BUSINESS ORGANIZATION II

CORPORATION

A:
1.

Article of Incorporation is generally submitted before

incorporation and is a condition precedent. By-laws may be
submitted before and after incorporation.

2.

AOI is the fundamental law. It would even bind even third parties.
Whereas the by-laws being an internal regulation, it binds only
the stockholders unless if third persons has knowledge about the
by-laws. Basically by-laws are binding among or between the
stockholders because they are internal in application.

February 1, 2012
BY-LAWS
Q: What documents do we file with the SEC?
A:
1.
Articles of incorporation
2.
By-laws of the corporation
WHEN BY LAWS ARE FILED
Q: When should by-laws be filed?
A: There are 2 options:
1.
Filed together with the AOI, or
2.
File it within 1 month after receipt of the official notice of the
issuance of its certificate of incorporation.
WAYS OF ADOPTING BY LAWS
Q: How should these by-laws be adopted?
A: it depends on when the by-laws are filed
If it is filed within 1 month after issuance of the certificate: it must be
1.
Affirmative vote by the majority of its stockholders.
2.
Signed by the stockholders voting for them
3.
A copy should be certified by the majority of the directors and
countersigned by the secretary of the corporation
4.
File with the SEC
If filed together with the AOI:
1.
Approved by all the incorporators
2.
Submitted to SEC together with the AOR
Note however that there are some corporations which require a certificate
of appropriate government agency to the effect that such by-laws or
amendments are in accordance with law. Thus, if it is a corporation engaged
in insurance business, the by-laws should first be submitted to the Office of
the Insurance Commission. If it holds for the opening of a radio station then
to the National Telecommunication Commission. Bank with the Central Bank.
Generally, if it does not involve any of these, you can file directly with the
SEC.
CONTENTS OF BY-LAWS
Q: What are the contents of the by-laws?
A: (Section 47)
1.
Time, place and manner of calling and conducting regular or
special meeting of the directors or trustees
2.
Time and manner of calling and conducting regular or special
meetings of the SH or members
3.
The required quorum in SHs meetings and the manner of voting
therein
4.
The form of proxies and the manner of voting them
5.
The qualifications, duties and compensation of directors, or
trustees, officers and employees
6.
The time for holding the annual election of directors and the
mode or manner of giving notice thereof
7.
The manner of election or appointment and the term of office of
all officers other than directors or trustees
8.
The penalties for violation of the by-laws
9.
In case of stock corporations, the manner of issuing certificates
10. Such other matter as may be necessary
DISTINCTION BETWEEN BY-LAWS AND ARTICLES OF INCORPORATION

If you want to know the exact duties we could consult the by-laws because
they are the documents which involve the organization of the corporation, it
enumerates who the corporate officers are. When we say corporate officers,
there responsibility applies to wider transactions. As distinguished from
operating officers with responsibilities limited only to a particular unit. But if
you are the VP of finance then your responsibility is wider, it includes some
functions not necessarily covered by the manager.
These corporate officers are enumerated in the by-laws and their functions
are stated there. So here, the organization, list of officers and a brief
description of their duties, their qualifications, methods of removal all
these things are mentioned in the by-laws. So basically, the by-laws is the
document which controls the rights of the stockholders, duties of its officers,
the procedures which the organization will be managed or manned.
By-laws also provides the manner, date and to some extent the procedures
of the meetings.
MEETINGS
Q: So what are the types of meetings?
A: Regular and Special meetings.
REGULAR MEETINGS OF STOCKHOLDERS
Q: when is the regular meeting for SHs held?
A: Regular meetings for stockholders should be held annually as fixed in the
by-laws and if not fixed then it should be on the month of April.
Q: Why April?
A: Because it is normally the filing of the ITR. This is more appropriate in April
because the financial statements have been prepared in connection with the
filing of the ITR. And so by this time, the financial statements are available for
distribution to stockholders. There, it could be discovered whether or not the
corporation has profits or losses. If they suffer losses then it has to be
reported to the stockholders.
During the stockholders meeting, the president has to make a report. And if
the president is willing to answer questions, then it could be ventilated in
that meeting. So here the annual meeting of the stockholders, this is an
occasion for the stockholders to know the actual status of the corporation.
ELECTION OF BODs AND ITS TERM
Q: Of course in that annual meeting also, other than reports, what is more
important?
A: Election of officers and BOD.
And this is so because as accorded by the Corporation Code, the term of the
BOD is only for 1 year.
Q: If you were the president and you know your term will expire for 1 year
and you are enjoying fat privileges, do you want to leave your presidency?
Can you therefore extend your term?
A: You will not want to leave but you cannot extend the time of election. The
Code says that it cannot be extended.

Q: what is the difference between By-laws and Articles of Incorporation?

1

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EXCEPTION TO THE NON-EXTINDIBLE TIME OF ELECTION OF BODs

VOTING IN CASE OF JOINT OWNERSHIP OF STOCKS

Q: Is this an absolute prohibition?

A: No sir. There are some exceptions

Q: However, if the certificate shows that it is owned by Yen, Timbal, Miral

and Espina, how should it be voted?
A: The consent of everyone must be secured.

There could be ways by which the President may refuse to call a meeting
because he wants to stay as a President. As much as possible he will try to
postpone the meetings. Illness is not a justification to postponement of
meeting.
Q: What could be a justified reason for the postponement of meeting?
1.
Erroneous date for holding the meeting stated in the notice sent
out to members.
2.
Natural calamity.
3.
Lack of the required quorum.
Q: What is a quorum?
A: Number required in the by-laws in order to have a valid
meeting.

Q: however, if the certificate says that this certificate is owned by Yen

and/or Timbal and/or Miral?
A: Any of them may attend the meeting or may execute a proxy
VOTING RIGHTS FOR TREASURY SHARES
Q: Remember treasury shares? Do they have value?
A: Yes because we use our money to buy them back. Therefore, we no longer
have money but have the shares.
Q: Can we still sell them?
A: Yes. They have value. We could reissue them. We can use them for
dividends. So they have value.

So lack of quorum could be a good ground to postpone a meeting.

Q: In the stockholders meeting, who can attend?
A: The stockholders but in the absence they could appoint proxies.
REQUISITES FOR A VALID MEETING
Q: What are the requisites for a valid meeting of stockholders/members?
A:
1.
It must be held at the proper place.
2.
It must be held at the stated date and at the appointed time or at
a reasonable time thereafter.
3.
It must be called by the proper person.
4.
There must be a previous notice.
5.
There must be a quorum.

RIGHT TO VOTE BY PLEDGORS, MORTGAGORS AND ADMINISTRATORS

Q: what is the difference between a Pledge and a Mortgage?
A: In pledge, what is involved is a personal property while in mortgage, real
or personal property is involved. Personal property refers to a chattel
mortgage
Q: what is the difference between a Chattel mortgage and a pledge?
A: in chattel mortgage, you do not surrender possession of the property
while in pledge you surrender possession of the property
Q: During a stockholders meeting, who will attend, Pledgor or pledgee?
A: The pledgor will attend. What has been transferred is actual possession
only and not the legal title. In a case were the stocks were pledged, the
pledgor remains to be the owner although not with the physical possession.
Q: how about In mortgage?
A: Generally, the owner mortgagor attends the meeting. Because the
pledgors and mortgagors remain to be the owner then they are entitled to
attend.
Q: If the stockholders are dead, who will attend the meeting?
A: If the court appoints an executor, then the executor will have to attend. If
no executor, then the administrator.
Q: But the deceased stockholder forgot to execute a proxy for the
executor/administrator, can they still be allowed to attend the meeting?
A: The rule requiring proxy is not applicable because the transfer of
ownership has been provided for by operation of law.

Q: Who will vote in a meeting in case of the treasury shares?

A: They do not have voting rights.
Q: Why?
A: this is because, the owner of the treasury shares is the corporation. The
BOD acts on behalf of the corporation. If we allow the BOD to vote, then the
directors will abuse this and use this in voting for themselves. The only
option of the corporation in so far as the treasury shares is to reissue. It
cannot be voted upon. If we allow these to be voted, the directors will use
these to perpetuate themselves.
PROXIES
Q: What are proxies?
A: It refers to the instrument.
Generally, as a stockholder, it is suppose to be a personal privilege but the
law allows proxies.
Stocks being personal are evidence by certificate of stocks. You have
certificates of stocks in your name. These certificates may be offered as a
security for a loan. And if you want to surrender the certificate, you execute
a contract of pledge because you offered personal property and you
surrender physical possession of this personal property.
LIMITATIONS OF PROXIES
Q: What are proxies? What are the limitations of a proxy?
A:
1.
Proxies must be in writing signed by the stockholder or member
and filed before the scheduled meeting with the corporate
secretary.
Oral proxies, therefore, are not valid.
2.

It is valid only for the meeting for which it is intended, unless

otherwise provided in the proxy.

3.

A continuing proxy must be for a period not exceeding 5 years at

any one time.

Q: So if it is a proxy given to a particular meeting, for how many meetings?

A: Only once. It is limited for 5 years.
Q: Why do you think proxies would be necessary if these are limited for 5
years?
A: Proxies are necessary for three things:
1.
to acquire a quorum in meetings
2.
Exercise of right to vote even though the SH is absent
3.
Management control
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RIGHTS OF TRUSTOR AND TRUSTEE

Q: In what way may the proxy be used as a management control?
A: Proxy is a tool to control management. It is usually done by officers or by
management so that they would be able to secure a proper authority to
approve a particular resolution during the meeting
VOTING TRUST AGREEMENT
Q: Another management control?
A: Voting trust agreement.
Q: what is a Voting trust agreement ?
A: It is actually an agreement wherein the trustor entrust his stocks to a
trustee wherein the trustee now exercise the power to vote and other
powers granted by said agreement.
You should execute a VTA certificate which is notarized and submitted to
SEC. These usually become necessary in cases where there is a term of loan
agreements, you borrowed billions from banks, the banks would make it sure
that the bonds released will return to them with the agreed interest. They
want to make sure that you are not diverting these funds for other uses. So
they want to be sure that every decision of the corporation should be
intended to pursue the plans for which these loans were released. They want
to be sure otherwise they will end up unpaid. Although they have the
protection to go over the properties but foreclosing the properties is not the
business of the bank.
The business of the bank is to lend money and earn out of those money. So
this is one way of controlling management. The bank would therefore
require the borrower corporation, not only to pledge or mortgage the stocks
to them because pledge or mortgage cannot be considered a management
control device.
Q: Why is pledge and mortgage not considered a management control?
A: Pledge or mortgage cannot be used as a management control device
because the pledgor or mortgagor still has the power to vote. While it is a
security, it is not an assurance by the bank to monitor closely the banks
released.

Q: Going back to VTA, what are the rights of the trustee and the trustor?
A:
Trustor:
1.
The right to the dividends
2.
The right to inspect the books
Trustee:
1.
Voting rights
2.
Right to inspect the books of the corporation
3.
Since he is the one listed in the books, he is qualified to elect and
be elected as member of the board.
OBJECTIVE OF VOTING TRUST AGREEMENT
Q: What is the objective of a VTA?
A: (page 521) --- Such an agreement as that authorized by our law makes
possible a unified control of the affairs of the corporation and a consistent
policy by binding a SH to vote as a unit.
It also makes it possible for a majority group of shareholders who transferred
their individual holdings to a voting trustee to dispose of their shares and still
retain control of the corporation through the voting trustee who shall have
the power to vote as a unit the shares thus pooled.
TERM OF VOTING TRUST AGREEMENTS
Q: What is the life of a VTA?
A: General Rule it is should not exceed 5 years. However, it may be
extended depending on whether the loan has been already fully paid
Q: Why do you think there is a need for that long period?
A: This is because, most of the time, the corporation has long term plans.
These long term plans will have to be implemented phase by phase. If you
are not sure of the composition of the BOD during that period, the next BOD
may have some other plans and what they will do is to strike out the plan of
the previous BOD and design a new plan. The reason for the long period is to
enable the corporation to pursue its long term plans. Here the VTA place a
very critical role in pursuing long term plans of the corporation.

