Law Summary Part 2

GENERAL PROVISIONS  Corporation – an artificial being created by operation of law having the right of succession and the powers, attributes, and properties expressly authorized by law or incident to its existence.  Fiction of corporate entity – a corporation is a legal entity or a person in law, distinct from the persons composing it.  Stock corporation – ordinary business corporation created and operated for the purpose of making a profit which may be distributed in the form of dividends to stockholders.  Capital stock – amount fixed in the articles of incorporation  Outstanding capital stock – portion of the capital stock which is issued and held by persons other than the corporation itself  Cumulative preferred share – share which entitles the holder thereof not only to the payment of current dividends but also to dividends in arrears  Treasury share – shares of stock which have been issued and fully paid for, but subsequently reacquired by the issuing corporation by purchase, redemption, donation or through some other lawful means.  Promoters – persons who bring about or cause to bring about the formation and organization of a corporation by bringing together the incorporators or the persons interested in the enterprise. 1. Give at least 4 distinctions between a corporation and a partnership. PARTNERSHIP CORPORATION created by mere created by law agreement organized by two requires at least 5 persons only commences juridical commences only from personality at the the date of the issuance execution of the contract of certificate of of partnership incorporation by SEC when the management the power to do is not agreed upon, business and manage every partner is an its affairs is BOD or BOT agent 2. Distinguish share of stock from capital stock. o Share of stock is used in a distributive sense to refer to the stock in the hands of the stockholders (it belongs to them). Capital stock signify the whole body of shares of stock in the corporation.

3. Give at least 3 advantages and 3 disadvantages of no par value shares. ADVANTAGES DISADVANTAGES Issued as fully paid and Legalize large issues of non-assessable stock for property Price is flexible Conceal the money or property represented by the shares Low-priced stocks Promote issuance of enjoy wider distribution watered stock 4. Who are the 4 classes of persons composing a corporation. Identify them.

Corporators – compose the corporation, whether stockholders or members o Incorporators – corporators mentioned in the articles of incorporation o Stockholders – owners of shares of stock o Members – corporators of a corporation which has no capital stock Give at least 3 advantages and 3 disadvantages of a business corporation. ADVANTAGES DISADVANTAGES Legal capacity to act as Complicated a legal unit Has continuity of Entails high cost of existence formation Management is Lack of personal element centralized in the BOD in view of the transferability of shares Creation, organization, Stockholders have little management and voice in the conduct of dissolution are the business. standardized Illustrate a cumulative preferred share. o If the stipulated dividend is not paid in a given year, it shall be added to the dividend which shall be due the following year and the accumulated dividends must be paid to the holder of said preferred share before any dividend may be paid to the holders of common stock. Give at least 4 similarities between a corporation and a partnership. Like partnership, o a corporation has a juridical personality separate and distinct from that of the individuals composing it; o a corporation act only through agents; o a corporation is an organization composed of an aggregate of individuals. Distinguish share of stock from certificate of stock. o Share of stock is incorporeal or intangible property while certificate of stock is tangible. Share of stock represents the right/interest of a person in a corporation, while certificate of stock is the written evidence of that right/interest. o

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Congress passed a proposed law creating a corporation to engage in agricultural activities. Is the law valid? It depends. Corporations cannot come into existence by mere agreement of the parties. Legislative grant or authority is necessary for the creation of a corporation with respect to corporations by prescription. X, Inc. and Y, Inc. are sister companies with the same set of officers. May X be held liable for the obligations of Y? It depends. A corporation may be allowed to exist solely for lawful purposes but where the fiction of corporate entity is being used as a cloak to cover for fraud or illegality, the individuals composing it will be treated as identical. One instance where fiction is disregarded is where a subsidiary company is created by a parent company merely as an agency of the latter especially if the stockholders or officers of the two corporations are substantially the same or their system of operations is unified.

