INTRODUCTION

Definition and attributes of a corporation

A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence. A corporation, being a creature of law, "owes its life to the state, its birth being purely dependent on its will," it is "a creature without any existence until it has received the imprimatur of the state acting according to law." A corporation will have no rights and privileges of a higher priority than that of its creator and cannot legitimately refuse to yield obedience to acts of its state organs. (Tanyag v. Benguet Corporation) A corporation has four (4) attributes: (1) (2) (3) (4) It is an artificial being; Created by operation of law; With right of succession; Has the powers, attributes, and properties as expressly authorized by law or incident to its existence.

CLASSIFICATION OF PRIVATE CORPORATIONS

Stock v. Non-Stock Corporations

Stock Definition Corporations which have capital stock divided into shares and are authorized to distribute to the holders of shares dividends or allotments of the surplus profits on the basis of the shares (3)

Non-Stock All other private corporations (3) One where no part of its income is distributable as dividends to its members, trustees or officers. (87)

Purpose

Primarily to make profits for its shareholders

May be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes like trade, industry, agricultural and like chambers, or any combination thereof. (88)

Distribution of Profits

Profit is distributed to shareholders

Whatever incidental profit made is not distributed among its members but is used for furtherance of its purpose. AOI or by-laws may provide for the distribution of its assets among its members upon its dissolution. Before then, no profit may be made by members. Members Each member, regardless of class, is entitled to one (1) vote UNLESS such right to vote has been limited, broadened, or denied in the AOI or bylaws. (Sec. 89)

Composition Scope of right to vote

Stockholders Each stockholder votes according to the proportion of his shares in the corporation. No shares may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares, and as otherwise provided by the Code. (Sec. 6) May be denied by the AOI or the bylaws. (Sec. 89) May be authorized by the by-laws, with

Voting by proxy

Cannot be denied. (Sec. 58)

Voting by mail

Not possible.

the approval of and under the conditions prescribed by the SEC. (Sec. 89) Who exercises Powers 23 Governing Board Corporate Board of Directors or Trustees Members of the corporation

Board of Directors or Trustees, consisting of 5-15 directors / trustees.

Board of Trustees, which may consist of more than 15 trustees unless otherwise provided by the AOI or bylaws. (Sec, 92) Board classified in such a way that the term of office of 1/3 of their number shall expire every year. Subsequent elections of trustees comprising 1/3 of the board shall be held annually, and trustees so elected shall have a term of 3 years. (Sec. 92) Officers may directly elected by the members UNLESS the AOI or by-laws provide otherwise. (Sec. 92)

Term of directors or trustees

Directors / trustees shall hold office for 1 year and until their successors are elected and qualified (Sec. 23).

Election of officers

Officers are elected by the Board of Directors (Sec. 25), except in close corporations where the stockholders themselves may elect the officers. (Sec. 97) Any place within the Philippines, if provided for by the by-laws (Sec. 93)

Place of meetings

Generally, the meetings must be held at the principal office of the corporation, if practicable. If not, then anyplace in the city or municipality where the principal office of the corporation is located. (Sec. 51) Generally non-transferable since membership and all rights arising therefrom are personal. However, the AOI or by-laws can provide otherwise. (Sec. 90) See Sec. 94.

Transferability of interest or membership

Transferable.

Distribution of assets in case of dissolution

CIR VS. CLUB FILIPINO (5 SCRA 321; 1962) FACTS: Club Filipino owns and operates a club house, a sports complex, and a bar restaurant, which is incident to the operation of the club and its gold course. The club is operated mainly with funds derived from membership fees and dues. The BIR seeks to tax the said restaurant as a business. HELD: The Club was organized to develop and cultivate sports of all class and denomination for the healthful recreation and entertainment of its stockholders and members. There was in fact, no cash dividend distribution to its stockholders and whatever was derived on retail from its bar and restaurants used were to defray its overhead expenses and to improve its golf course. For a stock corporation to exist, 2 requisites must be complied with: (1) a capital stock divided into shares (2) an authority to distribute to the holders of such shares, dividends or allotments of the surplus profits on the basis of shares held. In the case at bar, nowhere in the AOI or by-laws of Club Filipino could be found an authority for the distribution of its dividends or surplus profits. FORMATION AND ORGANIZATION OF CORPORATION Requirements in the formation of a corporation

Who may form a corporation (See SEC. 10) INCORPORATORS REQUIREMENTS COMMENTS

Definition

stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof natural persons

compare with Corporators which include all stockholders or members, whether incorporators or joining the corporation after its incorporation.

Characteristic

excludes corporations and partnerships may be more than 15 for non-stock corp. except educational corp. does not prevent the one-man (person) corporation wherein the other incorporators may have only nominal ownership of only one share of stock; not necessarily illegal

Number

not less than 5; not more than 15

Age Residence

of legal age majority should be residents of the Philippines residence a requirement; citizenship requirement only in certain areas such as public utilities, retail trade banks, investment houses, savings and loan associations, schools

Steps in the formation of a corporation

Mutual Agreement to perform certain acts required for organizing a corporation 12345Organize and establish a corporation Comply with requirements of corporation code Contribute capital/resources Mode of use of capital/resource and control/management of capital/resource distribution/disposition of capital/resource (embodied in constitutive documents)

STEPS a. Promotional Stage (See SEC. 2. Definitions) Promoter

COMMENTS

brings together persons who become interested in the enterprise aids in procuring subscriptions and sets in motion the machinery which leads to the formation of the corporation itself formulates the necessary initial business and financial plans and, if necessary, buys the rights and property which the business may need, with the understanding that the corporation when formed, shall take over the same.

b. Drafting articles of incorporation (See SEC. 14)

(see chart below)

c. Filing of articles; payment of fees.

AOI & the treasurers affidavit duly signed & acknowledged must be filed w/ the SEC & the corresponding fees paid failure to file the AOI will prevent due incorporation of

the proposed corporation & will not give rise to its juridical personality. It will not even be a de facto corp. Under present SEC rules, the AOI once filed , will be published in the SEC Weekly Bulletin at the expense of the corp. (SEC Circular # 4, 1982).

d. Examination of articles; approval or rejection by SEC.

Process: a) SEC shall examine them in order to determine whether they are in conformity w/ law. b) If not, the SEC must give the incorporators a reasonable time w/in w/c to correct or modify the objectionable portions. Grounds for rejection or disapproval of AOI: a) AOI /amendment not substantially in accordance w/ the form prescribed b) purpose/s are patently unconstitutional, illegal, immoral, or contrary to government rules & regulations; c) Treasurers Affidavit is false; d) required percentage of ownership has not been complied with (Sec. 17) e) corp.s establishment, organization or operation will not be consistent w/ the declared national economic policies (to be determined by the SEC, after consultation w/ BOI, NEDA or any appropriate government agency -- PD 902-A as amended by PD 1758, Sec. 6 (k)) Decisions of the SEC disapproving or rejecting AOI may be appealed to the CA by petition for review in accordance w/ the ROC.

e. Issuance of certificate of incorporation.

Certificate of Incorporation will be issued if: a) SEC is satisfied that all legal requirements have been complied with; and b) there are no reasons for rejecting or disapproving the AOI. It is only upon such issuance that the corporation acquires juridical personality. (See Sec. 19. Commencement of corporate existence) Should it be subsequently found that the incorporators were guilty of fraud in procuring the certificate of incorporation, the same may be revoked by the SEC, after proper notice & hearing.

b. Drafting articles of incorporation (See SEC. 14) CONTENTS OF AOI COMMENTS

Corporate Name

Essential to its existence since it is through it that the corporation can sue and be sued and perform all legal acts A corporate name shall be disallowed by the SEC if the proposed name is either:

(1)

identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law; or patently deceptive, confusing or contrary to existing laws. (Sec. 18)

(2)

LYCEUM OF THE PHILS. VS. CA (219 SCRA 610) The policy underlying the prohibition against the registration of a corporate name which is identical or deceptively or confusingly similar to that of any existing corporation or which is patently deceptive or patently confusing or contrary to existing laws is: 1. 2. 3. the avoidance of fraud upon the public which would have occasion to deal with the entity concerned; the prevention of evasion of legal obligations and duties, and the reduction of difficulties of administration and supervision over corporations.

Purpose Clause

A corporation can only have one (1) primary purpose. However, it can have several secondary purposes. A corporation has only such powers as are expressly granted to it by law & by its articles of incorporation, those which may be incidental to such conferred powers , those reasonably necessary to accomplish its purposes & those which may be incident to its existence. Corporation may not be formed for the purpose of practicing a profession like law, medicine or accountancy

Principal Office

must be within the Philippines specify city or province street/number not necessary important in determining venue in an action by or against the corp., or on determining the province where a chattel mortgage of shares should be registered cannot specify term which is longer than 50 years at a time may be renewed for another 50 years, but not earlier than 5 years prior to the original or subsequent expiry date UNLESS there are justifiable reasons for an earlier extension. names, nationalities & residences of the incorporators; names, nationalities & residences of the directors or trustees who will act as such until the first regular directors or trustees are elected; treasurer who has been chosen by the pre-incorporation subscribers/members to receive on behalf of the corporation, all subscriptions /contributions paid by them. amount of its authorized capital stock in lawful money of the Philippines number of shares into which it is divided in case the shares are par value shares, the par value of each, names, nationalities and residences of the original subscribers, and the amount subscribed and paid by each on his subscription, and if some or all of the shares are without par value, such fact must be stated for a non-stock corporation, the amount of its capital, the names, nationalities and residences of the contributors and the amount contributed by each 25% of 25% rule to be certified by Treasurer paid up capital should not be less than P5,000 Classes of shares into w/c the shares of stock have been divided; preferences of & restrictions on any such class;

Term of Existence

Incorporators and Directors

Capital Stock

Other matters

and any denial or restriction of the pre-emptive right of stockholders should also be expressly stated in said articles. If the corporation is engaged in a wholly or partially nationalized business or activity, the AOI must contain a prohibition against a transfer of stock which would reduce the Filipino ownership of its stock to less than the required minimum.

Any corporation may be incorporated as a close corporation, except: a) mining or oil companies; b) stock exchanges; c) banks; d) insurance companies; e) public utilities; f) educational institutions; & g) corporations declared to be vested w/ public interest

De Facto Corporations: Requisites User of Corporate Powers What is a de facto corporation? A de facto corporation is a defectively organized corporation, which has all the powers and liabilities of a de jure corporation and, except as to the State, has a juridical personality distinct and separate from its shareholders, provided that the following requisites are concurrently present: (1) (2) (3) That there is an apparently valid statute under which the corporation with its purposes may be formed; That there has been colorable compliance with the legal requirements in good faith; and, That there has been use of corporate powers, i.e., the transaction of business in some way as if it were a corporation.

Can a corporation transact business as a de facto corporation while application is still pending with SEC? No. In the case of Hall v. Piccio (86 Phil. 603; 1950), where the supposed corporation transacted business as a corporation pending action by the SEC on its articles of incorporation, the Court held that there was no de facto corporation on the ground that the corporation cannot claim to be in good faith to be a corporation when it has not yet obtained its certificate of incorporation. Formation under apparently valid statute. MUNICIPALITY OF MALABANG V. BENITO (29 SCRA 533; 1969) WON a corporation organized under a statute subsequently declared void acquir es status as de facto corporation. No. A corporation organized under a statute subsequently declared invalid cannot acquire the status of a de facto corporation unless there is some other statute under which the supposed corporation may be validly organized. Hence, in the case at bar, the mere fact that the municipality was organized before the statute had been invalidated cannot conceivably make it a de facto corporation since there is no other valid statute to give color of authority to its creati on. Colorable compliance with the legal requirements in good faith. BERGERON V. HOBBS (71 N.W. 1056, 65 Am. St. Rep. 85) The constitutive documents of the proposed corporation were deposited with the Register of Deeds but not on file in said office. One of the requirements for valid incorporation is the filing of constitutive documents in the Register of Deeds. Was there colorable compliance enough to give the supposed corporation at least the status of a de facto corporation? No. The filing of the constitutive documents in the Register of Deeds is a condition precedent to the right to act as a corporate body. As long as an act, required as a condition precedent, remains undone, no immunity from individual liability is secured.

HARRIL V. DAVIS (168 F. 187; 1909)

The constitutive documents were filed with the clerk of the Court of Appeals but not with the clerk of court in the judicial district where the business was located. Arkansas law requires filing in both offices. Was there colorable compliance enough to give the supposed corporation at least the status of a de facto corporation? No. Neither the hope, the belief, nor the statement by parties that they are incorporated, nor the signing of the articles of incorporation which are not filed, where filing is requisite to create the corporation, nor the use of the pretended franchise of the nonexistent corporation, will constitute such a corporation de facto as will exempt those who actively and knowingly use s name to incur legal obligations from their individual liability to pay them. There could be no incorporation or color of it under the law until the articles were filed (requisites for valid incorporation).

HALL v. PICCIO (29 SCRA 533; 1969) In the case of Hall v. Piccio, where the supposed corporation transacted business as a corporation pending action by the SEC on its articles of incorporation, the Court held that there was no de facto corporation on the ground that the corporation cannot claim to be in good faith to be a corporation when it has not yet obtained its certificate of incorporation. NOTE: The validity of incorporation cannot be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry must be through a quo warranto proceeding made by the Solicitor General. (Sec. 20) CORPORATION BY ESTOPPEL (Sec. 21)

Distinguish a de facto corporation from a corporation by estoppel. The de facto doctrine differs from the estoppel doctrine in that where all the requisites of a de facto corporation are present, then the defectively organized corporation will have the status of a de jure corporation in all cases brought by and against it, except only as to the State in a direct proceeding. On the other hand, if any of the requisites are absent, then the estoppel doctrine can apply only if under the circumstances of the particular case then before the court, either the defendant association is estopped from defending on the ground of lack of capacity to be sued, or the defendant third party had dealt with the plaintiff as a corporation and is deemed to have admitted its existence. (De facto has status of de jure corpo, except separate personality against State, provided all requisites are present) What are the effects of a Corporation by Estoppel in suits brought: (1) against the Corporation? Considered a corporation in suits brought against it if it held itself out as such and denies capacity to be sued; against third party?

