The Professional CPA Review School

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BUSINESS LAW ATTY. MARY ANN SAGANA

LECTURE AID CORPORATIONS

CORPORATION
- Artificial being created by operation of law having the right of succession, and the powers, attributes
and properties expressly authorized by law and incident to its existence.

Attributes of a corporation:
1. It is an artificial being.
2. It is created by operation of law.
3. It enjoys the right of succession.
4. It has the powers, attribute and properties expressly authorized by law or incident to its existence.

Consequences of a corporation as an artificial being:

a. has a personality separate and distinct from the stockholders/members
b. may acquire and possess properties
c. can sue and be sued upon
d. can be adjudged insolvent although the SH/M are solvent
e. can incur obligations
f. can enter into contracts

Tests to determine nationality/citizenship of a corporation:

1. Incorporation test place of creation regardless of the citizenship of Stockholders
2. Control test citizenship of controlling Stockholders
3. Business domicile test/ Center of Management Theory place of domicile/principal office

Advantages of forming a Disadvantages of forming a

corporation corporation
1. Capacity to act as a legal entity 1. Subject to greater governmental
control
2. Continuity of life 2. Frequent and varied reports are
required
3. The liability of the stockholders 3. Cannot engage in any other
for the debts of the corporation is business other than the business
limited to their fully paid investment specified in the Articles of
in the corporation Incorporation

4. There is better management as 4. Minority stockholders may be at

the best service may be extracted the mercy of majority stockholders
from the bigger membership of a
corporation
5. There is more unified form of 5. Cannot transact business in
control which is reposed in the another state unless it obtains a
BOD license for that purpose
6. Transferability of shares without 6. OCS cannot be more than the
consent of the other stockholders ACS
7. There is greater source of capital 7. Double taxation is involved
8. Credit is limited on account of
limited liability of stockholders
9. Greater possibility of abuse of
power

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Filipino ownership requirement in certain corporations:
1. 60% Filipino owned:
a. Public utilities
b. Educational institutions (except if established by religious orders or charitable org.)
c. Exploitation of natural resources
d. Coastwise shipping
e. Civil aeronautics
f. Financing companies
g. Atomic energy
2. 70% Filipino owned:
a. Savings and loan associations (voting stocks)
b. Banking institutions (voting stocks)
c. Advertising firms
d. Pawnshops
3. 75% Filipino owned:
a. cottage industries
4. 100% Filipino owned:
a. Mass media
b. Security agencies
c. Rural banks
d. Retail trade
e. Rice and corn industry

Classes of corporation:
1. AS TO ORGANIZERS
a. public - by State only; and
b. private - by private persons alone or with the State.

2. AS TO FUNCTIONS
a. public - governmental and other functions; and
b. private - usually for profit-making functions

3. AS TO GOVERNING LAW
a. public - Special Laws; and
b. private - Law on Private Corporations

4. AS TO LEGAL STATUS
a. de jure corporation - organized in accordance with the requirements of law

b. de facto corporation - a corporation where there exists a flaw in its incorporation. Its
existence cannot be inquired collaterally. Such inquiry may be
made by the Solicitor General in a quo warranto proceeding.

REQUISITES OF DE FACTO CORPORATION:

1. The existence of a valid law under which it may be incorporated;
2. An attempt in good faith to incorporate;
3. Use of corporate powers; and
4. Issuance of certificate of incorporation by the SEC as a minimum
requirement of continued good faith.
c. corporation by estoppel - groups of persons which holds itself out as a corporation
and enters into a contract with a 3rd person on the strength of
such appearance. It cannot be permitted to deny its existence in
an action under said contract.

d. corporation by prescription - body that though not lawfully organized as a

corporation, has been duly recognized by immemorial usage as
a corporation, with rights and duties maintainable at law.

5. AS TO EXISTENCE OF SHARES OF STOCK

a. stock corporation - a corporation in which capital stock is divided into shares and is
authorized to distribute to holders thereof of such shares dividends or
allotments of the surplus profits on the basis of the shares held.

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 b. Non-stock corporation does not issue stocks and not distribute dividends to their
members, for public good and welfare.

6. AS TO RELATIONSHIP OF MANAGEMENT AND CONTROL

a. holding corporation - it is one which controls another as a subsidiary by the power to
elect management. It is one which holds stocks in other companies for
purposes of control rather than for mere investment. It has a passive portfolio
merely holding securities for control and management, as distinguished
from an active investment policy which has an active portfolio buying and
selling securities.

TWO KINDS OF SUBSIDIARIES

1. Majority owned subsidiary where one corporation owns 51%-94% of the
capital stock of another corporation.
2. Wholly owned subsidiary where one corporation holds 95% to 100% of
the capital stock of another corporation.

b. affiliates - company which is subject to common control of a mother holding

company and operated as part of the system.

c. parent and subsidiary corporation - separate entitles with power to contract with
each other. The board of directors of the parent company determines its
representatives to attend and vote in the stockholder's meeting of its subsidiary.
The stockholders of the parent company demand representation in the board
meetings of its subsidiary. The board of directors of the parent or holding
company has the prerogative to choose its nominees in the board of directors
or its subsidiary.

7. AS TO PLACE OF INCORPORATION
a. Domestic corporation - corporation formed, organized or existing under Philippine
laws
b. Foreign Corporation - a corporation formed, organized or existing under any laws
other than those of the Philippines and whose laws allow Filipino citizens and
corporation to do business in its own country or state.

