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Week 12 Corporation

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DON HONORIO VENTURA STATE UNIVERSITY

College of Business Studies


Business Laws and Regulations
Atty. Angela Dela Cruz-Lacanlale
LAW ON CORPORATIONS

I. STOCKHOLDERS AND MEMBERS

A person becomes a stockholder the moment he:

(1) Enters into subscription contract with an existing corporation


(2) Purchase treasury shares from the corporation
(3) Acquires shares from existing shareholders by operation of law (like
succession)

Rights of a stockholder and member

(1) Management rights

a. To attend and vote in person or by proxy at a stockholder’s meeting


(Secs. 49, 57 RCC)
b. To elect and remove directors (Secs. 23, 27 RCC)
c. To approve certain corporate acts (Sec. 57, RCC)
d. To adopt and amend or repeal the by-laws (Sec. 45, 47 RCC)
e. To compel the calling of the meetings (Sec. 49, RCC)
f. To enter into a voting trust agreement (Sec. 58, RCC)
g. To have the corporation voluntarily dissolved (Secs. 117, 118 RCC)

(2) Proprietary rights

a. To transfer stock in the corporate book (Sec. 62, RCC)


b. To receive dividends when declared (Sec. 42, RCC)
c. To the issuance of certificate of stock or other evidence of stock
ownership (Sec. 63, RCC)
d. To participate in the distribution of corporate assets upon
dissolution (Secs. 117, 118 RCC)
e. To pre-emption in the issuance of shares (Sec, 38, RCC)

(3) Remedial rights

a. To inspect corporate books (Sec. 73, RCC)


b. To recover stock unlawfully sold for delinquent payment of
subscriptions (Sec. 68, RCC)
c. To be furnished with most recent financial statements or reports of
the corporation’s operations (Secs. 73, 74 RCC)
d. To bring suits (derivative suit, individual suit, and representative
suit)

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Business Laws and Regulations
Atty. Angela Dela Cruz-Lacanlale
e. To demand payment in the exercise of appraisal right (Secs. 40, 81
RCC)

DOCTRINE OF EQUALITY SHARES – All stocks issued by the


corporation are presumed equal with the same privilege and
liabilities, provided that the AOI is silent on such differences.

Obligations of a stockholder

a. Liability to the corporation for unpaid subscription (Secs. 65-69, RCC)


b. Liability to the corporation for interest on unpaid subscription if so
required by the subscription contract (Sec. 65, RCC)
c. Liability to the creditors of the corporation for unpaid subscription (Sec.
59, RCC)
d. Liability for watered stock (Sec. 64, RCC)
e. Liability for dividends unlawfully paid (Sec. 42, RCC)
f. Liability for failure to create the corporation (Sec. 10, RCC)

II. STOCKHOLDERS’/MEMBERS’ MEETING

Regular Meeting

(1) Annually on date fixed in the by laws; or


(2) If not so fixed, on any date after April 15 of every year as determined by the
BOD/BOT

Venue

Stock Corporations – in the principal office of the corporation as set forth in


the AOI, or if not practicable, in the city or municipality where the principal
office of the corporation is located

NOTE: Any city or municipality in Metro Manila, Metro Cebu, Metro Davao, and
other Metropolitan areas shall, for purposes of this section (Sec. 50, RCC) be
considered a city or municipality.

Non-stock corporations – Any place even outside the place where the
principal office of the corporation is located, as long as within Philippine
territory and proper notice is sent to all members.

Notice- The notice of meetings shall be in writing, and the time and place
thereof stated therein. The written notice of regular meetings may be sent

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Business Laws and Regulations
Atty. Angela Dela Cruz-Lacanlale
through electronic mail or such other manner as the commission shall allow
under its guidelines. The notice shall be sent to the stockholder or member:

a. At least 21 days prior to the meeting


b. Unless a different period is required in the by-laws, law, or regulation

Special Meeting

(1) Any time deemed necessary; or


(2) As provided in the by-laws

Venue: In the principal office of the corporation as set forth in the AOI, or if not
practicable, in the city or municipality where the principal office of the
corporation is located. Provided, that Metro Manila shall be considered a city
or municipality

Notice – The notice shall be in writing and the time and place thereof stated
therein. The notice shall be sent to the stockholder or member:

a. At least 1 week prior to the meeting


b. Unless a different period is provided in the by-laws, law or regulation.

Notice may be waived, expressly or impliedly, by any stockholder or member.

