VI. CORPORATE CONTRACT LAW 1. Pre-Incorporation Contracts (a) Who Are Promoters?

Promoter is a person who, acting alone or with others, takes initiative in founding and organizing the business or enterprise of the issuer and receives consideration therefor. (Sec. 3.10, Securities Regulation Code [R.A. 8799]) (b) Nature of Pre-incorporation Agreements (Secs. 60 and 61; Bayla v. Silang Traffic Co., Inc., 73 Phil. 557 [1942]) (c) Theories on Liabilities for Promoters Contracts (Cagayan Fishing Development Co., Inc. v. Teodoro Sandiko, 65 Phil. 223 [1937]; Rizal Light & Ice Co., Inc. v. Public Service Commission, 25 SCRA 285 [1968]; Caram, Jr. v. CA, 151 SCRA 372 [1987]). 2. De Facto Corporation (Sec. 20) (a) Elements for Existence of De Facto Corporation: (1) Valid law under which incorporated; (2) Attempt in good faith to incorporate; colorable compliance; (3) Assumption of corporate powers; and (4) Issuance of certificate of incorporation. Arnold Hall v. Piccio, 86 Phil. 634 (1950). 3. Corporation by Estoppel Doctrine (Sec. 21; Salvatierra v. Garlitos, 103 Phil. 757 [1958];Albert v. University Publishing Co., 13 SCRA 84 [1965]; International Express Travel & Tour Services, Inc. v. Court of Appeals, 343 SCRA 674 (2000); xAsia Banking Corporation v. Standard Products, 46 Phil. 145 [1924]; xMadrigal Shipping Co., Inc. v. Ogilvie, Supreme Court Advanced Decision, 55 O.G. No. 35, p. 7331). An individual should be held personally liable for the unpaid obligations of the unincorporated association in whose behalf he entered into such transactions, under the principle that any person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and becomes personally liable for contract entered into or for other acts performed as such agent. International Express Travel & Tour Services, Inc. v. Court of Appeals, 343 SCRA 674 (2000). (a) Nature of Doctrine Corporation by estoppel doctrine is founded on principles of equity and is designed to prevent injustice and unfairness. It 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 the form of a corporation, who therefore know that it has not been registered, there is no corporation by estoppel. Lozano v. De Los Santos, 274 SCRA 452 (1997) A party cannot challenge the personality of the plaintiff as a duly organized corporation after having acknowledged same when entering into the contract with the plaintiff as such corporation for the transportation of its merchandise. (Ohta Dev. Co. v. Steamship Pompey, 49 Phil. 117 [1926]); the same principle applied in Compania Agricole de Ultramar v. Reyes, 4 Phil. 1 [1911] but that case pertained to a commercial partnership which required registration in the registry under the terms of the Code of Commerce. (b) Two Levels: (i) With fraud and (ii) Without fraud When incorporating individuals represent themselves to be officers of the corporation never duly registered with SEC, and engages in the name of purported corporation in illegal recruitment, they are estopped from claiming that they are not liable as corporate officers, since Section 25 of Corporation Code provides that all persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all the debts, liabilities and damages incurred or arising as a result thereof. People v. Garcia, 271 SCRA 621 (1997). An individual cannot avoid his liabilities to the public as an incorporator of a corporation whose incorporation was not consummated, when he held himself out as officer of the corporation and received money from applicants who availed of their services. Such individual is estopped from claiming that they are not liable as corporate officers for illegal recruitment under the corporation by estoppel doctrine under Sec. 25 of the Corporation Code which provides that all persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all the debts, liabilities and damages incurred or arising as a result thereof. People v. Pineda, G.R. No. 117010, 18 April 1997. 4. Trust Fund Doctrine (a) Commercial/Common Law Premise on Equity vis-a-vis Debts (b) Nature of Doctrine Under the trust fund doctrine, the capital stock, property and other assets of the corporation are regarded as equity in trust for the payment of the corporate creditors. Commissioner of Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999). The requirement of unrestricted retained earnings to cover the shares is based on the trust fund doctrine which means that the capital stock, property and other assets of a corporation are regarded as equtiy in trust for the payment of corporate creditors. The reason is that creditors of a corporation are preferred over the stockholders in the distribution of corporate assets. There can be no distribution of assets among the stockholders without first paying corporate creditors. Hence, any disposition of corporate

funds to the prejudice of creditors is null and void. Boman Environmental Dev. Corp. v. CA, 167 SCRA 540 (1988). The Trust Fund doctrine considers the subscribed capital as a trust fund for the payment of the debts of the corporation, to which the creditors may look for satisfaction. Until the liquidation of the corporation, no part of the subscribed capital stock may be turned over or released to the stockholder (except in the redemption of the redeemable shares) without violating this principle. Thus dividends must never impair the subscribed capital stock; subscription commitments cannot be condoned or remitted; nor can the corporation buy its own shares using the subscribed capital as the consideration therefore. NTC v. Court of Appeals, 311 SCRA 508, 514-515 (1999). (c) Corporation Purchasing Own Shares (Secs. 8, 41, 43 and 122, last paragraph; Phil. Trust Co. v. Rivera, 44 Phil. 469 [1923]; Steinberg v. Velasco, 52 Phil. 953 [1929]) VII. ARTICLES OF INCORPORATION 1. Nature of Charter The charter is in the nature of a contract between the corporation and the Government. Government of P.I. v. Manila Railroad Co., 52 Phil. 699 (1929). 2. Procedure and Documentary Requirements (Sec. 14 and 15) (a) As to Number and Residency of Incorporators (Sec. 10) (b) Corporate Name (Secs. 18, 14(1) and 42; Red Line Trans. v. Rural Transit, 60 Phil. 549 [1934]). A corporation may change its name by the amendment of its articles of incorporation, but the same is not effective until approved by the SEC. Philippine First Insurance Co. v. Hartigan, 34 SCRA 252 (1970) A change in the corporate name does not make a new corporation, and whether affected by special act or under a general law, has no effect on the identity of the corporation, or on its property, rights, or liabilities. Republic Planters Bank v. CA, 216 SCRA 738 (1992). Similarity in corporate names between two corporations would cause confusion to the public especially when the purposes stated in their charter are also the same type of business. Universal Mills Corp. v. Universal Textile Mills Inc., 78 SCRA 62 [1977]). A corporation has not right to intervene in a suit using a name other than its registered name; if a corporation legally and truly wants to intervene, it should have used its corporate name as the law requires and not another name which it had not registered. Laureano Investment and Development Corporation v. Court of Appeals, 272 SCRA 253 (1997). There would be no denial of due process when a corporation is sued and judgment is rendered against it under its unregistered trade name, holding that a corporation may be

sued under the name by which it makes itself known to its workers. Pison-Arceo Agricultural Development Corp. v. NLRC, 279 SCRA 312 (1997) (c) Purpose Clause (Secs. 14(2) and 42; Uy Siuliong v. Director of Commerce and Industry, 40 Phil. 541 [1919]) (d) Corporate Term (Sec. 11). No extension can be effected once dissolution stage has been reached. Alhambra Cigar v. SEC, 24 SCRA 269 (1968). (e) Principal Place of Business Place of residence of the corporation is the place of its principal office. Clavecilla Radio System v. Antillon, 19 SCRA 379 (1967) The residence of its president is not the residence of the corporation because a corporation has a personality separate and distinct from that of its officers and stockholders. Sy v. Tyson Enterprises, Inc., 119 SCRA 367 (1982). (f) Minimum Capitalization (Sec. 12) - Why is maximum capitalization required to be indicated? (g) Subscription and Paid-up Requirements (Sec. 13) (h) Steps and Documents Required in SEC 3. Grounds for Disapproval (Sec. 17) When the proposed articles presented show that the object of incorporation is to organize a barrio of a given municipality into a separate corporation for the purpose of taking possession and having control of all municipal property within the barrio so incorporated and administer it exclusively for the benefit of the residents, the object is unlawful and the articles can be denied registration. Asuncion v. De Yriarte, 28 Phil. 67 [1914]). 4. Amendments to Articles of Incorporation (Sec. 16) 5. Commencement of Corporate Existence (Sec. 19) VIII. BY-LAWS 1. Nature and Functions (Gokongwei v. SEC, 89 SCRA 337 [1979]; Pea v. CA, 193 SCRA 717 [1991]) As the rules and regulations or private laws enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and its stockholders or members and directors and officers with relation thereto and among themselves in their relation to it, by-laws are indispensable to corporations in this jurisdiction. These may not be essential to corporate birth but certainly, these are required by law for an orderly governance and management of corporations. Nonetheless, failure to file them within the period required by law by no means tolls the automatic dissolution of a

corporation. Loyola Grand Villas Homeowners (South) Association, Inc. v. Court of Appeals, 276 SCRA 681 (1997). (a) Common Law Limitations on By-Laws (i) By-Laws Cannot Be Contrary to Law and Articles of Incorporation A by-law provision granting to a stockholder a permanent representation in the Board of Directors is contrary to the Corporation Code requiring all members of the Board to be elected by the stockholders or members. Even when the members of the association may have formally adopted the provision, their action would be of no avail because no provision of the by-laws can be adopted if it is contrary to law.Grace Christian High School v. Court of Appeals, 281 SCRA 133 (1997). Although the right to amend by-laws lies solely in the discretion of the employer, this being in the exercise of management prerogative or business judgment, such right cannot impair the obligation of existing contracts or rights or undermine the right to security of tenure of a regular employee. Otherwise, it would enable an employer to remove any employee from employment by the simple expediency of amending its by-laws and providing the position shall cease to exist upon occurrence of a specified event. Salafranca v. Philamlife (Pamplona) Village Homeowners Association, Inc., 300 SCRA 469, 479 (1998). (ii) By-Laws Cannot Be Unreasonable or Be Contrary to Nature of By-laws. Government of the Philippine Islands v. El Hogar Filipino, 50 Phil. 399 (1927). Authority granted to a corporation to regulate the transfer of its stock does not empower corporation to restrict the right of a stockholder to transfer his shares, but merely authorizes the adoption of regulations as to the formalities and procedure to be followed in effecting transfer. Thomson v. Court of Appeals, 298 SCRA 280 (1998). By-laws are intended merely for the protection of the corporation, and prescribe regulation, not restrictions; they are always subject to the charter of the corporation. Rural Bank of Salinas, Inc. v. CA, 210 SCRA 510 (1992), quoting fromThompson on Corporation Sec. 4137, cited in xFleischer v. Nolasco, 47 Phil. 583. (iii) By-Laws Cannot Discriminate (b) Binding Effects of By-laws (China Banking Corp. v. Court of Appeals, 270 SCRA 503 [1997]). Neither can we concede that such contract would be invalid just because the signatory thereon was not the Chairman of the Board which allegedly violated the corporations bylaws. Since by-laws operate merely as internal rules among the stockholders, they cannot affect or prejudice third persons who deal with the corporation, unless they have knowledge of the same. PMI Colleges v. NLRC, 277 SCRA 462 (1997). 2. Adoption Procedure (Sec. 46)

Section 46 of the Corporation, which requires the filing of by-laws, does not expressly provide for the consequence of their non-filing within the period provided therein; however, Pres. Decree 902-A allows the SEC to suspend or revoke, after proper notice and hearing, the franchise or certificate of registration of corporations which fail to file their by-laws. Clearly, there can be no automatic corporate dissolution simply because the incorporators failed to abide by the required filing of by-laws, and there is no outright demise of corporate existence. Proper notice and hearing are cardinal components of due process in any democratic institution, agency or society, which would require that the incorporators must be given the chance to explain their neglect or omission and remedy the same. Loyola Grand Villas Homeowners (South) Association, Inc. v. Court of Appeals, 276 SCRA 681 (1997). 3. Contents (Sec. 47) 4. Amendments (Sec. 48) Power to amend may be delegated to the board of directors

IX. CORPORATE POWERS, AUTHORITY AND ACTIVITIES 1. Corporate Power and Capacity (Art. 46, Civil Code; Secs. 36 and 45; Land Bank of the Philippines v. COA, 190 SCRA 154 [1990]) A corporation has no power except those expressly conferred on it by the Corporation Code and those that are implied or incidental to its existence. In turn, a corporation exercises said powers through its board of directors and/or its duly authorized officers and agents, since the physical acts of the corporation, like the signing of documents, can be performed only by natural persons duly authorized for the purpose of by corporate bylaws or by a specific act of the board of directors. Reynoso, IV v. Court of Appeals, G.R. No. 116124-25, 22 November 2000. Precisely because the corporation is such a prevalent and dominating factor in the business life of the country, the law has to look carefully into the exercise of powers by these artificial persons it has created. (a) Classification of Corporate Powers: Express; Implied; and Incidental There is basis to rule that the act of issuing the checks on behalf of the corporation was well within the ambit of a valid corporate act, for it was for securing a loan to finance the activities of the corporation, hence, not an ultra vires act. Atrium Management Corporation vs. Court of Appeals, G.R. No. 109491, 28 February 2001. (b) Where Corporate Power is Lodged (Sec. 23)

