Corporations 2: Classes of Corporations

General Principles:

• Creation by Operation of Law: Corporations are created by a special grant from the state, either through a general law (for private
corporations) or a special law/charter (for public corporations).
• Revised Corporation Code (RCC): Republic Act 11232, the Revised Corporation Code, governs private corporations. Public corporations
are primarily governed by their special laws or charters, supplemented by the RCC only when applicable.
• Separate Judicial Personality: Corporations have a separate legal personality distinct from their owners, leading to the principle of limited
liability.

Classes of Corporations:

1. By Purpose & Organization:

• Public Corporations:
• Organized by the state to perform functions belonging to the state.
• Examples: GSIS (Government Service Insurance System)
• Governed by: Special laws/charters, supplemented by the RCC only when applicable.
• Test for GOCCs (Government-Owned and Controlled Corporations): The government owns the majority of the stock (in stock
corporations) or the majority of the members (in non-stock corporations), per Libanan vs. Gordon.
• Private Corporations:
• Organized by private persons.
• Governed by: The RCC.
• Types:
• Stock Corporations:
• Have capital stock divided into shares.
• Authorized to distribute dividends to shareholders based on their shareholdings.
• Examples: Publicly listed companies, family-owned businesses.
• Non-Stock Corporations:
• No part of their income is distributable as dividends.
• Organized for charitable, religious, educational, fraternal, literary, trade, industrial, agricultural, or other
similar purposes.
• Examples: Charities, foundations, non-profit organizations.
• Quasi-Public Corporations:
• Private corporations granted a franchise or contract by the state to perform public duties.
• Organized for profit.
• Examples: Public utility companies, transportation providers.
• Quasi Corporations:
• Bodies or municipal societies recognized by statutes or immemorial usage as having corporate powers, but not vested with
general corporate powers.
• Examples: Municipalities, certain associations with specific legal duties and privileges.

2. By Incorporation & Existence:

• De Jure Corporation:
• Formed in strict compliance with all mandatory statutory requirements for incorporation.
• Their existence cannot be challenged.
• De Facto Corporation:
• Formed with substantial compliance with the law, but with some minor defects.
• Existence can only be challenged in a quo warranto proceeding.
 • Example: Failure to file bylaws on time.
• Consequences:
• Cannot be attacked collaterally (e.g., in a debt collection suit).
• Shareholders are not personally liable for the corporation’s debts due to limited liability.
• Corporation by Estoppel:
• A group of persons assuming to act as a corporation, knowing they lack legal authority.
• Consequences:
• The group cannot deny their corporate status in a legal action brought against them.
• The group is liable as general partners for all debts, liabilities, and damages incurred.
• Third parties relying on the representation of a corporation can hold the group liable for transactions or torts, even if
the corporation was not legally formed.
• Example: Individuals transacting business as a corporation without proper incorporation.

3. By Public Access:

• Open Corporations:
• Open to any person who wishes to become a shareholder or member.
• Examples: Publicly listed companies, most large corporations.
• Close Corporations:
• Restricted to a specified number of shareholders (no more than 20).
• Stock transfer is subject to restrictions.
• Not listed on any stock exchange.
• Prohibited for: Mining, oil companies, stock exchanges, banks, insurance companies, public utilities, educational institutions,
and corporations vested with public interest.

4. By Management & Control:

• Holding Corporations:
• Control subsidiaries by holding majority shares.
• They hold stocks for control rather than mere investment.
• Subsidiary Corporations:
• Controlled by another corporation, typically a parent company, through majority ownership of voting stock.
• Often share directors and management.
• Affiliate Corporations:
• Related to another corporation through common ownership, management, long-term lease of properties, or other control
devices.
• Parent Corporations:
• Have controlling financial interest in one or more corporations.

5. By Number of Members:

• Aggregate Corporation:
• Requires more than one person or member.
• Corporation Sole:
• A corporation consisting of only one person.
• Example: Religious organizations administered by a single person.
• One Person Corporation (OPC):
• A corporation with a single shareholder.
• Can be formed by a natural person, trust, or estate.
• Prohibited for: Banks, quasi-banks, pre-need companies, insurance companies, public and publicly listed companies, and non-
chartered government-owned and controlled corporations.
 • Note: Professionals licensed to exercise a profession (e.g., lawyers, accountants) cannot organize as an OPC for the purpose of
practicing their profession, unless specifically allowed by a special law.

6. By Purpose & Religious Affiliation:

• Ecclesiastical Corporations:
• Organized for religious purposes.
• Example: Religious denominations, churches.
• Lay Corporations:
• Organized for non-religious purposes.
• Eleemosynary Corporations:
• Established for charitable purposes.
• Example: Foundations, charities.
• Civil Corporations:
• Established for profit.
• Condominium Corporations:
• Organized for construction of a building with individual living or office units, with co-ownership of common areas.

Key Points to Remember:

• The distinction between de jure, de facto, and corporation by estoppel is crucial for determining liability and the existence of a
corporation.
• Close corporations are subject to specific requirements and limitations.
• One-person corporations have significant advantages and limitations.
• The different classifications of corporations provide a framework for understanding their unique characteristics and legal frameworks.

Disclaimer: This information is for educational purposes only and should not be considered as legal advice. Please consult with a legal professional
for specific advice regarding your situation.

Corporations 3: Incorporation (How to Make A Private Corporation)

What is Incorporation?

• Incorporation is the formal process of creating a private corporation.

• This involves actions by incorporators and official acts/records that give the corporation legal existence.
• Key Point: Only the issuance of a Certificate of Incorporation by the Securities and Exchange Commission (SEC) grants a private
corporation legal personality.

Components of a Corporation

1. Promoter: A person who undertakes to form a corporation, gathers resources, and establishes its capacity to operate.
• They are an agent of the incorporators, not the corporation itself.
2. Corporators: Individuals who compose the corporation.
• Stockholders in stock corporations or members in non-stock corporations.
3. Incorporators: Individuals mentioned in the Articles of Incorporation as the original founders.
• They sign and acknowledge the Articles before a notary public.
• They have limited powers, only those granted by the Articles.
• They remain incorporators until the corporation’s termination, even if they leave or die.
• The Articles cannot be amended to change their names.
4. Subscribers: People who agree to buy original and unissued shares of a corporation.
5. Underwriter: A person who guarantees the distribution and sale of securities for another company.
Qualifications of Incorporators

• General Rule: Any person, partnership, or corporation, singly or jointly (up to 15 individuals), can form a corporation.
• Exceptions: Professionals (lawyers, accountants) can only incorporate if allowed by special laws.
• Requirements for Natural Persons:
• Must be of legal age.
• Must own or subscribe to at least one share of capital stock.
• Foreign Ownership:
• General Rule: A corporation composed entirely of aliens may be incorporated as long as the majority of incorporators are
residents of the Philippines.
• Exceptions: This does not apply to nationalized corporations or those subject to foreign equity participation restrictions (like
those regulated by the Constitution or Foreign Investment Acts).

Other Corporation Components

• Stockholders: Owners of shares in a stock corporation, with rights to management, income, and assets.
• Members: Members of a non-stock corporation.
• Board of Directors: Exercise corporate powers, conduct business, and control property.
• Officers: Appointed by the board, including President, Treasurer, Secretary, and Compliance Officer (for corporations vested with public
interest).

Steps in Corporation Creation

1. Name Selection:
• The incorporators choose a name that is distinguishable from existing names and not protected by law.
• The SEC verifies the name and reserves it if it meets the requirements.
2. Drafting the Articles of Incorporation:
• The Articles contain the legal foundation of the corporation.
• It defines the relationship between the state and the corporation, the corporation and stockholders, and stockholders among
themselves.
• The Articles must be acknowledged before a notary public.

Key Contents of the Articles of Incorporation

• Name: Distinguishable from existing names.

• Purpose Clause: States the primary and secondary purposes of the corporation.
• Determines the classification of the corporation.
• Informs investors about the nature of the business.
• Provides guidance for directors on authorized business activities.
• Allows third parties to determine if the corporation is acting within its authority.
• Implied and incidental powers are not always explicitly stated in the Articles.
• Principal Office: Located within the Philippines, serving as the corporation’s legal residence.
• Term of Existence: Default is perpetual existence, unless a specific term is chosen (which can be amended later).
• Incorporators: Names, nationalities, and addresses.
• Directors:
• Number of directors or trustees (no more than 15 for stock corporations).
• Names, nationalities, and addresses of interim directors.
• Capitalization:
• Stock Corporation:
• Authorized capital stock: Total amount of capital stock divided into shares.
• Par value shares: Each share has a fixed subscription/issue value.
 • No par value shares: Corporation has flexibility in setting issue values for each share.
• Subscribed capital stock: Portion of authorized capital covered by subscription agreements.
• Paid-up capital: Amount of outstanding capital stock and additional premium paid on par value shares.
• Outstanding capital stock: Total shares issued to subscribers, excluding treasury shares.
• Non-Stock Corporation:
• Amount of capital contributed or donated by contributors.
• Names, nationalities, and addresses of contributors.
• Amount contributed by each individual.

Trust Fund Doctrine

• Subscribed capital stock is considered a trust fund for the payment of corporate debts.
• Creditors have priority over stockholders in case of asset distribution.
• Creditors can sue stockholders for unpaid stock subscriptions.

Grounds for Disapproval of Articles of Incorporation

• Not substantially in accordance with the prescribed form.

• Purpose is unconstitutional, illegal, immoral, or against government rules.
• False certification about subscribed and/or paid capital stock.
• Non-compliance with Filipino ownership requirements.

Amending the Articles of Incorporation

• Requires a majority vote of the board and two-thirds vote of stockholders representing outstanding capital stock.
• Amendments must be indicated by underlining changes.
• Submitted to the SEC for approval.

Bylaws

• Internal rules of the corporation for governance.

• Cover rights and duties of stockholders and the corporation.
• Can be filed with the SEC after incorporation or with the Articles.
• Effective upon SEC certification of compliance with the law.

Incorporation Process in Practice (Online)

1. Submit the proposed corporate name for verification.

2. Correspondence with SEC on matters like the nature of the industry.
3. Upload the Articles and Bylaws.
4. Pay the assessment fee based on authorized capital stock.
5. Receive the Certificate of Incorporation.
6. Obtain a stock and transfer book.
7. Secure business permits from the local government.
8. Apply for requirements from BIR, SSS, PhilHealth, etc.

Corporate Existence and Legal Personality

• A corporation starts existing and gains legal personality upon issuance of the Certificate of Incorporation by the SEC.

Defective Incorporation:
 • De Facto Corporation:
• Occurs when there is substantial compliance with incorporation requirements but not complete compliance.
• The corporation has exercised corporate powers.
• The Articles have been filed and a Certificate of Incorporation issued by the SEC.
• Its existence is not questioned in private lawsuits.
• Inquiry into its existence is limited to a quo warranto proceeding by the Solicitor General.
• Corporation by Estoppel:
• Occurs when a corporation has not been properly incorporated but is treated as a corporation for the protection of third
parties.
• The corporation and its members may be held liable as general partners for corporate debts.
• A third party cannot evade performance by claiming the corporation’s lack of legal personality.

Corporation Dissolution and Delinquent Status

• A corporation that does not commence business within five years of incorporation has its Certificate of Incorporation revoked.
• A corporation that becomes inoperative for five consecutive years may be placed under delinquent status by the SEC.
• A delinquent corporation has two years to resume operations and comply with SEC requirements.
• Failure to comply within the given period leads to revocation of the Certificate of Incorporation.

Conclusion

• Understanding the process of incorporation is crucial for forming a private corporation.

• It is essential to follow the legal requirements to ensure legal recognition and avoid potential issues.
• The episode provides a practical overview of the steps involved and key considerations for successful incorporation.

Corporations 4.1: Stocks 1 (Nature, Classifications, Subscription

Contract, Consideration)
1. Nature of Shares of Stock:

• Share of Stock: A unit into which the capital stock of a corporation is divided.
• Capital Stock: The total amount of shares authorized by the corporation to be issued.
• Representation of Share of Stock:
• A stockholder’s interest in the management of the corporation (through voting rights, if applicable).
• A stockholder’s right to a portion of corporate earnings (dividends).
• A stockholder’s right to a share in the corporation’s assets upon liquidation.
• Distinction between Share of Stock and Corporate Property: A stockholder doesn’t own the corporation’s assets; they only own a
portion of the company’s value represented by their shares.
• Shares of Stock are Not Debt: Stockholders cannot sue the corporation for unpaid dividends or contributions.

2. Classifications of Shares of Stock:

• Common Shares: The most basic class of stock; entitles holders to a proportionate share of profits without preference.
• Preferred Shares: Shares with special rights and privileges, typically issued with a stated par value.
• Cumulative Preferred Shares: Holders receive dividends in arrears if they were not paid in a previous year.
• Non-Cumulative Preferred Shares: Dividends not paid in a given year are lost forever.
• Participating Preferred Shares: Holders receive a preferred dividend rate and can participate in remaining profits alongside
common shareholders.
 • Non-Participating Preferred Shares: Holders receive only the preferred dividend rate.
• Preferred as to Dividends: Holders receive a fixed amount or percentage of dividends before common shareholders.
• Preferred as to Assets: Holders have priority in receiving assets upon liquidation.
• Voting Shares: Entitle holders to vote in corporate matters.
• One Share, One Vote: Generally, each share holds one voting right.
• Non-Voting Shares: Shares that do not grant voting rights to their holders.
• Exceptions: Holders of non-voting shares can still vote on specific matters like amendments to the articles, bylaws, etc.
• Par Value Shares: Shares with a fixed monetary value stated in the articles of incorporation.
• Advantages: Easier to sell, protection for creditors, less likely to be sold at a lower price, potential for dividend distribution
from ostensible profits.
• Disadvantages: Subscribers can be liable for unpaid subscriptions, stated face value may not reflect actual value.
• No Par Value Shares: Shares without a stated monetary value on the face of the stock certificate.
• Advantages: Flexible pricing, typically lower priced, wider distribution.
• Disadvantages: Not permitted for certain types of corporations (banks, insurance companies, etc.).
• Treasury Shares: Issued and fully paid shares that have been re-acquired by the corporation.
• Treatment: Regarded as property acquired by the corporation, may be re-issued or sold.
• Voting and Dividends: No voting rights or dividends while in the treasury.
• Distribution: May be distributed as property dividends if there are retained earnings.
• Founders Shares: Shares issued to organizers and promoters of a corporation, often with special voting and profit-sharing privileges.
• Limitations: Exclusive voting rights for directors cannot exceed five years.
• Redeemable Shares: Shares that can be purchased by the corporation from holders upon the expiration of a fixed period, typically
preferred shares.
• Conditions: Expressly provided for in the articles, may be deprived of voting rights except on specific matters.
• Redemption: Repurchased by the corporation, exchanged for cash or property at a fixed redemption price.

3. Subscription Contract:

• Definition: A contract for the acquisition of unissued stock in an existing or to-be-formed corporation.
• Trust Fund Doctrine: Subscription funds are considered a trust fund to protect corporate creditors.
• Unpaid Subscriptions: Subscribers who haven’t fully paid are debtors to the corporation and can be pursued by creditors.
• Types of Subscriptions:
• Pre-Incorporation Subscription: Made before the formation of the corporation, irrevocable for at least six months.
• Post-Incorporation Subscription: Made after the corporation is formed.
• Distinction from Stock Option: A privilege to subscribe to unissued stock within a specified time.
• Distinction from Warrant: A security giving the holder the right to subscribe to unissued stock or purchase issued shares in the future.

