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Corporations Code of the Philippines Ateneo Reviewer

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Corporations Code of the Philippines Ateneo Reviewer

  1. 1. AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 1 of 87 Darren L. Salipsip 98B & Ronald Patrick Rubin 06C CHAPTER 2: DEFINITION AND ATTRIBUTES  A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence.  Attributes: 1. Artificial being; 2. Created by operation of law; 3. Right of succession; and 4. Powers, attributes and properties expressly authorized by law or incident to its existence.  A corporation may claim for moral damages under Art. 2219 (7) of the Civil Code in cases of libel, slander or any form of defamation. (Filipinas Broadcasting Network vs. Ago Medical and Educational Center)  Advantages of corporate form of business: 1. Capacity to act as a single unit; 2. Limited shareholder‟s liability; 3. Continuity in existence; 4. Feasibility of greater undertaking; 5. Transferability of shares; 6. Centralized management; and 7. Standardized method of organization, management and finance  Disadvantage of corporate form of business: 1. To have valid and binding corporate act, formal proceedings, such as board meetings are required. 2. The business transactions of a corporation is limited to the State of its incorporation and may not act as such corporation in other jurisdiction unless it has obtained a license or authority from the foreign state. 3. The shareholders‟ limited liability tends to limit the credit available to the corporation as a separate legal entity. 4. By the very nature of shares of stock which are personal properties, transferable at will by the owners thereof, transfers of share may result to uniting incompatible and conflicting interests. 5. The minority shareholders have practically no say in the conduct of corporate affairs. 6. In large scale enterprises, stockholders‟ voting rights may become merely fictitious and theoretical because of disinterest in management, wide-scale ownership and inaccessible place of meeting. 7. Double taxation may be imposed on corporate income. 8. Corporations are subject to governmental regulations supervision and control including submission of reportorial requirements not otherwise imposed in other business form.
  2. 2. AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 2 of 87 Darren L. Salipsip 98B & Ronald Patrick Rubin 06C  Distinctions between a corporation and a partnership CORPORATION PARTNERSHIP 1. Created by law or operation of law 1. Created by mere agreement of the parties 2. Generally there must be at least 5 incorporators 2. May be formed by 2 or more natural persons 3. Can exercise only such powers and functions expressly granted to it by law and those necessary or incident to its existence 3. Can do anything by agreement of the parties provided only that it is not contrary to law, morals, good customs, public policy and public order 4. Unless validly delegated expressly or impliedly, must transact its business through the board of directors 4. In absence of agreement to the contrary, any one of the partners may validly bind the partnership 5. Has the right of succession which presupposes that it continues to exist despite the death, withdrawal, incapacity or civil interdiction of the stockholders or members 5. Based on mutual trust and confidence such that the death, incapacity, insolvency, civil interdiction or mere withdrawal of one partner would result in it dissolution 6. Any stockholder can ordinarily transfer, sell or assign his shares of stock without the consent of the other stockholders 6. A partner cannot transfer his rights or interest in the partnership so as to make the transferee a partner without the consent of the other partners 7. The liability of the stockholders or members in is limited to the extend of their subscription or their promised contribution 7. All partners are liable pro rata with all their property and after all the partnership property has been exhausted, for all partnership liability 8. Term of existence is limited only to 50 years unless extended 8. May exist for an indefinite period 9. Consent of the State is necessary for its dissolution 9. Partners may dissolve at will CHAPTER 3: CLASSIFICATION OF CORPORATIONS  Classes of corporations: 1. Stock 2. Non-stock  Requisites to be classified as a stock corporation: 1. That they have a capital stock divided into shares; and 2. That they are authorized to distribute dividends or allotments as surplus profits to its stockholders on the basis of the shares held by them  Non-stock corporations – no part of their income is distributable as dividends to its members, trustees or officers subject to the provisions on dissolution. (Sec. 87)  The plain and ordinary meaning of a business is restricted to activities or affairs where profit is the purpose or livelihood is the motive, and the term business when used without qualification, should be construed in its plain and ordinary meaning, restricted to activities for profit or livelihood. (CIR vs. Club Filipino, Inc.)  The test in determining whether a government owned or controlled corporation is subject to the Civil Service Law is the manner of its creation, such that government corporations created by special charter are subject to its provisions while those incorporated under the General Corporation Law are not within its coverage. (PNOC-EDC vs. NLRC)
  3. 3. AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 3 of 87 Darren L. Salipsip 98B & Ronald Patrick Rubin 06C  Other classes of corporations: 1. Public and Private. a. Public corporations – those created, formed or organized for political or governmental purposes with political powers to be exercised for purposes connected with the public good in the administration of civil government. b. Private corporations – those formed for some private purpose, benefit, aim or end. 2. Ecclesiastical (religious societies or corporation sole) and Lay (eleemosynary or civil). a. Ecclesiastical or religious corporations – those composed exclusively of ecclesiastics organized for spiritual purposes or for administering properties held for religious ones. They are further classified as religious societies or corporation sole. b. Lay corporations – those established for the purposes other than religion. They are further classified as eleemosynary or civil. Eleemosynary corporations are created for charitable and benevolent purposes. Civil corporations are organized not for the purpose of public charity but for the benefit, pecuniary or otherwise, of its members. 3. Aggregate and Sole. a. Aggregate corporations – those composed of a number of individuals vested with corporate powers. b. Corporations sole – those that consist of one person or individual only and who are made as bodies corporate and politic in order to give them some legal capacity and advantage which, as natural persons, they cannot have. 4. Close and Open. a. Close corporations – those whose shares of stock are held by limited number of persons. b. Open corporations – those formed to openly accept outsiders as stockholders or investors. 5. Domestic and Foreign. a. Domestic corporations – those that are organized or created under or by virtue of the Philippine laws. Note: issues of intra-corporate nature are governed by Philippine law. b. Foreign corporations – those formed, organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or state. 6. Parent or Holding Companies and Subsidiaries and Affiliates. a. Holding corporations – corporations that confine their activities to owning stock in, and supervising management of other companies. b. Subsidiary corporations – those which another corporation owns at least a majority of the shares, and thus have control. c. Affiliates – those corporations which are subject to common control and operated as part of a system. 7. Quasi-public. a. Quasi-public corporations – private corporations which have accepted from the State the grant of a franchise or contract involving the performance of public duties (public service corporations).
  4. 4. AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 4 of 87 Darren L. Salipsip 98B & Ronald Patrick Rubin 06C 8. Quasi corporations. a. Quasi corporations – public bodies or municipal societies such as townships, counties, school districts, road or highway districts which, though not vested with the general powers of corporations, are organized by statutes or immemorial usage, as persons or aggregate corporations with precise duties which may be enforced, and privileges which may be maintained, by suits of law. 9. De jure corporations. a. De jure corporations – juridical entities created or organized in strict or substantial compliance with the statutory requirements of incorporation and whose right to exist as such cannot be successfully attacked even by the State in a quo warranto proceeding. 10. De facto corporations. a. De facto corporations – those which exist by virtue of an irregularity or defect in the organization or constitution or from some other omission to comply with the conditions precedent by which corporations de jure are created, but there was colorable compliance with the requirements of the law under which they might be lawfully incorporated for the purposes and powers assumed, and user of the rights claimed to be conferred by law. 11. Corporations by estoppel. a. Corporations by estoppel – those which are so defectively formed as not to be either de jure or de facto corporations but which are considered as corporations in relation only to those who cannot deny their corporate existence due to their agreement, admission or conduct.  The mere fact that the government happens to be a majority stockholder does not make it a public corporation. (National Coal vs. CIR) CHAPTER 4: FORMATION AND ORGANIZATION  Stages in the life of a corporation: 1. Creation 2. Reorganization or quasi-reorganization 3. Dissolution and winding up  Steps in creation: 1. Promotional stage 2. Process of incorporation 3. Organization and commencement of business PROMOTIONAL STAGE  A promoter acting for a proposed corporation has 3 options: 1. He may make a continuing offer on behalf of the corporation, which, if accepted after incorporation, will become a contract. In this case, the promoter does not assume any personal liability, whether or not the corporation will accept the offer. 2. The promoter may make a contract at the time binding himself, with the understanding that if the corporation, once formed, accepts or adopts the contract, he will be relieved of responsibility. 3. The promoter may bind himself personally and assume the responsibility of looking to the proposed corporation, when formed, for reimbursement.
