Corporation Review TSN 2015 PDF

Corporation Law Review 2014
Fr. Agustin Nazareno
Corporation Law Review Notes
December 1, 2014
I would suggest that you read NPC Drivers and Mechanics Assoc vs. NPC. There are six
decisions of the SC. This is a government corporation but the decision was in 2006- first decision.
Last decision is Sept 9, 2014. It is a resolution not signed by the SC. Division Clerk of Court
Wilfredo Lapitan signed it. Why? The SC cannot enforce their own decision. Everybody is asking
for an MR but since the SC already had an entry of judgment, it cannot back out. Unless there is
an appropriation of congress, this cannot be enforced.
This decision is about BOD in a government corpo. According to the EPIRA law, which
rationalized electricity. The NAPOCOR is abolished. Upon abolition, there was no more any
Board of Directors. The DoE hastily convened the board and they let the cabinet members sit as
if they were BOD and they passed a resolution abolishing the positions of employees of
NAPOCOR without benefits. There is an ad hoc members of the board that sat for the board.
They were the members of the cabinet of GMA. According to them, the EPIRA authorized them to
abolish the position and such is a prerogative of the government.
These NPC drivers are some 5T employees sued in the CSC, which dismissed their complaint. In
the CA, the CSC was upheld and in the SC overturned it. SC says the act of cabinet members
sitting as board is ILLEGAL. They have no authority. That is 33.7B and it cannot be paid. Out of
the 3T debt, and 2T budget. 33B is something like 15% of the total budget. This comes back and
forth since 2006. Clerk of court na gani mupirma, naghunaw na ang SC.
Even in public officers, a constitution of an ad hoc Board after the board has already been
dissolved because a corporation is already dissolved, it is illegal so its act is already void right
from the start. So the basis for abolition and therefore the severance of the employees is illegal.
They cannot be reinstated anymore because the corporation is no longer there so they have to be
paid separation benefits.
The SC asked for a complete list of employees and the benefits that have been given them.
NAPOCOR gave them a list of 16 names. The SC got mad and held in contempt the SOLGEN
and all the cabinet secretaries.
Board of Directors. Important for the BOD is not the standard provisions now but I would like to
emphasize the independent directors because that is the trend now for governance. It all
started with the Sarbanes-Auxley Law in the US and because most of the corporations that have
attained a certain size and want to obtain funds in the financial market have to comply with the SA
law. That is why in special laws, the Philippines has also instituted the requirement of
independent director. If you are a corporation that is listed in the stock exchange, you must
have an independent director. Even if you are not listed in the PSE, if your assets are at least
50M, and you have 200 or more stockholders, 100 of which are owning at least 100 shares, then
you must already have an independent director. Even if you are not listed in the stock exchange
but you issue securities, whether stock, bonds or derivatives which are required to be registered
under the SEC then you must have independent directors because you sell to the public and the
interest of the public must be protected. These are the corporations (5) that require independent
director.
Jennifer Yanto 1
When a director is independent is different under the Bangko Sentral and under the SRC.
The BS is more complicated. It has a very elaborate circular but the SRC is less cumbersome
because the definition under Sec. 38 of RA 8799 is: For this purpose, an independent director
shall be a person other than an officer or employee of a corporation xxx(insert). In the BSP, it has
a very long circular.
How many independent directors will you have? 20% of the BOD or 2, whichever is less. Shall
have at least 2 independent directors or 20% or whichever is less, normally, for this purpose.
What is the theory behind an independent director? In the SEC, you cannot be if you own 5% of
the outstanding capital stock. In BSP, you cannot be if you hold at least 2% of the outstanding
capital stock of the bank. Technically speaking, if there are 10 members of the board, to take one
seat, you must have at least the vote of 10% of the outstanding capital stock. You do not have
10%, you do not have a fighting chance. That is why they put a limit to the shares of stocks of the
independent director. What is the idea? You will fulfill your duties with the corporation if you have
less ties with the corporation whether by function, as an employee, consultant or by ownership so
the less you are tied, the better you are for the corporation. The better for whom? For the
investing public. What is to be protected is the interest of the investing public because in
another portion of the corporation code, if you have more ownership of the outstanding capital
stock ( I think he meant less) the thesis is, the less you would take advantage of the corporation.
When is that? In cases of self-dealing with a corporation. When a corpo deals with another and
there is own directorship, interlocking directorship. The moment you are a substantial owner of
the corporation, it is assumed that you need not need the confirmation vote of 2/3 of the
stockholders because it is said that you cannot take advantage of the corporation because you
own substantial shares.
These are two theories that are divergent. One is pre-SA Law and the other is Post-SA law
theory. Now, the thinking is the responsibility to the corpo is not just to its stockholders, employee,
to its creditors, but also, the INVESTING PUBLIC which is neither here nor there. Today, you may
be stockholder but tomorrow, you may not be because you sold it already. But the going in and
out is based on the transparency of the corporation. It is influenced by its governance principles.
How come it is not enough to have governance standards. You have to have governance charter
and a governance complying officer. Now there is an association of governance complying and
complying officers. They study the laws that require to be complied with, associations, training
because they management need to set up on the need, the requirements that have to be met with
respect to governance.
The board of the bank (father sits), the compliance officer is there and is very strict. Example
when there are DOSRI loans, there are a lot of signing that has to be made. She enters the
minutes and the votes and signs the minutes, then attests that the terms of the loan given are not
appreciably and more advantageous to the borrower than the other classes of loans. That is
supposed to protect the public. Governance requirements.
Business Judgment Rule- it begins with the BOD as the body that exercises the powers of the
corporation. How about stockholders? They indirectly participate in the exercise by electing the
BOD or BOT but it is the BOT that holds the property for the corporation, that exercises the power
of the corporation, and controls the direction that the corporation is supposed to be. According to
classic corporation theory, this is derived from law. It is not delegated by the stockholders to the
Jennifer Yanto 2
board. Why is it derived from law? Because there is Section 23. If the board should, in the valid
meeting where there is a quorum, should it pass a resolution, which the stockholder who is not a
member of the board but who is a dominant member, holding majority of the outstanding
capital stock, can he override the decision of the board? He cannot. That is the so-called
business judgment rule. It is the corporation’s board that the law has entrusted this decision to be
made and according to the SC, not even this court can correct its judgment unless there is grave
abuse of discretion.
If you look for a brain, or a pilot, it is not the janitor but the Board. The board, according to the SC
is a board only when it sits as such, it is collegial body. The board member separated and walking
around is no board. That is why the formality of a resolution is essential, without that, there is no
formal act of the corporation. But be that as it may, the same may be ratified subsequently as
long as there is no law forbidding any ratification.
A corporation makes a resolution within its power to do but it lacks a quorum and it is obvious in
the minutes that there is no quorum. There is no resolution. What is that act? Did the corporation
already extend money for that? Can the board subsequently in another meeting ratify that?
For as long as it is just ultra vires, it is not illegal, it can be done. The board can meet, there
is now a quorum and the secretary informs them that there is a resolution made which did not
meet the statutory requirements and now, they have to ratify. Of the board intelligently does the
ratification and there is quorum and voting requirement, then, the act is ratified, provided it is just
an ultra vires act. It is beyond the power of the board of directors.
Election of Board members. Five instances when it is required that stockholders vote before
the BOD (directors must be voted by the stockholders):
1. at the end of the term of the board members/trustees
2. in case of removal of a board member or trustee
Take note that the voting may be done in the same meeting before the member is removed
without need of notice. But, if the replacement is voted by stockholders in a separate voting, it
must be by qualified voting, at a special stockholders meeting. There must be qualified notice as
to the removal of the board. Take note that if you are a director representing minority
stockholders, you can only be removed for cause. You cannot be removed without cause. If you
are a director representing majority interest then you may be removed with or without cause.
3. when the director is chosen to fill in an additional board seats after the approval of the
amendment of the articles of incorporation.
If the articles provided for five board members and subsequently there is an approval of two more
seats and the amendment is approved by the SEC, a special stockholders meeting has to be
called to vote the two. Is there an obligation to fill up those two immediately? No. because there is
a quorum, five is the quorum unless the articles provide that the quorum is the total membership
of the board. If the bylaws is silent, majority of the board is the quorum. Five is more than majority
of seven so therefore there is a quorum even if you don’t fill out the two additional seats. If the
SEC approves the additional two, you can either hold a special stockholders meeting and the two
new members will be voted or you will wait for the annual stockholders meeting to elect the seven
members of the board of directors.
Jennifer Yanto 3
4. in those instances when it is the board who can fill up the vacancy but the board no
longer has a quorum.
The corporation code says in case of death, disability, resignation, of a board member, the board
of directors can choose the replacement to fill up the vacancy and serve for the remaining portion
of the term. But then, let us say, there is no more quorum. There are five members, three died.
How can they fill up the three vacancy? That is when you call the special stockholders meeting
even if it is one month to go until the annual meeting otherwise you have no functioning board.
You cannot decide when to make and send communication without a board. Five-man and
woman board.
5. When the resignation, death or incapacity of the board member is that of a holdover
board member.
That is a recently decided case. SC said it is no longer the board who will elect to fill the vacancy
because there is no unexpired portion of the term. A director died and he was replaced by
someone chosen by the board and upon choosing, the following annual meeting, there is no
quorum. What happens if during the annual meeting there is no quorum to elect the members of
the board? Holdover. The term of the board member is one year or until his successor is elected
and qualified. He resigns, dies or rendered incapacitated.
Those are the instances, the rest it is the board who can fill up. of course, the voting is cumulative
when it comes to BOD. The bylaws cannot provide for less than cumulative. Why? Because if
you deny cumulative voting, you deny representation. That’s why the SC said you cannot deny.
In non-stock/non-profit, the rule is no cumulative voting unless the bylaws so provide.

What is cumulative voting? It is the maximum number of votes that a stockholder can cast is
the number of shares that he owns plus the number of proxies that he has obtained
multiplied by the number of vacancies that have to be filled. That is a maximum number of
votes that he can cast. He can either cumulate them to one candidate or distribute according to
his fancy. That is necessary in stock/profit corporations because without it the majority cannot be
represented.
What is the obligation of the corporation when a director dies?
This is a giveaway on the bar exam. It is in the corporation code. within thirty days, you must
serve notice to the SEC, the court. That’s what the law says even if there is no quorum.
Remember the election of board members is part of the organizing of a corporation. The moment
the corporation receives its certificate of incorporation from the sec, it has 30 days to organize.
That means that the first task is elect the members of the board of directors or trustees. After it
elects, the board of directors elects the officers.
For the non-stock, the members elect the directors and the officers. It is not the board that
does it unless the bylaws says that it is the board of trustees. So it is at large. That is why
sometimes the Jaycees does not have a President because they are fighting because members
at large vote for the officers.
What is the DOCTRINE OF APPARENT AUTHORITY?
Jennifer Yanto 4
It is 1. Those who act for and in behalf of the corporation are designated by the law of the
corporation. They are designated as attorneys-in-fact of the corporation. If there is no such
designation, then, authority to act for and in behalf of the corporation can be granted through a
resolution of the board. So the board can make a resolution granting someone who is not a
stockholder or member of the board to sign an agreement for and in behalf the corporation. That
normally happens when the corporation has to bring up a case. Let us say, authorizing a manager
to file a case against an employee, sign all documents and pleadings, papers necessary or
convenient for the advancement of the cause of the corporation.
Is the ordinary individual out there under obligation to know what the statutes of the
corporation say as to who has authority to sign for the corporation?
SC said NO. the bylaws are internal to the corporation. How is the ordinary man guided as to
whom he should deal with where the rest of the corporation knows, sees and allows a certain
employee of a corporation to act for and in behalf of the corporation then the corp. is estopped
from later on denying his liability. There is a case now, a hospital. This surgeon is named in the
list of doctors approved by the hospital. That is enough authority to bind the hospital. The
complainant can sue not only the doctor but also the hospital because the hospital misled
the public that this doctor is operating under the endorsement and under apparent
authority.

