yes you really
have to shell out. Every time you increase, you have to subscribe
25% of that increase and pay up 25% of that increase.
Are you allowed to increase your authorized capital while
you have not fully subscribed to your existing authorized
capital?
Yes, you are allowed. You don’t need to fully subscribed your
existing authorized capital before you increase your authorized
capital.
Example: If you have 5M authorized capital and 3M subscribed
leaving 2Munsubscribed, then you increase 2M. Is that allowed?
Yes. For your 2M increase, 25% of that must be subscribed
(50,000) and 25% of that must be paid-up (12,500).
You can just get that from the unissued portion, are you required to
first fully subscribed? The SEC said no because if you want to
increase your authorized capital stocks then by all means increase it
and pay the filing fee to the SEC. Whereas, if you just use your
unissued, there’s no need to pay filing fees because that’s already
been paid for and you don’t need the SEC approval.
In Halley vs. Printwell, the SC emphasized the corporation has
no right to release its stockholders from their unpaid subscription.
CONTENTS OF ARTICLES OF INCORPORATION
1. Name of the Corporation
2. Specific purpose or purposes for which the corporation is
being incorporated
3. Place where principal office of the corporation is to be
located
4. Term for which the corporation is to exist
5. The names, nationalities and residences of incorporators
6. The number of directors or trustees, which shall not be
less than 5 nor more than 15
7. The names, nationalities and residences of persons who
shall act as directors or trustees
8. If it be a stock corporation, the amount of its authorized
capital stock, the number of shares and par value of each
shares, the 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;
9. If it be a non-stock corporation, the amount of its capital,
the names, nationalities and residences of the
contributors and the amount contributed by each; and
10. Such other matters as are not inconsistent with law and
which the incorporators may deem necessary and
convenient.
Name of the corporation
Name must not be identical or deceptively or conclusively similar to
that of an existing corporation.
You can reserve it online. If the online will not allow you to reserve
the name because it’s similar to another registered corporation, you
can ask for a reconsideration by manually writing a letter to SEC as
to why you should be allowed to use the name (i.e, other
corporation is a related company)
Specific purpose or purposes for which the corporation is
being incorporated
You can have Primary purpose or Secondary purpose. If you do a
transaction not covered by your purpose, the transaction is ultra
vires.. The purpose of a corporation determines the power and
authorities of 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.
Place where principal office of the corporation is to be
located;
Must be specific and include unit number, building name, street
name, barangay and city. This is to prevent fly-by night corporation.
For convenience purposes, if you want to move and as long as
you’re within the same city, you can just file a general information
sheet to show your new address. No need to amend articles.
Original Subscribers
A corporation can become an original subscriber as long as it is not
an incorporator. Only natural persons are allowed to be
incorporators. But a corporation can be a subscriber and can’t be an
incorporator.
LIFE OF A CORPORATION
A corporation is considered alive when the SEC issues the certificate
of incorporation. The life of the corporation starts at the date of the
issuance of the certificate of incorporation. That is the time you
start counting the 50 years.
The certificate of incorporation is now considered as the primary
franchise of the corporation.
If the corporation wants to engage in another business, ordinarily, it
does not need any other permits. But if it wants to engage in
regulated industries like banks, insurance, they need to get
secondary franchise (i.e. BSP, Insurance Commission, SEC).
What happens if you incorporated but you did not start your
business? Under Sec 22, if you did organize and commence
transaction within 2 years from your incorporation, your corporate
powers will cease and the corporation is deemed to be dissolve.
If you commenced your transaction, but you stopped? The law says
that if you are inoperative for a period of 5 years, it is a ground for
suspension or revocation of your franchise.
What is the difference between the two?
In the first, if you did not commence business within 2 years from
the issuance of certificate of incorporation, it is automatically
deemed dissolved. Whereas, in the second, the SEC will need to
conduct hearings before it can declare that your certificate has been
revoked. There has to be an issuance from the SEC revoking your
certificate. It is merely a ground for revocation.
AMENDMENT OF THE ARTICLES OF INCORPORATION
Three-step process
1. Approved by the majority of the Board of Directors.
2. Once the BOD approves, you need to go to the
stockholders. You need the vote of stockholders
representing 2/3 of the outstanding capital stock,
whether voting or non-voting.
o TN: This is one of the item where even the non-
voting shares are required to vote.
3. Approval of SEC. If the SEC does not act on it within 6
months from filing, it is automatically deemed approved.
Exemption to the Three-step process
If your corporation is one of the regulated companies, the SEC will
not accept your application for amendment unless you get an
endorsement from the regulatory agency.
BOARD OF DIRECTORS AND TRUSTEES
Sec. 23. The board of directors or trustees. - Unless otherwise
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
of stocks, or where there is no stock, from among the members of
the corporation, who shall hold office for one (1) year until their
successors are elected and qualified.
Qualifications of a Director and Trustees
1. He must be a holder of at least one share.- The share
must be recorded under the director’s name in the Stock
and Transfer Book of the corporation.
2. Majority of the directors must be residents of the
Philippines.
3. Not convicted by final judgment of an offense punishable
by imprisonment exceeding 6 years or a violation of the
Corporation Code, committed within 5 years before the
date of his election.
4. He must be of legal age.
5. He must possess other qualifications as may be
prescribed in the by-laws of the corporation.
How are directors elected?
In the election of directors, there must be present, in person or in
proxy, the owners of the majority of the outstanding capital stocks
(or, if non-stock, majority of the members entitled to vote).
TN: Only stocks with voting rights. Non-voting stocks are not
allowed to vote in the election of the directors.
There must be a quorum. The majority of the outstanding capital
stock must be present for the election of the directors.
How will the stockholders vote? Every stockholder entitled to vote
shall have the right to vote the number of stocks standing at the
time fixed in the by-laws in his own name, or where the by-laws are
silent, at the time of the election.
The by-laws can say that “The stockholders who are entitled to vote
in the meeting are only those who own shares at least 30 days
before the date of the annual stockholders meeting.” That 30 days
before should be your record date.
For publicly-listed companies, it is necessary to set the record date.
Because if they allow those stockholders who own shares to vote
on the meeting date, they will really never know since the stocks
change hands all the time.
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
publicly-listed companies, they normally set a record date.
A stockholder is allowed to vote such number of shares that he
owns as listed in the stock and transfer book as of record date. If
the by-laws does not provide for record date, then on the date of
the meeting.
Example:
On record date — 1M
On meeting date — 5M shares
How much shares can the stockholder vote?
1M shares only.
But if the by-laws are silent, the stockholder can vote 5M shares.
Provided, that the shares are already listed in the stock and transfer
book. If not recorded, you are not deemed a stockholder as to
those shares.
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
the reckoning point is the shares owned on record date.
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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.
VOTING
How is voting done?
A stockholder can only vote such number of shares as is recorded in
his name in the stock and transfer book of the corporation.
The number of votes that a stockholder can cast is the number of
shares held multiplied by the number of directors to be elected.
Example:
100,000 shares
5 vacancies in the board
————————————-
= 500,000 votes
How will the 500,000 votes be distributed?
a. The law provides that it can be distributed per
seat/vacancy, i.e. 100,000 votes each per nominee; or
b. All votes can be given to only 1 nominee.
Can the votes be divided among:
A. 3 nominees? Yes.
B. 2 nominees? Yes.
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
to all.
Does the distribution have to be equal?
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,
150,000 votes to Nominee B, 100,000 votes to Nominee C, etc.