PROCEDURE ON VOTING TRUST AGREEMENTS

DIFFERENCE BETWEEN PROXY AND VOTING TRUST AGREEMENT
Q: How is VTA done?
A:
1.
The certificate which is named under the trustor would be
cancelled and the corporation will issue a new certificate under
the name of the trustee.
2.
The new certificate would be recorded in the books of the
corporation.
3.
The new certificate will be notarized and a certified true copy will
be given to the SEC.
Q: In a VTA, who is the beneficial owner and who is the naked owner?
A: beneficial owner is the trustor while the naked owner is the trustee
Q: Why is one called a beneficial owner?
A: He enjoys the benefits of the property.
Q: what is the benefit obtained by the SHr?
A: The dividends.
So the trustor is still entitled to the dividends. It is the trustor who is the
beneficial owner. He enjoys the benefits which are the fruits of the stocks,
specifically the dividends.
But the legal owner or naked owner is the trustee because he has ownership
of such certificates as it is under his name but not the fruits of the stocks. He
has nothing at all except to represent that share.

Q: Differentiate Proxy from a Voting Trust Agreement

A:
1.
A proxy has no legal title to the shares of the SH giving the agency,
while a trustee acquires legal title to the shares of the transferring
SH
2.
A proxy, unless coupled with interest, is revocable at anytime,
while a VTA, if validly executed is intended to be irrevocable for a
definite and limited period of time
3.
A proxy can only act at a specified SHs meeting (if the proxy is not
continuing in nature, otherwise it is good for 5 years), while a
trustee is not limited to any particular meeting
4.
A proxy votes only in the absence of the owner of the stock, while
a trust can vote and exercise all the rights of the transferring SH
even when the latter is present
5.
A proxy is usually of shorter duration than a VTA, although the
maximum duration of both cannot exceed 5 years at any one time
6.
A proxy need not be notarized nor a copy filed with the SEC, while
a VT must be notarized and a certified copy filed with the
Commission
7.
A proxy does not have a right of inspection f corporate books,
while a trustee has such right.
Q: In a VTA, even if the stockholder is not present at the meeting, still it is the
voting trustee who could vote on the shares. Why is this so?
A: In a VTA, the legal title is transferred to the trustee. As a matter of fact,
the certificate is cancelled and a new certificate is issued in the name of the
trustee.
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On the other hand, in proxy, when the stockholder appears, the proxy cannot
vote because the proxy does not acquire the legal title of the stocks.
REVOCATIONS OF PROXIES
Moreover, proxies are generally revocable. The appearance of the
stockholder in the meeting, in effect revokes the authority earlier granted.
As a matter of fact, revocation could be done either expressly or impliedly.
The appearance of the stockholder, even if he did not tell the proxy, this is an
implied revocation.
Q: Another implied revocation?
A: The execution of another proxy.
Q: If 2 proxies are executed, which of the 2 proxies should prevail?
A: One which bears the later date because the proxy containing the earlier is
deemed to have been revoked by the later one.
Q: If both proxies bear the same date?
A: The one that would prevail is the one mailed at the later date.
Q: If both are mailed at the same date?
A: We look at the time.
Q: Same time?
A: Then the proxy committee will now determine which of the proxy will be
honored or recognized.
Q: If you are a proxy, you will represent the stockholder and you have the
right to vote. What are you suppose to do before you could attend the
meeting?
A: Go to the proxy committee, record your proxy and inform the committee
that you are present. This is important so that they could record your
attendance or appearance.
If there are 2 of the proxy, the committee will decide as to which of the 2
would be allowed to attend and vote.
SO WE NOW HAVE 2 MANAGEMENT CONTROL DEVICES PROXY AND VTA.
VOTING AGREEMENT
Q: Any other management control devices?
A: Pooling agreement/Voting agreement. THIs is where stockholders agree
among themselves that they should vote as one. By agreeing on themselves
on how to vote on certain issues, they could have control.
They pool their stocks together, and agree among themselves that before
they will vote, they will agree on how to vote.

SH agree that their votes will be considered as one). It may also refer to
other issues which needs the approval of the SH. There is an agreement to
vote as a block. It does not only refer to voting of directors.
On the other hand, a voting trust agreement is where a trustor transfers to a
trustee the right to vote and other rights pertaining to the shares for a period
not exceeding five years at any one time.
Q: what common distinction can you easily think between the two?
A: in VTA there is transfer of title an ownership. There is a cancellation of
the old certificate and you issue a new certificate for the trustee. In a
voting agreement, no transfer is made
Q: here in proxy and voting trust agreement, during the meeting, in the
entrance there was a poster saying that no proxy and voting trust agreement
is allowed. What could happen to the proxies and VTAs?
A: Generally this is prohibited because this would result to the
disenfranchisement of the SHs. It is void because it will limit the rights of the
owners. The right to vote is part and parcel of the ownership of a person.
Q; what happens in a VTA?
A: the ownership is transferred to the trustee. So you cannot disallow the
trustee to present in the meeting. In a proxy, you cannot prevent either
because it is tantamount to saying to the real owner of the stocks that he
cannot exercise his right to vote which is part of ownership
Q: In a VTA there is a new certificate of stocks title. So once the loan expires,
what happens?
A: the VTA is cancelled. And you have to issue another certificate of stocks
back to the trustor.
STOCKS AND STOCKHOLDERS
ACQUISITION OF STOCKS
Q: how do we acquire stocks?
A: we can subscribe unissued stocks, purchase issued stocks, or acquire
stocks from the treasury (from the corporation itself)
So basically:
1. From unissued shares by subscription
2. By purchase of treasury shares by any other persons or SHs
3. By transfer from a previous SH of the outstanding shares or
exiting subscription to shares
So we can acquire by subscription or subsequent transfer
Q: from the corporation how do we acquire?
A: we can acquire from the corporation treasury shares by mere purchase. Or
acquire unissued shares by subscription.
DIFFERENCE BETWEEN PURCHASE AND SUBSCRIPTION

Q: What are the various management control devices and differentiate one
from the other?
A: recap of answer for
1.
proxy,
2.
voting trust agreement and
3.
voting agreement / pooling agreement
February 6, 2012 --- earthquake! No class!

Q: whats the difference? Whats the difference between purchase and

subscription?
A: in treasury shares, it is a reissued share that is why it is purchased. For the
unissued shares, it is newly purchased shares --- this can be covered by a
subscription agreement
Q: how about acquisition from a previous SH of the outstanding shares?
A: these can be acquired through purchase

February 8, 2012
SUBSCRIPTION CONTRACT
DIFFERENCE OF VOTING TRUST AGREEMENT AND VOTING AGREEMENT
Q: what happens in a voting agreement as distinguished from a voting trust
agreement?
A: in a voting agreement, what is agreed upon is how the voting should be
done or who should be voted upon (example: pooling agreement --- minority
4

Q: what is a subscription agreement or subscription contract?

A: it is any contract for the acquisition of unissued stock in an existing
corporation or a corporation still to be formed

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If you acquire it from a corporation which is yet to be formed, it is called a

PREINCORPORATION SUBSCRIPTION
Being a contract, we follow the liberality of contracts. The subscription
agreement can be subject to terms and conditions that are convenient to the
parties so long as they are not contrary to laws, morals, public policy, public
order.

LIABILITY OF DIRECTORS FOR WATERED STOCKS

Q: it can be questioned by who, how? Who are the parties liable for the
watered stocks?
A: the board of directors (consenting directors) and the subscriber
themselves are liable for the watered stocks

WATERED STOCKS

Any director or officer of a corporation 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 who, having
knowledge thereof, does not forthwith express his objection in writing and
file the same with the corporate secretary, shall be solidarily, liable with the
stockholder concerned to the corporation and its creditors for the difference
between the fair value received at the time of issuance of the stock and the
par or issued value of the same

Q: can you say the first installment will be paid until you become a lawyer?
A: No, because it is conditional. A condition which is an uncertain event is
void.

Q: why the subscriber?

A: the subscriber is liable because the other creditors and even some of the
SHs will be prejudiced because of the trust fund doctrine.

BlessY: If we allow this, there is uncertainty as to the payment. Then the

capital will not be certain and it may violate the trust fund doctrine

Q: the nature of their liability?

A: solidarily liable

Q: In this case you are not considered as a stock holder until that condition
occurs. But in this case, what happens to the stocks?
A: The stocks remain valid because the subscription contract is still
considered valid. What is void is the condition or stipulation regarding the
condition because this tantamount to a WATERED STOCKS

Q: you now have the certificates for the partial payment. And we said that
these certificates are transferable. And when you were holding these
certificates, you saw someone you learned to love ---- after giving these
stocks to that person, how much did he pay for it?
A: nothing

The stocks should still remain valid because if you consider it void then the
public will no longer have trust to the issuance of stocks by the corporation

Q: do you think you will be liable for the watered stocks?

A: NO BECAUSE WATERED STOCKS REFERS ONLY TO SALE OF UNISSUED
STOCKS (ORIGINAL ISSUANCE OF SHARES) in this case, these stocks are
already issued and are already paid for, thus there is no impairment of
capital.

Q: who are the PARTIES TO A SUBSCRIPTION CONTRACT?

A: the (1) issuing corporation and the (2) subscriber
Q: can the subscriber pay by installments?
A: yes he can.

WHAT IS VOID IS THE CONDITION. THE CONTRACT REMAINS VALID THAT IS

WHY THE ISSUANCE OF STOCK IS STILL VALID.
Q: when we say watered stocks, what do we refer to?
A:
Types of Watered Stocks:
i. Those issued without consideration (bonus share)
ii. Issued as fully paid when the corporation has received a lesser
sum of money than its par/issued value (discounted share)
iii. Issued for a consideration other than cash, the fair value of
which is less than the par or issued value
iv. Issued as stock dividend when there are no sufficient restricted
earnings or surplus
Q: difference of a reduced price or discounted?
A:

RP there is a market consideration or reason or factor for the

reduction

D no reason or factor for the reduction of price

so discounted stocks are watered stocks.
HISTORY OF WATERED STOCKS ---- WATERED CHICKEN
--- the value of the chicken is less than the amount we paid. --- WE PAY LESS
THAN TH VALUE OF THE STOCKS.
So remember: watered stocks are questionable but not void.
Q: what is our concern then if it is valid?
A: it will endanger the capital because stock are issued without or less than
its proper consideration.

CONSIDERATION FOR STOCKS

Q: what if the scenario is that the subscriber will say that I will take the bar
next year, once I become a lawyer, I will serve the corporation for three
years. And the salary I will acquire will be paid for the shares?
A: This is not allowed. Past services are allowed but future services not
allowed.
Q: Why would his services not be enough? How come past services allowed?
A: Because in the case of future service, the consideration is not certain. It
could happen that you dont pass the bar or that if it happens that you meet
an accident, etc.
Q: so what if someone says that give me shares of stocks, I will lend you
money. You need not pay me, just issue stocks is that allowed?
A: No. what is allowed is only previously incurred indebtedness by the
corporation --- not future indebtedness.
Note also that the law says that pre-existing debts. --- not debts which are
already paid.
Q: so what considerations may stocks be acquired?
A: section 62
1.
2.
3.

Because the stocks are supposed to represent the value of the capital. And if
no value is given or is less than the par or the property is over evaluated,
there could be watered stocks --- the stocks remain legitimate

4.