If the book value of the share of stock in a corporation is P100, is this amount also its par value and market value? It depends. The par value does not always reflect its actual or true value or book value which may be determined by dividing the net value of the total corporate assets by the number of shares issued or outstanding. Par value and market value may be more or less than market value but market value is affected by the law of supply and demand. The articles of incorporation provides that a particular class of shares shall be deprived of the right to vote. Nevertheless, may they be still entitled to vote? Yes. Under the Code, no share may be deprived of voting rights except those classified and issued as “preferred” or “redeemable” shares, unless otherwise provided in the code. A corporation issued redeemable shares in favor of S who informs the corporation of his option to redeem the same as provided in the articles of incorporation. Has C, a corporate creditor, the right to object? It depends. Pp. 256-257 A corporation voted its treasury shares and received dividends thereon. Can the corporation do these? No. Treasury shares have no voting rights as long as they remain in the treasury. Neither are treasury shares entitled to dividends or assets because dividends cannot be declared by a corporation to itself as such distribution would be like taking money or stock from one of its pockets and putting the same in another, which would be pointless. The treasury shares were acquired by the corporation at P100 per share. May the corporation sell them at only P50 per share? It depends. Treasury shares may be resold by the corporation at any price the board of directors sees fit to accept, even at less than par. A stockholder, dissatisfied with the management of the corporation, surrenders his certificate of stock and demands the return of the subscription price paid by him. Can he rightfully do this? No. Shares of stock do not constitute an indebtedness of the corporation to the shareholder and are, therefore, not credits. Hence, no action can be maintained against the corporation for the return of the contributions of the shareholders as long as the corporation needs them and is not under dissolution. INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS  Articles of incorporation – document prepared by the persons establishing a corporation and filed with the SEC.  De facto corporation – one which actually exists for all practical purposes as a corporation but which has no legal right to corporate existence as against the state.  De jure corporation – one created in strict conformity with the mandatory statutory requirements for incorporation.  Collateral attack – one whereby corporate existence is questioned in some incidental proceeding not provided

by law for the express purpose of attacking the corporate existence. 1. What are the requisites in the statement of the purpose or purposes for which a corporation is formed? a. Lawful b. Purpose/s must not be indefinitely stated c. Primary purpose must be stated d. Must be capable of being lawfully combined 2. May individuals organize a corporation by mere agreement like in the formation of a general partnership? Explain. a. No. The right to be and act as a corporation does not belong to any person as a natural and civil right, but as a special privilege conferred upon a group of persons by the sovereign power of the state. 3. How shall the 25% subscription requirements be computed where the capital stock consists only of par value shares? a. The minimum subscription should be 25% of the amount of authorized capital stock or 25% of the aggregate value of all the shares of stock the corporation is authorized to issue. 4. What are the essentials for the existence of a de facto corporation? a. Valid law under which a corporation with powers assumed might be incorporated b. A bona fide attempt to organize a corporation under such law c. Actual user or exercise in good faith of corporate powers A corporation was continuously inoperative for 3 years. Is the corporation deemed dissolved? It depends. If the corporation does not formally organize and commence its business or the construction of its works within 2 years from the date of incorporation, its corporate powers cease and the corporation shall be deemed dissolved. However, if a corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least 5 years, the same shall be a ground for the suspension/revocation of its corporate franchise or certificate of incorporation. 2 years before the expiration of the corporation term of existence, the corporation applied with the SEC for extension of said term. Under the law, can the extension be granted? It depends. The extension cannot be made earlier than 5 years prior to the expiration date unless there are justifiable reasons therefor as may be determined by the SEC. Under Section 10, there must be at least 5 incorporators in the formation of a corporation. X organized a corporation, together with A, B, C, and D. All the shares are admittedly owned by X who register 4 shares in the name of A, B, C, and D. Is this a violation of the mandatory requirement of minimum number of incorporators? No. The law permits the existence of corporation originally formed by the required number of incorporators affected by the subsequent accumulation of all the shares in the hands of one individual.

