CORPORATION LAW (2)

Proxies

Proxy may either mean:

1. a relationship;
2. a legal document; or
3. a person.

As a relationship:

Special type of agency relationship; stockholder is the

principal and the agent is the proxy;

Proxy agreement may limit the matters that the proxy holder
may vote on;

Proxy agreement is usually revocable, i.e., the stockholder

can always issue another proxy; later proxy cancels the
earlier one;

In a stock corporation, right to vote by proxy cannot be

removed; in a non-stock corporation, right to vote by proxy
can be removed;

As a document:

Embodies the proxy agreement; must be in writing, signed

by the stockholder and submitted to the corporation;

As a person:

Person or agent who represents the principal;

Proxy system allows a stockholder to send his representative

or agent to attend and vote in a stockholders meeting;

Voting trust agreements

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Stockholder of record confers to the trustee the right to vote

those shares; should not exceed 5 years unless it is a
condition for a loan;

VTA is irrevocable unless the parties agree; stockholder

continues to receive the dividends; trustee can be voted as
director;

Powers of the Board

1. Entering into contracts;

2. Filing of cases;

Directors liability

A director becomes liable if he willfully and knowingly votes

for or assents to a patently unlawful act;

Also liable if he commits gross negligence or bad faith in

directing the affairs of the corporation;

Liable if he acquires a personal or pecuniary interest in

conflict with his duty as a director;

Disloyalty of a director

A director cannot take advantage of a business opportunity

which he had come across while he was performing an act as
a director (Business Opportunity Rule);

Factors to be considered:

1. information/opportunity was gained simply because he

was a director;
2. business he usurped is the same line of business in
which the corporation is engaged;
3. corporation has the capability to take advantage of the
business opportunity;
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If the corporation had the opportunity but did not take

advantage of it, director is not liable;

Self Dealing

Dealings between the corporation and the director which are

not authorized by the board;

Not all dealings between a director and the corporation are

fraudulent or disadvantageous;

Transaction between corporation and director is valid if:

1. the presence of the director was not necessary for

quorum;
2. his vote was not necessary for approval; and
3. contract is fair and reasonable;

If the contract is fair and reasonable, it can be ratified by 2/3

vote of the stockholders upon full disclosure to the
stockholders of the interest of the director;

Interlocking Directors

Transaction is between two corporations and the person

involved is a director of both corporations;

General rule: contract involving two corporations with

interlocking directors is valid;

Exception: contract is invalid if it involves fraud or contract is

unfair; this rule applies when the holdings of the interlocking
director in the injured corporation are minimal while his
holdings in the benefited corporation are substantial (20% or
more);
Transaction is valid if the director has no incentive to benefit
one corporation over another corporation;
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Appraisal Rights

Right to demand payment of the fair value of his shares after

dissenting to a proposed corporate action; can be exercised
in the following instances:

1. Amendments to the AI that have the effect of:

a. merger;
b. consolidation;
c. changing or restricting stockholders rights;
d. changing rights of shares;
e. shortening corporate life;
f. extending the corporate life;
g. sale of all or substantially all of the assets of the
corporation;

Appraisal right is more applicable to privately held

corporations; in publicly listed corporations, your remedy is
just to sell your shares in the stock market;

Manner of exercising right

1. Written demand for payment of shares within 30 days

from approval of the corporate act;
2. Surrender stock certificates within 10 days from date of
demand;
3. Upon surrender, corporation is required to pay value of
shares, reckoned from day before vote is obtained on
the corporate act;
4. In case of disagreement on value of shares, 3
disinterested parties may decide;
5. Price is paid within 30 days from time the panel
decides;

Right of appraisal cannot be exercised if the corporation

does not have sufficient unrestricted retained earnings;

Books and Records

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Stock and Transfer Book (stock corporations)

Corporations official record of the ownership structure;

original entries would be the initial subscriptions;

Membership Records Book (non-stock corporations)

Contains names of the members, contributions, date of

admission, resignations, removals;

Minutes of Meetings

Minutes are not the transcripts; need not state in detail the
entire discussions of the board; major points must be stated;
minutes will have to be approved by the directors during the
next board meeting;

Any action of the board must be stated via a Resolution,

which must be properly numbered;

General Information Sheet (GIS)

Powers (or Authorities) of Corporations

In General

Can own and sell property; sue in its corporate name; enter
into contracts;

Powers of a Juridical Person (Corporation)

1. Increase (Decrease) of Authorized Capital Stock (ACS);
2. Creating Bonded Indebtedness;
3. Extend or Shorten Corporate Term;
4. Power to Deny Pre-Emptive Right;
5. Power to Sell All Assets;
6. Power to Acquire Own Shares;
7. Power to Invest in Another Corporation or Business;
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8. Investment in a Business Other than in the Primary

Purpose;
9. Power to Declare Dividends;
10. Power to Enter into a Management Contract;
11. Power to Enter Into Partnerships and Joint
Ventures;

Close Corporations

A cross between a limited partnership and an ordinary

corporation; gives advantage of limited liability of a
corporation and affords the owners direct management; also
known as incorporated partnership;

To incorporate as a close corporation:

1. All of the issued stocks (except treasury) must be held

by no more than 20 stockholders;
2. All shares must have a restriction against transfer;

If the above-stated conditions are violated, the close

corporation becomes an ordinary corporation;

Non-Stock Corporations

No Stocks

General rule: Member does not own any share in the

corporation;

Members may own stock but the purpose is not for business
and there is a prohibition against the distribution of
dividends;
No Dividends

Members are not entitled to any dividends;

No Profits
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Purpose is not to earn profits for distribution to its members;

corporation may earn profits which must be applied to the
purposes for which it was organized (charitable, religious,
educational, professional, cultural, recreational, fraternal,
literary, scientific, social, civic service, similar purposes);

Distribution upon Dissolution

After the debts are paid, the assets of the dissolved non-
stock corporation are distributed as follows:

1. The terms and conditions of the donation will be

followed; example: reversion of the assets to the donor
or assets shall go to another foundation);
2. If the purpose of the donation is indicated (for an
orphanage), assets must be donated to a similar
foundation;
3. Plan of distribution (assets may be given to the
members themselves); exception to the rule of non-
distribution of profits in a non-stock corporation;

Stock Corp. v. Non-Stock Corp.

Stock Corp. is organized primarily for profit; a non-stock

corp. is a non-profit organization;

Shares of stock in a stock corp. are transferable, subject to

restrictions; membership in a non-stock corp. is not
transferable, unless its articles or by-law.
Stockholders are entitled to cumulative voting; members of
non-stock corp. cannot cumulate their votes;

Term of office of a director is one (1) year with right to hold-

over until successor is elected and has qualified; term of
office of a trustee may be for three (3) years, with right to
hold-over.
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Number of directors in a stock corp. cannot exceed fifteen

(15); a board of trustees in a non-stock corp. may have more
than fifteen (15) members;

Stockholders cannot be deprived of their right to vote by

proxy; prohibition of vote by proxy is invalid;

In a non-stock corp., its articles or by-laws may provide that

members cannot vote by proxy.

Officers of a stock corp. (president, vice president, treasurer

& secretary) are elected by the directors;

Officers of non-stock corp. may be directly elected by the

members.