8. OTHER CORPORATIONS:
a Close Corporation
b. Open corporation
c. educational corporation
d. ecclesiastical(religious)
1. corporation sole
2. religious societies
e. lay corporation
f. eleemosynary corporation
g. civil corporation
h. trading corporation
i. tramp corporation
j. wasting assets corporation
k. quasi - corporation
l. quasi-public corporation

Components of a corporation:
1. incorporators
2. corporators
3. stockholders and members
4. promoter
5. board of directors
6. executive committee
7. officers of the corporation
8. subscriber
9. underwriter

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INCORPORATORS
- They are those mentioned in the articles of incorporation as originally forming and
composing the corporation, having signed the articles and acknowledged the same
before a notary public. They have no power beyond those vested in them by the
statute.
- Only natural persons can be incorporators except when otherwise allowed by law as in the
case of incorporated cooperative which are allowed to be incorporators of rural banks.

Number and qualifications of incorporators:

1. natural person
2. not less than 5 but not more than 15
3. of legal age
4. majority must be resident of the Philippines
5. each must own or subscribe to at least one share

INCORPORATORS CORPORATORS
1. signatories to Articles of 1 stockholder of stock corporation
Incorporation or member of non-stock
corporation
2. do not cease to be as such 2. cease to be as such if they are
no longer stockholders
3. number is limited 5-15 3. no restriction as to number
4. must have contractual capacity 4. may be such through guardian

EXECUTIVE COMMITTEE: composed of at least 3 BOD

Acts that cannot be delegated to the Executive Committee:
1. approval of any action where the approval of the SH is also required
2. Filling vacancies in the Board
3. Adoption, Repeal or Amendment of by-laws
4. Amendment or Repeal of any Board Resolution
5. Declaration and distribution of cash dividends

SUBSCRIBER: -one who has agreed to take stock from the corporation on the original issue of
such stock

UNDERWRITER: - a person who promises, (with an underwriter agreement entered into before
the corporate shares are brought before the public) to subscribe and take the
stocks in the event the stocks will be offered to the public and will not be
subscribed.

CHARTER: the instrument granting the right and privilege to the corporation to be and act as
such.

FRANCHISE: the privilege itself to act as a corporation.

FRANCHISES OF CORPORATION
1. PRIMARY FRANCHISE - the franchise to exist as a corporation.
2. SECONDARY FRANCHISE - right or privilege conferred upon existing corporation,
such as to use the streets of a municipality to lay pipes or tracks, or operate a
messenger and express delivery service.

Steps in the creation of a corporation:

1. Promotion
2. Incorporation
a. Drafting and execution of the Articles of Incorporation by the incorporators
b. Filing of the Articles and all the necessary attachments with the Securities and
Exchange Commission (SEC)

Attachments:
1. Treasurers affidavit
2. Statement of assets and liabilities
3. Certificate of bank deposit

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 4. Certificate as to the name of the corporation
5. Certificate of authority form the Monetary Board of the Central Bank
in cases of banking corporation
c. Payment of the filing and publication fees
d. Issuance by the SEC of the certificate of incorporation if all the papers filed after
verification and examination, are found in order.
3. Formal organization and commencement of business operations (w/in 2 yrs. after COI)
EFFECTS OF NON-USE OF CORPORATE CHARTER AND CONTINUOUS
INOPERATION OF CORPORATION:
1. NON-USER FOR 2 YEARS - when the corporation does not fully organize and
commence the transaction of its business or the construction of its works within 2 years
from the date of its incorporation, its corporate powers cease and the corporation shall
be deemed dissolved.

2. NON-USER FOR 5 YEARS - when the corporation has commenced the transaction of
its business but subsequently becomes continuously inoperative for a period of at least 5
years EXCEPT if reason for non-use or in operation is beyond the control of the
corporation.

CONTENTS OF ARTICLES OF INCORPORATION:

1. name of corporation
LIMITS ON THE USE OF CORPORATE NAME
a. Names which are identical, deceptively or confusingly similar to that of any
existing corporation;
b. name already protected by law;
c. name which is patently deceptive, confusing or contrary to existing laws
2. purpose/s indicating the primary and secondary purposes
3. place of principal office
4. duration
CORPORATE TERM - 50 years which may be subject to extension for another 50
years by amendment of the Articles of Incorporation

SHORTENING of corporate term:

- refers to the dissolution of a corporation prior to the expiration of its terms as fixed
in the articles of incorporation
- formal not mere written assents, and procedural requirements of the Corporation
Code must be followed
EXTENSION of corporate term:
- refers to the continuation of a corporation beyond the term originally fixed in the
articles of incorporation
Requisites for extension of term:
a. The extension cannot be made earlier than five (5) years prior to the
original or subsequent expiry date unless warranted by a justifiable
reason to be determined by the SEC- for evaluation purposes.
b. There can be no more extension after the expiration of the corporate term
of existence because there is no more corporate life to extend and
promote in such case.
c. It should be approved by 2/3 of the outstanding capital stock.
5. names, citizenship and residences of incorporators
6. number, names, citizenship and residences of directors
7. if stock corporation, amount of capital stock, number of shares and in case of par value
stock corporations, the par value of each share
8. names, residences, number of shares and amounts of subscription of subscribers, which
shall not be less than 25% of the authorized capital stock
9. names, residences, and amount paid by each subscriber on their subscription, which
shall not be less than 25% of total subscription

10. name of treasurer elected by subscribers

11. if the corporation engages in a nationalized industry, a statement that no transfer of stock
will be allowed if it will reduce the stock ownership of Filipinos to a percentage below
the required legal minimum.
12. Acknowledgement
13. Treasurers affidavit

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AMOUNT OF CAPITAL STOCK TO BE SUBSCRIBED AND PAID FOR PURPOSES OF
INCORPORATION
- 25% of ACS must be subscribed at time of incorporation
- 25% of total subscription must be paid upon subscription but must not be less than
P5,000

CALL - Declaration officially made by the corporation usually in the form of a resolution of the BOD
requiring payment of unpaid subscription
Elements of a valid call:
1. It must be in a manner prescribed by law
2. It must be made by the BOD
3. It must be uniform in operation
Call is not necessary if:
a. Corporation is insolvent
b. Subscription is payable on a specified date, or by installment at a specified
time

VALID CONSIDERATIONS IN SUBSCRIPTION AGREEMENT:

1. Cash
2. Property
3. Labor or service actually rendered to the corporation
4. Prior corporate obligations
5. Amounts transferred from unrestricted retained earning to stated capital
6. Outstanding shares in exchange for stocks in the event of reclassification or conversion.
IMPORTANT: shares of stock shall not be issued in exchange for promissory notes or future
services. But may be issued for checks and other bill of exchange.