Third party cannot deny existence of corporation if it dealt with it as such. EMPIRE vs. STUART (46 Mich. 482, 9 N.W. 527; 1881) Company was sued on a promissory note. Its defense was that at the time of its issuance, it was defectively organized and therefore could not be sued as such. The Corporation cannot repudiate the transaction or evade responsibility when sued thereon by setting up its own mistake affecting the original organization. LOWELL-WOODWARD vs. WOODS (104 Kan. 729; 1919) Corporation sued a partnership on a promissory note. The latter as defense alleged that the plaintiff was not a corporation. One who enters into a contract with a party described therein as a corporation is precluded, in an action brought thereon by such party under the same designation, from denying its corporate existence. ASIA BANKING VS STANDARD PRODUCTS (46 Phil. 145; 1924) The corporation sued another corporation a promissory note. The defense was that the plaintiff was not able to prove the corporate existence of both parties. The defendant is estopped from denying its own corporate existence. It is also estopped from denying the others corporate existence. The general rule is that in the absence of fraud, a person who has contracted or otherwise dealt with an association is such a way as to recognize and in effect admit its legal existence as a corporate body is thereby estopped from denying its corporate existence. CRANSON VS IBM (234 MD. 477, 200 A. 2D 33 ; 1964)

(2)

IBM sued Cranson in his personal capacity regarding a typewriter bought by him as President of a defectively organized company whose Articles were not yet filed when the obligation was contracted. IBM, having dealt with the defectively organized company as if it were properly organized and having relied on its credit instead of Cransons, is estopped from asserting that it was not incorporated. It cannot sue Cranson personally. SALVATIERRA VS GARLITOS (103 Phil. 757; 1958) Salvatierra leased his land to the corporation. He filed a suit for accounting, rescission and damages against the corporation and its president for his share of the produce. Judgment against both was obtained. President complains for being held personally liable. He is liable. An agent who acts for a non-existent principal is himself the principal. In acting on behalf of a corporation which he knew to be unregistered, he assumed the risk arising from the transaction. ALBERT VS UNIVERSITY PUBLISHING CO., INC. (Jan. 30, 1965) Mariano Albert entered into a contract with University Publishing Co., Inc. through Jose M. Aruego, its President, whereby University would pay plaintiff for the exclusive right to publish his revised Commentaries on the Revised Penal Code. The contract stipulated that failure to pay one installment would render the rest of the payments due. When University failed to pay the second installment, Albert sued for collection and won. However, upon execution, it was found that University was not registered with the SEC. Albert petitioned for a writ of execution against Jose M. Aruego as the real defendant. University opposed, on the ground that Aruego was not a party to the case. The Supreme Court found that Aruego represented a non-existent entity and induced not only Albert but the court to believe in such representation. Aruego, acting as representative of such non-existent principal, was the real party to the contract sued upon, and thus assumed such privileges and obligations and became personally liable for the contract entered into or for other acts performed as such agent. The Supreme Court likewise held that the doctrine of corporation by estoppel cannot be set up against Albert since it was Aruego who had induced him to act upon his (Aruego's) willful representation that University had been duly organized and was existing under the law. BY-LAWS (Sec. 46 & 47)

When adopted: (a) No later than one (1) month after receipt from SEC of official Requirement:

notice of issuance of Cert. of incorporation.

Affirmative vote of stockholders representing at least majority of outstanding capital stock (Stock Corp.) or members (Non-Stock) Must be signed by stockholders or members voting for them

(b) Prior to incorporation Requirement: Approval of all incorporators; must be signed by all of them

Where kept:

(1) In the principal office of the corporation ; and (2) Securities and Exchange Commission Only upon the SECs issuance of a certification that the by -laws are not inconsistent with the Corporation Code.

When effective:

Special corporations: By-laws and/or amendments thereto must be accompanied by A certificate of the appropriate government agency to the effect that such by-laws / amendments are in accordance with law. banks or banking institutions building and loan associations trust companies insurance companies public utilities educational institutions other special corporations governed by special laws

Contents of By-laws - Subject to the provisions of the Constitution, this Code, other

special laws, and the articles of incorporation, a private corporation may provide in its by-laws for: 1) 2) 3) 4) 5) 6) 7) 8) 9) the time, place and manner of calling and conducting regular or special meetings of the directors or trustees; the time and manner of calling and conducting regular and special meetings of the stockholders or members; the required quorum in meetings of stockholders or members and the manner of voting herein; the form for proxies of stockholders and members and the manner of voting them; the qualifications, duties and compensation of directors or trustees, officers and employees; the time for holding the annual election of directors or trustees and the mode or manner of giving notice thereof; the manner of election or appointment and the term of office of all officers other than directors or trustees; the penalties for violation of the by-laws; in the case of stock corporations, the manner of issuing certificates; and

10) such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs. FLEISCHER V. BOTICA NOLASCO CO. (47 Phil. 583; 1925) As a general rule, the by-laws of a corporation are valid if they are reasonable and calculated to carry into effect the objective of the corporation and are not contradictory to the general policy of the laws of the land. Under a statute authorizing bylaws for the transfer of stock, a corp. can do no more than prescribe a general mode of transfer on the corp. books and cannot justify an restriction upon the right of sale. GOVT. OF P.I. V. EL HOGAR Is a provision in the by-laws allowing the BOD, by vote of absolute majority, to cancel shares valid? No. It is a patent nullity, being in direct conflict with Sec. 187 of the Corp. Law which prohibits forced surrender of unmatured stocks except in case of dissolution. Is a provision in the by-laws fixing the salary of directors valid? Yes. Since the Corporation Law does not prescribe the rate of compensation, the power to fix compensation lies with the corporation. Is a provision requiring persons elected to the Board of Directors to own at least P 5,000 shares valid? Yes. The Corporation Law gives the corporation the power to provide qualifications of its directors. CITIBANK, N.A. v. CHUA (220 SCRA 75) Where the SEC grants a license to a foreign corporation, it is deemed to have approved its foreign-enacted by-laws. Sec. 46 of the Corporation Code which states that by-laws are not valid without SEC approval applies only to domestic corporations. A board resolution appointing an attorney-in-fact to represent the corporation during pre-trial is not necessary where the by-laws authorize an officer of the corporation to make such appointment.

LOYOLA GRAND VILLAS v. CA (276 SCRA 681) ISSUE: Whether the failure of a corporation to file its by-laws within one (1) month from the date of its incorporation, as mandated by Art. 46 of the Corporation Code, results in the corporation's automatic dissolution. RULING: No. Failure to file by-laws does not result in the automatic dissolution of the corporation. It only constitutes a ground for such dissolution. (Cf. Chung Ka Bio v. IAC, 163 SCRA 534) Incorporators must be given the chance to explain their neglect or omission and remedy the same.

THE CORPORATE ENTITY The Theory of Corporate Entity

When does the corporations existence as a legal entity commence? Upon issuance by the SEC of the certificate of incorporation (Sec. 19)

What rights does the corporation acquire? The right to: 1) 2) 3) 4) sue and be sued; hold property in its own name; enter into contracts with third persons; & perform all other legal acts.

Since corporate property is owned by the corporation as a juridical person, the stockholders have no claim on it as owners, but have merely an expectancy or inchoate right to the same should any of it remain upon the dissolution of the corporation after all corporate creditors have been paid. Conversely, a corporation has no interest in the individual property of its stockholders, unless transferred to the corporation. Remember that the liability of the stockholders is limited to the amount of shares. SAN JUAN STRUCTURAL & STEEL FABRICATORS v. CA (296 SCRA 631) A corporation is a juridical person separate and distinct from its stockholders or members. Accordingly, the property of the corporation is not the property of its stockholders or members and may not be sold by the stockholders or members without express authorization from the corporation's Board of Directors. In this case, the sale of a piece of land belonging to Motorich Corporation by the corporation treasurer (Gruenberg) was held to be invalid in the absence of evidence that said corporate treasurer was authorized to enter into the contract of sale, or that the said contract was ratified by Motorich. Even though Gruenberg and her husband owned 99.866% of Motorich, her act could not bind the corporation since she was not the sole controlling stockholder. STOCKHOLDERS OF F. GUANZON V. REGISTER OF DEEDS (6 SCRA 373) Properties registered in the name of the corporation are owned by it as an entity separate and distinct from its members. While shares of stock constitute personal property, they do not represent property of the corporation. A share of stock only typifies an aliquot part of the corporation's property or the right to share in its proceeds to that extent when distributed according to law and equity, but its holder is not the owner of any part of the capital of the corporation. Nor is he entitled to the possession of any definite portion of its property or assets. The act of liquidation made by the stockholders of the corp of the latters assets is not and cannot be considered a partitio n of community property, but rather a transfer or conveyance of the title of its assets to the individual stockholders. Since the purpose of the liquidation, as well as the distribution of the assets, is to transfer their title from the corporation to the stockholders in proportion to their shareholdings, that transfer cannot be effected without the corresponding deed of conveyance from the corporation to the stockholders. It is, therefore, fair and logical to consider the certificate of liquidation as one in the nature of a transfer or conveyance. CARAM V. CA (151 SCRA 373; 1987) The case of the unpaid compensation for the preparation of the project study. The petitioners were not involved in the initial stages of the organization of the airline. They were merely among the financiers whose interest was to be invited and who were in fact persuaded, on the strength of the project study, to invest in the proposed airline. There was no showing that the Airline was a fictitious corp and did not have a separate juridical personality to justify making the petitioners, as principal stockholders thereof, responsible for its obligations. As a bona fide corp, the Airline should alone be liable for its corporate acts as duly authorized by its officers and directors. Granting that the petitioners benefited from the services rendered, such is no justification to hold them personally liable therefor. Otherwise, all the other stockholders of the corporation, including those who came in late, and regardless of the amount of their shareholdings, would be equally and personally liable also with the petitioner for the claims of the private respondent. PALAY V. CLAVE (124 SCRA 640; 1983) The case of the reliance on a default provision of the contract granting automatic extra-judicial rescission. The court found no badges of fraud on the part of the president of the corporation. The BOD had literally and mistakenly relied on the default provision of the contract. As president and controlling stockholder of the corp, no sufficient proof exists on record that he used the corp to defraud private respondent. He cannot, therefore, be made personally liable because he appears to be the controlling stockholder. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality.

MAGSAYSAY V. LABRADOR (180 SCRA 266) The case of the assignment by Senator Magsaysay of a certain portion of his shareholdings in SUBIC granting his sisters the right to intervene in a case filed by the widow against SUBIC. The words "an interest in the subject," to allow petitioners to intervene, mean a direct interest in the cause of action as pleaded, and which would put the intervenor in a legal position to litigate a fact alleged in the complaint, without the establishment of which plaintiff could not recover. Here, the interest, of petitioners, if it exists at all, is indirect, contingent, remote, conjectural, consequential and collateral. At the very least, their interest is purely inchoate, or in sheer expectancy of a right in the management of the corporation and to share in the profits thereof and in the properties and assets thereof on dissolution, after payment of the corporate debts and obligations. While a share of stock represents a proportionate or aliquot interest in the property of the corp, it does not vest the owner thereof with any legal right or title to any of the property, his interest in the corporate property being equitable and beneficial in nature. Shareholders are in no legal sense the owners of corporate property, which is owned by the corp as a distinct legal person.

PIERCING THE CORPORATE VEIL

Q: What is the theory of corporate entity? A: That a corporation has a personality distinct from its stockholders, and is not affected by the personal rights, obligations and transactions of the latter. Q: When Can the Veil of Corporate Entity be Pierced? A: The veil of corporate fiction may be pierced when it is used as a shield to further an end subversive of justice, or for purposes that could not have been intended by law that created it or to defeat public convenience, justify wrong, protect fraud or defend crime or to perpetuate fraud or confuse legitimate issues or to circumvent the law or perpetuate deception or as an alter ego, adjunct or business conduit for the sole benefit of the stockholders. Q: What are the effects of disregarding the corporate veil? (1) Stockholders would be personally liable for the acts and contracts of the corporation whose existence at least for the purpose of the particular situation involved is ignored. (2) Court is not denying corporate existence for all purposes but merely refuses to allow the corporation to use the corporate privilege for the particular purpose involved. Contrary to law / public policy; evasion of liability to government STATE V. STANDARD OIL (49 Ohio, St., 137, N.E. 279, 15; 1892) Where all or a majority of stockholders comprising a corporation do an act which is designed to affect the property and business of the company, as if it had been a formal resolution of its Board of Directors and the acts done is ultra vires, the act should be regarded as the act of the corporation, and may be challenged by the state in a quo warrranto proceeding. LAGUNA TRANS V. SSS (107 Phil. 833; 1960) Where the corporation was formed by and consisted of the members of a partnership whose business and property was conveyed to the corporation for the purpose of continuing its business, such corporation is presumed to have assumed partnership debts. MARVEL BLDG. CORP. V. DAVID (94 Phil. 376; 1954) The fact that: certificates in possession of Castro were endorsed in blank; Castro had enormous profits and had motive to hide them; other subscribers had no incomes of sufficient magnitude; and directors never met;

shows that other shareholders may be considered dummies of Castro. Hence, corporate veil may be pierced. evasion of liability to creditors TAN BOON BEE CO. V. JARENCIO (163 SCRA 205; 1988)

Tan BBC (T) supplies paper to Graphics Publishing Inc (G) but the latter fails to pay. G's printing machine levied upon to satisfy claim but PADCO, another corpo intercedes, saying it is the owner of the machine, having leased such to G. Printing machine was allowed by the Court to satisfy G's liability. Both G and PADCO's corporate entities pierced because they have: the same board of directors, PADCO owns 50% of G, PADCO never engaged in the business of printing. Obviously, the board is using PADCO to shield G from fulfilling liability to T. NAMARCO v. AFCorp (19 SCRA 962; 1967) Associated Financing Corp. (AFC), through its pres. F. Sycip (who together with wife, own 76% of AFC) contracts with NAMARCO for an exchange of sugar (raw v. refined). N delivers, AFC doesn't since it did not have sugar to supply in the first place. N sues to recover sum of money plus damages. Sycip held jointly and severally liable with AFC. AFC's corporate veil was pierced because it was used as Sycip's alter ego, corpo used merely as an instrumentality, agency or conduit of another to evade liability. JACINTO V. CA (198 SCRA 211) Jacinto, president/GM and owner of 52% of corpo, owes MetroBank sum of money, signs trust receipts therefor. Jacinto absconds. Jacinto ordered to jointly and severally pay MetroBank. Corpo veil pierced because it was used as a shield to perpetuate fraud and/or confuse legitimate issues. There was no clear cut delimitation between the personality of Jacinto and the corporation.

Evasion of liability / obligation to employees CLAPAROLS V. CIR (65 SCRA 613; 1975) Both predecessor and successor were owned and controlled by petitioner and there was no break in the succession and continuity of the same business. All the assets of the dissolved Plant were turned over to the emerging corporation. The veil of corporate fiction must be pierced as it was deliberately and maliciously designed to evade its financial obligation to its employees.