  5. 5. AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 5 of 87 Darren L. Salipsip 98B & Ronald Patrick Rubin 06C PROCESS OF INCORPORATION  Process of incorporation: 1. Drafting the articles of incorporation 2. Preparation and submission of additional and supporting documents 3. Filing with the SEC 4. Subsequent issuance of certificate of incorporation  Contents of the articles of incorporation 1. Name 2. Purpose 3. Principal office 4. Term 5. Incorporators 6. Number of directors/trustees 7. Names, nationalities and residences of directors/trustees 8. If a stock corporation, amount of authorized capital stock, number of shares, par value, original subscribers 9. If a non-stock corporation, amount of capital, contributors 10. Such other matters not inconsistent with law and which the incorporator may deem necessary and convenient 11. Treasurer‟s certificate CORPORATE NAME  A corporation cannot use a name which is: 1. identical or deceptively or confusingly similar to that of any existing corporation or to any other name protected by law; or 2. patently deceptive, confusing or contrary to law.  The law gives a corporation no express or implied authority to assume another name that is unappropriated; still less that of another corporation, which is expressly set apart from it and protected by law. (Red Line Transportation Co. vs. Rural Transit Co.)  A word or phrase originally incapable of exclusive appropriation with reference to an article on the market, because geographically or otherwise descriptive, might nevertheless have been used so long and so exclusively by one producer with reference to his article that, in that trade and to that branch of the purchasing public, the word or phrase has come to mean that the article was his product. (Doctrine of secondary meaning, Lyceum of the Philippines, Inc. vs.CA)  A corporation's right to use its corporate and trade name is a property right, a right in rem, which it may assert and protect against the world in the same manner as it may protect its tangible property, real or personal, against trespass or conversion. It is regarded, to a certain extent, as a property right and one which cannot be impaired or defeated by subsequent appropriation by another corporation in the same field. (Philips Export B.V. vs. CA)  To come within the scope of the prohibition of Sec. 18, two requisites must be proven, namely: 1. That the complainant corporation acquired a prior right over the use of such corporate name; and 2. The proposed name is either: (a) identical or (b) deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law; or (c) patently deceptive, confusing or contrary to existing law. (Philips Export B.V. vs. CA)
  6. 6. AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 6 of 87 Darren L. Salipsip 98B & Ronald Patrick Rubin 06C  In determining the existence of confusing similarity in corporate names, the test is whether the similarity is such as to mislead a person using ordinary care and discrimination. Proof of actual confusion need not be shown. It suffices that confusion is probably or likely to occur. (Philips Export B.V. vs. CA)  A corporation has an exclusive right to the use of its name, which may be protected by injunction upon a principle similar to that upon which persons are protected in the use of trademarks and tradenames. (Philips Export B.V. vs. CA)  A mere change in the name of a corporation, either by the legislature or by the corporators or stockholders under legislative authority, does not, generally speaking, affect the identity of the corporation, nor in any way affect the rights, privileges or obligations previously acquired or incurred by it. PURPOSE CLAUSE  A corporation has only such powers as are expressly granted to it by law and by its articles of incorporation including those which are incidental to such conferred powers, those reasonably necessary to accomplish its purpose and those which may be incidental to its existence.  Reasons for requiring a statement of purposes or objects: 1. In order that the stockholder who contemplates on an investment in a business enterprise shall know within what lines of business his money is to be put at risk. 2. So that the board of directors and management may know within what lines of business they are authorized to act. 3. So that anyone who deals with the company may ascertain whether a contract or transaction into which he contemplates entering is one within the general authority of the management.  If the corporate purpose or objective includes any purpose under the supervision of another government agency, prior clearance and/or approval of the concerned government agencies or instrumentalities will be required.  General limitations on the purpose clause: 1. The purpose must be lawful. 2. The purpose must be specific or stated concisely although in broad or general terms. 3. If there is more than one purpose, the primary as well as the secondary ones must be specified. 4. The purpose must be capable of being lawfully combined. THE PRINCIPAL OFFICE  The residence of the corporation is the place of its principal office as may be indicated in its articles of incorporation and may, therefore, be sued only at that place. (CRS vs. Antillon) TERM OF EXISTENCE  Sec. 11. Corporate term. - A corporation shall exist for a period not exceeding fifty (50) years from the date of incorporation unless sooner dissolved or unless said period is extended. The corporate term as originally stated in the articles of incorporation may be extended for periods not exceeding fifty (50) years in any single instance by an amendment of the articles of incorporation, in accordance with this Code; Provided, That no extension can be made earlier than five (5) years prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as may be determined by the Securities and Exchange Commission. INCORPORATORS  Sec. 10. Number and qualifications of incorporators. - Any number of natural persons not less than five (5) but not more than fifteen (15), all of legal age and a majority of whom are residents of the Philippines, may form a private corporation for any lawful purpose or purposes. Each of the incorporators of a stock corporation must own or be a subscriber to at least one (1) share of the capital stock of the corporation.
  7. 7. AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 7 of 87 Darren L. Salipsip 98B & Ronald Patrick Rubin 06C  General rule: Only natural persons can be incorporators.  Exception: Cooperatives and corporations primarily organized to hold equities in rural banks.  Minors are not qualified to become incorporators. THE DIRECTORS/TRUSTEES  General rule: There must be at least 5 but not more than 15 directors or trustees in a private corporation.  Exceptions: 1. Educational corporations registered as a non-stock corporation whose number of trustees, though not less than 5 and not more than 15 should be divisible by 5; 2. In close corporations where all the stockholders are considered as members of the board of directors thereby effectively allowing 20 members in the board; and 3. Corporation sole.  The by-laws may provide for additional qualifications and disqualifications. However, it may not do away with the minimum disqualifications laid down by the Code.  Qualifications: 1. Directors must own at least one (1) share of the capital stock of the corporation. Trustees must be members. 2. A majority of the directors or trustees must be residents of the Philippines.  Disqualifications: 1. Conviction by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or a violation of this Code committed within five (5) years prior to the date of election or appointment. 2. Other disqualifications under applicable special laws.  A by-laws may validly provide that no person may be elected as director unless he owns a specified number of shares required for the directorate qualification.  It may likewise disqualify a stockholder from being elected into office if he has a substantial interest in a competitor corporation to avoid any possible adverse effects of conflicting interest of a director.  In order to be eligible as a director, what is material is the legal title to, not beneficial ownership, of the stock as appearing on the books of the corporation. (Lee vs. CA)  If no election is conducted or no qualified candidate is elected, the incumbent director shall continue to act as such in a hold over capacity until the election is held and a qualified candidate is so elected. (Detective and Protective Bureau vs. Cloribel) CAPITALIZATION  Authorized capital – the maximum amount fixed in the articles to be subscribed and paid-in or secured to be paid by the subscribers.  Subscribed capital stock – the total number of shares and its total value for which there are contracts for their acquisition or subscription.  Paid-up capital stock – the actual amount or value which has been actually contributed or paid to the corporation in consideration of the subscriptions made thereon.  Stocks shall not be issued for a consideration less than the par or issued price thereof.
  8. 8. AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 8 of 87 Darren L. Salipsip 98B & Ronald Patrick Rubin 06C  Consideration for the issuance of stock may be any or a combination of any two or more of the ff: 1. Actual cash paid to the corporation; 2. Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued; 3. Labor performed or services actually rendered to the corporation; 4. Previously incurred indebtedness by the corporation; 5. Amounts transferred from unrestricted retained earnings to stated capital; and 6. Outstanding shares in exchange for stocks in the event of reclassification or conversion.  Stocks shall not be issued in exchange of promissory notes or future services. Shares of stock and their classification  Shares of stock designate the interest or right which the stockholder has in the management of the corporation, and in the surplus profits and, in case of distribution, in all assets remaining after the payment of its debts.  Stock certificate is a document or instrument evidencing the interest of a stockholder in the corporation.  The shares of stock of stock corporations may be divided into classes or series of shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation.  Purpose of classification: 1. To specify and define the rights and privileges of the stockholders. 2. For regulation and control of the issuance of sale of corporate securities for the protection of purchasers and stockholders. 3. As a management control device. 4. To comply with statutory requirements. 5. To better insure return on investment. 6. For flexibility in price.  Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be equal in all respects to every other share. Common and preferred shares  Common stock – a stock which entitles its owner to an equal pro-rata division of profits, if there be any, but without any preference or advantage in that respect over any other stockholder or class of stockholders.  Preferred stock – a stock that gives the holder a preference over the holder of common stocks with respect to the payment of dividends and/or with respect to distribution of capital upon liquidation.  Limitations on preferred stock: 1. Must be issued with a stated par value; and 2. The preferences must be stated in the articles of incorporation and in the certificate of stock, otherwise, each share shall be, in all respect, equal to every other share.  The guarantee to preference as to dividends does not create a relation of debtor and creditor between the corporation and the holders of such stock. The board has the discretion to determine whether or not to declare dividends.  Preferred shares are presumed to be non-participating.  Participating preferred shares – the holders thereof are still given the right to participate with the common stockholders in dividends beyond their stated preference.