Unless otherwise provided by the Corporation Code, corporate powers, such as the power to enter into contracts, are exercised by the Board of Directors. However, the Board may delegate such powers to either an executive committee or officials or contracted managers, which delegation, except for the executive committee, must be for specific purposes. The delegated officers makes the latter agents of the corporation, and rules of agency as to the binding effects of their acts would apply. For such officers to be deemed fully clothed by the corporation to exercise a power of the Board, the latter must specially authorize them to do so. ABS-CBN Broadcasting Corporation v. Court of Appeals, 301 SCRA 572 (1999). 2. Ultra Vires Acts (a) Concept and Types (Sec. 45) An ultra vires act is one committed outside the object for which a corporation is created as define by the law of its organization and therefore beyond the power conferred upon it by law. The term ultra vire is distinguished from an illegal act from the former is merely voidable which may be enforced by performance, ratification, or estoppel, while the latter is void and cannot be validated. Atrium Management Corporation vs. Court of Appeals, G.R. No. 109491, 28 February 2001. (b) Ratification of Ultra Vires Acts: (Pirovano v. De la Rama Steamship Co., Inc., 96 Phil. 335 [1954]; Carlos v. Mindoro Sugar Co., 57 Phil. 343 [1932];Republic v. Acoje Mining Co., 3 SCRA 361 [1963]; Crisologo Jose v. CA, 177 SCRA 594 [1989]; (i) Theory of Estoppel or Ratification In order to ratify the unauthorized act of an agent and make it binding on the corporation, it must be shown that the governing body or officer authorized to ratify had full and complete knowledge of all the material facts connected with the transaction to which it relates. Ratification can never be made on the part of the corporation by the same person who wrongfully assume the power to make the contract, but the ratification must be by the officer or governing body having authority to make such contract. The act or conduct for which the corporation may be liable under the doctrine of estoppel must be by those of the corporation, its governing body or authorized officers, and not those of the purported agent who is himself responsible for the misrepresentation. Vicente v. Geraldez, 52 SCRA 210 (1973). When the counsel representing the corporation in a collection suit admits on behalf of the corporation that the latter admitted culpability for personal loans obtained by its corporate officers, such admission cannot be given legal effect to the detriment of the corporation. The admission made in the answer by the counsel for the corporation was without any enabling act or attendant ratification of corporate act, as would authorize or even ratify such admission. In the absence of such ratification or authority, such admission does not bind the corporation. Also, the letter issued by the corporate officers who obtained the

loan as indicating the corporate liability of the corporation, cannot also serve to make the corporation liable. The documents and admissions cannot have the effect of a ratification of an unauthorized act. Ratification can never be made on the part of the corporation by the same persons who wrongfully assume the power to make the contract, but the ratification must be by the officers as governing body having authority to make such contract. Aguenza v. Metropolitan Bank and Trust Co., 271 SCRA 1 (1997). (ii) Doctrine of Apparent Authority (Prime White Cement Corp. v. Intermediate Appellate Court, 220 SCRA 103, 113-114 [1993]; Francisco v. GSIS, 7 SCRA 577 [1963]) A contract signed by the President/Chairman without authority from the Board of Directors is void. Although the by-laws grant authority to the President to execute and sign for and in behalf of the corporation all contracts and agreements which the corporation may enter into, the same presupposes a prior act of the corporation exercised through its Board of Directors. Yao Ka Sin Trading v. CA, 209 SCRA 763 (1992). 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. Yao Ka Sin Trading v. CA, 209 SCRA 763 (1992). Persons who deal with corporate agents within circumstances showing that the agents are acting in excess of corporate authority, may not hold the corporation liable.Traders Royal Bank v. Court of Appeals, 269 SCRA 601 (1997); also Art. 1883, Civil Code. The authority of a corporate officer in dealing with third persons may be actual or apparent. . . the principal is liable for the obligations contracted by the agent. The agents apparent representation yields to the principals true representation and the contract is considered as entered into between the principal and the third person. First Philipine International Bank v. Court of Appeals, 252 SCRA 259 (1996). If a corporation knowingly permits one of its officers, or any other agent, to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those acts; and thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agents authority. Soler v. Court of Appeals, G.R. No. 123892, 21 May 2001. Under Article 1898 of the Civil Code, the acts of an agent beyond the scope of his authority do no bind the principal unless the latter ratifies the same expressly or implied. It also bears emphasizing that when the third person knows that the agent was acting

beyond his power or authority, the principal can not be held liable for the acts of the agent. If the said third person is aware of such limits of authority, he is to blame, and is not entitled to recover damages from the agent, unless the latter undertook to secure the principals ratification. In the case of the corporation as the principal, there was no such ratification. Therefore, when the officer entered into the speculative contracts without securing the Boards approval, nor did he submit the contracts to the Board after their consummation nor were they recorded in the books of the corporation, there was, in fact, no occasion at all for ratification. Safic Alcan & Cie. V. Imperial Vegetable Co., G.R. No. 126751, 28 March 2001. (iii) Theory of No State Damage (Harden v. Benguet Consolidated Mining Co., 58 Phil. 140 [1933]). 3. Specific (Express) Powers (a) Enumerated Powers (Secs. 36) Example of Poor Draftsmanship: When the article of incorporation expressly provides that the purpose of the corporation was to engage in the transportation of person by water, such corporation cannot engage in the business of land transportation, which is an entirely different line of business, and, for which reason, may not acquire any certificate of public convenience to operate a taxicab service. Luneta Motor Co. v. A.D. Santos, Inc., 5 SCRA 809 [1962]). Power to Sue Under section 36 of the Corporation Code, in relation to Section 23, it is clear that where a corporation is an injured party, its power to sue is lodged with its board of directors or trustees. A minority stockholder and member of the Board, who fails to show any proof that he was authorized by the Board of Directors, has no such power or authority to sue on the corporations behalf. Nor can we uphold this as a derivative suit. For a derivative suit to prosper, it is required that the minority stockholder suing for and on behalf of the corporation 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 who may wish to join him in the suit. There is now showing that petitioner has complied with the foregoing requisites. Tam Wing Tak v. Makasiar, G.R. 122452, 29 January 2001. (b) Power to Extend or Shorten Corporate Term (Secs. 37 and 81 [1]) (c) Power to Increase or Decrease Capital Stock (Sec. 38) Prior to SEC approval of the increase in the authorized capital stock, and despite the Board resolution approving the increase in capital stock, and the receipt of payment on the future issues of the shares from the increased capital stock, such funds do not constitute part of the capital stock of the corporation until approval of the increase by SEC. Central Textile Mills, Inc. v. National Wages and Productivity Commission, 260 SCRA368 (1996).

A reduction of capital to justify the mass layoff of employees, especially of union members, amounts to nothing but a premature and plain distribution of corporate assets to obviate a just hearing to labor of the vast profits obtained by its joint efforts with capital through the years, and would constitute unfair labor practice. Madrigal & Co. v. Zamora, 151 SCRA 355 [1987]); (d) Incur, Create or Increase Bonded Indebtedness (Sec. 38) (e) Sell or Dispose of Assets (Sec. 40). Sale by the Board of the only property of the corporation without compliance with the provisions of Sec. 40 of the Corporation Code requiring the ratification of members representing at least two-thirds of the membership, would make the sale null and void. Islamic Directorate of the Philippines v. Court of Appeals, 272 SCRA 454 (1997); Pea v. CA, 193 SCRA 717 (1991). (f) Invest Corporate Funds in Another Corporation or Business or For Any Other Purpose (Sec. 42; De la Rama v. Ma-ao Sugar Central Co., 27 SCRA 247 [1969]). (g) Declare Dividends (Sec. 43; Nielson & Co. v. Lepanto Consolidated Mining Co., 26 SCRA 540 [1968]). Stock dividend is the amount that the corporation transfers from its surplus profit account to its capital account. It is the same amount that can loosely be terms as the trust fund of the corporation. National Telecommunications Commission v. Court of Appeals, 311 SCRA 508, 514-515 (1999). Although the certificates of stock granted the stockholder the right to receive quarterly dividends of 1%, cumulative and participating, the stockholders do not become entitled to the payment thereof as a matter of right without necessity of a prior declaration of dividends. . . Both Sec. 16 of the Corporation Law and Sec. 43 of the present Corporation Code prohibit the issuance of any stock dividend without the approval of stockholders, representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. These provisions underscore the fact that payment of dividends to a stockholder is not a matter of right but a matter of consensus. Furthermore, interest bearing stocks, on which the corporation agrees absolutely to pay interest before dividends are paid to the common stockholders, is legal only when construed as requiring payment of interest as dividends from net earnings or surplus only. Republic Planters Bank v. Agana, 269 SCRA 1 (1997). (i) Enter into Management Contracts (Sec. 44; Nielson & Co., Inc. v. Lepanto Consolidated Mining, 26 SCRA 540 [1968]; Ricafort v. Moya, 195 SCRA 247, at pp. 266-267 [1991]). Why the difference in rule between entity and individual? (j) Other Powers - To Sell Land and Other Properties

A corporation whose primary purpose is to market, distribute, export and import merchandise, the sale of land is not within the actual or apparent authority of the corporation acting through its officers, much less when acting through the treasurer. Likewise Article 1874 and 1878 of the Civil Code requires that when land is sold through an agent, the agents authority must be in writing, otherwise the sale is void. San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, 296 SCRA 631, 645 (1998). - To Borrow Funds The power to borrow money is one of those cases where even a special power of attorney is required under Art. 1878 of the New Civil Code. There is invariably a need of an enabling act of the corporation to be approved by its Board of Directors. The argument that the obtaining of loan was in accordance with the ordinary course of business usages and practices of the corporation is devoid of merit because the prevailing practice in the corporation was to explicitly authorize an officer to contract loans in behalf of the corporation. China Banking Corp. v. Court of Appeals, 270 SCRA 503 (1997). - To Provide Gratuity Pay for Employees Providing gratuity pay for its employees is one of the express powers of a corporation under the Corporation Code, and cannot be considered to be ultra viresto avoid any liability arising from the resolution granting such gratuity pay. Lopez Realty v. Fontecha, 247 SCRA 183, 192 (1995). - To Donate - To Enter Into Partnership, Joint Venture. Tuason & Co. v. Bolanos, 95 Phil. 106 (1954). X. DIRECTORS, TRUSTEES AND OFFICERS 1. Powers of Board of Directors or Trustees (Sec. 23; Gamboa v. Victoriano, 90 SCRA 40 [1979]). (a) Two Theories on Source of Power of Board of Directors (Angeles v. Santos, 64 Phil. 697 [1937]). (b) Board Must Act As Body (Sec. 25; The Board of Liquidators v. Heirs of Maximo M. Kalaw, 20 SCRA 987 [1967]; Ramirez v. Orientalist Co. and Fernandez, 38 Phil. 634 [1918]; Acua v. Batac Producers Cooperative Marketing Association, 20 SCRA 526 [1967]). The general rule is that a corporation, through its broad of directors, should act in the manner and within the formalities, if any, prescribed by its charter or by the general law. Thus, directors must act as a body in a meeting called pursuant to the law or the corporations by-laws, otherwise, any action taken therein may be questioned by any objecting director or shareholder. Be that as it may, jurisprudence tells us that an action

of the board of directors during a meeting, which was illegal for lack of notice, may be ratified either expressly, by the action of the directors in subsequent legal meeting, or impliedly, by the corporations subseqeunt course of conduct. Lopez Realty v. Fontecha, 247 SCRA 183, 192 (1995). (c) Effects of a Bogus Board The acts or contracts effected by a bogus board would be void pursuant to Art. 1318 of the Civil Code because of the lack of consent. Islamic Directorate of the Philippines v. Court of Appeals, 272 SCRA 454 (1997). (d) Executive Committee (Sec. 35) 2. Business Judgment Rule (Montelibano v. Bacolod-Murcia Miling Co., Inc., 5 SCRA 36 [1962]; Philippine Stock Exchange, Inc. v. Court of Appeals, 281 SCRA 232 [1997]) Board members and officers who purport to act for and in behalf of the corporation, keep within the lawful scope of their authority in so acting and act in good faith, do not become liable, whether civilly or otherwise, for the consequences of their acts. Those acts, when they are such a nature and are done under such circumstances, are properly attributed to the corporation alone and no personal liability is incurred by such officers and Board members. Benguet Electric Cooperative, Inc. v. NLRC, 209 SCRA 55 (1992) 3. Qualifications of Directors and Trustees (Secs. 23 and 27; Gokongwei, Jr. v. SEC, 89 SCRA 336 [1979]). (a) A director must own at least one share of stock (Pea v. CA, 193 SCRA 717 [1991]; xDetective & Protective Bureau, Inc. v. Cloribel, 26 SCRA 255 [1969]) (b) Mere beneficial ownership in a voting trust arrangement no longer qualifies (Lee v. CA, 205 SCRA 752 [1992]). 4. Election of Directors and Trustees (a) Directors (Secs. 24 and 26; Premium Marble Resources v. Court of Appeals, 264 SCRA 11 [1996]). (b) Trustee (Secs. 92 and 138) (c) Cumulative Voting (Sec. 24; Cumulative Voting in Corporate Elections: Introducing Strategy in the Equation, 35 South Carolina L. Rev. 295) 5. Vacancy in Board (Sec. 29) By-law provision or the practice giving a stockholder a permanent seat in the Board of Directors would be against the provision of Sections 28 and 29 of the Corporation Code which requires member of the board of corporations to be elected. In addition, Section 23 of the Corporation Code which provides for the powers of the Board of Directors or Trustees expressly requires them to be elected from among the holders of stock, or where there is no stock, from among the members of the corporation.Grace Christian High School v. Court of Appeals, 281 SCRA 133 (1997). 6. Term of Office, Hold-over Principle