INDOPHIL TEXTILE MILL WORKERS UNION V. CALICA (205 SCRA 698) Rule: The doctrine of piercing the veil of corporate entity applies when corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime, or when it is made as a shield to confuse the legitimate issues or where a corporation is the mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation. Case at bar: Union sought to pierce corporate veil alleging that the creation of Acrylic is a devise to evade the application of the CBA Indophil had with them (or it sought to include the other union in its bargaining leverage). SC: Legal corporate entity is disregarded only if it is sought to hold the officers and stockholders directly liable for a corporate debt or obligation. Union does not seek to impose such claim against Acrylic. Mere fact that businesses were related, that some of the employees of Indophil are the same persons manning and providing for auxiliary services to the other company, and that physical plants, officers and facilities are situated in the same compound - not sufficient to apply doctrine. NAFLU V. OPLE (143 SCRA 125; 1986) Libra/Dolphin Garments was but an alter ego of Lawman Industrial, therefore, the former must bear the consequences of the latter's unfair acts. It cannot deny reinstatement of petitioners simply because of cessation of Lawman's operations, since it was in fact an illegal lock-out, the company having maintained a run-away shop and transferred its machines and assets there. Here, the veil of corporate fiction was pierced in order to safeguard the right to self-organization and certain vested rights which had accrued in favor of the union. Second corporation sought the protective shield of corporate fiction to achieve an illegal purpose. ASIONICS PHILS. v. NLRC (290 SCRA 164) A corporation is invested by law with a personality separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality. Where there is nothing on record to indicate the President and majority stockholder of a corporation had acted in bad faith or with malice in carrying out the retrenchment program of the company, he cannot be held solidarily and personally liable with the corporation. Evasion of liability on contract

VILLA-REY TRANSIT V. FERRER (25 SCRA 849; 1968) Jose M. Villarama, operator of a bus company, Villa Rey Transit, which was authorized to operate 32 units from Pangasinan to Manila and vice-versa, sold 2 CPCs to Pantranco. One of the conditions included in the contract of sale was that the seller (Villarama) "shall not, for a period of 10 years from the date of the sale, apply for any TPU service identical or competing with the buyer (Pantranco)." Barely 3 months after the sale, a corporation called Villa Rey Transit, Inc. was organized, with the wife of Jose M. Villarama as one of the incorporators and who was subsequently elected as treasurer of the Corporation. Barely a month after its registration with the SEC, the corporation bought 5 CPCs and 49 buses from one Valentin Fernando, and applied with the Public Service Commission (PSC) for approval of the sale. Before the PSC could take final action on the said application, however, 2 of the 5 CPCs were levied upon pursuant to a writ of execution issued by the CFI in favor of Eusebio Ferrer, judgment creditor, against Valentin Fernando, judgment debtor. During the public sale conducted, Ferrer was the highest bidder, and a certificate of sale was issued in his name. Shortly thereafter, he sold the said CPCs to Pantranco, and they jointly submitted their contract of sale to the PSC for approval. The PSC issued an order that pending resolution of the applications, Pantranco shall have the authority to provisionally operate the service under the 2 CPCS that were the subject of the contract between Ferrer and Pantranco. Villa Rey Transit took issue with this, and filed a complaint for annulment of the sheriff's sale of the CPCs and prayed that all the orders of the PSC relative to the dispute over the CPCs in question be annulled. Pantranco filed a third-party complaint against Jose M. Villarama, alleging that Villarama and Villa Rey Transit are one and the same, and that Villarama and/or the Corporation is qualified from operating the CPCs by virtue of the agreement entered into between Villarama and Pantranco. Given the evidence, the Court found that the finances of Villa-Rey, Inc. were managed as if they were the private funds of Villarama and in such a way and extent that Villarama appeared to be the actual owner of the business without regard to the rights of the stockholders. Villarama even admitted that he mingled the corporate funds with his own money. These circumstances negate Villarama's claim that he was only a part-time General Manager, and show beyond doubt that the corporation is his alter ego. Thus, the restrictive clause with Pantranco applies. A seller may not make use of a corporate entity as a means of evading the obligation of his covenant. Where the Corporation is substantially the alter ego of one of the parties to the covenant or the restrictive agreement, it can be enjoined from competing with the covenantee. Close Corporations CEASE V. CA (93 SCRA 483; 1979) The Cease plantation was solely composed of the assets and properties of the defunct Tiaong plantation whose license to operate already expired. The legal fiction of separate corporate personality was attempted to be used to delay and deprive the respondents of their succession rights to the estate of their deceased father. While originally, there were other incorporators of Tiaong, it has developed into a closed family corporation (Cease). The head of the corporation, Cease, used the Tiaong plantation as his instrumentality. It was his business conduit and an extension of his personality. There is not even a showing that his children were subscribers or purchasers of the stocks they own.

DELPHER TRADES V. CA (157 SCRA 349; 1988) The Delpher Trades Corp. is a business conduit of the Pachecos. What they really did was to invest their properties and change the nature of their ownership from unincorporated to incorporated form by organizing Delpher and placing the control of their properties under the corporation. This saved them inheritance taxes. This is the reverse of Cease; however, it does not modify the other cases. It stands on its own because of the facts.

Parent-Subsidiary Relationship

Q: What is the general rule governing parent-subsidiary relationship? A: The mere fact that a corporation owns all or substantially all of the stocks of another corporation is not alone sufficient to justify their being treated as one entity. Q: When may it be disregarded by the courts? (1) (2) (3) if the subsidiary was formed for the payment of evading the payment of higher taxes where it was controlled by the parent that its separate identity was hardly discernible parent corporations may be held responsible for the contracts as well as the torts of the subsidiary

Q: What are the criteria by which the subsidiary can be considered a mere instrumentality of the parent company?

1. 2. 3. 4. 5. 6. 7.

the parent corp. owns all or most of the capital stock of the subsidiary. the parent and subsidiary have common directors and officers the parent finances the subsidiary the parent subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation the subsidiary has grossly inadequate capital the parent pays the salaries and other expenses or losses of the subsidiary the subsidiary has substantially no business except with the parent corp. or no assets except those conveyed to or by the parent corp. 8. in the papers of the parent corp. or in the statements of its officers, the subsidiary is described as a department or division of the parent corp. or its business or financial responsibility is referred as the parents own 9. the parent uses the property of the subsidiary as its own 10. the directors or the executives of the subsidiary do not act independently in the interest of the subsidiary but take their orders from the parent corp. in the latters interest 11. the formal legal requirements of the subsidiary are not observed (Garrett vs. Southern Railway) (Note: Sir Jack said that we must not stop after weve gone through the 11 points in order to determine whether or not there is a subsidiary or instrumentality. We must go further and consider other circumstances which may help determine clearly the true nature of the relationship. --- Em) GARRETT VS. SOUTHERN RAILWAY (173 F. Supp. 915, E.D. Tenn. 1959) This case involved a Workers Compensation claim by a wheel moulder employed by Lenoir Car Works. The plaintiff sought to claim from Southern Railway Company, which acquired the entire capital stock of Lenoir Car Works. Plaintiff contended that Southern so completely dominated Lenoir that the latter was a mere adjunct or instrumentality of Southern. The general rule is that stock ownership alone by one corporation of the stock of another does not thereby render the dominant corporation liable for the torts of the subsidiary, unless the separate corporate existence of the subsidiary is a mere sham, or unless the control of the subsidiary is such that it is but an instrumentality or adjunct of the dominant corporation. In the case, it was found that there were two distinct operations. There was no evidence that Southern dictated the management of Lenoir. In fact, evidence shows that Marius, the manager of the subsidiary, was in full control of the operation. He established prices, handled negotiations in CBAs, etc. Lenoir paid local taxes, had local counsel and maintain a Workmens Compensation Fund. There was also no evidence that Lenoir was run solely for the benefit of Southern. In fact, a substantial part of its requirements in the field of operation of Lenoir was bought elsewhere. Lenoir sold substantial quantities to other companies. Policy decisions remained in the hands of Marius. Hence, the complaint against Southern Railway was dismissed. KOPPEL VS. YATCO (77 Phil. 496; 1946) This case involved a complaint for the recovery of merchant sales tax paid by Koppel (Philippines), Inc. under protest to the Collector of Internal Revenue. Although the Court of First Instance did not deny legal personality to Koppel (Philippines), Inc. for any and all purposes, it dismissed the complaint saying that in the transactions involved in the case, the public interest and convenience would be defeated and would amount to a perpetration of tax evasion unless resort was had to the doctrine of "disregard of th e corporate fiction." The facts show that 99.5% of the shares of stocks of K-Phil were owned by K-USA. K-Phil. acted as a representative of K-USA and not as an agent. K-Phil. also bore alone its own incidental expenses (e.g. Cable expenses) and also those of its principal. Moreover, K-Phils share in the profits was left in the hands of K -USA. Clearly, K-Phil was a mere branch or dummy of K-USA, and was therefore liable for merchant sales tax. To allow otherwise would be to sanction a circumvention of our tax laws and permit a tax evasion of no mean proportion and the consequent commission of a grave injustice to the Government. Moreover, it would allow the taxpayer to do by indirection what the tax laws prohibit to be done directly. LIDDELL & CO. VS. CIR (2 SCRA 632; 1961) Liddel Motors Inc. was an alter ego of Liddel & Co. At the time of its incorporation, 98% of the Liddel Inc.s stock belonged to Frank Liddel. As to Liddel Motors, Frank supplied the original capital funds. The bulk of the business of Liddel Inc. was channeled through Liddel Motors. Also, Liddel Motors pursued no other activities except to secure cars, trucks and spare parts from Liddel Inc. and then sell them to the general public. To allow the taxpayer to deny tax liability on the ground that the sales were made through another and distinct corporation when it is proved that the latter is virtually owned by the former or that they were practically one and the same is to sanction the circumvention of tax laws. YUTIVO VS. CTA (1 SCRA 160; 1961)

Southern Motors was actually owned and controlled by Yutivo as to make it a mere subsidiary or branch of the latter created for the purpose of selling vehicles at retail. Yutivo financed principally, if not wholly, the business of Southern Motors and actually exceeded the credit of the latter . At all times, Yutivo, through the officers and directors common to it and the Southern Motors exercised full control over the cash funds, policies, expenditures and obligations of the latter. Hence, Southern Motors, being a mere instrumentality or adjunct of Yutivo, the CTA correctly disregarded the technical defense of separate corporate identity in order to arrive at the true tax liability of Yutivo. LA CAMPANA VS. KAISAHAN (93 Phil. 160; 1953) The La Campana Gaugau Packing and La Campana Coffee Factory were operating under one single business although with 2 trade names. It is a settled doctrine that the fiction of law of having the corporate identity separate and distinct from the identity of the persons running it cannot be invoked to further the end subversive of the purpose for which it was created. In the case at bar, the attempt to make the two businesses appear as one is but a device to defeat the ends of the law governing capital and labor relations and should not be permitted to prevail. PROMOTERS CONTRACTS PRIOR TO INCORPORATION Liability of Corporation for Promoters Contracts

While a corporation could not have been a party to a promoter's contract since it did yet exist at the time the contract was entered into and thus could not possibly have had an agent who could legally bind it, the corporation may make the contracts its own and become bound thereon if, after incorporation, it: (1) (2) Adopts or ratifies the contract; or Accepts its benefits with knowledge of the terms thereof.

It must be noted, however, that the contract must be adopted in its entirety; the corporation cannot adopt only the part that is beneficial to it and discard that which is burdensome. Moreover, the contract must be one which is within the powers of the corporation to enter, and one which the usual agents of the company have express or implied authority to enter. McARTHUR V. TIMES PRINTING CO. (48 Minn. 319, 51 N.W. 216; 1892) It is not a requisite that a corporation's adoption or acceptance of a promoter's contract be expressed, but it may be inferred from acts or acquiescence on the part of the corporation, or its authorized agents, as any similar original contract might be shown. The right of agents to adopt an agreement originally made by promoters depends upon the purposes of the corporation and the nature of the agreement. The agreement must be one which the corporation itself could make and one which the usual agents of the company have express or implied authority to enter into. CLIFTON v. TOMB (21 F. 2d 893; 1921) Whatever may be the proper legal theory by which a corporation may be bound by the contract (ratification, adoption, novation, a continuing offer to be accepted or rejected by the corporation), it is necessary in all cases that the corporation should have full knowledge of the facts, or at least should be put upon such notice as would lead, upon reasonable inquiry, to the knowledge of the facts. CAGAYAN FISHING DEV. CO. v. SANDIKO (65 Phil. 223; 1937) A promoter could not have acted as agent for a corporation that had no legal existence. A corporation, until organized, has no life therefore no faculties. The corporation had no juridical personality to enter into a contract. Also see Caram v. CA Corporate Rights under Promoters Contracts

Should the other contracting party fail to perform its part of the bargain, the corporation which has adopted or ratified the contract may either sue for: (1) (2) Specific performance; or Damages resulting from breach of contract.

The fact of bringing an action on the contract has been held to constitute sufficient adoption or ratification to give the corporation a cause of action.

BUILDERS DUNTILE CO. v. DUNN (229 Ky. 569, 17 S.W. 2d 715; 1929) When the corporation was formed, the incorporators took upon themselves the whole thing, and ratified all that had been done on its behalf. Though there was no formal assignment of the contract to the corporation, the acts of the incorporators were an adoption of the contract. Therefore the corporation has the right to sue for damages for the breach of contract. RIZAL LIGHT V. PSC (25 SCRA 285; 1968) The incorporation of (Morong) and its acceptance of the franchise as shown by this action in prosecuting the application filed with the Commission for approval of said franchise, not only perfected a contract between the municipality and Morong but also cured the deficiency pointed out by the petition. The fact that Morong did not have a corporate existence on the day the franchise was granted does not render the franchise invalid, as Morong later obtained its certificate of incorporation and accepted the franchise. Personal Liability of Promoter on Pre-Incorporation Contracts

GENERAL RULE:

Promoters are personally liable on their contracts made on behalf of a corporation to be formed. If there is an express or implied agreement to the contrary. It must be noted that the fact that the corporation when formed has adopted or ratified the contract does not release the promoter from responsibility unless a novation was intended.

