Greendale Community College

Corporate Anthropology 101

Note: If with !!! it means that this topic appeared in the Midterms Exam

INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS

- Number and Qualifications of Incorporators
- Not more than 15
- Own at least 1 share of capital stock
- Corporate Term
- Perpetual existence unless otherwise in AOI
- Certificates of incorporation issued prior to RCC and continue to exist: perpetual existence
- Appraisal right if any change in corporate term
- May be extended or shortened
- Extension - GEN: not 3 years earlier than expiration unless justifiable reason determined
by SEC; effective on day after expiry date
- Revival: if corporate term has already expired
- Subject to liabilities before revival
- Deemed revived upon approval by SEC → certificate of revival will be issued giving it
perpetual existence
- No application for revival for financial intermediaries unless accompanied with favorable
recommendation of appropriate gov’t agency
- Minimum Capital Stock NOT required of stock corporations
- Contents of AOI
- (1) Purpose (primary and secondary)
- Nonstock corporation may not include purpose that would change/contradict its nature
- (2) principal office
- (3) term
- (4) term
- (5) incorporators
- (6) number of directors/trustees - not more than 15
- (7) directors or trustees (temporary before elected)
- (8) amount of authorized capital stock and number of shares (for stock)
- (9) amount of capital (for non-stock)
- (10) other matters
- Arbitration agreement may be included
- Amendments to AOI
- Majority vote of Board AND vote OR written assent of ⅔ OCS or members
- Duly certified by secretary and majority of board
- Effectivity: approval by SEC OR date of filing if SEC did not act upon it within 6 months for cause
that is not attributable to the corporation
- When AOI or its amended May be Disapproved
- SEC shall give reasonable time for it to be modify
- No AOI or amendment for financial intermediaries unless accompanied with favorable
recommendation of appropriate gov’t agency
- Grounds
- (a) not in substantially in accordance with form prescribed
- (b) purpose is illegal, unconstitutional, immoral
- (c) falsity of certification of amount of capital stock paid/subscribed
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Corporate Anthropology 101

- (d) required percentage of Filipino ownership not complied with

- Corporate Name
- Not allowed if:
- not distinguishable from name already reserved or registered
- Already protected by law
- Contrary to law, rules and regulations
- If corporate name is not allowed, SEC may:
- summarily order to cease and desist from using
- require to register a new one
- Remove all visible signs bearing the invalid corporate name
- Approval of new corporate name → new certificate of incorporation w/ amended name
- Failure to comply
- Contempt (corporation and responsible directors or officers) AND/OR
- Administratively, civilly or criminally liable AND/OR
- Revoke registration of corporation AND/OR
- Registration, Incorporation and Commencement of Corporate Existence
- Reservation of name
- if name is distinguishable, not protected by law and not contrary to law
- Commencement of corporate existence and juridical personality (of a private corporation)
- Date of issuance of certificate of incorporation
- De Facto Corporations
- Due incorporation of a corporation claiming in good faith to be a corporation cannot be inquired
into collateral in any private suit
- Inquiry may be made by SOLGEN in a Quo Warranto proceeding
- Corporation by Estoppel
- All persons who assume to act as a corporation knowing it has no authority
- Liable as general partners
- “Sue”
- When sued for transaction corporation entered into OR on any tort, it cannot use its lack
of personality as defense
- Anyone who deals with the corporation cannot resist performance on the ground that
has no personality
- Effect of Non-Use of Corporate Charter and Continuous Operation
- Certificate of Incorporation deemed revoked (day after the 5 yr period) → not formally organize
and commence business within 5 years from date of incorporation
- Commenced but inoperative for 5 consecutive years → delinquent status (after notice and
hearing)
- 2 years to resume operations and comply
- If complied → SEC issues order lifting the delinquent status
- If not complied → revocation of certificate of incorporation

BOARD OF DIRECTORS/TRUSTEES AND OFFICERS

- Board of Directors or Trustees of a Corporation; Qualification and Term (22)
- Election
- Director → 1 year from among the holders of stocks
- Trustee → not exceeding 3 years from among members
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Corporate Anthropology 101

- Hold office until successor is elected and qualified

- Independent Directors
- For corporations vested with public interest (20% of the Board)
- (a) Public companies covered by Section 17.2 of SRC → (i) Those whose
securities are registered with SEC; (ii) Those listed for trading with an exchange;
AND (iii) Those with assets of at least 50M and having 200 or more
stockholders, each holding at least 100 shares
- (b) Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money
service business, pre-need, trust and insurance companies, and other financial
intermediaries
- Other corporations engaged in business vested with public interest similar to
the above, as may be determined by the Commission.
- SEC MC 9-2009 provides that a regular director who resigns or whose term ends on the
day of the election shall only qualify for nomination and election as independent
director only after a 2-year cooling off period.
- The segregate casting of votes for regular and independent directors is not contrary to
the RCCP
- Election of Directors or Trustees (23)
- Each stockholder can nominate any director/trustee except when exclusive right is reserved for
holders of founders shares
- Must be present at election
- Majority of OCS/members
- Remote communication or in absentia
- If authorized by the bylaws
- No need for authorization in bylaws for corporations vested with public interest
- Stock corporations
- stockholders entitled to vote shall have the right to vote the number of shares of stock
standing in their own names (example: if a stockholder has 1,000 shares and there are
15 directors to be elected, the stockholder is entitled to cast 15,000 votes.)
- Straight Voting → vote such number of shares for as many persons as there are directors
to be elected
- Cumulative Method of Voting → cumulate said shares and give one (1) candidate as
many votes as the number of directors to be elected multiplied by the number of the
shares owned; OR distribute them on the same principle among as many candidates as
may be seen fit
- Nonstock corporations
- May cast as many votes as there are trustees to be elected
- Adjournment of elections
- If no election held OR owners of majority OCS/members are not present
- Corporate Officers (24)
- President → must be a director
- Treasurer → must be a resident
- Secretary → must be a citizen and resident
- Other officers → provided in the bylaws
- Compliance officer → for corporations vested with public interest
- Same person can hold 2 or more but the ff. Combinations are NOT allowed:
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Corporate Anthropology 101