Directors may lawfully fill vacancies occurring in the board, and such officials, as well as the original directors, hold until qualification of their successors. Government v. El Hogar Filipino, 50 Phil. 399 (1927). The remedy is quo warranto to question the legality and proper qualification of persons elected to the board. Ponce v. Encarnacion, 94 Phil. 81 (1953). 7. Removal of Directors or Trustees (Sec. 28; Roxas v. De la Rosa, 49 Phil. 609 [1926]). 8. Directors or Trustees Meetings (Secs. 49, 53, 54 and 92) In a board meeting, an abstention is presumed to be counted as an affirmative voteinsofar as it may be construed as an acquiescence in the action of those who voted affirmatively; but such presumption, being merely prima facie would not hold in the face of clear evidence to the contrary. xLopez v. Ericta, 45 SCRA 539 [1972]). 9. Compensation of Directors (Sec. 30) Directors and trustees are not entitled to salary or other compensation when they perform nothing more than the usual and ordinary duties of their office, founded on the presumption that directors and trustees render service gratuitously, and that the return upon their shares adequately furnishes the motives for service, without compensation. Western Institute of Technology, Inc. v. Salas, 278 SCRA 216, 223 (1997). Under Section 30 of the Corporation Code, there are two (2) ways by which members of the board can be granted compensation apart from reasonable per diems: (a) when there is a provision in the by-laws fixing their compensation; and (b) when the stockholders representing a majority of the outstanding capital stock at a regular or special meeting agree to give them compensation. From the language of Section 30, it may also be deduced that members of the board may also receive compensation,when they render services to the corporation in a capacity other than as directors or trustees of the corporation. The position of being Chairman and Vice-Chairman, like that of Treasurer and Secretary, were considered by the officers as not mere directorship position, but officership position that would entitle the occupants to compensation. Likewise, the limitation placed under Section 30 of the Corporation that directors cannot receive compensation exceeding 10% of the net income of the corporation, would not apply to the compensation given to such positions since it is being given in their capacity as officers of the corporation and not as board members. 10. Role of Directors (a) Directors as Fiduciaries. - Pre-Corporation Code. Palting v. San Jose Petroleum, Inc., 18 SCRA 924 (1966).

- Nature of Duties of Directors and Officers. Prime White Cement Corp. v. IAC, 220 SCRA 103 (1993). (b) Duty of Obedience A corporation, through its board of directors, should act in the manner and within the formalities, if any, prescribed by its charter or by the general law. xLopez Realty, Inc. v. Fontecha, 247 SCRA 183 (1995) (c) Duty of Diligence (Sec. 31; Steinberg v. Velasco, 52 Phil. 953 [1929]; Bates v. Dresser, 251 U.S. 524, 64 L. Ed. 388, 40 S. Ct. 247 [1919]; Smith v. Van Gorkam, 488 A.2d 858, Supreme Court of Delaware, 1985).. (d) Duty of Loyalty (Secs. 31 to 34; Mead v. McCullough, 21 Phil. 95 [1911]). - Doctrine of Corporate Opportunity (Gokongwei v. SEC, 89 SCRA 336 [1979]; SeeAnnotations: Doctrine of Corporate Opportunity, 89 SCRA 412). - Self-dealings (Secs. 32 and 33) - Using Inside Information (Gokongwei v. SEC, 89 SCRA 336 [1979]). When a director, who also owns of the equity of the corporation, who has also been designated as the administrator of corporate affairs, and who was directly negotiating the sale of the corporations large landholdings to the Government at great prices, purchases the shares of stock of a shareholder without informing the latter of the on-going negotiations, such director is deemed to have fraudulently acquired the shareholdings by way of deceit practiced by means of concealing his knowledge of the state of the negotiations and their probable successful result. xStrong v. Repide, 41 Phil. 947 [1909]; - Applies to confidential employees (cf. xSing Juco v. Llorente, 43 Phil. 589 [1922]) (e) Duty to Creditors and Outsiders [xVillanueva, The Fiduciary Duties of Directors and Officers Representing the Creditor Pursuant to a Loan Workout Arrangement: Parameters Under Philippine Corporate Setting, 35 Ateneo L.J. (No. 1, Feb. 1991)] (f) Corporate Dealings with Directors and Officers (Sec. 32; Gokongwei v. SEC, 89 SCRA 336 [1979]; Prime White Cement Corp. v. IAC, 220 SCRA 103 [1993]). (g) Contracts Between Corporations with Interlocking Directors (Sec. 33) 11. Who Is an Officer of the Corporation (Sec. 25; Gurrea v. Lezama, 103 Phil. 553 [1958];Mita Pardo de Tavera v. Tuberculosis Society, 112 SCRA 243 [1982]; PSBA v. Leao, 127 SCRA 778 [1984]; Dy v. NLRC, 145 SCRA 211 [1986]; xVisayan v. NLRC, 196 SCRA 410 [1991]). Corporations act only through their officers and duly authorized agents. All acts within the powers of a corporation may be performed by agents of its selection; except so far as limitations or restrictions imposed by special charter, buy-laws, or statutory provisions. xBA Savings Bani v. Sia, 336 SCRA 484 (2000).

An office is created by the charter of the corporation and the officer is elected by the directors or stockholders. . . Note that a corporate officers removal from his office is a corporate act. If such removal occasions an intra-corporate controversy, its nature is not altered by the reason or wisdom, or lack thereof, with which the Board of Directors might have in taking such action. When petitioner, as Executive Vice-President allegedly diverted company funds for his personal use resulting in heavy financial losses in the company, this matter would amount to fraud. Such fraud would be detrimental to the interest not only of the corporation but also of its members. This type of fraud encompasses controversies in a relationship within the corporation covered by the SEC jurisdiction [now with the regular courts]. Perforce, the matter would come within the area of corporate affairs and management, and such a corporate controversy would call for the adjudicative expertise of the SEC, not the Labor Arbiter or the NLRC. De Rossi v. NLRC, 314 SCRA 245 (1999). When the by-laws of the condominium corporation specifically includes the position of Superintendent/Administrator in is roster of corporate officers, then such position is clearly a corporate officer position and issues of reinstatement would be within the jurisdiction of the SEC and not the NLRC. Ongkingco v. NLRC, 270 SCRA 613 (1997). When the by-laws provide that one of the powers of the Board of Trustees is [t]o appoint a Medical Director, Comptroller/Administrator, Chiefs of Services and such other officers as it may deem necessary and prescribe their powers and duties, then such specifically designated positions should be considered corporate officers position. The determination of the rights and the concomitant liability arising from any ouster from such positions, would be intra-corporate controversy subject to the jurisdiction of the SEC (now RTC). An office is created by the charter of the corporation and the officer is elected by the directors or stockholders (2 Fletcher Cyc. Corp. Ch. II, Sec. 266). On the other hand, an employee usually occupies no office and generally is employed not by action of the directors or stockholders but by the managing officer of the corporation who also determines the compensation to be paid to such employee. (Ibid) . . . A corporate officers dismissal is always a corporate act, or an intra-corporate controversy, and the nature is not altered by the reason or wisdom with which the Board of Directors may have in taking such action. The president, vice-president, secretary and treasurer are commonly regarded as the principal or executive officers of a corporation, and modern corporation statutes usually designate them as the officers of the corporation. However, other offices are sometimes created by the charter or by-laws of a corporation, or the board of directors may be

empowered under the by-laws of a corporation to create additional offices as may be necessary. Tabang v. NLRC, 266 SCRA 462 (1997). 12. Powers of Corporate Officers: (a) The Rule on Corporate Officers Power to Bind Corporation An officers power as an agent of the corporation must be sought from the statute, charter, the by-laws or in a delegation of authority to such officer, from the acts of the board of directors formally expressed or implied from a habit or custom of doing business.Vicente v. Geraldez, 52 SCRA 210 [1973]; reiterated in xBoyer-Roxas v. CA, 211 SCRA 470 (1992). (b) When Corporation Bound by Act of Its President. Peoples Aircargo v. Court of Appeals, 297 SCRA 170 (1998) (c) Corporate Secretary In the absence of provisions to the contrary, the corporate secretary is the custodian of corporate recordshe keeps the stock and transfer book and makes proper and necessary entries therein. It is the duty and obligation of the corporate secretary to register valid transfers of stock in the books of the corporation; and in the event he refuses to comply with such duty, the transferor-stockholder may rightfully bring suit to compel performance. xTorres, Jr. v. Court of Appeals, 278 SCRA 793 (1997). When a Secretarys Certificate is regular on its face, it can be relied upon by a third party who does not have to investigate the truths of the facts contained in such certification; otherwise business transactions of corporations would become tortuously slow and unnecessarily hampered. Esguerra v. Court of Appeals, 267 SCRA 380 (1997). (d) Corporate Treasurer A corporate treasurers function have generally been described as to receive and keeps funds of the corporation, and to disburse them in accordance with the authority given him by the board or the properly authorized officers. Unless duly authorized, a treasurer, whose power are limited, cannot bind the corporation in a sale of its assets. Selling is obviously foreign to a corporate treasurers function. When the corporation categorically denies ever having authorized its treasurer to sell the subject parcel of land, the buyer had the burden of proving that the treasurer was in fact authorized to represent and bind the allegedly selling corporation in the transaction. And failing to discharge such burden, and failing to show any provision of the articles of incorporation, by-laws or board resolution to prove that the treasurer possessed such power, the sale is void and not binding on the alleged selling corporation. San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, 296 SCRA 631, 645 (1998). (e) Other Officers for Service of Summons on Corporation For purposes of determining proper service of summons to a corporation in a quasijudicial proceeding before the NLRC, a bookkeeper can be considered as an agent of the

corporation within the purview of the Rules of Court. The rationale of all rules with respect to service of process on a corporation is that such service must be made to an agent or a representative so integrated with the corporation sued as to make it a priori supposable that he will realize his responsibilities and know what he should do with any legal papers served on him. The bookkeepers task is one under consideration that his regular recording of the corporations business accounts and essential facts about the transactions of a business or enterprise safeguards the corporation from possible fraud being committed adverse to its own corporate interest. Pabon v. NLRC, 296 SCRA 7 (1998). In spite of provisions of the Rules of Court on service of process to bind corporate entities, service made to a representative so integrated with the corporation sued as to make it a priori supposable that he will realize his responsibilities and know what he should do with any legal papers served on him, has been considered proper service to bind the corporation. (Villa Rey Transit, Inc. v. Far East Motor Corp., 81 SCRA 298 [1078], overturning xDelta Motor Sales Corp. v. Mangosing, 70 Phil. 598 [1976]; reiterated in xR. Transport Corp. v. CA, 24a SCRA 77 [1995]). Section 11, Rule 14 of the 1997 Rules of Civil Procedure uses the term general manager and unlike the old provision in the Rules of Court, it does not include the term agent. Consequently, the enumeration of persons to whom summons may be served is restricted, limited and exclusive following the rule on statutory construction expressio unios est exclusion alterius. Therefore, the earlier cases that uphold service of summons upon a construction project manager; a corporations assistant manager; ordinary clerk of a corporation; private secretary of corporate executives; retained counsel; officials who had charge or control of the operations of the corporation, like the assistant general manager; or the corporations Chief Finance and Administrative Officer;no longer apply since they were decided under the old rule that allows service of summons upon an agent of the corporation. E.B. Villarosa & Partners Co., Ltd. v. Benito, 312 SCRA 65 (1999). (f) Coverage of Corporate Agents Blacks Law Dictionary defines an agent as a business representative, whose function is to bring about, modify, affect, accept performance of, or terminate contractual obligations between principal and third persons. To this extent, an agent may also be shown to represent his principal in some one or more of his relations to others, even though he may not have the power to enter into contracts. The rules on service of process make service on agent sufficient. It does not in any way distinguish whether the agent be general or special, but is complied with even by a service upon an agent having limited authority to represent his principal. As such, it does not necessarily connote an officer of the corporation. However, though this may include employees other