EXCEPTION:

WELLS VS. FAY & EGAN CO. (143 Ga. 732, 85 S.E. 873; 1915) Individual promoters cannot escape liability where they buy machinery, receive them in their possession and authorize one member to issue a note, in contemplation of organizing a corporation which was not formed. (see Campos' notes p. 258-259). The agent is personally liable for contracts if there is no principal. The making of partial payments by the corporation, when later formed, does not release the promoters here from liability because the corporation acted as a mere stranger paying the debt of another, the acceptance of which by the creditor does not release the debtors from liability over the balance. Hence, there is no adoption or ratification. HOW & ASSOCIATES INC. VS. BOSS (222 F. Supp. 936; 1963) The rule is that if the contract is partly to be performed before incorporation, the promoters solely are liable. Even if the promoter signed "on behalf of corporation to be formed, who will be obligor," there was here an intention of the parties to have a present obligor, because three-fourths of the payment are to be made at the time the drawings or plans in the architectural contract are completed, with or without incorporation. A purported adoption by the corporation of the contract must be expressed in a novation or agreement to that effect. The promoter is liable unless the contract is to be construed to mean: 1) that the creditor agreed to look solely to the new corporation for payment; or 2) that the promoter did not have any duty toward the creditor to form the corporation and give the corporation the opportunity to assume and pay the liability. QUAKER HILL VS. PARR (148 Colo. 45, 364 P. 2d 1056; 1961) The promoters here are not liable because the contract imposed no obligation on them to form a corporation and they were not named there as obligors/promissors. The creditor-plaintiff was aware of the inexistence of the corporation but insisted on naming it as obligor because the planting season was fast approaching and he needed to dispose of the seedlings. There was no intent here by plaintiff-creditor to look to the promoters for the performance of the obligation. This is an exception to the general rule that promoters are personally liable on their contracts, though made on behalf of a corporation to be formed. Fiduciary relationship between corporation and promoter OLD DOMINION VS. BIGELOW (203 Mass. 159, 89 N.E. 193; 1909) A promoter, notwithstanding his fiduciary duties to the corporation, may still sell properties to it, but he must pursue one of four courses to make the contract binding. These are: 1) provide an independent board of officers in no respect directly or indirectly under his control, and make full disclosure to the corporation through them; 2) make full disclosure of all material facts to each original subscriber of shares in the corporation; 3) procure a ratification of the contract after disclosing its circumstances by vote of the stockholders of the completely established corporation; or 4) be himself the real subscriber of all the shares of the capital stock contemplated as a part of the promotion scheme. The promoter is liable, even if owning all the stock of the corporation at the time of the transaction, if further original subscription to capital stock contemplated as an essential part of the scheme of promotion came in after such transaction. CORPORATE POWERS

General Powers of Corporation (Sec. 36) To sue and be sued in its corporate name;

Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of incorporation; To adopt and use a corporate seal; To amend its articles of incorporation in accordance with the provisions of this Code; To adopt by-laws not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this Code; In case of stock corporations, to issue of sell stocks to subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to admit members to the corporation if it be a non-stock corporation; To purchase, receive, take, grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transaction of the lawful business of the corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution; (NOTE: There are two (2) general restrictions on the power of the corp. to acquire and hold properties: (1) that the property must be reasonable and necessarily required by the transaction of its lawful business, and (2) that the power shall be subject to the limitations prescribed by other special laws and the Constitution.)

To adopt any plan of merger or consolidation as provided in this Code; To make reasonable donations, including those for the public welfare of for hospital, charitable, cultural, scientific, civic, or similar purposes: Provided that: no corporation, domestic or foreign, shall give donations in aid of any political party or candidate or for purposes of partisan political activity;

To establish pension, retirement and other plans for the benefit of its directors, trustees, officers and employees; and To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in its articles of incorporation.

Specific Powers of Corporation

Extension or shortening of the corporate term (Sec. 37) Increase or decrease of the capital stock (Sec. 38) Incur, create or increase bonded indebtedness (Sec. 38) Denial of the pre-emptive right (Sec. 39) Sale or other disposition of substantially all its assets. (Sec. 40) O A sale is deemed to substantially cover all the corporate property and assets if such sale renders the corporation incapable of continuing the business or accomplishing the purpose for which it was incorporated.

Implied Powers

Acquisition of its own shares. (Sec. 41) Investment in another corporation or business. (Sec. 42) Declaration of dividends. (Sec. 43) Entering into management contracts. (Sec. 44)

Under Sec. 36, a corporation is given such powers as are essential or necessary to carry out its purpose or purposes as stated in the articles of incorporation. This phrase gives rise to such a wide range of implied powers, that it would not be at all difficult to defend a corporate act versus an allegation that it is ultra vires. A corporation is presumed to act within its powers and when a contract is not its face necessarily beyond its authority; it will, in the absence of proof to the contrary, be presumed valid. The Ultra Vires Doctrine

Blacks Law Dictionary Definition: Ultra vires acts are those acts beyond the scope of the powers of the corporation, as defined by its charter or laws of state of incorporation. The term has a broad application and includes not only acts prohibited by the charter, but acts which are in excess of powers granted and not prohibited, and generally applied either when a corporation has no power whatever to do an act, or when the corporation has the power but exercises it irregularly. Q: What are the consequences of ultra vires acts? The corporation may be dissolved under a quo warrranto proceeding. The Certificate of Registration may be suspended or revoked by the SEC. Parties to the ultra vires contract will be left as they are, if the contract has been fully executed on both sides. Neither party can ask for specific performance, if the contract is executory on both sides. The contract, provided that it is not illegal, will be enforced, where one party has performed his part, and the other has not with the latter having benefited from the formers performance. Any stockholder may bring an individual or derivative suit to enjoin a threatened ultra vires act or contract. If the act or contract has already been performed, a derivative suit for damages against the directors maybe filed, but their liability will depend on whether they acted in good faith and with reasonable diligence in entering into the contracts. When the suit against the injured party who had no knowledge that the corporation was engaging in an act not included expressly or impliedly in its purposes clause. Ultra vires acts may become binding by the ratification of all the stockholders, unless third parties are prejudiced thereby, or unless the acts are illegal.

REPUBLIC OF THE PHILS. v. ACOJE MINING (7 SCRA 361; 1963) Resolution adopted by the company to open a post office branch at the mining camp and to assume sole and direct responsibility for any dishonest, careless or negligent act of its appointed postmaster is NOT ULTRA VIRES because the act covers a subject which concerns the benefit, convenience, and welfare of the companys employees and their families. While as a rule an ultra vires act is one committed outside the object for which a corporation is created as defined by the law of its organization and therefore beyond the powers conferred upon it by law, there are however certain corporate acts that may be performed outside of the scope of the powers expressly conferred if they are necessary to promote the interest or welfare of the corporation. CARLOS v. MINDORO SUGAR CO. (57 SCRA 343, 1932) The BOD of the Phil Trust Co. adopted a resolution which authorized its president to purchase at par and in the name of the corp. bonds of MSC. These bonds were later resold and guaranteed by PTC to third persons. PTC paid plaintiff the corresponding interest payments until July 1, 1928 when it alleged that it is not bound to pay such interest or to redeem the obligation because the guarantee given for the bonds was illegal and void. Held: The act of guaranty by PTC was well within its corporate powers. Furthermore, having received money or property by virtue of the contract which is not illegal, it is estopped from denying liability. Even if the then prevailing law (Corp. Law) prohibited PTC from guaranteeing bonds with a total value in excess of its capital, with all the MSC properties transferred to PTC based on the deed of trust, sufficient assets were made available to secure the payment of the corresponding liabilities brought about by the bonds. GOVT v. EL HOGAR (50 Phil 399; 1932) (This case is an example of how the implied powers concept may be used to justify certain acts of a corporation.) A quo warranto proceeding instituted by the Gov't against El Hogar, a building and loan ass'n to deprive it of its corp. franchise. 1. El Hogar held title to real property for a period in excess of 5 years in good faith, hence this cause will not prosper. 2. El Hogar owned a lot and bldg. at a business district in Manila allegedly in excess of its reasonable requirements, held valid bec, it was found to be necessary and legally acquired and developed.

3. El Hogar leased some office space in its bldg.; it administered and managed properties belonging to delinquent SHs; and managed properties of its SHs even if such were not mortgaged to them. Held: first two valid, but the third is ultra vires bec. the administration of property in that manner is more befitting of the business of a real estate agent or trust company and not of a building and loan ass'n. 4. Compensation to the promoter and organizer allegedly excessive and unconscionable. Held: Court cannot dwell on the issue since the promoter is not a party in the proceeding and it is the corp. or its SHs who may bring a complaint on such. 5. Issuance of special shares did not affect El Hogar's character as a building and loan ass'n nor make its loans usurious. 6. Corporate policy of using a depreciation rate of 10 % per annum is not excessive, bec. accdg. to the SC, the by-laws expressly authorizes the BOD to determine each year the amount to be written down upon the expenses of installation and the property of the corp. 7. The Corp. Law does not expressly grant the power of maintaining reserve funds but such power is implied. All business enterprises encounter periods of gains and losses, and its officers would usually provide for the creation of a reserve to act as a buffer for such circumstances. 8. That loans issued to member borrowers are being used for purposes other than the bldg. of homes not invalid bec. there is no statute which expressly declares that loans may be made by these ass'ns solely for the purpose of bldg. homes. 9. Sec. 173 of the Corp. Law provides that "any person" may become a SH on a bldg. and loan ass'n. The word "person" is used on a broad sense including not only natural persons but also artificial persons.

BISSEL v. MICHIGAN SOUTHERN ( 22 NY 258; 1860) Two railroad corporations contend that they transcended their own powers and violated their own organic laws. Hence, they should not be held liable for the injury of the plaintiff who was a passenger in one of their trains. Held: The contract between the two corporations was an ultra vires act. However, it is not one tainted with illegality, therefore, the accompanying rights and obligations based on the contract of carriage between them and the plaintiff cannot be avoided by raising such a defense. PIROVANO v. DELA RAMA STEAMSHIP (96 Phil 335 , 1954) This case involved the issue of whether or not the defendant corporation performed an ultra vires act by donating the life insurance proceeds to the minor children of Pirovano, the deceased president of the defendant company under whose management the company grew and progressed to become a multi-million peso corporation. Held: NO. The AOI of the corporation provided two relevant items: (1) to invest and deal with moneys of the company not immediately required, in such manner as from time to time may be determined; and (2) to aid in any other manner any person, association or corporation of which any obligation or in which any interest is held by this corporation or in the affairs of prosperity of which this corporation has a lawful interest. From this, it is obvious that the corporation properly exercised within its chartered powers the act of availing of insurance proceeds to the heirs of the insured and deceased officer. HARDEN v. BENGUET CONSOLIDATED (58 Phil 141) A contract between Benguet and Balatoc provided that Benguet will bring in capital, eqpt. and technical expertise in exchange for capital shares in Balatoc. Harden was a SH of Balatoc and he contends that this contract violated the Corp.Law which restricts the acquisition of interest by a mining corp. in another mining corp. Held: Harden has no standing bec. if any violation has been committed, the same can be enforced only in a criminal prosecution by an action of quo warranto which may be maintained only by the Attorney-General.

CONTROL AND MANAGEMENT Allocation of Power and Control

Q: What are the three levels of corporate control/power? Board of directors or trustees- responsible for corporate policies and the general management of the business and affairs of the corporation. Officers- execute the policies laid down by the board. Stockholders or members- have residual power over fundamental corporate changes like amendments of articles of incorporation.

Who Exercises Corporate Powers Board of directors or trustees Q: What are the powers of the BOD? The BOD is responsible for corporate policies and the general management of the business affairs of the corporation. (See Citibank v Chua) (a) (b) Authority (Sec. 24) Requirements (i) (ii) (iii) (iv) Qualifying share (Sec. 24) Residence (Sec. 24) Nationality Disqualifications (Sec. 27) conviction by final judgment of offense punishable > 6 yrs. prison violation of Corporation code within 5 years prior to date of election or appointment

(c)

How elected (Sec. 24) The formula for determining the number of shares needed to elect a given number of directors is as follows: X = Y x N1 N+1 +1

X = being the number of shares needed to elect a given number of directors Y = being the total number of shares present or represented at the meeting N1 = being the number of directors desired to be elected N = being the total number of directors to be elected (d) How removed (Sec. 28) By a vote of the SHs holding or representing at least 2/3 of the outstanding capital stock, or by a vote of at least 2/3 of the members entitled to vote, provided that such removal takes place at either a regular meeting of the corporation or at a special meeting called for the purpose. In both cases, there must be previous notice to the SHs / members of the intention to propose such removal at the meeting. Removal may be with or without cause. However, removal without cause may not be used to deprive minority SHs or members of the right of representation to which they may be entitled under Sec. 24 of the Code. (e) How vacancy filled (Sec. 29) If vacancy due to removal or expiration of term: Must be filled by the SHs in a regular or special meeting called for that purpose.

If "vacancy" due to increase Only by means of an election at a regular or special SHs in number of directors meeting duly called for the purpose, or in the same trustees: meeting authorizing the increase of directors or trustees if so stated in the notice of the meeting.

or

All other vacancies:

May be filled by the vote of at least a majority of the

remaining directors or trustees, if still constituting a quorum. Note: Directors or trustees so elected to fill vacancies shall be elected only for the unexpired term of their predecessors in office. (f) How compensated (Sec. 30) If provided in by-laws: If not provided in by-laws: That compensation stated in the by-laws. Directors shall not receive any compensation other than reasonable per diems, as directors. However, compensation other than per diems may be granted to directors by a majority vote of the SHs at a regular or special stockholders' meeting.

Note: In no case shall the total yearly compensation of directors, as such directors, exceed 10% of the net income before income tax of the corporation during the preceding year. (g) (h) Matters requiring Board of Directors' action Liability (See subsequent discussion under Duties of Directors and Controlling Stockholders.) (i) In general (Sec. 31) (ii) Business judgment rule (iii) Dealings with the corporation (Sec. 32) (iv) Contracts between corporations with interlocking directors (Sec. 33) (v) (vi) (i) Disloyalty (Sec. 34) Watered stocks (Sec. 65)

Executive Committee (Sec. 35) See subsequent discussion under Board Committees.