December 2, 2014

A few odds and ends with respect to directors, trustees and officers. There is a decided case:
Cosare vs. Broadcomm Asia Inc, February 5, 2013.
The SC distinguishes a corporate officer from an ordinary employee. The SC says that if the
position is provided for in the bylaws and there is action or appointment from the BOD then the
person or individual concerned is an officer.
My caveat to that is even if there is no provision in the articles or bylaws, if any of the five officers
listed in the corporation code: President, Sec, Treasurer, VP, and Asst Treasurer, that takes the
place of the proviso creating that position in the bylaws. Why does that make a difference?
Because it is an officer, any complaint with respect to remuneration, compensation, money
claims, or severance, it becomes an intra corporate dispute if the individual is an officer. If just an
ordinary employee, it is a matter of the labor code, labor arbiter.
The SC has held that “All stockholders are entitled to be elected as directors of the corporation or
as officers of the corporation.” Which is different from a cooperative. If you are a member of the
board, you cannot be an officer of the cooperative because that will be a conflict. You can be a
general manager and be a member of the board. But in a cooperative, it is not allowed.
The bylaws of the corporation can add qualifications for the election of a director. Likewise, it can
also provide for disqualifications. That is ruled by SC in GOKONGWEI vs. SEC. why is it allowed
to provide for disqualifications? According to the SC, a especially publicly listed corpo- large
corpo, with their own industrial assets that form part of the corpus of their intellectual properties,
they have the right to self defense to protect themselves from prying eyes, from alien interest that
Jennifer Yanto 5
would want to profit from their intellectual property. The corporation is entitled to put
disqualifications but the rule remains that the PRESUMPTION is ALL stockholders have an equal
right to be elected and because that is the presumption, you do not go by COMMON
KNOWLEDGE. Someone who is disqualified and is not allowed to be voted for to the BOD must
be allowed due process by which the corpo proves that he is covered by the exclusion. In other
words, his inimical business interest that disqualifies him under the bylaws must be proven and
he is given a chance to refute that. That he is engaged in inimical competitive, hostile interest to
that of the corporation. Afterwards, when the corporation decides, he is excluded. He can go up to
the courts and bring an intra-corporate dispute and it would be up to the courts to decide WON
the disqualification is reasonable and WON it was carried out reasonably. (see gokongwei case)
Disqualification: The director cannot be one who has been convicted by final judgment of an
offense punishable by imprisonment not exceeding six years, or convicted of the violation of this
code, committed within five years prior to the date of his election or appointment. Specific
disqualification written into ALL bylaws because it is provided for by the corporation code.
Liabilities. There is the so-called liability for 1. willful and knowingly voting for or assenting to
patently unlawful acts of the corporation. No debate, it is clear – patent, and then the director
voted or assented. Corporation is engaged in transporting business, and allows its cargo vans to
be used by certain corporation convicted of transporting contraband goods. If he knew that the
van itself would be loaded with specific contraband, that would be patently illegal but if the
corporation that is leasing the van is just convicted or found to have transported illegal
contraband in the past, does not necessarily mean that it is every use, every time that it makes
use of the van, that it is engaged in transporting illegal contraband, hence not PATENTLY
ILLEGAL.
2. guilty of gross negligence or bad faith in directing the affairs of the corporation.
3. acquire any personal or pecuniary interest in conflict with the duty of such director or trustee.
Vitug vs. CA – she was directed by the corporation by resolution to look for land to be used to be
used for realty to be marketed after it has been subdivided. She comes upon a piece of land ideal
and another which requires development at a higher cost. She gets the better piece of land and
gives it to her own corporation but she gives the inferior piece to the corporation for which she is
director. It is in conflict with her duty as a director. She SHALL BE JOINTLY AND SEVERALLY
LIABLE FOR ALL THE DAMAGES SUFFERED BY THE STOCKHOLDERS AND MEMBERS
AND OTHERS.
IT IS THE SAME AS A PARTNERSHIP. You are a partner and there is a partnership. Mr. C owes
you money and also owes the partnership. Both have matured and are now to be paid. You
collect money from MR. C but you apply it first to yourself. It is wrong. Charity for you is inferior to
charity for corporation because you are a fiduciary of the corporation. It has to be prioritized
because it is supposed to be defenseless.
Executive committee is a technical term provided in the corporation code provided to remedy the
hiatus in between meetings of board of directors. BOD many times cannot meet everyday, so the
corpo code provides for an executive committee, the majority of members of which must be
directors of the corporation. The SC said even if there is no provision in the bylaws for the
Jennifer Yanto 6
corporation to set up an EXEcom because the BOD has PLENARY powers to set up such
committee as in its judgment the corporation needs. It can put up an audit committee, a
governance, a risk committee. All corporations now listed with more than 200 stockholders
holding at least 100 shares are required to have risk and governance and audit committee. The
internal auditor reports to the audit committee and not to the board.
POWERS: Sec. 36
1. You must not confuse powers with purpose. When you start copying section 36 for your
purpose clause and you have nothing there but Sec 36, you run the risk of your articles of
incorporation being rejected by the SEC. if you have an honest to goodness purpose clause, you
lengthen it, what you are doing is you are engaged in a SURPLUSAGE. Nagsulat walay
hinungdan. It is no longer needed because it is in the corporation code. the corporation has those
powers. But then there are purpose clauses like that in MEGAWORLD – to acquire real or
personal property, shares of stocks, options, derivatives, etc. Technically speaking it can go into
banking, trade, etc because it has everything in its purpose clause. That is different but if you take
a look at the powers of the corporation, you do not need to put in the purpose clause that the
corporation has power to acquire real or personal property because that is not a purpose but a
POWER; it is already listed in the corporation code.
Distinguish between express or implied power and incidental power. Incidental power is also
sometimes called INHERENT POWER. They belong to the corporation by its nature as a person.
Express powers are those that the corporation has because the law explicitly grants it to the
corporation like the power to adopt and use a corporate seal, a symbol of a corporation. How
does a corporation adopt a corporate seal? Be it resolved as it is hereby resolved that the
corporation has adopted a corporate seal. You have to explicitly state it, describe it as follows,
whether it is round, etc.
To make sure that the corporate seal is not used by another corporation, YOU ALSO REGISTER
IT WITH THE BUREAU OF PATENTS. Natural persons, the closest thing is the coat of arms. It is
not subject to whim, a science of heraldry. It cannot be registered with the bureau of patents
because it is not worth a dime, does not barter goods and services but it is peculiar to certain
families or persons such as bishops. If they elevate to archbishop, they amend it.
For a corporation to adopt a corporate seal, that is an express power. He has that power because
the LAW grants him that power. The power to sue and be sued, own real or personal property are
express power.
Incidental powers. Even if the same is amended out of existence, the corporation still has those
powers because that is the very essence of a person. In the civil code, a person is one who is
subject of rights and obligations. He has liabilities and rights, that is a person.
An express power #9. To make reasonable donations, including those for public welfare or
for hospital, charitable, cultural, scientific, civic, or similar purpose. Provided, that no
corporation, domestic or foreign, shall give donations in aid of any political party of
candidate or for purposes of partisan political activity.
Jennifer Yanto 7
What is the rule in the US, can they donate to political parties? Yes, provided there is disclosure.
Philippines, you are forbidden as a corporation but there is somehow an ingrained suspicion that
corporations give.
#8. To enter into merger or consolidation with other corporations as provided in this code.
for a natural person, to merge, to get married, is a natural right. It is even antecedent to the state.
The state merely regulates it. It does not grant it.
#10. To establish pension, retirement, and other plans for the benefit of its directors,
trustees, officers and employees.
Why is that to be given expressly before a corporation can do it? Because a corporation is a
separate and distinct personality and this disposition of assets is for the benefit of third persons.
Directors, as far as the corporation is concerned is a third person, a person other than the
corporation who is supposed to hold property for its benefit. Therefore, the law has to explicitly
grant this because the properties for the corporation is expended for the benefit of persons other
than the corporation.
Sec. 37. Power to extend or shorten corporate term. If you extend the term, there is exercise
of the right to appraisal. If you amend the term to shorten it, there is no exercise of the right.
There is however a corporation where there is no need to extend the term. What is it? I refer you
to SEC OGC OPINION NO. 14-18. July 10, 2014. A religious corporation such as the INC, there
is no term, it is PERPETUAL. There is no need to extend the term. It is envisioned to exist in
perpetuum. The opinion cites THREE REASONS:
1. In the old corporation law, there is no provision for the term. In the new corporation code, there
is no requirement.
2. in the intention of most founders of religious corporation, it is not temporary, it is permanent.
What happens if you drew it up and it has a term? You do not have to extend the term, if it goes
beyond the term provided for, it does not have to be amended. It is PRESUMED to be ad
perpetuum.
When you extend the term, you give the subscribers appraisal right. WHY? Because the contract
among the subscribers is what is written in the articles of incorporation that that is the maximum.
If you change that, that means the investment would be tied up longer than agreed to. If you
amend the term of the provision to shorten it, there is no right of appraisal because shortening it
means dissolving it and when you dissolve, the corporation pays the stockholder what the value
of the stocks is upon dissolution if there is still balance upon payment of just and valid sum of any
liabilities. The right of appraisal means you want to be bought out by the corporation because
there is a disagreement that you have with the course of action that the corporation is taking so
you are granted the right to be paid the amount of the shares and to withdraw the investment.
December 8, 2014
Just to point out to you the highlights of the cases discussed in the lectures which I gave to you
the other time, be familiar with the three points raised in the case of RIDON VS. AXN
Jennifer Yanto 8
NETWORKS phils. August 26, 2014. Three points why the SC dismissed the petition questioning
the grant of SEC to AXN of a certificate of incorporation to AXN and FOX.
1. There is no judicial act that was done and certiorari is only to correct judicial acts, therefore, the
SC said there is yet no justiciable controversy;
2. this involves a hearing because it is in effect an action to cancel the registration.
Under PD 902-A, you cannot cancel a certificate of incorporation without holding a hearing. The
SC does not hold a hearing, but oral arguments, because it is not a trier of facts;
3. it is a collateral attack forbidden by the Corporation code.
A certificate of incorporation has been issued and you are questioning the incorporation of an
existing corporation. You cannot do that with the SC. According to the SC, the correct suit is for
the SolGen is to file a QUO WARRANTO PROCEEDING. It is not signed by the SC even if it is
a lengthy opinion.
It is the court’s way of saying, we will not entertain an original action such as that because not too
long ago, there was a law which was passed- RA 10574, May 2013. An Act Allowing The
Infusion Of Foreign Equity In The Capital Of Rural Banks. Amending RA 7353. 60% of rural
banks under this rule, can now be owned by foreigners. Rural banks have real property, how can
you allow a corporation to own real property that has 60% Filipino ownership. If you question this,
the SC will dismiss it following the case of Ridon vs. AXN. You have to first bring it to the intra-
corporate court or file cancellation proceedings with the SEC under PD 902-A, Sec.5. Elevate it to
the CA, then to the SC.
Not only that. Sometime in July 15, 2014, after two weeks publication, it became effective July 30,
2014, RA 10641 is passed. It was even more sweeping; it allows the full entry of foreign banks in
the Philippines, amending for that purpose RA 7731. You’re a foreigner, you can buy the entire
outstanding shares of a commercial bank in the Philippines and it shall be wholly owned by
foreigners. if you question this, you ask, cant the president be impeached by this? The first to be
impeached are those congressmen and senators who first signed it. This was passed because
the ASEAN has already approved in the ministerial level that all restrictions to banking are to be
lifted. If you are a Filipino, you should be able to operate a bank in KL and the Malaysians can
demand the same rights in the Philippines. If you do not grant this, you wouldn’t be allowed to
operate in BKK, Mal, Jak. It had to be passed even if the Constitution says that it has to be
operated by 60% Filipinos.
(Father states Nationality is a dead cause. Encourages at least regionalization. Talks about sugar;
rice and palm oil no more tariff by 2015)
Yuchengco vs. SB 2006
The SEC must check the structure of the OCS of PLDT and according to the dispositive portion:
If found that its voting shares whether common or preferred is less than 60% owned by Filipinos,
then the appropriate solution would be imposed by __(?)
Jennifer Yanto 9
Heirs of Gamboa vs. Teves adds the very crucial paragraph which was not included in the
dispositive portion says that the 60% ratio must not only be verified in the voting stock but also in
the preferred stock and in every other class of shares. Many analysts say this is obiter dictum
because it is not in the dispositive portion. everybody was waiting how the SEC implements it.
The decision of the SC forms part of the land. The SEC memorandum 8-2013 says “60-40 ratio
should be verified in the class of voting shares and also in the overall OCS, voting and non-
voting.” There are only two ratios that have to be complied with for purposes of the SEC.
How is control supposed to be determined?
SEC office of the General Counsel says there are two rules:
1. Control rule- If Philippine ownership of the owning corporation in an investing corporation is