than officers of a corporation, this does not include employees whose duties are not so integrated to the business that their absence or presence will not toll the entire operation of the business. Pabon v. NLRC, 296 SCRA 7 (1998). 13. Liabilities of Corporate Officers: (Sec. 31; Vazquez v. Borja, 74 Phil. 560 (1944); Palay, Inc. v. Clave, 124 SCRA 638 [1093]; Tramat Mercantile, Inc. v. CA, 238 SCRA 14 [1994]; Pabalan v. NLRC, 184 SCRA 495 [1990]; xSulo ng Bayan, Inc. v. Araneta, Inc. Inc., 72 SCRA 347 [1976]; xMindanao Motors Lines, Inc. v. Court of Industrial Relations, 6 SCRA 710 (1962); The general rule is that corporate officers are not personally liable for their official acts unless it is shown that they have exceeded their authority. xARB Constructions Co., Inc. v. Court of Appeals, 332 SCRA 427 (200) Jurisprudential Enumeration of Officer Liabilities MAM Realty v. NLRC, 244 SCRA 797, (1995); reiterated in xNational Food Authority v. Court of Appeals, 311 SCRA 700 (1999); xUichico v. NLRC, 273 SCRA 35 (1997). The hornbook law is that corporate personality is a shield against personal liability of its officers. Thus, when the trust receipt sued upon was clearly entered into in behalf of the corporation by its Executive Vice-President, then such officer and his spouse cannot be made personally liable; the personality of the corporation is separate and distinct from the persons composing it. xThe Consolidated Bank and Trust Corp. v. Court of Appeals, G.R. No. 114286, 19 April 2001. Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only when: (a) He assents to a patently unlawful act of the corporation; (b) Guilty of bad faith or gross negligence in directing its affairs; (c) for conflict on interest resulting in damages to the corporation, its stockholders or other persons; (d) He consents to the issuance of watered down stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; (e) He agrees to hold himself personally and solidarily liable with the corporation; or (f) He is made, by a specific provisions of law, to personally answer for his corporate action. Atrium Management Corporation vs. Court of Appeals, G.R. No. 109491, 28 February 2001

The finding of solidary liability among the corporation and its officers and directors would patently be baseless when the decision contains no allegation, finding or conclusion regarding particular acts committed by said officers and members of the Board of Directors that show them to have been individually guilty of unmistakable malice, bad faith, or ill-motive in their personal dealings with third parties. When corporate officers and directors are sued merely as nominal parties in their official capacities as such, they cannot be held liable personal for the judgment rendered against the corporation. National Power Corp. v. Court of Appeals, 273 SCRA 419 (1997). When corporate officers are sued in their official capacity, the suit is equivalent to a suit against the corporation, and judgment may be enforced against corporate assets. xEmilio Cano Enterprises, Inc. v. CIR, 13 SCRA 291 (1965). An attempt by the corporation to avoid liability by distancing itself from the acts of the its President was struck down with the Court holding that a corporation may not distance itself from the acts of a senior officer: the dual roles of Romulo F. Sugay should not be allowed to confuse the facts. R.F. Sugay v. Reyes, 12 SCRA 700 (1961). Generally, officers or directors under the old corporate name bear no personal liability for acts done or contracts entered into by officers of the corporation, if duly authorized.Republic Planters Bank v. CA, 216 SCRA 738 (1992). An officer-stockholder who is a party signing in behalf of the corporation to a fraudulent contract cannot claim the benefit of separate juridical entity: Thus, being a party to a simulated contract of management, petitioner Uy cannot be permitted to escape liability under the said contract by using the corporate entity theory. This is one instance when the veil of corporate entity has to be pierced to avoid injustice and inequity. Paradise Sauna Massage Corporation v. Ng, 181 SCRA 719 (1990). (a) Special Provisions in Labor Laws. In the Labor Code since a corporate employer is an artificial person, it must have an officer who can be presumed to be the employer, being the person acting in the interest of (the) employer as provided in the Labor Code. A.C. Ransom Labor Union-CCLU v. NLRC, 142 SCRA 269 (1986). Under the Labor Code, in the case of corporations, it is the president who responds personally for violation of the labor pay laws. Villanueva v. Adre, 172 SCRA 876 (1989). For the separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and convincingly established. Del Rosario v. NLRC, 187 SCRA 777 (1990). A corporate officer cannot be held personally liable for a corporate debt simply because he had executed the contract for and in behalf of the corporation. It held that when a corporate officer acts in behalf of a corporation pursuant to his authority, is a corporate

act for which only the corporation should be made liable for any obligations arising from them. Western Agro Industrial Corporation v. Court of Appeals, 188 SCRA 709 (1990). Only the responsible officer of a corporation who had a hand in illegally dismissing an employee should be held personally liable for the corporate obligations arising from such act. Maglutac v. NLRC,189 SCRA 767 (1990); reiterated in xGudez v. NLRC, 183 SCRA 644 (1990) and xChua v. NLRC, 182 SCRA 353 (1990). The case of Ransom v. NLRC is not in point because there the debtor corporation actually ceased operations after the decision of the Court of Industrial Relations was promulgated against it, making it necessary to enforce it against its former president. When the corporation is still existing and able to satisfy the judgment in favor of the private respondent, the corporate officers cannot be held personally liable. Lim v. NLRC, 171 SCRA 328 (1989). The aforecited cases will not apply to the instant case, however, because the persons who were there made personally liable for the employees claims were stockholders-officers of the respondent corporation. In the case at bar, the petitioner while admittedly the highest ranking local representative of the corporation, is nevertheless not a stockholder and much less a member of the board of directors or an officer thereof. De Guzman v. NLRC, 211 SCRA 723 (1992) A mere general manager cannot be held solidarily liable with the corporation for unpaid labor claims, especially when he is neither a stockholder or a member of the board of the corporation. A president cannot be held solidarily liable personally with the corporation absent evidence of showing that he acted maliciously or in bad faith. EPG Constructions Co. v. CA, 210 SCRA 230 (1992). A judgment rendered against a person in his capacity as President of the corporation was enforceable against the assets of such officer when the decision itself found that he merely used the corporation as his alter-ego or as his business conduit. Arcilla v. Court of Appeals, 215 SCRA 120 (1992). The President and General 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 persons composing it. Rustan Pulp & Paper Mills, Inc. v. IAC, 214 SCRA 665 (1992), citing xBanque Generale Belge v. Walter Bull and Co., 84 Phil. 164 (1949). Reahs Corporation v. NLRC, 271 SCRA 247 (1997), reviewed the A.C. Ransom doctrine of imposing solidarily liability on the highest officers of the corporation for judgment on labor claims rendered against the corporation pursuant to Art. 283 of the

Labor Code, and reviewed its application in subsequent cases of Maglutac, Chua, Gudezand Pabalan. It reiterated the main doctrine of separate personality of a corporation which should remain as the guiding rule in determining corporate liability to its employees, and that at the very least, to justify solidary liability, there must be an allegation or showing that the officers of the corporation deliberately or maliciously designed to evade the financial obligation of the corporation to its employees, or a showing that the officers indiscriminately stopped its business to perpetuate an illegal act, as a vehicle for the evasion of existing obligations, in circumvention of statutes, and to confuse legitimate issues. Corporate officers are not personally liable for money claims of discharged employees unless they acted with evident malice and bad faith in terminating their employment.AHS/Philippines v. Court of Appeals, 257 SCRA 319 (1996). The finding of solidary liability among the corporation and its officers and directors would patently be baseless when the decision contains no allegation, finding or conclusion regarding particular acts committed by said officers and members of the Board of Directors that show them to have been individually guilty of unmistakable malice, bad faith, or ill-motive in their personal dealings with third parties. When corporate officers and directors are sued merely as nominal parties in their official capacities as such, they cannot be held liable personal for the judgment rendered against the corporation. National Power Corp. v. Court of Appeals, 273 SCRA 419 (1997). In labor cases, particularly, 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. In this case, it is undisputed that the corporate officers have a direct hand in the illegal dismissal of the employees. They were the one, who as high-ranking officers and directors of the corporation, signed the Board Resolution retrenching the employees on the feigned ground of serious business losses that had no basis apart from an unsigned and unaudited Profit and Loss Statement which, to repeat, had no evidentiary value whatsoever. This is indicating of bad faith on the part of the corporate officers for which they can be held jointly and severally liable with the Corporation for all the money claims of the illegally terminated employees. Uichico v. NLRC, 273 SCRA 35 (1997). A corporation, being a juridical entity, may act only through its directors, officers and employees and obligations incurred by them, acting as corporate agents, are not theirs but the direct accountabilities of the corporation they represent. Brent Hospital, Inc. v. NLRC, 292 SCRA 304 (1998). The manager of a corporation are not personally liable for their official acts unless it is shown that they have exceeded their authority. There is nothing on record to show that the manager deliberately and maliciously evaded the corporations financial obligation to the employee; hence, there appearing to be no evidence on record that the manager acted

maliciously or deliberately in the non-payment of benefits to the employee, the manager cannot be held jointly and severally liable with the corporate employers. [CLV Nothing was shown to determine whether the corporate employer had no assets with which to pay the claims of the employee]. Nicario v. NLRC, 295 SCRA 619 (1998). In Restuarante Las Conchas v. Llego, 314 SCRA 24 (1999), the Supreme Court had apparently returned to the A.C. Ransom principle that [a]lthough as a rule, the officers and members of a corporation are not personally liable for acts done in the performance of their duties, this rule admits of exceptions, one of which is when the employer corporation is no longer existing and is unable to satisfy the judgment in favor of the employee, the officers should be held liable for acting on behalf of the corporation. In that case, the restaurant business had to be closed down because possession of the premises had been lost through an adverse decision in an ejectment case. The Court held: In the present case, the employees can no longer claim their separation benefits and 13th month pay from the corporation because it had already ceased operation. To require them to do so would render illusory the separation and 13tj month pay awarded to them by the NLRC. Their only recourse is to satisfy their claim from the officers of the corporation who were, in effect, acting in behalf of the corporation. The A.C. Ransom doctrine has been reiterated in Carmelcraft Corp. v. NLRC, 186 SCRA 393 (1990), xValderrama v. NLRC, 256 SCRA 466 (1996).

CORPORATION LAW
1. Doctrine of Corporate Opportunity - a director is made to account to his corporation, gains and profits from transactions entered into by him/another competing corporation in which he has substantial interest, which should have been a transaction undertaken by the corporation. This s a breach of fiduciary relationship. 2. Doctrine of Piercing the Veil of Corporate Entity - it is to disregard for justifiable reasons by the state the fiction of juridical personality of the corporation separate and distinct from the persons composing it 3. De Jure Corporation - corporation formed with all the requirements of law 4. De Facto Corporation - corporation defectively formed from a bona fide attempt to incorporate under the existing law and exercises corporate powers 5. Corporation by Estoppel - a group of persons which holds itself out as a corporation and enters into a contract with 3rd persons on the strength of such appearance cannot be permitted to deny its existence in an action under said contract

6. Corporation by Prescription - body not lawfully organized as a corporation but has been recognized by immemorial usage as a corporation with rights and duties maintainable by law (ex. Roman Catholic) 7. Trust Fund Doctrine - the subscribed capital stock of the corporation is a trust fund for the payment of debts of the corporation which the creditors have the right to look up to satisfy their credits. Corporations may not dissipate this and the creditors may sue the stockholders directly for their unpaid subscriptions 8. Voting Shares a. Founders Shares - given rights and privileges not enjoyed by owners of other stocks; right to vote/be voted in the election of directors shall not exceed 5 years Non-Voting Shares a. Preferred Shares - issued only with par value; given preference in distribution of assets in liquidation and in payment of dividends and other preferences stated in the articles of incorporation b. Redeemable Shares - expressly provided in articles; have to be purchased/taken up upon expiration of period of said shares purchased whether or not there is unrestricted retained earnings c. Treasury Stocks - stocks previously issued and fully paid for and reacquired by the corporation through lawful means (purchase, donation, etc.) 9. Exceptions where holders of non-voting shares may vote: a. amendments of articles of incorporation b. adoption/amendment of by-laws c. increase/decrease of bonded indebtedness d. increase/decrease of capital stock e. sale/disposition of all/substantially all corporate property f. merger/consolidation of corporation g. investment of funds in another corporation/another business purpose h. corporate dissolution 10. Preferred Cumulative Participating Share of Stock - share entitling its holder to preference in the payment of dividends ahead of common stockholders and to be paid the dividends ahead of common stockholders and to be paid the dividends due for prior years and to participate further with common stockholders in dividend declarations Promotion Stock for Services Rendered Prior to Incorporation Escrow Stock stock deposited with a 3rd person to be delivered to stockholder/assignor after complying with certain conditions - usually payment of full subscription price Over-issued Stock - stock issued in excess of authorized capital stock; null and void Watered Stock - stock issued gratuitously, money/property less than par value, services less than par value, dividends where no surplus profits exist Certificate of Stock - written acknowledgment by the corporation of the stockholders interest in the corporation. It is the personal property and may be

11.