4. Consideration for Stocks:

• Section 61: Shares cannot be issued for less than the par value or issued price.
• Acceptable Considerations:
• Actual cash.
• Property (tangible or intangible) received by the corporation.
• Services actually rendered to the corporation.
• Previously incurred indebtedness of the corporation.
• Amounts transferred from unrestricted retained earnings.
• Outstanding shares exchanged for stocks in reclassification or conversion.
• Shares of stock in another corporation.
• Other generally accepted forms of consideration.
• Valuation of Non-Cash Considerations: Determined by the stockholders or board, subject to SEC approval.
 • Unacceptable Considerations: Promissory notes, future services.
• Issuing Price for No Par Value Shares: Fixed in the articles or by the board, if authorized.
• Minimum Consideration for No Par Value Shares: At least five pesos.

General Principles and Exceptions:

• Doctrine of Equality of Shares: Each share is equal in all respects, except as provided in the articles of incorporation or certificate of
stock.
• Trust Fund Doctrine: Subscription funds are held in trust to protect corporate creditors.
• Voting Rights:
• Preferred shares can be deprived of voting rights, except on specific matters.
• Non-voting shares can be issued, but there must be a class of shares with full voting rights.
• Treasury shares have no voting rights.
• Redemption:
• Only redeemable shares can be redeemed, as provided in the articles.
• Common shares cannot be redeemed.
• Consideration for Shares: Minimum value specified in the law, unacceptable considerations prohibited.

• Stock Certificates:
• Physical manifestation of intangible stock ownership.
• Written acknowledgement of a person’s interest in the corporation’s management, profits, and assets.
• Not the stock itself, but evidence of ownership.
• Essential for transfer of title.
• Requirements for issuance:
• Signed by president/vice-president and secretary/assistant secretary.
• Sealed with the corporation’s seal.
• Issued in accordance with the by-laws.
• Delivered.
• Full payment of par value (par value shares) or subscription (no-par value shares).
• Original certificate surrendered in case of transfer.
• Payment of Subscription:
• Stockholders are entitled to a certificate upon full payment.
• Unpaid subscriptions can be collected through:
• Calls: Official declarations by the board requiring payment of all or a portion of a stock subscription.
• Must be made in the manner prescribed by law.
• Must be made by the board.
• Must operate uniformly on all stockholders.
• Delinquency and Sale at Auction: Stocks become delinquent if the holder fails to pay within 30 days of the specified
date in the contract or the call.
• Effects of Delinquency:
• Cannot vote.
• Not entitled to rights of a stockholder, except for dividends.
• Cash dividends applied to unpaid balance.
• Stock dividends withheld until full payment.
• Sale Procedure:
• Board makes a call, specifying the date for payment.
• Notice of the call given to the stockholder.
• If payment is not made within 30 days, the stocks become delinquent.
 • Corporation fixes the date, time, and place of the sale (30-60 days after delinquency).
• Notice of sale is given to the stockholder and published twice a week in a newspaper.
• The stockholder can prevent the sale by paying the balance, interest, advertisement costs, and
sale expenses.
• Shares are sold at public auction to the highest bidder (smallest number of shares for the highest
amount).
• Corporation can purchase delinquent shares if it has net earnings (trust fund doctrine), which
become treasury shares.
• Contest period is six months from the sale date, with the protesting party paying the sale amount
and interest.
• Ordinary Court Action: Expressly provided for in the code.
• Collecting from Dividends: Allowed by by-laws or agreement.
• Subscribers are liable for the balance, interest at the legal rate, and expenses.
• Interest is computed from the date specified, default date, or as agreed.
• Transfer of Stocks:
• Stockholders have the inherent right to sell and transfer stocks.
• Restrictions are allowed, but prohibitions are void.
• Valid transfer requires:
• Delivery of the certificate.
• Endorsement by the owner, attorney-in-fact, or legally authorized person.
• Recording in the stock and transfer book.
• Stock certificates are quasi-negotiable (title transfer by endorsement).
• Transfer is valid between parties upon endorsement and delivery, but must be recorded in the corporate books to bind third
persons and the corporation.
• Registration in the stock and transfer book is mandatory for absolute transfers (ownership has passed to the transferee).
• Pledge or mortgage does not require registration (contracts of security, not ownership transfer).
• Purposes of registration:
• Corporation knows its actual stockholders.
• Corporation can object to transfers.
• Avoid fraudulent transfers.
• Failure to register does not invalidate the transfer between parties, but affects third persons and the corporation.
• Transferee has the right to vote, participate in meetings, and receive dividends (held in trust for the transferee until registered).
• Replacement of Lost or Destroyed Certificates:
• Finder or thief does not acquire ownership of a lost or stolen certificate.
• Owner must file an affidavit with the corporation, stating details of the loss and providing evidence.
• Corporation publishes a notice in a newspaper for three consecutive weeks.
• Contest period is one year.
• Corporation issues a new certificate after one year if no contest is filed, or earlier if the owner provides a bond.
• Issuance of a new certificate is suspended if a contest is filed or an action is pending.
• Corporation is not liable for issuing a new certificate unless there is fraud, bad faith, or negligence.

General Principles and Exceptions:

• Trust Fund Doctrine: The corporation’s assets are held in trust for the benefit of the creditors and stockholders.
• Close Corporations: Have restrictions on stock transfers, which will be discussed in a future episode.

Sample Discussion:

• The episode discusses the example of a delinquent subscriber who fails to pay the remaining 200 pesos on a 500 pesos subscription. The
board calls for payment, the subscriber fails to pay, and the stock is sold at auction. The highest bidder offers to pay the balance plus
 interest and costs for the smallest number of shares, in this case, two shares. The original subscriber retains the remaining three shares,
and the transaction is deemed fully paid.

Overall, this episode provides a comprehensive overview of stock certificates, payment of subscriptions, transfer of stocks, and replacement of
lost or destroyed certificates. It highlights the legal procedures and requirements involved, as well as the rights and obligations of stockholders
and the corporation

Corporations 4.2: Stocks 2 (Stock Certificate, Payment,

Replacement)
This episode continues the discussion on shares of stock, building upon the previous episode’s explanation of stock’s nature and
classifications.

Key Points:

• Stock Certificates:
• Physical manifestation of intangible stock ownership.
• Written acknowledgement of a person’s interest in the corporation’s management, profits, and assets.
• Not the stock itself, but evidence of ownership.
• Essential for transfer of title.
• Requirements for issuance:
• Signed by president/vice-president and secretary/assistant secretary.
• Sealed with the corporation’s seal.
• Issued in accordance with the by-laws.
• Delivered.
• Full payment of par value (par value shares) or subscription (no-par value shares).
• Original certificate surrendered in case of transfer.
• Payment of Subscription:
• Stockholders are entitled to a certificate upon full payment.
• Unpaid subscriptions can be collected through:
• Calls: Official declarations by the board requiring payment of all or a portion of a stock subscription.
• Must be made in the manner prescribed by law.
• Must be made by the board.
• Must operate uniformly on all stockholders.
• Delinquency and Sale at Auction: Stocks become delinquent if the holder fails to pay within 30 days of the
specified date in the contract or the call.
• Effects of Delinquency:
• Cannot vote.
• Not entitled to rights of a stockholder, except for dividends.
• Cash dividends applied to unpaid balance.
• Stock dividends withheld until full payment.
• Sale Procedure:
• Board makes a call, specifying the date for payment.
• Notice of the call given to the stockholder.
• If payment is not made within 30 days, the stocks become delinquent.
• Corporation fixes the date, time, and place of the sale (30-60 days after delinquency).
• Notice of sale is given to the stockholder and published twice a week in a newspaper.
• The stockholder can prevent the sale by paying the balance, interest, advertisement costs,
and sale expenses.
 • Shares are sold at public auction to the highest bidder (smallest number of shares for the
highest amount).
• Corporation can purchase delinquent shares if it has net earnings (trust fund doctrine),
which become treasury shares.
• Contest period is six months from the sale date, with the protesting party paying the sale
amount and interest.
• Ordinary Court Action: Expressly provided for in the code.
• Collecting from Dividends: Allowed by by-laws or agreement.
• Subscribers are liable for the balance, interest at the legal rate, and expenses.
• Interest is computed from the date specified, default date, or as agreed.
• Transfer of Stocks:
• Stockholders have the inherent right to sell and transfer stocks.
• Restrictions are allowed, but prohibitions are void.
• Valid transfer requires:
• Delivery of the certificate.
• Endorsement by the owner, attorney-in-fact, or legally authorized person.
• Recording in the stock and transfer book.
• Stock certificates are quasi-negotiable (title transfer by endorsement).
• Transfer is valid between parties upon endorsement and delivery, but must be recorded in the corporate books to
bind third persons and the corporation.
• Registration in the stock and transfer book is mandatory for absolute transfers (ownership has passed to the
transferee).
• Pledge or mortgage does not require registration (contracts of security, not ownership transfer).
• Purposes of registration:
• Corporation knows its actual stockholders.
• Corporation can object to transfers.
• Avoid fraudulent transfers.
• Failure to register does not invalidate the transfer between parties, but affects third persons and the corporation.
• Transferee has the right to vote, participate in meetings, and receive dividends (held in trust for the transferee until
registered).
• Replacement of Lost or Destroyed Certificates:
• Finder or thief does not acquire ownership of a lost or stolen certificate.
• Owner must file an affidavit with the corporation, stating details of the loss and providing evidence.
• Corporation publishes a notice in a newspaper for three consecutive weeks.
• Contest period is one year.
• Corporation issues a new certificate after one year if no contest is filed, or earlier if the owner provides a bond.
• Issuance of a new certificate is suspended if a contest is filed or an action is pending.
• Corporation is not liable for issuing a new certificate unless there is fraud, bad faith, or negligence.

General Principles and Exceptions:

• Trust Fund Doctrine: The corporation’s assets are held in trust for the benefit of the creditors and stockholders.
• Close Corporations: Have restrictions on stock transfers, which will be discussed in a future episode.

Sample Discussion:

• The episode discusses the example of a delinquent subscriber who fails to pay the remaining 200 pesos on a 500 pesos
subscription. The board calls for payment, the subscriber fails to pay, and the stock is sold at auction. The highest bidder offers
to pay the balance plus interest and costs for the smallest number of shares, in this case, two shares. The original subscriber
retains the remaining three shares, and the transaction is deemed fully paid.
Corporations 5.1: Board of Directors 1: Nature
General Principles:

• Corporation as an Artificial Being: A corporation is an artificial being and cannot act on its own. It acts through its elected Board of
Directors and authorized officers. (Section 22, Revised Corporation Code)
• Board as the Repository of Corporate Powers: The Board of Directors (or simply “the Board”) exercises all corporate powers, conducts
business, and controls corporate properties. (General Rule, Section 22)
• Exceptions:
• Duly Authorized Officers: Can bind the corporation through their actions.
• Executive Committee: Can act on specific matters delegated by the board.
• Close Corporations: Stockholders can directly manage the business with authorization from the Articles of Incorporation.
• Delegation of Powers: The board can delegate its power through Board Resolutions.
• Board as the Governing Body: Elected by stockholders, the Board determines company policy and conducts ordinary business within the
scope of its charter.
• Nature of Board’s Power:
• Original Power: The board’s power comes from the Articles and Bylaws, which are grants from the state.
• Derivative Power: The board derives its power from the state through the act of incorporation.
• Concentration of Power: Power is concentrated within the board for efficiency, as managing a corporation with scattered stockholders is
impractical.
• Board’s Fiduciary Duty: Directors owe a fiduciary duty to the corporation and its stockholders. They must act in good faith, with diligence,
care, and skill. They can be held liable for breaches of this duty.
• No Fiduciary Duty to Individual Stockholders: However, under the “Special Fact Doctrine”, directors must disclose pertinent official
information if special circumstances arise.
• Board’s Action: The board must act collectively through lawful meetings, not individually. Individual directors cannot bind the corporation
unless authorized by a board resolution.

Board Meetings:

• Types of Meetings:
• Regular Meetings: Held monthly unless otherwise stated in the Bylaws.
• Special Meetings: Held on call of the president or as provided in the Bylaws.
• Location: Meetings can be held anywhere within or outside the Philippines, unless specified in the Bylaws.
• Presiding Officer: Chairman, or in their absence, the president.
• Notice: Notice must be sent to all directors at least two days prior, unless a longer time is specified. Notice can be waived by directors.
• Remote Participation: Directors can participate and vote remotely through video conferencing or teleconferencing, but not by proxy.
• Binding Resolutions: Board resolutions passed through voting at meetings bind the corporation.
• Business Judgment Rule: Courts cannot interfere with the board’s decisions on administrative matters, as long as they act in good faith.

Board Quorum:

• General Rule: A majority of the directors constitutes a quorum for transacting business.
• Election of Officers: Requires a majority vote of all board members.
• Quorum Calculation: Generally, a majority (50% + 1) is needed.
• Vacancies: Vacancies do not affect the quorum requirement.
• Non-Qualified Directors: Directors who were never qualified (e.g., did not own required shares) are not counted towards the quorum.
• Insufficiency of Quorum: The board cannot act without a quorum, except in specific exceptions.
Delegation of Powers:

• To Officers and Agents: The board can delegate its powers to officers or agents expressly or impliedly.
• To Executive Committee: The Bylaws can authorize the board to create an executive committee with at least 3 directors.
• Powers: The committee acts on delegated matters within the board’s competence.
• Restrictions: They cannot vote on specific matters, like stockholder approval actions, filling board vacancies, amending bylaws,
and distributing dividends.
• Binding Decisions: Their decisions are binding within the scope of their delegated powers.
• Management Contract: The board can delegate powers under a management contract (maximum 5 years).
• Limits on Delegation:
• Discretionary Powers: These powers, which allow the actor to decide the course of action, are exclusively vested in the board.
• Ministerial Duties: Non-discretionary duties can be delegated.
• Entire Supervision and Control: The board cannot delegate full supervision and control of the corporation.
• Special Powers: The board cannot delegate powers specifically granted to it by stockholders.
• Bylaw Restrictions: Any delegation is subject to bylaw restrictions.

Key Takeaways:

• The Board of Directors plays a crucial role in the operation of a corporation.

• Understanding the nature of the board’s powers, its fiduciary duties, and its decision-making process is essential for anyone involved in
corporate governance.
• The board’s power is broad but subject to various limitations and restrictions.
• The board can delegate its powers, but there are specific limits and exceptions.

Corporations 5.2: Board of Directors 2: Qualifications, Term, Hold-Over,

Compensation
Introduction

• Purpose: Discussing the qualifications, disqualifications, and other matters concerning directors.
• Educational Purpose: For educational purposes only; not a substitute for legal advice.

Qualifications for Directors

• Natural Person: Must be a natural person, not a juridical entity.

• Stock Ownership: Must own at least one share of capital stock (legal title, not just beneficial ownership).
• Continued Ownership: Must continue to own at least one share during their term.
• Other Qualifications: Additional qualifications may be imposed by bylaws, as long as they do not conflict with the law.

Disqualifications for Directors

• Criminal Conviction: Within five years prior to election, conviction by final judgment of an offense punishable by imprisonment exceeding
six years, or violation of the Revised Corporation Code or Securities Regulation Code.
• Administrative Liability: Found administratively liable for any offense involving fraudulent acts.
• Foreign Court Rulings: Found liable by a foreign court or equivalent foreign regulatory authority for similar violations.
• Philippine Competition Commission: Certain qualifications or disqualifications may be imposed by the Philippine Competition
Commission or other regulatory agencies.
Note: A corporation may still be bind even if the said Director is disqualified for the protection of third person.