60% Filipino, then all the shares it owns in the investing corporation shall be deemed Filipino.
2. Strict rule- a Filipino ownership of the owning corporation is less than 60%, let’s say 50%, then
the shares of stocks it owns in the investing corporation will only be to the extent of the Filipino
ownership. Meaning, Suppose the investing corporation owns 60% of the OCS with the investee
and the ownership is only 60% then that 60% is Filipino is deemed only 30% - ½, because the
ownership of the investing corporation is less than 60%, only 50% Filipino. This is discussed by
the SC in the case I gave you.
The SC also said in a case that LAYERING is not outlawed. PROVIDED, that the layering is not
done to circumvent the Filipino ownership rules of the Constitution and the FIA Foreign
Investments Act.
Layering is the structure by which one corporation’s stocks are owned by another corporation on
top of it, which in turn, the OCS is owned by another corporation.
(father illustrates) 60% Filipino, supposed the 60% is counted as entirely Filipino. However, if this
were 50% Filipino and 50% foreign, the 60% will only be Filipino to the extent of the investment.
So, it’s only 30%. This will NOT QUALIFIED AS A FILIPINO CORPORATION THAT OWNS REAL
PROPERTY OR IS ENGAGED IN PUBLIC UTILITY. This is already called layering. There are at
least two layers of ownership here: the investing and investee. You have another corporation
here. There are already three layers. If you want to escape the restriction of the constitution, you
can very easily do it in only two layers. If the 60% is owned by a 60-40 corporation, the same
foreigner is here again, and he owns 40% and he already owns 40% of the 60 which makes it
24% (40x60) (24% + 40% =60%) Equivalently, he has the majority. You must produce a good
reason why you are layering because according to the SC, you cannot resort to it to circumvent
the restriction. What is the reason for layering? Let us say a holding company that owns the 60%
of the shares of stock but this company also owns other subsidiary corporations. Do you think it
will directly own the stocks of each subsidiary corporation? The holding corporation will not hold it
directly. It would have to resort to a justifiable layering. There will be a corporation wholly owned
by the holding corporation that owns the subsidiary in order to maximize its raising of capital. He
(other corpo) will go to the bank and pledge the shares and he will get a loan from the bank
according to how the bank ascertains and measures the credit value. If he wants to loan based
on MTIC, he will pledge the shares to another bank. He cannot do that if xx. If the holding corpo
(first pacific) went to pledge the shares, the bank will say put up more collateral or pay me back
Jennifer Yanto 10
the amount by which Philex has reduced the price to the open market. That is why there is a
reason for the intermediate layering. There is another reason which is, supposed First pacific
owns an entity (Nippon) and says you want to invest in PLDT (Nippon international) so it will have
an intermediate corporation wholly owned by Nikkon and this will create another corporation
NKK-Twin Rivers so that the shares will be just voted as one. you have three layers. Those are
the type of layering that justifies and proves that it is not being used as circumventing the
constitution. The same set of assets, say first pacific pledges the shares. The bank will take a
look at the shares of stock and inspect the NKK and it will tell FPIC what they think it the credit
value of PLDT. Now PLDT itself will also borrow. Will the bank who lends PLDT look up or look
down? It has no business looking up. therefore, the same set of assets you can borrow twice.
First from the parent company bank, then second, from the operating. Because when one
borrows, they look down. After that, the other one borrows, then they look down to see how much
is borrowed to maximize profit.
NAGA NICKEL MINING DEVT CORPORATION vs. REDMONT CONSOLIDATED MINES CORP.
APRIL 21, 2014 L-195580 J. DE CASTRO
It’s the first time the SC has repeated with the slightly new ones the DOJ Opinion 2005 the
grandfather rule and the strict implementation of Filipino control and ownership.
The SEC opinion on how to determine whether it is the same name, if the investee corporation
concerned is a manning agency. There will be ownership of ocs minimum at 75% according to
Article27 of the Labor Code. the rule to be followed according to the SEC is still the same. If the
75% is owned by a corporation, 60% Filipino, then the minimum requirement is satisfied. Just
because 75% is the requirement now, the ratio in the investing corporation is not raised. It is still
the same at 60%.
The corporation in the Philippines that is foreign as opposed to domestic, it cannot do business in
the Philippines without first obtaining a license. Is an investment in a Filipino corporation
understood as doing business in the Philippines? It is answered by Sec Opinion 14-12, rules for
the determination of whether an investment of a foreign corpo in a business will require license
from the SEC. the business which is the object is actually a partnership, a consortium. Is that
considered as doing business?
SEC says “mere investment where there is no participation in the governance like the board, or
there is no foreigner who is an officer of the corporation, that does not require a license in doing
business. You are a passive investor.”
All those corporations with indirect investments. As long as they are just minority investor, they
have no representation in the board of directors of these investee corporations, they do not need
any license to do business. They come in and out, operate through brokers. However, even if it is
just a consortium of partnership, but you have a say in the management of the corporation, you
have certain duties and here, in this opinion, there are duties because of the consortium
agreement. All partners in this agreement may be called upon to make guarantees in the
consortium. Because the foreign corporation is committed, then, the SEC says, it needs a license
to do business.
Jennifer Yanto 11
TERM. In the SEC opinion 14-18, July 10, 2014, the SEC says this: A religious corporation has no
corporate term. Under Corporation law, it is presumed to exist perpetually. Even if the articles
says 50%, if the corporation allows it to lapse, it cannot be deprived of its certificate of
incorporation. (See circular)
When is an individual considered an officer as distinguished from an ordinary employee? That is

issue cited in Cosare vs. Broadcomm Asia Feb. 5, 2014
SC says there are two requisites for a person to be a corporate officer:
1. His position is provided for in the corporation code, in the charter, or in the bylaws.
2. ?
3. Action by the board of directors or BOT installing him into that position, whether by resolution,
election or by designation.
What are the positions in the Corporation Code? if you are named in this position, even if there is
no provision in the bylaws, you are a corporate officer.
1. President
2. Secretary
3. Treasurer
Then, under Sec. 63 where the corporation code says that the certificate of stock may be signed
by the PRESIDENT or VP and by the SECRETARY or ASSISTANT SECRETARY.
In the SEC memo 8 implementing Gamboa vs. Teves, there is this specific provision of the SC:
the duty of monitoring, maintaining and reporting of the 60-40% of the voting and the ocs voting
and nonvoting, falls on the shoulder of the SECRETARY OF THE CORPORATION because most
problematic corporations that are dealing with public utilities like PLDT, energy and landowning,
their stockholding structure is monitored and the reporting requirements are done by delegation to
a STOCK AND TRANSFER AGENT. It’s too much work for the secretary. How can you follow up
ownership changes where it is done everyday? The memorandum says it is the responsibility of
the Secretary and it is by EXCEPTION that it can be delegated with assistance of another entity.
It is very important because of all positions of corporate officers, the secretary is the most
ceremonial because you have to have a familiar knowledge of the corporation code if you are a
secretary. The secretary declares the existence of a quorum.
TERM. You know very well that the SEC has cancelled the registration the incorporation of many
corporations. Those who have not been reporting were finally issued a notice of cancellation. The
first is a show cause order in order for registration not to be cancelled because the corporation
failed to submit the general information sheet, audited financial statements. Then, they will mail a
second notice to the last known address- still a show cause order. Finally, a notice of cancellation.
Even if you have received it, you still have sometime within which to file a petition to lift the order
of cancellation. There is a deadline for filing that – one year. SEC puts down the schedule for the
deadline, but if you exceed it, you can no longer revive.
Jennifer Yanto 12
The rule that an individual is considered a corporate officer is his position is provided for by the
bylaws or the articles of incorporation appointing him, the board electing/appointing/executing a
resolution putting him to the position has two exceptions taken from Labor cases: Araneta Univ
Foundation vs. Teodoro AND PHILAMLIFE SARAHJANI vs. Philip Ang: (only one was asked
in the bar)
Teodoro was installed as a non-teaching staff in the Araneta University Foundation (now
Adamson) HE became registrar and he taught units and became a regular teacher, finally VP for
administration. Every year he was appointed until the board stopped appointing him. He did not
receive separation benefits so he filed a labor case. The LA ruled in favor of Teodoro. There was
yet no CA at the time so the university elevated the case to the SC.
Q: Did he hold a corporate officer position? (if he did, the LA did not have jurisdiction. The
difference is that there is no raffling because there is only one sala which is in an intracorporate
court.)
A: SC said that Teodoro was a corporate officer but also a regular employee. He had attained
regular status as regular employee. He may be removed from his position as admin VP but he
should keep his position as faculty because he has attained regular status. LA correctly assumed
jurisdiction of the complaint and his ruling is correct.
PHILAMLIFE case is the case of the chief security of the subdivision. The homeowners
association which are composed of employees of Philamlife. The office was not mentioned in the
bylaws. The association did not want him anymore so they amended the bylaws where they
provided for a position of chief security officer. After they created the position, they appointed him.
The following year, they appointed another person, equivalently removing him from the position
so he filed an illegal dismissal complaint.
According to the SC, the amendment of the bylaws is contrived, it was in bad faith, purposely
aimed at removing him and he had a vested right since he attained regularity of employment.
Those are the two exceptions to the general rule.
December 9, 2014