12. 13. 14.

mortgaged/pledged. Transfer binds the corporation when it is recorded in the corporate books. A stockholder who does not pay his subscription is not entitled to the issue of a stock certificate. The total par value of the stocks subscribed by him should first be paid. 15. Chattel mortgage of shares registered with the Registrar of Deeds need not be registered in corporate books to bind third parties because corporate books only cover absolute transfers. But the pledgee/mortgagee may not have voting rights unless stated in the contract and registered in the corporate name. Methods of Collection of Unpaid Subscription call, delinquency and sale at public auction of delinquent shares ordinary civil action collection from cash dividends and other amounts due to stockholders if allowed by by-laws/agreed to by him A corporation can reacquire stocks in the following cases: eliminate fractional shares corporate indebtedness arising from unpaid subscriptions purchase delinquent shares exercise of appraisal right

16. a. b. c. 17. a. b. c. d.

18. Right of Appraisal a. amending articles, changing, restricting, enlarging stockholders rights/extending, shortening corporate life b. sale/disposition of all/substantially all of corporate assets c. merger and consolidation d. investment of funds in another corporation/for a different purpose 19. a. b. c. d. 20. Grounds for Rejection of Registration not in prescribed form purpose illegal, inimical treasurers affidavit false non-compliance with required Filipino stock ownership

Corporation must organize within 2 years from issuance of certificate of incorporation. How to organize? a. adoption of by-laws b. election of Board of Directors c. election of officers But from issuance of certificate, it acquires juridical personality Merger - one corporation absorbs the other and remains in existence while the other is dissolved Consolidation - a new corporation is created and the consolidating corporations are extinguished

21. 22.

23. 24. 25.

Theory of General Capacity - a corporation is said to hold such powers as are not prohibited/withheld from it by general law Theory of Special Capacity - the corporation cannot exercise powers except those expressly/impliedly given Concession Theory - a group of persons wanting to create a corporation will have to execute documents and comply with requirements set by the state before being given corporate personality; merely a privilege; state may provide causes for which the privilege may be withdrawn Acts requiring majority vote of stockholder: filing of issue value of no par value share adoption, amendment, repeal of by-laws compensation and other per diems for directors

26. a. b. c. 27.

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 even without formal authorization of the board of directors

28. Powers of stockholders: a. a direct participation in management - where his vote is needed to approve certain corporate actions b. indirect participation in management to vote or remove directors c. proprietary rights d. remedial rights 29. Voting Trust Agreement - an agreement between a group of stockholders and trustee for a term not exceeding 5 years in which control over the stocks is lodged in the trustee. The purpose is for controlling the voting. a. in writing, notarized and filed with the SEC and the corporation b. period not exceeding 5 years c. cannot be entered into to circumvent the laws against monopolies, illegal combinations in restraint of trade in fraud Cumulative Voting - the number of votes that a shareholders number of shares multiplied by the number of directors may give all said votes to one candidate or he may distribute them as he may deem fit. Cumulative voting is a matter of right in a stock corporation. In a non-stock corporation, it cannot be utilized unless allowed by the by-laws/articles The power of removal of directors that may be exercised with or without cause cannot apply to the director representing the minority shareholders. He may only be removed with cause.

30.

31.

32.

General Rule: If surplus profits exceed the requirements the corporation shall declare dividends. This is compulsory if the surplus is equal/or more than the paidup capital. Exceptions: a. justified by approved expansion projects

b. prohibited by creditor to declare dividends c. retention is necessary under existing circumstances 33. Business Judgment Rule - decisions made by a corporations management body shall not be interfered with even by the courts unless such acts are oppressive/unconscionable as to violate the rights of the minority Individual Suit - one brought to assert a right of a stockholder peculiar to himself Representative Suit - brought by the stockholder in his own behalf and in behalf of other stockholders similarly situated, having common cause against the corporation

34. 35.

36.

Derivative Suit - brought by a stockholder for and in behalf of the corporation to protect/vindicate corporate rights after he has exhausted intra-corporate remedies Requisites: a. cause of action in favor of the corporation b. refusal of corporation to sue c. injury to the corporation Although corporations dissolved have 3 years to wind up, they can convey their properties to a trustee who can continue the suit beyond the 3 year period. The lawyer who handled the case in the trial court may be considered as trustee for the dissolved corporation with respect to the matter in litigation only even if no appointment was extended to him. (Selano vs. CA) In a case filed before dissolution, it may continue even beyond the 3 year period until final determination of litigation. Otherwise, the corporation in liquidation would lose what justly belongs to them/be exempt from payment of obligations because of a technicality.

37. Foreign Corporations a. Doing Business - continuity of commercial dealings incident to prosecution of purpose and object of the organization. Isolated, occasional or casual transactions do not amount to engaging in business. But where the isolated act is not incidental/casual but indicates the foreign corporations intention to do other business, said single act constitutes engaging in business in the Philippines b. Instances when unlicensed foreign corporations can sue: (1) isolated transactions (2) action to protect good name, goodwill, and reputation of a foreign corporation (3) contracts provide that Phil. Courts will be venue to controversies (4) license subsequently granted enables foreign corporation to sue on contracts executed before the grant of the license (5) recovery of misdelivered property (6) where the unlicensed foreign corporation has a domestic corporation 38. Religious Corporations a. Corporation Sole - special form of corporation; associated with the clergy and consists of 1 person only and his successors; incorporated by law giving them legal capacity and advantage

b. Close Corporations - one whose articles provide that its shares shall not be held by more than 20 persons; its issued stock shall be subject to one or more restrictions on transfer and shall not be listed in any stock exchange/make public offering c. Non-stock Corporation - one where no part of its income is distributable to its members and shall be used in furtherance of the purpose of which it was organized 39. SEC Jurisdiction a. original and exclusive jurisdiction (1) fraudulent devices and schemes employed by directors detrimental to public interest (2) intra-corporate disputes and with the state in relation to their franchise and right to exist as such (3) controversies in the election, appointment of directors, trustees, etc. (4) petition to be declared in a state of suspension of payments b. Grounds for Suspension/Revocation of Certificate of Registration (1) fraud in procuring registration (2) serious misrepresentation as to objectives of corporation (3) refusal to comply with lawful order of SEC (4) continuous inoperation for at least 5 years (5) failure to file by-laws within the required period (6) failure to file reports (7) other similar grounds CORPORATION CODE (B.P. Blg. 68) CHARACTERISTICS OF A CORPORATION: 1. Artificial being. 2. Created by operation of law. 3. Enjoys the right of succession. 4. Having powers, attributes and properties expressly authorized by law or incident to its existence. (Sec. 2)

CORPORATION
1. Should be formed by not less than 5 incorporators 2. Created by operation of Law

PARTNERSHIP
1. Can be formed by two or more persons.

2.Can be formed by mere agreement of the parties . 3.Can be organized only for 50 years , 3.Can be organized for an indefinite period renewable for a periods not exceeding 50 of time. years for each renewal 4.Stockholders in a corporation are liable 4. General partners are liability for payment only to the extent of their unpaid of partnership debts extents to their subscription for the payment of corporate properties. debts. 5.Death , insolvency , insanity or civil 5.Death , insolvency , insanity , civil interdiction of a stockholder does not affect interdiction of general partner dissolves the the existence of the corporation. partnership.

6.Corporation cannot be dissolved without the approval of the BOD and the stockholders , and consent of the state 7.A stockholder can transfer his shareholding without the consent of the other stockholders. 8. Corporation can exercise only such powers as may be granted by law and its AOI , or those that are implied or incidental thereto.

6. A partnership can be dissolved by a partner by his own act of withdrawal. 7.A partner need to get the consent of the other partners to be able to transfer his interest in the partnership. 8. A partnership can do anything by agreement among the partners.

THEORIES ON THE FORMATION OF A CORPORATION: There are two theories: The Concession Theory asserts that a corporation is an artificial creature without any existence until it has received the approval of the state acting in accordance with law through the SEC. On the other hand, the Theory of Corporate Enterprise or Economic Unit maintains that the corporation is not merely an artificial being, but more of an aggregation of persons doing business, or an underlying business unit. TWO TYPES OF FRANCHISE: 1. Primary or Corporate Franchise is the right or privilege granted by the State to individuals to exist and act as a corporation after its incorporation. 2. Secondary or Special Franchise is the special right or privilege conferred upon an existing corporation to the business for which it was created. PRIMARY FRANCHISE 1. Refers to the franchise of existing as a corporation 2. Vested in the individuals who compose the corporation 3. It cannot be sold or transferred because it is inseparable from the corporation itself. SECONDARY FRANCHISE 1. Refers to the exercise of rights. 2. Deemed vested in the corporation 3. It may be sold or transferred and be subject to levy and sale on execution.

Corporations are classified according to: 1. ORGANIZERSPublic, by the State only; and Private, by private persons alone or with the State 2. FUNCTIONSPublic, the governance of a portion of the territory; and Private, usually for profit-making purposes 3. GOVERNING LAWPublic, by special laws; and Private, by the law on Private Corporations 4. LEGAL STATUS A) De Jure Corporationorganized in accordance with the requirements of law.

B) De Facto Corporationorganized with a colorable compliance with the requirements of a valid law. Its existence cannot be inquired collaterally. Such inquiry may be inquired only by direct attack by the State through the Solicitor General in a quo warranto proceeding. (Sec. 20) REQUISITES OF DE FACTO CORPORATION: 1. Existence of a valid law under which it may be incorporated; 2. Attempt in good faith to incorporate; 3. Actual use or exercise in good faith of corporate powers; and 4. Issuance of a Certificate of Incorporation by the SEC despite defect in its incorporation Difference between a De Facto corporation and a De Jure corporation: De Jure corporation can, successfully resist a suit by a state brought to challenge its existence; a de facto corporation cannot sustain its right to exist. C) Corporation by Estoppela group of persons which assumes to act as a corporation knowing it to be without authority to do so, and enters into a transaction with a third person on the strength of such appearance. It cannot be permitted to deny its existence in an action under said transaction. It is neither de jure nor de facto. D) Corporation by Prescriptionone which has exercised corporate powers for an indefinite period without interference on the part of the sovereign power, e.g. Roman Catholic Church. 5. EXISTENCE OF SHARES OF STOCK a) Stock corporation has capital stock which is divided into shares, and which is authorized to distribute to shareholders dividends or allotments of the surplus profits on the basis of the shares held. (Sec. 3) b) Non-stock corporation does not issue stocks nor distribute dividends to their members. 6. RELATIONSHIP OF MANAGEMENT AND CONTROL a) Holding corporation is one which, by the power to elect management, controls another as a subsidiary. It is a corporation that holds stocks in other companies for purposes of control rather than for mere investment. b) Subsidiary corporation Majority-owned subsidiarywhere one corporation owns 51% to 94% of the capital stock of another corporation. Wholly-owned subsidiarywhere one corporation holds 95% to 100% of the capital stock of another corporation. c) Affiliates are companies subject to common control of a mother holding company and operated as part of the system. d) Parent and Subsidiary corporations are separate entities with power to contract with each other. The board of directors of the parent company determines its representatives to attend and vote in the stockholder's meeting of its subsidiary. The stockholders of the parent company demand representation in the board meetings of its subsidiary. 7. PLACE OF INCORPORATION a) Domestic corporationformed, organized, or existing under Philippine laws b) Foreign corporationformed, organized, or existing under any laws other than those of the Philippines (Sec. 123)