Election of Directors

Note: Founder shares shall be a priority to be voted before an actual election of directors take place.

• Nomination: Each stockholder/member has the right to nominate a director who meets the qualifications.
• Notice: Notice of the election time and procedures should be provided in the bylaws.
• Quorum Requirement: Majority of outstanding capital stock or members entitled to vote must be present.
• Voting Methods:
• In-person attendance.
• Through a written proxy.
• Through remote communication (authorized by bylaws or majority of directors).

Voting Procedures

Notes on Voting Methods in Stock Corporations

1. Straight Voting:
o Definition: A stockholder may vote their shares for as many directors as there are to be elected, with each share entitled to one
vote per director.
o Illustration:
▪ If Stockholder A has 100 shares and there are 5 directors to be elected, A can cast 100 votes for each of the 5
directors. This is the straightforward application of votes—100 shares x 1 vote per director = 100 votes per director.
2. Cumulative Voting for One Candidate:
o Definition: A stockholder can choose to concentrate all their votes on a single candidate by multiplying the number of shares
they own by the number of directors to be elected.
o Illustration:
▪ If A has 100 shares and there are 5 directors to be elected, A can accumulate all 500 votes (100 shares x 5 directors)
and give them to one candidate.
▪ In contrast to straight voting, this method allows a stockholder to heavily favor one candidate, providing a way to
concentrate voting power.
3. Cumulative Voting by Distribution:
o Definition: The stockholder may distribute their votes across different candidates but in varying amounts, still ensuring that the
total votes do not exceed their cumulative number of votes.
o Illustration:
▪ A has 100 shares and 5 directors are to be elected. A can distribute the 500 votes (100 shares x 5 directors) as follows:
▪ 100 votes to candidate W
▪ 150 votes to candidate X
▪ 250 votes to candidate Y
▪ The total remains 500 votes, but the stockholder can adjust how many votes each candidate gets.
4. Protecting Minority Stockholders:
o Benefit of Cumulative Voting: This method is particularly advantageous for minority stockholders. By concentrating their votes
on a single candidate, minority shareholders can ensure their interests are represented on the board.
o Example:
▪ Stockholders C, D, and E own a combined 100 shares, while Stockholders A and B own 400 shares. In an election for 5
directors, A and B have 2,000 votes (400 shares x 5) and C, D, and E have 500 votes (100 shares x 5).
▪ If C, D, and E pool their votes and concentrate all 500 votes on one candidate, they improve their chances of electing a
representative.
5. Election Calculations:
o Scenario: Minority stockholders want to elect 3 directors out of 11, and the corporation has 20,000 shares outstanding.
▪ Step 1: Multiply the total shares by the number of directors to be elected:
20,000×3=60,00020,000 \times 3 = 60,00020,000×3=60,000
▪ Step 2: Add 1 to the total number of directors:
11+1=1211 + 1 = 1211+1=12
▪ Step 3: Divide the previous total by the new sum:
60,000÷12=5,00060,000 \div 12 = 5,00060,000÷12=5,000
▪ Step 4: Add 1 to the result:
5,000+1=5,0015,000 + 1 = 5,0015,000+1=5,001
 ▪ Step 5: Multiply by the total number of directors to be elected:
5,001×11=55,0115,001 \times 11 = 55,0115,001×11=55,011
▪ Thus, 55,011 votes would be required to elect the desired number of directors, with each of the 3 candidates getting
18,337 votes.

Key Reminders:

• Total votes cast should never exceed the stockholder’s total number of shares multiplied by the number of directors to be elected.
• No delinquent stock (shares on which payment has not been completed) is allowed to be voted.
• Minority stockholders can use cumulative voting to elect their representatives and protect their board representation.

This explanation simplifies the process of understanding voting rights and methods in stock corporations and how minority stockholders can
maximize their influence.

Non- Stock Corporation

• non-stock corporation members may cast as many votes as there are trustees to be voted for but they may not cast more than one vote
per candidate

Term and Hold-Over

• Term: One year for stock corporations, three years for non-stock corporations.
• Hold-Over Principle: Incumbent director continues to hold office until a successor is elected and qualified.
• Term vs. Tenure:
• Term: Fixed period (one or three years).
• Tenure: Actual time holding office (may be longer due to hold-over).
• Valia Verde v. Africa Case: Distinguishes between term and tenure.
• Vacancy: Filled by stockholders, not the board.

Term and Holdover of Directors

1. Term of Office:
o A director’s term is the legally fixed period during which they have the right to hold office:
▪ In stock corporations, the term is one year.
▪ In non-stock corporations, the term can be up to three years.
2. Holdover Principle:
o If the term of a director expires but no replacement has been elected or qualified, the holdover principle applies. Under this
principle, the outgoing director continues to serve until a qualified successor is elected.
o This concept is based on Section 22 of the Corporation Code, which states that each director holds office until their successor is
elected and qualified.
3. Distinction Between Term and Tenure:
o Term: The fixed legal duration during which a person has the right to hold office (e.g., one year for stock corporations).
o Tenure: The actual time the person holds office. If a director continues to serve after their term due to the absence of a
successor, their tenure extends beyond the term.
4. Holdover Does Not Extend the Term:
o The term remains fixed (e.g., one year), but the director continues to hold office under the holdover rule until a successor is
duly elected and qualified. This holdover period is not considered part of the director’s original term but is an extension of their
tenure.
5. Stockholders’ Rights During Holdover:
o If the director’s term has expired, the position is not considered vacant, and it cannot be filled by the board. It is the
stockholders who have the right to elect a new director.

The holdover principle ensures the continuity of corporate governance while protecting stockholder rights in electing board members

Compensation of Directors

• Setting Compensation: Can be set in the bylaws.

• Total yearly compensation must not exceed 10% of the net income before income tax.
 • If not set in bylaws, directors are entitled to reasonable per diems.
• Approval: Stockholders representing at least a majority of the outstanding capital stock or members must approve compensation.
• General Rule: Directors performing usual duties are not entitled to salary or compensation, except for reimbursement of legitimate
expenses.

Reportorial Requirements for Corporations

1. Report After Election:

o Within 30 days from the election of directors, the corporation’s secretary or any other officer must submit a report to the
Securities and Exchange Commission (SEC). This report should include:
▪ Names of the elected directors
▪ Nationalities
▪ Shareholdings
▪ Residential addresses
o This ensures transparency and keeps the SEC informed of the individuals elected to manage the corporation.
2. If No Election is Held:
o If an election cannot be held because a quorum is not present (either in person, by proxy, remote communication, or voting in
absentia), the meeting must be adjourned.
o In case of adjournment, a report must be submitted to the SEC within 30 days from the scheduled election date. The report
must:
▪ Explain the reasons for the failure to hold the election
▪ Specify the new election date, which should be set no later than 60 days from the original scheduled date.
o Failure to Hold or Reschedule the Election:
▪ If no new election date is designated, or if the rescheduled election also does not take place, the SEC may take action.
▪ Upon the application of any stockholder, member, director, or trustee, and after verifying that the non-holding of the
election is unjustifiable, the SEC may issue an order for the election to be held summarily.
3. Reporting Changes in Directors, Trustees, or Officers:
o When a director, trustee, or officer dies, resigns, or in any manner ceases to hold office, the corporation must file a report
with the SEC.
o This report must be submitted within 7 days from the time the secretary or the officer becomes aware of the change.
o This helps ensure that the SEC has up-to-date information about the composition of the corporation’s leadership.

Summary of Timeframes:

• 30 days from election: Submit names, nationalities, shareholdings, and addresses of elected directors to the SEC.
• 30 days from failed election: Submit a report to the SEC explaining why the election was not held and provide a new election date (no
later than 60 days from the original date).
• 7 days from a director/trustee/officer's exit: Submit a report on the death, resignation, or cessation of office to the SEC.

These reportorial requirements ensure corporate governance and accountability in managing corporations.

Conclusion

• Educational Purpose: For educational purposes only; not a substitute for legal advice.
• Next Episode: Continuation of the discussion on the board of directors.

Corporations 5.3: Board of Directors 3: Responsibilities, Liabilities, &

Dealings of Directors
This episode delves into the responsibilities and liabilities of directors in a corporation, focusing on the Philippines legal framework.

General Principles

• Threefold Duty of Directors: Directors in the Philippines have a threefold duty:

 • Obedience: They must direct corporate affairs in line with the corporation’s purposes, as defined in its charter and the law (Sec.
23).
• Diligence: They must exercise due care in performing their duties, avoiding willful assent to unlawful acts and acting without
bad faith or gross negligence (Sec. 30).
• Loyalty: They owe undivided loyalty to the corporation, prioritizing its welfare over any personal interests (Sec. 30).
• Fiduciary Relationship: Directors occupy a fiduciary relationship with the corporation and its stockholders, requiring them to act in good
faith and for the best interests of the corporation.
• Business Judgment Rule: Generally, directors and officers aren’t personally liable for business losses based on honest judgments. This rule
protects board decisions, allowing them to make business choices without fear of excessive scrutiny by the courts.

Liabilities of Directors

While directors aren’t typically held personally liable for business losses, they can be held personally liable in the following circumstances:

1. Willful Assent to Unlawful Acts: Voting for or assenting to knowingly unlawful acts of the corporation.
2. Conflict of Interest: Acquiring personal or pecuniary interests that conflict with their duties as directors.
3. Gross Negligence or Bad Faith: Directing corporate affairs with gross negligence or in bad faith.
4. Watered Stocks: Consenting to or having knowledge of the issuance of watered stocks without filing objections with the corporate
secretary.
5. Personal Liability in Contracts: Agreeing to or stipulating personal liability in contracts with the corporation.
6. Specific Provisions of Law: Being held liable under specific provisions of the law.

• Liability for Co-Director Misconduct: Directors may be held liable for the misconduct of other directors or officers if they:
• Connive, conspire, or participate in the misconduct.
• Are negligent in discovering or preventing the misconduct.

Self-Dealing Directors

• Definition: Self-dealing directors are those who contract with the corporation for their own benefit. This includes contracts involving their
spouse or relatives within the fourth civil degree of consanguinity or affinity.
• General Rule: These contracts are avoidable at the corporation’s option, meaning the corporation can choose to annul the contract.
Damage to the corporation is not a necessary element for voidability.
• Exceptions (Contracts are Valid):
• Presence Not Necessary for Quorum: The director’s presence in the board meeting approving the contract wasn’t essential to
constitute a quorum.
• Vote Not Necessary for Approval: The director’s vote wasn’t necessary for the contract’s approval.
• Fair and Reasonable Contract: The contract is fair and reasonable under the circumstances.
• Corporations with Public Interest: Material contracts are approved by at least two-thirds of the board with a majority of
independent directors voting in favor.
• Contracts with Officers: The contract was previously authorized by the board of directors.
• Ratification: If the first three conditions are absent, the contract may be ratified by a vote of at least two-thirds of the outstanding capital
stock, provided:
• Full disclosure of the director’s adverse interest is made during the ratification meeting.
• The contract is fair and reasonable.

Interlocking Directors

• Definition: Interlocking directors occur when one or more directors of one corporation are also directors of another corporation.
• Validity of Contracts: Contracts between corporations with interlocking directors are valid unless there is fraud or the contract is unfair
and unreasonable.
• Substantial vs. Nominal Interest: If a director has a substantial interest in one corporation (exceeding 20% of outstanding capital stock)
and a nominal interest in the other corporation, the contract is subject to the same validity conditions as self-dealing contracts.
Doctrine of Corporate Opportunity

• Definition: This doctrine prohibits directors from acquiring business opportunities that belong to the corporation, thereby gaining profits
at the corporation’s expense.
• Director’s Obligation: A director who violates this doctrine must account for and refund to the corporation all profits derived from the
opportunity.
• Exceptions (Opportunity is Personal):
• Corporation’s Refusal or Inability: The corporation refuses or is unable to take advantage of the opportunity.
• Distinct Enterprise: The opportunity is in a distinct enterprise from the corporation’s business, and the director acts in good
faith.
• Non-Essential Opportunity: The opportunity is not essential to the corporation’s business.
• No Corporate Resources: The director did not exploit the opportunity using the corporation’s resources.
• Ratification: The act may be ratified by a vote of at least two-thirds of the outstanding capital stock.

Corporations 5.4: Board of Directors 4: Removal, Vacancy, Corporate

Officers
I. Removal of Directors

• General Principle: Shareholders have the power to remove directors.

• Section 27 (Revised Corporation Code): Directors can be removed for any cause by a two-thirds vote of the outstanding capital stock (for
stock corporations) or two-thirds of the members entitled to vote (for non-stock corporations).
• Exception: A minority director elected through cumulative voting cannot be removed without cause.
• Procedure:
• Removal requires a regular or special meeting called for this purpose.
• Notice of removal must be provided to the shareholders/members.
• A special meeting for removal can be called by the secretary on the order of the president or upon a written demand from
stockholders holding a majority of the outstanding capital stock or a majority of the members.
• SEC Power: The Securities and Exchange Commission (SEC) can remove directors on its own initiative or based on a verified complaint.

II. Vacancy in Directorship

• Causes of Vacancy: Removal, expiration of term, resignation, abandonment, etc.

• Filling Vacancies:
• Removal or Expiration of Term: Vacancy is filled by shareholders/members at a regular or special meeting.
• Other Causes: Filled by a majority vote of the remaining directors (if they constitute a quorum) or by shareholders/members.
• Emergency: If remaining directors cannot constitute a quorum and emergency action is required, temporary vacancy can be
filled by unanimous vote of the remaining directors from among the corporation’s officers.
• This emergency board has limited authority and its term ends when the emergency ends or a replacement director is
elected.
• Increase in Number of Directors: Vacancy is filled by election at a regular or special meeting called for that purpose.
• Term of Replacement Directors: They serve only the unexpired portion of the term of the predecessor.

III. Corporate Officers

• Election: Directors elected by shareholders elect the corporate officers.

• Mandatory Officers (Section 24): President, Treasurer (resident of the Philippines), Secretary (resident and citizen of the Philippines), and
Compliance Officer (for corporations vested with public interest).
• Other Officers: Can be elected if provided in the corporation’s by-laws.
 • Concurrent Positions: One person can hold two or more positions except for President and Secretary or President and Treasurer.
• Powers: Officers manage the corporation as provided in the by-laws or board resolutions.
• Corporate Officers vs. Corporate Employees: Officers hold positions mentioned in the by-laws; employees hold positions created by
board resolutions.
• A corporate office under Section 24 of the Revised Corporation Code, it must be explicitly mentioned in the corporation's by-
laws. If a position is created by a board resolution rather than by the by-laws, then the person holding that position is not
considered a corporate officer but rather a corporate employee.
• For instance, if a person is appointed as a general manager, whether they are classified as a corporate officer or employee
depends on the by-laws:
• if the by-laws specifically create the position of general manager as a corporate officer, the person is a corporate officer.
• If the board appoints someone as a general manager through a resolution without the position being stated in the by-laws, that
person is merely a corporate employee.
• This distinction is important because corporate officers can only exercise powers delegated to them by the Revised Corporation
Code, the articles of incorporation, or the by-laws.
• Apparent Authority: Corporations are bound by the actions of officers acting within their apparent authority, even if not expressly
authorized.
• Compensation and Term: Board fixes the salaries of officers, and the term of office may be fixed in the by-laws or they can be removed by
the board.