III. PARTICIPATION IN THE MANAGEMENT

Under the RCC, stockholders or members periodically elect the BOD/BOT,


who are charged with the management of the corporation. The board, in turn,
periodically elects officers to carry out management functions on a day-to-day
basis. As owners, though, the stockholders or members have residual powers
over fundamental and major corporate changes.

A. PROXY – stockholders and members may vote in person or by proxy in all


meetings of stockholders or members. However, the right of members to
vote by proxy may be denied under the AOI or by-laws of a non-stock
corporation.

The term “proxy” designates the formal written authority given by the owner
or holder of the stock, who has the right to vote it, or by a member, as
principal, to another person, as agent, to exercise the voting rights of the
former.

Purposes of Proxies:

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Business Laws and Regulations
Atty. Angela Dela Cruz-Lacanlale

(1) Assures the presence of quorum in meetings of stockholders of large


corporations
(2) Enables those who do not wish to attend a stockholders’/members’
meeting to protect their interest by exercising their right to vote through
a representative
(3) One of the devices in securing voting control or management control in
the corporation

Duration of Proxy

a. Specific Proxy – authority granted to the proxy holder to vote only for a
particular meeting on a specific date

b. Continuing Proxy – authority granted a proxy to appear and vote for and
on behalf of a shareholder for a continuing period which should not be
more than five (5) years at any one time

Extent of Authority

a. General Proxy – A general discretionary power to attend and vote at an


annual meeting, with all the powers the stockholder/member would
possess if personally present, to vote for directors and all ordinary
matters that may properly come before a regular meeting

NOTE: A holder of a general proxy has no authority to vote for a


fundamental change in the corporate charter or other unusual
transactions such as merger or consolidation

b. Limited Proxy – Restrict the authority to vote to specified matters only


and may direct the manner in which the vote shall be cast

B. VOTING TRUST AGREEMENT – an agreement whereby one or more


stockholders transfer their shares of stock to a trustee, who thereby
acquires for a period of time the voting rights (and/or any other specific
rights) over such shares; and in return, trust certificates are given to the
stockholder/s which are transferable like trust certificates, subject to the
trust agreement.

Other purposes:

1. To make possible a unified control of the affairs of the corporation and


a consistent policy by binding stockholders to vote as a unit

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Business Laws and Regulations
Atty. Angela Dela Cruz-Lacanlale
2. To assure continuity of policy and management especially of a new
corporation desirous of attracting investors
3. To enable the owners of the majority of the stock of the corporation to
control the corporation
4. To vest and retain the management of the corporation in the persons
originally forming it
5. To prevent a rival concern from acquiring control of the corporation
6. To carry out a proposed sale of the corporation’s assets and to facilitate
its dissolution
7. To enable two holding companies to operate jointly a corporation
controlled by them
8. To effect a plan for reorganization of a corporation in financial difficulty
or in bankruptcy proceedings
9. To aid a financially embarrassed corporation to obtain a loan and
protect its creditors

Voting Trust Proxy


Revocability
If validly executed, VTA is intended to A proxy, unless couple with
be irrevocable for a definite and interest, is revocable at any time
limited period of time
Legal Title
Trustee acquires legal title to the Proxy has no legal title to the
shares of the transferring shares of the principal
stockholder
Rights included
Right to vote as well as other rights Only the right to vote is included
may be given except the right to
receive dividends. The trustee may
vote in person or by proxy unless the
agreement provides otherwise
Notarization requirement
The agreement must be notarized Proxy need not be notarized
Limitations to act
Trustee is not limited to act any Proxy can only base on authority
particular meeting given
Cancellation of Stock Certificate
The stock certificate shall be No cancellation of the certificate
cancelled and a new one in the name shall be made
of the trustee shall be issued stating
that they are issued pursuant to the
VTA
Extent of right

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Business Laws and Regulations
Atty. Angela Dela Cruz-Lacanlale
A trustee can vote and exercise all A proxy can only vote in the
the rights of the stockholder even absence of the stockholder
when the latter is present

Term or duration
An agreement must not exceed 5 A proxy is usually shorter duration
years at any one time except when although under Sec. 58 it can be for
the same is made a condition of loan a longer period not to exceed 5
years at any one time
Governing law
Governed by the law on trust Governed by the law on agency
Right to inspect
A trustee has the right to inspect A proxy does not have a right of
corporate books inspection of corporate books

IV. RIGHT TO DIVIDENDS -It is the right of the stockholder to demand payment of
dividends after the board’s declaration. Stockholders are entitled pro rata
based on the total number of shares that they own and not on the amount paid
for the shares.