3 tests to determine NATIONALITY of Corporations INCORPORATION TEST is determined by the state of incorporation, regardless of the nationality of the stockholders. DOMICILE TEST is determined by the state where it is domiciled. CONTROL TEST is determined by the nationality of the controlling stockholders or members. This test is applied in times of war and is also known as the WAR-TIME TEST. The control test is applied both with respect to the ownership of shares entitled to vote and the membership in the board of directors. Who is a PHILIPPINE NATIONAL? 1. A corporation organized under the laws of the Philippines of which at least 60% of the outstanding capital stock entitled to vote is owned by Filipino citizens; 2. A foreign corporation licensed as doing business in the Philippines of which 100% of the outstanding capital stock entitled to vote is wholly owned by Filipinos; Double 60% RuleWhere a corporation and its non-Filipino stockholders own stocks in a SEC-registered enterprise, at least 60% of the capital stock outstanding and entitled to vote of both corporations and at least 60% of the members of the board of directors of both corporations must be Filipino citizens (FOREIGN INVESTMENT ACT OF 1991, R.A. No. 7042) The GRANDFATHER RULE is the method by which the percentage of Filipino equity in a corporation engaged in nationalized and/or partly nationalized areas of activities, provided for under the Constitution and other nationalization laws, is computed, in cases where there are corporate shareholders. The present application of the rule embodies the control test: Thus, if the shares belonging to corporations or partnerships at least 60% of the capital is owned by Filipino citizens, such corporation or partnership shall be considered of Philippine nationality. But if the percentage of Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as pertaining to Philippine nationality. What is the DOMICILE of a corporation? The domicile of a corporation is the place fixed by the law creating or recognizing it; in the absence thereof, it shall be understood to be the place where its legal representation is established or where it exercises its principal functions (Art. 51, NCC) NATIONALIZED CORPORATIONS: 100% Filipino Owned a) Mass Media which includes radio, television and printed media (Sec. 11(1), Art. XVI, 87 Constitution) b) Rural Banks -100% of its capital stock (RA No. 720, as amended) c) Rice and Corn Industry (RA No. 3018, as amended) d) Security, watchman & Detective Agency (RA No. 5487) 75% Filipino Owned a) Advertising Industry (Sec. 11(2), Art. XVI, 87 Consti) 70% Filipino Owned a) Private Development Banks; (RA No. 4093) b) Savings and Loan Associations (RA No. 3779 and RA No. 4378, as amended) 60% Filipino Owned a) Financing Companies60% of the capital stock. (RA No. 5980)

b) Fishing and Business Activity relating to Fishery Industry - 60% of the capital stock. c) Banks other than rural banks and new banks established by consolidation of branches or agencies of foreign banks in the Philippines; (RA No. 337) (PD 43 and PD 704) d) Exploration, Development and Utilization of Natural Resources (Sec. 2 Art. XII, 1987 Constitution) e) Ownership of Lands (Sec. 2 Art. XII, 1987 Constitution) f) Operation of Public Utility (Sec. 11 Art. XII, 87 Consti) g) Educational Institutions other than these established by religious groups (Sec. 4[2], Art. XIV, 87 Consti) h) Any business reserved by Congress (Sec. 10, Art. XII, 1987 Consti) Majority Owned by Filipinos a) Investment House (PD 129) What are the OTHER TYPES of corporations? Close corporations (Secs. 96-105) Special corporations a) Educational corporation (Secs.106-108) b) Religious corporation (Sec. 109) i. corporation sole (Sec. 110) ii. religious societies (Sec. 116) WHAT ADVANTAGES DOES A CORPORATION ENJOY OVER AN UNREGISTERED ASSOCIATION? A Corporation 1. enjoys perpetual succession under corporate name and in an artificial form; 2. can acquire and dispose of property; 3. can contract obligations; 4. can sue and be sued in its corporate name as a juridical person; 5. has capacity to receive and enjoy common grants of privileges and immunities; and 6. no personal liability beyond value of their shares What is the DOCTRINE OF SEPARATE PERSONALITY? A corporation has a juridical personality separate and distinct from that of its stockholders or members. Rationale of the Doctrine: For purposes of convenience and to serve the ends of justice. Consequences: A corporation 1. Can own property in its own name, and has capacity to sue and be sued in its own right (Art. 46, NCC); 2. Entitled to constitutional rights, e.g., due process, equal protection; 3. Can be liable for torts , because the law on quasi-delict does not distinguish between a natural person and a n artificial being. 4. Cant be liable for crimes because a corporation cannot be imprisoned being a mere artificial being and not having a physical existence but the corporation can be fined as a consequence of a violation of the law. 5. As a rule is not entitled to moral damages for physical suffering or mental anguish , fright , serious anxiety , wounded feelings , mental shock , social humiliation and similar internal injury because being an artificial being it cannot suffer such internal feelings. However, a corporation can claim moral damages on sufferance of besmirched reputation if warranted by evidence. It is essential for the claim to prosper that said corporation enjoys good reputation. DOCTRINE OF PIERCING THE VEIL OF CORPORATE ENTITY Allows the State to disregard the fiction of juridical personality of the corporation where the entity is formed or used for non-legitimate purposes, such as to evade a just and due

obligation or to justify a wrong, to shield or perpetrate fraud, or to carry out similar other unjustifiable aims or intentions. When the defendant corporation's legal personality has been pierced in one case, such corporation still possesses separate juridical personality in any other case, or with respect to other issues. Cases Calling for PIERCING the Veil: In Fraud cases, whenever a corporation is used as a cloak to cover fraud, or to do wrong; in Alter Ego cases, whenever the corporate entity is merely a farce since the corporation is an alter ego, business conduit or instrumentality of a person or another corporation; and in Equity cases, when piercing the corporate fiction is necessary to achieve justice or equity. INSTRUMENTALITY / ALTER EGO RULE Where one corporation is so organized and controlled and its affairs are conducted so that it is in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the "instrumentality" may be disregarded.

1. ControlThere must be 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 that time, no separate mind, will or existence of its own; 2. Breach of dutySuch control must have been used by the defendant to commit fraud or wrong, to perpetrate the violation of a statutory or other positive duty, or dishonest and unjust act in contravention of plaintiff's legal rights; and 3. Such Control and Breach must proximately cause the injury to the plaintiff. A ONE-MAN CORPORATION is a corporation wherein all or substantially all of the stocks is held directly or indirectly by one person. Such corporation is not necessarily illegal. The corporation should still follow and observe the law throughout its existence and conduct its business affairs lawfully. Otherwise, the doctrine of piercing the veil may be applied in such a case. Who is an INCORPORATION PROMOTER? One who, by contract of lease of services or agency, initiates and undertakes the preincorporation steps until the actual formation of the corporation. Contracts by the promoter for and in behalf of a proposed corporation generally bind him only, subject to and to the extent of his representations, and not the corporation, unless and until after these contracts are ratified, expressly or impliedly, by the corporations Board of Directors/Trustees. PRE-INCORPORATION SUBSCRIPTION AGREEMENTS (PISA) RULE: Subscription of shares of stock of a corporation still to be formed shall be irrevocable for a period of at least 6 months from date of subscription, UNLESS: 1. All of the other subscribers consent to the revocation; and 2. Incorporation of said corporation fails to materialize within said period or within a longer period as may be stipulated in the contract of subscription; provided that no pre-incorporation subscription may be revoked after the submission of the articles of incorporation to the SEC. (Sec. 61)

Requisites:

SC allowed the rescission of the PISA on the ground of substantial breach of obligations as provided for in Art. 1191 of the NCC. The SC recognized the nature of a PISA as a reciprocal obligation by the original subscribers with the corporation intended to be formed as a beneficiary of a pour autri stipulation in such agreement. (Ong Yong vs. CA, Feb. 1, 2002) ARTICLES OF INCORPORATION is the document prepared by the persons establishing a corporation and filed with the SEC containing the matters required by the Code. CONTENTS: 1. Name of corporation; 2. Purpose/s, indicating the primary and secondary purposes; 3. Place of principal Office; 4. Term of existence; 5. Names, citizenship and residences of incorporators 6. Number, names, citizenship and residences of directors or trustees; 7. Names, nationalities, and residences of the persons who shall act as directors or trustees until the first regular ones are elected and qualified; 8. if a stock corporation, the amount of its authorized capital stock, number of shares and in case the shares are par value shares, the par value of each share; 9. Names, residences, number of shares, and the amounts subscribed and paid by each of the original subscribers which shall not be less than 25% of authorized capital stock; 10. If non-stock, the amount of capital, the names, residences, and amount paid by each contributor, which shall not be less than 25% of total subscription; 11. Name of treasurer elected by subscribers; and 12. If the corporation engages in a nationalized industry, a statement that no transfer of stock will be allowed if it will reduce the stock ownership of Filipinos to a percentage below the required legal minimum. (Sec.14) NON-AMENDABLE ITEMS IN THE ARTICLES OF INCORPORATION: Those matters referring to facts existing as of the date of the incorporation such as: 1. Names of incorporators; 2. Names of original subscribers to the capital stock of the corporation and their subscribed and paid up capital; 3. Treasurer elected by the original subscribers 4. Members who contributed to the initial capital of a non-stock corporation; 5. Date and place of execution of the articles of incorporation; and 6. Witnesses to the signing and acknowledgment of the articles and acknowledgment of the articles.

IMPORTANCE OF THE AOI. Failure to file the AOI with the SEC and the lack of Certificate of Incorporation from the SEC is fatal to a de facto corporation because the omission would preclude the stockholders from claiming good faith in being a corporation.

CERTIFICATE OF INCORPORATION is the document issued by the SEC if after examination and verification the AOI and other papers needed to be filed is found in order.

IMPORTANCE OF THE CERTIFICATE OF INCORPORATION:

A corporation starts to have juridical personality and legal existence from the moment of the issuance by the SEC to the incorporators of the certificate. Once issued, the certificate and the copy of the AOI filed which is returned becomes the corporate charter enabling the corporation to exercise its corporate powers. In case of GOCCs , it acquires juridical personality from the effectivity of the special charter or law creating it.
A corporation cannot sue or be sued prior to the issuance of the certificate of incorporation. BY-LAWS are rules adopted by a corporation for its internal government and for the regulation of conduct and prescribe the rights and duties of its stockholders or members towards itself and among themselves in reference to the management of its affairs. REQUISITES for its validity: 1. Must not be contrary to law nor with the Corporation Code; 2. Must not be contrary to morals and public policy; 3. Must not impair contract obligations; 4. Must be general and uniform; 5. Must be consistent with the charter or articles of incorporation; and 6. Must be reasonable, not arbitrary or oppressive. Binding effect: AS TO THE MEMBERS AND CORPORATION has the force of contract between the members themselves and between the members having direction, management and control of the corporation and the corporation itself AS TO THIRD PERSONS they are not bound to know the by-laws which are merely provisions for the government of a corporation and notice to them will not be presumed. Rationale: By-laws have no extra-corporate force and are not in the nature of legislative enactments so far as third persons are concerned.

Articles of Incorporation 1) It is a condition precedent in the acquisition of corporate existence; 2) It is essentially a contract between the corporation and the stockholders/ members; between the stockholders/ member inter se, and between the corporation and the State;

By-Laws 1) It is a condition subsequent; its absence mere furnishes a ground for the revocation of the franchise; 2) It is for the internal government of the corporation but has the force of contract between the corporation and the stockholders/ members, and between the stockholders and members; 3) It may be executed after incorporation. Sec. 46 allows the filing of the by-laws simultaneously with the Articles of Incorporation; 4) It may be amended by a majority vote of the BOD and majority vote of outstanding capital stock or a majority of the members in a non-stock corporation; and 5) Power to amend or repeal by-laws or adopt new by-laws may be delegated by the 2/3 of the OCS or 2/3 of members in case of nonstock corporation.

3) It is executed before incorporation; 4) It is amended by a majority of the directors/ trustees and stockholders representing 2/3 of the outstanding capital stock, or 2/3 of the members in case of non-stock corporations; and 5) Power to amend/repeal articles cannot be delegated by the stockholders/ members to the board of directors/ trustees.

FORMAL ORGANIZATION AND COMMENCEMENT OF THE TRANSACTION OF BUSINESS are conditions subsequent to the issuance of the Articles in order that a corporation may legally continue as such. The law requires only substantial compliance of formal organization, which means: 1. Adoption of By-Laws and filing of the same with the SEC; 2. Election of board of directors/trustees, and officers; 3. Establishment of principal office; and 4. Providing for subscription and payment of capital stock. PERSONALITIES INVOLVED IN THE DEVELOPMENT OF A CORPORATION 1. PROMOTER is a person who, acting alone or with others, takes initiative in founding and organizing the business or enterprise of the issuer and receives consideration therefor. 2. INCORPORATORS are those mentioned in the Articles of Incorporation as originally forming and composing the corporation, having sign id the Articles and acknowledged the same before a notary public. They have no powers beyond those vested in them by the statute. QUALIFICATIONS: 1. Natural person; 2. Not less than 5 but not more than 15; 3. Of legal age; 4. Majority must be residents of the Philippines; and

5. Each must own or subscribe to at least one share. (Sec. 10)

RULE: Only natural persons can be incorporators. EXCEPTION: Unless otherwise allowed by law. Under the Rural Banks Act of 1992, incorporated cooperatives are allowed to be incorporators of rural banks. While corporations cannot generally be incorporators, there is no doubt that corporations can be corporators. Incorporators 1) Signatory to the Articles of Incorporation 2) It is a fait accompli or an accomplished fact. Thus, the Articles of Incorporation cannot be amended to replace them. 3) Number is limited to 5-15 4) Must have contractual capacity 3. CORPORATORS a) Stockholders b) Members; Corporators 1) Stockholder (stock corporation) or member (non-stock corporation) 2) They may cease to be such if they subsequently lose their qualifications. 3) No restriction as to number

4) May be such through a guardian

GOVERNING BODY (absolute control and direction) a) Board of Directors (stock); or b) Board of Trustees (non-stock) QUALIFICATIONS: 1. Ownership of at least (1) share of capital stock of the corporation in his own name, and if he ceases to own at least one share in his own name, he automatically ceases to be a director. (Sec. 23) For a non-stock corporation, only members of the corporation can be elected to seat in the Board of Trustees; 2. Majority of the directors/trustees must be residents of the Philippines; (Sec. 23) 3. Not have been convicted by final judgment of an offense punishable by imprisonment for a period exceeding 6 years or a violation of the Corporation Code, committed within five years from the date of his election; (Sec. 27) 4. Only natural persons can be elected directors/trustees; and 5. Other qualifications as may be prescribed in the by-laws of the corporation RULE: The Board of Directors/Trustees is the repository of corporate powers. Hence, all powers of the corporation shall be exercised, all business conducted and all property of such corporation controlled and held by the Board of Directors or Trustees. (Sec. 23) EXCEPTIONS: 1. Executive Committee duly authorized in the by-laws; 2. Contracted manager which may be an individual, a partnership, or another corporation. 3. Close corporations, the stockholders may manage the business of the corporation instead of a board of directors, if the articles of incorporation so provide. Directors are not entitled to compensation as such directors except that they are allowed reasonable per diems. However , directors may be given compensation when 1. There is a provision in the by-laws authorizing payment of compensation ; or 2. By a vote of the Stockholders representing at least majority of the outstanding capital stock at a regular or special meeting.