Actual cash paid to the corporation

Property (tangible/intangible) convenient or necessary for its use
and lawful purposes
Labor performed for or services actually rendered (note: future
service not allowed because it is uncertain)
Previously incurred indebtedness which are PRE-EXISTING
(meaning not yet paid)

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5.

6.

Amounts transferred from URE to stated capital (stock dividends)

--- there is enough cash but the corporation needs it for other
expenses so it will transfer cash to new capital
Outstanding shares exchanged for stocks in the event of
reclassification or conversion --- preferred stocks converted to
common stocks; they have different par value, thus you use the
difference to acquire new stocks

Q: when we say conversion of stocks, what does this mean?

A: this is when a preferred stock will be converted to common stocks.
In this case, the conversion may have different par value. Thus you may use
such value
Q: so shares are issued as a consideration? How do you illustrate this?
A: yes, you issue shares from the corresponding unrestricted retained
earnings. This shares are then given to the SHs as stock dividends already.
Q: when do corporations usually issue stock dividends?
A: the corporation may issue stocks because the corporation needs the cash
for other expenses. So it will say that it will transfer the cash to new capital,
which will result to the issuance of new stocks --- you are richer not in cash
but in shares of stocks.
Q: so here, when stocks are issued, the SHs would have to increase their
outstanding shares. In another situation, all the SHs agree that they will
contribute their property worth 1M each. But they agreed among
themselves, we will issue 10M worth of shares for the 1M contribution, is
this possible?
A: this cannot happen. RULE ON PROPERTY AS A CONSIDERTAION: the SEC
must approve the valuation and they require proof that the corresponding
valuation in relation to the issuance of shares should correspond to the
true fair market value of the properties transferred.
CERTIFICATE OF STOCKS AND TRANSFER OF SHARES

A: the SHAREHOLDERS
Q: the certificate may contain certain conditions, one condition is that
transfer will not be effective unless transfer has been approved by the
president? Can you transfer it nevertheless?
A: yes, because this is a violation to your right of ownership. This is restraint
of trade and business
Q: how about a condition that transfer cannot be made unless offered to
existing SHs, is this allowed?
A: this may be allowed. Because it is a means of protection
Q: why is one allowed and the other is not?
A: in the second, it is not a restriction of ownership but a mere regulation. It
is intended so that other SHs may exercise their pre-emptive rights.
Q: why is one a restriction and the other not?
A: the first restricts your ownership in a way that he is not given an
opportunity to dispose. His rights become dependent on the approval of
someone else who are in fact not the owners of that said stock. In the
second, he can still dispose but there is just a limit of time wherein he could
sell it first to existing SHs
The first is absolute restriction --- the second is not absolute, you offer first
to existing, if they dont want then you can offer it to other.
ISSUANCE OF STOCK CERTIFICATES
Q: when are you entitled to the issuance of the shares of stocks?
A:

Q: as we said, what is the proof of ownership?

A: the certificate of stocks.
Q: As a matter of fact, what can we do with the certificate?
A: you can deliver it to others. (transfer it to another)
Q: Certificate of stock is not only personal property but is also evidence of
ownership. Being an evidence of ownership, how can it be transferred?
A: you can endorse it then deliver --- MODE OF TRANSFERING STOCKS
In other words the certificate of stock is a negotiable instrument?
A: no.
Q: why is it different?
A: although transfer is made through endorsement and delivery, it is not a
negotiable instrument. Not a negotiable instrument because it is not an
unconditional promise or order to pay sum certain in money --- RATHER
YOU TRANSFER SHARES --- it represents shares of stocks not payment of
money.
Q: what is a negotiable instrument?
A:
1.
Instrument in writing signed by the maker
2.
There is unconditional promise or order to pay sum certain in
money
3.
Payable at a fix or determinable future time
4.
Payable to order or bearer
5.
When it is addressed to a drawee, the drawee should be named
or indicated therein with reasonable certainty
Although transferable by endorsement or delivery, it is not negotiable --- it is
only transferable

GR (Section 64): you are entitled to it upon FULL PAYMENT of

your subscription (together with interest and expenses if any)
EXC: in case of PARTIAL PAYMENT (RULE)
i. Payments should be made or deemed pro-rated
among all the shares and therefore no certificate of
stocks can be issued until the entire subscription is
paid
ii. Unless prohibited in the by-laws it may be issued for
less than the number of shares subscribed provided
the par value of each stock represented by said
certificate has been fully paid
Note: once an alternative is chosen, it must be applied uniformly
to all SH similarly situated

So in partial payment: you may apply two thousand for the two shares. Or
apply the two thousand pro-rata so none of the subscription is paid so no
certificates shall be issued at all.
PAYMENT OF BALANCE OF SUBSCRIPTION
Q: so this certificate once issued, when is the remaining value paid?
A: it depends on the provision of subscription contract. If there is no
mention regarding the time, it is dependent on the call of the BOD.

February 13, 2012

RECAP ON ISSUANCE OF STOCK CERTIFICATES
Q: so we said that the best evidence of ownership is the certificate of stocks,
so what would the bank require if we obtain a loan?
A: they will ask for the certificate.
You cannot merely present the articles of incorporation because the
certificate of stock is transferable through endorsement. So it is possible that
owners listed in the articles are no longer the owners

Q: who can endorse the certificate?

6

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Q: so we said the only proof is the certificate, so if you only pay 2 million out
of 10 million, can you obtain a certificate?
A: refer to old www regarding rule on partial payment
Q: so that if the corporation refuses to issue the certificate, what is your
remedy?
A; file for MANDAMUS; compel the corporation to issue you the certificate
Q: if there is a balance of 8 million, when will you pay?
A: if the date is stipulated in the subscription contract, you refer to that
date. If no date, it will depend on the call of the directors

Q: how? PROCEDURE ON DELINQUENCY SALE

A:
1.
The corporation will call for the payment. If no payment after 30
days, the stocks are delinquent then there will be a notice for sale.
2.
The sale should be not less than 30 days but not more than 60
days from the time it is considered delinquent.
3.
And there shall be a posting of such notice in a newspaper of
general circulation once a week for two consecutive weeks in a
place where the principal place of business of the corporation is
established.
LOST OR DESTROYED CERTIFICATES

DELINGQUENT STOCKS
Q: what happens if the stockholder does not pay after the call,
A: after 30 days from the call, the SH will be considered delinquent
Q: may the SH justify that there is URE and you havent declared dividends,
can he say that payment will be based on the dividends?
A: no because there is no creditor debtor relationship with regards to being
and incorporator you are an investor. But as regards the payment of
subscription, there is that relationship

Q: so here, it will be sold. On the other hand, if the certificate is lost?

A: PROCEDURE --1.
the SH who lost it shall make an affidavit containing the
circumstances of how the certificate was lost.
2.
And such should be verified by the secretary or the corporation.
3.
There will also be a publication of once a week for three
consecutive weeks.
4.
And then for 1 year, the person who wants to protest can file for
such protest. And if there is no protest for 1 year, then the
corporation can issue a new certificate.

EFFECT OF DELINQUENCY
Q: once declared delinquent, what will happen?
A: there are certain rights that can no longer be exercised --1.
voting rights,
2.
rights to be represented,
3.
right to be voted upon
Q: but I thought the right to vote is part and parcel of ownership, so why are
they not allowed to vote? who owns the shares?
A: the SH owns the share. They are not allowed to vote as punishment. So
that those who are prompt in paying their subscription will continue to
promptly pay. This is to set an example.

Q: so what could happen within that one year period?

A: the SH should wait for 1 year period before the new certificate can be
given. But if the SH cannot wait, then he can file a bond to answer for the
damages or for the amount that the other party who protested will pay .
Q: what is the PURPOSE FOR THAT BOND?
A: it is a security for that particular period if anyone or third person would
protest because in fact the certificate was not really lost.
The bond will answer for the amount of the issued certificate. Value of the
certificate ---- in other words this would probably happen if the certificate
was not really lost but was sold or transferred to another.

Q: so rights are left to them?

A: rights to dividends

If this is not allowed, then SHs will abuse because we know that the
certificate can easily be transferred by endorsement and delivery.

Q: why give right to dividends but not vote?

A: because the constitution (BILL OF RIGHTS) provides that you cannot
deprive a person of his life, liberty and PROPERTY without DUE PROCESS

This procedure is offered by the law to avoid any possibility of abuse.

The dividends are the fruits of what you own. You are thus entitled to that
because you own it.

Q: As a SH you are entitled certain rights, do you have a right against the
corporation for your investment? As a SH you have an indirect obligation that
the corporation will exist and that it is profitable and that all its officers will
work for the existence and profitability of the corporation. If you notice that
some of the officers are not performing their task, what do you think you
should do as a SH? --- (answered later)

The right to vote on the other hand is just a privilege attached to the Share.
Q: so here, once declared delinquent, certain rights are suspended. When we
say suspended? As distinguish from forfeited
A: it means that once paid, the rights are restored.

RIGHTS OF UNPAID SHARES

Q: who owns the shares which are not yet fully paid for?
A: still the SHs because it is already their subscription. Everything that they
have subscribed, they own even if not yet paid.
Holders of subscribed shares not fully paid which are not delinquent shall
have all the rights of a stockholder.
DELINQUENCY SALE
Q: so we said that privileges are merely suspended. However, if no payment
is made?
A: then the corporation can result to a delinquency sale
7

DERIVATIVE SUIT

(side track discussion)

The SH does not participate with management. But they
participate indirectly by voting for the board of directors. But any
other action by the board, can the SHs participate? GENERALLY
NO!
The SH can only vote on instances when the SHs approval is
necessary --- other than this, the SHs cannot question the
decision of the Stockholders
As a matter of fact, as we were discussing about the liability of the
directors, what can be done? they can ask for the SEC to call for
a stock holders meeting
DISCUSS CONFLICT OF INTEREST AND INTERLOCKING DIRECTORS -- effect of the abuse of interlocking directors: rescind the
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contract (voidable) at the option of the corporation where the

interlocking director has nominal interest
Q; if that happens, the corporation is given the option to question. And if the
corporation is placed on a situation where it is jeopardized, they can actually
go after the responsible director. But the corporation thru the board may not
initiate the questioning of such transaction. What can the SH do?
A: the SH may file for a derivative suit --- a suit filed by the SH for the
corporation when the board of directors does not act on it on matters
wherein the corporation is prejudiced
(KUSOG ANG BELL, DI KO KADUNGOG SA INGON NI TIMBAL)
..Before filing the derivative suit, there must be showing for the
exhaustion of all administrative remedies.

THE CAUSE OF ACTION SHOULD BELONG TO THE COPRATION. AND THE SH

WHO FILES MUST BE A SH AT THE TIME THE ANOMALOUS TRANSACTION IS
ENTERED INTO.
Q: Why cant a SH file a case by himself?
A: because the right violated is not of the SH but is that of the corporation.
So it is the rights of the corporation that are violated. He cannot in his own
right go and file a case in his own name.
Q: so that if a case is filed and there is a reward, who owns the reward?
A: the corporation enjoys the award --- Because it is the corporation who
has a real interest.

----- sirs discussion: preview on merger and consolidation --DERIVATIVE SUIT vs. REPRESENTATIVE SUIT
In a derivative suit, the SH does not file it as a party themselves to the case.
They merely file it in behalf the corporation. It is a representative suit. --filed by someone not a party in interest but representing someone else.
Q; so here actually, when we talk of procedure, if a case is filed by a party
himself?
A: then it should be under his name, in his individual capacity --Q: as distinguished?
A: as distinguished from a derivative suit. He is filing not in his own capacity
but by the capacity of the corporation
DERIVATIVE SUIT vs. CLASS SUIT
Q: but isnt that a class suit?
A: a CLASS SUIT is different because in derivative suit, the SH represents the
entire corporation. In a class suit, he is just representing those who has
similar rights as him.
In a representative suit, you represent the others because there are a lot of
you --- this is to minimize multiplicity of suits and to minimize expenses.
Q: remember pepsi incident --- what kind of suit is this?
A: class suit. As distinguished from a derivative suit, it is the SH representing
the corporation. In a class suit, there is the same right that has been violated.