RAMIREZ VS. ORIENTALIST CO AND FERNANDEZ (38 Phil. 634; 1918) In this case, the board of directors, before the financial inability of the corporation to proceed with the project was revealed, had already recognized the contracts as being in existence and had proceed with the necessary steps to utilize the films. The subsequent action by the stockholders in not ratifying the contract must be ignored. The functions of the stockholders are limited of nature. The theory of a corporation is that the stockholders may have all the profits but shall return over the complete management of the enterprise to their representatives and agents, called directors. Accordingly, there is little for the stockholders to do beyond electing directors, making by-laws, and exercising certain other special powers defined by law. In conformity with this idea, it is settled that contracts between a corporation and a third person must be made by directors and not stockholders. LOPEZ VS. ERICTA (45 SCRA 539; 1972) In this case, the Board of Regents of the University of the Philippines terminated the ad interim appointment of Dr. Blanco as Dean of the College of Education by not acting on the matter. In the transcript of the meeting which was latter agreed to be deleted, it was found out that the BOR, consisting of 12 members, voted 5 in favor of Dr. Blanco's appointment 3 voted against, and 4 abstained. The core of the issue is WON the 4 abstentions will be counted in favor of Dr. Blanco's appointment or against it. The SC held that such abstentions be counted as negative vote considering that those who abstained, 3 of which members of the Screening Committee, intended to reject Dr. Blanco's appointment. ZACHARY VS. MILLIN (294 Mic. 622; 1940) The issue in this case is regarding the validity of the director's meeting at the company's laboratory on December 8, 1937 wherein Zachary was removed as president of the company. Zachary that he was not notified of the meeting thus, the action was void. On the other hand, the defendants contend that the notice requirement was waived by Zachary's presence at the meeting. The SC held that the validity of the meeting was not affected by the failure to give notice as required by the by-laws, provided that the parties were personally present. Since all the parties were present at the meeting of December 8, and understood that the meeting was to be a directors' meeting, then the action taken is final and may not be voided by any informality in connection with its being called.

PNB VS. CA (83 SCRA 238; 1978) The action was brought by the mortgagor (Tapnio) against PNB for damages in connection with the failure of the latter's board of directors to act expeditiously on the proposed lease of the former's sugar quota to one Tuazon. The Supreme Court held that while the PNB has the ultimate authority to approve or disapprove the proposed lease since the quota was mortgaged to PNB, the latter certainly cannot escape liability for observing, for the protection of the interest of the private respondents, that degree of care, precaution and vigilance which the circumstances justly demand in approving or disapproving the lease of the said sugar quota.

Corporate officers and agents (a) Minimum set of officers and their qualifications ( Sec. 25) The minimum set of officers are: (1) (2) (3) president (who shall be a director); secretary (who shall be a resident and Filipino citizen); and treasurer (who may or may not be a director)

The by-laws, however, may provide for other officers. Any 2 or more positions may be held concurrently by the same person, except that no one shall act as (a) president and secretary, or (b) president and treasurer at the same time. (b) Disqualifications (Sec. 27) - Conviction by final judgment of an offense punishable by imprisonment > 6 yrs. - Violation of Corporation Code committed within 6 yrs. prior to the date of election or appointment (c) Liability in general (Sec. 31) See discussion under Duties of Directors and Controlling Stockholders. . (d) Dealings with the corporation (Sec. 32) - Generally voidable (See discussion under Duties of Directors and Controlling Stockholders) What is the doctrine of apparent authority? The doctrine of apparent authority provides that a corporation will be liable to innocent third persons for the acts of its agent where the representation was made by the agent in the course of business and acting within his/her general scope of authority even though, in the particular case, the agent is secretly abusing his authority and attempting to perpetrate a fraud upon his/her principal or some other person for his/her own ultimate benefit.

FIRST PHILIPPINE INTERNATIONAL BANK & RIVERA v. CA (January 24, 1996) The authority of a corporate officer in dealing with third persons may be actual or apparent. The doctrine of "apparent authority," with special reference to banks, was laid out in Prudential Bank v. CA (223 SCRA 350) where it was held that: A bank is liable for the wrongful acts of its officers done in the interest of the bank or in the course of dealings of the officers in their representative capacity but not for acts outside the scope of their authority. A bank holding out its officers and agents as worthy of confidence will not be permitted to profit by the frauds they may thus be enabled to perpetrate in the apparent scope of their employment; nor will it be permitted to shrink from its responsibility for such frauds, even though no benefit may accrue to the bank therefrom. Accordingly, a bank is liable to innocent third persons where the representation is made in the course of its business by its agent acting within the general scope of his authority even though, in the particular case, the agent is secretly abusing his authority and attempting to perpetrate a fraud upon his principal or some other person for his own ultimate benefit. Application of these principles is especially necessary because banks have a fiduciary relationship with the public and their stability depends on the confidence of the people in their honesty and efficiency. Such faith will be eroded where banks do not exercise strict care in the selection and supervision of its employees, resulting in prejudice to their depositors.

YU CHUCK V. KONG LI PO (46 Phil. 608; 1924) The power to bind a corporation by contract lies with its board of directors or trustees. Such power may be expressly or impliedly be delegated to other officers and agents of the corporation. It is also well settled that except where the authority of employing servants or agents is expressly vested in the board, officers or agents who have general control and management of the corporation's business, or at least a specific part thereof, may bind the corporation by the employment of such agents and employees as are usual and necessary in the conduct of such business. Those contracts of employment should be reasonable. Case at bar: contract of employment in the printing business was too long and onerous to the business (3-year employment; shall receive salary even if corp. is insolvent). THE BOARD OF LIQUIDATORS V. HEIRS OF MAXIMO KALAW (20 SCRA 987; 1967) Kalaw was a corporate officer entrusted with general management and control of NACOCO. He had implied authority to make any contract or do any act which is necessary for the conduct of the business. He may, without authority from the board, perform acts of ordinary nature for as long as these redound to the interest of the corporation. Particularly, he contracted forward sales with business entities. Long before some of these contracts were disputed, he contracted by himself alone, without board approval. All of the members of the board knew about this practice and have entrusted fully such decisions with Kalaw. He was never questioned nor reprimanded nor prevented from this practice. In fact, the board itself, through its acts and by acquiescence, have laid aside the by-law requirement of prior board approval. Thus, it cannot now declare that these contracts (failures) are not binding on NACOCO. ZAMBOANGA TRANSPO V. BACHRACH MOTORS (52 Phil. 244; 1928) A chattel mortgage, although not approved by the board of directors as stipulated in the by-laws, shall still be valid and binding when the corporation, through the board, tacitly approved and ratified it. The following acts of the board constitute implied ratification: 1. 2. Erquiaga is one of the largest stockholder, and was the all-in-one officer (he was the President, GM, Attorney, Auditor, etc.) Two other directors approved his actions and expressed satisfaction with the advantages obtained by him in securing the chattel mortgage. The corporation took advantage of the benefits of the chattel mortgage. There were even partial payments made with the knowledge of the three directors.

3.

ACUNA V. BATAC PRODUCERS COOPERATIVE MARKETING ASSOCIATION (20 SCRA 526; 1967) Acuna entered into an agreement with Verano, manager of PROCOMA, in which the former would be constituted as the latter's agent in Manila. Acuna diligently went about his business and even used personal funds for the benefit of the corporation. During the face-to-face meeting with the board, Acuna was assured that there need not be any board approval for his constitution as agent for it would only be a mere formality. Later on, the board disapproved the agency and did not pay him. The SC ruled that the agreement was valid due to the ratification of the corp. proven by these acts: 1. 2. 3. He was assured by the board that no board approval was necessary. He delivered P 20,000, performed his work with the knowledge of the board. Due to acquiescence, the board cannot disown or disapprove the contract.

Board Committees The By-laws of the corporation may create an executive committee, composed of not less than 3 members of the Board, to be appointed by the Board. The executive committee may act, by majority vote of all its members, on such specific matters within the competence of the board, as may be delegated to it in either (1) the By-laws, or (2) on a majority vote of the board. However, the following acts may never be delegated to an executive committee: (1) (2) (3) (4) approval of any action for which shareholders' approval is also required; the filling of vacancies in the board (refer to Sec. 29); the amendment or repeal of by-laws or the adoption of new by-laws; the amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable; and (5) a distribution of cash dividends to the shareholders. HAYES V. CANADA, ATLANTIC AND PLANT S.S CO., LTD. (181 F. 289; 1910) In this case, the Executive Committee: a) b) removed the Treasurer and appointed a new one fixed the annual salary of the members of the Executive Committee

c)

amended the by-laws by giving the President the sole authority to call a stockholder's meeting and a board of directors meeting d) amended the composition of the ExeCom by limiting it to just 2 persons. Was these actions valid? No, because the Executive Commmittee usurped the powers vested in the board and the stockholders. If their actions was valid, it would put the corp. in a situation wherein only two men, acting in their own pecuniary interests, would have absorbed the powers of the entire corporation. "Full powers" should be interpreted only in the ordinary conduct of business and not total abdication of board and stockholders' powers to the ExeCom. "FULL POWERS" does not mean unlimited or absolute power. Stockholders or Members In the following basic changes in the corporation, although action is usually initiated by the board of directors or trustees, their decision is not final, and approval of the stockholders or members would be necessary: (1) (2) (3) (4) (5) Amendment of articles of incorporation; Increase and decrease of capital stock; Incurring, creating or increasing bonded indebtedness; Sale, lease, mortgage or other disposition of substantially all corporate assets; Investment of funds in another business or corporation or for a purpose other than the primary purpose for which the corporation was organized; (6) Adoption, amendment and repeal of by-laws; (7) Merger and consolidation; (8) Dissolution of corporation In all of these cases, even non-voting stocks, or non-voting members, as the case may be, will be entitled to vote. (Sec. 6) BOARD OF DIRECTORS AND ELECTION COMMITTEE OF SMB VS. TAN (105 Phil. 426; 1959) Meeting was invalid for lack of notice. By-laws provide for a 5-day notice before meeting. March 26 posting not enough for March 28 election. JOHNSTON VS. JOHNSTON (61 O.G. No. 39, 6160; 1965) As a general rule, a quorum at a stockholders' meeting, once reached, cannot be nullified by a subsequent walkout. However, the proceedings can be nullified if the walkout was for a reasonable and justifiable cause. In this case, F. Logan Johnston, who owned and/or represented more than 50% of the corporation's outstanding shares, was prohibited from voting the shares of the Silos family (which he had validly purchased) and of the minor children of Albert S. Johnston (of whom he was guardian) on the ground that such shares must first be registered in the names of the wards, thereby prompting the walkout. The Court of Appeals held that the walkout was neither unreasonable nor unjustifiable. It noted however that there was no formal declaration of a quorum before the withdrawal from the meeting by F. Logan Johnston. PONCE VS. ENCARNACION (94 Phil. 81; 1953) Upon good cause, such as a Chairman of the Board failing to call a meeting, either by his absence or neglect, the Court may grant a stockholder the authority to call such a meeting. DETECTIVE AND PROTECTIVE BUREAU VS. CLORIBEL (26 SCRA 225; 1968) The Corporation Law says that every director must own at least one (1) share of the capital stock of the corporation. GOKONGWEI VS. SEC (89 SCRA 336; 1979) Section 21 of the Corporation Law provides that a corporation may prescribe in its by-laws the qualifications, duties, and compensation of its directors. A stockholder has no vested right to be elected director for he impliedly contracts that the will of the majority shall govern. Amended by-laws are valid for the corporation has its inherent right to protect itself.

ROXAS V. DELA ROSA (49 Phil. 609; 1926) Under the Law, directors can only be removed from office by a vote of the stockholders representing 2/3 of subscribed capital stock, while vacancies can be filled by a mere majority. A director cannot be removed by a mere majority by disguising it as filling a vacancy.

ANGELES V. SANTOS (64 Phil. 697; 1937) Court may appoint a receiver when corporate remedy is unavailable when board of directors perform acts harmful to the corporation. Generally, stockholders cannot sue on behalf of the corporation. The exception is when the defendants are in complete control of the corporation. CAMPBELL V. LEOWS INC. (134 A. 2d 852; 1957) The stockholders have an implied power to remove a director for cause. Even when there is cumulative voting, stockholders can still remove directors for cause. DELA RAMA V. MA-AO SUGAR CENTRAL CO, INC. (27 SCRA 247; 1969) A corporation may use its funds to invest in another corporation without the approval of the stockholders if done in pursuance of a corporate purpose. However, if it is purely for investment, the vote of the stockholders is necessary.

VOTING

Pledgors, mortgagors, executors, receivers, and administrators (Sec. 55) - Pledgors or mortgagors have the right to attend and vote at stockholders' meetings. Exception: If the pledgee or mortgagee is expressly given by the pledgor or mortgagor such right in writing which is recorded on the appropriate corporate books. - Executors, administrators, receivers and other legal representatives duly appointed by the court may attend and vote in behalf of the stockholders or members without need of any written proxy. Joint owners of stock (Sec. 56) - Generally, consent of all co-owners shall be necessary. Treasury shares (Sec. 57) - Treasury shares have no voting right for as long as such shares remain in the Treasury.

Proxies (Sec. 58) - Proxies must be in writing, signed by the stockholder/member, filed before the scheduled meeting with the corporate secretary. - Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended. No proxy shall be valid and effective for a period longer than five (5) years at any one time. - Voting trusts may be voted by proxy unless the agreement provides otherwise. (Sec. 59) - It must be noted however that directors or trustees cannot vote by proxy at board meetings. (Sec. 25) - Note that in Sec. 89, non-stock corporations are permitted to waive the right to use proxies via their AOI or by-laws. Voting trust (Sec. 59) - Voting trusts must be in writing, notarized, specifying the terms and conditions thereof, certified copy filed with SEC. Failure to comply with this requirement renders the agreement ineffective and unenforceable. - As a general rule, voting trusts are valid for a period not exceeding 5 years at any one time, and automatically expire at the end of the agreed period unless expressly renewed. However, in the case of a voting trust specifically required as a condition in a loan agreement, said voting trust may exceed 5 years but shall automatically expire upon payment of the loan. - Voting trusts may be voted by proxy unless the agreement provides otherwise. (Sec. 59) Pooling agreement

- Pooling agreements refer to agreements between 2 or more SHs to vote their shares the same way. They are different from voting trust agreements in that they do not involve a transfer of stocks but are merely private agreements between 2 or more SHs to vote in the same way. - Sec. 100, par. 2 of the Corporation Code provides for pooling and voting agreements in close corporations. Although there is no equivalent provision for widely-held corporations, Justice and Prof. Campos are of the opinion that SHs of widely-held corporations should not be precluded from entering into voting agreements if these are otherwise valid and are not intended to commit any wrong or fraud on the other SHs that are not parties to the agreement.