Key Points

• The Board of Directors acts as a body of oversight for the corporation, with the power to formulate broad policy and appoint corporate
officers.
• Shareholders have ultimate control over the Board, with the power to remove directors and elect their replacements.
• The SEC has oversight authority over corporate governance and can intervene to remove directors if necessary.
• Corporate officers are appointed by the Board and manage the daily operations of the corporation, acting within their delegated
authority.

Example

The presenter discusses the example of a corporation allowing its president to enter into contracts without a board resolution. This creates
apparent authority for the president, meaning the corporation is bound by his actions, even though the board didn’t explicitly authorize them.

Corporations 6.1: Powers of Corporations

I. General Principles

• Artificial Being: Corporations are legal entities and cannot perform physical acts. They can only act through their board of
directors, authorized agents, or officers.
• Limited Capacity: Corporations possess powers expressly authorized by law or incident to their existence. They cannot
perform acts forbidden by law or their articles of incorporation.
• Express Powers: These powers are explicitly stated in the law and the corporation’s articles of incorporation.
• Incidental Powers: Powers inherent in the corporation’s existence, necessary for its operation and derived from the fact of
being a legal entity.
• Implied Powers: Powers reasonably necessary to exercise express powers and achieve the corporation’s stated purposes.
These are not explicitly stated in the law or articles but are derived from the doctrine of necessary implication.
• Ultra Vires Acts: Actions taken by a corporation that go beyond its authorized powers. These acts may be invalid or
unenforceable.

II. Classifications of Powers

A. Express Powers (Section 35)

 1. Sue and Be Sued: Corporations can initiate legal proceedings and be named as defendants. This includes de facto
corporations, but not unincorporated entities or dissolved corporations (past the 3-year winding up period).
• General Principle: Corporations can sue and be sued.
• Exception: Dissolved corporations (after the 3-year winding up period) cannot sue or be sued.
2. Perpetual Existence: Corporations exist indefinitely unless a shorter term is specified in their articles of incorporation.
3. Corporate Seal: Corporations have the power to adopt and use a seal for authentication purposes. While the law suggests
sealing stock certificates, some argue this is not mandatory.
4. Amend Articles of Incorporation: Corporations can modify their articles with the required procedures.
5. Adopt and Amend Bylaws: Corporations can create and modify internal rules that are not contrary to law, morals, or public
policy.
6. Issue and Sell Stocks: (Stock Corporations) Corporations can issue shares to subscribers and sell treasury stocks.
7. Admit Members: (Non-Stock Corporations) Corporations can add new members.
8. Deal with Real and Personal Property: Corporations can buy, sell, lease, mortgage, and otherwise handle real and personal
property as necessary for lawful business operations.
9. Enter into Partnerships: Corporations can now form partnerships, joint ventures, mergers, consolidations, or other
commercial agreements with individuals or legal entities. This is a recent modification to the law.
10. Make Reasonable Donations: Corporations can contribute to public welfare, charitable, cultural, scientific, civic, or similar
causes.
• General Principle: Corporations can donate to charitable causes.
• Exception: Foreign corporations cannot donate to political parties or candidates or engage in partisan political
activities.
11. Establish Pension Plans: Corporations can create benefit plans for their directors, trustees, officers, and employees.
12. Exercise Essential Powers: Corporations can perform any other acts necessary to carry out their stated purposes.

B. Incidental Powers

• Power of Succession: The corporation can continue to exist even after a change in ownership or management.
• Corporate Name: Corporations have the right to have a unique name.
• Make Bylaws: Corporations can create internal regulations.
• Sue and Be Sued: This is also an incidental power.
• Acquire and Hold Property: Corporations have the inherent right to own property for their authorized business purposes.
• Enter into Contracts: Corporations can create binding agreements.

C. Implied Powers

• Acts in the Usual Course of Business: Corporations can perform actions common to their industry.
• Protecting Corporate Debts: Corporations have the implied power to protect debts owed to them.
• Embarking on New Business: Corporations may engage in activities related to their primary business.
• Collecting Debts from Profits: Corporations can use profits to collect debts.
• Protecting or Aiding Employees: Corporations can act to safeguard the well-being of their employees.
• Increasing Business: Corporations can perform actions to expand their operations.

III. Determining Corporate Powers

To determine if a corporation can perform a particular act, consider:

1. Express Powers: Is it explicitly stated in the law or the corporation’s articles?

2. Incidental Powers: Is it necessary for the corporation’s existence as a legal entity?
3. Implied Powers: Is it reasonably necessary to exercise express powers and fulfill the corporation’s purposes?
IV. Specific Powers

• Sue and Be Sued: A corporation can sue and be sued, and it cannot claim moral damages unless its reputation is damaged,
and this is proven.
• Perpetual Existence: Corporations exist perpetually unless a shorter term is specified.
• Acquire and Convey Property: Corporations can buy, sell, and transfer property subject to legal limitations.
• Acquire Shares or Securities: Corporations can buy shares of other companies, subject to legal and constitutional limitations
and stockholder approval if the acquisition is for investment purposes not stated in the articles.
• Acquire Own Shares: Corporations can buy their own shares subject to the availability of unrestricted retained earnings.
• Enter into Partnerships: Corporations can now participate in partnerships, joint ventures, mergers, consolidations, or other
commercial agreements with individuals or legal entities.
• Donate to Charities: Corporations can make reasonable charitable donations with restrictions on political contributions for
foreign corporations.
• Establish Pension Plans: Corporations can create benefit plans for employees.

V. Power to Extend or Shorten Corporate Term (Section 36)

• Procedure:
i. Board Vote: Majority of the board votes to extend or shorten the term.
ii. Stockholder Notice: Written notice sent to stockholders about the meeting to ratify the board’s decision.
iii. Stockholder Vote: Ratification by a two-thirds vote of stockholders owning outstanding capital stock or members.
iv. SEC Filing: Amended articles are filed with the SEC for approval.
v. Appraisal Right: Dissenting stockholders have the right to demand payment for their shares at fair value.

VI. Power to Increase or Decrease Capital Stock

• Capital vs. Capital Stock: Capital refers to the corporation’s assets and resources, while capital stock is the amount fixed in
the articles for subscription and payment by stockholders.
• Methods of Increase or Decrease:
i. Changing the number of shares while maintaining par value.
ii. Changing the par value of existing shares without altering the number of shares.
iii. Changing both the number of shares and the par value.
iv. Issuing stock dividends.
• Limitations:
i. Decreasing capital stock cannot relieve existing subscribers from paying unpaid subscriptions without valuable
consideration.
ii. Corporations cannot issue stock exceeding the amount limited in their articles.
iii. Increase or decrease can only occur through the legal process.
• Procedure:
i. Board Vote: Majority of the board votes to increase or decrease capital stock.
ii. Stockholder Notice: Written notice sent to stockholders about the meeting to ratify the board’s decision.
iii. Stockholder Vote: Ratification by a two-thirds vote of stockholders holding outstanding capital stock.
iv. Certificate Filing: Certificate signed by directors and counter-signed by the chairperson and secretary of the
stockholders meeting, outlining the details of the action, is filed with the SEC within six months.
v. SEC Approval: The SEC approves the increase or decrease.

VII. Power to Incur, Create, or Increase Bonded Indebtedness

• Corporate Bond: An obligation to repay a specific amount with interest at a future date.
• Procedure:
 i. Board Vote: Majority of the board votes to incur, create, or increase bonded indebtedness.
ii. Stockholder Notice: Written notice sent to stockholders about the meeting to ratify the board’s decision.
iii. Stockholder Vote: Ratification by a two-thirds vote of stockholders holding outstanding capital stock.
iv. Certificate Filing: Certificate signed by directors and counter-signed by the chairperson and secretary of the
stockholders meeting, outlining the details of the action, is filed with the SEC within six months.
v. SEC and PCC Approval: The SEC and, where applicable, the PCC, approve the action.

VIII. Power to Deny Preemptive Right

• Preemptive Right: The preferential right of stockholders to subscribe to new shares in proportion to their existing holdings
when the capital stock is increased.
• Purpose: To protect the stockholders’ proportionate voting control, dividend payments, and equity.
• Denial: Corporations can deny preemptive rights only through the articles of incorporation or an amendment.
• Exceptions: Preemptive right does not apply in specific situations like stock offering compliance with public ownership
requirements, shares offered after initial issuance, shares issued in exchange for property, shares issued to pay debts, and other
situations as mentioned in the law.
• Stockholder Options: A stockholder denied the preemptive right can file a lawsuit to compel the corporation to allow it or
exercise the appraisal right if the denial is due to an amendment.

Corporations 6.2: Powers of Corporations 2

I. Power of Sale or Other Disposition of Assets

• General Principle: Corporations can sell, lease, exchange, mortgage, pledge, or dispose of their assets.
• Distinction:
• Ordinary Course of Business: A majority vote of the board is required. The proceeds should be used for the
remaining business.
• All or Substantially All Assets: Requires majority vote of the board and ratification by stockholders representing
two-thirds of the outstanding capital stock.
• Appraisal Right: Dissenting stockholders can exercise their appraisal right in this case.
• Exception: Appraisal right is not available for disposition in the ordinary course of business.
• Board Discretion: The board may abandon the disposition after stockholder approval, subject to third-party contractual rights.

II. Power to Acquire Its Own Shares

• General Principle: A corporation cannot purchase its own shares if it violates the trust fund doctrine (protects creditors by
ensuring capital is maintained).
• Limitations:
• Legitimate Corporate Purpose: The acquisition must serve a valid corporate purpose.
• Unrestricted Retained Earnings: The corporation must have sufficient earnings to cover the shares acquired.
• Instances Where Acquisition is Allowed:
• Eliminating Fractional Shares: To address shares less than one whole share.
• Example: A 25% stock dividend on 250 shares results in 312.5 shares, creating a fractional share. The
corporation can buy it back.
• Collecting Delinquent Debts: To acquire shares of stockholders who haven’t paid subscriptions.
• Paying Dissenting/Withdrawing Stockholders: To compensate stockholders who don’t want to remain in the
company.
• Acquiring Treasury Shares: Shares repurchased by the corporation and held for future use.
• Redeemable Shares: Shares that can be bought back by the corporation at a predetermined price.
 • Decreasing Capital Stock: To reduce the number of outstanding shares.
• Deadlock in Management: In close corporations, to resolve management issues.
• Additional Limitations:
• No Capital Impairment: The acquisition cannot reduce the corporation’s capital.
• Good Faith & No Prejudice: The acquisition should be done ethically and without harming stockholders or creditors.

III. Power to Invest Corporate Funds

• General Principle: Investments are generally limited to the corporation’s primary purpose or those reasonably necessary to
achieve it.
• Majority Vote: Only a majority board vote is required for investments within the primary purpose.
• No Appraisal Right: Dissenting stockholders cannot exercise their appraisal right in this case.
• Secondary Purpose Investments:
• Requirements: Investments outside the primary purpose, but listed as secondary in the articles of incorporation,
require:
• Majority Board Vote: A majority of the board must approve.
• Stockholder Ratification: Stockholders must ratify the decision by a vote representing at least two-thirds of
the outstanding capital stock.
• Appraisal Right: Dissenting stockholders can exercise their appraisal right in this case.

IV. Power to Declare Dividends

• Definition: A portion of the corporation’s profits set aside, declared, and ordered by the board to be paid to stockholders
based on their holdings.
• Source: Dividends come from profits, but only become dividends when declared by the board.
• Board Authority: The board has the power to declare dividends from unrestricted retained earnings.
• Limitations:
• Retained Earnings: Dividends can only be paid from unrestricted retained earnings.
• Trust Fund Doctrine: The capital stock is a trust fund for creditors; dividends cannot impair it.
• Improperly Accumulated Earnings Tax: Corporations cannot excessively retain earnings, subject to penalties.
• Exceptions to Dividend Declaration Requirements:
• Corporate Expansion Projects: Retained earnings can be used for approved expansion projects.
• Loan Agreements: Retained earnings may need to be retained due to restrictions in loan agreements.
• Special Circumstances: Retained earnings may be necessary for unforeseen contingencies.
• Types of Dividends:
• Cash Dividend: Payment made in cash.
• Property Dividend: Payment made in the form of real or personal property.
• Stock Dividend: Payment made in shares of the corporation’s stock.
• Capitalization of Profits: Stock dividends add accumulated profits to the capital account.
• Unrealized Gain: Stock dividends are not subject to income tax until profits are realized.
• Ratification: Requires two-thirds stockholder approval.
• Optional Dividends: Stockholders can choose between cash or stock dividends.
• Composite Dividends: A combination of cash and stock dividends.
• Script Dividends: Payment of money is deferred to a future date.
• Bond Dividends: Dividends paid in bonds.
• Preferred Dividends: Dividends paid to preferred stockholders before common stockholders.
• Cumulative Dividends: Dividends that accumulate if not paid in a certain period.
• Liquidating Dividends: Dividends paid when the corporation is being dissolved.
• Participating Dividends: Dividends that allow preferred stockholders to participate in additional profits.
V. Power to Enter into Management Contracts

• Definition: A contract where a corporation manages or operates all or substantially all of another corporation’s business.
• Duration: No longer than five years, except for natural resource agreements, where the period is determined by law.
• Requirements:
• Majority Board Vote: A majority of each corporation’s board must approve.
• Stockholder Ratification: Stockholders in both corporations must ratify the decision by a majority vote of the
outstanding capital stock.
• Stricter Requirements:
• Interlocking Stockholders: If stockholders with the same interests in both corporations own or control over one-
third of the voting stock in the managing corporation, ratification requires two-thirds of the outstanding capital stock
in the managed corporation.
• Interlocking Directors: If the majority of the board in the managing corporation is also the majority in the managed
corporation, ratification requires two-thirds of the outstanding capital stock in the managed corporation.

VI. Ultra Vires Acts

• Definition: Acts performed beyond the corporation’s powers.

• Classifications:
• Acts Outside the Corporation’s Powers: Avoidable.
• Acts Performed by Unauthorized Persons: Avoidable.
• Acts That Are Illegal: Void, cannot be ratified.
• Enforcement:
• Executory Contracts: Not enforceable by either party.
• Fully Performed Contracts: Cannot be set aside by either party.
• Partially Performed Contracts: The party who received benefits may be compelled to return them or pay their
reasonable value.
• Apparent Authority: If the corporation has previously permitted unauthorized acts, it may be estopped from
denying the person’s authority.
• Test for Valid Acts: An act is valid if it:
• Is Lawful: Not prohibited by law.
• Serves Corporate Ends: Aids the corporation’s goals.
• Contributes to Corporate Promotion: Substantially advances the corporation’s interests.
• Furthers the Corporation’s Business: Directly and immediately supports the corporation’s operations.

Corporations 7: Stockholders - Rights, Powers, & Liabilities

What is a Stockholder?

A stockholder is a person who owns stock in a stock corporation. They gain ownership through various means:

• Subscription Contract: Agreeing to purchase shares from the corporation.

• Purchase of Treasury Shares: Buying back shares the corporation previously issued.
• Sale or Transfer: Acquiring shares from a previous shareholder.
• Subscription to Shares: Subscribing to new shares offered by the corporation.
• Stock Dividends: Receiving shares as a dividend from the corporation.
Key Points to Remember:

• Stockholders must pay for their subscriptions fully. Failure to do so can result in delinquency and affect their rights.
• Stockholders are not creditors of the corporation. Shares represent ownership, not debt.
• Stockholders don’t own specific corporate property. The corporation owns its assets.