Powers of a Corporation
We have discussed the express, implied and inherent/incidental powers. There is a distinction
made as to powers that are exercised by the corporation and it is outside the object for which the
corporation is created. In other words it cannot be located in the purpose clause. It cannot be
located in the purpose clause because it is not express nor is it implied. The corporation is
created for the purpose of erecting, organizing, a cement factory and what it does is it embarks in
Jennifer Yanto 13
the logging business. It is not inherent nor express. It cannot be implied from the making of
cement. The exercise is called ULTRAVIRES ACT because it is outside of the object. It has to be
distinguished from ILLEGAL ACTS.
ULTRA VIRES ACTS are merely voidable which could be enforced by performance by estoppel
while the latter is void and cannot be validated. If a corporation engages in the manufacture of
shabu which is an illegal drug, it is not only prohibited, it is illegal. It is not like morphine which is
regulated, use is allowed. It cannot be validated. Therefore, it is an illegal act. Ultra vires act, if it
is an executed contract, courts will not set aside or interfere with such contracts if it is executed.
Why? It is already done. The party enters into a contract and it is ultra vires, he cannot use its
being an ultra vires act to renege on its obligations in the contract. Executory contracts, however,
that are the product of ultra vires acts, no enforcement even at the suit of either party can be
allowed. It is void and unenforceable, if it is still executory. Partly executed and partly executory,
then the principle of unjust enrichment applies. If it is partly executed, then the other party who
still owes execution must perform his obligation otherwise the principle of unjust enrichment is
violated.
How about acts which do not conform with the formalities that are required? In certain procedures
or formalities are prescribed in the articles of incorporation or the bylaws and the same are not
complied with, the resulting act is NOT an ultra vires act of the corporation. If the bylaws
prescribe procedure in entering into contracts and the same was not complied with where the
contract involved in the case was executed, it may be valid as to third persons who are not
familiar with the bylaws. Why? Because third parties are not expected to be familiar with the
bylaws being internal rules.
Let’s say the bylaws provide that the BOD approve explicitly loans exceeding 25M. for loans less
than 25M, only the execom need approve the loan. Now somebody borrows and he is approved
and his loan is 30M. is he obligated to know that the board should approve? No. can he now
demand approval for release of the loan and subsequently the releasing, it has no approval from
the board? He cannot be denied the proceeds of the loan because he is not expected to know the
internal requirements.
Ultra vires acts may be distinguished from UNAUTHORIZED acts. It means it’s a corporate act
done by an officer without authority to do so. That is not ultra vires. The act may be within the
powers of the corporation but not within the powers of the particular officer executing it. It is
sometimes referred to as ultra vires act OF THE OFFICER. The law on AGENCY applies. For
instance, the authority of the agent must be in writing, otherwise the sale shall be void. Hence, if
there is no written authority from the BOD to sell the piece of land in the form of a resolution, the
sale of the officer shall be void. HOWEVER, if there is no formality required and he has in fact NO
authority to act? If the third party can find refuge in APPARENT AGENCY, if the corporation holds
out the particular officer as a legitimate officer, it knows that the officer entered into contract but
the other officers and the board do not do anything to recall the contract or warn the third party,
that may be considered as IMPLIED RATIFICATION of the otherwise unauthorized officer
entering the contract. These are the elements to be familiar with. Illegal, ultra vires, and an ultra
vires act on the part of the officer because there are different principles that may be involved in
those various contracts.
POWER OF THE CORPORATION TO EXTEND OR SHORTEN ITS TERM
Jennifer Yanto 14
A religious corporation does not have a term according to the SEC opinion. But setting aside the
religious corpo, the ordinary corpo has a term, maximum of 50 years. It may be amended. It may
be extended or shortened. In either case, it requires participation of stockholders and members. It
is one of those instances where even the non-voting shares if it is a stock and profit corporation,
cannot be excluded from voting. They have voting rights. If it is extension, those who are against
the extension may exercise appraisal right. If shortening, no appraisal right because there is a
dissolution. If shortened, if the circumstances allow it, they are given the value of the shares
because that is the end of the life of the corporation.
Extension of the term.
It is a clear rule that once the corporation is dissolved, there is an automatic 3-year period where
the corporation is in a state of limbo; no longer to transact business but to liquidate assets so that
it can pay its just and valid obligations and distribute the net value of shares if there is a
remainder if it is a stock corporation. If it is a non-stock corporation, what happens to the
remainder after the payment of debts. The assets are distributed according to the plan of
distribution if it has a plan stated in the bylaws. If none, the SEC will appoint a corporation similar
in purpose to the dissolved corporation to receive the remaining assets. If the dissolved
corporation is an orphanage, the assets would be given to another orphanage/similar corporation.
How about the members of the corporation? They CANNOT because that is an indirect violation
from the provision that it cannot distribute its profits among any of its members or officers. It can
be ploughed back to the corporation but it cannot be distributed.
When can you renew or extend the term? The correct term is not to renew but to extend. The first
term is normally 50 years, you may extend for another 50. Section 37. You cannot do it earlier
than five years before the expiration of the term. Why? It is considered as PREMATURE. That is
the general rule. Exception is if there are circumstances which warrant for the grounds for pre-
extension of the term. What would be those instances?
Let’s say you are still 6 yrs to expiration but the corporation wants to borrow money from the bank
for a term of 10 yrs. The bank says that it is to expire in six years and the corpo took a loan for 10
years. Are you going to abscond with the money? You can ask to amend the articles so that
legally, the corporation can still exist to pay the loan at maturity, in which case that can be used
as a reason before the SEC for the early extension of the term.
Can the corporation extend its term during the 3-yr statutory period for liquidation after it has
opted to dissolve?
E.g. 100 ha of coconut plantation where there are cattles. He presents his original purpose,
coconuts and secondary. Plant overrun by the abu sayyaf. The corporation was voted dissolved.
For three years of liquidation. The abu sayyaf were killed and there are two years into the
liquidation. Corpo filed a petition to RENEW TERM because the circumstances have changed
(answered prayer)
In several decided cases, during the three years, that is not the existence of the corporation; it no
longer functions. In fact, there is no board of directors. There is a receiver in dissolution because
all the activity of the corporation is limited to reduce into cash all its assets so that it can easily be
divided among the creditors. That’s the purpose of the 3-yrs. It is no longer an ongoing
Jennifer Yanto 15
corporation; it is only to liquidate. No extension is allowed within the three yr period allowed by
law as a consequence of dissolution.
Suppose there is an appointed receiver who filed a case at the beginning of liquidation, in order to
recover certain assets and it does not conclude during the three yr period. Let’s say only five
years later. What happened to the assets? The proceeds are at the command and possession of
the receiver. If there is no receiver because the three yr period has expired, then the lawyer of the
corporation who brought about the suit and the successful outcome of the case is the DE FACTO
RECEIVER and there is an IMPLIED TRUST created. He holds the judgment in behalf or for the
benefit of the creditors, if there are any left. If none, then for the stockholders. If NON-STOCK, he
holds in trust for the SEC because the latter chooses the beneficiary which is a similar
corporation.
If you are a receiver in dissolution, the assets run out by the third year. before the third year
happens, you already sell this contingent claim of the corporation. You assign it for a valuable
consideration. But if it is a touch and go case, there’s still someone who will buy it. By the end of
the third year, everything is liquidated. Even future good can be realized in the present in order to
close the dissolution with finality. Of course, you will need the permission of the COURT, not the
SEC, because if it is on liquidation stage, it is handed to the court, it approves. In many instances,
the SEC does not have jurisdiction, it is the courts which have general jurisdiction of nominate
contracts even if it is a BOND.
Example:
There is a corpo dissolved but still has liability. Five years, long term bonds. You can set aside
money and you can hand it over to the trustee of the bond. Since it is five years, you can invest
the money. The safest investment is you put it into the account and the growth is what you leave
behind to the trustee.
Q: if you are the trustee, you report to the court that it is a bond, isn’t it that the SEC can approve
it because it is a security?
A: In a contract of mutuum, its only the court can decide. The intrinsic provision, the terms and
conditions of the bond, it is only
The bond raised for money is covered by the SEC but as to terms and conditions, it is the court
only that can approve the show.
The moment you already prepay the bond, it is called NOVATION. It is you who pays. Those are
essential terms and conditions of the contract. If you change it, it is novation.
Increase or decrease of capital stock
How may a corporation increase or decrease its capital stock?
You can amend the articles of incorporation and this is an instance when even nonvoting shares
cannot be prevented from voting because it is one of the instances provided under Sec. 6.
If it is an increase of capital stock, there is an accompanying certificate of increase and this is a

sworn statement of the corporation showing that at least 25% of such increase is subscribed and
Jennifer Yanto 16
25% of the amount subscribed has been paid in actual cash or equivalent value of property
received by the corporation and valuated fairly. In other words, no undue advantage taken by the
supplier of the property and receiver of the new shares.
We said that it must be 25% as to the increase, not 25% of the overall increased capital. Let’s say
original authorized capital stock is 1M and it is fully subscribed, fully paid up. After 10 yrs when it
is fully subscribed and paid up, it applies for an increase to 2M. Instead of 1M now, the original,
the new authorized capital is 2M. if you take a look at the subscribed and paid up, it is 50% of 2M
so you still need the treasurer’s certificate that 25% of the capital is subscribed and 25% is paid
up. IF IT IS 25% OF THE NEW CAPITAL STOCK, YOU DON’T NEED IT. BUT THE LAW SAYS IT
MUST BE 25% AS TO THE INCREASE OF THAT 1M ADDITIONAL TO THE OLD 1M
AUTHORIZED, THAT ADDIITONAL 25% MUST BE SUBSCRIBED AND THAT IS WHAT THE
TREASURER MUST ATTEST TO. Take note: That is not what is required of individual
subscribers. They may subscribe a number of shares and its paid up need not be 25% at least of
the subscription. What the law requests only is that the OVERALL PAID UP CAPITAL must be
25% of the overall subscribed capital and the subscribed capital must be at least 25% of the
authorized capital stock.
Authorized capital stock- Let’s say par value of one peso. The increased capital may be issued by
the corporation at the price higher than the par value. In other words, it cannot issue the shares of
stock for a consideration less than par value. More than par value, it can issue the shares. Let us
say it issues the 50% of the increase (500T shares for 1 peso par value) but because so many
are interested to buy, there are twice more buyer than shares. They increase the issued price.
Instead of P1, they put it at P2 so out of the issue of 500T, they get 1M because they issue it not
at par value but P2. The subscribed amount is already 1M. after that issuance, can they still issue
500T shares of the balance of the authorized capital because they were able to raise 1M? THEY
CAN STILL ISSUE THAT IS WHY THE AUITHORIZSED CAPITAL OF THE CORPORAITON IS
NOT THE LIMIT AS TO THE PESO VALUE. What you are authorized to issue is as to the number
of shares to the absolute value. What is fixed is the number of shares, not the peso value of the
authorized capital stock. If your shares are stolen because your shares make money.
Father cites UBER case. It is valued at billions of dollars and it is going to issue new shares at the
amount of 10B.

December 12, 2014

Powers of the corporation
Two recent cases decided by the supreme court:
COSMOS BOTTLING VS. SEC November 12, 2014
The SEC now is issuing orders cancelling registration for failure to comply with the
reportorial requirements. After the order is given to you, you have a period of time to file an MR to
lift the order of cancellation. Here, they failed to file the financial statements of 2005 but then what
happens is they filed the petition to lift the order together with their explanation why they were
Jennifer Yanto 17
unable to file the audited financial statements. The SEC indorsed the submission of COSMOS to
their specific department- SEC CFD – corporation finance department and the SEC CFD, after
considering the formal explanation of COSMOS, issued a report, copy furnished to the SEC and
COSMOS. COSMOS filed a petition to the SEC en banc questioning the order of the SEC CFD.
When the SEC en banc received the submission of COSMOS, it said that it was an MR because
the SEC CFD is already the SEC acting and the MR under the implementing rules of the SEC is a
FORBIDDEN PLEADING. The SEC issued an order making the order permanent.
CA affirmed SEC. COSMOS went to the SC.
PRIMORDIAL ISSUE: WON THE CA CORRECTLY TREATED THE COSMOS APPEAL