Non-voting shares (Sec. 6) - Preferred or redeemable shares. ITF shares And/or shares (Sec. 56) - Any one of the joint owners can vote said shares or appoint a proxy thereof. Devices Affecting Control

Proxy Device Sec 58. Proxies. Stockholders and members may vote in person or by proxy in all meetings of stockholders or members. Proxies shall be in writing, signed by the stockholder or member and filed before the scheduled meeting with the corporate secretary. Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended. No proxy shall be valid and effective for a period longer than five (5) years at any one time. Character: agency relationship; revocable at will (by express revocation, by attending the meeting) and by death, except when coupled with interest or is a security. IN RE GIANT PORTLAND CEMENT CO. (21 A.2d 697; 1941) Even if stocks are sold, the stockholder of record remains the owner of the stocks and has the voting right until the by-law requiring recording of transfer in the transfer book is complied with. Thus, a proxy given by the stockholder of record even if he has already sold the share/s of stock remains effective. STATE EX REL EVERETT TRUST V PACIFIC WAXED PAPER, (159 A.L.R. 297; 1945) The general rule is that a proxy is revocable even though by its express terms it is irrevocable. The exceptions are: (a) when authority is coupled with interest; (b) where authority is given as part of a security and is necessary to effectuate such a security. It is coupled with interest when there is interest in the share themselves (such as a right of first refusal in case of sale) and the rights inherent in the shares (such as voting rights; capacity to obtain majority). DUFFY V LOFT (17 Del. Ch. 376, 152 A. 849; 1930) Where a stockholders meeting was validly convened, the proxies must be deemed present even if the proxies were not presented, provided: (a) their existence is established; (b) the agents were so designated to attend and act in SHs be half; (c) the agents were present in the meeting. Q: Is it valid for the corporation to pay the expenses for proxy solicitation? A: In the case of Rosenfeld v. Fairchild Engine and Airplane Corp. ( 128 N.E. 2d 291; 1955), it was held that in a contest over policy (as opposed to a purely personal power contest), corporate directors have the right to make reasonable and proper expenditures, subject to the scrutiny of the courts when duly challenged, from the corporate treasury for the purpose of persuading the SHs of the correctness of their position and soliciting their support for policies which the directors believe, in all good faith, are in the best interests of the corporation. The SHs, moreover, have the right to reimburse successful contestants for the reasonable and bona fide expenses incurred by them in any such policy contest, subject to like court scrutiny. However, where it is established that such monies have been spent for personal power, individual gain or private advantage, and not in the belief that such expenditures are in the best interest of the stockholders and the corporation, or where the fairness and reasonableness of the amounts allegedly expended are duly and successfully challenged, the courts will not hesitate to disallow them.

ROSENFELD V. FAIRCHILD (128 N.E. 2d 291; 1955) In a contest over policy, as compared to a purely personal power contest, corporate directors have the right to make reasonable and proper expenditures. Reason: in these days of giant corporations with vast numbers of SHs, if directors are not allowed to authorize reasonable expenses in soliciting proxies, corporate business may be hampered by difficulty in procuring quorum; or corporations may be at the mercy of persons seeking to wrest control for their purposes if the directors may not freely answer their challenge. But corp expense may be disallowed by courts where money was shown to have been spent for personal power, individual gain or private advantage, or where fairness and reasonableness of amount spent has been successfully challenged. Voting Trust A Voting Trust Agreement (VTA) is an agreement whereby the real ownership of the shares is separated from the voting rights, the usual aim being to insure the retention of incumbent directors and remove from the stockholders the power to change the management for the duration of the trust. Advantages Accumulates power. Small shareholders are given the chance to have a representation in the BOD or at least a spokesperson during stockholders meetings. Continuity of management. More effective than proxies because it is irrevocable. Ensures that the required number of stockholders is met thereby facilitating smooth corporate operations.

Disadvantages Stockholders give up rights (voting and naked title) Susceptible to abuse Not used in widely held corporations

Rights given up by the shareholder in a VTA in exchange for the fiduciary obligation of the trustee: Voting rights Proprietary rights/naked title/legal ownership Incidental rights such as to attend meetings, to be elected, to receive dividends)

Rights retained by the shareholder Beneficial or equitable ownership Right to revoke VTA in case of breach by trustee Regain full ownership after the lapse of the period Right to an accounting by the trustee after the period of the VTA

How is a voting trust created? (1) (2) A VTA is prepared in writing, notarized, and filed with the corporation and SEC. The certificates of stock covered by the VTA are cancelled and new ones (voting trust certificates) are issued in the name of the trustee/s stating that they are issued pursuant to the VTA. The transfer is noted in the books of the corporation. The trustee/s execute and deliver to transferors the voting trust certificates. (Note that these certificates shall be transferable in the same manner and with the same effect as certificates of stock.) At the end of the period of the VTA (or the full payment of the loan to which the VTA is made a condition, as the case may be), in the absence of any express renewal, the voting trust certificates as well as the certificates of stock in the name of the trustee/s shall be deemed cancelled and new certificates of stock shall be reissued in the name of the transferors.

(3) (4)

(5)

EVERETT V. ASIA BANKING (49 Phil. 512; 1926) This case illustrates how VTA can give rise to effective control and how it can be abused. Original stockholders can set aside the VTA when their rights are trampled upon by the trustee. MACKIN, ET AL. V. NICOLLET HOTEL (25 F. 2d 783; 1928) Invalidating circumstances of a VTA are: Want of consideration

Voting power not coupled with interest Fraud Illegal or improper purpose

NIDC V. AQUINO (163 SCRA 153; 1988) A VTA transfers only voting or other rights pertaining to the shares subject of the agreement, or control over the stock. Stockholders of a corp. that lost all its assets through foreclosures cannot go after those properties. PNB-NIDC acquired those properties not as trustees but as creditors.

Pooling and voting agreements What are the advantages/disadvantages of a pooling agreement? Advantages: 1. there is a commitment to agree to a certain manner of voting 2. minority stockholders are able to control the corpo Disadvantages: 1. possibility of disagreement thus the need for an arbitration clause 2. there is no compelling reason for stockholders to act together

What rights does a shareholder give up/ retain with a pooling agreement? Shareholders retain their right to vote because the parties are not constituted as agents. However, the will of the parties may not be carried out due to non-compliance with the pooling agreement.

RINGLING v. RINGLING (29 Del. Ch. 318, 49 A. 2d 603; 1946) Generally, agreements and combinations to vote stock or control corporate fiction & policy are valid if they seek without fraud to accomplish only what parties might do as stockholders and do not attempt it by illegal proxies, trusts or other means in contravention of statutes or law. BUCK RETAIL STORE v. HARKERT (62 N.W. 2d 288; 1954) Stockholders control agreements are valid where it is for the benefit of corporation where it works no fraud upon creditors or other stockholders and where it violates no statute or recognized public policy. MCQUADE v. STONEHAM (189 N.E. 234; 1934) An agreement among stockholders to divest directors of their power to discharge an unfaithful employee is illegal as against public policy. Stockholders may not by agreement among themselves control the directors in the exercise of the judgment vested in them by virtue of their office to elect officers and fix salaries. CLARK v. DODGE (199 N.E. 641; 1936) If the enforcement of a particular contract damages nobody-not even the public, there is no reason for holding it illegal. Test is WON it causes damage to the corporation and stockholders. Cumulative voting (see sec. 24) Methods of Voting 1. Straight voting: If A has 100 shares and there are 5 directors to be elected, he shall multiply 100 by five (equals 500) and distribute equally among the five candidates without preference

2.

Cumulative voting: If A has 100 shares and there are 5 directors to be elected, he shall (one candidate) multiply 100 by five (equals 500) and he can vote the 500 for only one candidate. Cumulative voting: If A has 100 shares, there are 5 directors to be elected, and he only (multiple candidates) wants to vote for two nominees, he can divide 500 votes between the two, giving each one 250 votes.

3.

How to compute votes needed to get a director elected by cumulative voting: 1. Freys formula (minimum no. of votes to elect one director) X= # of shares required Y= # of outstanding votes Z= # of directors to be elected X = _ Y__ + 1 Z+1 2. Baker & Carys formula (minimum no. of votes needed to elect multiple directors) X= # of shares required Y= # of shares represented at meeting D= # of directors the minority wants to elect D= total # of directors to be elected X= Y x D + 1 D' + 1 NOTES Levels playing field or at least ensures that the minority can elect at least one representative to the board of directors (BOD) Cannot of itself give the minority control of corporate affairs, but may affect and limit the extent of the majoritys control By-laws cannot provide against cumulative voting since this right is mandated by law in Section 24.

Classification of shares (see sec. 6) Type of shares 1. 2. Common: Preferred: share with right to vote share has preference over dividends and distribution of assets upon liquidation; right to vote may be restricted (Sec. 6)

3.

Redeemable: share is purchased or taken up by the corporation upon the expiration of a fixed period (Sec. 8); right to vote may be restricted (Sec. 6)

NOTES Stock can also be both preferred and redeemable. Even though the right to vote of preferred and redeemable shares may be restricted, owners of these shares can still vote on certain matter provided for in Sec. 6. SEC requires that where no dividends are declared for three consecutive years, in spite of available profits, preferred stocks will be given the right to vote until dividends are declared.

GOTTSCHALK V. AVALON REALTY (23 N.W. 2d 606; 1946) Provision granting right to vote to preferred stock previously prohibited from voting, constitutes diminution of the voting power of common stock. Provision in the articles of incorporation granting holders of preferred stock right to vote in case of default in payment of dividends after July 1, 1951 was construed as denial by necessary implication of the right to vote even prior to July 1, 1951.

Restriction on transfer of shares Peculiar to close corporations. Most common restriction: granting first option to the other stockholders and/or the corporation to acquire the shares of a stockholder who wishes to sell them. Restrictions on shares of stock must conform to the requirements in Sec. 98

This gives to the corporation and/or to its current management the power to prevent the transfer of shares to persons who they may see as having interests adverse to theirs.

Prescribing qualifications for directors; founders shares Directors (See Sec. 23, 27, 47) As long as the qualifications imposed are reasonable and not meant to unjustly or unfairly deprive the minority of their rightful representation in the BOD, such provisions are within the power of the majority to provide in the by-laws. According to Gokongwei vs. SEC, aside from prescribing qualifications, by-laws can also provide for the disqualification of anyone in direct competition with the corporation.

Founders shares See Sec. 7 for definition Exception to the rule in sec. 6 that non-voting shares shall be limited to preferred and redeemable shares If founders shares enjoy the right to vote, this privilege is limited to 5 years upon SECs approval, so as to prevent the perpetual disqualification of other stockholders.

Management contracts (sec. 44) Contract to manage the day-to-day affairs of the corporation in accordance with the policies laid down by the board of the managed corporation. BOD can and usually delegate many of its functions but it cant abdicate its responsibility to act as a governing body by giving absolute power to officers or others, by way of a management contract or otherwise. It must retain its control over such officers so that it may recall the delegation of power whenever the interests of the corporation are seriously prejudiced thereby.

SHERMAN & ELLIS VS. INDIANA MUTUAL CASUALTY (41 F. 2d 588; 1930) Although corporations may, for a limited period, delegate to a stranger certain duties usually performed by the officers, there are duties, the performance of which may not be indefinitely delegated to outsiders.

UNUSUAL VOTING AND QUORUM REQUIREMENTS (Sec. 25, 97 [for close corporations]) Increases veto power of the minority in some cases. In exchange for the numerical majority in the BOD, minority can ask for a stronger veto power in major corporate decisions.

BENITENDI VS. KENTON HOTEL (60 N.E. 2d 829; 1945) A requirement that there shall be no election of directors at all unless every single vote be cast for the same nominees, is in direct opposition to the statutory rule that the receipt of plurality of the votes entitles a nominee to election. (See Sec. 24) Requiring unanimity before the BOD can take action on any corporate matter makes it impossible for the directors to act on any matter at all. In all acts done by the corporation, the major number must bind the lesser, or else differences could never be determined nor settled. The State has decreed that every stock corporation must have a representative government, with voting conducted conformably to the statutes, and the power of decision lodged in certain fractions, always more than half, of the stock. This whole concept is destroyed when the stockholders, by agreement, by-law or certificates of corporation provides for unanimous action, giving the minority an absolute, permanent and all-inclusive power of veto. The requirement of unanimous vote to amend by-laws is valid. Once proper by-laws have been adopted, the matter of amending them is no concern of the State.

Device Cumulative voting

Favorable To: MINORITY: assures them of representation on the board MINORITY: so long as they hold more common stock as opposed to

Limitations Cant give minority control of corp. affairs Preferred and redeemable stock can still vote on certain matters as

Classification of shares

the majority who holds more preferred stock Restriction on transfer of shares *applicable only to close corporations MAJORITY: they can choose whether to keep or release shares and they can prevent opposition from acquiring shares MAJORITY: theyre the ones who can prescribe the qualifications in the by-laws MAJORITY: allows them to delegate certain functions and duties without losing control over the corporation

provided in Sec. 6 or as may be provided by the corp. See Sec. 98

Prescribing qualifications for directors; founders shares

Qualifications must be reasonable and do not deprive minority of representation on the board Cannot exceed five years BOD must retain control over corp. policies BOD must have power to recall contract

Management contracts

Unusual voting and quorum requirements

MINORITY: gives them stronger veto power in certain corp. affairs MEETINGS

Subject to the limitations in Sec. 103.

Meetings of Directors / Trustees KINDS: Meetings of the Board of Directors or Trustees may be either regular or special. (Sec. 49) REGULAR: Held monthly, unless otherwise provided in the by-laws. (Sec. 53) At any time upon call of the president or as provided in the bylaws.

SPECIAL:

NOTICE:

Must be sent at least 1 day prior to the scheduled meeting, unless otherwise provided by the bylaws. Note: Notice may be waived expressly or impliedly. (Sec. 53)

WHERE: QUORUM:

Anywhere in or outside the Philippines, unless the by-laws provide otherwise. Generally, a majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of corporate business. (Sec. 25) Exceptions: (1) (2) If the AOI or by-laws provide for a greater majority; If the meeting is for the election of officers, which requires the vote of a majority of all the members of the Board

WHO PRESIDES:

The president, unless the by-laws provide otherwise. (Sec. 54)

Meetings of Stockholders / Members

KINDS:

Meetings of stockholders or members may be either regular or special. (Sec. 49) REGULAR: Held annually on a date fixed in the by-laws. If no date is fixed, on any date in April of every year as determined by the Board of Directors or trustees.

Notice: Written, and sent to all stockholders or members of record at least 2 weeks prior to the meeting, unless a different period is required by the by-laws. SPECIAL: At any time deemed necessary or as provided in the by-laws. Notice: Written, and sent to all stockholders or members of record at least 1 week prior to the meeting, unless otherwise provided in the by-laws.