- President & Secretary

- President & Treasurer
- Report of Election of D/T/O, Non-Holding of Election and Cessation from Office (25)
- Within 30 days after the election
- SEC may summarily order election → non-holding or rescheduled election not held
- Report death, resignation, or any manner where there is cessation of office
- Disqualification of D/T/O (26)
- If within 5 years before election/appointment:
- (a) Convicted by final judgment:
- Imprisonment exceeding 6 years
- Violating RCC
- Violating the Securities Regulation Code
- (b) Administratively liable for offense involving fraudulent acts
- (c) By foreign court or body for acts similar to (a) and (b)
- SEC or PCC may provide other disqualifications
- Removal of Director/Trustee (27)
- ⅔ OCS/Members
- After previous notice to stockholders/members
- Removal shall be without prejudice to other sanctions (to D/T who failed to remove despite
knowledge of the disqualification)
- Vacancies in the Office of D/T; Emergency Board (28)
- Vacancy
- May be filled by:
- (still a quorum) majority vote of remaining D/T if still a quorum
- (no quorum) stockholders/members
- Election may be held no later than 45 days from vacancy
- Termination → Regular term
- Vacancy due to expiration
- Election held not later than day of expiration
- Termination → Replacement director or trustee shall serve only for the unexpired term
of the predecessor in office
- Vacancy due to removal
- Election may be held on same day of meeting authorizing the removal
- Termination → Replacement director or trustee shall serve only for the unexpired term
of the predecessor in office
- Emergency Board
- When the vacancy results in no quorum + emergency action required to prevent grave
and irreparable loss to the corporation
- Temporarily fill from officers by unanimous vote remaining D/T
- Action is limited to emergency action
- Termination → cessation of emergency OR election of replacement D/T (whichever
earlier)
- Vacancy due to increase in # of D/T
- Filled at the same meeting authorizing the increase
- Termination → Regular term
- Compensation of D/T (29)
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Corporate Anthropology 101

- No compensation if not in the bylaws except for “reasonable per diems”

- No compensation unless approved by majority of OCS/members
- No compensation if it will exceed 10% of net income before income tax (preceding year)
- Liability of D/T/O (30)
- D/T → liable solidarily
- knowingly vote/assent to patently unlawful acts of the corporation; OR
- Guilty of gross negligence or bad faith in directing the affairs; OR
- Acquire personal or pecuniary interest in conflict with duty
- D/T/O → liable as a trustee and must account for the profits
- Not attempt to acquire any interest adverse to the corporation in any matter reposed to
them in confidence (equity)
- Dealings of D/T/O with the Corporation (31)
- Voidable contracts (at option of the corporation)
- With D/T/O or D/T/O’s spouses, relatives within 4th civil degree of consang/affin
- Not voidable when the following conditions are present:
- (1) presence of D/T is not necessary to constitute quorum in board meeting where
contract is approved
- (2) vote of D/T not necessary for approval of the contract
- (3) contract is fair and reasonable
- *(4) if corporation vested with public interest, there is approval of ⅔ of entire board &
majority of independent directors
- (5) * if officer, contract was previously approved by the Board
- Note: any of 1 - missing, it needs ratification of ⅔ OCS/members + contract is fair and
reasonable
- Contracts between corporations with Interlocking Directors (32)
- GEN: Contracts between 2 or more corporations having Interlocking Directors are valid
- XPN: Contract is tainted with fraud, unfairness, or unreasonableness.
- If the interest of the interlocking director in one corporation is substantial and in the other is
merely nominal, the latter corporation shall be subject to Sec. 31
- “Substantial” → exceeding 20% of the OCS
- Disloyalty of a Director (33)
- By virtue of his office, acquires business opportunity belonging to the corporation + obtaining
profits to the prejudice of the corporation (despite D risking his own funds)
- Account and refund all profits
- XPN: ratified by ⅔ OCS
- Executive, Management, and Other Special Committees (34)
- Can be created if provided in the bylaws
- At least 3 directors which act by a majority vote of all members
- GEN: Can do almost all the authorized acts of the board
- XPNs:
- (a) any corporate act requiring stockholders approval
- (b) filling of vacancies in the board
- (c) amendment or repeal of bylaws, or the adoption of new bylaws
- (d) amendment of a board resolution, which by its express terms is not amendable or
repealable
- (e) distribution of cash dividends to shareholders
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Corporate Anthropology 101