AN MR TO THE SEC CFD.
HELD: BOTH THE CA AND SEC ARE IN ERROR.
SEC CFD is a department of the SEC and not the SEC itself. In sum, the order is
deemed an order issued by the SEC as a department and it may be appealed to the SEC EN
BANC as what COSMOS did. Hence, CA erred in treating the MR an appeal. Case remanded to
the SEC en banc for resolution on the merits.
Cancellation of registration
SEC vs. CA and OMICO
Election on the basis of proxies; They have street certificates. Can brokers grant proxies
out of the street certificates they are handling. The SEC says that it can be done if they ask
permission from the real beneficial owners of those street certificates.
How come the brokers have street certificates? Instead of paying for another fee for a certificate
of stock, the clients are not issued certificates in the name of the transferee. What they hold are
confirmation slips and the broker holds a certificate endorsed in blank and in his records, it is the
client who owns it.
Why would the client not pay for the certificate of stock? Most likely, he is a punter. He goes in
and out the stock market so that it is an added cost to pay stock certificate.
In a battle for the election of directors, the voter is solicited for the votes of the shares in his
disposition. SEC says he can grant these proxies if he has permission of clients, transferees.
The issue is one of jurisdiction, penned by J. Sereno. Whether the SEC has jurisdiction over
issues arising from the validation of proxies for the election of the directors of a corporation.
This issue has been raised but in another context in the case of WINSTON GARCIA VS.
ANTHONY ROSETE et.al. the camp of Garcia was allied with Cojuangco. They obtained a
restraining order from the SEC. rosete argued it should be from courts.
SC said that it is true that the SEC has jurisdiction over proxies but the one that has jurisdiction is
the body which has jurisdiction over the mother case- election contest, which under PD902-A, is
under the jurisdiction of the INTRA-CORPORATE COURT. Why did the issue come back?
Because the brokers are saying that the PSE is under the jurisdiction of the SEC not the
Jennifer Yanto 18
regulatory boards. The brokers are governed by the rules of the stock exchange, which are self-
regulating entities. The SEC comes in to regulate the rules, so this is not an issue of proxies, this
is an issue of whether or not the brokers are going out of line or they are acting in accordance
with law. Whether the SEC has jurisdiction over controversies arising from the validation of
proxies for the election of directors of a corporation. Of course, it is the regular courts because
the issue is not seen as the issue of a proper behavior of the brokers.
But let me point out something, towards the end of the decision, CJ Sereno comes up with this:
the court closes with an observation: As in the instant cases, GSIS vs. CA is a consolidation of
two cases, one of which was filed by a private party and the other by the SEC itself. In both
cases, the parties were aggrieved by the CA ruling, so they filed a case seeking the order of the
court that they recognize the jurisdiction of the SEC over the controversy. Calling to mind
established jurisprudential principles, the court ruled that QUASI-JUDICIAL AGENCIES DO NOT
HAVE THE RIGHT TO SEEK THE REVEIEW OF AN APPELLATE COURT DECISION
REVERSING ANY OF THE RULINGS. Title gud sa case SEC vs. CA, Omico, Astra Securities
Corporation vs. Omico. It would seem that the SEC is asking relief from the SC because it was
overturned by the CA. but then J. Sereno says, “calling to mind xxx quasi judicial agencies do not
have the right to seek the review of the appellate court decision xxx THIS IS BECAUSE THEY
ARE NOT THE REAL PARTIES IN INTEREST. Thus, the court EXPUNGED the petition filed by
the SEC for the latter’s lack of capacity to file the suit. So it must be in the instant cases.” The
dispositive portion says, “WHEREFORE, the petition SEC vs. CA is expunged.” Expunged pero
naa man, nag-una na man sa title. It is in the dispositive portion, wala na unta naapil. Anyone of
you can write urgent motion for execution of this decision to remove it, expunge it really.
The dispositive portion is different from the opinion in that it is the only portion that can be a
subject for a motion for execution. That’s the only thing that can be executed. Before it becomes
final, bring it to the attention of the court so it can be modified to include that which you would like
to be executed. Bantayi especially cases in legal separation and support. In your MR, ask it to be
brought down to the motion for execution. Otherwise it will just be obiter dictum, just thinking
aloud.
There are a couple of guidelines from the SEC about where a corporation can source its
declaration of dividends. From the different SEC memorandum circulars, the following:
1. Shared equity in net income of associate or joint venture accounted for in equity method as the
same is not yet actually earned or realized cannot be the source of dividends (SEC memo
11-2008)
Kanang imong subsidiary if less than 50% and net income, equity lang imo ana. It cannot be
consolidated to the financial statements of a holding company, which holds more than 50% of the
shares of stock of the subsidiary.
2. Unrealized foreign exchange gains except those attributable to cash and cash equivalents for
the time being that they are not yet actual income prior to the realization of such foreign exchange
gains cannot be the source of dividends. – naa kay bonds denominated in US dollars, you bought
US TREASURY bills. But you’re in the Philippines so the financial statement is in pesos. Mahal
pa ang dollar when you purchased it. Now because the peso became strong, the exchange rate
came at only 44. What will happen? Will peso be more or less? It will be less, when you translate
Jennifer Yanto 19
that into the financial statement. That could be a LOSS BUT NOT COUNTED. Or, if it were the
other way around, it cannot be gained because IT IS AN UNREALIZED GAIN. It is not yet in
cash. Only when you convert it to cash can that be a source of dividends, or as soon as it is not,
iadjust ang amount because the value ran out, it cannot be the source of dividends.
3. UNREALIZED ACTUARIAL GAINS WHEN THE COMPANY CHOOSES THE OPTION OF

RECOGNIZING ACTUARIAL GAINS OR LOSSES DIREECTLY TO PROFIT OR LOSS
STATEMENT.
These are about insurance companies.
4. FAIR VALUE ADJUSTMENT OR GAINS ARISING FROM MARKET TO MARKET VALUATION

WHICH ARE NOT YET REALIZED. That cannot be the source of dividends.
5. THE AMOUNT OF RECOGNIZED DEFERRED TAX ASSET THAT REDUCED THE AMOUNT
OF INCOME TAX EXPENSE AND INCREASED THE NET INCOME AND RETAINED EARNINGS
UNTIL REALIZED.
6. PAID IN SURPLUS, this is a mestizo treatment- CANNOT BE DECLARED AS A DIVIDEND.
Paid in surplus is the difference in the par value and the issued value or selling price of the
shares cannot be considered profits earned in the conduct of business of the corporation. They
are considered PART OF CAPITAL.
In the testimony of MINISTER ABELLO: this cannot be the source of dividends because it is not
the predict of the strenuous operation of business.
Those that are part of the increase of shares, above par value, that is what is subject to
dividends. Those which are wanted by the stock purchasers. Although, there is another
memorandum of the SEC which says that that can be the source of stock dividends.
7. REVALUATION SURPLUS or INCREASE IN THE VALUE OF ASSETS CANNOT BE

CONSIDERED EARNINGS OF THE CORPORATION. THEY ARE NOT INCOME BUT ARE BY
NATURE SUBJECT TO FACTUATION (?) Sec opinion dated OCTOBER 2, 1981 and MARCH 19,
1992.
8. REDUCTION SURPLUS likewise cannot be included in the amount to be declared as

dividends because they are not income from operations.
Reduction surplus are those arising from the reduction of par value of the issued shares of
stocks. SEC OPINION AUGUST 8, 1991.
• GAINS ON THE SALE OF CORPORATIONS’ REAL PROPERTY CAN BE

CONSIDERED PART OF RETAINED EARNINGS. THE SALE CAN BE PART OF THE
BUSINESS OF THE CORPORATION.
RETAINED EARNINGS INCLUDE NOT ONLY EARNINGS REALIZED FROM THE ORDINARY
COURSE OF BUSINESS BUT ALSO THOSE ARISING FROM TRANSACTIONS NOT RELATED
WITH THE INCIDENTAL AND NECESSARY IN KEEPING WITH THE BUSINESS IN WHICH
THE CORPORATION WAS ORGANIZED.
Jennifer Yanto 20
This is called NON-RECURRING INCOME, and they can be included in accumulated surplus and
they can be the source of dividends. SEC OPINION May 9, 1990. This is just a repetition of an
old memorandum of the SEC.
But if this is open to be given out as dividends, ONLY AS PROPERTY DIVIDENDS. TREASURY
SHARES CANNOT BE DECLARED AS CASH OR STOCK DIVIDENDS BECAUSE THEY ARE
NOT CONSIDERED AS PART OF EARNED OR SURPLUS PROFITS. THEY CAN BE
DISTGRIBUTED AS PROEPRTY DIVIDENDS TO BE ISSUED OUT OF THE RETAINED
EARNINGS PREVIOUSLY USED TO SUPPORT THEIR ACQUISITIONS PROVIDED THAT THE
AMOUNT OF SAID RETAINED EARNINGS HAS NOT BEEN SUBSEQUTNLY IMPAIRED BY
LOSSES. SEC opinion July 17, 19__
Other rules with respect to the power of the corporation to declare dividends:
1. Stockholders are entitled to dividends pro-rata based on the number of shares and not on the
amount paid for the shares.
2. Stockholders at the time of declaration are entitled to dividends. Dividends declared before the
transfer of shares beknown to the transferor and those declared after the transfer beknown to the
transferee.
3. Stockholders’ right to be paid dividends accrues as soon as the declaration is made in

accordance with SEC 43. From that time, the stockholders can already demand payment. It can
be declared at premium or at a value of a higher amount.
4. Even unpaid subscribers are entitled to dividends provided their subscription is (not yet?) been
fully paid or they failed to pay the balance. In other words, their subscription is still good because
if they are delinquent subscribers, they have no rights, no dividends.
(THIS IS A RICH SOURCE OF PROBLEMS WITH RESPECT TO THE POWER OF THE

CORPORATION)
POWER TO DENY PRE-EMPTIVE RIGHT.
It can be in the articles of incorporation, the bylaws, that there is no such thing as pre-emptive
right so the corporation is free to accept anybody or all comers that they want to by selling new
shares.
What if the bylaws and the articles are silent? There is pre-emptive right; it is presupposed.
Is there such a thing as STATUTORY PRE-EMPTIVE RIGHT? If the corporation is mandated by

law to maintain a certain proportion of Filipino ownership, in order for that proportion to be
maintained…if you go to the ruling in the case of GAMBOA VS. TEVES, et al., “The 60-40 must
be maintained IN ALL CLASSES OF SHARES but the memorandum circular of the sec only
requires the 60-40 to be verified in two places: among the VOTING SHARES, and in the
OVERALL OUTSTANDING CAPITAL STOCK VOTING AND NON-VOTING. Only in those two
places.
Even if the corporation is required under the Corporation code or under Special laws to maintain
a certain percentage, technically, as long as these two requirements of the SEC are fulfilled, the
Jennifer Yanto 21
corporation can still issue shares without granting pre-emptive rights to the Filipino shareholders.
If he will issue preferred non-voting, he does not have a choice because it is the supplier who is
given. As to that class, maybe the shares of the corporation is already in excess of the ratio, but
as to the overall outstanding, the ratio is not disturbed, neither is it as to the voting. It is still okay
for purposes of the SEC.
Remember that the corporation code in the classification of shares, you can classify shares in
such a way as to purposely aim that the ratio is maintained, under Sec. 6. There’s a particular
portion which says there can be a classification of shares to effectively maintain the ratio of
nationality required by the special laws or the constitution. But, this is now discouraged by the
PSE. The PSE will not approve you for listing if you have in your articles/bylaws that proviso of
classification of shares limited to Filipino ownership. According to the PSE, it adds a premium
when there is no qualitative difference in the shares. There is no preference; the only thing is that
more possible transferees because one class may be owned by Filipinos or foreigners and
another class of shares are owned by Filipinos. The ones which may be owned by both Filipinos
and foreigners have higher rate. That’s the only one which creates difference in price.
In the PSE, who has the responsibility? It is the SECRETARY of the corporation. He will watch
out that the foreigner holdings of the corporation would not exceed. That is specific in Heirs of
Gamboa vs. Teves. The obligation to maintain this ratio is with the SECRETARY and he CANNOT
be deprived of his responsibility, NOR CAN HE DELEGATE HIS RESPONSIBILITY UNLESS
WITH THE CONSENT OF THE BOARD OF DIRECTORS.
Capital –is the sum total of all the assets of the corporation –real or personal, tangible or
intangible. Although the main way by which the corporation in the initial stage is by issuing shares
of stock, it can raise capital by borrowing money from the bank. That is (not?) considered a
MAJOR decision of the corporation which requires the intervention of the stockholders. So, all
instances where there is an increase or decrease of capital stock, it requires the intervention of
the stockholders because it is a major decision.
We are familiar with the most common increase or decrease of capital stock. You amend the
authorized capital, you increase authorized capital. Potentially, you are on your way to increasing
capital stock. Upon its increase, you can issue. Why? Because the requirement is 25% of the
increase must be subscribed. You are already increasing capital stock.
Another way of increasing capital stock is by INCREASING THE PAR VALUE OF EXISTING
SHARES WITHOUT CHANGING THE NUMBER OF SHARES. Or, by INCREASING THE
NUMBER OF SHARES AND INCERASING THE PAR VALUE OF THE SHARES.
Increasing capital stock, that is why when the corporation issues stock dividends, it requires the
participation or intervention of the stockholders because you are increasing capital stock.
There is only one instance where if you increase capital, you are required to get the participation
of stockholders and it is not by way of increasing capital stock, but if you incur, create or increase
bonded interest. That is the only time when the intervention of stockholders, 2/3s vote of capital
stock voting or non-voting. And why is that required? Not because it is related to capital stock but
because IT INVOLVES THE PUBLIC. The corporation is put whether it likes it or not as a PUBLIC
CORPORATION. There are so many retail investors involved unless you will call it a private
Jennifer Yanto 22
placement. You issue a convertible bond where only two would purchase, the bond is worth more
than 6B and the buyer is the holding company and some other xx (father leaves)
Manila bulletin article: Philex mining wholly owned subsidiary, silangan Mindanao is planning to
offer 7.2B worth of SMCI convertible notes. They are called such but are actually a bond. A
promissory note is technically matures within one year, beyond one year, it should technically be
called a bond. If five years, medium-term. Ten years, it is a long-term bond. In a disclosure to the
PSE, Philex said it will act as the solidary co-issuer for the offering which is subject to the terms
and conditions of the convertible notes and agreement. It is between Philex, Silangan and the
Note holders- Asialink and SSS. Only two purchasers, both existing shareholders of Philex. SMCI
is the holding company of Silangan. The proceeds of the issue shall be used primarily by SMCI to
finance the projects: definitive feasibility study and repay advances from Philex. Why is feasibility
so expensive? The deeper you go, you get an actual ore. The valuation of the Silangan project
which formed the basis of the size of the issue (7.2B) which was conducted by an independent
appraiser. The issue bears a coupon rate of 1.5% payable semi-annually every June and
December and has a maturity of 8 years. It makes it a coupon bond(twice paid, you tear it every
payment period. You give it to them they pay you 1.5%)
A premium payable at the rate of 3% per annum retroactive from the issued date and
compounded semi-annually will apply if SMCI exercises the redemption option. One-year
redemption. There’s a 3% premium. Convertibility rate-every 18,000-peso worth of notes is
convertible into one common share of SMCI starting Dec 2015. A total of 400,000 new shares
representing 40% of the expanded capital of SMCI will be issued upon conversion. Upon maturity,
all notes of standing will be redeemed at par plus all accrued interest including the 3% premium
on face value compounded semi-annually from the date of issue, December 18, 2014.
Sale or disposition of assets. Remember the corporation has the power to sell all or substantially
all of its assets. Sell, lease, exchange, mortgage, pledge or otherwise dispose of all or
substantially all of its properties. This is actually a REDUCTION OF CAPITAL. The corporation
disposes of its assets in order to be capable to carry out more purpose. The last paragraph says,
if thereby the corporation will be rendered incapable of continuing the business or accomplishing
the purpose for which it was created. If by selling all your assets, you can comply and do your
purpose better, then this does not apply. You do not need the intervention of the stockholders.
They do not have to vote 2/3s. this is what Ramon Ang did with SMC. He first changed the
purpose clause and started disposing the assets because now, in accordance with the new
purpose, he can be more equipped to give life to that new purpose. (SMC history, starting from
beer, then beverage, RTO then to food.) for that he needed 2/3 votes to amend or change the
articles, then he sold half of the beer to Japan. He sold Magnolia but not its name, only the ice
cream. Within five years, he couldn’t sell ice cream.
The coco levy, to make sure that this does not oppose him, what did they do? They just converted
the shares into preferred non-voting shares. They made it into preferred shares. Amendment of
the articles of the incorporation does not require 2/3s vote- 2/3s WRITTEN ASSENT, not votes
because it is not one of those found in Sec. 6. Then they amended the articles to change the 25%
into preferred. If they are preferred, they are no longer included in the common shares divided
into the profit. The earnings per share of the common SMC will increase. That was the
propaganda so that all common shares voted for it. The rate of preference is just 5 ½%. In other
Jennifer Yanto 23
words, that was supposed to be held by the government if the government opposed the new
purpose clause. Now, there’s a petition in the SC to have it distributed to the coconut farmers.
Sale, lease, exchange of all or substantially all of corporate property. That is why it is important
that for a stock and profit corporation, there is a distinction as to the purpose: primary or
secondary. If you can no longer perform the primary purpose, it is considered a Sec. 40 case. Get
the approval of the stockholders before you can make the transaction.
Remember that transactions in the ordinary course of business which may appear to be selling or
disposition of assets is not a Sec. 40 case. For instance, here is a corporation engaged in real
property development. Its first project is to develop and subdivide a 40-ha land. Because it is
close to a big corporation, this big corpo says it wants to buy everything. Only one customer. Is
that not a sale of all or substantially all of corporate asset? It is a sale in the ordinary course of
business. Now, there are some commentators that say when this happens in the ordinary course
and involves all or substantially all, it involves the application of the BULK SALES LAWS. it is
misguided because it is designed to protect the creditors of MERCHANTS. (perya, ukay2) but if
you are a corporation with a factory, you’re not moving from place to place, the Bulk Sales Law
does not apply. It has many requirements; before you can make a sale of all your inventory,
you’ve to report to the local business bureau and submit all the names of creditors because it is
considered as one of the ways by which merchants abscond.
Power of the corporation to acquire its own shares
It is called an EXTRAORDINARY POWER because the corporation is normally out to increase its
capacity by issuing more shares. Why is it acquiring more shares? Because sometimes the law
requires the corporation to acquire its own shares. When?
1. To eliminate fractional shares arising out of stock dividends. Eliminate them by