4.

In either case , the total yearly compensation of the directors shall not exceed 10% of the net income before income tax of the corporation during the preceding year. This is likewise applicable to trustees of non-stock corporation. Theory of Original Powerthe powers of the Board of directors or trustees are ORIGINAL and UNDELEGATED. The stockholders or members do not confer, nor can they revoke, those powers. They are DERIVATIVE only in the sense that they are given by the State in the act of incorporation. BUSINESS JUDGMENT RULE The board of directors/trustees is the body entrusted with the general control and management of the business of the corporation having plenary power and authority to transact all the ordinary business of the corporation within the scope of its charter power. The SEC, stockholders, and the courts cannot overrule a pure business judgment. THREE-FOLD DUTIES OF DIRECTORS 1. Duty of Obedience to direct the affairs of the corporation only in accordance with the purposes for which it was organized; 2. Duty of Diligence 3. Duty of Loyalty WHEN ARE DIRECTORS PERSONALLY LIABLE? 1. Willfully and knowingly voting for and assenting to patently unlawful acts of the corporation; (Sec. 31) 2. Acquiring any personal or pecuniary interest in conflict of duty; (Sec. 31) 3. Gross negligence or bad faith in directing the affairs of the corporation; (Sec. 31) 4. Agreeing or stipulating in a contract to hold himself liable with the corporation; 5. By virtue of a specific provision of law; or 6. Consenting to the issuance of watered stocks, or, having knowledge thereof, failing to file objections with the secretary;(Sec. 65) 7. Doctrine of Corporate Opportunity (Sec. 34)

REMEDIES IN CASE OF MISMANAGEMENT: 1. receivership; 2. injunction, if the act has not yet been done; : 3. dissolution if the abuse amounts to a ground for quo warranto but the Solicitor General refuses to act; and 4. derivative suit or complaint filed with SEC DOCTRINE OF SPECIAL FACT Director takes advantage of information obtained by reason of his office to the disadvantage of the corporation. INHERENT POWER OF "AMOTION" It is the inherent power to remove directors, officers or trustees prior to the expiration of their term RULES GOVERNING CONTRACTS ENTERED INTO BY DIRECTORS/TRUSTEES OR OFFICERS:

Doctrine of Corporate Opportunity The doctrine wherein a director , by virtue of his office, cannot acquire property or business opportunity in which the corporation has interest. When a director violates this doctrine , Unless his act is ratified by a vote of the stockholders representing 2/3 of the outstanding capital stock, the director shall refund to the corporation all the profits he realizes on a business opportunity which the corporation: 1. Is financially able to undertake; 2. Is in line with corporations business and is of practical advantage to it; and 3. Has an interest or a reasonable expectancy. The doctrine shall be applied notwithstanding the fact that the director risked his own funds in the venture. (Sec. 34) Contracts of Self Dealing Directors Contracts entered into by the corporation with one or more of its own directors/trustees, or officers are voidable UNLESS ALL the following conditions are present: a) Presence of such director/trustee in the board meeting approving the contract was not necessary to constitute a quorum for such meeting; b) Vote of such director/trustee in the board meeting approving the contract was not necessary for the approval of the contract; I c) Contract is fair and reasonable under the circumstances; d) In the case of an officer, there was previous authorization by the board of directors. (Sec. 32) If not all the requisites are present, the corporation may 1. choose to declare the contract voidable; OR 2. choose not to question the validity of the contract, without prejudice to the liability of the director/trustee for damages under Sec. 31. Where any of the first two conditions is absent, said contract must be ratified by the vote of the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of the members in a meeting called for the purpose, provided that full disclosure of the adverse interest of the director/ trustee involved is made at such meeting. (Sec. 32) Contracts of interlocking directors Contracts entered into between corporations with interlocking directors (directors whose interest is substantial or whose stockholdings exceed 20% of the outstanding capital stock of both corporations) are valid, provided that the contract is: a) Not fraudulent; and b) Fair and reasonable under the circumstances. If the interlocking director's interest in one corporation or corporations is "nominal" (not exceeding 20% of the outstanding capital stock), then all the conditions prescribed in Sec. 32 on self-dealing directors must be present with respect to the corporation in which he has nominal interest. (Sec. 33)

5. MANAGING AND ADMINISTRATIVE BODY (limited to the general corporate business) a) Executive committee; and b) Contracted managers. in case the contracted manager is another corporation, apply the rule under Sec. 44. LIMITATIONS ON THE POWERS OF EXECUTIVE COMMITTEE (Sec. 35): It cannot act on the following: 1) Matters needing stockholder approval; 2) Filling up of vacancies in the board; 3) Amendment or repeal or adoption of by-laws; 4) Amendment or repeal of any resolution of the Board which by its express terms is not so amendable or repealable; and 5) Distribution of cash dividend to the shareholders 6. CORPORATE OFFICERS Who are the corporate officers? President, who must be a director; Treasurer, who may or may not be a director, and as a matter of sound corporate practice, he must be a resident. Secretary, who need not be a director unless required by the by-laws; must be a resident and citizen of the Philippines; and Other such officers as may be provided in the by-laws. Corporate officers are those whose offices are created by the Corporation Code or the corporation's own by-laws. They do not enjoy security of tenure, and their incumbency is within the business judgment discretion of the board of directors/trustees. Their removal is considered an intra-corporate controversy and beyond the reach of labor courts. CAPITAL STRUCTURE of Stock Corporations CAPITAL STOCK / LEGAL STOCK / STATED CAPITAL is the amount fixed in the corporate charter to be subscribed and paid in cash, kind or property at the organization of the corporation or afterwards and upon which the corporation is to conduct its operation. CAPITAL is the value of the actual property or estate of the corporation whether in money or property. Its net worth or stockholder's equity is its assets less liabilities. AUTHORIZED CAPITAL STOCK is the capital stock divided into shares with par values. Par value stocks are required in the case of corporations issuing preferred shares, as well as in the case of banks, trust companies, insurance companies, building and loan associations, and public utilities. It is the total amount in the charter, which may be raised by the corporation for its operations. SUBSCRIBED CAPITAL STOCK is the total amount of the capital stock subscribed whether fully paid or not. OUTSTANDING CAPITAL STOCK is the portion of the capital stock issued to subscribers except treasury stocks. STATED CAPITAL is the capital stock divided into no par value shares. PAID-UP CAPITAL is the amount paid by the stockholders on subscriptions from unissued shares of the corporation.

What are the ways of increasing capital stock? 1) by increasing the number of shares and retaining the par value; 2) by increasing the number of shares and increasing the par value; 3) by increasing the par value of existing shares w/o increasing the number of shares; or 4) by reinvesting retained earnings to the capital and issuing stock dividends What are the available methods to replenish capital? 1) Additional subscription to shares of stock of the corporation by stockholders or by investors; 2) Advances by the stockholders to the corporation; or 3) Payment of unpaid subscription by the stockholders PREREQUISITES TO INCORPORATION 1. Compliance with MINIMUM CAPITAL STOCK RULE: No minimum required for capital stock under the Corporation Code (Sec.12). However, under the Code, a minimum paid-up capital of P5,000.00 is required. (Sec. 13) EXCEPTIONS: a) Domestic Insurance Corporations require P500T capital stock, of which 50% must be subscribed and the balance payable in 12 months. b) Private Development Banks - P4M for class A - P2M for class B - P1M for class C c) Investment Companies need a paid up of at least P500T d) Savings and Loan Corporation is fixed by the Monetary Board, but not less than P100T e) Financing Companies Paid upP2M for Metro Manila P1M for cities P500T for others 2. Compliance with MINIMUM SUBSCRIBED CAPITAL STOCK whereby at least 25% of authorized capital stock must be subscribed to. (Sec. 13) 3. Compliance with MINIMUM PAID-UP CAPITAL whereby at least 25% of the total subscription must be paid upon subscription but must not be less than P5,000.00, the minimum capital stock requirement. (Sec. 13) Non-resident aliens should pay their subscriptions in full unless the balance unpaid is assumed by a resident. The subscription payments of the non-resident aliens shall not be included in the computation of the 25% minimum paid-up capital requirement.

RULES ON CONVERSION
From Stock to Non-stock corporation Conversion may be made by mere amendment of the articles of incorporation. From Non-stock to Stock corporation The corporation must first be dissolved. Mere amendment of the articles of incorporation would not suffice because the conversion would change the corporate nature from non-profit to one for monetary gain.

GENERAL RULES ON CLASSSIFICATION OF SHARES 1. Shares have rights, privileges , or restrictions stated in the AOI. 2. Each share has the same rights unless otherwise provided in the AOI DOCTRINE OF EQUALITY OF SHARES Where the articles of incorporation do not provide for any distinction of the shares of stock, all shares issued by the corporation are presumed to be equal and enjoy the same rights and privileges and are likewise subject to the same liabilities. (Sec. 6) How are shares CLASSIFIED? COMMON SHARES are the basic class of stock ordinarily and usually issued without extraordinary rights and privileges. The owners thereof are entitled to a pro rata share in the profits of the corporation and in its assets upon dissolution and, likewise, in the management of its affairs without preference or advantage whatsoever. PREFERRED SHARES are those issued with par value, and preferences either with respect to: a)assets after dissolution (PREFERRED SHARES AS TO ASSETS) , b)distribution of dividends( PREFERRED SHARES AS TO DIVIDENDS), c)or both, and other preferences. Preferred or Redeemable shares may be deprived of voting rights (Sec. 6). [See discussion of NON-VOTING shares below]

KINDS OF PREFERRED SHARES AS TO DIVIDENDS

1.Cumululative preferred share - a share which entitles the holder thereof not only the payment of current dividends but also of dividends in arrears. 2.Non cumulative preferred share- a share which allows the holder thereof to the payment of current dividends only without regards to dividends in arrears. 3.Participating preferred share- a share which gives the holder the right to participate with the holders of the common share in the remaining profits pro rata, aside from the right to receive the stipulated dividends at a preferred rate. 4.Non participating preferred share- a share which allows the holder to receive the stipulated dividends at a preferred rate only. The holder shall not share in the dividends distributed to common shares.. Preferred share holders are not guaranteed dividends by the corporation , such is subject to the availability of surplus profits or unrestricted retained earning plus dividend declaration. They do not have a lien on the property of the corporation nor are creditors of the corporation. REDEEMABLE SHARES are those which permit the issuing corporation to redeem or purchase its own shares. LIMITATIONS: a) Redeemable shares may be issued only when expressly provided for in the articles of incorporation; b) Terms and conditions affecting said shares must be stated both in the articles of incorporation and in the certificates of stock representing such shares;

c) Redeemable shares may be deprived of voting rights in the articles of incorporation, unless otherwise provided in the Code. Redeemable shares may be redeemed, regardless of the existence of unrestricted retained earnings (Sec. 8), and provided further that the corporation has, after such redemption, sufficient assets in its books to absorb corporate debts and liabilities.

KINDS OF REDEEMABLE SHARES

1.Compulsory redeemable shares shares which the issuing corporation must redeem after a stated period or when demanded by the holder. 2. Optional redeemable shares shares which may or may not be redeemed by the issuing corporation. TREASURY SHARES are shares that have been earlier issued as fully paid and have thereafter been acquired by the corporation by purchase, donation, redemption or through some lawful means. (Sec. 9) If purchased from stockholdersthe transaction in effect is a return to the stockholders of the value of their investment in the company and a reversion of the shares to the corporation. The corporation must have surplus profits with which to buy the shares so that the transaction will not cause an impairment of the capital. If acquired by donation from the stockholdersthe act would amount to a surrender of their stock without getting back their investments which are instead, voluntarily given to the corporation. When treasury shares are sold below its par or issued value, there can be no watering of stock because watering of stock contemplates an original issuance of shares. RULE ON THE REACQUISITION BY CORPORATION OF ITS OWN STOCK: A stock corporation may acquire or purchase its own shares for legitimate corporate purposes PROVIDED it has unrestricted retained earnings . 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 under the provisions of this Code. FOUNDERS' SHARES are shares issued to organizers and promoters of a corporation in consideration of some supposed right or property. These shares, when classified as such in the articles of incorporation may be given special preference in voting rights and dividend payments. But if an exclusive right to vote and be voted for as director is granted, this privilege is subject to approval by the SEC, and cannot exceed 5 years from the date of approval. VOTING SHARES are shares with a right to vote. NON-VOTING SHARES are shares without right to vote.