  9. 9. AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 9 of 87 Darren L. Salipsip 98B & Ronald Patrick Rubin 06C  Cumulative preferred share – those that entitle the owner thereof to payment not only of current dividends but also back dividends not previously paid whether or not, during the past years, dividends were declared or paid.  In absence of express stipulation, preferred shares are presumed to be non-cumulative.  Non-cumulative preferred shares – those which grant the holders of such shares only to the payment of current dividends but not back dividends, when and if dividends are paid, to the extent agreed upon before any other stockholders are paid the same.  Types of non-cumulative preferred shares: 1. Discretionary dividend type – gives the holder of such shares the right to have dividends paid thereon in a particular year depending on the judgment or discretion of the board of directors. 2. Mandatory if earned type – impose a positive duty on directors to declare dividends every year when profits are earned. 3. Earned cumulative or dividend credit – gives the holder thereof the right to arrears in dividends if there were profits earned during the previous years but dividends were not declared.  Unless the right to vote is clearly withheld, a preferred stockholder has the right to vote.  Preference upon liquidation must be clearly indicated otherwise they shall be placed on equal footing with other shares. Par and no par value shares  Par value shares – those whose value are fixed in the articles of incorporation.  Par value shares cannot be issued nor sold by the corporation at less than par.  No par value shares – those whose issued price are not stated in the certificate of stock but which may be fixed in the articles of incorporation, or by the board of directors when so authorized by the said articles or by the by-laws, or in the absence thereof, by the stockholders themselves.  Limitations of no par value shares: 1. Such shares, once issued, are deemed fully paid and thus, non assessable; 2. The consideration for its issuance should not be less than P5.00; 3. The entire consideration for its issuance constitutes capital, hence, not available for dividend declaration; 4. They cannot be issued as preferred stock; and 5. They cannot be issued by banks, trust companies, insurance companies, public utilities and building and loan associations.  Advantages to the issuance of no par value shares: 1. Flexibility in price; 2. Evasion of the danger of liability upon watered stock; and 3. Disappearance of personal liability on the part of the holder thereof for unpaid subscription. Voting and non-voting shares  Voting shares – gives the holder thereof the right to vote and participate in the management of the corporation through the exercise of such right, either at the election of the board of directors, or in any manner requiring the stockholder‟s approval.  Non-voting shares – do not grant the holder thereof the right to vote except under the penultimate paragraph of Sec. 6.  Only preferred and redeemable shares may be denied the right to vote.  There must always be a class or series of shares which have complete voting rights.
  10. 10. AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 10 of 87 Darren L. Salipsip 98B & Ronald Patrick Rubin 06C  Non-voting shares shall nevertheless be entitled to vote on the following matters: 1. Amendment of the articles of incorporation; 2. Adoption and amendment of by-laws; 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property; 4. Incurring, creating or increasing bonded indebtedness; 5. Increase or decrease of capital stock; 6. Merger or consolidation of the corporation with another corporation or other corporations; 7. Investment of corporate funds in another corporation or business in accordance with this Code; and 8. Dissolution of the corporation.  Except as provided in the penultimate paragraph of Sec. 6, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights. Founders’ shares  Sec. 7. Founders‟ shares. - Founders' shares classified as such in the articles of incorporation may be given certain rights and privileges not enjoyed by the owners of other stocks, provided that where the exclusive right to vote and be voted for in the election of directors is granted, it must be for a limited period not to exceed five (5) years subject to the approval of the Securities and Exchange Commission. The five-year period shall commence from the date of the aforesaid approval by the Securities and Exchange Commission. Redeemable shares  Redeemable shares may be issued by the corporation when expressly so provided in the articles of incorporation.  They may be purchased or taken up by the corporation upon the expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the books of the corporation, and upon such other terms and conditions as may be stated in the articles of incorporation, which terms and conditions must also be stated in the certificate of stock representing said shares. Treasury shares  Treasury shares are shares of stock which have been issued and fully paid for, but subsequently reacquired by the issuing corporation by purchase, redemption, donation or through some other lawful means. Such shares may again be disposed of for a reasonable price fixed by the board of directors.  Treasury shares may again be issued for a price less than par.  Treasury shares have no voting and dividend rights. Such rights are only granted to outstanding shares of stock. (CIR vs. Manning) CAPITAL REQUIREMENT  Sec. 12. Minimum capital stock required of stock corporations. - Stock corporations incorporated under this Code shall not be required to have any minimum authorized capital stock except as otherwise specifically provided for by special law, and subject to the provisions of the following section.  Sec. 13. Amount of capital stock to be subscribed and paid for the purposes of incorporation. - At least twenty-five percent (25%) of the authorized capital stock as stated in the articles of incorporation must be subscribed at the time of incorporation, and at least twenty-five (25%) per cent of the total subscription must be paid upon subscription, the balance to be payable on a date or dates fixed in the contract of subscription without need of call, or in the absence of a fixed date or dates, upon call for payment by the board of directors: Provided, however, That in no case shall the paid-up capital be less than five Thousand (P5,000.00) pesos.
  11. 11. AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 11 of 87 Darren L. Salipsip 98B & Ronald Patrick Rubin 06C RESTRICTIONS AND PREFERENCES ON TRANSFER OF SHARES  General rule: Corporations may or may not provide for restrictions and preferences regarding the transfer, sale or assignment of shares in the articles of incorporation. It is discretionary.  Exception: Close corporations are required to subject their shares to specified restrictions as required in Sec. 96.  General rule: Restrictions or preferences must be contained in the articles of incorporation and in all stock certificates to be issued by the corporation.  Exception: In close corporations, such restrictions and preferences must also be embodied in the by-laws. NO TRANSFER CLAUSE  No transfer of stock or interest which will reduce the ownership of Filipino citizens to less than the required percentage of the capital stock as provided by existing laws shall be allowed or permitted to be recorded in the books of the corporation and this restriction shall be indicated in all of the stock certificates to be issued by the corporation. GROUNDS FOR DISAPPROVAL  Only substantial and not strict compliance is required.  Grounds for disapproval: 1. The articles of incorporation or any amendment thereto is not substantially in accordance with the form prescribed; 2. The purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations; 3. The Treasurer‟s Affidavit concerning the amount of capital stock subscribed and/or paid is false; 4. The percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied with as required by existing laws or the Constitution, 5. The articles of incorporation of corporations subject to government supervision are not accompanied by a favorable recommendation from the appropriate government agency.  The grounds are not exclusive. COMMENCEMENT OF CORPORATE EXISTENCE  It is only from the time of the issuance of the certificate of incorporation that a corporation acquires juridical personality and legal existence.  Prior to incorporation, a corporation has no juridical personality to enter into contracts. (Cagayan Fishing Development vs. Sandiko) DE FACTO CORPORATION  De facto corporation – one that is so defectively created as not to be a de jure corporation but nevertheless exists, for all practical purposes, as a corporate body, by virtue of its bona fide attempt to incorporate under existing statutory authority, coupled with the exercise of corporate powers.  Requisites: 1. There is a valid law under which the corporation could have been created as a de jure corporation; 2. An attempt, in good faith, to form a corporation according to the requirements of law (colorable compliance); 3. A user of corporate powers; and 4. Good faith in claiming to be and doing business as a corporation.