Under Section 13, at least 25% of the authorized capital stock must be subscribed and at least 25% of the subscription must be paid-up but the paid-up capital must not be less than P5,000. Can this requirement be complied with where the authorized capital stock of the corporation is only P20,000. Yes. The subscribed is 20,000 and the paid up is 25% or 5,000.

X, a director in a corporation, is recorded in the book of the corporation as owner of 1 share of stock. X admits that the true owner is Y, its President. Is X disqualified to be a director? No. The general rule is that the person who holds the legal title to the stock as shown by the books of the corporation is qualified although some other person may be the beneficial owner of the stock.

BOARD OF DIRECTORS/TRUSTEES/OFFICERS  Quorum – such number of the membership of a collective body as is competent to transact its business or do any other corporate act.  Cumulative voting for one candidate – stockholder is allowed to concentrate his votes and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal.  Cumulative voting by distribution – stockholder may cumulate his shares by multiplying also the number of his shares by the number of directors to be elected and distribute the same among as many candidates.  Corporate opportunity doctrine – director who acquires for himself a business opportunity which should belong to the corporation.

A vacancy occurs in the broad of directors, further reducing the number from 11 to 6 members. Who is empowered to free the vacancy, the stockholders or the incumbent directors? It depends. It may be filled by the vote of at least a majority of the remaining directors/trustees, if still constituting a quorum. Otherwise, said vacancies must be filled by the stockholders in a regular or special meeting called for that purpose.

1. State the qualifications prescribed by the Corporation Code for directs and trustees of stock and non-stock corporations. a. Own at least one share of the capital stock b. Registered in his name c. Continuously own at least a share of stock during his term, otherwise, he shall automatically cases to be a director. d. Majority must be residents of the Philippines 2. How shall the directors/trustees exercise their powers in order to bind the corporation? Give the reasons for the rule? a. They must act together as a body in a lawful meeting in order to bind the corporation by their acts. 3. Illustrate straight voting as a method in the election of directors. a. Every stockholder may vote such number of shares for as many persons as there are directors 4. Illustrate voting in a non-stock corporation in the election of trustees. a. Members of non-stock corporations may cast as many votes as there are trustees to be elected but may not cast more than one vote for one candidate. A contact was entered into in the name of corporation with the unanimous approval of all the stockholders. Is the contract binding on the corporation? No. The stockholders (or members) elect a board of directors (trustees) to oversee the management and operation of the corporation. They are not the agents of the corporation; they cannot bind it by their acts. The directors have sole authority to determine policy and conduct the ordinary business of the corporation within the scope of its charter.

X was elected director in a corporation. The other directors who supported his election, assured him a monthly compensation of P50,000. In fact, they approved a resolution granting him the compensation. Is X entitled to the compensation? No. As a general rule, when directors perform nothing more than the usual and ordinary duties of their office, they are not entitled to salary or other compensation. The reason is that directors render services gratuitously and that the return upon their shares adequately furnishes the motives for services without compensation. If a director deserves compensation for such services, the same may be granted by the vote of the stockholders. POWERS OF CORPORATION  Implied powers – powers which are reasonably necessary to exercise the express powers and to accomplish or carry out the purposes for which the corporation was formed  Incidental power – powers which a corporation can exercise by the mere fact of its being a corporation or powers which are necessary to corporate existence and are impliedly granted.  Right of pre-emption – whenever the capital stock of a corporation is increased nad new shares of stock are issued, the new issue must be offered first to the stockholders who are such at the time the increase was made.  Dividends – part or portion of the profits of a corporation set aside, declared and ordered by the directors to be paid ratably to the stockholders on demand or at a fixed price.  Retained earnings – difference between the total present value of its assets after deducting losses and liabilities and the amount of its capital stock. 1. What are the ways for increasing/decreasing the authorized capital stock? Increasing/decreasing: a) Number of shares authorized to be issued without increasing/decreasing the par value b) Par value of each share without increasing/decreasing the number c) Both the number of shares authorized to be issued and the par value 2. What do you understand by the trust fund doctrine?