reacquiring the fractional shares, they all meet in the treasury and they become whole.
2. To collect or compromise an indebtedness to the corporation, arising out of unpaid

subscription, in a delinquency sale, and to purchase delinquent shares sold during said
sale;

If you follow delinquency method, you will have to have a public auction. If there are no
bidders, then the default winner in the bidding of delinquency shares will be the
corporation and that will mean that the corporation will repurchase its own shares. TN: no
corporation can buy its own shares without unrestricted retained earnings because if you
do not have it, you cannot bid. Then, you will have to pay out of capital stock. It is a
violation of the trust fund doctrine.

A corporation will only resort to delinquency sale if it has unrestricted retained earnings,
accumulated surplus. If there is ACCUMULATED SURPLUS, that means it is a profitable
corporation. If it is profitable, there will be many bidders during the execution sale. The
Jennifer Yanto 24
chances of the corporation being the only bidder will be next to zero. If there is none,
bigger chance that nobody will buy during the public auction as no one will be interested.

3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under
the provision of this Code.

Appraisal right. The corporation is mandated by law to reacquire the stocks of the
shareholder who validly exercised his appraisal right. Certain fundamental decisions of
the corporation which is against the stockholder such as extending the term. What are
the conditions? You must be against it, you must not have voted for, you lost, surrender
your certificate of stock. From then on, you have no more rights except to be paid the fair
value of the shares. You cannot vote, no dividends, cannot inspect the books, only the
right to be paid.

Once again, the corporation must have unrestricted retained earnings because if it
doesn’t, it cannot repurchase shares covered by appraisal right. While the law commands
the corporation to satisfy a disgruntled stockholder on specific grounds provided by law, it
is not at the expense of the corporation violating the trust fund doctrine. That is instances
required by law.
Can a corporation acquire its stocks for other than the reasons aforementioned?
The SEC in a memorandum says ANY LEGITIMATE REASON FOR THE ENHANCEMENT OF
THE CORPORATION IS ENOUGH FOR THE CORPORATION TO REACQUIRE THE SHARES.
Very common corporations listed in the PSE, once the corporation believes that the market is not
buying its shares at its fair market value, normally, what the corporation does is it will result to
buying its own shares. The reasoning behind that, let us say the book value of the shares is
higher at which the market is trading and very few buy, the corporation will say that the shares are
lowest price to the public because it is lower than the book value such that it is prompted to buy it
for the purpose of MAKING THE CORPORATION MORE PROFITABLE. Why? It has
accumulated surplus profits. When it bought its own shares, it reduces the number of outstanding
capital stock. The shares, that will be the divisor of profits. The earnings per share would go up.
and because it goes higher, it pushes the market price at which the stock is traded.
Power to invest corporate funds in another corporation or business or for any other
purpose.
Discussed in SMC.
Power to declare dividends.
Discussed in Memorandum Circular 19-2008
Jennifer Yanto 25
Power to enter into management contract.
The corporation can enter into a contract with another corporation. Two parties to the contract: a
managing corporation and a managed corporation.
There are rules:
1. Should be approved by 1/3 of the total outstanding capital stock entitled to vote FOR THE
MANAGING CORPORATION
2. majority (2/3s) in case of a non-stock corporation for both managing and managed corporation
at a meeting duly called for the purpose.
MEETING DULY CALLED FOR THE PURPOSE means QUALIFIED NOTICE which means
notices sent out to the meeting, to the stockholders, it does not contain only time and date, but
also the specific agenda that will be discussed, entering into a management contract, because
that is crucial for the decision of the stockholder to attend the meeting or not. The law deems it
crucial.
Provided, 1. There is stockholder representing the same interest of both the managing and
managed corporation owned or controlled more than 1/3 of the outstanding capital stock entitled
to vote of the managing corporation. 2. And where members of the majority of the board of
directors of the managing corporation also constitutes majority of the members of the board of the
managed corporation. Then, the contract must be approved by the stockholders OF THE
MANAGED CORPORATION owning at least 2/3s of the total outstanding capital stock.
Sec. 45. Ultra vires acts.
Ultra vires acts on the part of OFFICERS OF THE CORPORATION- they are UNAUTHORIZED
ACTS. They are unenforceable but they may be ratified expressly and impliedly. They may be
ratified impliedly if and when the so-called apparent agency doctrine is complied with. Other
officers of the corporation know about the transaction that has no authority from the board and yet
they act as if there is authority because they signed receipts for the contract, received fruits, even
if it was entered into by the officer without authority.
Ultra vires contract of the corporation- entered by the corporation without having been written in
the purpose clause, with authority from the board. It is the corporation itself that has gone beyond
its power. It is ratified by amending the articles of incorporation to include this particular
transaction now as one of its purposes. But if the corporation enters into an illegal transaction,
like the corporation bought land but it is not a Filipino corporation.
Remember the decision of the SC, ONLY the government can question the acquisition and
possession of the land, not anybody. It is a void transaction but there are legal effects.
Ultra vires acts may be ratified while illegal acts may not be ratified.
Powers of the corporation is finished.

Jennifer Yanto 26

Corpo
December 15, 2014

Does Section 17 which provides that the commission shall give the incorporators a reasonable
time to correct or modify the objectionable portions of the articles. Notice the confusion. It says
shall be incorporators. Does it mean pre-incorporation articles or includes amendments?
If it is incorporators, THERE ARE NO AMENDMENTS. AN INCORPORATOR CANNOT APPLY

FOR AN AMENDMENT BECAUSE WHAT THE INCORPORATOR ADMITS IS A CONTRACT.
That is the problem.
SC says it includes amendments so therefore, one day before the expiry of the fiftieth year, the
SEC is obliged to give you REASONABLE TIME.
We have finished the powers.
Two ways to adopt the bylaws:
1. File it together with the proposed articles or
2. Within thirty days from the issuance of the certificate of incorporation, the corporation adopts
the bylaws. There are two ways to adopt it:
1. Vote, simply majority.
2. Delegate to the board for which ratification of a vote of 2/3s is required.
Take note, whether you vote it or delegate to the board, participation is by VOTING shares under
section 6. If you have so delegated it to the board and if you want to remove it, it only requires
SIMPLE MAJORITY of stockholders.
The bylaws are the internal rules of the corporation. The public is NOT OBLIGED to be familiar
with the bylaws that’s why the DOCTRINE OF APPARENT AGENCY is prevalent. It is a
confluence of acts by which the corpo or its officers made it appear to the public that the officers
are in fact speaking for the corpo. If there are those series of acts, then the corpo is bound to that
particular officer even if he has no authorization under the bylaws nor does he have under any
specific resolution to bind the corpo.
Meetings of the board/meetings of stockholders. There are regular meetings which are those
designated in the bylaws. Special are those not found in the bylaws or designated but are called
by the proper authorities. The requirement in meetings is PROPER NOTICE. And it should be in
accordance with what is provided in the BYLAWS. If there is no provision, the corporation code
takes effect: at least one week notice must be sent to stockholders unless otherwise provided.
For the board of directors, IT IS ENOUGH IF YOU MAKE THEM SIGN ANY WAIVER because
notice of any meeting may be waived expressly or impliedly by any stockholder or member of the
corporation. During the ANNUAL MEETING, you can give them a list of ALL the resolution of the
board and stockholders and after informing them, you can ask for a vote to ratify. If you have a
Jennifer Yanto 27
majority, then all the defects are cured. Remember, the curing must be based on KNOWLEDGE:
knowingly ratified. That is why you have to keep them not just a list but make them read. You
flash them as they come pag may meeting, the resolution. Call their attention and also give them
a list of the resolutions. They are presumed to have read it because it is in their possession even
though it is their armpit that is closest to it.
Vote, then ratify whatever defects there are there. There is no provision in the corporation code
about teleconferencing. There are now two ways: teleconferencing or videoconferencing.
The SEC has issued a special circular accepting tele and videoconference which gives specific
duties to the management of the corporation in the manner of holding meetings. Check if they can
hear, see, if they have agenda or copy of meetings. That is required in the special circular. There
is no such provision in the corporation code because what is provided is physical presence, social
conference. Is the idea of teleconferencing and video conferencing acceptable? That is the issue.
Expert travel and tours vs. CA 459 S 147 2005
The SC takes JUDICIAL NOTICE of teleconferencing. The SC did not pass upon it, it accepted it
as a fact. The SC is in fact saying that technology is overtaking us and we now realize that it is a
fact. It is now a fact of life. It does not even require proof.
What should be in the agenda of the stockholders’ annual meeting?
1. Call to order

2. verification of the quorum (this number are physically present; this number are present by
proxy; total outstanding shares present is this much which is majority of the outstanding shares
as of the close of the stock and transfer books) publicly traded corporations have a cutoff date
because everyday there is a buying and selling, and then the secretary declares a quorum, then
the president will say that the secretary has just provided a go-signal and the annual meeting is
called to order.