February 15, 2012

CORPORATE BOOKS AND RECORDS
Q: you were the corporate secretary, what do you think are the records
available in your custody?
A:
1. records of all business transactions of the corporation (journals,
ledgers, financial statements)
2. minutes of the meetings of the SHs and the directors
3. stock and transfer books and certificate books
Q: you met a SH in the mall, and after recognizing that you were the
corporate secretary, he asked for your cellular number, will you give your
number?
A: it is ok to give him my number so that he can at least inquire into matters
regarding the corporation. Although there are limitations to the inquiry of
books, you should give SHs that degree of respect to accommodate them if
they request something from you which is related to the corporation.

IN A CLASS SUIT --- THERE IS A SIMILAR CAUSE OF ACTION OF THE ONE

REPRESENTING AND THOSE REPRESENTED.

YOU ACCORD HER DUE RESPECT BUT ACCESS IS SUBJECT TO CERTAIN

LIMITATIONS. BECAUSE HOW CAN THEY ACCESS IF THEY CANT GET IN TOUCH
WITH YOU

IN A DERIVATIVE SUIT --- THE SHs DERIVE HIS OR HER CAUSE OF ACTION
FROM THE CORPORATION. --- his right to file has been derived from the
corporation itself which supposedly have filed it.

LIMITATION ON THE RIGHT TO INSPECT BOOKS

WHEN DERIVATIVE SUIT IS PROPER

Q: when is derivative suit proper?
A: it is proper when:
1.
2.
3.
4.

there is an unauthorized action by an officer, or

unauthorized use of the property or funds of the corporation.
Or when there is ultra vires acts
Conflict of interest

REQUIREMENTS FOR DERIVATIVE SUIT

Q: requirements for derivative suit?
A:
1.
2.
3.
4.

Corporation should have a cause of action

That the shareholder demanded from the board to sue but the
board denied such demand
The SH must be a shareholder that the questionable transaction
occurred or cause of action accrued
The case should be brought in the name of the corporation
8

Q: what are the limitations?

A: you can only check at the place of business and reasonable hour of the
business. --- it should not be beyond the working hours. If the office is
already close, you can no longer demand.
Q: what if he calls you 3am, and says that he is leaving town. Then he asks
you if you can bring the books to the coffee shop where he is. Is that
permitted?
A: it is a rule that the corporate books are vital to the existence of the
corporation thus it cannot be taken out of the premises of the corporation.
He should ask for court order or permission from the SEC if he wants to
remove it outside the premises.
Q: what if he asks for a copy instead. 5 sets of the records?
A: if he wants to obtain a copy, it shall be at the expense of the requesting
SH. But we should note that the records he is requesting for are not trade
secrets.

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Q: Thus, he can have a copy of 5 sets at 6 am?

A: if the SH really needs it, then the secretary can also accommodate it if
such is reasonable.
As SH they are given the right to inspect the books. The only limitation is that
they can inspect within reasonable hour. But if the SH really needs it, as long
as the secretary will not be prejudiced by giving such service, then they can
accommodate ---- BUT STILL THE BEST TIME TO ACCOMMODATE SUCH
REQUEST WILL BE FOR AS LONG AS IT IS UNDER THE REASONABLE HOUR
(OFFICE HOUR)
Q: what could the books be?
A: business transactions, minutes of meetings, the stock and transfer book,
the certificates

b. personal novation --- change of the parties; change of debtor;

change of creditor
Q: in merger what has happened?
A: corporation Y has assumed and has been given the obligation to demand
the payment of Mr. X.
Q: how do you think X will react?
A: he will doubt the capacity of Corporation Y.
Q: in novation, what is required?
A: if change in creditor, there is no need for the consent of the debtor. But if
you change the debtor, you need to have the consent of the creditor.
IN NOVATION, ONLY THE CONSENT OF THE CREDITOR IS NECESSARY.

Note that financial records may be in the custody of the financial officer,
not necessarily under the custody of the secretary.
MERGER AND CONSOLIDATION

Q: here in merger, the surviving corporation now assumes and would the
debtor have any reason not to pay?
A: no. the debtor still needs to pay

Q: what is marriage?
A: it is the union of two individual persons, male and female at the presence
of the solemnizing officers.

Q; if you are the debtor, will you easily pay?

A: no. you should be vigilant because payment to the wrong person does not
extinguish your obligation (own answer).

Q: we are talking of marriage, because this is similar to merger. In what way?

A: two corporations decide to merge and one of them is the surviving
corporation while the other will be dissolved

Q: so that the collection in that case, what could happen?

A: the collection of the payment will now extinguish the debt

Q: what could happen in a merger?

A: there is a fusion of the business but there is only one surviving
corporation as agreed by parties.
As we usually promise in marriage, what is mine is yours and what is yours is
mine
In a merger, two or more constituent corporations agree that only one of
them survives

Q: if the debtor refuses to pay?

A: his obligation will still stand
Q: how will you explain to the debtor?
A: the surviving corporation should show the debtor that there was a
merger, so you show the articles of the merger. To show that the it has
assumed the outstanding liabilities
The debtor cannot demand for a separate authority from the new or
surviving corporation. The approval of the SEC of the merger results to the
automatic assumptions of the surviving corporation

EFFECTS OF MERGER/CONSOLIDATION AS REGARDS ASSETS/LIABILITIES

Q: what happens to the assets?
A: the assets will be transferred to the surviving corporation. As well as the
liabilities --- these are assumed by the surviving corporation
Q: so that in a merger, while corporation A before was the creditor of Mr. X.
but after the merger, it is corporation Y who is the surviving corporation,
who can now demand for the payment?
A: corporation Y is entitled.
Q: if you are the debtor, and the new creditor Y will demand. Will you pay?
A: yes because my debt will be considered as an asset of the surviving
corporation. So the surviving corporation can collect.

Q: what if debtor still doesnt pay?

A: Y corporation (surviving corporation) can continue to demand from the
debtor. It can institute a collection case in court
Q: in court, what will you show if X files a motion to dismiss on the ground of
no cause of action --- wrong party
A: in the answer of Y corporation, it should lay down the foundation of
article of merger. When it was approved by SEC and all circumstances that
leads to the SEC and that A corporation is the party of the merger
Q: so what will be the caption in the collection case?
A: it will be Y corporation vs. the Debtor (Mr. X)
WHAT TO PROVE IN A CASE FOR COLLECTION OF SUM OF MONEY

Q: what do you remember about NOVATION?

A: there is a change of the creditor, or debtor or change of the object
(subject matter) of the debt
Two types:
a. real novation --- change of the res (change of the thing);
change of the subject matter
9

Q: what if Mr. X says you have no cause of action. As a surviving corporation,

what should you do?
A: first you have to establish the merger.

You have to enumerate the parties to the merger.

Usually, there is a plan of merger, this plan is made at least by

majority of the directors.
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It should prove that it was presented to the SH and approve by at

least 2/3 of SH.
It should also show that if it is a bank, loan association,
educational Institution, there should be a favorable
recommendation by the responsible government institution. And
there should be an approval of SEC of the merger.
He should also establish that Mr.X is an outstanding debtor.

Q: what problem can you think if the corporation sells all its assets?
A: the problem arises if you sell and your assets are not enough to cover your
existing liabilities, the sale may be questioned. --- because we said that that
the assets are held in trust for the corporation --- so you take care first of
your creditors.
Q: so what could be sold as assets?
A: unencumbered assets. --- only if you settle first all your obligations

IN SHORT YOU HAVE TO TRACE THE STORY. THAT Y CORPO IS DEMANDING

PAYMENT BEC DEBTOR X EXECUTED A PROMISSORY NOTE IN FAVOR OF
CORP A.

But in merger, you dont need to settle all your obligations --- Because those
obligations will be absorbed by the surviving corporation.

THEN YOU SHOULD ESTABLISH THAT ALL THE ASSETS INCLUDING THE DEBT
HAS BEEN TRANSFERRED TO Y AS EVIDENCED BY ARTICLES OF MERGER DULY
APPROVED BY SEC

ANOTHER DISTINCTION OF SALE OF ASSETS AND MERGER:

3.
In merger, the creditors are protected! In sale of assets, the
creditors are not totally protected!

THERE IS NO NEED FOR CORP A TO EXECUTE A SEPARATE ASSIGNMENT

BECAUSE THE ARTICLE ALREADY SERVES AS THE ASSIGMENT OF THIS DEBT.

OTHER CORPORATE COMBINATIONS

ALL LIABILITIES OF A CORPORAITON ARE ASSUMED BY Y CORPORATION

HAVING ESTABLISHED THOSE, Y CORP WHICH IS THE PARTY CLAIMING WILL
NOW HAVE THE PERSONALITY TO FILE THE CASE BECAUSE OF THE MERGER.
Q: Now it could be the other way around. Corp A is debtor? What happens?
A: since Y corporation assumes the liabilities of A corporation, it should pay.
You dont simply assume the assets, you also assume the liabilities.
This will now be a SALE OF ASSETS

1. CONSOLIDATION --- two or more corporations unite to form a new

corporation. There is no surviving corporation, instead a new corporation is
established
2. SALE OF STOCKS --- there is a sale of stocks by one corporation to another;
in such a case the SH of the selling corporation will just assign it to another
and they will just get the money and walk away --- the new party will just
acquire the stocks of an existing corporation --- the selling corporation
continues to exist. The buyer will just become the SH of the selling
corporation. So if there are any liabilities, it is still the selling corporation who
will be liable, its personality remains. The assets and liabilities remain to the
selling corporation. ONLY THE OWNERSHIP OF STOCKS IS TRANSFERRED.

SALE OF ASSETS
Q: distinguish sale of assets and merger
A:
1.
SA the corporation who will sell will still have the personality;
the two corporations maintains their juridical personality
M only one personality will survive, the other will cease to exist
2.

HERE either R corporation will be the buyer of all the stocks of Q corporation
or the SH of R will buy directly from the SH of Q.
3. LEASE OF ASSETS --- another corporation leases its property and merely
receives rentals as payment. There is no change of ownership or transfer of
any of the assets and liabilities. --- you only transfer the rights to use the
assets.

SA the corporation involved still has the cause of action against

its debtor; the two corporations maintain their liabilities; the
corporation who purchased will not assume the liabilities of the
selling corporation
M the corporation who ceases to exist can no longer have the
cause of action against its debtor --- only the surviving corporation
has the C.O.A.

Example L leases to R. the liabilities of L will remain with L. the assets will also
remain with L except the right to use which is transferred to R. the existence
of L will still remain. The only thing is that it ceases to operate but not ceases
to exist. Nevertheless, you consider it active if the corporation is engaged in
leasing.

BECAUSE IN MERGER, THE SURV. CORP ASSUMES BOTH ASSETS AND

LIABILITIES

SALE OF STOCKS vs. SALE OF ASSETS

Q: in sale of stocks, what happens to the former SH?
A; the former SH of the selling corporation will no longer be the SH of the
corporation. (get the money and walk away)

Q: if the surviving Corporation refuses to assume liability but assumes assets,

they refer to?
A: sale of assets

Here in sale of assets --- sooner or later, they will cease to exist.
In sales of stocks if not all stocks are sold, they will continue to exist.