DELINQUENT STOCK - stock which was not paid within 30 days from the date fixed in the contract of
subscription or from the date stated in the call made by the BOD
Effects:
1. Delinquent stocks shall be subject to delinquency sale
2. The stock shall not be voted or be entitled to vote or to representation at any stockholders
meeting
3. The holder thereof shall not be entitled to any of the rights of a stockholder except the right
to dividends, but the corporation has the right:
a. to apply cash dividends due to the unpaid balance on the unpaid subscription plus
cost and expenses
b. to withhold stock dividends until the unpaid subscription is fully paid

WHAT CANNOT BE AMENDED IN THE ARTICLES OF INCORPORATION

Those matters referring to facts existing as of the date of incorporation such as:
1. names of incorporators
2. names of original subscribers to the capital stock of the corporation and their
subscribed and paid up capital
3. treasurer elected by the original subscribers
4. members who contributed to the initial capital of a non-stock corporation
5. date and place of execution of the articles of incorporation
6. witnesses, to and acknowledgment of the articles.

ELEMENTS OF A VALID BY-LAWS:

1. Must not be contrary to existing law nor inconsistent with the Code, else they have no
binding effect;
2. Must not be contrary to morals and public policy
3. Must not impair contractual obligations
4. Must be general and uniform
5. Must be consistent with the charter or articles of incorporation
6. Must be reasonable, not arbitrary or oppressive.
Reasonableness depends upon:
a. Facts and circumstances of the case
b. Nature, Purpose, Object of the corporation
c. Whether or not it is within the corporation's power of adoption

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 d. The relation which the person raising the question sustains to the corporation, i.e.
whether he is a stockholder or member or stranger to the corporation.

IMPORTANT:
1. The by-laws may be filed with the articles of incorporation and should be approved and
signed by the incorporators
2. The by-laws may also be filed 1month after the issuance of the certificate of incorporation
and should be approved by majority of the OCS
3. Amendment of the BL should be by vote of majority of OCS and majority of BOD
4. Delegation of power to the BOD to amend or repeal the BL or adopt a new BL - 2/3 votes of
OCS
5. Revocation of the power majority votes of the OCS

BINDING EFFECTS OF BY-LAWS:

1. AS TO MEMBERS AND CORPORATION
- They have the same force and effect as the provisions of the charter and articles of
incorporation. They have the force of contract between the members themselves.
- They are binding only upon the corporation adopting them and on its members and
those having direction, management and control of its affairs.

2. AS TO THIRD PERSONS
- Strangers are not bound to know the laws which are merely provisions for the
government of a corporation and notice to them will not be presumed.

ARTICLES OF INCORPORATION BY-LAWS

1. It is essentially a contract 1. It is more of a rule for the internal
between the corporation and the government of the corporation but has
stockholders/ members; between the force of a contract between the
the stockholders/ member inter se, corporation and the stockholders/
and between the corporation and members, and between the
the State; hence must be stockholders and members;
notarized themselves;
2. It is executed before 2. It is usually executed after the
incorporation incorporation although Sec. 46 allows
simultaneous filling of the two;

3.It is a condition precedent in the 3. It is a condition subsequent

acquisition of corporate existence;

4. It is amended by a majority of 4. It may be amended by a majority

the directors/ trustees and vote of the BOD and majority vote of
stockholders representing 2/3 of outstanding capital stock or a majority
the outstanding capital stock, or of the member in non- stock
2/3 of the members incase of non- corporation
stock corporations
5. Power to amend/repeal articles 5. Power to amend or repeal by-laws
cannot be delegated by the or adopt new by-laws may be
stockholders/members to the delegated by the 2/3 of the outstanding
board of directors/ trustees. capital stock or 2/3 of the members in
the case of non- stock corporation.

BOARD OF DIRECTORS/TRUSTEES/OFFICERS:
- The board of directors or trustees conducts all the business and controls and holds all the
property of the corporation but the task of actual management and carrying on the details
of business operations are delegated by it to administrative officers over whom it exercises
supervision;
- Generally composed of not less than five (5) but not more than 15 members elected from the
stockholders, or where there is no stock, from the members of the corporation;
- It elects, in turn, the administrative officers of the corporation such as the president,
treasurer, secretary, and such other officers as may be provided for in the by-laws;
- The directors or trustees are elected to hold office for one (1) year and until their successors
are elected and qualified;

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 - The directors of a stock corporation are elected by cumulative voting
CUMULATIVE VOTING - Shareholders, being entitled to that number of votes that his number
of shares multiplied by the number of directors to be elected will
bring, may give all said votes to one candidate or he may
distribute them among as many candidates as he sees fit.