3.Election of board of directors is the first thing

4. Approval of the audited financial statements of the preceding fiscal year
There will be an explanation, there’s a president’s report on the performance. The report
may be DISPENSED with since it has been read or received by the stockholders, they can move
for voting. Once approved, it becomes an ACT OF THE CORPORATION, like a resolution. It is
the official financial snapshot of the corporation. But even before it is official, it is already in the
annual report, published.
After the approval of the annual meeting, is there no election of officers? If it is a stock
and profit, the election is done by the board. This is the stockholders’ meeting. If non-stock, yes,
because members vote. It is the board for stock and profit for the officers and all those listed in
the bylaws.

5.Vote for the ratification all the resolutions and acts of the board. Somebody will move,
seconded. Then if there is no objection, is it carried. If there is an objection, there is voting to
Jennifer Yanto 28
divide the house. If there is majority, then objection is sustained. After you have gotten the
ratification vote, what else?
6. Appointment of the EXTERNAL AUDITOR. It is the stockholders who appoint. There will be a
motion endorsed by the FINANCE COMMITTEE of the board to review the appointment of the
financial independent external auditor and for the BOD to negotiate the Auditor’s fee for the next
succeeding year. Technically, the stockholders do so, but for practical purposes, it is good to defer
it to the board of directors.

7. Set the meeting and call for an adjournment. The President says that the items in the agenda
are covered, there are no more maters to be discussed.

PROXIES:
What is the difference between voting trust agreement and a proxy?
• Both are schemes or contrivances approved by the corporation code by which someone
other than the named stockholder exercises the vote of the particular shares.
• Both have a limit of five years and both must be in writing.
• The difference is, a voting trust agreement, the stockholder must surrender his certificate
of stock and it is replaced and then the stockholder issues a paper to the transferee. The
certificate of stock covered by the voting stock agreement shall be cancelled and a new
one shall be issued in the name of the trustee. In the books of the corporation, it shall be
noted that the transfer is made pursuant to the said trust agreement. The trustee or
trustees execute a document that is the voting trust certificate which shall be transferable
and this is given to the transferors, the original stockholder, in the same manner and in
the same effect as the certificate of stock. The transferor is no longer eligible to be a
director in case of voting of shares of stock and the trustee is actually exercising his vote,
not the vote of the original stockholder. A proxy is exercising the vote of the original
stockholder. The proxy can be given written instruction by the stockholder on HOW
precisely to vote because he is just taking his place. He is like an extension only. A voting
stock agreement normally has considerations while proxy does not because it is still the
stockholder exercising the right to vote. A proxy unless he is a stockholder cannot be
elected but a trustee can be voted as a director. That is the difference.

What persons other than those that are named as shareholders may vote shares of stocks even if
they are not the named owner in the certificate and in the books of the corporation?

• executors of the will
• administrators/administratrix of estate or entity
• receivers in bankruptcy
• receivers in liquidation

They can vote without need of a proxy. All they have to produce is the papers appointing them in
their office. Someone died but the estate is under custodial egis because there is an estate
proceedings. Administrator appointed by the court votes. Does he have to produce a proxy? That
is an impossible demand because the one who gives is dead. The court cannot write a proxy
because the name of the court is not in the certificate of stock. The administrator just produces
his appointment.
Jennifer Yanto 29

STOCKS AND STOCKHOLDERS

The subscription is a technical term. It is contract for the acquisition of an issued stock in an
existing corporation or a corporation still to be owned? So that if you acquire shares of stock from
the corporation but it is treasury shares that is not a subscription offer. You can call it by any other
name but it is not subscription because treasury shares ARE ALREADY ISSUED SHARES BUT
THEY ARE NOT OUTSTANDING. A subscription cannot be a conditional contract because the
public has a right to rely on the subscription contract. It is part of the number of shares that are
already answered, it is only a question as to when but it is already answerable. It is not even
comparable to an engagement because it can still be called off. Subscription cannot be broken
because the public is already informed whether it is a pre-incorporation articles or old articles that
is amended to reflect the increase in the stock and the new subscription. That is important, there
cannot be a conditional subscription.

It is said that subscription of shares of stocks of a corporation still to be formed shall be
IRREVOCABLE for a period of at least six months from the date of subscription unless all the
other subscribers consent to the revocation or unless the incorporation fails to materialize. Six
months, it is irrevocable but beyond that, in a pre incorporation subscription, it is revocable,
provided that the incorporation papers have NOT YET BEEN SUBMITTED TO THE SEC because
once the SEC says no pre-incorporation sub may be revoked after the submission of the articles.
Why? Because the articles, after submission to the SEC, becomes a public document. Everyone
has access to it. Even if you loan from a bank, you float a bond, you give it to the bank, or the
brochure. It contains the authorized, subscribed, and even paid up capital. It is included in the
REGISTRATION STATEMENT.

The registration statement is the application for the registration of a security. A bond is a security.
Before you can float a bond, it has to be registered with the SEC and in order to register, submit a
registration statement, detailing the plans, people issued, proceeds of the bonds to be used for
what, etc. now, the public cannot ___...you dilute it, write a brochure detailing the essentials of the
bond in layman’s language with pictures.

Pre-need plans is a security which has to be registered with a registration statement and it is
translated to a brochure even if nothing in there talks about death.
The moment the articles of incorporation are submitted, it is complete, even if all the subscribers
agree that you withdraw subscription, that is no longer allowed because your subscription is
already included in the articles of incorporation, it cannot be changed as it is already submitted.
That is why you cannot change it.

Subscription- a contract for the acquisition of new shares, whether for incorporation subscription
or post-incorporation subscription. There can be subscriptions in installment, there can be one on
non-installment, one time only.
For no par value shares, it is necessarily one-time payment. For par value, it can be one-time or
installment.

Jennifer Yanto 30
Remember, even if the corporation says ‘installment’, the subscriber can still pay it and force the
corporation to receive the full payment of the subscription. WHY? Because the subscriber is fully
answerable for the total value of the subscription. He can compel the corporation to receive the
fulfillment of this obligation so that the corporation cannot prevent him from complying with the
subscription application.

Sec. 62. Consideration for stock- it is normally an asset, the thing valued, an asset which you
give in exchange for that aliquot portion called share of stock. And the law has a list of allowable
considerations, foremost of which is 1. actual cash.

Q: Can a domestic corporation in the Philippines issue shares in consideration specifically in US
dollars? Can it require that the consideration be in US dollars.
A: Yes. You can contract the consideration of which is in US dollars. But there has to be a
TRANSLATION because as a domestic corporation, your financial statements are denominated in
Philippine pesos so that the dollars are ultimately reckoned with as property and it should be
justly appraised.
What conversion rate applied? It must be on an objective basis. The rate of exchange acceptable
by banks when you pay on that particular day because at the end, the domestic corporation files
its audited financial statements in Philippine pesos not in dollars.

You can pay in CHECK, but what is meant is legal tender. Just think that if your subscription is
20M, you will have a hard time producing 20M in cash.

2. Property, tangible or intangible, actually received by a corporation, necessary and
convenient for its use and lawful purposes with a fair valuation equal to the par or issued
price of the stock issued.

Property can either be personal, real, tangible or intangible. But the common denominator is that
it must be APPRAISED by an acceptable appraiser. Licensed, normally. There are various kinds
of appraisers like real property appraisers, intellectual property appraisers. They have the way of
measuring intellectual property, in fact, they are divided into classes. The appraisers for musical
intellectual property which has the lowest appraisal rate.

These are all exchangeable for shares of stocks, intellectual properties valuated by licensed
appraisers. Remember it is better to undervalue the property, as it is not against the law, in
exchange for shares of stocks. It is when you overvalue when you run afoul with the law.

e.g. fishpond labeled as commercial property is overvaluation. The shares of stocks are issued
and are called watered stocks and the corporation has the right to ___ the water in the stock. All
the officers/directors of the corporation who approved the transaction and those who knew about
it and did not object in writing are liable. When you are quiet, that is complicity by silence, like
admission by silence.

3. Labor performed for or services actually rendered for the corporation. Future labor is
never allowed as consideration for shares of stocks. It is only labor already performed.

Jennifer Yanto 31
4. Previously incurred indebtedness of the corporation. Dacion en pago. The subscriber is

originally a creditor and in exchange for his credit which is the debt of the corporation, in fact not
written off, is the consideration of the shares, then that creditor becomes a stockholder.

5. Amounts transferred from unrestricted retained earnings to stated capital. It is called
stock dividend. The corporation issues shares and then there is actually no showing that a
consideration was paid but the corporation issued these new shares to existing stock holders and
these shares in the URE are just transferred to common stock.

6. Outstanding shares exchanged for stocks in the event of reclassification or conversion.
You have preferred shares but they are convertible preferred shares. The corporation is saying
we will issue you common shares and the consideration is your preferred shares, so there is a
conversion. Your preferred shares become common shares.

Reclassification: Class B, Class C. Class B shares owned by Fil and foreigners. Class C only
owned by FIl. PSE now says, at the end of 2015, there shall be no more classification of shares
on the basis of ownership. All corporations that want to maintain their listing in the PSE must
amend their articles. all the Class B owners surrender their stock certificates and will be issued
Class A shares. All shares can be owned by anyone. No restrictions. There has been a
reclassification and the consideration is the old class of shares in exchange for new class of
shares.

What is the process of valuation? According to the corporation code, Sec. 62 “Where the
consideration is other than actual cash, or consists of intangible property such as patents of
copyrights, the valuation thereof shall initially be determined by the incorporators or the board of
directors, subject to approval by the SEC.” the rule of the SEC is: if there is no existing
stockholder who will complain, then they will not call a hearing. But if there is a complaint
because what happens is if the property is overvalued in exchange for shares of stocks,
everybody suffers. All the stockholders suffer, so normally if it is a considerable transaction,
shareholders will complain. They will file a complaint with the SEC, then it will question the initial
valuation of the corporation and will ask the corporation to present proof that the valuation is fair
and reasonable. That is when the corporation is forced to present the official valuation of
appraisers.

Promissory notes are not consideration, neither are future services.

The issued price of no-par value shares may be fixed in the articles of incorporation or by the
board of directors pursuant to authority conferred upon it by the articles of incorporation or by the
board of directors pursuant to authority conferred upon it by the articles of incorporation or the
bylaws, or in the absence thereof, by the stockholders representing at least a majority of the
outstanding capital stock at a meeting duly called for the purpose.

So how is the issued price of no-par value shares determined?
1. by the incorporators, that is the first determinant of no-par value shares
Jennifer Yanto 32
2. articles of incorporation by the incorporators 2)board of directors, if they are conferred authority
by the articles 3)majority of the stockholders

It should be the stockholders who should approve because if the valuation of the issued price of
no-par value shares is lower than the book value, then it is the stockholders who will suffer. In the
very least it should be book value, but most stockholders will say they are having a hard time to
reach the book value. You must put a premium to the risk taken to reach the value. No par value
shares come in at an issued price higher than book value and they put a premium to the risk that
they had to get to reach it.

Sec. 63. Certificate of stocks and transfer of shares. What is the difference between the certificate
of stock and shares of stock?