Relationship between Corporation and Stockholder:

This relationship is contractual and arises from the acquisition of stock.

Stockholder Rights and Powers:

These rights are categorized as:

1. Management Rights:

• Indirect:
• Right to Vote/Elect Directors: Stockholders vote to choose the Board of Directors.
• Right to Remove Directors: Can remove directors under certain circumstances.
• Direct:
• Approval of Corporate Actions: Can approve significant corporate actions like investments, mergers, etc.
• Bylaw Amendments: Have the power to adopt, amend, or repeal bylaws.
• Calling Stockholder Meetings: Can compel a meeting when the authorized person refuses or is unavailable.

2. Proprietary Rights:

• Right to Dividends: Entitled to receive dividends based on the corporation’s profits.

• Appraisal Right (Right to Demand Payment): Can demand the fair value of their shares and withdraw from the
corporation under certain circumstances (e.g., major corporate changes).
• Stock Certificate Issuance: Entitled to a certificate for fully paid shares.
• Voluntary Dissolution: Can participate in the corporation’s voluntary dissolution process.
• Participation in Asset Distribution: Entitled to a proportional share of assets upon liquidation.
• Transfer of Stocks: Can transfer or sell their shares.
• Preemptive Right: Right to purchase new shares to maintain their proportionate ownership.
• Right of First Refusal: May have the right to buy back shares if offered for sale, if granted by the corporation.
• Inspection of Books and Records: Can inspect corporate books and records under certain conditions.
• Financial Statements: Can request and receive the corporation’s financial statements.
• Recovery of Unlawfully Sold Shares: Can recover shares sold due to delinquent subscriptions.
• Voting Trust Agreements: Can enter into voting trust agreements to transfer voting rights.
• Commencing Suits: Can bring legal suits against the corporation for specific reasons.

3. Remedial Rights:

• Individual Suit: Filed by a stockholder against the corporation for direct violations of their rights.
• Representative Suit: Filed by a group of stockholders on behalf of themselves and other similarly situated
stockholders.
• Derivative Suit: Filed by one or more stockholders on behalf of the corporation to address wrongs against the
corporation itself.

Corporate Acts Requiring Stockholder Approval:

Here’s a list of corporate actions requiring a two-thirds vote of the outstanding capital stock:
 • Amendment of the Articles of Incorporation (Section 15)
• Removal of Directors (Section 27)
• Dealing of Directors, Trustees, Officers with the Corporation (Section 31)
• Director Disloyalty (Section 33)
• Extension/Shortening of Corporate Term (Section 37)
• Increase/Decrease of Capital Stock (Section 37)
• Creation/Increase of Bonded Indebtedness (Section 37)
• Sale/Disposition of Assets (Section 39)
• Investment in Another Corporation/Business (Section 41)
• Declaration of Stock Dividends (Section 42)
• Management Contract (Section 43 - two-thirds vote for the managed corporation)
• Delegation of Bylaw Amendment Power to Directors (Section 47)
• Merger or Consolidation (Section 76)
• Voluntary Dissolution (Sections 134, 135)

Corporate Acts Requiring Double Majority (Majority Vote of the Board and Stockholders):

• Election of Directors/Trustees (Section 23)

• Filling Board Vacancies (Section 28)
• Compensation of Directors (Section 29)
• Management Contract (Section 43 - for both managing and managed corporations if there are no interlocking directors or
stockholders)
• Adoption of Bylaws (Section 45)
• Amendment of Bylaws (Section 47)

Detailed Discussion of Specific Rights and Powers:

Amendment of the Articles:

• Requires a majority vote of the board and two-thirds of the outstanding capital stock.
• Dissenting stockholders have appraisal rights.
• SEC can approve or disapprove amendments based on certain grounds.

Election, Removal, Dealing, Compensation, and Filling Vacancies in the Board:

These topics are covered in previous episodes on the Board of Directors.

Extension/Shortening Corporate Term, Increase/Decrease Capital Stock, Investment, Dividends, and Management Contracts:

These topics are covered in previous episodes on powers of corporations.

Adoption, Amendment, and Delegation of Bylaw Power:

• Bylaws are internal rules governing the corporation.

• Adoption requires a majority vote of stockholders.
• Amendment and delegation require a majority vote of the board and stockholders.
• Delegation to the board needs a two-thirds vote of the stockholders.
• Delegation can be revoked by a simple majority vote of the stockholders.

Merger or Consolidation:
 • Requires approval by two-thirds of the outstanding capital stock of each corporation.
• Dissenting stockholders have appraisal rights.

Voluntary Dissolution:

• Requires a majority vote of the board and stockholders if no creditors are affected.
• Requires a two-thirds vote of the stockholders and a verified petition if creditors are affected.

Appraisal Right:

• Stockholder’s right to demand payment for their shares and withdraw from the corporation under certain circumstances (e.g.,
fundamental changes in the articles).
• Available in cases of amendment, sale of assets, merger/consolidation, and investment outside the corporation’s primary
purpose.
• Stockholder must dissent, make a written demand within 30 days, and surrender their stock certificate.
• Fair value determined through agreement or appraisal.
• Cost and expenses of appraisal depend on the fairness of the corporation’s offer.
• Corporation has to pay within 30 days.

Right to Inspect Books and Records:

• Available to directors, trustees, stockholders, and members.

• Must be done at reasonable hours on business days.
• Subject to confidentiality rules.
• Denied to non-stockholders, competitors, and those not acting in good faith.
• Can be enforced through the SEC or a court order.
• Refusal to allow inspection can result in fines.

Right to Financial Statements:

• Stockholders can request the corporation’s most recent financial statements.

• Corporation must provide them within 10 days of the request.

Meetings:

• Can be regular or special.

• Notices must be sent to stockholders.
• Notices can be waived.
• A quorum is required for a meeting to be valid.
• Improperly called meetings can be valid if all stockholders are present or represented.

Voting:

• Incident of stock ownership.

• Can be done in person, by proxy, remotely, or in absentia.
• Proxy is a written authority given by a stockholder to another person to vote on their behalf.
• Proxies are revokable unless irrevocable or coupled with an interest.
• Voting Trust Agreements allow stockholders to transfer voting rights to a trustee for a specific period (generally not exceeding
five years).
• Trustees have legal title for voting purposes, but stockholders remain beneficial owners.
Stockholder Suits:

• Three types: Individual, representative, and derivative.

• Individual Suit: Filed by a stockholder for personal violations of their rights.
• Representative Suit: Filed by a group of stockholders on behalf of themselves and others similarly situated.
• Derivative Suit: Filed by stockholders on behalf of the corporation to address wrongs done to the corporation.

Stockholder Liabilities:

• Unpaid Subscription: Liability to the corporation for unpaid stock subscriptions.

• Interest on Unpaid Subscriptions: Liability for interest on unpaid subscriptions.
• Liability to Creditors: Liability to corporate creditors for unpaid subscriptions (based on the trust fund doctrine).
• Wrongful Dividends: Liability to refund dividends received if they were wrongfully or illegally declared.
• Watered Stock: Liability for the difference between the value received and the par value of watered stock (shares issued for
inadequate consideration).

Corporations 9: Non-Stock, Educational, & Religious

Corporations
This transcript discusses the characteristics, formation, and governance of three types of corporations under the Revised Corporation
Code of the Philippines:

I. Non-Stock Corporations:

Definition:

• Corporations where no part of the income is distributable as dividends to its members, trustees, or officers.
• They do not have capital stock divided into shares.
• Profits are used solely for furthering the organization’s purpose.

Purpose:

• Charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes.
• May include trade, industry, agricultural, and chambers of commerce.

Governance:

• Members:
• Replace stockholders in non-stock corporations.
• Voting rights can be limited, broadened, or denied in the articles of incorporation or bylaws.
• Each member usually has one vote, unless cumulative voting is authorized.
• Voting can be by proxy, remote communication, or in absentia.
• Membership and rights are personal and non-transferable, unless specified otherwise.
• Termination of membership doesn’t necessarily extinguish all rights, unless specified otherwise.
• Board of Trustees:
• Replaces the board of directors.
• Must be members of the corporation.
• Number is fixed in the articles or bylaws, with a maximum of 15.
 • Hold office for up to three years until successors are elected.
• Staggering of terms is no longer required.
• May include an independent trustee who need not be a member.
• The corporation maintains a list of members and proxies for the SEC.
• Meetings:
• Can be held anywhere in the Philippines, even outside the principal office, with proper notice.

Conversion:

• Stock corporations can be converted to non-stock corporations by amending the articles of incorporation.
• Stockholders become members with no pecuniary interest or right to profits.
• Non-stock corporations cannot be converted to stock corporations, they should be dissolved and a new corporation formed.

General Principles:

• Specific provisions on non-stock corporations in the Revised Corporation Code prevail.

• Provisions governing stock corporations may supplementarily apply if no specific rule exists for non-stock corporations.

II. Educational Corporations:

Definition:

• Stock or non-stock corporations organized to provide education, with a regular faculty, curriculum, and student body.
• Governed by special laws and the general provisions of the Revised Corporation Code.

Governance:

• Non-Stock Educational Corporations:

• Minimum 5, maximum 15 trustees in multiples of 5.
• Term of one-fifth of the trustees expire each year (staggering).
• Subsequent trustees serve 5-year terms.
• Vacancies are filled for the remaining term.
• Majority of trustees constitute a quorum.
• Powers and authority defined in the bylaws.
• Stock Educational Corporations:
• Number and term of directors are governed by provisions for stock corporations.
• Multiples of five and staggering system are mandatory.

III. Religious Corporations:

Definition:

• Corporations composed entirely of spiritual persons, established for the furtherance of religion, perpetuating church rights,
administration of church or religious work, or property.
• Governed by special provisions in the Revised Corporation Code and supplementarily by the general provisions on non-stock
corporations.

Classifications:

• Corporation Soul:

• Incorporated by one person (chief archbishop, etc.) and their successors.

 • Purpose: to administer and manage the affairs, property, and temporalities of a religious denomination.
• Articles of Incorporation: filed with the SEC, stating the religious denomination, its consistency with being a
corporation sole, the administrator’s responsibilities, vacancy filling procedures, principal office location, and other
relevant provisions.
• Formation: The corporation soul is formed upon filing the required documents with the SEC.
• Property: Holds property in trust for the benefit of the religious denomination.
• Disposal: Requires authority from the RTC for mortgage or sale, unless the religious denomination has its own rules
governing property acquisition, mortgage, and sale.
• Vacancies: Successors take office upon filing their credentials with the SEC. During a vacancy, persons authorized by
the religious denomination’s rules administer the corporation.
• Dissolution: Voluntary, upon filing a declaration of dissolution with the SEC, and subsequent approval.

• Religious Society:

• Incorporated by a group of persons.

• Purpose: to administer and manage its temporalities, affairs, and property.
• Formation: Requires a written consent or affirmative vote of two-thirds of the members, and filing of verified articles
of incorporation with the SEC.
• Approval by the SEC is not expressly required for incorporation.

General Principles:

• Special provisions regarding religious corporations prevail over general provisions on non-stock corporations.

Case Study: Long vs. Basa

• Illustrates the relationship between a religious corporation and its members based on adherence to a common belief.
• Expulsion of members for dissenting doctrines is conclusive in civil courts.
• Ecclesiastical discipline is left to the religious group and can be specified in their articles or bylaws.

Close Corporations: A Breakdown of Key Concepts

This transcription covers the topic of Close Corporations (also known as Family Corporations) under the Revised Corporation Code.
Here’s a summary of the key points discussed:

Defining Close Corporations:

• A close corporation is a corporation with a limited number of shareholders (typically family members or close associates) who
hold a majority of the stock and rarely sell or trade their shares.
• They offer limited liability benefits similar to regular corporations, but operate with a more informal and partnership-like
structure.

Key Characteristics of Close Corporations:

1. Limited Number of Shareholders: The articles of incorporation must specify a maximum number of shareholders, not
exceeding 20.
2. Restrictions on Transfer of Shares: The articles, bylaws, and stock certificates must include specific restrictions on the transfer
of shares. This could include the “right of first refusal,” where existing shareholders or the corporation have the first option to
purchase shares before they can be sold to outsiders.
3. No Public Offering or Listing: Close corporations cannot publicly offer their shares or list on stock exchanges.
Additional Provisions Allowed in the Articles:

• Classification of shares and rights: This can define different types of shares with varying voting rights or ownership
privileges.
• Qualifications for owning shares: The articles can specify qualifications for who can own or hold shares.
• Restrictions on transfer of shares: Again, this is a key feature of close corporations.
• Classification of directors: The articles can specify that different classes of shares elect directors, potentially creating a multi-
tiered board structure.
• Greater quorum or voting requirements: The articles can specify a higher quorum or voting threshold for stockholders or
directors than those outlined in the Revised Corporation Code.
• Management by stockholders: The articles can allow stockholders to directly manage the corporation, eliminating the need
for a separate board of directors.

Key Considerations for Directors in Close Corporations:

• Informal Action: Under certain circumstances, directors can take corporate action without a formal meeting, including:
• Written consent from all directors
• Implied knowledge and no written objections from stockholders
• Established practice of informal action with stockholder acquiescence
• Implied knowledge of the action and no written objections from directors
• Ratification of Actions: If a director was absent from a meeting without proper call or notice, they can be deemed to have
ratified the action if they don’t file a written objection promptly after gaining knowledge of it.

Key Considerations for Officers and Employees:

• Appointment by Stockholders: The articles can specify that stockholders, not the board, appoint officers or employees.

Amendments to the Articles:

• Any amendment that seeks to delete or remove required provisions or reduce quorum or voting requirements requires a two-
thirds majority vote of the outstanding capital stock.

Restrictions on Transfer of Shares:

• Purpose: Restrictions are meant to protect the close-knit group of shareholders and ensure control remains within the trusted
circle.
• Types of Restrictions: The law primarily focuses on the “right of first refusal” as a maximum restriction.
• Binding Restrictions: Restrictions must be clearly stated in the articles, bylaws, and stock certificates to be legally binding on
any purchaser in good faith.

Effects of Breaching Transfer Restrictions:

• Conclusive Presumptions: The law sets out several conclusive presumptions for those who acquire stock in violation of
restrictions, including:
• Notice of ineligibility
• Notice of exceeding the maximum number of shareholders
• Notice of violation of transfer restrictions
• Consequences of Breaching Restrictions: The corporation can refuse to register the transfer of shares to the transferee.
• Exceptions to the Consequences:
• Consent of all stockholders: The corporation can register the transfer if all shareholders consent.
• Amendment to the Articles: The corporation can register the transfer if the articles are amended to remove the
restriction.
 • Other Remedies for the Transferee: The transferee may still have legal recourse to rescind the transaction or recover under
any applicable warranty.

Stockholder Agreements:

• Pre-incorporation Agreements: Agreements made before the formation of the corporation are valid and binding after
incorporation, provided they are consistent with the articles.
• Voting Agreements: Stockholders can agree on how their shares will be voted, ensuring control stays within the desired
group.
• Business Conduct Agreements: Agreements relating to business conduct are valid, but stockholders are still personally liable
for management acts that violate the law.
• Fiduciary Duties: Stockholders actively involved in management owe strict fiduciary duties to each other.