  12. 12. AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 12 of 87 Darren L. Salipsip 98B & Ronald Patrick Rubin 06C  Rules on collateral and direct attack against corporate existence: 1. The corporate existence of a de jure corporation cannot be directly attacked either directly or collaterally, even by the State. 2. The corporate existence of a de facto corporation can be directly attacked on a quo warranto proceeding. 3. The corporate existence of a de facto corporation is not subject to collateral attack by any party.  A municipal corporation created by an unconstitutional law cannot be cannot exist as a de facto corporation unless there is some other valid law giving corporate vitality to the organization. An unconstitutional law confers no rights. (Municipality of Malabang vs. Benito)  Without having obtained a certificate of incorporation, a corporation – even its stockholders – may not claim in good faith to be a corporation. (Hall vs. Piccio) CORPORATION BY ESTOPPEL  Sec. 21. Corporation by estoppel. - All persons who assume to act as corporation knowing it be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof; Provided, however, That when any such ostensible corporation is sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality.  The doctrine of corporation by estoppel may apply to the alleged corporation or to a third party transacting with the former.  The principle of estoppel cannot be invoked in favor of a person who is a member of the association and therefore must be presumed to know that it is not a corporation. (Lozano vs. De Los Santos)  The principle of estoppel applies when persons assume to form a corporation and exercise corporate functions and enter into business relations with third persons. Where there is no third person involved and the conflict arises only among those assuming to form a corporation, who therefore know that it has not been registered, there is no corporation by estoppel. (Lozano vs. De Los Santos)  One who has induced another to act upon his willful misrepresentation that a corporation was duly organized and existing under the law, cannot, thereafter set up against his victim the principle of corporation by estoppel. Such persons becomes liable for the contracts entered into by such ostensible corporation. (Albert vs. University Publishing Co., Inc.)  A person who has contracted or dealt with an association in such a way as to recognize its existence as a corporate body is estopped from denying the same in an action arising out of such transaction or dealing, yet this doctrine may not be held to be applicable where fraud takes part in the said transaction. (Salvatierra vs. Garlitos)  Persons who have continuously and for a long period misrepresented themselves as a corporation as estopped from denying such personality to defeat claims against it. (Chiang Kai Shek School vs. CA)  In the absence of fraud, a person who has contracted or dealt with an association in such a way as to recognize and in effect admit its legal existence as a corporate body is thereby estopped to deny its corporate existence in an action leading out of or involving such contract or dealing, unless the existence is attacked for causes which have arisen since making the contract or other dealing relied on as an estoppel. (Asia Banking Corp. vs. Standard Products Co., Inc.)  The doctrine of estoppel applies to a third party only when he tries to escape liability on a contract from which he has benefited. It does not apply when the third party is the one claiming from the contract. (International Express Travel & Tours Services, Inc. vs. CA)  The doctrine of estoppel applies to foreign as well as domestic corporations. Foreign corporations doing business in the Philippines may sue in Philippine courts although not authorized to do business here against the Philippine citizen who had contracted with and been benefited by said corporation. (Georg Grotjahn GMBH & Co. vs. Isnani)
  13. 13. AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 13 of 87 Darren L. Salipsip 98B & Ronald Patrick Rubin 06C  If a corporation by estoppel exists and enters into a contract or transacts business with a third party, the latter has three remedies: 1. He may file a suit against the ostensible corporation to recover from the corporate properties; 2. He may file the case directly against the associates personally who held out the association a corporation; and 3. Against both the ostensible corporation and persons forming it, jointly and severally.  As regards the liability of the associates of the alleged corporation, only those who actively participated in holding out the association as a corporation should be held personally liable. ORGANIZATION AND COMMENCEMENT OF BUSINESS  Sec. 22. Effects on non-use of corporate charter and continuous inoperation of a corporation. - If a corporation does not formally organize and commence the transaction of its business or the construction of its works within two (2) years from the date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved. However, if a corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least five (5) years, the same shall be a ground for the suspension or revocation of its corporate franchise or certificate of incorporation. This provision shall not apply if the failure to organize, commence the transaction of its businesses or the construction of its works, or to continuously operate is due to causes beyond the control of the corporation as may be determined by the Securities and Exchange Commission.  Organization – the election of officers, providing for the subscription and payment of capital stock, the adoption of by-laws, and such other steps as are necessary to endow the legal entity with the capacity to transact the legitimate business for which it was created.  Failure of the corporation to organize within the prescribed period would result in its automatic dissolution, unless its failure to do so is due to causes beyond its control.  Substantial compliance is sufficient.  Subsequent inoperation is merely a ground for suspension or revocation of corporate franchise. Dissolution is not automatic. CHAPTER 5: THE CORPORATE CHARTER AND ITS AMENDMENTS CORPORATE CHARTER  Corporate charter – an instrument or authority from the sovereign power, bestowing rights and power.  The corporate charter is a three-fold contract: 1. Between the corporation and the state insofar as it concerns its primary franchise to be and act as a corporation; 2. Between the corporation and the stockholders or members insofar as it governs their respective rights and obligations; and 3. Between and among the stockholders or members themselves as far as their relationship with one another is concerned.  The charter of corporations created under the Corporation Code consists of the articles of incorporation and the Corporation Code inclusive of the by-laws adopted thereunder and all pertinent provisions of any statute governing them.  The charter of corporations created by special laws consists of the special law creating the same and any and all laws, rules and regulations affecting or applicable to them.  Franchise – the right or privilege itself to be and act as a corporation or to do a certain act.
  14. 14. AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 14 of 87 Darren L. Salipsip 98B & Ronald Patrick Rubin 06C  Kinds of franchises: 1. Primary franchise – the right or privilege of being a corporation which the state confers upon the applicant for this faculty. 2. Secondary franchise – the powers and privileges vested in, and to be exercised by the corporate body as such. CORPORATE ENTITY THEORY  The corporation is possessed with a personality separate and distinct from the individual stockholders or members.  A corporation is a distinct legal entity to be considered as separate and apart from the individual stockholders or members who compose it, and is not affected by the personal rights, obligations and transactions of its stockholders or members. Conversely, a corporation has no interest in the individual property of its stockholders unless transferred to the corporation, even in case of a one- man corporation. (Sulo ng Bayan, Inc. vs. Gregoria Araneta, Inc.)  A bona fide corporation should alone be liable for its corporate acts as duly authorized by its directors and officers. (Caram vs. CA)  The president and manager of a corporation who entered into and signed a contract in his official capacity, cannot be made liable thereunder in his individual capacity in the absence of stipulation to that effect due to the personality of the corporation being separate and distinct from the person composing it. (Rustan Pulp and Paper Mills, Inc. vs. IAC)  A corporation has a personality distinct and separate from its individual stockholders or members. The mere fact that one is president of a corporation does not render the property he owns and possesses the property of the corporation, since the president, as an individual, and the corporation are separate entities. (Cruz vs. Dalisay)  Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not, of itself, sufficient ground for disregarding the separate corporate personality. (Palay Inc. vs. Clave)  In a right of action against the corporation, the officers may not be held personally liable as long as they act within the scope of their authority. (Soriano vs. CA) PIERCING THE VEIL OF CORPORATE FICTION  Piercing the veil of the corporate fiction is resorted to only in cases where the corporation is used or being used to defeat public convenience, justify wrong, protect fraud, defend crime, confuse legitimate issues, or to circumvent the law or perpetuate deception, or an alter-ego, adjunct or business conduit for the sole benefit of a stockholder or a group of stockholders or another corporation.  Test in determining the applicability of the doctrine of piercing the veil of corporation fiction: 1. Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; 2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff's legal rights; and 3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of. (Instrumentality Rule, Concept Builders, Inc. vs. NLRC) WHEN PIERCING THE CORPORATE FICTION IS NOT JUSTIFIED  Corporate fiction cannot be disregarded in the absence of intent to defraud in corporate transactions. (Remo, JR vs. IAC)  For the separate juridical personality of a corporation to be disregarder, the wrongdoing must be clearly and convincingly established. (Del Rosario vs. NLRC)
  15. 15. AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 15 of 87 Darren L. Salipsip 98B & Ronald Patrick Rubin 06C  Mere corporate ownership of all the stocks of another corporation will not justify their being treated as single entity. (PNB vs. Ritratto)  There being not the least indication that the second corporation is a dummy or serves as a client of the first corporation, the fiction of separate and distinct corporate entities cannot be disregarder and brushed aside. (Yu vs. NLRC) AMENDMENT OF THE CORPORATE CHARTER  Steps to be followed for an effective amendment of the articles of incorporation: 1. Resolution by at least a majority of the board of directors or trustees. 2. Vote or written assent of the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of the members in case of non-stock corporation. 3. Submission and filing of the amendments with the SEC as follows: a. The original and amender articles together shall contain all the provisions required by law to be set out in the articles of incorporation. Such articles, as amended, shall be indicated by underscoring the change or changes made. b. A copy thereof, duly certified under oath by the corporate secretary and a majority of the directors or trustees stating the fact that such amendments have been duly approved by the required vote of the stockholders or members. c. Favorable recommendation of the appropriate government agency concerned in the case where the corporation is under its supervision.  Time when the amendments shall take effect: 1. Upon approval of the SEC; or 2. From the date of filing with the SEC if not acted upon with 6 months from the date of filing for a cause not attributable to the corporation. (Note: not applicable to special amendments)  Special amendments: 1. Extension or shortening of corporate term (Sec. 37) 2. Increase or decrease of capital stock (Sec. 38) 3. Incurring, creating or increasing bonded indebtedness (Sec. 38) PROVISIONS SUBJECT TO AMENDMENT  Matters which are fait accompli are not subject to change.  A change in the name of the corporation does not affect the identity of the corporation, nor in any way affect the rights, privileges, or obligations previously acquired or incurred by it. (Philippine First Insurance Co. vs. Hartigan) AMENDMENT OF THE CORPORATE TERM  Procedure to amend the corporate term: 1. Approval by a majority vote of the board or directors or trustees. 2. Written notice of the proposed action and the time and place of meeting shall be served to each stockholder or member either by mail or by personal service. 3. Ratification by the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of the members in case of non-stock corporations. 4. In case of extension of corporate term, the extension should be for periods not exceeding 50 years in any single instance, and provided that no extension can be made earlier than 5 years prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as may be determined by the SEC. 5. In cases of extension of corporate term, a dissenting stockholder may exercise his appraisal rights.