GR: Those stockholders at the time of declaration are entitled to dividends

NOTE: Dividends declared before the transfer of shares belong to the


transferor and those declared after belong to the transferee

EXPN: In case a record date is provided for. A record date is the date fixed in the
resolution declaring dividends , when the dividend shall be payable to those
who are stockholders of record on a specified future date or as of the date of
the meeting declaring said dividend.

V. RIGHT OF APPRAISAL – the right of a stockholder to dissent and demand


payment of the fair value of the shares in the certain instances provided in the
RCC (Sec. 80, RCC)

Requisites:

(1) Any of the grounds for appraisal must be present


(2) A written demand on the corporation must be made within 30 days after
the date when the vote was taken
(3) The dissenting stockholders attend the meeting of the stockholders and
voted against the proposed actions
(4) The price of the fair market value of the shares on the day before the date
of voting

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Business Laws and Regulations
Atty. Angela Dela Cruz-Lacanlale
NOTE: In case of disagreement, the value will be determined by appraisal
of 3 disinterested persons (Sec. 81, RCC)

(5) The corporation has sufficient unrestricted retained earnings. The Trust
Fund Doctrine backstops the requirement of URE to fund the payment of
the shares of stocks of the withdrawing stockholders.

Instances of Exercise of Appraisal Right

a. In case any amendment to the AOI has the effect of changing or restricting
the rights of any stockholder or class of shares, or of authorizing
preferences in any respect superior to those of outstanding shares of any
class, or of extending or shortening the term of corporate existence.

b. In case of sale, lease, exchange, transfer, mortgage, pledge, or other


disposition of all or substantially all of the corporate property and assets.

c. In case of merger and consolidation

d. In case of investment of corporate funds for any purpose other than the
primary purpose of the corporation

Effects of Exercise of Right of Appraisal

(1) Once the dissenting stockholder demands payment of the fair value of his
shares:

- All rights accruing to such shares including voting and dividend rights
shall be suspended; and

- He shall be entitled to receive payment of the fair value of his shares as


agreed upon between him and the corporation or as determined by the
appraiser chosen by him.

- GR: He is not allowed to withdraw his demand for payment of his shares
EXPN: Unless the corporation consents thereto

(2) If the dissenting stockholder was not paid the value of his shares within 30
days after the award, his voting and dividend rights shall be immediately
restored until payment of his shares. (Sec. 82, RCC)

(3) Upon payment of the stockholder’s shares, all his rights as stockholders
are terminated, not merely suspended. (Sec. 81, RCC)

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Business Laws and Regulations
Atty. Angela Dela Cruz-Lacanlale

(4) If before the stockholder is paid, the proposed corporate action is


abandoned, his rights and status as a stockholder shall thereupon be
permanently restored. (Sec. 83, RCC)

VI. RIGHT TO INSPECT – The stockholder’s right of inspection of the corporation’s


books and records is based upon his ownership of shares in the corporation
and the necessity of self-protection.

The stockholder’s right of inspection of the corporation’s books and records is


based upon their ownership of the assets and property of the corporation. It is
therefore an incident of ownership of the corporate property.

Valid Purposes of Inspection

a. Ascertainment of financial condition of corporation or propriety of


dividends
b. Ascertainment of the value of the shares of stock for sale or investment
c. Existence of mismanagement
d. Obtainment of list of stockholders to solicit proxies or influence voting
e. Obtainment of information in aid of litigation with the corporation or its
officers regarding corporate transactions

Books and Records Required to be kept

1. The AOI and bylaws of the corporation and all their amendments
2. The current ownership structure and voting rights of the corporation,
including lists of stockholders or members, group structures, intra-group
relations, ownership data, and beneficial ownership
3. The names and addresses of all the members of the board of directors or
trustees and the executive officers
4. A record of all business transactions
5. A record of the resolutions of the board of directors or trustees and of the
stockholders or members
6. Copies of the latest reportorial requirements submitted to the
Commission
7. The minutes of all meetings of stockholders or members, or of the board
of directors or trustees
8. Corporate records
9. Stock and transfer book, in case of stock corporations

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Business Laws and Regulations
Atty. Angela Dela Cruz-Lacanlale
Requirements for the Exercise of the Right of Inspection