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
you your nominees in the board. But normally, you can actually
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
your votes. It’s not important that you get all the seats, what is
important is you get majority of the seats. When the directors vote,
they don’t vote unanimously, they vote based on the majority.
Even unpaid shares will be counted in the voting. As long as your
shares are subscribed, even if not yet fully paid, you can vote those
shares. The problem is, if your shares are already delinquent.
Meaning, there was already a call for the payment and you did not
pay, so the directors declared your shares as delinquent. In which
case, you are no longer allowed to vote the shares.
Earlier we said that it’s the stockholders who can vote in the
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
board. Because it’s actually tedious to call a meeting of the
stockholders, especially if you have a big corporation because your
stockholders can be all over the Philippines. And remember the rule
that when the stockholders have a meeting, it has to be in the
principal place of business of the corporation. It should only ideally
be done once a year, during the annual stockholders’ meeting.
Outside of the annual stockholders’ meeting, if there is a vacancy in
the board because one director resigned, the other directors can fill
in the seat. Provided, that the other directors still constitute
a quorum. So, if there is a vacancy in the board and the remaining
directors still constitute a quorum, they can be the ones to elect
another member of the board.
Exceptions to the above rule
1. Reason for the vacancy is due to the removal by the
stockholders of the director. The removal is done in a
meeting and during that stockholders’ meeting you need
to elect the replacement.
2. Expiration of term. Normally, this happens during the
annual stockholders’ meeting. In that case, the directors
by themselves cannot elect.
3. Increase in the number of directors or trustees.
The increase in the number of directors or trustees
requires the amendment of your articles.
If outside of these three reasons and the remaining board still
constitutes a quorum, then yes, they can fill in the vacancy without
having to resort to stockholders’ meeting.
Aside from directors, you also need to elect the officers of the
corporation. Stockholders elect the directors, the directors elect and
appoint the officers.
BASIC OFFICERS IN THE CORPORATION CODE
1. President
2. Treasurer
3. Corporate Secretary
Are the officers required to be stockholders?
General Rule: They are not required to be stockholders.
Exception: President. Because he is required to be a director and
to be a director, you need to be a stockholder.
The law requires the secretary to be a resident and a citizen of the
Philippines. SEC Rules requires the treasurer to be a resident of the
Philippines.
Concurrent positions are allowed as long as not president and
secretary or president and treasurer at the same time.
Can you provide in your articles and by-laws that you don’t
want to have your stockholders’ meeting all the time?
No. The 1 year term is fixed.
When directors or trustees hold a meeting, it is required that there
should be a quorum.
QUORUM
When do you have quorum?
There is quorum when the majority of the number of board of
directors as fixed in the articles are present. When you have a
quorum, the directors can now validly transact business.
In order to get approval of any particular transaction, what you
need is only the majority of the directors present, provided that you
have a quorum.
Situation
If your articles says that you have 5 board of directors:
If 3 directors attend the meeting, that is already majority. You have
a quorum. If during the meeting, they approve corporate acts but
one director objected and only 2 approved. There is approval
because, for the approval, you only need the majority of the
directors present, provided, that you already have a quorum.
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
majority of the directors present.
If two directors appear in the meeting do you have a quorum? If
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
order to have a valid approval, you also need to have a quorum
first.
To have a quorum, you look at the number of directors in the
articles. Majority of that is your quorum. Once you have those
numbers in the meeting, you can have a quorum and you can have
a valid meeting. Now once you have a valid meeting, in order to
approve a corporate act, you only need majority of those present
even if it’s less than the majority stated in the articles.
Attendance/Voting by Proxy
Directors or trustees cannot attend or vote by proxy, only
stockholders can attend meetings by proxy. This is because
directors are elected based on their knowledge and business
experience. Directors will always have to attend in person. This is
why the SEC allowed for BOD meeting to be done by video
conference as long as they are in person, not by proxy.
Stockholders on the other hand, since they are allowed to attend by
proxy, they are not allowed to meet by video conference because
they can always send a representative.
BOARD OF DIRECTORS
Board Meeting
The board does not have to meet all the time. Ideally, they only
have to meet every quarter to discuss the quarterly results. On the
day to day operations they can designate an executive committee
which must be made up of not less than 3 members of the board to
be appointed by the board members. They can act on any action
that may be undertaken by the board except for those actions
where stockholder approval is required because in that case you will
need the majority vote of the directors in a meeting where there is
a quorum.
For example, when you amend your articles, you need to have a
meeting of the board of directors first where you have a quorum
and you have the majority vote of those present. So, the executive
committee cannot do that.
Filling of Vacancies
Filling of vacancies in the board has to be done by the board itself.
Amendment or repeal of by-laws
Amendment or repeal of by-laws or the adoption of new by-laws
cannot be done by the executive committee. Amendment or repeal
of any resolution of the board which by express term are not so
amendable or repealable and distribution of cash dividends to
shareholders have to be done by a full board meeting.
Exception to the Quorum Rule
There is an exception to the rule that once you have a quorum you
only need to have the approval of the majority of those present.
General rule, for a valid approval of the board of directors, it has to
be done in a meeting where there is a quorum but the approval
required is only the majority of those present. The exception is
election of officers, because the vote required for the election of
officers is not majority of those present but the majority of the
numbers of directors stated in the articles.
Every decision of the majority of the directors where there is a
quorum shall be valid as a corporate act except for the election of
officers which shall require the majority vote of all the members of
the board.
In determining your election of officers, if you have 5 directors and
3 directors present, you have a quorum. Ordinarily vote of 2 is
allowed but for the election of officers, you need a vote of 3
because it is majority of the number. But is it okay that only the 3
attended? Yes, because the law does not say that it has to be
attendance, it has to be the vote of the majority of the directors.
Business Judgment Rule
Under the business judgment rule, which is followed by our courts,
any decision made by directors in the regular course of the
performance of their duties, are considered as valid and the
directors cannot be held liable for them.
Courts have no authority to supplant the judgment of the directors
because, precisely, the directors are supposed to be elected on the
basis of their expertise with regards to the operations of the
corporation.
So, the business judgment rule states that the questions of policy or
management are left solely to the honest decision of the officers
and directors of a corporation. The courts cannot substitute their
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
reviewable by the courts or by the SEC. And the directors cannot be
held liable to the stockholders in performing such acts, even if the
acts result to a loss to the corporation.
Exceptions to Business Judgment Rule
The rule will only apply if the director acts in good faith – which
means that exceptions to this general rule are under Section 31 of
the Corporation Code:
a. if the director willfully and knowingly vote for or assent to
patently unlawful acts of the corporation; or
b. he is guilty of gross negligence or bad faith in directing
the affairs of the corporation,
In which case, the director shall be held jointly and severally
(solidary) liable for all damages resulting therefrom, suffered by the
corporation, its stockholders, members and other persons.
Aside from this liability, directors can also be liable in cases of
conflict of interest between the interest of the director and that of
the corporation. This rule prohibiting conflict of interest stems from
the fiduciary nature of the relationship between the director, the
corporation and the stockholders.