IN A SALE OF ASSETS, YOU HAVE TO EXECUTE TRANSFER DOCUMENTS.

4. STOCK-ASSETS SWAP --- combination of sale of assets and sale of stocks

Q: because if you sell all the assets, what could happen here?
A: there will be a dissolution --- but it still exists

Illustration:
A has assets worth 50M
B has assets worth 25M
C has assets worth 200 M (this is represented by stocks worth 200M)

Q: what is the purpose if it sells all the assets but decides to remain to exist?
A: it will only remain to exist to pay its all its liabilities.
10

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A would like to transfer all its physical assets to C. and C did not want to pay
cash but wanted to pay stocks worth 50M. it pays A -- -A would now become
a SH of C.

5.

Same thing with B. it sold it to C. C acquires it with stocks worth 25M. B now
becomes a SH of C.

6.

So here is C corporation with SH among other, B and A.

Here there is no merger --Q: why is this not a merger?
A: because by C buying thru stocks does not assume the liabilities of A and B.
it only bought the assets. Although the assets are transferred, there was a
consideration of such transfer.

LEGAL EFFECTS OF MERGER (SEC. 80)

1.
2.
3.

4.
Because in a merger, only one survives --- here B and A still exist --- they still
have assets which are the stocks that they have. The stocks are the new
assets of A and B. here everyone survives.
Q: what do you mean by sale of stocks? Why cant stock-asset swap be
considered a sale of stocks?
A: In sales of stocks you sell your stocks to another corporation.
One corporation buys the stocks of another. --- the SH of the selling
corporation just walks away, that is why we cant call this scenario as sale of
stocks.

of appropriate government agency for those governed by special

laws)
Conduct of hearing by SEC if it has reason to believe that the
proposed merger is contrary to or inconsistent with the provisions
of the Code or law (Commission may or may not conduct a
hearing)
Issuance of Certificate by SEC the merger shall then be effective

5.

The constituent corporation shall become a single corporation

Separate existence of the constituent corporations shall cease,
except the surviving corporation
The surviving corporation shall possess al the rights, privileges,
immunities and powers and shall be subject to all the duties and
liabilities of a corporation
The surviving corporation shall possess all the rights, privileges,
immunities and franchises of each of the constituent corporations
(ALL ASSETS ARE TRANSFERRED TO THE SURVIVING CORP)
All liabilities and obligations are transferred to the suriving
corporation

Q: suppose the employees are organized, meaning they have a union, while
the others dont have a union, what could happen? Supposing the surviving
corporation does not have a union
A: You should respect the union that is existing. Because the existence of
the union and that of the corporation is separate. You should respect what
has been agreed upon in the collective bargaining agreement.
THE UNION GOES TO Y CORPORATION. So that instead of corporation X
giving the privileges as contained in the CBA, it is now corporation Y.

LAST QUESTION: DISTINCTIONS OF --A. MERGER,

B. SALE OF ASSETS,
C. SALE OF STOCKS,
D. LEASE OF ASSETS,
E. CONSOLIDATION AND
F. STOCK-ASSET SWAP

February 20, 2012 ---- activity on merger and consolidation

February 22, 2012
PROCEDURE OF MERGER
Steps:
1.

2.
3.

4.

Approval of plan --- majority of the BOD of each corporation,

party to the merger, shall approve a plan of merger setting forth:
a.
Names of the corporation proposing to merge
b.
Terms of the merger and the mode of carrying the
same into effect
c.
A statement of changes, if any, in the articles of
incorporation of the surviving corporation
d.
Other provisions with respect to the proposed merger
Submission to stockholder or members for approval --- submitted
to each corporation at separate corporate meetings (2/3 vote)
Execution of a formal contract after approval by the prescribed
vote of SH, a formal contract known as articles of merger shall be
executed by each of the constituent corporations, to be signed by
the president or VP and certified by the secretary or assistant
secretary setting forth
a.
The plan of the merger/consolidation
b.
The number of shares outstanding
c.
The number of shares or members voting for and
against such plan, respectively
Submission to SEC for approval the articles shall be submitted to
SEC in quadruplicate for its approval (provided: recommendation
11

Q: if corporation X is granting one sack of rice to its employees every week,

what happens to the employees of corporation Y after the merger, will they
receive the same?
A: all members are to receive what union members receive subject to the
condition that those non union members are to pay the union or
membership fee.
Q: however, the union members will complain also, what do you think will be
their complaints?
A: they will complain as regards the membership fee.
Q: so there will be problems, how will you suggest in order to solve such
problem?
A: Note: you cannot compel them to join the union because of the freedom
of association.
Prior to the consolidation and merger, there should be a deliberation with
the employees and even the employers. This should be discussed during the
planning stage. This should even have been discovered even before drafting
the plan of merger, --- during the INVESTIGATION PERIOD/BACKGROUND
CHECK.
DISCOVER EVERYTHING DURING DUE DILIGENCE INVESTIGATION!
Q: in another aspect, corporation X also discovered (after the merger) that
the corporation Ys large office or building was on a land which did not
belong to corporation Y. --- it was discovered that Corporation Y only owned
the building but not the land it was on. Who owns the building?
A: the surviving corporation. The land belongs to whoever corporation which
owns it
Q: they also discovered that the lease agreement provides that the lease
contract shall not be assigned to someone else, and should be enjoyed only
by the lessee. Is there a problem?
A: the problem is the non-assignable of the lease.

angels notes
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It is possible that the owner of the land may rescind the lease contract
because of change of lessee.
There is contradiction of the lease contract which must be assigned and the
articles of merger which according to the law does not need an assignment.
(in merger, there is automatic transfer of assets, rights, liabilities, privileges,
franchises and permits)

b.

2.

3.
Q: So which of the two will prevail?
A: most likely it will end up in courts --- which is the last thing that the
merger will do. --- SO MAYBE THEY CAN JUST MAKE COMPROMISE.
THE POINT IS THAT YOU SHOULD PERFORM DUE DILIGENCE SO AS TO
KNOW THE STATUS OF EACH CORPORATION.

of authorizing preferences in any respect superior to

those of outstanding shares of any class, or
c.
of extending or shortening the term or corporate
existence
in case of sale, lease, exchange, transfer, mortgage, pledge or
other disposition of all or substantially all of the corporate
property and assets
in case of merger and consolidation

Q: illustrate authorizing preferences (1.b.)?

A: This is as regards dividends and voting rights. Like others can only get
stock dividends and not cash dividends. Another instance is when the old SHs
are entitled to double the dividends.

--- THIS MUST BE SETTLED, DISCOVERED AND AGREED DURING THE

PLANNING STAGE AND THAT EVERY ASPECT MUST BE CAREFULLY
SEARCHED AND INVESTIGATED. --- THATS THE PURPOSE OF THE DUE
DILIGENCE.

Q: other than the demand for an appraisal right, is there other way that I
leave and get my cash?
A: for big corporation, they can sell it to the public (publicly listed
corporation --- sell it in the stock exchange). Or even if not publicly listed, you
can sell it to the existing SHs or anyone (friends)

So the only way we could have a perfect marriage if we only know who are
we trying to unite with.

I am free because this is my property. So I am entitled to convey such

because it is part of my right to ownership. (this is the right to dispose)

APPRAISAL RIGHT
Q: In a corporation, your relationship with the corporation is?
A: I am an investor.
As investor, you have the right to: (some rights)
1.
know the financial condition of the corporation.
2.
And since you own your stocks, you have the right to dispose
your stocks.
3.
And you also have an appraisal right.
4.
As an investor you have the right to dividends
5.
and the right to vote.
Q: so if you no longer want to remain in that corporation?
A: I can sell your shares of stocks either to the existing SH or to non-stock
holders.
Q: however, if there are no takers?
A: I could sell it to the corporation.
Q: how much?
A: sell it at its FAIR VALUE (note: not fair market value)
But note that there are certain conditions for you to sell your shares to the
corporation. IT IS NOT AN ABSOLUTE RIGHT
Q: what do you mean?
A: your right to sell it back to the corporation and leave is subject to
limitations.
Q: what good reason must you have to be able to demand the corporation to
buy back your shares?
A: you should have voted against a change in the corporation which has the
effect of changing your rights which requires the consent of the SH. --- in
this situation, you can exercise your appraisal right.
INSTANCES OF APPRAISAL RIGHT
Q: so that one occasion where in you can demand for appraisal right is when
there are fundamental changes, what are these fundamental changes?
A: Section 81
1.
In case any amendments to the articles of incorporation has the
effect of
a.
changing or restricting the rights of any SH or class of
shares, or
12

Q: if no one will buy it, do you think I can leave?

A: No. because you need to consider the TRUST FUND DOCTRINE.
Because if I leave without a valid reason, the creditors will be prejudiced.
My assets form parts of the capital which is reserved for the creditors. And
if I withdraw, such capital will be diminished.
Q: so if you have an URE, but you dont fall under any of the circumstances
can you exercise the appraisal right, can you exercise that right?
A: NO.
Q: can you compel the corporation to buy?
A: no. because you have to take into account the trust fund doctrine. You can
only compel the corporation to buy as long as there are URE.
Q: so does both need to exist: URE and the GROUNDS for APPRAISAL RIGHT?
A:
IF THERE ARE OCCASIONS TO EXERCISE APPRAISAL RIGHT BUT NO URE, YOU
CANNOT EXERCISE THE APPRAISAL RIGHT.
HOWEVER: (if grounds exist but no URE, can he exercise the right?)
YES HE CAN EXERCISE HIS APPRAISAL RIGHT, BUT HE CAN ONLY GET PAID
WHEN THERE IS UNRESTRICTED RETAINED EARNINGS.
He will only be paid if there is existence of URE
Exercise of such right should be distinguished from payment.
REASONS WHY YOU CANNOT EXERCISE YOUR APPRAISAL RIGHT ABSENT
THE OCCASION PROVIDED FOR IN SECTION 81
Q: Absent the occasions, you cannot exercise the appraisal. Why?
A:
You can exercise your appraisal right on those instances because
those situations refer to things which were not contemplated in
the agreement
If you remain in the corporation but you are a perennial dissenter
then the law can allow you to leave.
You cannot leave the corporation without the instances because
this would violate the trust fund doctrine.
Because you are an investor you took the risk, therefore
whether the corporation is doing good or doing bad you should
stay with the corporation
HOW RIGHT IS EXERCISED (PROCEDURE)
1.

stockholder should dissent to the fundamental change (present at

the meeting, voted against)
angels notes
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2.

written demand of the fair value within 30 days from the dissent
--- fair value is determined as of the day prior to the date on
which the vote was taken notwithstanding and appreciation or
depreciation in value
--- within 60 days from approval of corporate action, and the SH
and corporation cannot agree on the fair value, it shall be
determined by the appraisal committee

3.
4.
5.

within 10 days from demand submit certificate to the corporation

for notation
within 30 days from award, the corporation should pay you
(provided there are URE)
the SH shall fortwith transfer his shares to the corporation

Q: so one decision was made by 2/3 of the SH. And that was to engage in
another business for their secondary business. However, the minority later
discovered that they decided to rent that place because it was owned by the
president and vice president. Can they exercise the right?
A: This is not an instance of appraisal right. Instead, because there is bad
faith, then the minority SH can go the SEC or courts to rescind such
contract.
THE REMEDY IS TO ANNUL THE LEASE. Although you cannot ask for an
appraisal right because this is not one of the grounds. You can ask for the
annulment of any agreement entered into.
Q: So what is required to exercise such right?
A: refer to steps above
Q: what if the SH was absent?
A: if there is proxy, then you can still exercise such right. But if there is no
proxy, the SH should be PRESENT in the meeting, otherwise, he cannot
exercise the right.
Q: so that if the inability to participate during the deliberation is excusable,
what do you think?
A: The law states that HE MUST HAVE BEEN PRESENT AND HE MUST HAVE
DISSENTED. But logic will tell us that since it is an important right --- sir: he
should still be allowed to exercise if he had good reason to be absent.
EFFECTS OF APPRAISAL RIGHT
Q: what is the effect of the appraisal right?
A: your rights are suspended: rights to dividends and voting rights. But the
right to receive the fair value of his shares is not suspended
APPRAISAL COMMITTEE
Q: how do you determine the fair value of the shares?
A: it is the corporation which will determine. If the corporation cannot
decide within 60 days, then you form an appraisal committee.
Q; what is the composition of the appraisal committee?
A: 3 persons
1.
one shall be named by the SH
2.
another by the corporation
3.
chosen by the two thus chosen