  16. 16. AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 16 of 87 Darren L. Salipsip 98B & Ronald Patrick Rubin 06C  Extension may be made only before the term provided in the corporate charter expires. (Alhambra Cigar & Cigarette Mfg. Co., Inc. vs. SEC) CHAPTER 6: BOARD OF DIRECTORS/TRUSTEES AND OFFICERS POWERS OF THE BOARD  Sec. 23. The board of directors and trustees. - Unless otherwise provided in the Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees.  The authority of the board of directors does not extend to the fundamental changes in the corporate charter.  The board may delegate the exercise of corporate powers.  A corporation is bound by the acts of its corporate officers if they act within the scope of the 5 classifications of powers of corporate agents: 1. Those expressly conferred or those granted by the articles of incorporation, the corporate by-laws or by the official act of the board of directors. 2. Those that are incidental or those acts as are naturally and ordinarily done which are reasonable and necessary to carry out the corporate purpose or purposes. 3. Those that are inherent or acts that go with the office. 4. Those that are apparent or those acts which although not actually granted, the principal knowingly allows or permits it to be done. 5. Powers arising out of customs, usage or emergency.  Where a corporation seeks to evade liability on a contract on the ground of lack of authority on the part of the person who assumed to act for it, such defense should be specially pleaded. Failure to make an issue as to such authority eliminates any questions regarding it. (Ramirez vs. Orientalist Co.)  The fact that the power to make corporate contracts is thus vested in the board of directors does not signify that a formal vote of the board must always be taken before contractual liability can be fixed upon a corporation; for the board can create liability, like an individual, by other means than by a formal expression of its will. (Ramirez vs. Orientalist Co.)  The power to make corporate contracts resides primarily in the company's board of directors; but the board may ratify an unauthorized contract made by an officer of the corporation. Ratification in this case is held to have occurred when the board, with knowledge that the contract had been made, adopted a resolution recognizing the existence of the contract and directing that steps be taken to enable the corporation to utilize its benefits. (Ramirez vs. Orientalist Co.)  Where a corporate contract has been effected with the approval of the board of directors, a resolution adopted at a meeting of stockholders refusing to recognize the contract or repudiating it is without effect. (Ramirez vs. Orientalist Co.)  Contracts between a corporation and third persons must be made by or under the authority of its board of directors and not of its stockholders. (Barreto vs. La Previsora) QUALIFICATIONS AND DISQUALIFICATIONS  Qualifications: 1. Directors must own at least one (1) share of the capital stock of the corporation. Trustees must be members. 2. A majority of the directors or trustees must be residents of the Philippines.
  17. 17. AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 17 of 87 Darren L. Salipsip 98B & Ronald Patrick Rubin 06C  Disqualifications: 1. Conviction by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or a violation of this Code committed within five (5) years prior to the date of election or appointment. 2. Other disqualifications under applicable special laws.  In order to be eligible as a director, what is material is the legal title to, not beneficial ownership, of the stock as appearing on the books of the corporation. (Lee vs. CA)  If no election is conducted or no qualified candidate is elected, the incumbent director shall continue to act as such in a hold-over capacity until the election is held and a qualified candidate is so elected. (Detective and Protective Bureau vs. Cloribel) ELECTION AND VOTING  In stock corporations, the majority of the outstanding capital stock, in person or by representative authorized to act by written proxy, must be present at the election of directors.  In non-stock corporations, a majority of the members entitled to vote, in person or by proxy, if allowed in its articles of incorporation or by-laws, must be present in the election.  The election may be adjourned if, for any reason, no election is held, or if the required quorum is not obtained. However, it may not be adjourned indefinitely.  The election must be by ballot if requested by any voting stockholder or member.  Candidates receiving the highest number of votes shall be declared elected.  In stock corporations, cumulative voting is a matter of right.  In non-stock corporations, cumulative voting is not available unless provided for in the articles of incorporation or by-laws. I.e., a member may cast as many votes as there are trustees to be elected but may not cast more than one vote for one candidate.  In stock corporations, the stockholder may: 1. Vote such number of shares for as many persons as there are directors to be elected; 2. Cumulate said shares and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal; 3. Distribute them on the same principle among as many candidates as he shall see fit.  No delinquent stock shall be voted.  Officers to be elected 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 for in the by-laws.  Any two (2) or more positions may be held concurrently by the same person, except that no one shall act as president and secretary or as president and treasurer at the same time.  The directors or officers shall hold office for one (1) year until their successors are elected and qualified. VALIDITY AND BINDING EFFECT OF ACTIONS OF CORPORATE OFFICERS  General rule: the quorum requirement for a valid board meeting is the majority of the number of the directors or trustees as fixed in the articles of incorporation.  Exception: The articles of incorporation or the by-laws may provide for a greater majority.  General rule: To have a valid corporate act, the decision of at least a majority of the directors or trustees present at a meeting at which there is a quorum is required.
  18. 18. AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 18 of 87 Darren L. Salipsip 98B & Ronald Patrick Rubin 06C  Exception: The election of corporate officers requires the vote of a majority of all the members.  General rule: Individual directors cannot bind the corporation by their individual acts.  Exceptions: 1. By delegation of authority; 2. Where expressly conferred; or 3. Where the officer or agent is clothed with actual or apparent authority.  Although an officer or agent acts without, or in excess of, his actual authority if he acts within the scope of an apparent authority with which the corporation has clothed him by holding him out or permitting him to appear as having such authority, the corporation is bound thereby in favor of a person who deals with him in good faith in reliance on such apparent authority, as where an officer is allowed to exercise a particular authority with respect to the business, or a particular branch of it, continuously and publicly, for a considerable time. Also, if a private corporation intentionally or negligently clothes its officers or agents with apparent power to perform acts for it, the corporation will be estopped to deny that such apparent authority is real, as to innocent third persons dealing in good faith with such officers or agents. This apparent authority may result from (1) the general manner by which the corporation holds out an officer or agent as having power to act or, in other words, the apparent authority with which it clothes him to act in general, or (2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, whether within or without the scope of his ordinary powers. (Yao Ka Sin Trading vs. CA)  Any action of the board without a meeting and without the required voting and quorum requirement will not bind the corporation unless subsequently ratified, expressly or impliedly. (Lopez vs. Fontecha)  Where a general business manager of a corporation is clothed with apparent authority to borrow money and the amount borrowed does not exceed the ordinary requirements of the business, the authority is implied and that the corporation is bound. (Pua Casim & Co. vs. Neumark and Co.)  An invalid contract may be validated by the ratification only of the board of directors; the president has no authority to ratify such contract. (Yu Chuck vs. Kong Li Po)  Silence coupled with acceptance of benefits constitutes a binding ratification. (Francisco vs. GSIS)  A corporate officer entrusted with the general management and control of its business, has implied authority to make any contract or do any other act which is necessary or appropriate to the conduct of the ordinary business of the corporation. As such officer, he may, without any special authority from the Board of Directors, perform all acts of an ordinary nature, which by usage or necessity are incident to his office, and may bind the corporation by contracts in matters arising in the usual course of business. Where similar acts have been approved by the directors as a matter of general practice, custom, and policy, the general manager may bind the company without formal authorization of the board of directors. (Board of liquidators vs. Kalaw)  Lack of repudiation, acquiescence and acceptance of benefits are equivalent to an implied ratification by the Board of Directors and binds the corporation even without formal resolution passed and recorded. (Buenaseda vs. Bowen & Co., Inc.)  Express ratification: through formal board action.  Implied ratification: 1. Silence or acquiescence; 2. Acceptance and/or retention of benefits; or 3. By recognition or adoption.
  19. 19. AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 19 of 87 Darren L. Salipsip 98B & Ronald Patrick Rubin 06C REMOVAL AND FILLING UP OF VACANCIES  Requirements and procedure: 1. The removal should take place at a general or special meeting duly called for that purpose; 2. The removal must be a vote of the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of the members in case of non-stock corporations; 3. Prior notice of the proposed removal must be made stating the time and place of meeting either by publication or by written notice.  The special meeting must be called by the secretary, on order of the president or on the written demand of the stockholders representing a majority of the outstanding capital stock, or a majority of the members entitled to vote. Should the secretary fail or refuse to call the special meeting upon such demand or fail or refuse to give notice, or if there is no secretary, the call for the meeting may be addressed directly to the stockholders or members by any stockholder or member signing the demand.  General rule: Directors or trustees may be removed with or without just cause.  Exception: Removal without just cause may not be used to deprive minority stockholders or members of the right of representation to which they may be entitled under Sec. 24.  PD 902-A grants the court the power and authority to remove or oust a director and it can do so, even motu propio by the appointment of a management committee.  In case of a deadlock in a close corporation, the SEC is authorized to issue an order cancelling, altering, or enjoining any resolution or other act of the corporation or its board of directors or directing or prohibiting any act of the corporation or the board of directors thereby effectively taking away the rights of the directors to act as managers of the corporation.  Vacancies to be filled by the stockholders or members in a regular or special meeting: 1. Vacancy due to removal; 2. Vacancy due to expiration of term; 3. Vacancy due to an increase in the number of board of directors; and 4. Vacancy due to other causes when the remaining directors or trustees do not constitute a quorum.  Vacancy due to removal may be filled by an election at the same meeting without further notice.  Any change in the constitution of the board of directors or trustees must be reported to the SEC.  The tenure of the director filling up the vacancy shall only be for the unexpired term of his predecessor in office.  If the successor is not qualified, the predecessor shall hold office in a hold-over capacity until such successor is duly elected and qualified. (Detective and Protective Bureau vs. Cloribel) COMPENSATION OF DIRECTORS  General rule: Directors shall not receive any compensation, as such directors, except for reasonable per diems.  Exceptions: 1. When there is a provision in the by-laws fixing their compensation; 2. When the stockholders, by a majority vote the outstanding capital stock grant the same; and 3. If the director renders extra-ordinary or unusual service.  In no case shall the total yearly compensation of directors, as such directors, exceed 10% of the net income before income tax of the corporation during the preceding year.