- The board may create special committees of temporary or permanent nature

POWERS OF CORPORATIONS
❖ Corporate powers & capacity (35)
➢ (a) sue and be sued in its corporate name
➢ (b) have perpetual existence
➢ (c) adopt and use corporate seal
➢ (d) amends its AOI
➢ (e) adopt/amend/repeal Bylaws
➢ (f) issue or sell stocks to subscribers and sell treasury stocks and admit members
➢ (g) deal with real and personal property, including securities and bonds
➢ (h) enter into a partnership, joint venture, merger, consolidation, or any other commercial
agreement with natural and juridical persons
➢ (i) make reasonable donations (XPN: no foreign corporation can give donation in aid of politics)
➢ (j) establish pension, retirement for D/T/O and employees
➢ (k) exercise other powers essential or necessary to carry out its purpose or purposes
➢ Theory of General Capacity → A corporation is said to hold such powers as are not prohibited or
withheld from it by general law
❖ Power to extend/shorten corporate term (36)
➢ Majority of the board + ⅔ of OCS or members
➢ Written assent is NOT an option
➢ Appraisal right
■ In case of extension
■ RAR: If the effect is mere amendment of AOI, then there is appraisal right for BOTH
extension and shortening. If the end of term is more than one year from filing, then
effect is mere amendment so no need for BIR clearance since it is NOT a dissolution
case.
■ If shortened to 1 year, that’s sec. 80 (allows AR for Shortening). If it’s just 30, 20 years
converted to 5 or 10 years, invoke sec. 36 (not allow AR for Shortening)
➢ Reconcile with Sec. 11 with respect to extending corporate term - Not earlier than 3 years from
expiry
➢ Written notice requirement
❖ Power to increase/decrease capital stock; incur/create/increase bonded indebtedness (37)
➢ Common provisions
■ Majority board + ⅔ OCS
■ Prior approval of commission is required. The application shall be made within 6 months
from the date of approval of the board of directors and stockholders
■ Certificate must be signed by a majority of the directors
➢ Increase or Decrease Capital Stock
■ Increase in capital stock: Certificate of increase in capital must be accompanied by a
sworn statement of the treasurer showing (treasurer’s affidavit) i.e. How to fund an
increase
● at least 25% of the increase in capital stock has been subscribed; AND
● at least 25 % of the amount subscribed has been paid in actual cash to the
corporation, or that a property, valuation of which is equal to 25% of the
subscription has been transferred to the corporation.
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Corporate Anthropology 101

● Can you fund an increase in ACS without issuing new shares? No, shares will
have to be issued although the issuance can be for non-cash consideration (e.g.,
shares of another corporation in exchange for shares of the applicant
corporation via a share swap; provided that valuation is duly approved by the
SEC)
■ Decrease in capital stock: No decrease in capital shall be approved if it will prejudice the
rights of corporate creditors. (Trust fund doctrine)
● A decrease in capital stock be undertaken to wipe out a deficit → Resulting
surplus will be used to offset negative retained earnings. A reduction in par
value can also have this effect.
➢ Incur, Create, or Increase Bonded Indebtedness
■ “Bonded indebtedness” → long term debts of the corporation, secured by mortgage on
real or personal property of the corporation; a form of distributing liability securities to
the public
➢ Appraisal right
■ Allowed for increase of capital stock
■ Not allowed for decrease of capital stock → would result in returning part of the
investments of the stockholders, including dissenting stockholders
■ Not allowed for incurring/creating/increasing bonded indebtedness → would drain the
financial resources of the corporation, which is contrary to the purpose for which the
power is exercised, which is to raise funds for corporate affairs
➢ Written assent not allowed. Actual meeting required
➢ Bond IS NOT THE SAME as Bonded Indebtedness
■ April 6, 1990 SEC Opinion: debentures are not bonded indebtedness. Debentures or
notes are issued on the general credit of the corporation, and since they are not secured
by collaterals, they are not bonded indebtedness in the true sense. The SEC has also held
that “bond indebtedness” refers to negotiable corporate bonds which are secured by
mortgage on corporate property
❖ Power to deny preemptive right (38)
➢ Pre-emptive right
■ What → Preferential right of shareholders to subscribe to all issues or disposition of
shares of any class in proportion to their present shareholdings
● Similar to the right of first refusal. It means that when new shares of stock are
issued, the stockholders shall have the priority in acquiring them
■ Can only be exercised to the same class of shares issued or disposed with that owned by
the stockholder (Share-a-like basis).
■ When → When there is an issuance or disposition of shares of stock of any class
➢ Denial of pre-emptive right
■ AOI; OR
■ Shares to be issued are to comply with laws requiring stock offerings or minimum stock
ownership by the public; OR
■ Shares to be issued are in good faith with the approval of the stockholders representing
2/3 of the OCS in exchange for property needed for corporate purposes; OR
■ Shares to be issued are issued in payment of previously contracted debts OR
■ Waiver of the right by the stockholder
❖ Sale or other disposition of assets (39)
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Corporate Anthropology 101

➢ Sale (gen) – Majority of board

■ (a) necessary in the usual and regular course of business; OR
■ (b) proceeds are for the conduct of remaining business; OR
■ (c) sale not substantially all
➢ If sale of all or substantially all – majority board + 2/3 of OCS/members
➢ Non-stock with no voting rights – majority of trustees in office
➢ Sale of all or substantially all
■ Based on net asset value; if corporation would be rendered incapable of continuing the
business or accomplishing the purpose for which it was incorporated
■ Net asset → (assets - liabilities) shown in latest financial statement
➢ Written notice
➢ Abandonment
■ After approval by stockholders/members, Board may abandon without prior
authorization subject to 3rd party rights
➢ SEC Memo Circular No. 12-2020 (Shareholders' Approval on Sale of Corporate Assets)
■ sale of all or substantially all of corporate property and assets
● at least 51% of the corporation's total assets (computed based on its total
assets as shown in its latest audited financial statements)
● 2/3 OCS
■ In aggregate sale transactions, shareholder approval shall be required for the sale
transaction that exceeds the 51% corporate asset threshold.
❖ Power to acquire own shares (40)
➢ Corporation has unrestricted retained earnings
➢ For legitimate corporate purpose:
■ Eliminate fractional shares out of stock dividends
■ Collect or compromise an indebtedness out of unpaid subscription, in a delinquency sale
and purchase delinquent shares sold during said sale
■ Pay dissenting or withdrawing stockholders
❖ Power to invest corporate funds in another corporation or business or for any other purpose (41)
➢ Majority board + 2/3 OCS/members
■ When majority board only required → if the investment is reasonably necessary to
accomplish its primary purpose
➢ If the investment is outside the purpose/s for which the corporation was organized, Articles of
Incorporation must be amended first, otherwise it will be an Ultra Vires act.
➢ Appraisal rights
➢ Written notice
❖ Power to declare dividends (42)
➢ Only board resolution required
■ XPN: 2/3 OCS - if for stock dividend
➢ Declare dividends out of unrestricted retained earnings
➢ Payable in case, property or stock to all shareholders on the basis of outstanding stock held by
them
➢ Cash v. Stock Dividend
■ Cash - BOD resolution; Delinquent stock shall applied to the unpaid balance on the
subscription plus cost and expenses; Cannot be issued by executive committee
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Corporate Anthropology 101