- The directors or trustees must act as a board in order to bind the corporation by their acts.
Exceptions:
a. where the directors are themselves the sole stockholders;
b. where the contract is entered into by a corporate officer (e.g., general manager)
authorized by the board of directors;
c. where the transaction is ratified at a subsequent board meeting;
d. where all the stockholders or trustees consent; or
e. where the corporation is guilty of estoppel;
- The directors or trustees cannot delegate discretionary powers vested exclusively in them
by law, or by the by-laws, or by the vote of the stockholders or members, or are especially
delegated to them, like the delegated power to adopt or amend the by-laws;
- The directors or trustees cannot validly act by proxy as they are required to exercise their
personal judgment;
- The directors are agents of the corporation and they occupy fiduciary relation
- The qualifications, duties, and compensation of directors or trustees are those prescribed by
the law or by the by-laws.
Qualifications of a director:
Stock corporations:
1. Every director must own at least one (1) share of the capital stock;
2. The share of stock held by the director must be registered in the books of the corporation;
3. Every director must continuously own at least a share of stock during his term, otherwise,
he shall automatically cease to be a director; and
4. A majority of the directors must be residents of the Philippines.
Non-stock corporations:
1. Trustees must be members
2. Majority must be residents of the Philippines

Additional qualifications:
1. Under special laws, citizenship may be required.
a. Rural Banks BOD 100% Filipino citizens
b. Private development bank - BOD 100% Filipino citizens
c. Registered investment company - BOD 100% Filipino citizens
d. Domestic bank banking institutions and common carriers - BOD 2/3 Filipino citizens
2. No person convicted by final judgment of an offense punishable by imprisonment for a
period exceeding six (6) years, or a violation of the Code, committed within five (5) years
prior to the date of his election or appointment, shall qualify as a director, trustee or
officer of any corporation.

Corporate Officers:
1. President who shall be a director
2. Treasurer who may or may not be a director
3. Secretary who shall be a resident and citizen of the Philippines
4. Such other officers as may be provided in the by-laws
Note: the president cannot be a secretary or a treasurer at the same time

Three-fold duty of a director:

1. Duty of Obedience
2. Duty of Diligence
3. Duty of Loyalty

MEETINGS
Requisites:
1. It must be held at the proper place
2. It must be held at the stated date and at the appointed time or at a reasonable time
thereafter
3. It must be called by the proper person

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 4. There must be a previous notice
5. There must be a quorum.
Person who can call a meeting:
1. The person or persons designated in the by-laws
2. In the absence of such provision, a director/trustee or an officer entrusted with the
management of the corporation, unless otherwise provided by law
3. Stockholder or member authorized by the SEC whenever for any cause, there is no
person authorized to call a meeting
4. The special meeting for the removal of directors or trustees may be called by the
secretary of the corporation or by a stockholder or member.

- The president shall preside at all meetings of directors or trustees and of the stockholders
or members, unless otherwise provided in the by-laws.

Meetings of stockholders or members:

a. Regular or those held annually on a date fixed in the by-laws, or if not so fixed, on any
date in April of every year as determined by the board of directors or trustees
b. Special or those held at any time deemed necessary or as provided in the by-laws.
VENUE - in the city or municipality where the principal office of the corporation is
located and if practicable, in the principal office of the corporation.

Meetings of directors or trustees:

a. Regular or those held by the board monthly, unless the by-laws provide otherwise
b. Special or those held by the board at any time upon the call of the president or as
provided in the by-laws.
VENUE - anywhere in or outside the Philippines, unless the by-laws provide otherwise

Votes required for the approval of certain corporate acts:

1. To amend the articles of incorporation
a majority of the board of directors or trustees and vote or written assent of 2/3
of the outstanding capital stock or of the members.
2. To elect directors or trustees
a majority of the outstanding capital stock or of the members
3. To call a special meeting to remove directors or trustees
a majority of the outstanding capital stock or of the members
4. To remove directors or trustees
2/3 of the outstanding capital stock or of the members
5. To ratify a contract of a director/trustee or officer with the corporation
2/3 of the outstanding capital stock or of the members
6. To extend or shorten corporate term
a majority of the board of directors or trustees and 2/3 of the outstanding capital
stock or of the members
7. To increase or decrease the capital stock
a majority of the board of directors and 2/3 of the outstanding capital stock
WAYS OF INCREASING THE CAPITAL STOCK:
1. by increasing the number of shares and retaining the par value;
2. by changing the par value of existing shares without increasing the number of shares;
3. by increasing the number of shares and increasing the par value.
8. To incur, create or increase bonded indebtedness
a majority of the board of directors or trustees and 2/3 of the outstanding capital stock
or of the members.
9. To sell, lease, exchange, mortgage, pledge or other- wise dispose of all or substantially all of the
corporate assets
a majority vote of the board of directors or trustees and 2/3 of the outstanding capital
stock or of the members.
10. To invest corporate funds in another corporation or business or for any purpose other than the
primary purpose
a majority of the board of directors or trustees and 2/3 of the outstanding capital stock
or of the members
11. To issue stock dividends
a majority of the quorum of the board of directors and 2/3 of the outstanding capital
stock. The approval of the stockholders is not required with respect to other dividends
such as cash and bond dividends.
12. To enter into a management contract

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 a majority of the quorum of the boards of directors or trustees and a majority of
outstanding capital stock or of the members of both the managing and the managed
corporations and, in some cases, 2/3 of the total outstanding capital stock entitled to
vote or of the members, with respect to the managed corporation
13. To adopt by-laws
a majority of the outstanding capital stock or of the members.
14. To amend or repeal the by-laws or adopt new by-laws
a majority of the board of directors or trustees and of the outstanding capital stock or of
the members
15. To delegate to the board of directors or trustee the power to amend or repeal the by-laws or adopt
new by- laws
2/3 of the outstanding capital stock or of the members.
16. To revoke the preceding power delegated to the board of directors or trustees
a majority of the outstanding capital stock or of the members
17. To fix the issued price of no par value shares
a majority of the quorum of the board of directors if authorized by the articles of
incorporation or in the absence of such authority, by a majority of the outstanding
capital stock
18. To effect or amend a plan of merger or consolidation
a majority of the board of directors or trustees and 2/3 of the outstanding capital stock
or of the members of the constituent corporations.
19. To dissolve the corporation
a majority of the board of directors or trustees and 2/3 of the outstanding capital stock
or of the members.