(1) The right must be exercised during reasonable hours on business days
(2) The person demanding the right has not improperly used any information
obtained through any previous examination of the books and records of
the corporation
(3) The demand is made in writing and in good faith, or for legitimate purpose
germane to his interest as stockholder
(4) It should follow the formalities that may be required in the by-laws
(5) The right does not extend to trade secrets
(6) The inspecting or reproducing party shall remain bound by confidentiality
rules under prevailing laws
(7) It is subject to limitations under special laws (e.g. Secrecy of Bank
Deposits and Foreign Currency Deposits Act)

Persons entitled to right

The following are entitled to inspect the corporate books

(1) Any director, trustee, or stockholder or member of the corporation at


reasonable hours on business day
(2) Voting trust certificate holder
(3) Stockholder of a sequestered company
(4) Beneficial owner of shares (pledgee, judgment debtor, buyer from record
owner)

VII. BOARD OF DIRECTORS AND TRUSTEES – Unless otherwise provided in the


RCC, the BOD/BOT shall exercise the corporate powers, conduct all business,
and control all properties of the corporation (Sec. 22, RCC)

Stated otherwise, corporate acts must be approved by the BOD, otherwise,


such acts are generally not binding on the corporation.

DOCTRINE OF CENTRALIZED MANAGEMENT – Corporate powers are vested in


a body called board of directors for a stock corporation, and board of trustees
for non-stock corporations. Except in those instances where stockholders or
members’ approval is required for certain acts under the RCC or the
corporation’s bylaws, it is the board which exercises corporate powers.

EXPNS TO THE DOCTRINE OF CENTRALIZED MANAGEMENT

(a) In case of delegation to the Executive Committee duly authorized in the by-
laws

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Business Laws and Regulations
Atty. Angela Dela Cruz-Lacanlale
(b) Authorization pursuant to a contracted manager which may be an
individual, a partnership, or another corporation
(c) In case of close corporations, the stockholders may manage the business
of the corporation instead of a board of directors if the AOI so provide (Sec.
96, RCC)

Rationale for the Doctrine: The concentration in the board of the powers of
control of corporate business and of appointment of corporate officers and
managers is necessary for efficiency in large organization. Stockholders are
too numerous, scattered, and unfamiliar with the business of a corporation to
conduct its business directly.

BUSINESS JUDGMENT RULE – Questions of policy or management are left


solely to the honest decision of officers and directors of a corporation and the
courts are without authority to substitute their judgment for the judgment of
the BOD. The board is the business manager of the corporation and so long as
it acts in good faith, its orders are not reviewable by the courts or the SEC.
(Montelibano v. Bacolod-Murcia Milling Co.)

EXPNS:

(a) When the act is unconscionable and oppressive as to amount to wanton


destruction to the rights of the minority (Ong v. Tiu)
(b) When there is bad faith or gross negligence by the directors (Republic
Communications, Inc. v. CA)
(c) To declare dividends when there is no surplus profit or to declare dividends
out of re-appraisal surplus (Divina, 2020)
(d) To pay compensation to directors, as the power is lodged with the
stockholders
(e) To support a request for a new stock and transfer book on the pretext that
the original is lost (when in fact it is not) and declare entries in the
supposed lost stock and transfer book as invalid. (Provident International
Resources v. Venus)

Consequences of Business Judgment Rule

(1) Resolutions and transactions entered into by the Board within the powers
of the corporation cannot be reversed by the courts not even on the behest
of the stockholders
(2) Directors and officers acting within such business judgment cannot be
held personally liable for such acts

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Business Laws and Regulations
Atty. Angela Dela Cruz-Lacanlale
(3) If the cause of the losses is merely error in business judgment, not
amounting to bad faith or negligence, directors and/or officers are not
liable
(4) The BOD has the power to create positions not provided for in the
corporation’s by-laws since the board is the corporation’s governing body
(5) Directors and officers who purport to act for the corporation, within the
lawful scope of their authority and in good faith, do not become liable,
whether civilly or otherwise, for the consequences of their acts
(6) The power to elect corporate officers was a discretionary power that the
law exclusively vested in the BOD and could not be delegated to
subordinate officers or agents

Requirements for the application of Business Judgment Rule

(a) Presence of a business decision including decisions on policy


management and administration
(b) The decision must be intra vires and must comply with the procedural and
substantive requirements of law
(c) Good faith
(d) Due care in making decisions
(e) The director must not have personal interest or not self-dealing or
otherwise on breach of duty of loyalty.