Deadlock Resolution:

• Sec Arbitration: The Securities and Exchange Commission (SEC) has the power to arbitrate deadlocks among stockholders or
directors.
• Orders from the SEC: The SEC can issue orders to:
• Cancel or alter provisions in the articles, bylaws, or agreements.
• Cancel, alter, or stop resolutions or actions.
• Direct or prohibit specific acts.
• Order share buyouts at fair value.
• Appoint a provisional director (a neutral party with the powers of an elected director).
• Dissolve the corporation.

Stockholder Withdrawal and Dissolution:

• Stockholder Withdrawal: A stockholder can compel the corporation to buy their shares at fair value if the corporation has
sufficient assets to cover its liabilities.
• Dissolution: A stockholder can petition the SEC to dissolve the corporation in cases of illegal, fraudulent, dishonest,
oppressive, or unfairly prejudicial actions by those in control of the corporation, or misapplication or waste of assets.

General Principles and Exceptions:

• Contractual Freedom: While the law provides for specific provisions and remedies, stockholders cannot contract away
fundamental rights, such as those related to arbitration, dissolution, or stockholder withdrawal.
• Consistency with the Law: All agreements and actions must be consistent with the Revised Corporation Code and general
legal principles.

Sample Discussion and Elaboration:

The presenter provides an example of how the right of first refusal can be used to protect a family corporation. The restriction might
stipulate that shares can only be sold to existing shareholders or the corporation at a price not exceeding 25% of the par value. If a
shareholder wants to sell their shares to an outsider, they must first offer those shares to existing shareholders or the corporation at that
price. This ensures that the shares stay within the family and prevents outsiders from gaining control.
One Person Corporation (OPC) in the Philippines: Notes from
the Transcription
This transcription discusses the key features of One Person Corporations (OPCs) in the Philippines, drawing from the Revised
Corporation Code (RCC).

I. Introduction

• Definition: An OPC is simply a corporation with a single stockholder.

• Governing Provisions: Sections 115 to 132 of the RCC, with supplemental provisions from the rest of the code.
• Special Rules Prevail: Rules specifically for OPCs take precedence over general corporate rules.

II. Purpose and Benefits of OPCs

• Encourages Entrepreneurship: Facilitates the formation of small businesses, aligning with the state policy of encouraging
private enterprise.
• Avoids Dummy Incorporators: Allows individuals to enjoy the benefits of incorporation without resorting to using “dummy”
incorporators.
• Benefits MSMEs: Streamlines business processes and simplifies regulatory requirements for micro, small, and medium
enterprises.

III. Limitations on OPC Incorporation

• Eligible Entities: Only a natural person, trust, or estate can form an OPC.
• Prohibited Entities:
• Banks
• Quasi-banks
• Pre-need trusts
• Insurance companies
• Publicly listed companies
• Non-chartered GOCCs (Government-Owned and Controlled Corporations)
• Professionals: Licensed professionals (e.g., lawyers, CPAs) cannot incorporate an OPC for practicing their profession unless a
special law permits it.

IV. Separate Juridical Personality and Liability

• Separate Personality: OPCs have a distinct legal personality separate from the sole stockholder.
• Limited Liability: The stockholder’s liability is limited to their investment in the OPC.
• Burden of Proof: The stockholder must prove adequate financing of the OPC to claim limited liability.
• Piercing the Corporate Veil: The principles of piercing the corporate veil apply to OPCs. This remedy is used in cases of fraud,
alter ego, or equity issues, and requires compelling evidence of misuse of the corporate entity.

V. Incorporation of OPCs

• Minimum Authorized Capital Stock: No minimum requirement, except as specified by special laws.
• Bylaws: Not required, but an OPC can choose to file bylaws.
• Articles of Incorporation:
• Must include:
• Name, nationality, and residence of the sole stockholder (if a trust or estate, then trustee, administrator, etc.,
with proof of authority).
 • Name, nationality, residence, authority, and consent of nominee and alternate nominee.
• Existence: OPC comes into existence upon issuance of the Certificate of Registration by the SEC.
• Corporate Name: Subject to the same rules as ordinary corporations, with the requirement of including “OPC” below or at the
end of the name.

VI. Officers and Management

• Sole Director and President: The sole stockholder is the director and president of the OPC.
• Other Officers: The OPC must appoint a treasurer, corporate secretary, and other necessary officers within 15 days of
incorporation.
• Single Stockholder’s Restrictions:
• Cannot be the corporate secretary.
• If the treasurer, must provide a bond to the SEC and a written undertaking to manage funds properly.
• Corporate Secretary’s Special Functions:
• Maintaining minutes book and records.
• Notifying nominee and alternate nominee of the single stockholder’s death or incapacity.
• Notifying the SEC of the single stockholder’s death.
• Calling a meeting of the nominee, alternate nominee, and legal heirs.

VII. Nominees and Alternate Nominees

• Purpose: To ensure continuity of the OPC in case of the single stockholder’s death or incapacity.
• Designation: The sole stockholder designates a nominee and alternate nominee.
• Consent: Written consent of both nominee and alternate nominee must be attached to the articles of incorporation.
• Term:
• Temporary incapacity: Nominee takes over until the single stockholder regains capacity.
• Death or permanent incapacity:
• Nominee takes over until legal heirs are determined and designate one of them or agree on the estate as the
new single stockholder.
• Alternate nominee steps in if the nominee is unable or unwilling to act.
• Changing Nominee: The sole stockholder can change the nominee and alternate nominee at any time by submitting the new
nominees’ names and consent to the SEC.

VIII. Reportorial Requirements

• Purpose: To prevent abuse of power and conflict of interest.

• Submissions:
• Annual audited financial statements.
• Report on auditor’s qualifications, reservations, or adverse remarks.
• Disclosure of self-dealings and related party transactions.
• Other reports as required by the SEC.
• Fiscal Year: As stated in the articles, or the calendar year if not specified.
• Delinquent Status: If an OPC fails to submit reports three times in five years, the SEC may place it under delinquent status.
This can lead to the revocation of the certificate of incorporation if the requirements are not met within the prescribed period.

Corporations 12: Dissolution & Liquidation of Corporations - Notes

This video covers the dissolution and liquidation of corporations under the Revised Corporation Code (RCC). Here’s a breakdown of the
key points:
I. Dissolution

• Definition: Extinguishment or “death” of a corporation’s franchise, ending its existence.

• Nature: The state grants corporate existence, and it can be revoked or ended by the state.
• Types:
• Dissolution in Law: Brought about by the state through judicial sentence, expiration of the corporate term, or other
legal means.
• De Facto Dissolution: Takes place in practice, where the corporation ceases operations and goes into liquidation
while still technically existing.

II. Steps in Dissolution

1. Termination of Corporate Existence: The corporation stops doing ordinary business.

2. Winding Up (Liquidation): Paying debts to creditors and distributing assets to stockholders and others with interest. The
corporation ceases to exist after the winding up period.

III. Voluntary Dissolution

• Methods:
• Filing an Application with the SEC:
• No Creditors Affected: Majority vote of the board, ratified by majority of outstanding capital
stock/members, verified request filed with the SEC. Dissolution takes effect upon issuance of the Certificate
of Dissolution.
• Creditors Affected: Majority vote of the board, ratified by two-thirds of outstanding capital stock/members,
verified petition filed with the SEC. Public notice is required, and objections can be filed. Dissolution takes
effect upon issuance of the Certificate of Dissolution.
• Amending Articles of Incorporation to Shorten Corporate Term: Follows the amendment process. Dissolution
takes effect automatically on the day following the last day of the shortened term.

IV. Involuntary Dissolution

• Methods:
• Expiration of Limited Term: Corporation dissolves on the day after the last day of its existence.
• Legislative Dissolution: Congress can revoke franchises, especially for public utilities, for the common good.
• Quo Warranto Suit: A remedy against a de facto corporation.
• Minority Stockholder Suit: Suit for dissolution on justifiable grounds (e.g., fraud, oppression, asset misapplication)
under Section 104.
• SEC Order: SEC can dissolve a corporation on various grounds (e.g., non-use of charter, continuous inoperation,
violation of the RCC) after notice and hearing.
• Court Order: Dissolution upon finding of fraud, securities violations, etc.

V. Effects of Dissolution

• Legal Title Transfers: Corporate property goes to the stockholders.

• Business Cessation: The corporation can no longer operate.
• Winding Up Period: The corporation continues to exist for three years for liquidation purposes.
• Final Termination: After three years, the corporation ceases to exist for all purposes.

VI. Liquidation (Winding Up of Affairs)

• Definition: Converting corporate assets into cash to pay debts and distribute remaining assets.
• Methods:
 • Liquidation by the Corporation: The corporation handles winding up under Section 139, with a three-year period
for claims.
• Liquidation by a Receiver: Appointed by the SEC or a court to collect assets and pay debts. Receivership can be
indefinite until the corporation’s affairs are settled.
• Liquidation by Trustee: Corporate assets are conveyed to a trustee, who becomes the legal owner and manages
liquidation.

VII. Distribution of Assets

• Priority:
i. Corporate creditors.
ii. Loans from stockholders, members, directors, trustees.
iii. Stockholders/members in proportion to shareholdings.
iv. Unknown creditors/stockholders/members: Assets go to the national government.

VIII. General Principles

• Trust Fund Doctrine: Corporate capital is a trust fund for creditors’ satisfaction.
• Liability Continuity: Dissolution does not extinguish liabilities of the corporation, stockholders, directors, etc.

IX. Exceptions:

• Claims Beyond Three Years: Claims brought before or during the three-year winding up period can be prosecuted even after
the period ends.
• Redemption of Preferred Shares: Preferred shareholders may have asset preference upon dissolution.

X. Additional Notes

• The video focuses on solvent corporation dissolution, not insolvent ones covered under the Financial Rehabilitation and
Insolvency Act (FREYA).

13.1: Foreign Corporations - Nature & License Requirements

I. Definition of Foreign Corporation

• Definition: A foreign corporation in the Philippines is a corporation formed, organized, or existing under laws other than those
of the Philippines, where those laws allow Filipino citizens and corporations to do business in their own country or state.
(Section 140, Revised Corporation Code)

• Incorporation Test: The nationality of a corporation is determined by the state where it’s incorporated. A Philippine
corporation is considered domestic in the Philippines and foreign in other countries. Conversely, a corporation formed in
another country is considered domestic in that country and foreign in the Philippines.

• Control Test: Used during wartime or for investment purposes to determine the nationality of corporations, this test is used to
ensure compliance with laws prescribing ownership percentages in certain industries (e.g., the Foreign Investments Act).

• Reciprocity Rule: The definition of foreign corporations supports the reciprocity rule. A foreign corporation can be recognized
only if its home country allows Filipino citizens and corporations to do business within its territory.

• Limited Existence: A foreign corporation has no legal existence outside the bounds of the state where it was created. It only
exists in contemplation of and by force of the law.

II. Recognition and Licensing of Foreign Corporations

 • Express or Implied Consent: A foreign corporation can be recognized by another state through express or implied consent. In
the Philippines, this consent is given by issuing a license and certificate of authority after the corporation submits an
application.
• Compliance with Philippine Law: A foreign corporation wishing to operate in the Philippines must comply with all applicable
Philippine laws.
• License Requirements: A foreign corporation must obtain a license to transact business in the Philippines. This license does
not give the corporation its juridical personality; it already exists.
• Conditions Precedent:
a. Submit certified copies of Articles of Incorporation and Bylaws: This includes a translation if necessary,
and the application must be under oath.
b. Attached Documents:
a. Certificate of Good Standing: A sworn statement from the incorporating jurisdiction attesting to the
corporation’s good standing and allowing Filipinos to do business there (with a translation if necessary).
b. Statement of Solvency: A sworn statement by the president or authorized representative showing the
corporation’s solvency and financial condition (including assets and liabilities).
c. Certificate of Authority: From the appropriate government agency.
c. Power of Attorney: Designating a resident agent for service of summons and other legal processes.
d. Consent to Service: Agreement allowing service of process through the SEC if the corporation ceases to
operate in the Philippines or lacks a resident agent.
• Conditions Subsequent:
a. Deposit of Securities: Within 60 days of receiving the license, the foreign corporation must deposit
securities satisfactory to the SEC.
• Allowed Securities:
• Bonds or debt securities of the Philippine government, political subdivisions,
instrumentalities, or GOCCs.
• Shares of stock or debt securities registered under the Securities Regulation Code.
• Shares of stock in domestic corporations listed on the stock exchange.
• Shares of stock in domestic insurance companies and banks.
• Any financial instruments deemed suitable by the SEC.
• Amount: At least ₱500,000 or the amount set by the SEC.
• Exception: Foreign banking or insurance corporations are exempt from this requirement.
b. Additional Deposits: Within six months after each fiscal year, the SEC requires additional securities if:
• Gross income exceeds ₱10 million: Additional securities equivalent to 2% of the excess over ₱10
million.
• Value of deposited securities decreases: Additional securities to compensate for the decrease in
market value.
c. Release of Deposits: The SEC may release part of the additional deposits if the foreign corporation’s gross
income decreases or the total deposit’s market value increases.
d. Substitute Deposits: The SEC may allow substitute deposits.
e. Interest and Dividends: The foreign corporation is entitled to receive interest or dividends on its deposits.
f. Return of Deposits: Upon ceasing business in the Philippines, the foreign corporation can get its deposits
back by submitting proof of having no liabilities to Filipino residents.

III. Changes in Foreign Corporation After License Issuance

• Amendments to Articles or Bylaws: The corporation must file certified copies of amendments with the SEC and the
appropriate government agency within 60 days after the amendments become effective.
• Note: These amendments cannot enlarge the scope of the license’s authorization.
• Changes in Name or Purposes: Requires obtaining an amended license by submitting an application to the SEC and getting
an endorsement from the appropriate government agency.

IV. Revocation or Suspension of License

 • Grounds for Revocation or Suspension:
i. Failure to file annual reports or pay fees.
ii. Failure to appoint or maintain a resident agent.
iii. Failure to notify the SEC of changes in resident agent or address.
iv. Failure to submit amended articles or bylaws within the required timeframe.
v. Misrepresentations in applications, reports, affidavits, or documents.
vi. Failure to pay taxes, assessments, or penalties.
vii. Transacting business outside the authorized purposes.
viii. Acting as an agent for an unlicensed foreign corporation.
ix. Other grounds that render the corporation unfit to transact business.
• Consequences of Revocation:
i. The SEC issues a certificate of revocation and notifies the appropriate government agency.
ii. The foreign corporation is mailed a copy of the certificate at its registered office.
iii. Revocation does not invalidate prior contracts or the foreign corporation’s right to enforce them.

V. Merger and Consolidation

• Merger or Consolidation with Domestic Corporation: Allowed if:

i. The home country and Philippine laws permit it.
ii. Philippine laws regarding merger and consolidation are followed.
• Merger or Consolidation with Another Foreign Corporation:
i. The home country’s laws must be followed.
ii. The corporation must file a copy of the articles of merger or consolidation with the SEC and appropriate agency
within 60 days of the merger’s effectiveness.
• Withdrawal of License:
i. A foreign corporation can withdraw from the Philippines by filing a petition with the SEC.
ii. The SEC examines the corporation’s books and records to ensure no outstanding liabilities.
iii. A certificate of withdrawal is issued only after:
• All Philippine claims are paid, compromised, or settled.
• All taxes, assessments, and penalties are paid.
• The petition is published in a newspaper for three consecutive weeks.
iv. Note: Withdrawal does not exempt the corporation from pending legal actions.