Q: what are the reasons that the right ceases? (EXTINGUISHMENT OF RIGHT
TO PAYMENT)
A:
1. Such SH withdraws his demand for payment and the corporation
consents thereto;
2. The proposed corporate action is abandoned or rescinded by the
corporation
3. The proposed corporate action is disapproved by the SEC where
its approval is necessary
4. The Commission determines that such SH is not entitled to
appraisal right
(Refer to #3) --- In other words, the occasions that we have referred to as
proper grounds to exercise the right of appraisal are instances which may be
reviewed by the SEC. example of which is the plan of merger. (this plan is to
be submitted to the SEC --- if disapproved, the merger does not happen and
so the appraisal right is automatically terminated.)
If the corporation eventually abandon that plan, then there is no more point
paying.
Q: what if the corporation still decides to pay even if the SEC disapproves the
merger?
A: this cannot be done. It is in violation of the code already. You cannot
continue to demand payment and the corporation should not even pay.
if the corporation will force to pay even if there is no ground to exercise the
appraisal right, this will be tantamount to bad faith of wanting to kick out
the SH.
--- THE CORPORAITON IS TRYING TO DISTRIBUTE THE CAPITAL/ASSETS AS
VIOLATIVE OF THE TRUST FUND DOCTRINE AND PREJUDICIAL TO THE
CREDITORS.
WHO BEARS COSTS OF APPRAISAL
Q: what is the compensation of the committee?
A: reasonable amount (rule: apply section 85)
GR --- corporation will pay.
The costs and expenses of appraisal shall be borne as follows:
1.
By the corporation --a.
where the price which the corporation offered to pay
the dissenting SH is lower than the fair value as
determined by the appraisers named by them;
b.
Where an action if fled by the dissenting SH to recover
such fair value and the refusal of the SH to receive
payment is found by the court to be JUSTIFIED
2. By the dissenting SH
a.
Where the price offered by the corporation is
approximately the same as the fair value ascertained
by the appraisers
b.
Where the same action is filed by the dissenting SH
and his refusal to accept payment is found by the court
to be UNJUSTIFIED

Q: other than those mentioned in the law, what else are the grounds to
exercise your appraisal right?
A:

WHEN RIGHT TO PAYMENT CEASES; EFFECT

Q: after exercising appraisal right, he discovered that the business became
profitable, so he decided to recall his decision to exercise that right, what
could happen?
A: generally, the right to withdraw the appraisal right cannot be done unless
with the consent of the corporation.
Q: if the corporation agrees, what happens?
A: your rights are revived. Your status as a SH is restored.
13

1.

In all occasion when the qualified majority of the SH is required.

2.

Another instance is when the corporation decides to invest its

fund in another business which is not related to the primary
business of the corporation

3.

In a close corporation, when there are sufficient assets, the SH

can demand for the return of the fair value of the shares
angels notes
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Q; which is more lenient then, close or open corporation ?

A: close corporation is more liberal on the exercise of appraisal right.

Q: why the difference?

A: in a stock corporation, one of its characteristics is that it distributes
dividends based on the stocks. The stock is the measure of their ownership of
the corporation for the sake of the distribution of dividends.

February 27, 2012

RULE REGARDING DETERMINATION OF FAIR VALUE
continuation of APPRAISAL RIGHT
Q: because they were not able to agree on the value of the share, what is
supposed to be done?
A: they will form an appraisal committee (mention the composition)

In a non-stock, there is no distribution of dividends. So no need to divide

shares because usually each member is entitled only to one vote and there is
no distribution of dividends
Q: so that in dividing the capital into shares of stocks, the only purpose is?
A; the purpose is to be able to measure the ownership or interest of the SH
in a corporation and for the purpose of determining how much is his share
in the profits of the corporation
In a non stock, this is not needed as there are no dividends

Q: instead of appointing an appraisal committee, they said why dont we just

appoint arch bishop palma. The SH and the corporation agreed. What do you
think is the defect? (they just delegated it to a third person)
A: NO DEFECT (refer to discussion below)

IN A STOCK CORPORATION THERE IS INTENTION TO DIVIDE PROFITS, BUT IN

A NON STOCK, THERE IS NO INTENTION TO DIVIDE PROFITS

Q: how is the value determined?

A: the value is determined by the corporation. If there is a disagreement on
the valuation within 60 days, it is when you form the appraisal committee.

Q: so when we say non-stock corporations, are these non-profit corporations

(are they the same)?
A: They are not the same. Non-stock corporations earn profit but these
profits will not be distributed as dividends to its members.

In this case, there has already been an agreement that palma will decide for
the fair value. (sir: they likewise agreed that whatever the decision of palma
is, it will be binding)

Q: instead of distributing profits to their members?

A: the profits will be used for the furtherance of the purpose/s of the
corporation for which it exists --- example, improve the facilities.

Ton: I think since they already agreed that palma will decide, then the
requirement of an appraisal committee is dispensed with ---- thus the
decision of the arch bishop is binding

Sir in country club for example, you just have to create projects such as
lights near the holes in the golf course.

Q: what then is the procedure?

A:
First --- follow the agreement of who will determine the fair value (in our
situation, there has already been an agreement) ---why result to an
expensive committee if you can just resort to your own choice there is no
prohibition for coming up with an agreement
Second --- determined by the appraisal committee
NON-STOCK CORPORATIONS
Q: what is a stock corporation?
A: A STOCK CORPORATION is a corporation that has capital stocks divided
into shares and is authorized to distributed dividends or allotment of the
surplus profits on the basis of the shares held
It is primarily organize for profits, this profits are distributed to its SH by
means of its dividends.
Note: The purpose of dividing the capital into share of stocks is to determine
the appropriate distribution of profits
Q: what is a NON STOCK CORPORATION?
A: One where no part of the income of which is distributable as dividends
to its members, trustees or officers.
Q: in a NS, is there a need to distribute shares of stocks?
A: no need, there is no division of shares because you do not distribute your
profits as dividends (there is no intention to distribute profits)
14

They are NON PROFIT NOT BECAUSE THEY ARE NOT EARNING PROFIT BUT
BECAUSE THE PROFIT THEY EARN ARE ROLLED BACK FOR THE
FURTHERANCE OF ITS PURPOSE AND FOR THE BENEFIT OF ITS MEMBERS
THROUGH PROJECTS.
PURPOSES OF A NON-STOCK CORPORATION
Q: what are the different kinds of non stock corporations?
A: they may be formed or organized for:
a. charitable
g. fraternal
b. religious
h. literary
c. educational
i. scientific
d. professional
j. social
e. cultural
k. civic service
f. recreational
l. those of similar purposes
Q: so here, what could be the purposes of the NSC?
A; religious, charitable, cultural, educational, scientific, social, civic activities,
etc. --- any purpose you can think of so long as the purpose is not contrary
to laws, morals, public policy, public order
MEMBERS
Q: so that in a NSC, we said, how many members should there be?
A: there are no required members so long as there are enough of you to
constitute the board (5 of you can already form)
Q: so that if you are a member of membership club, you also pay
membership fees. They issue stocks which are actually membership. ONE
MEMBER ONE SHARE --- only one because your membership does not entitle
you to share in the profits, it entitle you only to?

angels notes
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A: the right to vote (section 89) --- [remember, there are other rights pa, this
is just one of the rights]
SIR: you might be a holder of one share as a member, but the fact that you
are a shareholder does not automatically mean that you are a member.
Because here, membership is not the same as ownership (as a shareholder) -- even if you were able to buy a share of that organization or corporation,
that ownership does not necessarily make you a member.
Point is: Ownership in the non-stock corporation is not equal to
membership.
EVEN IF youre an owner, you still have to apply to be a member. Ownership
only gives you the right of an owner: right to vote, right dispose
Q: if youre a member of NS, will you have the right to profits?
A: no. but you have the right to dispose your shares. You also have the right
to use the facilities (normally)
--- but in clubs, ownership of share does not make you automatically a
member because clubs are is exclusive. You do not become an automatic
member upon purchase of shares because anybody can buy shares --- you
cant prevent owner to sell their shares so we would not know who will be
owners or shareholders. So that if somebody becomes a shareholder and
that somebody has the tendency of moving around only with his underwear,
no member would allow that person to move around the club only with his
underwear. --- that is why you have to control membership. If you cant
control ownership, at least you can control membership.
In country club, when you buy as a member, your picture and personal
circumstances will be posted in the bulletin board for 3 weeks for others to
view --- they can then tell the membership committee why you are not
supposed to be admitted as member --- membership committee will then
not vote for your approval [BLACKBALL])

Example of a nationalize corporation is PLDT because it involves an industry

which is critical to the security of the nation. (if not nationalize, we will not
be able to hear OPM)
SIR: in determining the 40%, so that they could come up with more foreign
investors without exceeding the 40%, these companies issued non-voting
stocks (in a stock company). So although shares were issued to foreign
investors, they were not included in computing the 40% foreign investment
because their argument is that they are non-voting thus they dont
participate in the management of the corporation.
For a long time, that was the situation. Until the SC lately discovered that
many nationalized company used this strategy. So SC decided that foreign
investor, whether voting or non-voting should be included in the 40% --because WON voting or non-voting, they are still considered owners
NON-STOCK CORORATION vs. CLOSE CORPORATION
Q: so that, talking now of NS corporations, what are non-stock corporations?
A: one where no part of its income is distributable as dividends to it s
members, trustees or officers; any profits are for the furtherance of the
purpose of its corporation. --- may be formed or organized for charitable,
religion etc.
Q: as distinguished from a close corporation?
A: A close corporation is one whose articles of incorporation provide that:
1. All of the corporations issued stock of all classes, exclusive of
treasury shares, shall be held of record by not more than a
specified number of persons, not exceeding twenty (20);
2. All of the issued stock of all classes shall be subject to one or
more specified restrictions on transfer permitted
3. The corporation shall not list in any stock exchange or make any
public offering of any of its stock of any class
TRUSTEES AND OFFICERS

THE PURPOSE OF SCREENING THE MEMBERS IS TO MAKE SURE THAT YOU

ARE ABLE TO EXTABLISH A STANDARD OF BEHAVIOR WHOLESOME
RELATIONSHIP AMONG ITS MEMBERS.
Q: as we said, NS corporations are supposed to be non profit. So in what way
is the phrase non-profit appropriate?
A; in the sense that members are not entitled to profits (non profit for the
members)
Q: so that, we said, a shareholder has the right to vote. So here in the Stock
corporation we learn that there can be voting stocks and non-voting stocks.
What are examples of non-voting stocks?
A: example of non-voting stock i treasury shares. These are stocks which are
not entitled to vote. There are also non-voting stocks which are outstanding
yet not entitled to vote (ex. delinquent shares)
NATIONALIZE CORPORATION
Q: In non-voting shares of stock, holders of these shares, will not be entitled
to vote. So in a nationalize corporation or industry, what is the percentage
allowed?
A: 60% of the outstanding shares must be owned by Filipinos. These are
business where ownership of which should be owned and controlled by
Filipinos of at least 60%

Q: so that in a non-stock corporations, how many directors are there?