VIII. TENURE AND QUALIFICATIONS OF DIRECTORS AND TRUSTEES

Term of Office – Directors shall be elected for a term of one (1) year from among
the holders of stocks registered in the corporation’s books, while trustees shall
be elected for a term not exceeding three (3) years from among the member of
the corporation (Sec. 22, RCC)

Term – time during which the officer may claim to hold the office as a matter of
right, and fixes the interval after which the several incumbents shall succeed
one another

Tenure – represents the term during which the incumbent actually holds office.
The tenure may be shorter (or in case of holdover, longer) than the term for
reasons within or beyond the power of the incumbent.

Hold-over period – the time from the lapse of the one year from a member’s
election to the Board and until his successor’s election and qualification

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Business Laws and Regulations
Atty. Angela Dela Cruz-Lacanlale
COMMON QUALIFICATIONS OF DIRECTORS AND TRUSTEES

(1) The director/trustee must be of legal age (Sec. 10, RCC)


(2) The director must own at least one (1) share of stock of the corporation and
the trustee must be a member of the corporation (Sec. 22, RCC)
(3) Trustees of educational institutions organized as non-stock corporations
or religious societies shall not be less than five (5) nor more than fifteen
(15). However, with respect to educational institutions, the number of
trustees shall only be multiples of five (5). (Secs. 106 and 114, RCC)

Disqualifications:

A person shall be disqualified from being a director, trustee, or officer of any


corporation if within five (5) years prior to election or appointment such
person was:

a. Convicted by final judgment:


-Of an offense punishable by imprisonment for a period exceeding six (6)
years;
- For violating the RCC; and
- For violating R.A. 8799 or the Securities Regulation Code

b. Found administratively liable for any offense involving fraudulent acts


c. Found by a foreign court or equivalent foreign regulatory authority for acts,
violations, or misconduct similar to enumerated in paragraphs (a) and (b)
above.

Additional Qualifications Provided by the Revised Code of Corporate


Governance

a. College education or equivalent academic degree


b. Practical understanding of the business of the corporation
c. Membership in good standing in relevant industry, business or
professional organizations
d. Previous business experience

Disqualification of Foreigners – while foreigners are disqualified from being


elected/appointed as corporate officers in wholly or partly nationalized
business activities, they are allowed representations in the BOD or governing
body of said entities in proportion to their shareholding (Sec. 2-A, Ant- Dummy
Law; Sec. 11, Art XII, 1987 Constitution)

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Business Laws and Regulations
Atty. Angela Dela Cruz-Lacanlale
Are directors or trustees required to be residents of the Philippines?

- The requirement of the OCC which provides that majority of the


directors or trustees of all corporations must be residents of the
Philippines was REMOVED under the RCC. As such, it is possible that a
majority or even all directors or trustees may be non-residents.

Are directors or trustees required to be Filipino citizens?

- Similar to the OCC, the RCC does not require Filipino citizenship for
directors or trustees of a corporation. However, if the corporation is
engaged in wholly nationalized activities, citizenship becomes a
qualification. Foreigners cannot be appointed to the board of
corporations engaged in wholly nationalized activities. For partly
nationalized activities, foreigners can be elected to the BOD in
proportion their foreign equity, as allowed by law. (Divina, 2020)

Independent Directors – An independent director is a person who apart from


shareholdings and fees received from the corporation, is independent of
management and free from any business or other relationship which could or
could reasonably be perceived to materially interfere with the exercise of
independent judgment in carrying out the responsibilities as a director (Sec. 22,
RCC)

Requirement of Independent Directors- The board of the following corporations


vested with public interest shall have independent directors constituting at
least 20% of the Board:

(1) Corporations covered by the Sec. 17.2 of RA 8799 or the Securities


Regulation Code such as:

- Corporations whose securities are registered with the Commission


- Corporations listed with an exchange
- Public companies, meaning corporations with:
a. Assets of at least Php 50 Million
b. Having 200 or more shareholders
c. Each shareholder holding at least 100 shares of a class of its equity
shares

(2) Banks, quasi-banks, pre-need, insurance, and trust companies non-stock


savings and loan associations, pawnshops, corporations engaged in money
service business and other financial intermediaries
(3) Other corporations engaged in business vested with public interest

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