■ Stock - BOD resolution + 2/3 OCS; Delinquent stock shall be withheld from the
delinquent stockholder until his unpaid subscription is paid; Cannot be issued by
executive committee
➢ GEN: When there are profits earned by the corporation, BOD has the discretion to declare
dividends.
■ XPN: It is not anymore discretionary if retained earnings exceed 100% of the paid in
capital.
■ XPN to XPN (i.e. Even if it exceeds 100%, the corporation may still refuse to declare
dividends):
● (a) when justified by the definite corporate expansion projects or programs
approved by the BOD; OR
● (b) when the corporation is prohibited under any loan agreement with financial
institutions or creditors, whether local or foreign, from declaring dividends
without their consent, and such consent has not yet been secured; or
● (c) when it can be clearly shown that such retention is necessary under special
circumstances obtaining in the corporation, such as when there is need for
special reserve for probable contingencies.
➢ Can cash dividends less than the unpaid subscriptions be offset against unpaid subscription of the
EE such that ee receives nothing?
■ No, since if the shares are not delinquent, the dividends should be remitted in full to the
employee-shareholder
➢ Can stock Dividends be applied to the unpaid subscription of a delinquent SH?
■ Regardless if delinquent or not, you cannot apply stock dividends
➢ Can the BOD of a corporation with exclusively no-par value declare dividends to be paid out of
the stated capital?
■ No, this is ultra vires and void. Sec. 6 provides that “the entire consideration received by
the corporation for the no par value shares shall be treated as capital and shall NOT be
available for distribution as dividends.”
➢ Can dividends declared be reconsidered and revoked by the board of directors prior to payment
date but after record date?
■ No since rights have vested and the corporation becomes a debtor of the SH post
declaration. After the record date, there is already entitlement to stock dividend.
❖ Power to enter into management contract (43)
➢ It is an agreement whereby one undertakes to manage or operate all or substantially all of the
business of another, whether such contracts are called service contracts, operating agreements or
otherwise
➢ Term → maximum term is 5 years for any 1 term. Subject to renewal
➢ GEN: majority of BOD + majority of OCS/members (both managing and managed corporation)
■ XPN: 2/3 of OCS/members of managed corporation:
● (a) Stockholders represent the same interest of both parties and managed
corporation owns more than 1/3 of the OCS entitled to vote of the managing
corporation (interlocking stockholders)
● (b) majority of BOD of managing corporation is also majority of BOD of
managed corporation (interlocking directors)
❖ Ultra vires acts of corporation (44)
➢ GEN: corporation shall possess or exercise corporate powers that are in the RTCC or AOI only
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Corporate Anthropology 101

➢ XPN: necessary or incidental to the exercise of the powers conferred

➢ 3 types of ultra vires acts:
■ (a) beyond the powers as provided in RCC or AOI
■ (b) Acts entered into for the corporation by persons who have no corporate authority or
exceeded the scope of their authority
■ (c) Acts or contracts, which are illegal per se as being contrary to law
➢ Can be ratified; Voidable
➢ Consequences of Ultra Vires Acts:
■ Executed contract → courts will generally not set aside
■ Executory contract → void and unenforceable
■ Partly executed and partly executory → principle of unjust enrichment shall apply
➢ Remedies
■ State → dissolution through quo warranto; injunction; suspension/revocation of
certificate of incorporation
■ Stockholders → injunction; derivative suit; ratification except when 3rd party is
prejudiced
■ Creditors → Nullification of contract in fraud of creditors
➢ Ultra-vires act is NOT always an illegal act, while an illegal act is always an ultra vires

BYLAWS
❖ Adoption of Bylaws (45)
➢ Majority OCS/members
➢ Duly certified by majority of BOD
➢ Subject to inspection during office hours
➢ May be adopted before incorporation → approved and signed by all incorporators
➢ Effectivity → issuance of certification by SEC
➢ SEC shall not accept for filing bylaws of special corporations unless accompanied by certificate of
appropriate government agency
■ Bank, building and loan association, trust company, insurance company, public utility,
educational institution, or other special corporations governed by special laws
❖ Contents of Bylaws (46)
➢ Calling and conducting meetings (time, place, manner, mode)
➢ Quorum in meetings
➢ Voting
➢ Manner and election of appointment of Officers
➢ Qualifications, duties and guidelines for compensation of D/T
➢ Max # of board representations that independent D/T may have
➢ Term of Officers
➢ Penalties for violations of bylaws
➢ Manner of issuing stock certificates
➢ Arbitration Agreement
❖ Amendment of Bylaws (47)
➢ Majority of BOD + majority OCS/members
➢ Delegation of power to amend/repeal/adopt new to BOD
■ 2/3 OCS/members
■ Can be revoked → majority of OCS/members
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➢ Effectivity → issuance of certification by SEC