a. The assets of the corporation as represented by its capital stock are “trust funds” to be maintained unimpaired and to be used to pay corporate creditors in the sense that there can be no distribution of such assets among the stockholders without provision being first made for the payment of corporate debts. 3. Distinguish between ultra vires act from illegal act. a. Ultra vires means simply an act which is beyond the conferred powers of a corporation. An illegal act is an act which is contrary to law, morals, good customs, public order, or public policy. 4. What is the difference as to effect between the declaration of cash dividend and that of stock dividend? a. Effect of cash dividend means the assets of the corporation diminish by just so much the amount paid out and the property of the individual stockholders increases. Effect of stock dividend converts the surplus/profits of the corporation covered by such dividend into the permanent account thereby placing it beyond the power of the BOD to withdraw from corporate use and to distribute to the stockholders. 5. Compare the relative powers of a corporation and a private individual or an ordinary partnership. a. An individual and partnership has absolute right to use, enjoy and dispose of his properties. The corporation has only such powers as are expressly granted and those that are necessarily implied from those expressly granted or those which are incident to its existence. X subscribed to 100 shares of stock in a corporation which declared a cash divided. The dividend received by X is based only on the 70 shares fully paid by him. Has X the right to insist on the payment of dividends corresponding to 100 shares? Yes. As a general rule, the participation of each stockholder in the earnings of the corporation is based on his total subscription and not the amount paid by him. X, Y, and Z each owns 10% of the capital stock of a corporation. X exercised his pre-emptive right to new shares while Y offered his corresponding new shares to Z who purchased the same, thereby increasing Z’s proportionate holdings. Has X a ground for complaint? No. the pre-emptive right of stockholders extends “to all issues or disposition of shares of any class” unless denied by the articles of incorporation or an amendment. Suppose the original capital stock of a corporation is divided into 100,000 shares which were all offered for subscription. Only 60,000 shares were subscribed including 12,000 shares by X. Is X entitled to pre-emption in case the remaining unissued 40,000 shares are again offered for subscription? No. X is not entitled to pre-emption with respect to the remaining unissued 40,000 shares. But where the number of shares initially offered for subscription was only 40,000, then X may exercise his pre-emptive right, in case of the remaining 40,000 shares are subsequently offered to subscription.

The corporation has surplus profits amounting to more than 100% of its paid-up capital stock. It has not declared dividends for the last 5 years. May the corporation be compelled by the SEC to declare dividends to its stockholders? It depends. Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-in capital stock, except when justified by definite corporate expansion projects or programs approved by BOD, or when the corporation is prohibited under any loan agreement with any financial institution or creditor and such consent has not yet been secured, or when it can be clearly shown that such retention is necessary under special circumstances. A corporation borrowed money for the purpose of paying dividends. Is this legal? It depends. As a rule dividends cannot be declared out of borrowed money, for borrowed money is not profits; but money may be borrowed temporarily for the purpose of paying dividends, if the corporation has used its surplus assets to make improvements for which it might have borrowed money. STOCKS AND STOCKHOLDER  Derivative suit – one brought by one or more stockholders or members in the name and on behalf of the corporation  Watered stock – stock issued for no value at all or for a value less than its equivalent either in cash, property, services, or stock dividends.  Call – declaration officially made by a corporation usually expressed in the form of a resolution of the BOD requiring the payment of all or a certain prescribed portion of a subscriber’s stock subscription.  Highest bidder – person offering at the sale “to pay the full amount of the balance on the subscription together with accrued interest for the smallest number of shares.  Certificate of stock – written instrument signed by the proper officer of a corporation stating or acknowledging that the person named therein is the owner of a designated number of shares of its stock. 1. What are the different modes by which shares may be issued? a. By subscription before and after incorporation b. By sale of treasury stock after incorporation c. By subscription to new stocks when all the original stocks have been issued d. By making a stock dividend 2. Classify the labilities that maybe incurred by a stockholder. Liability to: a) The corporation for unpaid subscription b) The corporation for interest on unpaid subscription c) Creditors of the corporation on unpaid subscription d) Liability for watered stock e) Liability for dividends unlawfully paid f) Liability for failure to create corporation 3. How is participation in a corporation acquired? a. By subscription contract with an existing corporation