20. To adopt a plan of distribution of assets of a non-stock corporation

a majority vote of the board of trustees and 2/3 of the members having voting rights.

POWERS OF A CORPORATION
1. Express granted by law, Corporation Code and its Articles of Incorporation or Charter
2. Inherent / Incidental Powers - expressly stated but are deemed to be within the capacity of corporate
entities
3. Implied / Necessary - exists as a necessary consequence of the exercise of the express powers of
the corporation or the pursuit of its purposes as provided for in the Charter

EXPRESS CORPORATE POWERS AND CAPACITY:

1. To sue and be sued
2. Succession
3. To adopt and use corporate seal
4. To amend the Articles of Incorporation
5. To adopt by-laws
6. Stock corporations - issue and sell stocks to subscribers and treasury stocks
Non-stock corporations admit members
7. Purchase, receive, grant, take or deal real property, personal property, securities and bonds
8. To enter into merger or consolidation
9. To make reasonable donations for:

a. public welfare
b. hospital
c. charitable
d. cultural
e. scientific
f. civic
g. other similar purposes

10. Establish pension, retirement and other plans for the benefit of directors, trustees, officers and
employees
11. Other powers essential or necessary to carry out its purpose

Restrictions on the power to make donations:

1. The donation must be reasonable otherwise it would be tantamount to a conversion of
corporate funds
2. That it must not be in aid of any political party or candidate
3. That it must not be for purposes of partisan political activity

OTHER EXPRESS POWERS:

1. Power to extend or shorten corporate term
2. Increase/decrease corporate stock
3. Incur, create bonded indebtedness
4. Sell, dispose, lease, encumber all or substantially all of corporate assets
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 5. Purchase or acquire own shares provided:
a. there is an unrestricted retained earnings
b. for legitimate purpose
c. done in good faith
d. w/o prejudice to creditors and SH
6. Invest corporate funds in another corporation or business for other purpose other than primary
purpose
7. Power to declare dividends out of unrestricted retained earnings
8. Enter into management contract
9. Power to deny pre-emptive rights

Management contract
- one entered into between two corporations whereby one corporation undertakes to manage all
or substantially all of the business of the other corporation for certain period of time, whether
such be a service contract, operating agreement or otherwise.
- should not be longer than 5 yrs.

RULE : a corporation cannot enter into a partnership contract except:

1. when authorized by its charter
2. when temporary and for accomplishment of some particular purpose only
3. when the entire management of the business will be reserved to the corporation

ULTRA VIRES ACT

- an act which is not within the express, implied, and incidental powers of a corporation
EFFECTS:
2. Contract is illegal per se. It is wholly void and cannot be ratified.
3. Contract is not illegal per se. It is merely beyond the power of a corporation:
a. Executory on both sides. It cannot be enforced by either party thereto
b. Fully executed on both sides. Neither party can maintain an action to set aside the
transaction or to recover what has been parted with; and
c. Executory on one side and fully executed on the other.
1. Courts permit recovery on behalf of the latter;
2. There are instances when the courts hold the contract unenforceable, but
compel the party who has received the benefits of performance to return
what he has received, or in default thereof, to pay its reasonable value.

AUTHORIZED CAPITAL STOCK OR CAPITAL STOCK OR LEGAL STOCK OR STATED CAPITAL - the
amount fixed by the corporate charter to be subscribed and paid in cash, kind or property at the organization of
the corporation or afterwards and upon which the corporation is to conduct its operation.

SHARES OF STOCK - interest or right which owner has in the management of the corporation, and its surplus
profits, and, on dissolution, in all of its assets remaining after the payment of its debt.

CERTIFICATE OF STOCK - written acknowledgement by the corporation of the stockholders interest or right in
the corporation and its property.

WORKING CAPITAL - excess of current assets over current liabilities.

CIRCULATING CAPITAL - refers to the total amount of current assets.

DIVIDENDS unrestricted retained earnings set apart from the general mass of funds of the corporation and
distributed among the shareholders in proportion to their shares or interest in the corporation, in the form of
case, property or stocks.
Requisites for declaration of dividends:
1. Surplus profits
2. Original and unissued shares in case of stock dividends
3. Declared by the BOD and necessary vote of the SH

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Kinds of Dividends:
1. Cash
2. Property
3. Stock
4. Optional
5. Composite
6. Scrip
7. Bond
8. Liquidating
9. Cumulative

SHARE OF STOCK CERTIFICATE OF STOCK

1. unit of interest in a corporation 1. Evidence of the holder's ownership of the
stock and of his right as a shareholder and
of his extent specified therein.

2. it is an incorporeal or intangible 2. It is concrete and tangible

property

3. it may be issued by the corporation 3. It may be issued only if the subscription is

even if the subscription is not fully paid. fully paid.

4. Situs is generally the state where 4.The situs may be the place where it is
the corporation has its domicile located or at the domicile of the owner
even though the domicile of the owner,
except when corporation is dominated
elsewhere.

CLASSIFICATION OF SHARES:
1. PREFERRED SHARES - issued with par value and preference may be to
a. assets after dissolution
b. distribution of dividends and other preferences;
Kinds of Preferred shares:
1. CUMULATIVE PREFERRED SHARES - which entitle the holder thereof to payment
of current dividends as well as dividends in arrears.
2. NON-CUMULATIVE - which entitle the holder thereof only to the payment of current
and not past dividends.
3. PARTICIPATING - which entitle the holder thereof to participate with the holders of
common shares after their preferred rights has been satisfied.
4. NON-PARTICIPATING - which entitle the holder to payment of the stipulated
preferred dividends and no more.
5. CUMULATIVE-PARTICIPATING which entitle the holder thereof to payment of
dividends in arrears, and also after receiving his preferred shares of dividends, to
participation with the holders of common stock in the remaining profits.