MEETINGS
❖ Stockholders or Members (49 - 51)
➢ Regular meetings
■ Annually (as fixed in the bylaws OR any date after April 15)
➢ Special meetings
■ Any time deemed necessary OR provided in the bylaws
■ stockholder or member may propose the holding and items to be included
➢ Notice of any meeting may be waived
■ Regular → 21 days before the meeting
■ Special → at least one (1) week
■ General waivers in AOI/bylaws not allowed
■ Attendance at meeting = waiver of notice unless attends for the purpose of objecting to
the transaction
➢ No person authorized to call OR unjust refusal of authorized person to call
■ Any stockholder/member can petition → petitioner shall preside until majority of
SH/members has chosen a presiding officer
■ Good cause → SEC can order the a meeting be called
➢ Stock and transfer book shall be closed
■ Regular meeting (20 days)
■ Special meeting (7 days)
➢ Postponement of regular meeting
■ Written notice → at least two (2) weeks prior
➢ Right to vote may be exercised in person/proxy/remote communication or in absentia if
authorized in the bylaws
➢ Place → Principal office in the AOI OR if not practicable, in the city or municipality where
principal office is
➢ Valid even if improperly held or called
■ if proceedings or any business transaction are within the powers or authority of the
corporation
■ provided that all stockholders are present/represented + attendance is not to object
because meeting not lawful
➢ Quorum → GEN: majority of OCS/members
❖ Board of Directors or Trustees (52 - 53)
➢ Regular meetings
■ Monthly (unless otherwise provided in bylaws)
➢ Special meetings
■ Any time upon call of president or provided in the bylaws
➢ Place
■ Anywhere in our outside the PH
➢ Quorum → GEN: majority of D/T in the AOI
■ Valid corporate act (XPN: election of officers - majority of all members of the Board)
➢ Written notice
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Corporate Anthropology 101

■ At least two (2) days prior to the scheduled meeting, unless a longer time is provided in
the bylaws
■ Can be waived
➢ Can participate and vote through remote communications; No proxy
➢ D/T who has potential interest in any related transaction → must recuse from voting on the
approval of the transaction (subject to Sec. 31)

Stockholders/Members Board of D/T

Regular meetings Annually (as fixed in the bylaws OR Monthly (unless otherwise provided in
any date after April 15) bylaws)

Special meetings Any time deemed necessary OR Any time upon call of president or
provided in the bylaws provided in the bylaws

Stockholder or member may propose

the holding and items to be included

Place Principal office in the AOI OR if not Anywhere in our outside the PH
practicable, in the city or municipality
where principal office is

Quorum GEN: majority of OCS/members GEN: majority of D/T in the AOI

Valid corporate act (XPN: election of

officers - majority of all members of the
Board)

Written notice Regular → 21 days before the At least two (2) days prior
meeting

Special → at least one (1) week

Participation and Voting may be exercised in Can participate and vote through remote
person/proxy/remote communication communications
or in absentia if authorized in the
bylaws No proxy

❖ Right to Vote of Secured Creditors (54)

➢ Stockholder who grants security interest → has right to attend and vote
➢ Secured creditor given right in writing and recorded in corporate books → has right to attend and
vote
➢ Legal representatives appointed by the court → can attend and vote W/O written proxy
❖ Voting in Case of Joint Ownership of Stock (55)
➢ Consent of all co-owners needed unless written proxy signed by all co-owners authorizing
someone
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Corporate Anthropology 101

➢ “and/or” capacity → any one of joint owners can vote

❖ Voting Right for Treasury Shares (56)
➢ No voting rights as long as in the Treasury
❖ Manner of Voting; Proxies (57)
➢ In person
➢ Proxy
■ In writing,signed,filed by stockholder/member
■ Received by secretary before meeting
■ Validity → only for meeting which it is intended unless otherwise provided in proxy form
■ Effectivity → no proxy valid for period longer than 5 years at any one time
■ Natural person → power of attorney; Corporate stockholder → board resolution
➢ Remote communication or in absentia
■ If authorized in the bylaws OR majority of BOD + majority of OCS/members authorize it
(before finish counting if tally of votes)
❖ Voting Trusts (58)
➢ Can be created by one or more stockholders where they confer upon a trustee the right to vote
and other rights pertaining to the shares
➢ Period
■ GEN: not longer than 5 years at any one time
■ XPN: if a condition in a loan agreement, it can be longer than 5 years and expires upon
full payment
➢ In writing and notarized
➢ Filed with SEC (if not → ineffective and unenforceable)
➢ New certificates of stock shall be issued to the trustee
➢ Voting trust certificates → executed and delivered by trustee to the stockholder
➢ Subject to right of inspection
➢ Expiration → automatically end of agreed period
■ New certificates of stock will be issued in the name of the stockholders
➢ Trustee can vote by proxy or in any manner in the bylaws
➢ Trustee is the SH of record, Beneficial owner is the trustor.
➢ Right to inspect all corporate books is vested in both trustor and trustee