  20. 20. AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 20 of 87 Darren L. Salipsip 98B & Ronald Patrick Rubin 06C  If there is wastage of corporate assets, the courts may be justified to look into the reasonableness and fairness of the compensation despite the fact that the grant thereof is authorized pursuant to the by-laws and by the vote of the majority of the holders of the outstanding capital stock of the corporation.  The board may not grant compensation upon itself without authorization of the by-laws or in contravention of the by-laws. (Central Cooperative Exchange vs. Tibe, Jr.)  Members of the board of directors may receive compensation, in addition to reasonable per diems, when they render services to the corporation in a capacity other than as directors or trustees. (Western Institute of Technology, Inc. vs. Salas)  The fact that the amount paid as compensation to directors under a by-law provision has increased beyond what would probably be necessary to secure adequate service from them is a matter that cannot be corrected by the court. The remedy is in the hands of the stockholders who have the power at any lawful meeting to change the rule. (Govt. vs. El Hogar Filipino) LIABILITY OF CORPORATE OFFICERS  The general rule is that unless the law specifically provides, a corporate officer or agent is not civilly or criminally liable for acts done by him as such officer or agent.  Personal liability of a corporate director, trustee or officer along with the corporation may validly attach, as a rule, only when: 1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith, gross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons; 2. He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; 3. He agrees to hold himself personally and solidarily liable with the corporation; or 4. He is made, by specific provision of law, to personally answer for his corporate action. (Tramat Mercantile, Inc. vs. CA)  Where a check is drawn by a corporation, company or entity, the person or persons who actually signed the check in behalf of such drawer shall be liable under this Act. (Sec. 1, BP 22)  In labor cases, corporate directors and officers are solidarily liable with the corporation for the termination of employment of corporate employees done with malice or in bad faith. (Uichico vs. NLRC) THREE-FOLD DUTY OF DIRECTORS  Three-fold duty of directors: 1. Obedience 2. Diligence 3. Loyalty  Solidarily liability for all damages suffered by the corporation, its stockholders or members or other persons shall be imposed upon directors or trustees: 1. Who willfully and knowingly vote for or assent to patently unlawful acts of the corporation; 2. Who are guilty of gross negligence or bad faith in directing the affairs of the corporation; or 3. Who acquire any personal property or pecuniary interest in conflict with their duty as such directors or trustees.  Business judgment rule – directors are not liable for losses due to imprudence or honest error of judgment. Questions of policy and management are left solely to the honest decision of the board of directors and the courts are without authority to substitute its judgment as against the former.  Resolutions passed in good faith by the board of directors are valid and binding, and whether or not it will cause losses or decrease in profits are not subject to the review of the court. (Montelibano vs. Bacolod Murcia Milling, Co., Inc.)
  21. 21. AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 21 of 87 Darren L. Salipsip 98B & Ronald Patrick Rubin 06C  General rule: A director is not liable for misconduct of co-directors or other officers.  Exceptions: 1. He connives or participates in it; or 2. He is negligent in not discovering or acting to prevent it.  The duty of loyalty is violated in the following instances: 1. When a director or trustee acquires any personal or pecuniary interest in conflict with his duty as such director or trustee; 2. When he attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect to any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf; and 3. When he, by virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profit to the prejudice of such corporation.  Corporate opportunity doctrine – It places a director of a corporation in the position of a fiduciary and prohibits him from seizing a business opportunity and/or developing it at the expense and with the facilities of the corporation. He cannot appropriate to himself a business opportunity which in fairness should belong to the corporation.  Distinction between Secs. 31 & 34: 1. Sec. 31, where a director is liable to account for profits if he attempts to acquire or acquires any interest adverse to the corporation in respect to any matter reposed in him in confidence as to which equity imposes a disability upon him to deal in his own behalf is not subject to ratification by the stockholders. 2. Sec. 34, where the director acquires for himself a business opportunity which should belong to the corporation, he is bound to account for such profits unless his act is ratified by the stockholders owning or representing at least 2/3 of the outstanding capital stock.  Directors are liable for fraud committed by concealment of information as to the state and probable result of the negotiations for the sale of corporate assets which may affect the price of the corporation‟s stock. (Strong vs. Repide) SELF-DEALING DIRECTORS  A contract of the corporation with one or more of its directors or trustees or officers is voidable, at the option of such corporation, unless all of the following conditions are present: 1. That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting; 2. That the vote of such director or trustee was not necessary for the approval of the contract; 3. That the contract is fair and reasonable under the circumstances; and 4. That in case of an officer, the contract has been previously authorized by the board of directors.  Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a director or trustee, such contract may be ratified, provided: 1. The contract is ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members 2. Such ratification is made at a meeting called for that purpose; 3. Full disclosure of the adverse interest of the directors or trustees involved is made; and 4. The contract is fair and reasonable under the circumstances.  In the absence of express delegation, a contract entered into by the president, on behalf of the corporation, may bind the corporation if the board should ratify the same expressly or impliedly. Furthermore, the president as such may bind the corporation by a contract in the ordinary course of
  22. 22. AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 22 of 87 Darren L. Salipsip 98B & Ronald Patrick Rubin 06C business, provided the same is reasonable under the circumstances. These rules only apply where the president or other officer, purportedly acting for the corporation, is dealing with a third person, i.e., person outside the corporation. It does not apply to self-dealing directors or officers. (Prime White Cement Corp. vs. IAC)  A director or officer may in good faith and for an adequate consideration purchase from a majority of the directors or stockholders the property even of an insolvent corporation. (Mead vs. Mc Cullough) INTERLOCKING DIRECTORS  Sec. 33. Contracts between corporations with interlocking directors. - Except in cases of fraud, and provided the contract is fair and reasonable under the circumstances, a contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone: Provided, That if the interest of the interlocking director in one corporation is substantial and his interest in the other corporation or corporations is merely nominal, he shall be subject to the provisions of the preceding section insofar as the latter corporation or corporations are concerned. Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be considered substantial for purposes of interlocking directors.  A director who owns a substantial interest in one corporation dealing with another where he has a nominal interest is a regarded as a self-dealing director in so far as the latter corporation is concerned. DERIVATIVE SUIT  Suits that stockholders may bring against erring directors or officers: 1. Individual or personal suit – one brought by the shareholders for direct injury to his rights, such as denial of his right to inspect corporate books and records or pre-emptive right; 2. Representative of class suit - ; and 3. Derivative suit – an action based on injury to the corporation – to enforce a corporate right – wherein the corporation is joined as a necessary party, and recovery is in favor of the corporation.  A stockholder in a corporation who was not such at the time of the transactions complained of, or whose shares had not devolved upon him since by operation of law, can not maintain a derivative suit unless such transactions continue and are injurious to the stockholder, or affect him specifically in some other way. (Pascual vs. Orozco, et al.)  When the board is under the complete control of the principal defendants in the case, demand upon such board to institute action and prosecute the same is not required. The law does not require litigants to do useless acts. (Everett vs. Asia Banking Corporation)  The corporation should be made a party, in order to make the court‟s judgment binding upon it, and thus bar future relitigation of the issue. On what side the corporation appears is not important. (Republic Bank vs. Cuaderno)  The minority shareholder who is suing for and in behalf of the corporation must allege in his complaint before the proper forum that he is suing on a derivative cause of action on behalf of the corporation and all other shareholders similarly situated who wish to join. This is necessary to vest jurisdiction upon the tribunal in line with the rule that it is the allegations in the complaint that vest jurisdiction upon the court or quasi-judicial body concerned over the subject matter and nature of the action. (Western Institute of Technology, Inc. vs. Salas)  The bona fide ownership by a stockholder of stock in his own right suffices to invest him with standing to bring a derivative action for the benefit of the corporation. The number of his shares is immaterial since he is not suing in his own behalf, or for the protection or vindication of his own particular right, or the redress of a wrong committed against him, individually, but in behalf and for the benefit of the corporation. (SMC vs. Khan)  Where corporate directors are guilty of breach of trust – not mere error of judgment or abuse of discretion – and intra-corporate remedy is futile or useless, a stockholder may institute a suit in behalf of himself and other stockholders and for the benefit of the corporation, to bring about a
  23. 23. AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 23 of 87 Darren L. Salipsip 98B & Ronald Patrick Rubin 06C redress of the wrong inflicted directly upon the corporation and indirectly upon the stockholders. (Reyes vs. Tan, et al.)  The stockholders in a derivate suit cannot allege or vindicate their own individual interests or prejudice. (Gamboa vs. Victoriano, et al.)  In a derivative suit, the injury complained of is primarily to the corporation, so that the suit for the damages claimed should be by the corporation rather than by the stockholders. The stockholders may not directly claim those damages for themselves for that would result in the appropriation by, and the distribution among them of part of the corporate assets before the dissolution of the corporation and the liquidation of its debts and liabilities. (Evangelista vs. Santos)  Rules, requirements and procedure so that a derivative suit may proceed or prosper: 1. The party bringing the action should be a stockholder as of the time the act or transaction complained of took place, or whose shares have evolved upon him since by operation of law. This rule, however, does not apply if such act or transaction continues and is injurious to the stockholder or affects him specifically in some other way. The number of shares is immaterial. 2. He has tried to exhaust intra-corporate remedies, i.e. he has made a demand on the board of directors for the appropriate relief but the latter had failed or refused to heed his plea. Demand, however, is not required if the company is under the complete control of the directors who are the very ones to be sued (or where it becomes obvious that a demand upon them would have been futile and useless) since the law does not require a litigant to perform useless acts. 3. The stockholder bringing the suit must allege in his complaint that he is suing on a derivative cause of action on behalf of the corporation and all other stockholders similarly situated, otherwise, the case is dismissible. 4. The corporation should be made a party, either as party-plaintiff or defendant, in order to make the court‟s judgment binding upon it. 5. Any benefit or damages recovered shall pertain to the corporation. EXECUTIVE COMMITTEE  An executive committee may be created when authorized by the by-laws.  General rule: The executive committee may act, by majority vote of all its members, on such specific matters within the competence of the board, as may be delegated to it in the by-laws or on a majority vote of the board.  Exceptions: 1. Approval of any action for which shareholders' approval is also required; 2. The filling of vacancies in the board; 3. The amendment or repeal of by-laws or the adoption of new by-laws; 4. The amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable; and 5. A distribution of cash dividends to the shareholders. CHAPTER 7: CORPORATE POWERS AND AUTHORITY  Classification of corporate authority: 1. Those expressly granted or authorized by law inclusive of the corporate charter or articles of incorporation 2. Those impliedly granted as are essential or reasonably necessary to the carrying out of the express powers 3. Those that are incidental to its existence.