2. REDEEMABLE SHARES - are those which permit the issuing corporation to redeem or purchase its
own shares.

Limitations on the issuance:

1. Redeemable shares may be issued only when expressly provided for in the articles of
incorporation
2. The terms and conditions affecting said shares must be stated both in the articles of
incorporation and in the certificate of stock representing such share.
3. Redeemable shares may be deprived of voting rights in the articles of incorporation,
unless otherwise provided in the Code.

3. TREASURY SHARES - shares which have been earlier issued as fully paid and have thereafter been
acquired by the corporation by purchase, donation, redemption or
through some lawful means.

RULES:
1. If purchased from the stockholders - the transaction in effect is a return to the
stockholders of the value of their investment in the company and a reversion of
the shares to the corporation. The corporation must have surplus profits with
which to buy the shares so that the transaction will not cause an impairment of
the capital.

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 2. If by donation from the stockholders - the act would amount to a surrender of their
stock without getting back their investments which are instead, voluntarily given
to the corporation.
NOTE: Treasury shares are not entitled to dividends and are not part of
the OCS
4. FOUNDER'S SHARE
5. NON-VOTING SHARES
6. VOTING SHARES
7. COMMON SHARE - is the basic class of stock ordinarily and usually issued without extraordinary
rights and privileges and the owners thereof are entitled to a pro rata share in
the profits of the corporation and in its assets upon dissolution and likewise in
the management of its affairs without preference or advantage whatsoever.

8. PROMOTERS SHARES/PROMOTION STOCK - are those issued by mining corporations to owners

of mines who transferred their mining rights to such corporations or they are
shares issued to promoters of a corporation.

9. ESCROW STOCK - deposited with 3rd person to be delivered to stockholder or his assign after
complying with certain conditions, usually payment of full subscription price;

10. OVER-ISSUED STOCK - are those issued in excess of the authorized capital stock.

11. WATERED STOCK - issued as fully paid when in fact it is not water in the stock- represents the
difference between the fair market value at the time of the issuance of the
stock and the par or issued value of said stock. Both par and no-par stocks can
thus be watered stocks.

12. PAR VALUE SHARES- value is fixed in the articles of incorporation

13. NO PAR VALUE SHARES- shares having no par value but have issued value stated in the articles
of incorporation or to be fixed by the Board of Directors
Limitations in the issuance:
1. No par value shares cannot have an issued price of less than P5.00 while the par value
of a share can be as low as 1 cent.
2. The entire consideration for its issuance constitutes capital so that no part of it should be
distributed as dividends.
3. They cannot be issued as preferred stocks.
4.They cannot be issued by banks, trust companies, insurance companies, public utilities
and building and loan association.
5. The articles of incorporation must state the fact that it issued no par value shares as well
as the number of said shares.
6. Once issued, they are deemed fully paid and non-assessable.
14. DEBENTURE - charged on the net earning and profit of the corporation.

15. DEFERRED SHARES -are those which are entitled to dividends after the payment of holders of
common share.
16. STOCK WARRANT - security which entitle holder the right to subscribe to, or purchase from, the
unissued capital stock of a corporation in the future.

17. SCRIP - applied to certificates issued by trustee in a voting trust.

18. STREET CERTIFICATE - stock certificate endorsed by the registered holder in blank and transferee
can command its transfer to his name from the issuing corporation. The certificate
may be transferred by mere delivery.

REACQUISITION BY CORPORATION OF ITS STOCK:

1. to eliminate fractional shares;
2. to compromise an indebtedness arising out of unpaid subscription;
3. to purchase delinquent shares; and
4. to exercise its right of appraisal.

RIGHTS OF STOCKHOLDERS:
1. DIRECT OR INDIRECT PARTICIPATION IN MANAGEMENT
a. voting rights
Limitations:
1. Where the articles of incorporation provides for classification of shares pursuant to Sec. 6
of the Corporation Code, non-voting shares are not entitled to vote except as
provided for in the last paragraph of Sec. 6.
MATTERS WHERE HOLDERS OF NON-VOTING SHARES MAY VOTE:
1. amendment of Articles of Incorporation;
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 2. adoption and amendment of by-laws;
3. increase or decrease of bonded indebtedness;
4. increase or decrease of capital stock;
5. sale or disposition of all or substantially all of corporate property;
6. merger or consolidation of corporation;
7. investments of funds in another corporation or another business
purpose; and
8. corporate dissolution.
2. Preferred or redeemable shares may be deprived of the right to vote unless otherwise
provided in the Code
3. Fractional shares of stock cannot be voted unless they constitute at least one full share.
4. Treasury shares have no voting rights as long as they remain in the treasury
5. Holders of stock declared delinquent by the board of directors for unpaid subscription are
not entitled to vote or a representation at any stockholder's meeting.
6. A transferee of stock cannot vote if his transfer is not registered in the stock and transfer
book of the corporation
b. right to remove directors
2. PROPRIETARY RIGHTS
a. right to dividends:
b. appraisal right
c. right to issuance of stock certificate for fully paid shares
d. proportionate participation in the distribution of assets in liquidation
e. right to transfer of stocks in corporate books
f. pre-emptive right
PRE-EMPTIVE RIGHT OF STOCKHOLDERS - right to subscribe to all issues or
dispositions of shares of any class in proportion to his present stockholdings, the
purpose being to enable the shareholder to retain his proportionate control in the
corporation and to retain his equity in surplus.
g. right to inspect books and records
h. right to be furnished of the most recent financial statement/ financial report
i. right to recover stocks unlawfully sold for delinquent payment of subscription.
3. REMEDIAL RIGHTS
a. individual suit
b. representative suit
c. derivative suit - suit brought by stockholders for and in behalf of the corporation and against any
person, who could be another stockholder, director, officer or and 3 rd person.
REQUISITES:
1. the party bringing suit should be a shareholder as of the time of the act or transaction
complained of;
2. he has exhausted infra- corporate remedies; and
3.the cause of action actually devolves on the corporation, the wrongdoing or harm having
been caused to the corporation and not to the particular stockholder bringing the suit
PROXIES - Shareholders and members may vote in person of by proxy in all meetings of shareholders
or members.
Form - in writing, signed by the shareholder or member and filed before the scheduled
meeting with the corporate secretary.
Period of validity unless otherwise provided in the proxy, it should be valid only for the
meeting for which it is intended. No proxy shall be valid and effective for a longer period than
five years at any one time
- Proxies are also considered as corporate devise for securing voting control of the corporation
Instances where the right to vote by proxy are explicitly provided for:
1. election of the board of directors or trustees
2. voting in case of joint ownership of stock
3. voting by trustee under voting agreement
4. pledged or mortgaged share
5. as provided for in its by-laws