The law only authorizes the denial of voting rights in the case of redeemable shares and preferred shares, provided that there shall always be a class or series of shares which have complete voting rights. When such voting rights are denied, these redeemable and preferred shares shall nevertheless be entitled to vote on the following fundamental matters: a) Amendment of Articles of Incorporation; b) Adoption and amendment of by-laws; c) Sale or disposition of all or substantially all of corporate property; d) Incurring, creating or increasing bonded indebtedness; e) Increase or decrease of capital stock; f) Merger or consolidation of corporation; g) Investments of corporate funds in another corporation or another business purpose; and h) Corporate Dissolution (Sec. 6) ESCROW STOCK is deposited with a third person to be delivered to a stockholder or his assign, after complying with certain conditions, usually payment of full subscription price. OVER-ISSUED STOCK is stock issued in excess of the authorized capital stock. It is also known as spurious stock. Its issuance is considered null and void. WATERED STOCK is stock issued not in exchange for its equivalent either in cash, property, share, stock dividends, or services. The "water" in the stock represents the difference between the fair market value at the time of the issuance of the stock and the par or issued value of said stock. Both par and no par stocks can thus be watered stocks. PAR VALUE SHARES are shares with a value fixed in the certificates of stock and the articles of incorporation. NO PAR VALUE SHARES are shares having no par value but have an issued value stated in the certificate or articles of incorporation. LIMITATIONS: a) No par value shares can have an issued price of less than P5.00; b) The entire consideration for its issuance constitutes capital so that no part of it should be distributed as dividends; c) They cannot be issued as preferred stocks; d) They cannot be issued by banks, trust companies, insurance companies, public utilities and building and loan association; e) The articles of incorporation must state the fact that it issued no par value shares as well as the number of said shares; f) Once issued, they are deemed fully paid and non-assessable. (Sec. 6) STREET CERTIFICATE is a stock certificate endorsed by the registered holder in blank and the transferee can command its transfer to his name from the issuing corporation. CONVERTIBLE SHARE is a share a share that is changeable by the stockholder from one class to another at a certain price and within a certain period. FRACTIONAL SHARE is a share with a value of less than one full share. What is the TRUST FUND DOCTRINE? The subscribed capital stock of the corporation is a trust fund for the payment of debts of the corporation which the creditors have the right to look up to satisfy their credits, and

which the corporation may not dissipate. The creditors may sue the stockholders directly for the latter's unpaid subscription. Instances where the Doctrine was applied: 1) Where the corporation has distributed its capital among the stockholders without providing for the payment of creditors; 2) Where it had released the subscribers to the capital stock from their subscriptions; 3) Where it has transferred corporate property in fraud of its creditors; and 4) Where the corporation is insolvent. If the corporation is solvent, the TFD extends to the capital stock represented by the corporation's legal capital. If the corporation is insolvent, the TFD extends to the capital stock of the corporation and all of its property and assets. Exceptions to the Trust Fund Doctrine 1) Redemption of redeemable shares (Sec. 8) 2) In a close corporation, when there is a deadlock and the SEC orders the payment of the appraised value of the stockholder's share. (Sec. 104) ISSUANCE OF SHARES is the initial disposition (for consideration not less than par or stated value) of unissued shares, such as by subscriptions, stock dividends, and sale of, or payment of obligations with, shares from the unsubscribed capital stock. SUBSCRIPTION is any contract for the acquisition of unissued stock in an existing corporation or in one still to be formed, irrespective of how the parties refer to the agreement. (Sec. 60) The subscribed shares need not be paid in full in order that the subscription may be valid. The subscription contract is a consensual contract that is perfected upon the meeting the minds of the parties. The name of the subscriber is recorded in the Stock and Transfer book, and from that time, such subscriber becomes a stockholder of record entitled to all the rights of a stockholder. Until the stocks are fully paid, it continues to be a subsisting liability that is legally enforceable.

SUBSCRIPTION
1.refers to unissued shares 2.Corporation still to be form or already in existence 3.The subscriber can exercise all his right as a stockholder even before full payment of the subscription. 4.Corporate creditors may proceed against the subscriber for his unpaid subscription in case the corporate asset are not sufficient to satisfy their claims. 5.Subsciber may not be legally released from the payment of his unpaid subscription UNLESS no creditors would be prejudiced and all the stockholders agree thereto. 6.Subscription may be in any form , not covered by the statute of frauds.

PURCHASE OF SHARES
1. refers to issued shares 2.Can only be made when the corporation is already in existence 3.The purchaser can only exercise his right upon full payment of the purchase price. 4. Corporate creditor cannot proceed against the purchaser for the balance of the purchase price , because of the lack of privity of contact between them. 5. The corporation can rescind or cancel the contract in case of non fulfillment by the buyer. 6. Purchase of shares is covered by the statute of frauds in cases of purchases amounting to more than P500.

VALID CONSIDERATIONS IN SUBSCRIPTION AGREEMENT: [COP2AL] 1) Cash actually received; 2) Property, tangible or intangible, actually received AND necessary or convenient for its use and lawful purposes; 3) Labor or services actually rendered to the corporation; 4) Previously incurred corporate indebtedness; 5) Amounts transferred from unrestricted retained earning to stated capital; 6) Outstanding shares in exchange for stocks in the event of reclassification or conversion. (Sec. 62) Shares of stock shall not be issued in exchange for promissory notes or future services. (Sec. 62) STOCK OPTION is a privilege granted to a party to subscribe to a certain portion of the unissued capital stock of a corporation within a certain period and under the terms and conditions of the grant exercisable by the grantee at any time within the period granted. WARRANT is a type of security which entitles the holder the right to subscribe to the unissued capital stock of a corporation or to purchase issued shares in the future, evidenced by a Warrant Certificate, whether detachable or not, which may be sold or offered for sale to the public. SHARES OF STOCK is an interest or right which the owner has in the management of the corporation, its surplus profits, and upon dissolution, in all of its assets remaining after the payment of its debt. CERTIFICATE OF STOCK is the document evidencing the ownership of shares of stocks by a stockholder and the full payment of its issue or subscription price. The certificate is not essential to the ownership and/or existence of the share of stock. Where the certificate of stock reflects a greater volume of shares than the actual number of shares issued or to be issued, the following rules may be considered: If there is an over-issue, the excess issuance (over the authorized capital stock or the stated capital) shall be void as being ultra vires. If there is no over-issue, but no payment has been made to cover the par or stated value of the excess shares, the latter would constitute "watered" stocks. If there is no over-issue and no watering of stocks, the corporation may be bound to honor the certificate (if duly signed and released by its authorized officers) in the hands of a holder in good faith, reserving a right of recourse that an aggrieved party may pursue against the culpable or unjustly enriched party. CAPITAL STOCK Is the amount paid in or secured to be paid in by the stockholders upon which the corporation is to conduct its operation. It is the property of the corporation itself. SHARES OF STOCK Is the interest or right which the stockholder has in the management of the corporation, its surplus profits, and upon dissolution, in all of its assets remaining after payment of corporate debts. Certificate of Stock

Shares of Stock

1) Unit of interest in a corporation

1) Evidence of the holder's ownership of the stock and of his right as a shareholder 2) It is concrete and tangible 3) It may be issued only if the subscription is fully paid

2) It is incorporeal or intangible property 3) It may be issued by the corporation even if the subscription even if the subscription is not fully paid 4) Situs is the state where the corporation has its domicile

4) Situs may be the place where corporation is located or at the domicile of the owner

ISSUANCE OF CERTIFICATE OF STOCK Under the Doctrine of Individuality of Subscription, subscription is one, entire, indivisible, and whole contract which cannot be divided into portions. Thus, no certificate of stock shall be issued until the full amount of the subscription is paid. What is the Supreme Court ruling on the application of partial payment of subscription? When not prohibited by the corporations by-laws, the board of directors at its option, may apply a partial payment of the subscription to such shares as it may cover and issue the corresponding certificates of stock, OR apply said partial payment to all the shares in which case all the shares are partially paid and therefore, no certificate of stock can be issued therefor. What is the PROCEDURE for the ISSUANCE OF NEW CERTIFICATE OF STOCK IN LIEU OF LOST, STOLEN OR DESTROYED ONES? Step 1) Filing with the corporation an affidavit in triplicate by the registered owner setting forth the circumstances as to how the certificate was lost, stolen or destroyed, the number of shares, serial number of the certificate and the name of the corporation that issued the same; Step 2) Publication of notice of loss by the corporation in a newspaper of general circulation in the place of the principal office, once a week for 3 consecutive weeks; Step 3) After the Iapse of 1 year from the date of the last publication, if no contest has been presented, the corporation shall cancel in its books the certificate of stock which has been lost, stolen or destroyed, and issue in lieu thereof a new certificate of stock. However, if the registered owner files a bond or other securities as may be necessary to the board, the new certificate of stock may be issued even before the expiration of one (1) year period. (Sec. 73) SEC Opinion: The prescribed procedure does not apply to a case where the certificates are in the company's possession when lost, stolen or destroyed. In which case, the corporation, not the stockholder, bears the consequences of the loss. What is the rule regarding TRANSFER OF SHARES? RULE: A stockholder has an absolute right to transfer, convey, assign, sell or dispose his shares.

UNLESS there is a reasonable restriction in the Articles of Incorporation and in the certificates of stock. Kinds of Restrictions a) Absolute transfers or transfer of ownership b) Limited transfers or transfer of juridical possession only, such as pledge and mortgage. What are the MODES OF ABSOLUTE TRANSFER OF SHARES? 1) When a certificate of stock has already been issued (which presupposes a fully paid subscription) by indorsement and delivery; 2) When no certificate of stock has been issued, by deed of assignment but the transfer shall be valid only between the parties and void as to others until its recording in the stock and transfer book. The rule in the case of PLEDGE OR MORTGAGE OF SHARES, is the pledge or mortgage itself need not be recorded in the stock and transfer book, but a chattel mortgage must comply with the Chattel Mortgage Law, and a pledge would require the shares to be placed in the possession of the creditor/pledgee. The agreement must appear in a public instrument to take effect against third persons. An Underwriting Agreement is an agreement between a corporation and a third person, called the "underwriter", who agrees, for compensation, to take a stipulated amount of stocks or bonds, specified in the underwriting agreement, when such securities are not taken by those to whom they are first offered. Underwriting Agreement 1) The signers obligate themselves to take the shares of stock which cannot be sold. 2) Underwriters are given commission. 3) The signer can refuse to become a stockholder/member of the company. Stock Subscription Agreement 1) The obligation of the, signer to the purchasers and to the public is absolute. 2) There is no commission. 3) He becomes a stockholder of the company and is liable to pay the amount due on the stock.

How are unpaid subscriptions COLLECTED? Either by Voluntary payment a) upon the date specified in the subscription contract b) upon call by the Board of Directors OR by Involuntary payment a) extrajudicial i. delinquency sale ii. application of dividends b)judicial action WHEN do stocks become DELINQUENT? 1) If the subscription contract fixes the date for payment, failure to pay on such date shall render the entire balance due and payable with interest. Thirty days therefrom, if still unpaid, the shares become delinquent, as of the due date, and subject to sale, unless the board declares otherwise.

2) If no date is fixed in the subscription contract, the board of directors can make the call for payment, and specify the due date. The notice of call is mandatory. The failure to pay on such date shall render the entire balance due and payable with interest. Thirty days therefrom, if still unpaid, the shares become delinquent, as of the date of call, and subject to sale, unless the board declares otherwise. (Sec. 67) PROCEDURE FOR THE SALE OF DELINQUENT STOCKS: Step 1) A Call by resolution demanding payment of the balance. However, if the subscription contract already prescribes the date of payment, no call is necessary. Step 2) Notice of the board resolution is given to the stockholders by the corporate secretary, either personally or by registered mail. Publication of notice of call is not required. Step 3) Failure of the stockholder to pay within a grace period of 30 days from the date specified in the contract of subscription or in the call, the stocks shall be declared delinquent and shall be subject to sale. Step 4) Notice of delinquency served on the subscribers either personally or registered mail and publication in a newspaper of general circulation in the province or the city where principal office is located for once a week for 2 consecutive weeks. Notice shall state the amount due on each subscription plus accrued interest, and the date, time and place of the sale which shall not be less than 30 days nor more than 60 days from the date the stocks become delinquent. Step 5) Sale of the delinquent shares at public auction. (Sec. 68) Who is the HIGHEST BIDDER? The person participating in the delinquency sale who offers to pay the full amount of the balance of the subscription together with the accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares. In other words, the amount of the bid does not vary but only the number of shares to be bought changes and determines the highest bidder.