Under Section 31, it also says that when the director/officer
attempts to acquire or acquires in violation of his duty, any interest
adverse to the corporation, in any matter which has been reposed
in him in confidence (so it is in relation to his duty as a director of
the corporation), but instead he acquires an interest which is in
conflict of that of the corporation, then he can be held liable as
trustee for the corporation and must account for the profits which
would have accrued to the corporation.
Now, this rule under Section 31 must also be related to the rule
under Section 34: the doctrine of corporate opportunity.
Doctrine of Corporate Opportunity
This doctrine means that if there is a business opportunity which is
presented to a corporate officer/director that the corporation is able
to undertake, that it is in line with the corporation’s business and is
advantageous (like it’s not ultra vires, like it’s part of the operations
of the corporation), the corporation has an interest or reasonable
expectancy, and the director gets or embraces for himself that
opportunity, then the director will also be held in conflict of interest,
and the law will not permit him to seize the opportunity even if he
uses his own funds in the venture.
For example, you have a director who cancelled the contract
between a corporation and one of its clients. Later on, that director,
forming another business by himself, entered into the same
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.
The doctrine of corporate opportunity will apply if the business
opportunity is within the powers of the corporation to perform, the
corporation is capable of performing the obligations, and then the
director usurps for himself that opportunity even if he uses his own
funds. He must account to the corporation the profits of that said
business.
Exception to the Corporate Opportunity Rule
Exception to this rule is if his act is ratified by the stockholders
owning or representing at least 2/3 of the capital stock of the
corporation because that means that the ultimate beneficiary of the
corporation (which would be its SHs) have agreed to the director’s
taking of the opportunity for himself. Once there is ratification then
the director can validly enter into that business opportunity.
SELF-DEALING DIRECTORS
Self-dealing means that the director contracts with the corporation.
The director enters into a contract or transaction with the
corporation. Is it allowed?
General Rule:
Self-dealing between the director and the corporation is valid if it
complies with the following requirements under the Corporation
Code:1. necessary
The presence
meeting intowhich
constitute
of such
the acontract
director
quorumorwas
fortrustee
such
approved
meeting;
in the
wasboard
not
1. Quorum is majority of ALL the board of directors stated in
the Articles of Incorporation.
2. The self-dealing director presence must not be necessary
in order to constitute a quorum.
3. If there 5 directors and 3 appears, you have a quorum.
But if 1 of the 3 is the self-dealing director, then
automatically no. 1 is out.
4. 5 directors and 4 appears including the self-dealing
director, you still comply with requirement no. 1 because
you can still have a quorum even without the presence of
the self-dealing director.
2. the
The approval
vote of such
of the
director
contract;
or trustee was not necessary for
5. Given that the presence of the director was not necessary
for there to be a quorum, so there are 4 directors, then
the act was voted upon and in the approval 3 directors
approved. One of the directors who approved is the self-
dealing director. Allowed or not allowed? What do you
need for valid corporate action given that there is a
quorum? MAJORITY of the directors PRESENT. So, if there
are 4 directors present, how many do you need to have a
valid corporate action? You need 3.
6. If 1 of the 3 who approved is the self-dealing director, do
you comply with the 2nd requirement? No because without
that vote of the self-dealing director you will only have 2
approvals and that is not sufficient to give you the majority
vote.
7. But if all 4 approved, then that is considered compliance
with the 2nd requirement because even if you take out the
vote of the self-dealing director you still have sufficient
number of votes to approve the corporate action.
3. circumstances;
The contract and is fair and reasonable under the
8. Because the officer actually does not vote to approve. It’s
the directors who vote to approve.
9. Once you have the approval, then the contract with the
officer is already be considered valid.
What happens if it does not comply with the 1st or 2nd
requirement? What happens to the contract?
Voidable. It is not void.
This means that it can be subject to ratification of 2/3 vote of the
Outstanding Capital Stock or the 2/3 of the members in case of a
non-stock corporation.
But always there has to be disclosure of the adverse interest so that
when the stockholders ratify, they do so with open eyes. There has
to be a disclosure of the adverse interest of the self-dealing and
that the contract must always be fair and reasonable.
Note: You can dispense with the 2 procedural requirements
(quorum and votes for approval) but not with the substantive
requirement that the contract must be fair and reasonable, it cannot
be dispensed with.
INTERLOCKING DIRECTORS
How would you differentiate self-dealing directors with
interlocking directors?
In self-dealing directors, you have the corporation dealing with the
individual director. Interlocking, on the other hand, you have a
corporation dealing with another corporation and both of those
corporations have a common director. That is an interlocking
director transaction,
Rule on interlocking Directors
The general rule is that the contract with an interlocking director is
valid. The exception is when the contract is fraudulent.
If the interlocking director has substantial interest in one
corporation and nominal interest in another corporation. In which
case the law says, the corporation where that director has a
minimal interest, you have to comply with section 32 (quorum and
approval requirements).
Why do you think the law distinguishes between an
interlocking transaction where the director holds equal
interest in both companies and an interlocking director
transaction where one is minimal and one is substantial?
It can lead to conflict of interest. The tendency of the director
concerned will be of course to favor the corporation where he has
substantial interest because he will get the most benefit there.
Whereas, for the corporation where he as a minimal interest,
chances are his benefits there will also be minimal.
If one is substantial and the other is minimal, as far as that minimal
corporation is concerned, you have to comply with the rules for self-
dealing directors.
When can you say that the holding of a director is
substantial?
If it exceeds 20% of the outstanding capital stock.
If both corporations substantial, no problem. If both corporation
minimal, no problem. The problem will arise if there is now an
imbalance, one is substantial the other one is minimal in which case
you have to comply with the rules on self-dealing corporation.
1. The presence of such director or trustee in the board
meeting in which the contract was approved was not
necessary to constitute a quorum for such meeting;
2. The vote of such director or trustee was not necessary for
the approval of the contract;
3. The contract is fair and reasonable under the
circumstances; and
4. In case of an officer, the contract has been previously
authorized by the board of directors.
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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.
REMOVAL OF A DIRECTOR
Does the stockholder of a corporation have the right to
remove a director?
Sec. 28 of the Corporation Code allows the removal of a director.
And the removal, may be with or without cause. So if the
stockholder says, “O we don’t like your face anymore.” That is a
sufficient ground to remove a director because it can be with or
without cause.
Procedures to remove a director:
1. There must be a meeting of the stockholders. They cannot
remove a director without holding a meeting. There must be
a meeting whether it is a regular or special meeting and it
must be called for the purpose of removing the director. So
the purpose of holding that meeting must be specific. It is
for the purpose of removing the director.
2. Who is authorize to call such meeting? Sec. 28 says that it is
the corporate secretary upon order of the president or on
the written demand of the stockholders representing at least
a majority of the outstanding capital stock. The law is very
specific, if you are going to remove a director, it must be
done through a regular or special meeting called for that
purpose.
What happens if there is a failure by the secretary to
call such meeting?
The law goes further to say that if the secretary fails or
refuse or if there is no such secretary then the call for the
meeting maybe addressed directly to the stockholders or
members or any of the stockholder or member of the
corporation signing the demand.
3. The removal must be done by the vote of at least 2/3 of the
outstanding capital stock or if non-stock 2/3 of the members.
Exception to the rule on removal without cause