  24. 24. AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 24 of 87 Darren L. Salipsip 98B & Ronald Patrick Rubin 06C  Powers expressly granted 1. Power to sue and be sued (Sec. 36) 2. Power of succession (Sec. 36) 3. Power to adopt and use a corporate seal (Sec. 36) 4. Power to amend its articles of incorporation (Sec. 36) 5. Power to adopt, amend or repeal by-laws (Sec. 36) 6. Power to issue or sell stocks/ to admit members (Sec. 36) 7. Power to acquire or alienate real or personal property (Sec. 36) 8. Power to enter into merger or consolidation (Sec. 36) 9. Power to make reasonable donations (Sec. 36) 10. Power to establish pension, retirement, and other plans (Sec. 36) 11. Power to extend or shorten corporate term (Sec. 37) 12. Power to increase or decrease capital stock (Sec. 38) 13. Power to incur, create or increase bonded indebtedness (Sec. 38) 14. Power to deny pre-emptive right (Sec. 39) 15. Power to sell or dispose corporate assets (Sec. 40) 16. Power to acquire own shares (Sec. 41) 17. Power to invest corporate funds in another corporation or business or for any other purpose (Sec. 42) 18. Power to declare dividends (Sec. 43) 19. Power to enter into management contract (Sec. 44) POWER TO SUE AND BE SUED  The residence of the corporation is the place of its principal office as may be indicated in its articles of incorporation and may, therefore, be sued only at that place. (CRS vs. Antillon)  Service of summons upon a corporation must be made upon: 1. President, 2. Managing partner, 3. General manager, 4. Corporate secretary, 5. treasurer, or 6. In-house counsel  Strict compliance with the mode of service is necessary to confer jurisdiction of the court over a corporation. The officer upon whom service is made must be one who is named in the statute; otherwise the service is insufficient. (Delta Motor Sales Corp. vs. Mangosing)  Under the new rules, service of summons upon an agent of the corporation is no longer authorized. (E.B. Villarosa & Partner Co., LTD. vs. Benito) POWER OF SUCCESSION  Right of succession – a corporation persists to exist despite the death, incapacity, civil interdiction or withdrawal of the stockholders or members thereof.
  25. 25. AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 25 of 87 Darren L. Salipsip 98B & Ronald Patrick Rubin 06C POWER TO ADOPT AND USE COMMON SEAL  Statutes empowering corporations to make and own a seal are not mandatory but merely permissive. POWER TO AMEND ARTICLES OF INCORPORATION  General rule: Amendment of the articles of incorporation is a matter of right (Note: procedure differs for special amendments)  Exception: Corporations created by special law POWER TO ADOPT BY-LAWS  A corporation, once formed is required to adopt its by-laws, not contrary to law, morals or public policy, within one month from receipt of official notice of the issuance of certificate of incorporation or registration. POWER TO ISSUE/SELL STOCKS OR ADMIT MEMBERS  The power of a corporation to issue or sell stock is an inherent right except where it sells or issues stocks of other corporations (Securities Regulation Code). POWER TO ACQUIRE/ALIENATE PROPERTY  Real or personal properties must be acquired, held or conveyed as the transaction of the lawful business of the corporation may reasonably and necessarily require. Furthermore, it shall be subject to the limitations imposed by law and the Constitution.  A corporation cannot undertake acquisition of property which would have no purpose and would have no necessary connection with its legitimate business. (Luneta Motors Co. vs. A.D. Santos, Inc.)  A corporation whose business may properly conducted in a populous center may acquire an appropriate lot and construct thereon an edifice with facilities in excess of its own immediate requirements. (Govt. vs. El Hogar)  A corporation may register alienable public lands if it has been held by it, personally or through its predecessor-in-interest, openly, continuously and publicly within the prescribed statutory period of 30 years under the Public Land Law, as amended, since it is converted into private property by mere lapse of completion of said period. (Dir. of Lands vs. CA) POWER TO MAKE REASONABLE DONATIONS  Limitations imposed upon corporate donations: 1. The donation must be reasonable; 2. It must be for public welfare, or for hospital, charitable, scientific, cultural or similar purpose; and 3. It shall not be in aid of any political party or candidate, or for purpose of partisan political activity. POWER TO ESTABLISH PENSION, RETIREMENT AND OTHER PLANS  While as a rule an ultra vires act is one committed outside the object for which a corporation is created as defined by law of its organization and therefore beyond the powers conferred upon it by law, there are however certain corporate acts that may be performed outside of the scope of the powers expressly conferred if they are necessary to promote the interest or welfare of the corporation. (Republic vs. Acoje Mining Co., Inc.) POWER TO EXERCISE SUCH OTHER POWERS ESSENTIAL OR NECESSARY TO CARRY OUT ITS PURPOSES (IMPLIED POWERS)  Classification of implied powers: 1. Acts in the usual course of business 2. Acts to protect debts owing to the corporation 3. Embarking on a different business
  26. 26. AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 26 of 87 Darren L. Salipsip 98B & Ronald Patrick Rubin 06C 4. Acts in part or wholly to protect or aid employees 5. Acts to increase business  A corporation has authority to do what will legitimately tend to effectuate the express purposes and objects; that it may ordinarily do all things that are convenient, suitable or necessary to enable it to fully perform the undertaking designated in its charter, and for which it is organized.  There must be a logical and necessary relation of the act to the corporate purpose. (NPC vs. Vera)  If the act is one which is lawful in itself and not otherwise prohibited, and is done for the purpose of serving corporate ends, and reasonably contributes to the promotion of those ends in a substantial and not in a remote and fanciful sense, it may be fairly considered within the corporation‟s charter powers. (NPC vs. Vera)  Examples: 1. Operation and maintenance of an electric plant for a cement factory. (Teresa Electric Power Co., Inc. vs. PSC) 2. NPC‟s undertaking of stevedoring services for its power plant. (NPC vs. Vera) 3. International School‟s imposition of a development fee for expansion and maintenance. (Powers vs. Marshall) POWER TO EXTEND/SHORTEN CORPORATE TERM  Requirements and procedure: 1. Approval by the majority vote of the board of directors or trustees; 2. Ratification by the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of the members in case of non-stock corporations; 3. The ratification must be at a meeting duly called for that purpose; 4. Prior written notice of the proposal to extend or shorten the corporate term must be made stating the time and place of meeting addressed to each stockholder or member at his place of residence, either by mail or personal service; 5. In case of extension, the same cannot be made ealier than five (5) years prior to the original or subsequent expiry date unless there are justifiable reasons for an earlier extension; 6. In case of extension, the same must be made during the lifetime of the corporation; 7. Any dissenting stockholder may exercise his appraisal right; 8. Submission of the amended articles with the SEC; and 9. Approval thereof by the SEC. POWER TO INCREASE/DECREASE CAPITAL; INCUR, CREATE OR INCREASE BONDED INDEBTEDNESS  Requirements and procedure: 1. Approval by the majority vote of the board of directors or trustees; 2. Ratification by the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of the members in case of non-stock corporations; 3. The ratification must be at a meeting duly called for that purpose; 4. Prior written notice of the proposed action must be made stating the time and place of meeting addressed to each stockholder or member at his place of residence, either by mail or personal service; 5. A certificate in duplicate must be signed by a majority of the directors of the corporation, countersigned by the chairman and the secretary of the stockholder‟s meeting, setting forth the matters contained in subsection 1 to 7 of Sec. 38;
  27. 27. AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 27 of 87 Darren L. Salipsip 98B & Ronald Patrick Rubin 06C 6. In case of increase in capital stock, 25% of such increased capital must be subscribed and that at least 25% of the amount subscribed must be paid either in cash or property; 7. In case of decrease in capital stock, the same must not prejudice the right of the creditors; 8. Filing of the certificate of increase and amended articles with the SEC; and 9. Approval thereof by the SEC.  3 ways of increasing the capital stock: 1. Increasing the par value of the existing number of shared without increasing the number of shares; 2. Increasing the number of existing shares without increasing the par value thereof; and 3. Increasing the number of existing shares and at the same time increasing the par value of the shares.  Existence of unissued or unsubscribed share out of the original capital stock will not prohibit the increase of capital stock.  Reasons for decreasing capital stock: 1. To reduce or wipe out existing deficit where no creditors would thereby be affected; 2. When capital is more than what is necessary to procreate the business or reduction of capital surplus; or 3. To write down the value of its fixed assets to reflect the present actual value in case where there is a decline in the value of the fixed assets of the corporation.  A corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his shares, without a valuable consideration for such release; and as against creditors a reduction of the capital stock can take place only in the manner and under the conditions prescribed by law. Moreover, strict compliance with the statutory regulations is necessary. (Philippine Trust Company vs. Rivera)  A reduction of capital stock may not be used as a subterfuge, a deception as it were, to camouflage the fact that a corporation has been making profits to obviate a just sharing to labor. (Madrigal & Co. vs. Zamora)  A corporation which has the power to borrow or raise money, to contract for labor or services, or otherwise contract a debt has the implied power to issue bonds in payment or as a security provided it violates no prohibition or restriction in its charter or any other statutes.  Corporate bonds must be registered and approved by the SEC before they are issued. POWER TO DENY PRE-EMPTIVE RIGHTS  Pre-emptive right – is a right granted by law to all existing stockholders of a stock corporation to subscribe to all issues or disposition of shares of any class, in proportion to their respective stockholdings, subject only to the limitations imposed under Sec. 39.  The basis for the grant of this right is the preservation, unimpaired and undiluted, of the old stockholders‟ relative and proportionate voting strength and control, that is, the existing ratio of their proprietary interest and voting power in the corporation.  All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto.  Exceptions: 1. Shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; or 2. Shares to be issued in good faith with the approval of the stockholders representing two- thirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt.