STOCKS AND STOCKHOLDERS

❖ Subscription Contract (59)
➢ Subscription → any contract for acquisition of unissued stock (in an existing corporation OR
corporation still to be formed)
➢ Notwithstanding other term
❖ Pre-Incorporation Subscription (60)
➢ Subscription of shares in a corporation still to be formed
➢ GEN: Irrevocable for at least 6 mos. From date of subscription
➢ XPN:
■ Other subscribers consent to revocation; OR
■ Corporation fails to incorporate
➢ Cannot be revoked after AOI submitted to SEC
❖ Consideration for Stocks (61)
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➢ Cannot be issued for less than par or issued price (if it is → watered stocks na)
➢ Consideration (any or combination) – PAL-PAO-SO
■ (a) Property, tangible or intangible, actually received by the corporation.
■ (b) Actual cash
■ (c) Labor or services actually rendered
■ (d) Previously incurred indebtedness of the corporation
■ (e) Amounts transferred from URE to stated capital
● This pertains to STOCK DIVIDENDS
■ (f) Outstanding shares exchanged for stocks in the event of reclassification or conversion
● An example would be reclassification from one type of share to another
■ (g) Shares of stock in another corporation
● Meaning, they are stockholders of each other
■ (h) Other generally accepted form of consideration
■ Note: can also be the same considerations for bonds
➢ Not valid consideration:
■ Promissory notes
■ Future services
➢ Intangible property like patents or copyrights → value determined by stockholders or board and
must be approved by SEC
➢ Issued price of no-par value shares
■ Fixed in AOI or by board if authorized in AOI/bylaws
■ If not fixed, majority of OCS can determine
❖ Certificate of Stock & Transfer of Shares (62)
➢ Capital stock shall be divided into shares for which certificates shall be issued
➢ Shares of stock = personal property
■ Transferable by delivery of indorsed certificates
■ Transferable only if recorded in the books
■ Not transferable if there is unpaid claim on the shares
➢ SEC may require corporations whose securities are traded to issue their securities or shares of
stocks in uncertificated or scripless form
❖ Issuance of Stock Certificates (63)
➢ Full amount of subscription + interest + expenses have been paid
❖ Liability of Directors for Watered Stocks (64)
➢ Liable solidarily with stockholder concerned → difference between value received at issuance
AND par/issued value
➢ Consents
■ Issuance less than par/issued value
■ Other than cash, in excess of fair value
➢ Knowledge and not file written objection
❖ Interest on Unpaid Subscriptions (65)
➢ Subscribers shall be liable for interest from date of subscription (if no interest, legal rate applies)
❖ Payment of Balance of Subscription (66)
➢ Board can declare due and demandable anytime the unpaid subscriptions
➢ Pay on date in subscription contract OR date determined by the board
■ Failure to pay on date → entire balance due + interest
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■ If no payment within 30 days from date → stock becomes DELINQUENT and will be
subject to sale
❖ Delinquency Sale (67)
➢ Board resolution to order sale of delinquent stock
➢ When → not less than 30 nor more than 60 days from date stocks became delinquent
➢ Publication → once a week for 2 consecutive weeks in newspaper in principal office
➢ Sold at public auction
■ Unless delinquent stockholder pays before date of sale
■ Winner → **willing to pay for full amount for smallest # of shares
➢ New certificate of stock shall be issued
➢ Remaining shares → credited in favor of delinquent stockholder + new certificate of stock shall be
issued
➢ No bidder (**)
■ total amount credited as fully paid
■ Shall be vested as treasury shares
❖ When Sale May be Questioned (68)
➢ No action to recover delinquent stock on ground of defect in notice of sale/sale
■ UNLESS: one seeking action first pays/tenders to the one holding the stock the sum for
which the same was sold + interest at legal rate from date of sale
➢ No action unless filed within 6 months from date of sale
❖ Court Action to Recover Unpaid Subscriptions (69)
❖ Effect of Delinquency (70)
➢ Delinquent stock
■ cannot be voted for; cannot vote; cannot be represented at meetings
■ Not entitled to any rights of stockholder
■ Has right to dividends
❖ Rights of Unpaid Shares, Nondelinquent (71)
➢ Have all rights of a stockholder
❖ Lost or Destroyed Certificates (72)
➢ Registered owner of certificate of stock shall file an affidavit with the corporation about
circumstances of loss or destruction + details
➢ Publication of notice in newspaper for 3 weeks at expense of registered owner
➢ After 1 year from date of publication, right to contest is barred + lost/destroyed certificate shall
be canceled + new certificate shall be issued
■ BUT: New certificate before expiration of 1 year → If registered owner files a BOND or
other security effective for 1 year
➢ Suspension of issuance of new certificate → until final decision
➢ No action may be brought against corporation that issues new certificate of stock
■ XPN: fraud, bad faith or negligence

CORPORATE BOOKS AND RECORDS

❖ Books to be kept; Stock Transfer Agent (73)
➢ Every corporation shall keep and carefully preserve at its principal office all information relating
to the corporation including
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➢ Right of a director, trustor, shareholder or member to inspect the corporate books and records at
reasonable hours on business days, and a demand in writing may be made by such director, etc.
for copies of such records
➢ Confidentiality rules
➢ No right to inspect/demand reproduction:
■ not a stockholder or member of record OR represents the interests of a competitor
➢ Refusal to allow inspection/reproduction by officer or agent
■ Liable for damages + guilty of offense under Sec. 161
■ If made pursuant to board resolution → D/T who voted are liable
➢ Defense for refusal
■ (a) improperly used any information
■ (b) not acting in good faith or for a legitimate purpose
■ (c) represents the interests of a competitor
➢ Denial or Inaction on demand for inspection/reproduction
■ aggrieved may report to the SEC
■ Within 5 days SEC may conduct summary investigation and issue order for
inspection/reproduction
➢ Stock and Transfer Book → open for inspection by any director or stockholder of the corporation
at reasonable hours on business days
➢ Stock Transfer Agent → engaged principally in the business of registering transfers
■ allowed to operate in the Philippines upon securing a license from SEC (renewable
annually)
■ SEC may require stock corporations which transfer and/or trade stocks in secondary
markets to have an independent transfer agent
❖ Right to Financial Statements (74)
➢ Corporation shall furnish a stockholder or member, within ten (10) days from receipt of their
written request

MERGER AND CONSOLIDATION

❖ Plan (75)
➢ Merge into 1 corporation
➢ Consolidate into a new corporation
➢ Board shall approve
❖ Stockholders or members approval (76)
➢ Majority BOD of each + 2/3 OCS/member of each (approval of plan)
➢ Appraisal right
■ If after approval by stockholder, Board abandons the plan, right of appraisal is
extinguished
➢ Amendment to plan
■ Majority vote of each BOD
■ 2/3 OCS/member of each
❖ Articles (77)
➢ After approval in Sec. 76
➢ AOI executed by each (signed by president or VP; certified by secretary)
❖ Effectivity (78)
➢ Upon issuance of certificate by SEC
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➢ Special corporations need recommendation of appropriate government agency

➢ Upon investigation there is SEC’s reason to believe that it violates the law → set a hearing with
notice 2 weeks before
❖ Effects (79)
➢ Constituent becomes single corporation
■ Merger → surviving corporation
■ Consolidation → consolidated corporation
➢ Separate existence shall cease
➢ Surviving/Consolidated corporation shall possess all the rights, privileges of each constituent
corporation, including all interests
➢ The rights of creditors shall not be impaired
➢ Buying a corporation is not synonymous with merger
➢ Can a foreign corp merge with a domestic corp? YES
➢ Is there a liquidation of the assets of the absorbed corporation in a merger? NONE. The law
provides that among the effects of the merger s that properties, rights and subscriptions to
shares and other choses in action belonging to each constituent corporation shall be “deemed
transferred to and vested in such surviving or consolidated corporation without further act or
deed.