You cannot remove without cause if you use that power to deprive
minority stockholders or members of the right of representation
which they are entitled to under Sec. 24. (Election of Directors) It
means for example, that if I am a minority stockholder when I vote
for the election of the directors, my vote will be equal to the
number of shares that I hold, multiplied by the number of vacant
seats.
Scenario: If I used all of my votes to elect one person in the
board, I cumulated all of my votes because I’m only a minority
stockholder, so I cannot elect all or majority of the board. So I
made sure that I could elect at least one by accumulating all my
votes by voting for one person alone. And here comes 2/3
removing the director that I elected. The law says you cannot do
that without cause. The 2/3’s can only remove a director who has
been elected by the minority stockholder in the procedure for voting
under sec 24 if there is a valid cause for such removal.
Why is it as a rule, directors can be removed by the
stockholders?
We go back to the essence of the relationship between the
directors, corporation and the stockholder.
Bernas v. Cinco, GR No. 163356-57 July 1, 2015
Facts:
The case is about Makati Sports Club where in this case, there is a
certain group that had been managing the sports club. And then
there were rumor that the group was mismanaging and certain
funds were missing. The oversight committee which is made up of
previous/past presidents of the organization, called for a special
meeting to remove the directors. And they were able to call that
meeting and they had that meeting and they were able to remove
and replace the ruling group. So now a case was brought by the
removed directors saying that the oversight committee had no right
to remove them as director.
Ruling:
The SC said that the relationship of the directors and the
stockholder is a Fiduciary Relationship. Such that the stockholder
being the proprietor of the corporate interest and the beneficiary of
the corporate interest should have the power to console the
directors, such that if the directors fail to perform their duty, then
the director has the right under the law, under the by-laws of the
corporation to remove and replace the erring director. So SC said,
of course, the stockholders of a corporation has the right to remove
the directors because of the fiduciary relationship between the
corporation, the stockholders and the directors.
In the case, there is a problem because the special stockholders
meeting was not called by the corporate secretary upon order of
the president. The corporate secretary and the president would not
call because they were part of the ruling group, so it was not called
by the secretary, it was not even called by the members but rather
it was called by the oversight committee. The by-laws of the Makati
Sports Club says that it is the president or the board of directors
who can call for a special meeting. So it did not comply with the
procedure.
So according to the SC that even if you have the right to remove
the directors you have to follow the procedure. Sec 28 says, it is
the corporate secretary or upon written demand of a stockholder.
And even the by-laws says it is the president and board of directors.
SC said that nowhere in the corporation code or in the bylaws of
the Makati Sports Club that the oversight committee is authorized to
set in whenever there is a breach of fiduciary duty and call for
special election for the purpose of removing the existing set of
officers and electing their replacement.
The oversight committee did not have the power to call. Thus, the
special stockholders meeting is void. Even if that special meeting
was later on ratified during the annual stockholders meeting. “SC
said, if the act is invalid it cannot be ratified.” You have to
distinguish an act which is illegal because it is against the law and
an act which is beyong the authority of the officers. SC said that the
act is against the law, it cannot be ratified. The law is very specific,
in order to remove a director you have to comply with the
requirements of the corporation code or the bylaws. There was also
an issue that it’s impossible for the president to call for the meeting
because he’s the person that’s supposed to be removed. SC said, it
doesn’t matter because you are left recourse with the court. If the
officers mentioned in the bylaws fails to call such meeting you can
go to SEC.
POWERS OF THE CORPORATION
a. Express powers- those which are expressly listed in the
Corporation code and Articles of incorporation.
b. Implied powers – those which are necessary for the
exercise of the express powers.
c. Incidental powers – those which are incidental to the
existence of the corporation.
Sec. 36, CCP lists down the general powers of the corporation. To
sue and be sued, succession, adoption and use of coporate seal,
amendment of articles, adoption of bylaws, issuance and sale of
stocks to subscribers and sale of treasury shares, adopt plan of
merger or consolidation, make donations, establish retirement plans
for the benefits of its directors, and any other power which may be
necessary to achieve the purpose of 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.
Whether or not you include these purposes in your secondary
purpose. These are considered as express powers because they are
provided under the corporation code. You don’t actually need to put
it in the articles. Express powers may be exercised even if they are
not found under the articles of incorporation.
POWERS NOT FOUND IN SECTION 36
1. Power to extend or shorten the corporate term
2. Power to increase/decrease capital stock
3. Power to deny pre-emptive right
4. Power to sell, dispose, lease, and encumber all or
substantially all of the corporate assets of the
corporation.
5. Power to acquire their own shares of stock
6. Power to declare dividends (through the BOD) so long as
the corporation has unrestricted retained earnings.
7. Power to enter into management contracts
POWER TO EXTEND OR SHORTEN THE CORPORATE TERM
The term is part of your articles, when you amend the term, you
must also amend the articles (Majority of the board & 2/3 of the
Outstanding Capital Stock).
POWER TO INCREASE/DECREASE CAPITAL STOCK
You also need to amend your articles (Majority of the board & 2/3
of the Outstanding Capital Stock). For increasing, you need to
comply with the 25-25 requirement.
POWER TO DENY PRE-EMPTIVE RIGHT.
It is the right to subscribe to new issuance of share by the
corporation in proportion of the shareholding of the director. The
purpose of this right is to prevent diminution of a particular
stockholder because it may diminish his control in the corporation.
Example: A,B,C has 300 shares and they increase the shares to
200 shares and agreed that only A and B will subscribe for the 200
shares for 100 each. So, instead of C having 1/3 control, C will only
have 1/5 control of the corporation. Effectively instead of having
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
required to offer preemptive rights to its stockholder.
If the articles of incorporation is silent, that means, the stockholder
enjoy preemptive rights. But a corporation has the power to deny
preemptive rights by amending the articles and expressly providing
therein that preemptive rights are denied. If denied, that means
that the corporation can issue shares without first offering the
shares to its existing stockholders. However, but because the denial
requires amendment of AOI, that means you must comply with the
votes necessary to amend the articles, which is majority of the BOD
and 2/3 of Outstanding capital stock.
There are instances that even if preemptive rights are not denied,
they are not applicable, even if not expressly denied, in section 39:
- Shares to be issued in compliance with laws requiring
stock offerings or minimum stock ownership by the
public; or
- to shares to be issued in good faith with the approval of
the stockholders representing two thirds (2/3) of the
outstanding capital stock, in exchange for property
needed for corporate purposes or in payment of a
previously contracted debt.
What is the difference between a preemptive right and
right of first refusal?
A stockholder selling his share to another person – there can be a
Right of First Refusal. The Right of First Refusal is ordinarily not
provided under the law. Unless it is a close corporation where you
have to put in your articles. Ordinarily it is not provided by law.
Preemptive rights on the other hand, it is the corporation who
disposes not the stockholders. It is the corporation who issues the
shares not sale or transfer of the share. Even if the articles is silent,
there is preemptive rights.
If the articles is silent for a Right of First Refusal there can be no
Right of First Refusal.
If the corporation is the one issuing the shares from its unissued
capital stocks, then you have preemptive rights. If stockholder
selling his shares and there is an agreement that there should be a
ROFR then you have Right of First Refusal, but that is not
preemptive rights and it needs to be expressly agreed upon.
Does preemptive right apply to reissuance of treasury
stocks?
There are different thoughts, the most prevalent is that preemptive
rights only apply if the issuance is from the unissued capital stock, it
does not apply to shares which has already been issued.