  28. 28. AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 28 of 87 Darren L. Salipsip 98B & Ronald Patrick Rubin 06C  The exceptions do not apply to stockholders of a close corporation.  The right may be lost by waiver, expressly or impliedly by inability or failure to exercise it after having been notified.  The pre-emptive right covers all issues or disposition of share of any class. It includes new share issued pursuant to an increase in capital stock, unissued shares which form part of the original capital stock and treasury shares. POWER TO SELL/DISPOSE ASSETS  There is a sale or other disposition of substantially all the corporate property and assets if the corporation would thereby be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated.  Conditions for the valid exercise of this right: 1. Resolution by the majority vote of the board of directors or trustees; 2. Authorization from the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of the members in case of non-stock corporations; 3. The ratification must be at a meeting duly called for that purpose; 4. Prior written notice of the proposed action must be made stating the time and place of meeting addressed to each stockholder or member at his place of residence, either by mail or personal service; 5. The sale of the assets shall be subject to the provisions of existing laws on illegal combinations and monopolies; and 6. Any dissenting stockholder shall have the option to exercise his appraisal right. 7. (Note: In non-stock corporations where there are no members with voting rights, the vote of at least a majority of the trustees in office will be sufficient authorization for the corporation to enter into such transaction.)  Exception to application of the procedure and requirements: 1. The sale, lease, exchange, mortgage, pledge or other dispose of property and assets is necessary in the usual and regular course of business of the corporation; or 2. The sale or other disposition of property and assets is appropriated for the conduct of the corporation‟s remaining business.  The sale or other disposition of all or substantially all of the corporate property or assets must be voted for by the legitimate board and concurred in by the bona fide stockholders or members. (IDP vs. CA)  General rule: Where a corporation sells or otherwise transfers all of its assets to another corporation, the latter is not liable for the debts and liabilities of the transferor.  Exceptions: 1. Where the purchaser expressly or impliedly agrees to assume such debts; 2. Where the transaction amounts to a consolidation or merger of the corporations; 3. Where the purchasing corporation is merely a continuation of the selling corporation; and 4. Where the transaction is entered into fraudulently in order to escape liability for such debts.
  29. 29. AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 29 of 87 Darren L. Salipsip 98B & Ronald Patrick Rubin 06C POWER TO ACQUIRE OWN SHARES  A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the following cases: 1. To eliminate fractional shares arising out of stock dividends; 2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; 3. To pay dissenting or withdrawing stockholders entitled to payment for their shares; and 4. To redeem redeemable shares.  General rule: the corporation must have unrestricted retained earnings.  Exceptions: 1. Redemption of redeemable shares; and 2. Stockholder‟s right to compel a close corporation to purchase his shares when the corporation has sufficient assets to cover its debts and liabilities.  The acquisition of shares must be made in good faith, free from fraud, actual or constructive, and that the corporation is not insolvent or in the process of dissolution and that the rights of creditors and other stockholders are in no way injuriously affected. POWER TO INVEST FUNDS  The right refers to investment in the form of money, stock, bonds and other liquid assets and does not include real properties or other fixed assets.  Requirements and procedure: 1. Resolution by the majority vote of the board of directors or trustees; 2. Ratification by the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of the members in case of non-stock corporations; 3. The ratification must be at a meeting duly called for that purpose; 4. Prior written notice of the proposed investment and the time and place of meeting shall be made, addressed to each stockholder or member at his place of residence, either by mail or personal service; and 5. Any dissenting stockholder shall have the option to exercise his appraisal right.  The approval of the stockholders or members is not required where the investment is reasonably necessary to accomplish its primary purpose.  An unauthorized investment which is not illegal or void ab initio or not contrary to law, morals, public order or public policy, is merely voidable and may become binding and enforceable when ratified by the stockholders. (Gokongwei, Jr. vs. SEC) POWER TO DECLARE DIVIDENDS  Dividends – are corporate profits set aside, declared and ordered by the Board of Directors to be paid to the stockholders.  Dividends can only be declared out of unrestricted retained earnings.  Unrestricted retained earnings – undistributed earnings of a corporation which have not been allocated for any managerial, contractual or legal purpose and which are free for distribution to the stockholders as dividends.
  30. 30. AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 30 of 87 Darren L. Salipsip 98B & Ronald Patrick Rubin 06C  Types of dividends: 1. Cash dividend – those that are payable in lawful money. 2. Property dividend – those that take form of bonds, notes, evidences of indebtedness or stock in other corporations. 3. Stock dividends – refer to the corporation‟s shares of stock.  Rules on dividends due on delinquent stock: 1. Cash dividend – first applied to the unpaid balance on subscription costs and expenses. 2. Stock dividend – withheld until subscription is fully paid.  General rule: Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-in capital stock.  Exceptions: 1. When justified by definite corporate expansion projects or programs approved by the board of directors; or 2. When the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or 3. When it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies.  General rule: The board of directors exercise exclusive authority in declaring dividends.  Exception: In declaring stock dividends, the approval of the stockholders representing at least 2/3 of the outstanding capital stock is required.  The judgment of the board of directors in the matter of declaring dividends is conclusive except when they act in bad faith, or for a dishonest purpose or act fraudulently, oppressively, unreasonably or unjustly or abuse of discretion can be shown so as to impair the rights of the complaining stockholders to their just proportion of corporate profits.  The essential test of bad faith is to determine if the policy of the directors is dictated by their personal interest rather than the corporate welfare.  The right of the stockholders to be paid dividends vest as soon as they have been lawfully and finally declared by the Board of Directors.  No revocation of dividend may be had unless it has not been officially communicated to the stockholders or is in the form of stock dividends which is revocable at any time prior to distribution.  Stock dividends cannot be issued to a person who is not a stockholder. (Neilson & Co., Inc. vs. Lepanto Consolidated Mining Co.)  Directors are not liable for declaration of dividend contrary to law, unless attended with bad faith, gross negligence or willful and knowing assent. (Ladia) POWER TO ENTER INTO MANAGEMENT CONTRACTS  Requirements and procedure: 1. Resolution by the board of directors or trustees; 2. Approval by the stockholders representing a majority of the outstanding capital stock or majority of the members in case of non-stock corporations; 3. The approval must be at a meeting duly called for that purpose; 4. The contract shall not be for a period longer than 5 years for any one term, except those which relate to exploration, development or utilization of natural resources which may be entered into for such periods as may be provided by pertinent laws and regulations.

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