APPRAISAL RIGHT right to withdraw from the corporation and demand payment of the fair market
value of his shares after dissenting from certain corporate acts involving fundamental
changes in corporate structure
Instances when the right may be exercised:
1. extension of duration of corporate term;
2. change in the rights of shareholder, authorize preferences superior to those of the
shareholders, or restrict the right of any shareholder;
3. shareholders authorized the board to invest corporate funds in another corporation;
4. shareholders authorized board to engage in a purpose other than main purposes stated
in the Articles; and
5. corporation decides to sell or dispose of all or substantially all assets of corporation.

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 6. in case of merger or consolidation

VOTING TRUST - one or more shareholder of a stock corporation may create a voting trust for the
purpose of conferring upon a trustee or trustees the right to vote and other rights
pertaining to the shares for a period not exceeding 5 years at any one time. However, if
the voting trust was a requirement for a loan agreement, period may exceed 5 years but
shall automatically expire upon full payment of the loan .

PROXY VOTING TRUSTS

1. Proxy votes as agent 1. Trustee votes as owner rather than as
mere agent
2. Proxy must vote in person 2. Trustee may vote in person or by proxy
unless the agreement provides otherwise
3. The principal in a proxy does not 3. The beneficial owner ceases to be
cease to be a stockholder recognized as a shareholder of record and
the trustee assumes - practically all the rights
of a stockholder
4. Proxy has no legal title to the 4. Trustee acquires legal title to the shares of
shares of the principal the transferring stockholder
5. Proxy need not be notarized 5. The agreement must be notarized
6. Revocable anytime except one with 6. The agreement is irrevocable
interest
7. Proxy can only act at a specified 7.Trustee is not limited to act at any
stockholder's meeting (if not particular meeting
continuing)
8. Proxy can only vote in the absence 8.A trustee can vote and exercise all the
of the owners of the stock rights of the stockholder even when the latter
is present
9. A proxy is usually of shorter 9. An agreement must not exceed 5 years at
duration although under Sec. 58 it any one time except when the same is made
cannot exceed 5 years at any one time a condition of a loan

10. The right to vote is inherent in or 10. The voting right is distinct and separate
inseparable from the right to from the ownership of stocks
ownership of stock
11. Proxy may vote in the election of 11. Trustee can be voted as a director
directors but he cannot be voted as a
director

OBLIGATIONS OF A STOCKHOLDER:
1 Liability for failure to create corporation.
2. Liability for dividends unlawfully paid
3. Liability to the creditors of the corporation for unpaid subscription
4. Liability for watered stock
5. Liability to the corporation for interest on unpaid subscription if so required by the by-laws
6. Liability to the corporation for unpaid subscription

BOOKS REQUIRED TO BE KEPT:

1. Book of Minutes:
a. minutes of stockholders meetings
b. minutes of board meetings.
2. Book of all business transactions:
3. Stock and transfer book
AMALGAMATION corporate combinations
1. Merger
2. Consolidation
3. Formation of a holding corporation
4. Lease of assets of one corporation to another corporation
5. Sale of assets of one corporation to another corporation
MERGER - one corporation absorbs the other and remains in existence while the other is dissolved.

CONSOLIDATION - a new corporation is created, and consolidating corporations are extinguished.

PROCEDURE FOR MERGER OR CONSOLIDATION:

1. The Board of each corporation shall draw up a plan of merger or consolidation setting forth:
a. names of the corporation involved
b. terms and mode of carrying it

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 c. statement of changes, if any, in the present articles of the surviving corporation or the articles
of the new corporation to be formed in the case of consolidation.
2. Plan for merger or consolidation shall be approved by majority vote of each of the board of the
concerned corporations at separate meetings and approved by the majority vote of the 2/3 of the
Outstanding Capital Stock or members for non-stock corporations.
3. Any amendment to the plan must be approved by the majority vote of the board members or trustees
of the constituent corporations and affirmative vote of 2/3 of OCS or members
4. Articles of Merger or Articles of Consolidation shall be executed by each of the constituent
corporations, signed by the President or Vice-President and certified by the Secretary or Assistant
Secretary setting fort:
c. plan of merger or consolidation
d. for stock corporation, the number of shares outstanding; for non-stock, the number of
members
e. as to each corporation, number of shares or members voting for and against such plan
respectively
5. Four copies of the Articles of Merger or Consolidation shall be submitted in to the SEC for approval.

CLOSE CORPORATIONS
1. number of stockholders not to exceed 20
2. restriction on the transfer ; preemption in favor of the stockholder or the corporation;
3. the stocks cannot be listed in the stock exchange nor should they be publicly offered.

Special type of close corporation - 2/3 of the voting stocks or voting rights is owned or controlled
by another corporation which is not a close corporation.