Note: Notice of any meeting may be waived expressly or impliedly by any SH or member. (Sec. 50) WHERE: In the city of municipality where the principal office of the corporation is located, and if practicable in the principal office of the corporation. Metro Manila is considered a city or municipality. (Sec. 51) Generally, a quorum shall consist of the stockholders representing a majority of the outstanding capital stock, or a majority of the members. Exception: If otherwise provided for in the Code or in the by-laws. WHO PRESIDES: The president, unless the by-laws provide otherwise. (Sec. 54)

QUORUM:

WHAT IS THE EFFECT IF A STOCKHOLDER'S MEETING IS IMPROPERLY HELD OR CALLED? Generally, the proceedings had and/or any business transacted shall be void. However, the proceedings and/or transacted business may still be deemed valid if: (1) (2) Such proceedings or business are within the powers or authority of the corporation; and All the stockholders or members of the corporation were present or duly represented at the meeting. (Sec. 51)

DUTIES OF DIRECTORS AND CONTROLLING STOCKHOLDERS

Duties and Liabilities of Directors WHAT IS THE 3-FOLD DUTY THAT DIRECTORS OWE TO THE CORPORATION? (1) Diligence (2) Loyalty (3) Obedience Obedience - directors must act only within corporate powers and are liable for damages if they acted beyond their powers unless in good faith. Assuming that they acted within their powers, liability may still arise if they have not observed due diligence or have been disloyal to the corporation. WHEN DOES LIABILITY ON THE PART OF DIRECTORS, TRUSTEES OR OFFICERS ARISE? In general, liability of directors, trustees or officers arises when they either: (1) willfully and knowingly vote for or assent to patently unlawful acts of the corporation; or (2) are guilty of gross negligence of bad faith in directing the affairs of the corporation; or (3) acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees. In such cases, the directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which would otherwise have accrued to the corporation. (Sec. 31) In addition to this general liability, the Corporation Code provides for specific rules to govern the following situations: (1) (2) (3) (4) Self-dealing directors (Sec. 32) Contracts between interlocking directors (Sec. 33) Disloyalty to the corporation (Sec. 34) Watered stocks (Sec. 65)

Duty of Diligence: Business Judgment Rule. WHAT IS THE BUSINESS JUDGMENT RULE? As a general rule, directors and trustees of the corporation cannot be held liable for mistakes or errors in the exercise of their business judgment, provided they have acted in good faith and with due care and prudence. Contracts intra vires entered into by the board of directors are binding upon the corporation, and the courts will not interfere unless such contracts are so unconscionable and oppressive as to amount to a wanton destruction of the rights of the minority. However, if due to the fault or negligence of the directors the assets of the corporation are wasted or lost, each of them may be held responsible for any amount of loss which may have been proximately caused by his wrongful acts or omissions. Where there exists gross negligence or fraud in the management of the corporation, the directors, besides being liable for damages, may be removed by the stockholders in accordance with Sec. 28 of the Code. (Campos & Campos) GENERAL RULE: Contracts intra vires entered into by BoD are binding upon the corporation and courts will not interfere. EXCEPTION: When such contracts are so unconscionable and oppressive as to a wanton destruction of the rights of the minority. WHAT KIND OF DILIGENCE IS EXPECTED OF DIRECTORS? Directors are expected to manage the corporation with reasonable diligence, care and prudence, i.e. the degree of care and diligence which men prompted by self-interest generally exercise in their own affairs. Thus, they can be held liable not only for willful dishonesty but also for negligence. Although they are not expected to interfere with the day-to-day administrative details of the business of the corporation, they should keep themselves sufficiently informed about the general condition of the business. WHAT FACTORS SHOULD BE CONSIDERED IN DETERMINING WHETHER REASONABLE DILIGENCE HAS BEEN EXERCISED? The nature of the business, as well as the particular circumstances of each case. The court should look at the facts as they exist at the time of their occurrence, not aided or enlightened by those which subsequently took place. (Litwin v. Allen) OTIS AND CO. VS PENNSYLVANIA RAILROAD CO. (155 F. 2d 522; 1946) If in the course of management, the directors arrive at a decision for which there is a reasonable basis and they acted in good faith, as a result of their independent judgment, and uninfluenced by any consideration other than what they honestly believe to be for the best interest of the railroad, it is not the function of the court to say that it would have acted differently and to charge the directors for any loss or expenditures incurred. In the present case, the bond issue was adequately deliberated and planned, properly negotiated and executed; there was no lack of good faith; no motivation of personal gain or profit; there was no lack of diligence, skill or care in selling the issue at the price approved by the Commission and which resulted in a saving of approximately $9M to the corporation. MONTELIBANO VS. BACOLOD-MURCIA MILLING CO. (5 SCRA 36; 1962) The Bacolod-Murcia Milling Co. adopted a resolution which granted to its sugar planters an increase in their share in the net profits in the event that the sugar centrals of Negros Occidental should have a total annual production exceeding one-third of the production of all sugar central mills in the province. Later, the company amended its existing milling contract with its sugar planters, incorporating such resolution. The company, upon demand, refused to comply with the contract, stating that the stipulations in the resolution were made without consideration and that such resolution was, therefore, null and void ab initio, being in effect a donation that was ultra vires and beyond the powers of the corporate directors to adopt. This is an action by the sugar planters to enforce the contract. The terms embodied in the resolution were supported by the same cause and consideration underlying the main amended milling contract; i.e., the premises and obligations undertaken thereunder by the planters, and particularly, the extension of its operative period for an additional 15 years over and beyond the thirty years stipulated in the contract. As the resolution in question was passed in good faith by the board of directors, it is valid and binding, and whether or not it will cause losses or decrease the profits of the central, the court has no authority to review them. They hold such office charged with the duty to act for the corporation according to their best judgment, and in so doing, they cannot be controlled in the reasonable exercise and performance of such duty. It is a well-known rule of law that questions of policy or of management are left solely to the honest decision of officers and directors of a corporation, and the court is without authority to substitute its judgment of the board of directors; the board is the business manager of the corporation, and so long as it acts in good faith, its orders are not reviewable by the courts. to amount

LITWIN (ROSEMARIN ET. AL., INTERVENORS) VS. ALLEN ET. AL. (25 N.Y.S. 2d 667; 1940) FACTS: Alleghany Corp. bought terminals in Kansas City and St. Joseph. It needed to raise money to pay the balance of the purchase price but could not directly borrow money due to a borrowing limitation in its charter. Thus, it sold Missouri Pacific bonds to J.P. Morgan and Co. worth $IOM. J.P. Morgan, in turn, sold $3M worth of the bonds to Guaranty Trust Company. Under the contract, the seller was given an option to repurchase at same price within six months. HELD: Option given to seller is invalid. It is against public policy for a bank to sell securities and buy them back at the same price; similarly, it is against public policy for the bank to buy securities and give the seller the option to buy them back at the same price because the bank incurs the entire risk of loss with no possibility of gain other than the interest derived from the securities during the period that the bank holds them. Here, if the market price of the securities rise, the holder of the repurchase option would exercise it to recover the securities at a lower price at which he sold them. If the market price falls, the seller holding the option would not exercise it and the bank would sustain the loss. Directors are not in a position of trustees of an express trust who, regardless of good faith, are personally liable. In this case, the directors are liable for the transaction because the entire arrangement was improvident, risky, unusual and unnecessary so as to be contrary to fundamental conceptions of prudent banking practice. Yet, the advice of counsel was not sought. Absent a showing of exercise of good faith, the directors are thus liable. WALKER VS. MAN, ET. AL. (253 N.Y.S. 458; 1931) FACTS: Frederick Southack and Alwyn Ball loaned Avram $20T evidenced by a promissory note executed by Avram and endorsed by Lacey. The loan was not authorized by any meeting of the board of directors and was not for the benefit of the corporation. The note was dishonored but defendant-directors did not protest the note for non-payment; thus, Lacey, the indorser who was financially capable of meeting the obligation, was subsequently discharged. HELD: Directors are charged not with misfeasance, but with non-feasance, not only with doing wrongful acts and committing waste, but with acquiescing and confirming the wrong doing of others, and with doing nothing to retrieve the waste. Directors have the duty to attempt to prevent wrongdoing by their co-directors, and if wrong is committed, to rectify it. If the defendant knew that an unauthorized loan was made and did not take steps to salvage the loan, he is chargeable with negligence and is accountable for his conduct. STEINBERG VS. VELASCO (52 Phil. 953; 1929) FACTS: The board of directors of Sibuguey Trading Company authorized the purchase of 330 shares of stock of the corporation and declared payment of P3T as dividends to stockholders. The directors from whom 300 of the stocks were bought resigned before the board approved the purchase and declared the dividends. At the time of purchase of stocks and declaration of dividends, the corporation had accounts payable amounting to P9,241 and accounts receivable amounting to P12,512, but the receiver who made diligent efforts to collect the amounts receivable was unable to do so. It has been alleged that the payment of cash dividends to the stockholders was wrongfully done and in bad faith, and to the injury and fraud of the creditors of the corporation. The directors are sought to be made personally liable in their capacity as directors. HELD: Creditors of a corporation have the right to assume that so long as there are outstanding debts and liabilities, the BOD will not use the assets of the corporation to buy its own stock, and will not declare dividends to stockholders when the corporation is insolvent. In this case, it was found that the corporation did not have an actual bona fide surplus from which dividends could be paid. Moreover, the Court noted that the Board of Directors purchased the stock from the corporation and declared the dividends on the stock at the same Board meeting, and that the directors were permitted to resign so that they could sell their stock to the corporation. Given all of this, it was apparent that the directors did not act in good faith or were grossly ignorant of their duties. Either way, they are liable for their actions which affected the financial condition of the corporation and prejudiced creditors. BARNES V. ANDREWS (298 F. 614; 1924) A complaint was filed against a corporate director for failing to give adequate attention (he relied solely on the President s updates on the status of the corp) to the affairs of a corporation which suffered depletion of funds. The director was not liable. The court said that despite being guilty of misprision in his office, still the plaintiff must clearly show that the performance of the directors duties would have avoided the losses. When a business fails from general mismanagement, business incapacity, or bad judgment, it is difficult to conjecture that a single director could turn the company around, or how much dollars he could have saved had he acted properly. FOSTER V. BOWEN (41 N.E. 2d 181; 1942) Cushing, a director and in charge of leasing a roller skating rink of the corp, leased the same to himself. Minority stockholders filed suit against Bowen, the corporation's President, to recover for company losses arising out of an alleged breach of fiduciary duty.

Bowen was held to be not liable because: (1) Cushing's acts were not actually dishonest or fraudulent; (2) Cushing performed personal work such as keeping the facility in repair which redounded to the benefit of the company and even increased its income; (3) Bowen did not profit personally through Cushing's lease; and (4) the issue of the possible illegality of the lease was put before the Board of Directors, but the Board did not act on it but instead moved on to the next item on the agenda. Absent any bad faith on Bowen's part, and a showing that it was a reasonable exercise of judgment to take no action on the lease agreement at the time it was entered into, Bowen was not liable. LOWELL HOIT & CO. V. DETIG (50 N.E. 2d 602; 1943) Lowell Hoit filed action against directors of a cooperative grain company for an alleged willful conversion by the manager of grain stored in the company facility. The court said that the directors were not personally liable. There was no evidence that the directors had knowledge of the transaction between the manager and Lowell Hoit. The court will treat directors with leniency with respect to a single act of fraud on the part of a subordinate officer/agent. But directors could be held liable if the act of fraud was habitual and openly committed as to have been easily detected upon proper supervision. To hold directors liable, he must have participated in the fraudulent act; or have been guilty of lack of ordinary and reasonable supervision; or guilty of lack of ordinary care in the selection of the officer/agent. BATES V. DRESSER (40 S.Ct.247; 1920) Coleman, an employee of the bank, was able to divert bank finances for his benefit, resulting in huge losses to the bank. The receiver sued the president and the other directors for the loss. The court said that the directors were not answerable as they relied in good faith on the cashiers statement of assets and liabilities found correct by the government examiner, and were also encouraged by the attitude of the president that all was well (the president had a sizable deposit in the bank). But the president is liable. He was at the bank daily; had direct control of records; and had knowledge of incidents that ordinarily would have induced scrutiny. The self-dealing director WHAT IS A SELF-DEALING DIRECTOR? (Sec. 32) A self-dealing director is one who enters into a contract with the corporation of which he is a director. WHAT IS THE NATURE OF CONTRACTS ENTERED INTO BY SELF-DEALING DIRECTORS? Voidable at the option of the corporation, whether or not it suffered damages. It is possible that the selfdealing director may have the greatest interest in its welfare and may be willing to deal with it upon reasonable terms. However, such contract may be upheld by the corporation if all of the following conditions are present: (1) The presence of the self-dealing director or trustee in the board meeting for which the contract was approved was not necessary to constitute a quorum for such meeting; (2) The vote of such self-dealing director or trustee was not necessary for the approval of the contract; (3) The contract is fair and reasonable under the circumstances; (4) In the case of an officer, the contract has been previously authorized by the Board of Directors. In the event that either of or both conditions (1) and (2) are absent ( i.e., the presence of the director/trustee was necessary for a quorum and/or his vote was necessary for the approval of the contract), the contract may be ratified by a 2/3 vote of the OCS or all of the members, in a meeting called for the purpose. Full disclosure of the adverse interest of the directors or trustees involved must be made at such meeting. DOCTRINE: A director of a corporation holds a position of trust and as such, he owes a duty of loyalty to his corporation. In case his interests conflict with those of the corporation, he cannot sacrifice the latter to his own advantage and benefit. As corporate managers, directors are committed to seek the maximum amount of profits for the corporation. This trust relationship "is not a matter of statutory or technical law. It springs from the fact that directors have the control and guidance of corporate affairs and property and hence of the property interests of the stockholders." (Prime White Cement Corp. v. IAC, 220 SCRA 103; 1993)

PALTING V. SAN JOSE PETROLEUM (Dec. 17, 1966) The articles of inc. of respondent included a provision that relieves any director of all responsibility for which he may otherwise be liable by reason of any contract entered into with the corp., whether it be for his benefit or for the benefit of any other person, firm, association or partnership in which he may be interested, except in case of fraud. SC: This is in direct contravention of the Corp Law, of the traditional fiduciary relationship between directors and the SH. The implication is that they can do anything short of fraud, even to their benefit, and with immunity. Note: This case was decided in 1966 under the Corporation Law, which had no provisions on self-dealing directors. MEAD V. MCCULLOUGH (21 Phil. 95; 1911) Issue: validity of sale of corp. property and assets to the directors who approved the same. Gen Rule: When purely private corporations remain solvent, its directors are agents or trustees for the SH. Exception: when the corp. becomes insolvent, its directors are trustees of all the creditors, whether they are members of the corp. or not, and must manage its property and assets with strict regard to their interest; and if they are themselves creditors while the insolvent corp is under their management, they will not be permitted to secure to themselves by purchasing the corp property or otherwise any personal advantage over the other creditors. Exception to Exception: A director or officer may in good faith and or an adequate consideration purchase from a majority of the directors or SH the property even of an insolvent corp, and a sale thus made to him is valid and binding upon the minority. In the case at bar, the sale was held to be valid and binding. Company was losing. 4 directors present during meeting all voted for the sale. They likewise constitute majority of SH. Contract was found to be fair and reasonable. PRIME WHITE CEMENT CORP. V. IAC (220 SCRA 103; 1993) Prime White Cement Corp. (through the President and Chairman of the Board) and Alejandro Te, a director and auditor of the corporation, entered into a dealership agreement whereby Te was obligated to act as the corporation's exclusive dealer and/or distributor of its cement products in the entire Mindanao area for 5 years. Among the conditions in the dealership agreement were that the corporation would sell to and supply Te with 20,000 bags of white cement per month, and that Te would purchase the cement from the corporation at a price of P 9.70 per bag. Relying on the conditions contained in the dealership agreement, Te entered into written agreements with several hardware stores which would enable him to sell his allocation of 20,000 bags per month. However, the Board of Directors subsequently imposed new conditions, including the condition that only 8,000 bags of cement would be delivered per month. Te made several demands on the corporation to comply with the dealership agreement. However, when the corporation refused to comply with the same, Te was constrained to cancel his agreements with the hardware stores. Notwithstanding the dealership agreement with Te, the corporation entered into an exclusive dealership agreement with a certain Napoleon Co for marketing of corporation's products in Mindanao. The lower court held that Prime White was liable to Te for actual and moral damages for having been in breach of the agreement which had been validly entered into. On appeal, the Supreme Court held that the dealership agreement is not valid and enforceable, for not having been fair and reasonable: the agreement protected Te from any market increases in the price of cement, to the prejudice of the corporation. The dealership agreement was an attempt on the part of Te to enrich himself at the expense of the corporation. Absent any showing that the stockholders had ratified the dealership agreement or that they were fully aware of its provisions, the contract was not valid and Te could not be allowed to reap the fruits of his disloyalty.