APPRAISAL RIGHT
❖ When it may be exercised (80)
➢ Any stockholder right to dissent and demand payment of the fair value of the shares
➢ (a) amendment to the AOI thas the effect of:
■ changing or restricting the rights of any stockholder or class of shares, or
■ authorizing preferences, or
■ extending or shortening the term of corporate existence
➢ (b) disposition of all or substantially all of the corporate property and assets
➢ (c) merger or consolidation;
➢ (d) In case of investment of corporate funds for any purpose other than the primary purpose
❖ How exercised (81)
➢ Written demand within 30 days from date of voting or else, considered waiver
➢ corporation shall pay upon surrender of the certificate or certificates of stock
➢ Fair Value
■ As of the day before the vote was taken
■ Excluding any appreciation or depreciation
➢ If, within sixty (60) days from the approval, cannot agree on the fair value of the shares
■ appraised by three (3) disinterested persons
● one of whom shall be named by the stockholder,
● another by the corporation, and
● the third by the two (2) thus chosen
➢ The findings of the majority of the appraisers shall be final
➢ No payment unless the corporation has unrestricted retained earnings enough to cover
❖ Effect of demand and termination of right (82)
➢ From “Demand for Payment → Abandonment of Corporate Action OR Purchase of Shares by
Corporation”
● All rights accruing to such shares shall be suspended
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○ EXCEPT: right of such stockholder to receive payment of the fair value thereof
●If the dissenting stockholder is not paid within thirty (30) days after the award, the voting and
dividend rights shall immediately be restored.
❖ When right to payment ceases (83)
➢ No demand for payment under this Title may be withdrawn unless the corporation consents
thereto.
❖ Who bears cost of appraisal (84)
➢ The corporation or
➢ The stockholder
■ If fair value by appraisers is approximately the same as the price which the
corporation may have offered to pay the stockholder
➢ In the case of an action to recover such fair value, all cost and expenses shall be assessed:
against the corporation unless the refusal of the stockholder to receive payment was
unjustified
❖ Notation on certificates; rights of transferee (85)
➢ Within ten (10) days after demanding payment for shares held, a dissenting stockholder shall
submit the certificates of stock for notation that shares are dissenting
➢ Rights of transferee
■ Transferor as a dissenting stockholder rights shall cease
■ Transferee shall have all the rights of a regular stockholder; and all dividend distributions
which would have accrued on such shares shall be paid to the transferee.

NONSTOCK CORPORATIONS
❖ Definition (86)
➢ No part income distributable as dividends
➢ Any profit incidental to its existence → for the furtherance of the purpose or purposes
❖ Purposes (87)
➢ Charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic
service, or similar purposes, like trade, industry, agricultural and like chambers, or any
combination
❖ Members
➢ Right to vote (88)
■ May be limited, broadened, or denied in AOI/bylaws
■ Each member shall be entitled to one (1) vote unless limited, broadened, or denied
■ May vote by proxy; remote communication and/or in absentia if authorized in bylaws
➢ Non Transferability of membership (89)
■ Membership and all rights are personal and nontransferable, unless the AOI/bylaws
provide otherwise.
➢ Termination (90)
■ Manner and causes in AOI/bylaws
❖ Trustees and Officers
➢ Election and term (91)
■ Number → may or may not be more than 15 (fixed in AOI/bylaws)
■ Term → no more than 3 years until successors are elected and qualified (Trustees
elected to fill vacancy → only for unexpired period)
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■ Only member may be elected as trustee (XPN: independent trustees of nonstock

corporations vested with public interest)
■ Members may directly elect officers unless otherwise provided in AOI/bylaws
➢ List of members and proxies, Place of meetings (92)
■ List of members → updated 20 days before any election
■ Place of meetings → any place even outside the place where the principal office as long
as within Philippines
❖ Distribution of assets → undergoing the process of dissolution
➢ Rules of distribution (93)

All liabilities and obligations Assets be used to pay, satisfy or discharge

them

Assets held upon a condition requiring return, Assets must be returned, transferred, or
transfer or conveyance conveyed according to such condition for
holding it

Assets received and held which can be used Assets must be transferred to a corporation or
only for charitable, religious, educational or organization in the Philippines which engages
similar purpose in a substantially similar activity of the
dissolving corporation

Assets other than those mentioned Distributed according to the AOI or bylaws

Any other case Distributed according to plan of distribution

➢ Plan of distribution (94)

■ Board by majority may adopt a resolution recommending a plan and submitting it to
members with voting rights
■ Each member that can vote will be given written notice of the proposed plan
■ Approval of plan → 2/3 of members with voting rights