Remember, treasury stocks are already issued but not outstanding
shares. Preemptive rights which has not been previously issued.
In fact there is another issue on preemptive rights, that if for
example, the shares sold are from the unissued capital stock which
has been previously offered to the stockholders but no one bought,
and when it is sold again, even if it from the unissued capital stock,
preemptive rights will no longer apply, because effectively the
stockholders already waived their right when it was first offered.
Example: The BOD is issuing additional stocks of 500k shares at 1
peso per share, stockholders bought but only up to 300k, there is
200k unissued, the corporation then now sell it to the third person.
The stockholders can no longer say that they have preemptive
rights under this school of taught. Even if unissued share, you are
not allowed to exercise your preemptive rights because you already
waived it.
With a 10M Authorized capital stock, if you want to increase that to
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
outstanding capital stock. And of course, you need to comply with
the 25-25% requirement.
It’s another matter when the corporation will just increase its issued
capital. Issued capital or subscribed capital is different from its
authorized capital. The authorized capital is the maximum capital
that the corporation will have.
If you want to increase your maximum capital, you amend. For
example, if your authorized capital is 10 million, you have 5 million
subscribed that means you have 5 million unsubscribed.
What is the requirement in order to issue the unsubscribed
portion?
You only need to have majority of BOD, you do not need
stockholder’s approval for this. The issuance of shares from the
existing but unsubscribed authorized capital stock only needs the
approval of the majority of the BOD. This is the part where you
need the preemptive right. Because there is no stockholder’s
approval, so you need to give the stockholders time to determine if
they want to maintain their proportion. But of course, as I
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.
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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.
Do you need SEC approval?
You need to report to the SEC under the Securities and Regulation
Code. You have to show that the issuance is actually an exempt
transaction or an exempt security under the SRC otherwise, the SEC
will require you to register the issuance under the SRC. So you will
need to register, you need to file form 10-A because the exempt
transaction are in section 10 of the SRC. And you need to show
where in what exempted transaction it falls. No need for SEC
approval but you need to report to the SEC. And this the instance
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
accept your report and you will be penalized for failure to comply
with the regulations.
Note: Preemptive right is given by law and right of first refusal is
made by contract. Preemptive right is for issuance by the
corporation of unissued shares, right of first refusal is the sale or
transfer by an existing stockholder of his own stockholdings.
THE POWER TO SELL, DISPOSE, LEASE, AND ENCUMBER
ALL OR SUBSTANTIALLY ALL OF THE CORPORATE ASSETS
OF THE CORPORATION.
Y-I Leisure Philippines, Inc., Yats International Ltd. And Y-I
Clubs And Resorts, Inc, v. James Yu
The Nell Doctrine states that as a general rule, when all or
substantially all of the assets of the corporation are transferred to
another entity, the transferee corporation should not be held liable
for the liabilities or obligations of the transferor. There is just a sale
of assets but no transfer of liability.
The doctrine admits of 4 exceptions:
a. when the transferee expressly or impliedly assumes those
liabilities;
b. when the transfer amounts to a merger or consolidation;
c. when the transferee corporation is a mere continuation of
the business of the transferor corporation; and
d. when the transaction is fraudulently entered into to escape
liability.
One of the defenses of Y-I Leisure was that the transaction was
not entered into fraudulently. But the SC said that the exception
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
should be allowed to go after the properties acquired by Y-I
Leisure.
The exception where the acquiring corporation is a mere
continuation of the business of the selling corporation is what the
SC called as Business Enterprise Transfer Rule. It means that
when a corporation transfers all or substantially all of its properties,
it is not only transfering discrete properties of its business but its
entire business and that includes the liabilities.
There is a transfer of all its business when, in relation to Section 40
of the Corporation Code which states that a transfer of all or
substantially all of the properties should render the transferor
unable to continue operating its stated purpose.
What is the reason why in case of the business enterprise
transfer, the corporation is saying that you are not just
transferring your assets even if in reality you are just
buying the asset, you are not just transferring your asset
but you are transferring your liabilities as well?
The SC mentioned that the purpose of this section is for the
protection of the creditors of the transferor such that they should
not be left holding the bag, so to speak, once the transferor divests
itself of all its properties leaving the creditors with no other
recourse but to go after the transferee.
According to the SC, under this Business Enterprise Transfer Rule,
even if on paper what appears is merely a sale of the assets of the
company but if what the buyer is really acquiring is not just the
assets of the seller but the business of the seller including its
customers, goodwill, then it is not just a simple asset purchase, it is
actually a business acquisition. You are acquiring not just the asset
but the business. And when you are acquiring the busines of course
you are not just acquiring the assets but also the liabilities of that
business. That is the essence of the business transfer rule.
When the sale is completed, under the business enterprise transfer,
the seller is left with nothing. It cannot continue its business
anymore because its business has already been transferred to the
buyer.
The SC explained that under Sec.40, the sale, lease, exchange or
disposition of all or substantially all the corporate assets including
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 business of the seller. It is not just an asset transfer but it is
actually a business acquisition.
In order for this exception, the business enterprise transfer rule to
apply, there has to be an acquisition of all the assets including the
goodwill of the selling corporation. And there must be an intention
to continue the business of the selling corporation. Such that this
rule will not apply if the sale of the entire property and asset is only
in the regular course of business.
In fact, if the sale is only in the regular course of business of the
selling corporation, you do not need to have stockholders' approval.
Only BOD approval is required. Or if the proceeds of the sale or
other disposition of the property and asset will be appropriated for
the conduct of the remaining business.
If you take a look at this 2 exceptions, it will show you that the
selling corporation intends to remain in business. It is only doing
ordinary course of its operations when it sells the assets.
But if it shows that the selling corporation has already disposed all
of its assets such that it cannot continue in business anymore, the
SC said that you apply the business transfer rule. And it is not just a
sale of the assets but you also transfer the liabilities.
Under this rule, is fraud necessary in order to transfer?
Fraud is another exception. It has nothing to do with this exception
business enterprise transfer.
What about if the parties, like in this case, agreed that the seller will
be the one responsible for the payment of the creditors? That the
seller, which is the normal case, should keep the buyer free and
harmless from any claim or obligations resulting from the transfer of
the assets? Is that a valid agreement? It is a valid agreement.
However, in this case it does not apply to Yu because he was not a
party to the memorandum of agreement. So as to Yu, the debtor is
still MADCI. But since it’s called a free and harmless clause where it
is embodied in the MOA where Sangil undertook to pay the refunds
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
MADCI already divested itself of its properties then it can go to the
petitioner by virtue of the Nell Doctrine. But since by virtue of this
free and harmless clause, the petitioner should be able to go after
Sangil if it wishes to do so.
Atty: If the buyer and seller has an agreement that the seller will
keep the buyer free and harmless from any obligation and liabilities
arising from the transfer, that agreement is actually a valid
agreement. But it is only valid between the parties who had the
agreement. Since the creditors are not parties to that agreement,
then the creditors are not bound. As far as the creditor is
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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.
concerned, it can go after the buyer under the exception of the Nell