Using inside information USE OF INSIDE INFORMATION: Do directors and officers of a company owe any duty at all to stockholders in relation to transactions whereby the officers and directors buy for themselves shares of stock from the stockholders? MINORITY RULE: YES. Directors and officers have an obligation to stockholders individually as well as collectively. the

MAJORITY RULE: NO. Directors and officers owe no fiduciary duty at all to stockholders, but may deal with them at arms length. No duty of disclosure of facts known to the director or officer exists. Nondisclosure cannot constitute constructive fraud.

SPECIAL FACTS DOCTRINE: IT DEPENDS. Where special circumstances or facts are present which make in inequitable to withhold information from the stockholder, the duty to disclose arises, and concealment is fraud. In the case of Gokongwei v. SEC (89 SCRA 336; 1979), the Supreme Court, quoting from the US case of Pepper v. Litton (308 U.S. 295-313; 1939) stated that a director cannot, "by the intervention of a corporate entity violate the ancient precept against serving two masters He cannot utilize his inside information and his strategic position for his own preferment. He cannot violate rules of fair play by doing indirectly through the corporation what he could not do directly. He cannot use his power for his personal advantage and to the detriment of the stockholders and creditors no matter how absolute in terms that power may be and no matter how meticulous he is to satisfy technical requirements. For that power is at all times subject to the equitable limitation that it may not be exercised for the aggrandizement, preference, or advantage of the fiduciary to the exclusion or detriment of the cestuis."

Seizing Corporate Opportunity (Sec. 34) If a director acquires for himself, by virtue of his office, a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of the corporation, he must account to the corporation for all such profits by refunding the same. However, if his act was ratified by 2/3 stockholders' vote, he need not refund said profits. This provision applies even though the director may have risked his own funds in the venture. Note: This provision is to be distinguished from Sec. 32 on contracts of self-dealing directors: contracts of self-dealing directors are voidable at the option of the corporation even if it has not suffered any injury; on the other hand, Sec. 34 applies only if the corporation has been prejudiced by the contract. SINGER VS. CARLISLE (27 N.Y.S. 2d 190; 1941) In this case, it was held that the general allegations in the complaint of conspiracy of the directors to obtain corporate opportunity were deficient. The complaint should state specific transactions. Directorship in 2 competing corporations does not in and of itself constitute a wrong. It is only when a business opportunity arises which places the director in a position of serving two masters, and when, dominated by one, he neglects his duty to the other, that a wrong has been done. IRVING TRUST CO. VS. DEUTSCH (79 L. Ed. 1243; 1935) Fiduciary duty applies even if the corporation is unable to enter into transactions itself. LITWIN V ALLEN (25 N.Y.S. 2d 667; 1940) In this case, it was held that the common stock purchased by the defendants wasnt a business opportunity for the corporation. Having fulfilled their duty to the corporation in accordance with their best judgment, the defendant directors were not precluded from a transaction for their own account and risk. Interlocking directors WHAT IS AN INTERLOCKING DIRECTOR? An interlocking director is one who occupies a position in 2 companies dealing with each other. WHAT IS THE RULE ON CONTRACTS INVOLVING INTERLOCKING DIRECTORS? Except in cases of fraud, and provided the contract is fair and reasonable under the circumstances, a contract between 2 or more corporations having interlocking directors shall not be invalidated on that ground alone. This practice is tolerated by the Courts because such an arrangement oftentimes presents definite advantages to the corporations involved. However, if the interest of the interlocking director in one corporation is substantial ( i.e., stockholdings exceed20% of the OCS) and his interest in the other corporation or corporations is merely nominal, he shall be subject to the conditions stated in Sec. 32, i.e., for the contract not to be voidable, the following conditions must be present: (1) The presence of the self-dealing director or trustee in the board meeting for which the contract was approved was not necessary to constitute a quorum for such meeting; (2) The vote of such self-dealing director or trustee was not necessary for the approval of the contract; (3) The contract is fair and reasonable under the circumstances; (4) In the case of an officer, the contract has been previously authorized by the Board of Directors.

In the event that either of or both conditions (1) and (2) are absent ( i.e., the presence of the director/trustee was necessary for a quorum and/or his vote was necessary for the approval of the contract), the contract may be ratified by a 2/3 vote of the OCS or all of the members, in a meeting called for the purpose. Full disclosure of the adverse interest of the directors or trustees involved must be made at such meeting. Note: The Investment House Law prohibits a director or officer of an investment house to be concurrently a director or officer of a bank, except as otherwise authorized by the Monetary Board. In no event can a person be authorized to be concurrently an officer of an investment house and of a bank except where the majority or all of the equity of the former is owned by the bank. (P.D. 129, Sec. 6, as amended) The Insurance Code likewise prohibits a person from being a director and/or officer of an insurance company and an adjustment company. (Sec. 187) GLOBE WOOLEN CO. V. UTICA GAS & ELECTRIC (121 N.E. 378; 1918) Maynard, president and chief stockholder of Globe but nominal SH in Utica Gas, obtained a cheap, 10-year contract for Utica to supply power. Maynard did not vote during the meeting for the approval of the contract. Can Globe seek to enforce contract? The Supreme Court held that Globe could not enforce the contract and that said contract was voidable at the election of Utica. It was found that based on the facts of the case, the contract was clearly one-sided. Maynard, although he did not vote, exerted a dominating influence to obtain the contract from beginning to end. The director-trustee has a constant duty not to seek harsh advantage in violation of his trust.

Watered stocks (Sec. 65) Any director or officer of the corporation: (1) consenting to the issuance of stocks for a consideration less than its par or issued value or for a consideration in any form other than cash, valued in excess of its fair value, or (2) who, having knowledge thereof, does not forthwith express his objection in writing and file the same with the corporation secretary shall be solidarily liable with the stockholders concerned to the corporation and its creditors for the difference between the fair value received at the time of the issuance of the stock and the par or issued value of the same. Fixing compensation of directors and officers GENERAL RULE: Directors as such are not entitled to compensation for performing services ordinarily attached to their office. (1) If the articles of incorporation or the by-laws expressly (2) If a contract is expressly made in advance. WHO FIXES THE COMPENSATION? The stockholders only (majority of the OCS) EXCEPTION: Per diems, which can be fixed by the directors themselves so

EXCEPTIONS: provide;

APPLICABILITY OF COMPENSATION: Only to future and NOT past services. MAXIMUM AMOUNT ALLOWED BY LAW: Total yearly income of the directors shall not exceed 10% of the net income before income tax of the corporation during the preceding year (Sec. 30)

GOV'T OF THE PHILIPPINES VS. EL HOGAR FILIPINO (50 Phil. 399; 1927) The compensation provided in sec. 92 of the by-laws of El Hogar Filipino which stipulated that 5% of the net profit shown by the annual balance sheet shall be distributed to the directors in proportion to the attendance at board meetings is valid. The Corporation Law does not prescribe the rate of compensation for the directors of a corporation. The power to fix it , if any is left to the corporation to be determined in its by-laws. In the case at bar, the provision in question even resulted in extraordinarily good attendance. BARRETO VS. LA PREVISORA FILIPINA This action was brought by the directors of defendant corporation to recover 1% from each of the plaintiffs of the profits of the corporation for 1929 pursuant to a by-law provision which grants the directors the right to receive a life gratuity or pension in such amount for the corporation.

The SC held that the by-law provision is not valid. Such provision is ultra vires for a mutual loan and building association to make. It is not merely a provision for the compensation of directors. The authority conferred upon corporations refers only to providing compensation for the future services of directors, officers, and employees after the adoption of the by-law in relation thereto. The by-law can't be held to authorize the giving of continuous compensation to particular directors after their employment has terminated for past services rendered gratuitously by them to the corporation. CENTRAL COOPERATIVE EXCHANGE INC VS. TIBE (33 SCRA 596; 1970) The questioned resolutions which appropriated the funds of the corporation for different expenses of the directors are contrary to the by-laws of the corporation; thus they are not within the board's power to enact. Sec. 8 of the by-laws explicitly reserved to the stockholders the power to determine the compensation of members of the board and they did restrict such compensation to actual transportation expenses plus an additional P30 per diems and actual expenses while waiting. Hence, all other expenses are excluded. Even without the express reservation, directors presumptively serve without pay and in the absence of any agreement in relation thereto, no claim can be asserted therefore. FOGELSON VS. AMERICAN WOOLEN CO. (170 F. 2d. 660; 1948) A retirement plan which provides a very large pension to an officer who has served to within one year of the retirement age without any expectation of receiving a pension would seem analogous to a gift or bonus. The size of such bonus may raise a justifiable inquiry as to whether it amounts to wasting of the corporate property. The disparity also between the president's pension plan and that of even the nearest of the other officers and employees may also be inquired upon by the courts. KERBS VS. CALIFORNIA EASTERN AIRWAYS (90 A. 2d 652; 1952) This is an appeal filed to enjoin the California Eastern Airways from putting into effect a stock option plan and a profitsharing plan. The SC held that the stock option plan was deficient as it was not reasonably created to insure that the corporation would receive contemplated benefits. A validity of a stock option plan depends upon the existence of consideration and the inclusion of circumstances which may insure that the consideration would pass to the corporation. The options provided may be exercised in toto immediately upon their issuance within a 6 month period after the termination of employment. In short, such plan did not insure that any optionee would remain with the corporation. With regard to the profit-sharing plan, it was held valid because it was reasonable and was ratified by the stockholders pending the action.

Close Corporations

Sec. 97 provides that the AOI of a close corp. may specify that it shall be managed by the stockholders rather than the BoD. So long as this provision continues in effect: No stockholders meeting need be called to elect directors; Generally, stockholders deemed to be directors for purposes of this Code, unless the context clearly requires otherwise; Stockholders shall be subject to all liabilities of directors. The AOI may likewise provide that all officers or employees or that specified officers or employees shall be elected or appointed by the stockholders instead of by the BoD.

Further, Sec. 100 provides that for stockholders managing corp. affairs: They shall be personally liable for corporate torts (unlike ordinary directors liable only upon finding of negligence) If however there is reasonable adequate liability insurance, injured party has no right of action v. stockholdersmanagers

Duty of Controlling Interest

A SH/director is still entitled to vote in a stockholders meeting even if his interest is adverse to a corporation. But a stockholder able to control a corp. is still subject to the duty of good faith to the corp. and the minority. Persons with management control of corporation hold it in behalf of SHs and can not regard such as their own personal property to dispose at their whim. The ff. acts are legal:

Transfer of managerial control through BoD resignation & seriatim election of successors if concomitant with the sale and actual transfer of majority interest or that which constitutes voting control; Disposal by controlling SH of his stock at any time & at such price he chooses

The ff. are illegal: Selling corp. office or management control by itself, that is NOT accompanied by stocks or stocks are insufficient to carry voting control; Transferring office to persons who are known or should be known as intending to raid the corporate treasury or otherwise improperly benefit themselves at the expense of the corp. (Insuranshares Corp. V. Northern Fiscal); Receiving a bonus or premium specifically in consideration of their agreement to resign & install the nominees of the purchaser of their stock, above and beyond the price premium normally attributable to the control stock being sold;

INSURANSHARES CORP. V. NORTHERN FISCAL CORP. (35 F. Supp. 22; 1940) The corp. is suing its former directors to recover damages as a result of the sale of its control to a group (corporate raiders) who proceeded to rob it of most of its assets mainly marketable securities. Are previous directors who sold corp. control liable? Yes, they are under duty not to sell to raiders. Owners of corp. control are liable if under the circumstances, the proposed transfer are such as to awaken a suspicion or put a prudent man on his guard. As in this case, control was bought for so much aside from being warned of selling to parties they knew little about, and also from fair notice that such outsiders indeed intended to raid the corp.

Duty to Creditors

General rule: Corporate creditors can run after the corp. itself only, and not the directors for mismanagement of a solvent corp. If corp. becomes insolvent, directors are deemed trustees of the creditors and should therefore manage its assets with due consideration to the creditors interest. If directors are also creditors themselves, they are prohibited from gaining undue advantage over other creditors.

Personal Liability of Directors

In what instances does personal liability of a corporate director, trustee or officer validly attach together with corporate liability? When the director / trustee / officer: I. (1) assents to a patently unlawful act of the corporation; (2) is in bad faith or gross negligence in directing the affairs of the corporation; (3) creates a conflict of interest, resulting in damages to the corporation, its stockholders or other persons Consents to the issuance of watered stocks, or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; Agrees to hold himself personally and solidarily liable with the corporation; Is made, by a specific provision of law, to personally answer for his corporate action. (Tramat Mercantile v. CA, 238 SCRA 14) UICHICO v. NLRC (G.R. No. 121434, June 2, 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 the instant case, there was a showing of bad faith: the Board Resolution retrenching the respondents on the feigned ground of serious business losses had no basis apart from an unsigned and unaudited Profit and Loss Statement which had no evidentiary value whatsoever.

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III. IV.