CLOSE CORPORATIONS
❖ Definition and applicability of title (95)
➢ One whose AOI provides:
■ issued stock of all classes, exclusive of treasury shares, shall be held by persons not
exceeding twenty (20);
■ Issued stocks of all classes shall be subject to specified restrictions on transfer
■ Corporation shall not list any stock exchange or make any public offering of its stocks
➢ Not a closed corporation when:
■ At least 2/3 of its voting stock or voting rights is owned or controlled by another
corporation which is not a close corporation
■ Any corporation may be incorporated as a close corporation
● XPN: mining or oil companies, stock exchanges, banks, insurance companies,
public utilities, educational institutions and corporations declared to be vested
with public interest in accordance with the provisions of this Code
❖ Articles (96)
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➢ classification of shares or rights, the qualifications for owning or holding the same, and
restrictions on their transfers
➢ may be managed by the stockholders of the corporation rather than by BOD
■ In effect → no meeting of stockholders need be called to elect directors
■ Stockholders → deemed to be directors
■ Stockholders → subject to all liabilities of directors
➢ May provide that all officers/employees be elected/appointed by stockholders instead of BOD
❖ Validity of restrictions on transfer of shares (97)
➢ Restrictions on transfer must be in AOI, bylaws and certificate of stock (if not, not binding on
purchaser in good faith)
➢ Restrictions shall not be more onerous than granting stockholders or corporation a right of first
refusal with such reasonable terms, conditions or period stated
➢ ROFR deemed exercised upon failure to purchase shares within the period provided. Upon
expiration of period, stock may be transferred to any 3rd person
➢ “ROFR” vs. Pre-emptive right:

ROFR P-E

Option to purchase right of the stockholder to subscribe to all

issuances and dispositions

No right of first refusal unless embodied in Pre-emptive right is available to all

AOI, bylaws and certificate of stock stockholders unless denied in AOI

Pre-emptive right does not require any

statutory enabling provision

❖ Effects of issuance or transfer of stock in breach of qualifying conditions (98)

➢ If stock issued to person not eligible to be a holder + certificate shows conspicuously
qualifications of holders
■ person is conclusively presumed to have notice of the fact of ineligibility of stockholder
➢ If AOI states the # of persons entitled to be stockholders + certificate shows conspicuously the # +
issuance/transfer would cause stock to be held more than such #
■ person to whom stock issued/transferred conclusively presumed to have notice of this
fact
➢ If stock shows conspicuously a restriction on transfer and transferee acquires it in violation of
restriction
■ transferee is conclusively presumed to have notice of the fact of violation
➢ (for the 3 bullets above: Corporation, at its option, may refuse to register the transfer in name of
the transferee)
➢ Transfer → may or may not be a transfer for value
➢ Transferee may rescind the transfer or recover the stock
❖ Agreements by stockholders (99)
➢ Agreements before organization →survives incorporation and shall continue to be valid and
binding if such be the intent except those required to be in the AOI
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➢ A written agreement signed by two (2) or more stockholders may provide that in exercising any
voting right, the shares held by them shall be voted in accordance with a procedure agreed upon
by them
➢ No provision relating to any phase of corporate affairs, shall be invalidated on the ground that its
effect is to make them partners among themselves
➢ A written agreement among some or all of the stockholders in a close corporation shall not be
invalidated on the ground that it relates to the conduct of the business and affairs of the
corporation as to restrict or interfere with the discretion or powers of the board of directors
■ Provided, it imposes liabilities to stockholders for managerial acts
➢ stockholders actively engaged in the management or operation of the business and affairs of a
shall be held to strict fiduciary duties
■ Stockholders personally liable for corporate torts unless the corporation has obtained
reasonably adequate liability insurance
❖ When board meeting is unnecessary or improperly held (100) → action by directors w/o meeting and w/
due notice shall be valid if:
➢ Written consent thereto is signed by all the directors; OR
➢ All the stockholders or directors have actual or implied knowledge of the action and make no
prompt objection; OR
➢ Directors are accustomed to take informal action with the express or implied acquiescence of all
the stockholder
➢ An action within the corporate powers taken at a meeting held without proper call or notice is
deemed ratified by a director who failed to attend
■ UNLESS: after having knowledge, the director promptly files his written objection w/
secretary
❖ Preemptive right (101) → shall extend to:
➢ all stock to be issued; OR
➢ reissuance of treasury shares, whether for money, property or personal services; OR
➢ in payment of corporate debts, unless the AOI provide otherwise
❖ Amendment of articles (102)
➢ which seeks to delete or remove any provision OR reduce a quorum or voting requirement
➢ 2/3 OCS with or without voting rights
❖ Deadlocks (103) → directors/stockholders are so divided on the management of business affairs with the
consequence that the business and affairs of the corporation can no longer be conducted to the advantage
of the stockholders
➢ SEC, upon written petition by any stockholder shall have the power to arbitrate
➢ Provisional Director
■ Impartial → Neither a stockholder nor a creditor; not a receiver
■ Have all the rights and powers of a duly elected director → notified and vote until
removed by order of SEC or by all stockholders
■ Compensation → determined by agreement between such director and the corporation
subject to approval by SEC
❖ Withdrawal of Stockholder or Dissolution of Corporation (104)
➢ any stockholder of a close corporation may, for any reason, compel the corporation to
purchase shares held at fair value
■ not be less than the par or issued value
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■ when the corporation has sufficient assets to cover its debts and liabilities
exclusive of capital stock
➢ Any stockholder may, by written petition to the Commission, compel the dissolution
■ whenever any acts of the directors, officers, or those in control of the
corporation → illegal, fraudulent, dishonest, oppressive or unfairly prejudicial to
the corporation or any stockholder, OR
■ whenever corporate assets are being misapplied or wasted

Instances where WRITTEN ASSENT is allowed:

● Amendment of AOI - 2/3 OCS/members (stock corporation)
● Amendment of AOI - majority of trustees + 2/3 OCS/members (nonstock corporation)
● Change in corporate name;
● Change of purposes
● Reclassification of share category

Instances when WRITTEN NOTICE is required:

● Removal of Directors or Trustees
● Power to Extend or Shorten Corporate Term
● Power to Increase or Decrease Capital Stock; Incur, Create or Increase Bonded Indebtedness
● Sale or Other Disposition of Assets
● Regular and Special Meetings of Stockholders or Members
● Effectivity of Merger or Consolidation – hearing if SEC has reason to believe that proposed M/C is
contrary to law
● Plan of Distribution of Assets
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Corporate Anthropology 101