Doctrine. In this case, the Supreme Court said you have a valid free
and harmless clause but it does not apply to your creditor as they
are not a party to your agreement. So the creditor can still go after
the buyer, the buyer can go after the seller by virtue of the free and
harmless clause.
In order to apply the business enterprise transfer rule, you have to
comply with two requisites. In order to be exempt, one of the
exceptions from the Nell Doctrine where you don’t transfer liability
is when the transferor corporation sells all or substantially all of its
assets and the transferee continues the business of the transferor
corporation. If this is the case, there is a business enterprise
transfer and you acquire not just the assets but also the liabilities of
the transferor.
THE POWER TO ACQUIRE THEIR OWN SHARES OF STOCK.
In which case, the shares they acquire become treasury shares. If
you are buying through Sec. 41, then you have to comply with the
requirement that there should be sufficient unrestricted retained
earnings. Retained earnings is accumulated profits, which is assets
minus liabilities minus legal capital (subscribed capital). Whatever is
remaining that is your retained earnings. Corporations can only
acquire their own shares if they have sufficient unrestricted retained
earnings.
They have also the power to invest corporate funds in another
corporation or business or any other purpose. If the investment is
only part of the ordinary business of the corporation, let say the
corporation has excess funds so for now it bought shares purely for
liquidity purpose which it can immediately sell if it needs money,
that does not require the procedure required in Sec. 42. If it is in
the ordinary course, then that is not required to be approved by the
stockholders. The approval of BOD is sufficient.
But if the investment changes the purpose of the corporation, the
requirements under Sec. 42 must be complied with, BOD approval
and 2/3 of the OCS because if you are investing in another
corporation/business/purpose then you are changing the primary
purpose of your corporation. So you need to amend the Articles of
Incorporation.
POWER TO DECLARE DIVIDENDS SO LONG AS THE
CORPORATION HAS UNRESTRICTED RETAINED EARNINGS.
The law provides of three kinds of dividends: cash, property and
stock dividend. If you are issuing stock dividends, you need the
approval of the stockholders. For the other two, BOD approval is
sufficient.
These are not the only dividends a corporation may issue. It may
issue also promissory notes, liabilities or even bonds as dividends.
Such as scrip dividends which are promissory notes or promise of
the corporation to pay cash or assets in a predetermined future
time. That is also an allowable dividend. Corporations can also issue
treasury shares as dividends which become property dividends
because when you say stock dividend it must come from unissued
and authorized capital stock. Thus, if you have a fully subscribed
authorized capital stock, then you may no longer issue stock
dividends anymore. Distribution of treasury stock is not a stock
dividend but a property dividend.
Stock dividend vs stock split
A stock split is an increase in the number of shares of the
corporation without increasing the authorized or event he
subscribed capital of the corporation. There is no change in the
amount but it only changes the number of shares. If I am holding
500 shares of P100/share, then my total stockholding is P50,000.
If there is a stock dividend and my share in the dividend is 100
shares, then that means that my subscribed capital becomes
P60,000. If the total subscribed capital of the corporation is
P500,000 and it declares dividends at P100,000, the total
subscribed becomes P600,000. Now if I have P50,000 at 500 shares
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
P25/share. So you split the number of shares thereby dividing the
par value per share. There is no change in subscribed capital, there
is no change in the subscribed capital of the corporation, and what
changes is the number of outstanding shares, not the amount just
the number, and the par value per share.
When there is stock dividend, the subscribed capital increases of
the stockholder and the total capital of the corporation. When there
is stock split, the number of shares changes but the total subscribed
capital stays the same because it is the par value that changes.
Reverse stock split on the other hand will increase your par value
and decrease the number of shares. There is no change again in
the subscribed capital as what changes again is the number of
shares and the par value per share.
What is the basis for the amount of dividends that a
stockholder can receive?
It is the subscribed shares even if it is not paid up. In determining
how many shares are entitled to dividends, you take a look at the
subscribed shares.
Now, unpaid shares are also entitled to dividends, except if they
become delinquent. If the shares are delinquent, they are still
entitled to cash dividends but the amount will be applied with the
unpaid shares. Any stock dividends will be held until you have fully
paid your subscription.
Now, there is an incentive for corporations who give dividends.
Because corporations are prohibited from retaining more than
100% of their paid-in capital stock. Take note, it is the PAID IN, not
the subscribed capital stock.
So if your subscribed is 2.5 Million but your paid-in is only 2 Million,
the amount of retained earnings that you can keep is up to 2
Million. We take a look at the paid-in, not the subscribed.
And, if you fail to comply with this requirement, the SEC can
penalize you. Normally, the penalty is P10, 000 for every year that
you had more than 100% of your paid-in capital.
Exception to declaring of dividends
What the corporations normally do is, if at the end of the year, if
their retained earnings are more than their paid-in capital, what
they will do is that they will have:
1. extension programs or projects,
2. loan agreements which prohibit them from declaring
dividends
3. retention is necessary under special circumstances in the
corporation.
If you have these three, or any of them, you can actually reserve a
portion of your retained earnings. This becomes your reserved
retained earnings which you are not allowed to declare as
dividends. This is your reserved or restricted retained earnings
because dividends declared are from unrestricted retained earnings.
How does a corporation declare dividends?
Except for declaring stock dividends where you will need the
stockholders’ approval, you only need a Board Resolution to declare
dividends.
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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.
Now, there are three dates that you have to look at when you are
declaring dividends. You have the:
1. Declaration date
2. Record date
3. Payment date
Declaration Date
Declaration date is important because it is the date when you
record the liability for dividends. Unless you declare, you cannot
have dividends payable. You do not recognize liability even if have
cumulative shares.
So without declaration, there can be no dividend liability even if a
corporation have existing cumulative preferred shares. Once the
corporation declares dividends, that’s the time when the liability can
be reported.
During the declaration, you will say, “All stockholders of record as of
this particular date shall be entitled to dividends at P1 per share.”
Let’s say declaration date is today, November 10. All stockholders of
record as of December 15 are entitled to dividends at the rate of P1
per share to be paid on December 30, 2017.
Declaration date Nov. 10
Record date Dec. 15 -if you are a SH at this date, you
are entitled to dividends
Payment date Dec. 30
Record Date
The record date means that all stockholders as of that day will now
get the dividends. If you are not a stockholder of record as of Dec.
15, you cannot get dividends. Even if you are a stockholder on
December 30 or on November 10.
In accounting terms, if you are selling shares, from the time of
declaration date until the record date, you call it DIVIDENDS ON.
Because the shares still carry with them the ability to earn
dividends. So stocks or shares with dividends on.
Selling beyond Dec. 15, you now have DIVIDENDS OFF. Because
the shares that you sell at this point can no longer carry the
dividends. The dividends, mabilin sa stockholder as of Dec. 15. So
when you sell shares at this point, we call them shares with
DIVIDENDS OFF.
Dividends off
It is basically the shares that you are transferring after the record
date but before the payment date.
Dividends on
The shares that you sell after the declaration date but before the
record date.
POWER TO ENTER INTO MANAGEMENT CONTRACT.
A contract where a corporation undertakes to manage or operate all
or substantially all, the business of another corporation.
But, this can only be done with the approval of majority of its BOD
and its stockholders. Majority only (of stockholders) because it is
only a contract. There is no need to amend your article.
Exception
If where the stockholders representing the same interest of both
the managing and the managed corporation own and control more
than ⅓ of the total outstanding capital stock entitled to vote the
managing corporation; OR majority of the members of the BOD of