A: there is no BOD, rather, there is a Board of Trustees.
Q: how many trustees are there?
A: at least five but can be more than 15.
Q: how long does a director has for his/her term?
A: each director may serve for three years. Election will be conducted every
year
Q: how do you elect the board?
A: (example 15 BOT) First, you vote for all 15 in the first election. However
the term for every 1/3 of those voted will be different. the first 1/3 will have
a term of 1 year. The second 1/3 will have a term of 2 years and the third 1/3
will have a term of three years. Upon the expiry of each term, the
subsequent sets of 1/3 officers who will be elected will now have a term of
three years.
DISTRIBUTIONS OF ASSETS IN NON-STOCK COROPRATION
Q: NS corporation may decide to dissolve. And in its existence, it may have
acquired assets. So if they are not entitled to distribute profits, how will they
distribute their assets upon liquidation?
A: section 94

There was an issue where lately the SC decided on this requirement.

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1.

2.

3.

4.

5.

All liabilities and obligation of the corporation shall be paid,

satisfied and discharged, or adequate provision shall be made
therefore (ANSWER FIRST FOR ALL LIABILITIES)
Assets held by the corporation upon a condition requiring return,
transfer or conveyance, and which condition occurs by reason of
the dissolution, shall be returned, transferred or conveyed in
accordance with such requirements (RETURN TO THE DONOR IF
THE CONDITION TO RETURN IS MADE IN THE DEED OF
DONATION UPON THE LIQUIDATION OF THE CORPORATION)
Assets received and held by the corporation subject to limitations
permitting their use only for charitable, religious, benevolent,
educational or similar purpose, but not held upon a condition
requiring return, transfer or conveyance by reason of the
dissolution, shall be transferred or conveyed to one or more
corporations, societies or organization engaged in activities in the
Philippines substantially similar to those of the dissolving
corporation (TRANSFER TO A CORPORATION WITH
SUBSTANTIALLY SIMILAR ACTIVITY WITH THAT OF THE
DISSOLVING CORPORATION IF SUCH IS THE CONDITION ON THE
DONATION)
Assets other than those mention in the preceding paragraphs, if
any, shall be distributed in accordance with the provisions of the
articles of incorporation or the by 0laws, to the extent that the
articles of incorporation or by-laws determine the distributive
rights of members, or any class or classes of members, or provide
for distribution (DISTRIBUTE IT TO MEMBERS IN ACCORDANCE
TO WHAT IS PROVIDED IN THE ARTICLES OF INCORPORATIN OR
BY LAWS WITH REGARD TO THEIR DISTRIBUTIVE RIGHTS)
In any other case, assets may be distributed to such persons,
societies, organizations or corporations, whether or not organized
for profit, as may be specified in a plan of distribution
(DISTRIBUTED TO ANYONE AS MAY BE SPECIFIED IN A PLAN OF
DISTRIBUTION)

In other words, these types of corporations usually exist out of charity. So

this people are trained to be beggars of millions of worth. In a donation,
many donors will say that we will give this so long as you will use it for the
purpose that you have told us. The moment you will no longer use it for such
purpose, the donor or his/heir could always take it back.
If there is that condition, that condition must be followed.
Q: On the other hand, if the donor donates some beds for charitable
hospitals, but that hospital no longer wants to operate. If you are the donor,
what can you do?
A: you give it to another charitable hospitals --- non stock corporation of
similar objectives
Q: if after complying with all these, are they justified to distribute it among
their members? As long as the articles will provide that if after complying
with the distribution there should still be properties remaining, then this
would be ours, is that allowed?
A: you should distribute it to institutions with similar objectives.
You dont distribute it among yourselves otherwise; it will be violative of the
corporation code.

February 29, 2012

PURPOSE OF REGISTERING; RIGHTS ACQUIRED UPON REGISTERING
Q: in a NSC, is registration with SEC of any association or organization
compulsory? Any association MUST register?
A: NO need. You may remain as an association without necessarily
incorporating.
You may become a member of different organizations which are not
incorporated.
Q: so whats the purpose of this law, when in fact there is no need to
register, when you can pursue our activities even without registering? If you
are a member of rotary club, you can go and distribute relief goods without
registering. So whats the purpose?
A: this is to acquire legal personality
Q: what is the purpose of acquiring legal personality?
A: they will have their own rights and responsibilities. Like the right to hold
properties, assets, sue and be sued.
Q: once they have legal personalities, what are their rights?
A: acquire properties and exercise the powers of the corporation
CLOSE CORPORATION
Q: What is a close corporation?
A: One whose articles of incorporation provide that:
1.
All of the corporations issued stock of all classes, exclusive of
treasury shares, shall be held of record by not more than a
specified number of persons, not exceeding twenty (20);
2.
All of the issued stock of all classes shall be subject to one or more
specified restrictions on transfer permitted
3.
The corporation shall not list in any stock exchange or make any
public offering of any of its stock of any class
PARTNERSHIP vs. COROPRATION
Q: you will remember that when we were asked what would our preference
be, partnership or corporation?
A: jizza --- a corporation will be more advantageous, because the liability of
the shareholders will be limited to their investment and it will not extend to
their personal properties
Q: however we said that in organizing a corporation, one of the principal
objectives is to acquire capital. We are telling the public, that here are
certificate of stocks, if you are willing to invest, you can. It is a way of
acquiring additional capital from the public. AS DISTINGUISHED from a
partnership where we said?
A: In partnership we said that the acquisition of capital is limited among the
partners.
Although we said that there could be some other parties who can be an
associate partner who has nothing to do with the management. He is only an
investor in one sense but plays no other part in the partnership.

Q: in what way will it violate the existing law?

A: the distributions of these assets will be tantamount to distributing
dividends or profits which is not a characteristic of a NSC

Q: now if that were the purpose of acquiring capital from the public, why
should they choose to limit themselves to 20? Is this not inconsistent with
the objectives of a corporation?
A: No sir, because in a close corporation, one of its objective or purpose is to
remain intact and to preserve their relationship with each other.

THE MOST THAT THEY COULD DO IS TO LOOK FOR A SIMILAR INSTITUTION

AND DONATE THOSE PROPERTIES

They want to retain control of the corporations management among

themselves.
Q: but you will agree that it is somehow inconsistent with the idea of
acquiring capital from the public. So if we decide to limit our group among

16

angels notes
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us, why go through the process of incorporation and not just limit ourselves
to partnership?
A: because there are other advantages of making a corporation. Like:
1. They could avoid bigger tax liability
2. They could limit their liabilities to their investment
3.
They have the right of succession

are not considered income but are just considered investment

SHELTER

Q: should we evade taxes? What is the difference between tax evasion and
tax avoidance?
A: in tax evasion you perform illegal acts or fraud so as not to pay tax (you
find ways to hide your true income to have lesser tax)

3. for continuity
Corporations have the right of succession. They are not dissolved
with the death of a SH. But in partnership, the death of one
partner dissolves the partnership

In tax avoidance you find legal means or legal means to lessen or to be

exempted from tax (legal means to justify the savings; deductions)

VALIDITY OF RESTRICTIONS ON TRANSFER OF SHARES

Q: why incorporate, when in fact I cannot, as a close corporation, get as

much capital as I would if I were a corporation which is not a close
corporation?
A: because a corporation has continuity. The death of one partner will not
dissolve the business
Here we are really trying to distinguish a close corporation from a
partnership. Because the truth is, the SH of a close corporation has the duty
of outmost diligence among the partners, and in their mind they have an
organization of a partnership.
INDICATIONS THAT WHAT IS IN MIND IS PARTNERHIP
Q: To strengthen the commitment that there should only be a few of them,
what happens? How is it implemented, to be sure that there is only a few of
you?
A: there should be a restriction as regards the transfer.

---- TAX

2. To limit the liabilities of the SH to their investments

Because in partnership, their liabilities extends to their personal
properties

Q: so to ensure that there will only be a certain number, what do they

impose?
A: you specify that there will only be 20 of you. And the restriction as
regards the transfer must be stated in ARTICLES OF INCORPORATION, BY
LAWS AND CERTIFICATE OF STOCKS
Q: so how do you state your restrictions?
A: the stocks shall be transferred only if the other SH will be able to exercise
their right to first refusal
Q: so that if the certificate says, transfer of this shares to other persons can
be recognize by the corporation only after the transfer has been approved by
the secretary and president?
A: it is not valid because it restricts the right of the owner to dispose his
property
Q: so upto what can the restriction be done?
A: the restriction cannot be more onerous than the requirement of offering it
to other SHs. You can only impose regulations.

It is an indication is that their inner most intention is that of a partnership.

Q: any other indication that what they intended was a partnership?
A: that they indicate in the articles of incorporation that they dont have to
vote for a board of directors ---That the Stockholders will be the board
themselves.
As in Partnership, they do not have a board, they all manage the business.

EFFECTS OF ISSUANCE OR TRANSFER OF STOCK IN BREACH OF QUALIFYING

CONDITIONS
Q: the moment you see this restriction and the shares are offered to you,
what should you inquire?
A: you inquire on the truth and compliance of the restriction. Because there
is a conclusive presumption that you knew, so you should be careful.

ADVANTAGES OF INCORPORATING
Q: But what prompted them to incorporate? What are the reasons?
A:
1. It is a tax shelter in a partnership you are directly expose to almost all
taxes. In a partnership your respective income is clear. In a corporation, you
go with the 30% tax for corporation, separate from that of the shareholders.
--- How could the corporation be as a tax shelter? In partnership, the
partnership is liable for tax just like a corporation, further; the partners are
likewise individually liable from what they earn from the partnership.
In a corporation, the corporation having a separate legal entity, it only pays
the 30% for tax.
Q: other than that, what can the corporation do with its profits?
A: it may distribute it as dividends, or instead of distributing, they can keep it
there ---- STOCK DIVIDENDS (declare it as additional capital)
Whereas in partnership, it is very difficult to hide your income as a partner.
Although you could justify that you are making additional contributions, but
again, before these are contributed, these must first be given to the partners
before they are being contributed again. In a corporation, the money stays
there and they could always say we get it back, and what is given to the SH
are stocks, and therefore stocks are not taxable --- they become richer in
terms of stocks but exempted from any tax. Because distribution of stocks
17

If you are qualified or competent to purchase the stocks --- inquire from the
stockholder himself, or corporate secretary and seek proof that this has been
offered to the remaining SH or to the corporation and none was interested.
You can get a certification from the secretary himself.
To be sure that at least your acquisition can no longer be question.
Otherwise if you buy it despite the restriction and later on it will be
discovered that it was not offered, then the sale or transfer may be
questioned.
Other than the restriction, the number of certificates may be limited, and if
there are only 20 SH, these certificates are pre-numbered. To make sure that
it is within that number, check the corner of the certificate 1 of 20, 2 of 20,
etc.
Q: so that if you receive, 21 of 20?
A: it is a warning that it is a bogus certificate.
Q: so here, what is the purpose of indicating these restrictions in the
certificate, by laws and article?
A: so that the possible third party buyers are made aware of it and that they
will know that the corporation is a close corporation.
Q: so what is the effect on the violation of the transfer?
A: if there is a restriction and it is violated, the corporation may disallow
the registration of such transfer in the corporate books.
angels notes
B U S I N E S S O R G A N I Z A T I O N II
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Q: so if you were the corporate secretary and there is a buyer who cannot
prove compliance with the pre-emption right, what would you do?
A: you present to the board if they are willing to ratify such irregular sale of
the stock

Q: if he does not question an act which is questionable?