VI. General Principles

• Equal Footing: The purpose of licensing foreign corporations is to place them on an equal footing with domestic corporations.
• Protection of Philippine Residents: License requirements are designed to protect Filipino citizens by subjecting foreign
corporations to Philippine jurisdiction.
• Enforcement of Contracts: A foreign corporation can still enforce contracts entered into before its license is revoked.

Foreign Corporations in the Philippines: A Breakdown

This transcription outlines the key points regarding foreign corporations under Philippine law, focusing on the need for licenses,
resident agents, and the distinction between “doing business” and “isolated transactions.”

I. Foreign Corporations and the Need for Licenses

 • General Principle: Foreign corporations seeking to transact business in the Philippines require a license from the Securities
and Exchange Commission (SEC).
• Purpose of License: The license ensures Philippine courts can exercise jurisdiction over foreign corporations operating within
the country.
• Consequences of Operating Without a License:
• A foreign corporation operating without a license cannot sue in Philippine courts.
• However, it can be sued in Philippine courts on any valid cause of action recognized under Philippine laws.

II. The Resident Agent

• Requirement: A foreign corporation must appoint a resident agent in the Philippines to receive legal processes.
• Qualities of a Resident Agent:
• Individual: Must reside in the Philippines, be of good moral character, and have sound financial standing.
• Domestic Corporation: Must be lawfully transacting business in the Philippines, have sound financial standing, and be
in good standing with the SEC.
• Purpose of the Resident Agent: To ensure the Philippine courts can acquire jurisdiction over the foreign corporation.
• Legal Effect of Service on Resident Agent: Service on the resident agent is considered service on the foreign corporation.

III. Defining “Doing Business”

• No Hard-and-Fast Rule: There is no specific definition of “doing business” in the Revised Corporation Code.
• Factors Considered: The context of each case is assessed, taking into account elements like:
• Soliciting orders, service contracts, opening offices.
• Appointing representatives or distributors in the Philippines.
• Participating in the management or control of a domestic business.
• Acts implying a continuity of commercial dealings and arrangements.
• Performing acts or works for commercial gain.
• Tests to Determine “Doing Business”:
• Substance Test: Whether the foreign corporation is substantially engaged in the business for which it was created.
• Continuity Test: Whether the foreign corporation’s actions indicate a continuous pattern of commercial dealings in
the Philippines.

IV. Acts Not Deemed “Doing Business”

• Examples:
• Investing as a shareholder in a registered Philippine corporation.
• Having a nominee director or officer to represent interests in a Philippine corporation.
• Appointing a distributor who acts in their own name and account.
• Publishing general advertisements in the Philippines.
• Maintaining stock for processing by another entity in the Philippines.
• Consigning equipment to a local company for export processing.
• Collecting information in the Philippines.
• Performing services auxiliary to an isolated contract of sale (e.g., installation, servicing, training).

V. Isolated Transactions

• Definition: An isolated transaction is a single or series of transactions that are separate from the ongoing business of the
foreign corporation and do not imply an intention to engage in continuous business operations in the Philippines.
• Requirements:
• No intention to engage in ongoing business.
 • Transaction must be set apart from the corporation’s regular business.
• Examples:
• A foreign corporation selling a single item in the Philippines.
• A foreign corporation suing to protect its trademark or trade name.
• A foreign corporation suing for misdelivery of goods.
• Distinction: The key is not the number of transactions, but the corporation’s intention to continue its business in the
Philippines.

VI. Exceptions and Specific Examples

• Example 1: A foreign corporation sells bags online to a customer in the Philippines. This is an isolated transaction, and the
corporation does not need a license.
• Example 2: A foreign corporation sells a large quantity of bags to a reseller in the Philippines, intending for the reseller to
resell them. This may constitute “doing business,” depending on the circumstances.
• Example 3: A foreign corporation hires an agent in the Philippines to sell its products repeatedly, without transferring
ownership to the agent. This likely constitutes “doing business.”

VII. Status of Contracts Entered into by Unlicensed Corporations

• General Principle: Contracts entered into by foreign corporations operating without a license are unenforceable.
• Possible Argument: The contracts may be considered void due to violation of mandatory laws.
• Exception: The non-complying corporation cannot use its own non-compliance as a defense if the other party contracted in
good faith.
• Estoppel: A Philippine citizen or entity who contracts with an unlicensed foreign corporation may be estopped from
challenging the corporation’s status if they benefited from the contract.

VIII. Key Takeaways

• A foreign corporation must obtain a license to “do business” in the Philippines, which includes ongoing commercial operations.
• An isolated transaction does not require a license and allows a foreign corporation to sue in Philippine courts.
• Understanding the distinction between “doing business” and “isolated transactions” is crucial for foreign corporations seeking
to operate in the Philippines.

Securities Regulation Code (SRC) - Episode 1 Notes: Kinds of

Securities & Registration Procedure
Purpose of SRC:

• Establish a self-regulating, socially conscious free market.

• Encourage wider ownership in enterprises.
• Democratize wealth.
• Promote capital market development.
• Protect investors.
• Ensure full and fair disclosure of securities.
• Minimize or eliminate insider trading and fraudulent practices.

Key Points:
 • All securities except exempted securities or transactions require registration before sale to the public.
• SRC regulates securities through registration, rejection/revocation, protection of shareholder interests, and other mechanisms.

Overview of SRC’s Scope:

1. Registration of Securities: All securities (except exempted) need registration.

2. Rejection/Revocation of Registration: SEC can reject or revoke registration based on various grounds.
3. Regulation of Pre-need Plans: Contracts for future services/payments require SEC approval.
4. Protection of Shareholder Interest: Through tender offers (discussed in future episodes).
5. Prohibition of Fraud, Manipulation & Insider Trading: Strict rules apply.
6. Regulation of Market Professionals: Brokers and dealers require registration.
7. Revocation/Suspension of Registration: For brokers, dealers, salesmen, and associated persons.
8. Over-the-Counter Market Restrictions: Rules apply.
9. Self-Regulation of Associations: Securities brokers, dealers, and related organizations.
10. Registration of Clearing Agencies: Required.
11. Limitation on Margin Trading: Limits on credit extended on securities.
12. Civil Liabilities for False Statements: In registration statements.
13. Civil Liabilities for False Statements/Omissions: In prospectuses, communications, or reports.
14. Protection Against Manipulation & Fraud: Pre-need plans, commodities futures contracts, fraudulent transactions, and
insider trading.
15. Establishment of Trust Funds: To compensate investors for extraordinary losses due to business failure, fraud, or
mismanagement.

Defining Securities:

• Shares, participations, or interests in a corporation or commercial enterprise.

• Evidenced by certificates, contracts, instruments (written or electronic).

Kinds of Securities:

1. Shares of Stocks, Bonds, Debentures, Notes, Asset-Backed Securities: Represents ownership or debt.
2. Investment Contracts: Contracts where a person invests money in a common enterprise, expecting profits primarily through
efforts of others.
• Howie Test: Used to determine if an investment contract exists, with these elements:
• A contract, transaction, or scheme.
• Investment of money.
• Investment in a common enterprise.
• Expectation of profits.
• Profits primarily arising from the efforts of others.
• Example: Certificates of membership in a sports club, where members invest, expect profits, and rely on club
management.
3. Certificates of Interest/Participation, Profit-Sharing Agreements, Certificates of Deposit for Future
Subscription: Represent interests in a venture.
4. Fractional Undivided Interests in Oil, Gas, or Minerals: Ownership rights in resources.
5. Derivatives (Options & Warrants): Value depends on an underlying security without principal investment.
• Options: Contracts to buy or sell an underlying security at a predetermined price (strike price) before a
predetermined date (expiry date).
• Warrants: Rights to subscribe or purchase new or existing shares in a company before a predetermined date (expiry
date). Warrants typically have longer exercise periods than options.
6. Certificates of Assignment, Participation, Trust, Voting Trust, etc.: Represent ownership or control.
 7. Proprietary/Non-proprietary Membership Certificates: Membership in corporations with varying ownership rights.
• Proprietary: Entitles holder to use a specific property, dividends/earnings, and proportionate ownership in company
assets.
• Non-proprietary: Entitles holder to use a property but no right to dividends/earnings or assets upon liquidation.
8. Other Instruments: May be considered securities by SEC.

Procedure for Registration:

• Required for all securities except exempted securities or transactions.

• Issuer files a sworn registration statement with SEC.
• Statement must be signed by key officials and include a board resolution and prospectus.

Prospectus:

• Document made by issuer/underwriter/dealer to sell or offer securities to the public.

• Contains information required by SEC.
• Widely disseminated to prospective purchasers.
• May be preliminary (for pre-selling/pre-ordering) or final.
• Must be dated and contain information about the issuer, securities, and impact on ownership.

Registration Statement:

• Filed with SEC and subject to review.

• SEC can declare it effective (approved) or rejected (denied).
• Fees are paid by issuer.
• Notice of filing must be published in two newspapers.
• Public may inspect the statement at SEC.
• Effective date triggers the right to sell.
• Must be updated if material changes occur.

Liability for False Statements/Omissions:

• Issuer, directors, underwriters, auditors, etc., can be held liable for damages caused by untrue statements or omitted material
facts in the registration statement or prospectus.

Commencement of Sale:

• Begins within 10 business days of registration statement’s effectivity.

• Continues until the end of the offering period or termination by issuer.
• Failure to commence sale within 10 days results in cancellation and forfeiture of fees.

Shelf Registration:

• Delayed and continuous offering of securities in tranches over a period not exceeding three years.
• Registration statement must be effective.

Rejection/Revocation of Registration:

• SEC can reject or revoke a registration statement after notice and hearing based on:
• Issuer’s insolvency, violation of SRC/SEC orders, fraudulent transactions, false/misleading representations, or non-
compliance with SEC requirements.
 • Incomplete or inaccurate registration statement.
• Conviction of issuer, officers, directors, etc. of offenses involving moral turpitude or fraud.

Exempt Securities:

• Do not require registration because of the issuer’s reliability or oversight by another government entity.
• Examples:
• Securities issued by the Philippine government or foreign governments with diplomatic relations and reciprocity.
• Securities issued by a receiver, trustee in bankruptcy, insurance commission, HLURB, or BIR.
• Securities issued by a bank (except its own shares).

Exempt Transactions:

• Do not require registration based on the specific circumstances of the sale.

• Examples:
• Judicial sales, sales by executors, administrators, etc.
• Sales by pledge holders, mortgagees, or lien holders to liquidate debt.
• Isolated transactions by owners.
• Stock dividends.
• Issuance of bonds/notes secured by mortgages to a single purchaser.
• Exchange of securities for other securities of the same issuer.
• Broker’s transactions on registered exchanges.
• Subscriptions for shares prior to incorporation.
• Exchange of securities with existing security holders.
• Sales to fewer than 20 persons in the Philippines within a 12-month period.
• Sales to qualified buyers (banks, investment houses, insurance companies, etc.).

Confirmation of Exemption:

• Issuer may apply to SEC for confirmation of exemption.

• Burden of proof lies with the applicant.
• SEC can challenge the exemption at any time.
• Exemption does not guarantee freedom from civil liability for fraud or other issues.
• Exemption cannot be part of a plan to evade registration requirements.

General Principles:

• Public interest and protection of investors are paramount.

• Even exempt securities or transactions must comply with other provisions of the SRC.
• Fraud and other violations are not excused by exemption.
SRC 2: Prohibition on Price Manipulation, Fraud, Insider
Trading; Registration of Brokers & Exchange
Key Objective of SRC: Protect investors.

Prohibition on Price Manipulation

• Section 24.2: Prohibits manipulative or deceptive devices/contrivances to affect security prices.

• Prohibited Acts (Section 24):
• Creating false appearance of active trading: Transactions with no change in beneficial ownership, simultaneous
orders from colluding parties.
• Inducing purchase/sale through manipulation: Raising/depressing prices through various devices like:
• Painting the tape: Creating false impression of activity by engaging in fake transactions.
• Marking the close: Buying/selling at market close to influence closing price.
• Improper matched orders: Colluding parties placing buy/sell orders at same time and price.
• Hype and dump: Buying/selling at inflated/deflated prices to manipulate price movements.
• Wash sales: Transactions with no change in ownership.
• Squeezing the float: Controlling demand to exploit shortages and inflate prices.
• Boiler room sales: High-pressure tactics to sell securities.
• Daisy chain: Series of purchases/sales by the same group at successively higher/lower prices.
• Disseminating false information: Spreading misleading information to influence price.
• Pegging, fixing, or stabilizing price: Unless allowed by SRC or SEC rules.

General Principle: Actions that create false impressions of market activity or manipulate prices to the detriment of investors are
prohibited.

Exceptions: SEC may allow some prohibited acts if in the public interest and for investor protection.

Prohibition on Short Sales

• General Rule: Short sales (selling securities without owning them) are prohibited.
• Exception: Allowed if done according to SEC rules.

Prohibition on Stop Loss Orders

• General Rule: Stop-loss orders (orders to buy/sell when a specific price is reached) are prohibited.
• Exception: Allowed if done according to SEC rules.

Prohibition on Insider Trading

• Insider:
• Issuer, director, officer, or someone with control/common control of the issuer.
• Person with access to non-public information about the issuer or security due to relationship or former relationship.
• Government employee, exchange clearing agency director/officer, or self-regulatory organization director/officer with
access to non-public information.
• Anyone who learns of material non-public information from an insider, knowing the source is an insider.
• Unlawful Act:
• Insider selling/buying securities while possessing material non-public information (not generally available to the
public).
 • Material non-public information: Information not publicly disclosed that would likely affect the security’s market price after
public dissemination and a reasonable time for market absorption.
• Presumption of Insider Trading: Insider purchase/sale of issuer securities after material non-public information came into
existence, but before public dissemination and market absorption, is presumed to be insider trading. This presumption can be
rebutted by proving lack of awareness of the information.
• Exceptions:
• Insider proves the information wasn’t gained from their insider relationship.
• Insider discloses the information to the other party or proves the other party also possesses the information.

General Principle: Insider trading uses secret information to gain unfair advantage over uninformed investors. The law protects
investors by prohibiting this practice.

Duty to Disclose or Abstain: Insiders must either disclose material information to the other party or abstain from trading the
corporation’s shares. This duty is based on:
* Relationship providing access to confidential information intended for corporate purposes, not personal benefit.
* Inherent unfairness of taking advantage of unavailable information.

Insider Trading in Relation to Tender Offers:

• Prohibited Acts:
• Non-tender offerer possessing material non-public information related to a tender offer, knowing it’s non-public and
acquired from the tender offerer, buying or selling the issuer’s securities.
• Tender offerer, their agents, the issuer, or their insiders communicating material non-public information related to the
tender offer, which is likely to lead to insider trading.

Requirement of Registration

• Who Must Register:

• Broker-dealers: Entities that buy/sell securities for customers.
• Salesmen: Individuals who buy/sell securities on salary/commission.
• Associated Persons: Full-time employees of broker-dealers, involved in internal control and supervision.
• Exchanges: Organized markets for securities trading.
• Transfer Agents: Entities that handle share registration and transfers.
• Clearing and Settlement Agencies: Entities that facilitate the clearing and settlement of securities transactions.
• Requirements:
• Broker-Dealers:
• Written exam for natural persons.
• Unimpaired paid-up capital (amount varies based on transaction type).
• Perpetual license with annual fee.
• Salesmen & Associated Persons:
• Registration.
• Perpetual license with annual fee.
• Exchanges, Transfer Agents, Clearing and Settlement Agencies: Registration (unless exempt).
• Exemptions: SEC may exempt entities if it is in the public interest and protects investors.