b. By purchase from the corporation of treasury shares c. By transfer from a previous stockholder of the outstanding shares or existing subscription to shares 4. What are the grounds for recovery of stock unlawfully sold for delinquency? a. Irregularity/defect in the notice of sale b. Irregularity/defect in the sale itself 5. When is the bringing of a representative suit by a group of stockholders allowed? Cite an example when the method is used. Pp. 464-465 A corporation issued shares with a par value of P20. Subsequently, the corporation purchased the shares at par value. If the same shares are sold by the corporation for only P15 per share, is the officer who effected the sale be held liable for the difference or “water” in the stock? No. X subscribed for 100 shares of stock in a corporation. He has paid only for 70 shares. May a certificate of stock be issued for the 70 shares? No and Yes. No certificate of stock shall be issued to a subscriber as fully paid up until the full par value thereof, or the full subscription in case of no par stock has been paid by him to the corporation. However, in the absence of any prohibition in the by-laws, there is nothing wrong or immoral nor is it contrary to any public policy to adopt this alternative since the subscriber is still liable for his unpaid subscription, no prejudice is caused to the corporation or to corporate creditors. Therefore, it is believed that the ruling is still applicable but only if allowed by the by-laws. X sold his shares of stock to Y. The transfer was not registered with the corporation. What would be effects of the nonregistration insofar as the corporation is concerned? It is invalid insofar as the corporation is concerned except when notice is given to the corporation for purposes of registration: a. The transferor has the right to vote and be voted for, and has the right to participate in any meeting b. The transferor has the right to dividends as against the corporation but the transferor is the trustee for the benefit of the real owner In the same example, has Z, a corporate creditor, the right to enforce the liability of X? Yes. It is invalid as against corporate creditors, and the transferor is still liable to the corporation. The transfer of stock by a shareholder does not relieve him from liability to creditors of the corporation for unpaid subscription until the transfer is consummated by being registered in the books of the corporation.

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merging in itself the other which disappears as a separate corporation. Consolidation –two (or more) corporation unite, giving rise to a new corporate body and dissolving the constituent corporations as separate corporations. 1. Illustrate consolidation as a form of corporate combination. a. Sale of assets, lease of assets, sale of stock, merger, consolidation. 2. Illustrate lease of assets as a form of corporate combination. a. In this case, a corporation, without being dissolved, leases its property to another corporation for which the lessor merely receives rental paid by the lessee.

X, Inc. sold all its assets to Y, Inc. Give the effects of such sale on the existence of X, Inc. and the liability of Y, Inc. for the debts of X, Inc. A new corporation expressly acquired the assets and properties, and assumed the obligations and liabilities of an old corporation which it succeeded, the former cannot excuse itself from said obligations and liabilities on the argument that said two corporations are distinct and separate. In case of merger or consolidation, has Z, a corporate creditor, the right to object to the same? No. As long as the procedures for effecting a plan of merger or consolidation are followed.

APPRAISAL RIGHT What is meant by appraisal right of a stockholder? It refers to his right to demand payment of the fair value of his shares, after dissenting from a proposed corporate action involving a fundamental change in the charter or articles of incorporation. Give 3 instances when appraisal right is available to a stockholder. 1. In case any amendment to the articles of incorporation has the effect of changing or restricting the rights of any stockholders 2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets 3. In case of merger or consolidation

In the same example, is X liable to pay interest on the unpaid subscription? It depends. Subscribers for stock shall pay to the corporation interest on all unpaid subscriptions from the date of subscription and at the rate of interest fixed in the by-laws.