You will not say that the certificate of stock JUST represents the shares of stock. It is true, but it is
more than that because the right to a certificate of stock is represented by it. In other words, this
is a DISTINCT PROPERTY from the point of view of shareholders. It is a distinct right, he has a
right to the certificate of stock given certain requirements are complied with: if he has paid the
entire subscription, he can now demand that he be issued a certificate of stock. If he has lost his
certificate of stock, the corporation too can demand a certain procedure by which he is entitled to
a new certificate of stock. It is a DISTINCT AND SEPARATE PROPERTY from that of the shares
of stock. The share is an ALIQUOT PORTION, INTEREST, in the corporation and it is NOT
FIXED in value at any one time. it fluctuates depending on how the corporation performs. When it
is frozen, it is frozen when the corporation is dissolved or transactions ceased. Or the obligations
of the corporation are paid and whatever remains is distributed to the shareholders, the value is
fixed. You can receive the value of shares of stock upon dissolution. While the corporation is still
operating, your shares of stock partakes of an inchoate right as to its value. That is over and
above its right to dividends if the corporation is registering profits. That is distinct right derived
from the possession of the shares of stocks.

Is there also such a thing as a derived right from a certificate of stock?
There are certificates of stocks that are issued with distinct rights that are covered by particular
classifications in the articles of incorporation. Suppose, the board upon suggestion of its
investment advisers, amend the articles to produce a new class of shares to which are attached
options of additional shares of stocks and its price is as of the issuance of the original shares.
Represented by ? attached to the certificate. It can be done! After the issuance of the share and
the corporation would profit, the coupons attached would be very expensive. The issue becomes
whether those coupons are detachable or not. If detachable, on its own you can sell it. You have
the right or option to buy the same shares.

A certificate of stock is an entity in itself although its nature is a representation of an intangible,
inchoate right such as shares of stock. That is its basic nature. Although it is not an infallible
representation of the underlying shares. You can still be a shareholder without any certificate of
stock, like when you lost the certificate, it does not mean that you do not own a share. You go to
the stock and transfer book which states that what is written there is you, so you can still claim.
Jennifer Yanto 33
During the incorporation, you just paid because you were in a hurry, and you just took a receipt
that you paid for the subscription. If you do not have shares of stocks certificate or papers, that is
proof enough, a primary document- the receipt, the basis for issuing a certificate of stock. It is not
an infallible proof of representation of shares of stocks. There are other probably superior
documents that may support ownership of shares.

December 16, 2014

Sec. 66. The standard rule on the civil code is followed. The number 1 rule: it must be in writing.
This is the Waterloo of loan sharks. If there is no stipulation for interest, the collection of interest
is invalid.
Sec 67. There must be a stipulation. If none, the legal rate- 6% forbearance of money, or arising
from any obligation, NACAR case.
If you have certificate f stock rep 1000 shares, and you sell only 500, can you do it with only
endorsing the certificate of stock as outlined in the corporation code? Answer: sec. 63
Answer: The shares are left with you in the Philippines, the owner is abroad. They are not in
your name but you hold it. ASK FOR POWER SPECIAL POWER OF ATTORNEY. - power to
endorse the stock certificate at the back and to sign all necessary papers to effect the power of
attorney. If you're not selling the entire number f shares represented in the stock certificate, you
have to execute a deed of sale stating therein the number of shares that you own representing
the stock cert with the corresponding number issued by the CORPORATE SECRETARY and
state that you are only seeking. Ascertain number. You are only endorsing at the back but you
append a deed of sale. In exchange, TWO stock certificates will be issued. One, in the name of
the transferee and the remaining still under the name of the original owner. That is why the
PROCEDURE UNDER 63 is NOT UNIVERSAL BECAUSE THERE MAYBE PARTIAL SHARES
SOLD.
LAST PARAGRAPH of sec 63 is CRUCIAL
CASE: 1997 china banking corpo vs. CA 270 SCRA 503
Issue: what is an unpaid claim upon which the corporation has the power to withdraw the shares
from the transferee?
A: remember this is NOT A SHARE OF STOCK, BUT AN OWNERSHIP SHARE IN A NON
STOCK NON PROFIT CORPO Capitol golf and country club. He has certificate of stock of a unit,
membership holder. And he PLEDGES it its china bank to secure a personal loan which he got
from china and. H could not pay it so pledge was foreclosed. Automatically, china bank became
default buyer because there was no buyer. When it went to Capitol and now asked for a new
certificate in its name, Capitol refused because according to it, they have n unpaid claim, because
he was neglectful in paying his monthly dues and has not paid on the clubhouse. How can we
issue a certificate when there are unpaid claims?
CA Said Capitol is correct.
Held: the CA is incorrect.
The unpaid claim MUST BE RELATED TO THE SUBSCRIPTION.
THE MEANING IS UNLESS THE SUBSCRIPTION IS PAID, A CERTIFICATE OF STOCK
CANNOT BE ISSUED.
IT cannot be any other claim.

Sec 64. You have to pay everything before you can be issued shares.
Jennifer Yanto 34
Suppose all these subscribers and all the stockholders agreed, he can no longer pay his entire
subscription and he will be forgiven and he will just be issued certificate of stock corresponding to
that which was considered fully paid by his initial payment.
Q: is that allowed?
A: NO. Not allowed anymore.

Father gives example on geologist and mining company. It gave out dividends o stockholders and
10% of dividends promise to geologist.
Q: correct?
A: no. YOU CAN ONLY GIVE STOCK DIVIDENDS TO STOCKHOLDERS.
Q: how about the agreement?
A: valid, payable in pesos.

If shares of stock are issued AT LESS THAN PAR OR ISSUED VALUE, WHAT HAPPENS IS
THERE IS issuance of WATERED STOCK. who answers for water in the stock? The cow
example

WATERED STOCK- the difference between the issued value of the shares of stock and the actual
value of the payment or consideration given to the corp. in exchange of the share.

The law says (father cited sec. 65) OVERVALUED, not undervalued.
The director the moment he knows the there is an issuance of watered stock, is to object in
writing and to submit to the corporate secretary. IN WRITING.

The. Director And the officer, it is as if he accepts water in the stock, if he issued less than par of
if he receives the stock issued less than the share, the difference, who is liable? Te director is
solidarity liable. You can proceed directly to the director.

Unpaid subscriptions - benefits of the corporation: it can sue for money claims, or specific
performance. A subscription contra is a contract of sale. Ad a contract if sale is under the
jurisdiction of regular courts. You can sue specific performance.

The other means of recovering the balance of subscription is under Sec 68. You call a date by the
resolution of the board and he has not yet paid. You give thirty days, but he still has not paid.
Now, the corpo can declare the shares covered by the subscription now DELINQUENT. Then it
would be made not less than 30 but not more than 60 days from the date the stocks become
delinquent. Now, the delinquency sale , there has to be fulfillment of the requirement of NOTICE
AND PUBLICATION, once a week, two consecutive weeks. The delinquent stockholder still has
that time until the date of the delinquency sale. All he has to do is to pay the principal, plus the
penalty, plus the surcharges. At the sale itself, it will be the principal. Interest, penalties and
surcharges PLUS THE COST OF GHE DELINQUENCY SALE: hiring of the venue, payment of
the auctioner.

Why? Because their signature is very precious. Their signature is the execution of the sale. The
mode of acquisition is the SIGNATURE OF THE AUCTIONER. THAT IS THE PERFECTION,
EXECUTION NA. You can go now to the register of deeds.
Jennifer Yanto 35

You bid. Where do you refer? In the number of shares you are willing to get for the same amount.
1000 shares, only 1/3 is paid, 333k,balance is 666- principal, plus interest, penalties, cost, 750k
all. That is what you bid. For how many shares? Between 200 and 199 shares. 199 wins as
higher bidder because bid is same number 760/199, highest gihapon.

Suppose there are no bidders, the corporation becomes default winner and it has to have
UNRESTRICTED RETAINED EARNING SO THAT THE ENTIRE SUBCRIPTION is just absorbed
as TREASURY SHARES and the entire amount that's due and payable is transferred from
unrestricted retained earnings to capital stock.

If the corpo has NO unrestricted retained earnings, it should not declare stocks as delinquent
because if there is an auction sale and there are no bidders, wala siya ikapalit as default bidder. If
there has unrestricted retained earnings, it would not happen that it would be without another
bidder.

Q: is there still delinquency sale if shares are traded in the stock market?
A: theoretically, there is still. But practically, there is no more. Ngano maghago hago pa man ka
when anytime it can be sold? You are a subscriber, assuming installments can be paid( father
thinks not allowed anymore). Must be original stocks, all IPOS, must be fully paid, no partial and
transacted in the OPEN market. THE VALUE OF THE SHARES ARE REGISTERED FOR
EVERYBODY TO SEE.
Father gives examples of option exercise because stocks multiplied by 10 in par value in the
years, YOU DO NOT NEED CAPITAL TO EXERCISE. just call a broker and give the shares.
Talented people are enticed to join an upstart corpo because they can use their talent, you give
them options at par value.

Jennifer Yanto 36

Corporation Review TSN 2015 PDF

Încărcat de

Informații document

Titlu original

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

Corporation Review TSN 2015 PDF

Încărcat de

Drepturi de autor:

Formate disponibile

Corporation Law Review 2014

Fr. Agustin Nazareno

Corporation Law Review Notes

1. at the end of the term of the board members/trustees

2. in case of removal of a board member or trustee

In non-stock/non-profit, the rule is no cumulative voting unless the bylaws so provide.

What is the obligation of the corporation when a director dies?

What is the DOCTRINE OF APPARENT AUTHORITY?

2. in the intention of most founders of religious corporation, it is not temporary, it is permanent.

2. this involves a hearing because it is in effect an action to cancel the registration.

3. it is a collateral attack forbidden by the Corporation code.

Yuchengco vs. SB 2006

How is control supposed to be determined?

1. Control rule- If Philippine ownership of the owning corporation in an investing corporation is

When is an individual considered an officer as distinguished from an ordinary employee? That is

SC says there are two requisites for a person to be a corporate officer:

POWER OF THE CORPORATION TO EXTEND OR SHORTEN ITS TERM

Extension of the term.

Increase or decrease of capital stock

How may a corporation increase or decrease its capital stock?

If it is an increase of capital stock, there is an accompanying certificate of increase and this is a

Two recent cases decided by the supreme court:

COSMOS BOTTLING VS. SEC November 12, 2014

CA affirmed SEC. COSMOS went to the SC.

PRIMORDIAL ISSUE: WON THE CA CORRECTLY TREATED THE COSMOS APPEAL

HELD: BOTH THE CA AND SEC ARE IN ERROR.

SEC vs. CA and OMICO

3. UNREALIZED ACTUARIAL GAINS WHEN THE COMPANY CHOOSES THE OPTION OF

These are about insurance companies.

4. FAIR VALUE ADJUSTMENT OR GAINS ARISING FROM MARKET TO MARKET VALUATION

6. PAID IN SURPLUS, this is a mestizo treatment- CANNOT BE DECLARED AS A DIVIDEND.

7. REVALUATION SURPLUS or INCREASE IN THE VALUE OF ASSETS CANNOT BE

8. REDUCTION SURPLUS likewise cannot be included in the amount to be declared as

• GAINS ON THE SALE OF CORPORATIONS’ REAL PROPERTY CAN BE

3. Stockholders’ right to be paid dividends accrues as soon as the declaration is made in

(THIS IS A RICH SOURCE OF PROBLEMS WITH RESPECT TO THE POWER OF THE

POWER TO DENY PRE-EMPTIVE RIGHT.

Is there such a thing as STATUTORY PRE-EMPTIVE RIGHT? If the corporation is mandated by

Power of the corporation to acquire its own shares

1. To eliminate fractional shares arising out of stock dividends. Eliminate them by

2. To collect or compromise an indebtedness to the corporation, arising out of unpaid

Power to declare dividends.

Discussed in Memorandum Circular 19-2008

Power to enter into management contract.

There are rules:

Sec. 45. Ultra vires acts.

Powers of the corporation is finished.

If it is incorporators, THERE ARE NO AMENDMENTS. AN INCORPORATOR CANNOT APPLY

We have finished the powers.

Two ways to adopt the bylaws:

1. File it together with the proposed articles or

1. Vote, simply majority.

2. Delegate to the board for which ratification of a vote of 2/3s is required.

Expert travel and tours vs. CA 459 S 147 2005

What should be in the agenda of the stockholders’ annual meeting?

4. Previously incurred indebtedness of the corporation. Dacion en pago. The subscriber is

S-ar putea să vă placă și