Ethical Standards Rule: Registered individuals must observe high standards of commercial honor, just and equitable principles of
trade, honesty, fairness, diligence, conflict avoidance, and suitability.

Suitability Rule: Broker-dealers, salesmen, and associated persons must have reasonable grounds to believe that their
recommendations are suitable for their customers based on disclosed financial situation, security holdings, and needs.

Prohibition on Misleading Information: Registered individuals cannot publish notices, articles, or communications that falsely report
transactions or quote bid/ask prices.
Reasonable Diligence and Best Market: Individuals must use due diligence to find the best market for the security and execute
transactions in that market for the customer’s benefit.

Independent Directors

• Purpose: To ensure no single director or small group dominates decision-making, and protect company interests over
individual shareholder interests.
• Requirements:
• Issuers of Registered Securities and Public Companies: Minimum of two independent directors or 20% of the
board size, whichever is less.
• Exchanges: Minimum of three independent directors.
• Qualities:
• Independence from management.
• No conflicting business or relationships.
• Ability to exercise independent judgment.
• Ownership of at least one share.
• College graduate or at least 5 years of business experience.
• Integrity, probity, and assiduity.
• Not an officer or employee of the corporation.
• Beneficial security ownership not exceeding 2% of outstanding capital stock.
• Attendance at at least 50% of board meetings.
• Vacancy Filling: Filled by a majority vote of remaining directors after notice to the SEC, within 5 days of the vacancy.

General Principle: The presence of independent directors ensures balanced and unbiased decision-making within the company,
promoting corporate governance and protecting investor interests.

SRC 3: Protecting Investor Interests

This episode delves into various aspects of the Securities Regulation Code (SRC) that focus on protecting investor interests.

I. Tender Offers

• Definition: A publicly announced intention by a person (acting alone or with others) to acquire equity securities of a public
company. It’s an enticing offer to shareholders to tender (submit) their shares for purchase at specified terms.
• Purpose: Typically used for corporate takeovers, allowing the offeror to gain control of the target company.
• Regulation: Designed to prevent misleading information from offerors or target management. Requires extensive disclosure
by the offeror about the offer, which is then sent to shareholders.
• Mandatory Tender Offers: Situations where making a tender offer is required (Sections 19 and its implementing rules).
• 15% Acquisition: Declaration must be filed with the SEC if intending to acquire 15% of equity securities within 12
months.
• 35% Acquisition:
• If acquisition is within 12 months, a contemporaneous tender offer must be made for the percentage sought
to all security holders.
• If acquisition is through the stock exchange, no tender offer is required.
• If acquisition is direct from stockholders, a tender offer for all outstanding voting shares is required.
• Block sale is not allowed before the tender offer is closed.
• 50% Acquisition: Requires a tender offer for all outstanding equity securities at a price supported by a fairness
opinion from an independent financial advisor. All tendered securities must be accepted.
• Exemptions from Mandatory Tender Offers:
 • Purchasing unissued capital stock if the acquisition doesn’t result in 50% ownership or control of the board.
• Purchases from an increase in authorized capital stock.
• Purchases in connection with foreclosure proceedings involving a duly constituted pledge or security arrangement
(made by the debtor or creditor).
• Purchases in connection with privatization by the Philippine government.
• Purchases in connection with corporate rehabilitation under court supervision.
• Purchases in the open market at the prevailing market price.
• Merger or consolidation.
• Voluntary Tender Offers: Issuer (corporation) can buy back its stock if unrestricted retained earnings are available to cover
the amount of shares to be purchased.
• Purpose:
• Implement stock option or stock purchase plan.
• Meet short-term obligations.
• Pay dissenting or withdrawing shareholders.
• Other legitimate corporate purposes.
• Requirements for Filing a Tender Offer:
• Filing a declaration with the SEC.
• Annual report including balance sheet, profit and loss statement, statement of cash flows (certified by a CPA).
• Management discussion and analysis of results of operations.
• Periodical reports for interim fiscal periods.
• Current reports on significant developments of the issuer.
• Other documents required by the SEC.
• Public Announcement of Tender Offer: Any person making a tender offer must publicly announce their intention.
• Period and Manner of Making Tender Offers:
• Period:
• Minimum of 20 business days from commencement (or 10 business days if there are changes in the
percentage sought or consideration offered).
• Completion within 60 business days.
• Payment:
• Offerer must offer the highest price paid for securities in the previous 6 months.
• Securities for payment through transfer or allotment must be valued equitably.
• Withdrawal:
• Security holders can withdraw their securities at any time while the tender offer is open or after 60 business
days.
• Pro-rata basis: If more securities are tendered than the offerer intends to buy, they are accepted on a pro-rata basis.
• Increased Consideration: If the offerer increases the consideration offered, they must pay the increased amount to
all security holders whose securities have been accepted.
• Payment or Return: The offerer must either pay the consideration or return the securities within 10 business days
after the tender offer’s termination or withdrawal.
• Open to All: Tender offers must be open to all security holders of the class.
• Highest Consideration: All security holders must be paid the highest consideration offered.
• Extension: Requires prior clearance from the SEC and a published notice.
• Prohibitions Regarding Insider Trading in Tender Offers:
• Persons in possession of material non-public information cannot buy or sell the issuer’s securities (if they know or
have reason to believe the information is non-public and was acquired directly or indirectly from the tender offerer,
the issuer, or an insider).
• The tender offerer, issuer, and insiders are prohibited from communicating material non-public information to any
other person where such communication is likely to result in insider trading.
• Prohibited Acts in Tender Offers:
• Employing any device, scheme, or artifice to defraud.
 • Making any untrue statement of a material fact or omitting to state a material fact to avoid misleading the public.
• Engaging in any act, practice, or course of business that operates or would operate as fraud or deceit.
• Non-compliance with Tender Offer Requirements: The SEC can nullify the purchase and order a tender offer, subject to
additional sanctions.

II. Proxy Solicitation

• Definition: Any request for a proxy (authorization) from a stockholder to vote on their behalf.
• Regulation:
• Bylaws: Govern the procedure for execution and acceptance of proxies.
• Minimum Formalities: Must comply with the Revised Corporation Code and SRC.
• Proxy Requirements:
• Must be in writing, signed by the stockholder or their representative.
• Filed with the corporate secretary before the scheduled meeting.
• Valid only for the intended meeting and not for more than five years.
• Three-Way Approach to Proxy Solicitation Rules:
• Brief Description: Requires a description of the matters to be considered and the proposed action.
• Mailing: Registrant must mail proxy material to record owners upon request at their expense.
• Fraud Rule: Prohibits materially false or misleading statements.
• Regulation of Proxy Solicitation: Designed to minimize the abuse of proxy devices to prevent self-perpetuation and
irresponsibility of management.
• Validation of Proxies: Must be validated at least five days before the meeting.
• Issuers Must:
• Submit preliminary/definitive information statement, proxy form, and other materials to the SEC for approval at least
15 business days prior to the meeting.
• Transmit approved materials to every security holder of the class entitled to vote.
• Publish any changes within five business days of approval.
• Broker’s Proxy: Requires express written authorization from the customer.
• Prohibitions on Proxies:
• Cannot vote for a person to office if a bonafide nominee is not named in the information statement.
• Cannot vote for more than one meeting unless specifically stated in the information statement.
• Cannot consent to any action not proposed in the information statement.
• False or misleading statements and omissions of material facts are prohibited.
• Other Proxy Matters:
• Blank Proxy: Receiver can fill in the name of their choice.
• Undated Proxy: Date is the postmark or the date of presentation.
• Corporate Proxy: Board resolution or a proxy form executed by a duly authorized officer.
• Cut-off Date: Proxies must be submitted before the cut-off date specified in the bylaws or 10 days before the meeting
if no cut-off date exists.
• Multiple Proxies: Latest proxy submitted takes precedence.
• Alternative Proxies: Alternate can only act if the primary proxy is absent.
• Joint Ownership: Consent of all co-owners is required.
• Endowment/Trust: One owner can appoint a proxy.
• Presumption of Regularity: Proxies with prima facie authenticity are accepted unless challenged.

III. Internal Record Keeping and Accounting Controls

• Corporations Required to Comply:

• Issuers with a registered class of securities.
 • Issuers with a class of securities listed for trading on an exchange.
• Issuers with assets of at least 50 million or such other amount prescribed by the SEC and having 200 or more holders
each holding at least 100 shares of a class of securities.
• Requirements:
• Keep books, records, and accounts that accurately and fairly reflect transactions and dispositions of assets.
• Maintain a system of internal accounting controls to ensure:
• Transactions and asset access are authorized.
• Financial statements conform to generally accepted accounting principles.
• Recorded assets are compared to existing assets at reasonable intervals.

IV. Reporting Requirements for Beneficial Owners, Directors, and Officers

• Requirements:
• Persons owning 10% or more of any class of securities, directors, and officers must file statements with the SEC and
exchange (if applicable).
• File statements within 10 days after becoming a beneficial owner, director, or officer.
• File monthly statements reporting ownership and changes in ownership.
• Notify the SEC if ownership falls below 10% or if they cease to be a director or officer.
• Newly appointed officers must notify the SEC within 10 days.
• Prohibition on Insider Trading:
• Any profit realized from buying and selling securities within six months is recoverable by the issuer if there was unfair
use of information.
• Case can be filed with the RTC within two years of profit realization.
• Prohibition on Sale of Securities:
• It’s unlawful to sell securities without owning them or delivering them within 20 days.
• Failure to deliver or deposit within 5 days requires proof of good faith and undue inconvenience or expense.

V. Margin Trading

• Definition: Purchase of securities using credit from a broker to pay for a portion of the securities.
• Regulation: Prevents excessive use of credit or carrying of securities.
• Margin: Amount of money or securities deposited with a broker to secure a loan.
• Margin Call: Broker demands additional money or securities when the investor’s equity falls below a minimum standard.
• Credit Limit: Not greater than the higher of 65% of the current market price or 100% of the lowest price in the preceding 36
months, but not exceeding 75% of the current market price.
• Purpose: Allows investors to buy more securities than their cash position would allow.

VI. Power of the SEC to Suspend Trading

• Suspension: The SEC can summarily suspend trading of a listed security or all trading on a securities exchange if it’s necessary
for investor protection or the public interest.
• Duration:
• Maximum of 30 days.
• Up to 90 days with Presidential approval.
• Procedure:
• SEC must notify the issuer and give them an opportunity to be heard before lifting the suspension.

VII. Trust Fund for Investor Compensation

• Purpose: Compensate investors for extraordinary losses due to business failure, fraud, or mismanageme
Notes on RCCP Title IX: Merger and Consolidation
Introduction:

• This lecture covers Title IX of the Revised Corporation Code of the Philippines (RCCP), focusing on merger and consolidation of
corporations.
• The speaker uses two primary sources:
• “Partnerships and Private Corporations” by Leon and Leon Jr.
• “The Revised Corporation Code of the Philippines: A Short Introduction” by Aquino and Aquino

Forms of Corporate Combinations:

1. Sale of Assets:

• One corporation sells all or substantially all of its assets to another.

• This often leads to the dissolution of the vendor corporation, but not always.
• General Principle: Mere sale of all property does not automatically dissolve a corporation.
• Exception: Possession of property is not essential for corporate existence, meaning a corporation can continue to
exist even after selling all its assets.

2. Lease of Assets:

• One corporation leases its property to another.

• The lessor corporation becomes the “lesser” corporation, receiving rentals from the lessee.
• Similarity to Sale: Similar to sale, but ownership does not transfer to the lessee.

3. Sale of Stock:

• One corporation (the “holding company” or “parent company”) acquires a controlling amount of stock in another
corporation (the “subsidiary company”).
• The holding company gains control over the subsidiary.

4. Merger:

• Two or more corporations unite, with one retaining its corporate existence and absorbing the others.
• Process: Corporation A + Corporation B = Corporation A or Corporation B (depending on the agreement)
• Key Terms:
• Merged Corporation: The dissolved corporation (e.g., A)
• Merging/Surviving Corporation: The continuing corporation (e.g., B)
• Effectivity: Merger becomes effective upon the issuance of a Certificate of Merger by the Securities and Exchange
Commission (SEC).

5. Consolidation:

• Two or more corporations unite to form a completely new corporation.

• Process: Corporation A + Corporation B = Corporation C
• Key Terms:
• Original/Constituent Corporations: A and B, which are dissolved.
• Dissolved Corporations: A and B, after the consolidation.
• Consolidated Corporation: The newly created corporation (C).
 • Effectivity: Consolidation becomes effective upon the issuance of a Certificate of Consolidation by the SEC.

Procedure for Merger and Consolidation:

1. Plan of Merger or Consolidation:

• Drafted and approved by the board of directors of each constituent corporation.

• Approved by a majority vote of both boards.
• Dissenters have appraisal rights (discussed in Title X).
• Required Contents:
• Names of constituent corporations
• Terms of merger/consolidation and implementation methods
• Changes to articles of incorporation (for surviving corporation in merger)
• Statements required for articles of incorporation of the consolidated corporation (for consolidation)

2. Stockholders/Members Approval:

• Separate meetings for each constituent corporation.

• Notice given to all stockholders/members.
• Notice must include:
• Plan of merger/consolidation
• Meeting agenda (proposed merger/consolidation)
• Required Vote: Affirmative vote of stockholders representing two-thirds of the outstanding capital stock, or two-
thirds of the members.
• Amendments: Any amendment to the plan requires approval by both boards and a two-thirds vote of
stockholders/members of each constituent corporation.

3. Articles of Merger or Consolidation:

• Formal contract executed by corporate officers of each constituent corporation.

• Signed by the president or vice president, certified by the secretary or assistant secretary.
• Contents:
• Plan of merger/consolidation
• Outstanding shares (for stock corporations) or number of members (for non-stock corporations)
• Number of shares/members voting for and against the plan
• Carrying amounts and fair values of assets and liabilities
• Accounting method used for merger/consolidation
• Pro forma values
• Other information prescribed by the SEC

4. Submission to SEC:

• Articles of merger/consolidation, along with accompanying documents, are submitted to the SEC for approval.
• Required Documents:
• Resolutions of boards and stockholders/members approving merger/consolidation.
• Audited financial statements.
• Amended articles of incorporation and bylaws (for surviving corporation in merger, or consolidated
corporation in consolidation).
• List of creditors.
• Hearing: The SEC may conduct a hearing if there is reason to believe the proposed merger/consolidation is illegal.
Notice is provided to corporations.
 5. Certificate of Merger or Consolidation:

• The SEC issues a certificate upon approval, marking the effective date of the merger/consolidation.
• Effectivity: This is when the constituent corporations cease to exist, and the surviving or consolidated corporation
assumes their rights, privileges, and liabilities.

Effects of Merger and Consolidation:

• Single Corporation: The constituent corporations become a single entity:

• Merger: Surviving corporation
• Consolidation: Consolidated corporation
• Dissolution: The constituent corporations cease to exist as separate entities.
• Transfer of Rights and Liabilities: The surviving or consolidated corporation acquires:
• Rights, privileges, immunities, and powers of the constituent corporations.
• Franchises of the constituent corporations.
• Property (real and personal), receivables, and interests of the constituent corporations.
• Liability: The surviving or consolidated corporation is responsible for all liabilities and obligations of the constituent
corporations.