The following cannot be a close corporations:

1. mining companies
2. oil companies
3. stock exchanges
4. banks
5. insurance companies
6. public utility
7. education institution
8. other corporation declared to be vested with public interest
RESTRICTIONS ON TRANSFERS
- the restrictions in the transfer of the stocks must appear in the articles, in
the by-laws; and on the stock certificates.
- restriction on the transfer must not be onerous than granting the existing
shareholders or corporation the option to purchase the shares.

PRE-EMPTIVE RIGHT IN CLOSE CORPORATIONS

- shall extend to all stocks to be issued, including re-issuance of treasury share, whether for
money or property or personal services, or in payment or corporate debts, unless the articles of
incorporation provide otherwise
Characteristics:
1. Share holders act as directors without need of election and therefore are liable as directors;
2. Quorum may be greater than mere majority;
3. Transfers of stocks to others, which would increase the number of hare holders to more than the
maximum are invalid;
4. Corporate actuations may be binding even without a formal board meeting, if the share holders
had knowledge or ratified the informal action of the others;
5. Preemptive right extends to all stock issues;
6. Deadlocks in board are settled by the SEC, on the written petition by any share holders
7. Share holders may withdraw and avail of his right of appraisal.

NON-STOCK CORPORATIONS
- corporation where no part of its income is distributable as dividends its members, trustees; and
officers EXCEPT at dissolution.

PURPOSES:
1. charitable
2. religious
3. educational
4. professional
5. cultural
6. fraternal
7. literary
8. scientific
9. social
10. civic service
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 11. similar purposes e.g. chambers or combinations for trade industry or agricultural

DISTRIBUTION OF ASSETS ON DISSOLUTION OF

NON-STOCK CORPORATION:
1. all its creditors shall be paid;
2. assets held subject to return on dissolution shall be delivered back to their givers;
3. assets held for charitable, religious, etc., without a condition for their return on dissolution, shall
be conveyed to one or more organizations engaged in similar activities as dissolved corporation;
and
4. all other assets shall be distributed to members, as provided for in the Articles or by-laws.

RELIGIOUS CORPORATIONS
Kinds:
1. Corporation sole - special form of corporation, usually associated with the clergy and consists of
one person only and his successors, who are incorporated by law to give some legal capacities
and advantages; and
2. Religious societies - non-stock corporation governed by a board but with religious purposes.

FOREIGN CORPORATION
- corporation formed, organized or existing under any law other than those of the Philippines, and
whose laws allow Filipino citizens and corporations to do business in its own country or state.
DOING BUSINESS - implies a community of commercial dealings and arrangements, and contemplates
to some extent the performance of acts or works or the exercise of some functions normally
incident to and in progressive prosecution of, the purpose and object of its organization.
(Continuity Test)

SUABILITY OF FOREIGN CORPORATIONS:

1. Foreign corporation doing business in the Philippines -
a. with license : may sue and be sued in the Philippines;
b. without license: cannot sue but may be sued in the Philippines.
2.Foreign corporation not doing business in the Philippines on isolated transaction: may sue and be
sued.

GROUNDS FOR SUSPENSION OR CANCELLATION OF CERTIFICATE OF REGISTRATION:

1. fraud in procuring registration;
2. serious misrepresentation as to objectives of corporation;
3. refusal to comply with lawful order of SEC;
4. continuous in operation for at least 5 years;
5. failure to file by-laws within required period;
6. failure to file reports; and
7. other similar grounds.

THEORIES AND DOCTRINES:

1. TRUST FUND DOCTRINE - the subscribed capital stock of the corporation is a trust fund for the
payment of debts of the corporation which the creditors have the right to look up to satisfy their
credits. Corporation may not dissipate this and the creditors may sue stockholders directly for
the unpaid subscription.
2. DOCTRINE OF SEPARATE PERSONALITY - A corporation has a personality separate and distinct
from that of its stockholders or members
PIERCING DOCTRINE OF THE VEIL OF CORPORATE FICTION
- Allows the state to disregard for certain justifiable reasons the fiction of juridical
personality for the corporation, separate and distinct from the persons composing it.
THREE CLASSES OF PIERCING:
1. Fraud Cases -when a corporation is used as a cloak to cover fraud, or to do wrong
2. Alter Ego-Cases- when the corporate entity is merely a farce since the corporation is an
alter ego, business conduit or instrumentality or a person or another corporation
INSTRUMENTALITY RULE
- Where one corporation is so organized and controlled and its affairs are conducted so
that it is in fact, a mere instrumentality or adjunct of the other, the fiction of the
corporate entity of the "instrumentality" may be disregarded. The control necessary
to invoke the rule is not mere majority or even complete stock control bust such
domination of finances, policies, practices that the controlled corporation has, so to
speak, no separate mind, will or existence of its own, and is, but a conduit for its
principal

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 3. Equity cases when piercing the corporate fiction is necessary to achieve justice or
equity.

3. WASTING ASSET DOCTRINE permits corporations solely or principally engaged in the exploitation
of wasting assets to distribute the net proceeds derived from exploitation of their holdings such
as mines, oil wells, patents and leaseholds without allowance or deduction for depletion.

4. DOCTRINE OF CORPORATE OPPORTUNITY - if there is presented to a corporate officer or

director a business opportunity which:
a. corporation is financially able to undertake;
b. from its nature, is in line with corporations business and is of practical advantage to
it;
c. one in which the corporation has an interest or a reasonable expectancy.

- By embracing the opportunity, the self-interest of the officer or director will be brought into
conflict with that of his corporation, the law will not permit him to seize the opportunity.

5. DOCTRINE OF ISOLATED TRANSACTION - Foreign corporation can sue or be sued on a

transaction or series of transaction set apart from the common business of a foreign enterprise
in the sense that there is no intention to engage in a progressive pursuit of the purpose and
object of business transaction.

/mrs

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