the managing corporation also constitute a majority of the members
of the BOD of the managed corporation, in which case you need the
approval of at least ⅔ of the outstanding capital entitled to vote of
the managed corporation.
ULTRA VIRES ACT
These are acts committed outside of the object for which the
corporation is created and beyond the powers conferred upon such
corporation by the law.
So basically, acts in excess or beyond the purpose of the
corporation. But remember, that ultra vires acts does not
necessarily mean illegal acts.
So, illegal act is automatically void. There are instances when ultra
vires acts take effect. You have to distinguish between an ultra vires
act of the corporation itself and an ultra vires act of the directors or
officers of the corporation because when the ultra vires act is
merely that of a director or officer, that means that they are still
acting within the powers of the corporation but beyond their own
powers. In which case, their act can be ratified.
But the real ultra vires act, when done by a corporation, cannot be
ratified because it is really beyond the scope, powers and authority
of that corporation. It’s just that when the act is still executory, the
law says that that act or contract becomes unenforceable. But once
it has already been executed, that act becomes valid and the courts
will not interfere even if it is an ultra vires act and even if it cannot
be ratified.
Ultra vires act v. Illegal act
You have to distinguish between an illegal act because even if it is
consummated it will not have an effect since it is void. Ultra vires
acts by the directors or officers of the corporation can be ratified
because it is wtihtin the scope and powers of the corporation. Who
ratifies? The stockholders. The ultra vires act of the corporation
cannot be ratified since they have no power to enter into that act,
but if still executory, that is an unenforceable contract. But if
already executed, as long as it is not illegal, the courts will not
interfere.
In the case of Bernas v. Cinco, the court made a distinction
between those corporate acts which are illegal and those that are
merely ultra vires. Illegal acts, such as violating the provisions on
who is to make the call, is illegal and thus their meeting is void and
cannot be ratified, even if it was subsequently ratified by the
stockholders later on.
BY-LAW
These are the private laws of the corporation; these are part of the
fundamental laws of the corporation which governs the corporation
and its directors and officers. The rule of action adopted by the
corporation for its internal government and government of its
stockholders and members. It’s basically the rules of the
corporation.
Who approves the by-laws of the corporation?
Affirmative vote of the majority of the stockholders. But the practice
now is that by-laws are submitted together with the requirements
for incorporation. You cannot incorporate if you don’t submit your
by-laws as well.
Contents of the by-laws:
a. Time, place, manner of calling the meeting for directors
and officers.
b. Time, place, manner of calling the regular stockholders
meeting.
c. Required quorum which is the majority of all the
members of the board or the majority of all outstanding
stocks that is only a minimum requirement. The company
can actually prescribe a greater majority. In fact, there
are some by-law provision which we call as super minorty
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
the minority stockholders be present. In other words,
there will no quorum if the minority director is not
present. Or, not just in the quorum but also in the
approval, that at least one director from the minority
must vote to approve the action. Non-approval of the
minority director will not lead to a valid majority vote
from the board. Is that allowed? Yes, just put it in the by-
laws.
d. Form of the proxies of the stockholders and the manner
of voting them.
e. The qualifications, duties, and compensation of directors,
trustees, officers and employees.
⇒ In the Gokongwei case, they said that the
stockholder of a competitor company cannot be
a director in their company, is that allowed?
Yes, but it is a different matter if you say that
Mr. A cannot be a director of this company.
Limitations and qualifications must be
applicable to all and not only to specific
persons; it must not be discriminatory.
f. Time for holding the annual election of directors and
trustees.
g. The manner of the election and appointment of all
officers other than directors and trustees.
h. Penalties for violation. Manner of issuing stock
certificates. And such other matters.
Whether you are following calendar year. Your accounting period
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
put that in your by-laws.
How do you amend your by-laws? By majority of the Board of
Directors and the Majority of the Outstanding Capital Stock.
If the stockholder wants to delegate to amend the delegation
should be approved by 2/3 votes. Then revocable by majority votes
under section 48.
MEETINGS
Kinds
1. Regular Meeting
2. Special Meeting
Regular meeting
Refers regularly schedule special those that are called for specific
purpose. For stockholder meeting, that is once a year or also called
as annual or general stockholders meeting on a date fixed in the
by-laws.
Special meeting
This is done as may be necessary. For example you have annual
stockholder meeting on the 1st Friday of Monday May, but you want
to increase your ACS but it is not yet 1st Friday of May, then you can
call for a special meeting.
Notice requirement in meetings
a. Regular meeting - at least two weeks prior the meeting
because it is for you to know in advance where the
meeting shall take place and give more time to prepare
the stockholder,
b. Special meeting - it may be anytime because there is
emergency then 1 week shall suffice.
Guy v Guy G.R No. 184068 April 19, 2016 –
Meaning of “sending a notice”
You have to look at the ordinary meaning of send. Send means you
deposit the notice in the mail or deliver for transmission in the usual
means by postage or cause for transmission properly address or if
there no address then those that re reasonable under the
circumstance such that the notice should have arrived if properly
send.
It does not include the act of receiving but only the act of sending.
So once you send it then there is proper notice then the stockholder
cannot say that they were not notified. The officer is only
mandated to notify in the stockholders meeting in the post, the fact
that the stockholder did not received does not invalidate meeting.
Such that sending is different from service, if congress wanted
service then it should put the word service instead.
Clearly, respondents are only mandated to notify petitioner by
depositing in the mail the notice of the stockholders’ special
meeting with the postage or cost of transmission provided and the
name and address of the definition of “send” under the Black law
Dictionary, the term “receipt” only has the effect of proper sending
when a mail matter is received in the usual course of transmission.
Who is authorized to call the meeting?
A person designated in the by-laws. If no person is authorized, then
the SEC upon petition by any stockholder or member can give
proper notice of meeting.
Exception
Notice for removal of directors, it has to be done by corporate
secretary upon the order of the president or by stockholder holding
the majority of the outstanding capital stock.
In Bernas v Cinco, if the corporate secretary will not send notice
you are not without recourse because the law allows you go to SEC.
That you cannot take the law on your own hands.
Place of Meeting
If its stockholders meeting the meeting shall be done in the city or
municipality of the principal place of business, you cannot hold in
any other place. That is why stockholders are allowed to appear in
proxy, if they cannot attend they can still be represented.
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
seen in the Bernas v Cinco case. But if all the stockholders are
present in the meeting and there is a defect procedure then the
meeting is still valid provided that all stockholders are present or
duly represented.
Quorum
Unless otherwise provided in the by-laws, the quorum shall majority
of the OCS. But again you can have the super minority quorum.
Most of the by-laws I’ve seen the quorum is not majority but 2/3 of
the OCS that is still consider super minority because if you are 49%
that is minority and the 51% that is majority. The 51% is majority.
Supposedly the 51% can call a meeting by itself because there is
already a quorum except for those specific acts where 2/3 approval
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
and say “provided that there shall be no quorum unless the holders
of Class B common shares are present during the meeting”. Those
are what we call the super minority provisions.
It is the president who will preside in the
director/stockholder’s meeting.
Attendance in stockholder’s meeting can be in person or by proxy.
In person meaning it is the stockholder himself who attends the
meeting. Only stockholders on record date are allowed to attend. If
you are a transferee of a share but your acquisition was not yet
recorded in the stock and record book, you cannot attend the
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.