In what cases will a corporation bear the costs and expenses of appraisal? a) Where the price which the corporation offered to pay the dissenting stockholder is lower than the fair value as determined by the appraisers b) Where an action is filed by the dissenting stockholder to recover such fair value and the refusal of the stockholder to receive payment is found by the court to be justified

MERGER AND CONSOLIDATION  Merger – two (or more) corporations unite, one corporation which remains in being, absorbing or

X, stockholder, with appraisal right, demands payment of the fair value of his shares. May X continue to exercise his right as stockholder pending payment?

It depends. If he is not paid the value of his shares within 30 days after the award his voting and dividend rights shall be restored until payment of his shares. Upon such payment, all his rights as stockholder are terminated. May X withdraw from his decision to demand payment of his shares? Give the effect if it is found that X is not entitled to the appraisal right. It depends. A dissenting stockholder who demands payment of his shares is no longer allowed to withdraw from his decision unless the corporation consents thereto. DISSOLUTION  Dissolution – extinguishment of its franchise to be a corporation and the termination of its corporate existence  Liquidation – winding up of the affairs of the corporation by reducing its assents into money, settling with creditors and debtors, and apportioning the amount of profit and loss. 1. What are the voluntary methods for dissolving a corporation? It may be effected: a) By the vote of the BOD and the stockholders where no creditors are affected b) By judgment of the SEC after hearing of petition c) By amending the articles of incorporation to shorten the corporate term d) In case of a corporation sole, by submitting to the SEC a verified declaration of dissolution for approval 2. Give the 2 legal steps involved n the dissolution of a corporation. a. Termination of the corporate existence at least as far as the right to go on doing ordinary business is concerned b. The winding-up of its affairs, the payment of its debts, and the distribution of its assets Z, Inc. is dissolved a) The BOD approved a resolution authorizing the payment by the corporation under a contract. Is the resolution valid? It depends. Every corporation whose charter expirees by its own limitation or is annulled by forfeiture shall nevertheless be continued as a body corporate for 3 years after the time when it would have been so dissolved for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs. b) After the lapse of the 3 years winding-up period, what remedies, if any, are available to a corporate creditor to recover the debts of the corporation? The liquidation by a receiver where, upon dissolution, the SEC may appoint a receiver to collect its assets and pay the debts of the corporation. Courts are also empowered to appoint a receiver.

The directors and executive officers of Z, Inc. decided to hold a meeting at Boracay Resort. They all died in a plane crash. They own the majority capital stock. Is Z, Inc. deemed dissolved? No. A corporation ma be dissolved by the SEC upon filing of a verified complaint and after proper notice and hearing on grounds provided by existing laws, rules and regulations. FOREIGN CORPORATIONS  Foreign corporation – corporation created by or under the laws of another state or country.  Incorporation test – a corporation organized under the laws of the Philippines is a domestic corporation and a foreign corporation with reference to any other state; if organized under the laws of another country, it is domestic with reference to said country and a foreign corporation under our corporation code. 1. What are the objectives of laws regulation foreign corporations? a. To place them on an equality with domestic corporations b. To subject them to inspection so that their condition may be known c. To protect the residents of the state doing business with them by subjecting them to the courts of the state. 2. Give at least 3 acts constituting “engaging or transaction business” and at least 3 acts that are not included in the term. a. Soliciting orders, opening offices, appointing representatives F, a foreign corporation, transacts business in the Philippines without a license. May it sue and be sued? What is the purpose of the law in requiring a license? It may be sued or proceeded against before Philippine courts. The implication of the law is that it will help corporations and citizens here to avoid contracts made with such foreign corporation. Same example, except that the foreign corporation is not doing business in the Philippines but it entered into a contract with a Filipino manufacturer for the importation by the latter of certain capital equipment. May it maintain a suit in our courts for the enforcement of the contract? Yes. Conversely, a foreign corporation no transaction business in the Philippines may maintain an action, even if it has no license.