Proxy must be in writing, signed by the stockholder/member, and

filed before the scheduled meeting with the corporate secretary.
Unless otherwise provided, it is only valid for that particular
meeting. If you want to extend, it will only be valid for 5 years at a
time.

In pledged or mortgaged shares, the pledgor/mortgagor is still the

owner so they should still be the ones appearing in the stock and
transfer book as the stockholder. So they are the ones authorized to
attend and vote in the meeting. Except if the pledgee/mortgagee is
given the right, in writing, to attend. So either by proxy or the
pledge or mortgage is recorded in the stock and transfer book. If
that is the case, there is no need for a proxy; the
pledgee/mortgagee can attend.

If there is death or insolvency, the legal representative can attend

in behalf of the stockholder.

Voting trust agreement is basically like a proxy, but more

comprehensive. In voting trust agreement, the stock certificate of
the trustor is canceled and a voting trust certificate is issued in
favor of the trustee. So it is the trustee who appears in the book as
the stockholder; and he will exercise all the rights of such
stockholder as may be provided for in the voting trust agreement.
So the voting trustee can actually be elected as director because he
has shares appearing in his name in the stock and transfer book.
Voting trust agreement must be in writing, notarized, and filed with
the SEC.

Regular meeting of the BOD can be monthly or quarterly. They can

also meet during special occasions if the operation of the
corporation calls for such meeting then you have the special
meeting.

Place of meeting of the BOD is any place. Inside or outside of the

Philippines. Attending in proxy is not allowed. Also unlike in
stockholders meeting, attending through video conference or
teleconference is allowed.

Notice of the directors meeting must be given at least 1 day before

the scheduled meeting unless otherwise provided in the by-laws. In
fact for regular meetings, as long as the by-laws has already
provided the date for the regular meeting, there is no more need to
send a notice. But if you change the date of the regular meeting,
you have to send a notice.

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