A: then the resolution is deemed waived and the corporate action is
therefore ratified.
IN A CLOSED CORPORATION, THERE IS PRESUMPTION OF WAIVER WHEN
YOU FAIL TO QUESTION A DECISION WITHIN A REASONABLE TIME

(2 things that can be done: RATIFICATION AND AMEND THE ARTICLES)

WITHDRAWAL OF SH OR DISSOLUTION OF CORPORATION
SO THIS is basically partnership, in partnership if there is a person who wants
to be admitted, consent of all the partners are required.
IF SUCH ARE PRESENTED TO THE SH AND THEY CONSENT, THEN THE NEW
PERSON MAY BE ADMITTED.
Q: but what if the SH do not agree, what is the remedy of the buyer?
A: go after who sold him the stocks and recover what he paid for it. You can
now pursue the warranty of the seller.
You may rescind the sale and seek recovery of what you have paid.
MANAGEMENT AND MEETINGS
Q: Because this is a close corporation, who has the right to manage the
corporation?
A: in the absence of an agreement in the by-laws, every SH is an officer of
the corporation.
Q: so that here, in a meeting, its a close corporation, in your breakfast, can
you just tell your sister who is the treasurer to issue you a check?
A: usually in a close corporation, the formalities of a meeting are dispensed
with.

Q: so here, this was not only the first time. The SH noticed that every time he
is out, that is the time the meeting is called. You begin to suspect that they
are trying to make a decision without your knowledge. What you can do?
A: you may either withdraw your stocks from the corporation. Unrestricted
retained earnings are not necessary for as long as they have more assets
than their liabilities excluding the capital.
THERE IS NOW A DIFFERENCE IN A STOCK AND NON-STOCK CORPORATION.
HERE, YOU DO NOT NEED UNRESTRICTED RETAINED EARNINGS, SO LONG AS
THE LIABILITIES AND CREDITORS ARE TAKEN CARED OF, THEN YOU CAN
WITHDRAW
Q: other than withdrawing, what is your other option?
A: the SH can petition to the SEC for the dissolution --- applied only in case
of BAD FAITH on the acts of the other SH.
Q: so under what circumstances may a SH petition for the dissolution of a
corporation?
A:
1.

If there is deadlock and there is no other way to carry on the

business of the corporation.
Also they can ask for a dissolution if there are acts of the
directors, officers or those mainly responsible for the
management of the business which are ILLEGAL, FRAUDULENT,
OR PREJUDICIAL TO THE SH AND THE CORPORATION.
Another ground is if the corporation funds are wasted or
misapplied

Q: So that if a resolution is required from a bank and the bank would require
for a board resolution, can the board resolution be passed around and all the
SH will sign it?
A: yes, because formalities can be dispensed with. But if any one of them will
question or the bank will question the legality of the meeting, then it can be
ratified by the SHs.

2.

If there is any problem later on, all they have to do is ratify.

(2 AND 3: undue advantage taken by the board or SH acting as a board

Q: So if among the five at the time they signed the resolution, only two was
available, can the others just order the janitor to sign and present it to the
bank. But the bank did not honor?
A: this has to be ratified later on by the other SHs.
Even if there was no meeting that action could still be ratified.
SO LONG AS EVERYBODY KNOWS AND EVERYBODY AGREES AND IT HAS
BEEN THE LONG PRACTICE OF THE COPORATION THEN EVERYTHING IS OK.
IF THERE IS ANY QUESTION, YOU RATIFY!
Q: would notices be required in a meeting?
A: no.
The formalities of a stock corporation are disregarded or ignored, so long as
there is GOODFAITH and everyone is aware of the action, then it will be ok

Q: under what instances can their actions be questioned?

A: when the action of a SH is made in bad faith. (ex. The youngest is
deliberately not informed or invited in a meeting)
Q: so what will happen?
A: REMEDY OF SH WHEN THEY ARE NOT AGREEABLE TO WHAT HAS BEEN
DECIDED --1.
He may question the act of the board in writing made within
reasonable time
2.
He may withdraw from the close corporation
18

3.

DEADLOCKS
Q: however, there are occasions when the actions of some are not agreed by
others. This became a source of conflict. What do you think is the best thing
to do?
A: if they cant decide, it will result to a deadlock. And any SH can petition
to the SEC to arbitrate or break the deadlock.
Q: so what happens in a deadlock?
A: a deadlock is defined as a situation when the SH cannot agree among
themselves on the management of its business and affairs and such condition
is no longer advantageous to the existence of the corporation.
In such a case, the SH should send a written petition addressed to the SEC
so that SEC may arbitrate on the problem
Q: what may SEC do?
A: The SEC may do the following acts/order:
1.
Cancel or alter any provision contained in the AOI, by-laws or any
SH agreement
2.
Cancel, alter or enjoin any resolution or other act of the
corporations or its Board, SH or officers
3.
Direct or prohibit any act of the corporation, its board, SH officer
4.
Require the purchase at their fair value of shares of any SH, either
by the corporation regardless of the availability of URE
5.
Appointing a provisional director --- technical person who can
help or guide the SH in deciding on technical matters
6.
Dissolving the corporation
7.
Granting such other relief as the circumstances may warrant
angels notes
B U S I N E S S O R G A N I Z A T I O N II
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The SEC CAN ORDER ACTS WHICH CAN PRESERVE THE CORPORATION.
Q: when can SEC intervene?
A: IT CAN INTERVENE WHEN THE CORPORAITON CAN NO LONGER EXIST TO
THE ADVANTAGE OF THE SH. FROM THE MOMENT THAT THE DISPUTE
REACHES THAT POINT, THEN IT IS TIME FOR SEC TO INTERVEN

4.

In a widely held corporation, pre-emptive right is not mandatory

because they can sell it to the public. However in a close
corporation, pre-emptive right is mandatory

5.

In a close corporation, SH may withdraw from the corporation

even if there are no unrestricted retained earnings for as long as
the assets of the corporation are more than its liabilities exclusive
of the capital. For as long as they have addressed first their
liabilities with their creditors, SH are allowed to withdraw from
the corporation (as long as the creditors are protected)

6.

Further, in a close corporation, they may withdraw from the

corporation for any reason. Unlike in a widely held corporation
wherein there are grounds for you to exercise your appraisal
right.

7.

In a closely held corporation, there is a provision on Deadlocks

which is not available in a widely held corporation (note: actions
by SEC are noted in the later part of the notes)

8.

In a widely held corporation, another corporation may own its

stocks. However in a close corporation, when at 2/3 of voting
stocks are owned by a widely held corporation, then it ceases to
be a close corporation (----- note: this is based on my
understanding sa book, read below for the answer given in the
oral recitation)

Q: who is a PROVISIONAL DIRECTOR?

A: he is an impartial person, who is directed by SEC not only to break the tie
in deciding matters in the corporation but also to influence or guide SH to
vote on decisions which are beneficial for the corporation.
He is not a SH or a creditor, he is chosen by the SEC. He may participate in
voting on matters.
He is a technical guy, because issues which can only be understood by a
technical guy. He will guide you to solve some of your problems
BUT WHEN ALL THINGS FAIL, THE SEC MAY FIND DISSOLUTION AS A LAST
RESULT.
March 5, 2012
CLOSE CORPORATION vs. WIDELY HELD CORPORATION
Q: we notice that a lot of things that cannot be done in a stock corporation or
widely held corporation can be done in a close corporation. There are rules
which are no longer strictly applied in a close corporation because this type
of corporation is trying to get the best of both worlds --- best portion of
partnership and that of a corporation. So can we just point this out?
A: Things we cannot do in a widely held corporation that we can do in a
close corporation --1.
In a close corporation, requirement on notice for meetings are not
necessary (there are only at most 20 of you)
2.

In a close corporation, we can also forego with the formalities of

meetings
--- For as long as it is already the practice of the corporation not to
hold any regular meetings then actual meetings may not be held.
Proxy is irrelevant here because they can agree on something
even without meeting provided that all the directors or SH knew
about the transaction or it has already been a practice not to hold
any meeting.
Or if you have some objections, you can forward your written
objections within a reasonable time from the transaction. And if
you dont give such objection, then your right is waived and the
action is ratified --- PRESUMPTION THAT YOU HAVE AGREED
While in a widely held corporation, there should be meetings and
physical presence unless there are proxies or voting trust
agreements --- for as long as there is quorum

3.

In a close corporation, we can forego with electing for the Board

of Directors and state in the articles of incorporation that the SH
themselves will act as the board.
Q: why can the SH themselves manage the corporation?
A: because we said that the very intention of a close corporation
is to be a partnership. Since they want to preserve their diligence
and relationship to each other the SH themselves can act as the
Board of Directors (even without electing)
So here the board meeting therefore, unlike in a widely held
corporation, is no longer necessary. Because we said that the SH
themselves can act as a board. And therefore management is
vested on the SH themselves

----- We have held that there can be a parent corporation and a

subsidiary corporation in a widely held corporation. But in a close
corporation, it is not permitted that the stocks of close
corporation be owned by a widely held corporation
Why? Because as we have said, the very existence of a close
corporation is to have a fiduciary relationship among themselves.
So that if that corporation is not held by a close corporation, so
they do not know the circumstances of the other SH.
SIR: in other words, in a close corporation we said that it should
not be more than 20. But if we allow a corporation to be a MAJOR
HOLDER of a close corporation, what is the requirement? --- Only
a close corporation can own stocks in another close corporation
SIR: SO THAT IF A CLOSE CORPORAITON HAS SH AMONG THEM
WHICH IS A CORPOATION WHICH IS OWNED BY MORE THAN 20
PERSONS, THEN THAT COULD NO LONGER BE ALLOWED BECAUSE
THE SH CORPORATION WHICH IS MORE THAN 20 OWNS A CLOSE
CORPORAITON WHICH IS LESS THAN 20 --- THAT IS NO LONGER
CONSIDERED CLOSE.
SPECIAL CORPORAITONS
EDUCATIONAL CORPORATION
Q: should we organize or incorporate if we intend to have a dancing school?
A: no need.
Q: why?
A: because when we speak of educational institutions which are to be
organized, they have to have a regular faculty, curriculum, students and it
should be mainly for teaching and learning
THE LAW ALLOWS FOR AN INCORPORAITON OF SCHOOLS OR INSTITUIONS
ENGAGE IN PROMOTING ACADEMIC EDUCATION SUBJECT TO THE
CONDITION OF FIRST OBTAINING A FAVORABLE RECOMMENDATION FROM
THE MINISTRY OF EDUCAITON AND CULTURE (DEPARTMENT OF
EDUCAITON)
Q: can a corporation engage in a driving school, dancing school?
A: Yes. But they dont need a recommendation from DepEd.

19

angels notes
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e.
These are schools which only purpose is acquiring technical skills
Q: how many members of the board?
A: for non stock educational institution, they must not be less than 5 and
not more than 15. (Provided however, that the number of trustees shall be
in multiples of 5)
For stock educational institution, they must follow the provision of the stock
corporation wherein which is also not less than 5 but not more than 15. (---nigawas si sir, so ala na na discuss ang other important points for the board
of a non-stock educational institution)
Codal: Unless otherwise provided in the articles of incorporation on the bylaws, the board of trustees of incorporated schools, colleges, or other
institutions of learning shall, as soon as organized, so classify themselves
that the term of office of one-fifth (1/5) of their number shall expire every
year. Trustees thereafter elected to fill vacancies, occurring before the
expiration of a particular term, shall hold office only for the unexpired
period. Trustees elected thereafter to fill vacancies caused by expiration of
term shall hold office for five (5) years. A majority of the trustees shall
constitute a quorum for the transaction of business. The powers and
authority of trustees shall be defined in the by-laws
RELIGIOUS CORPORATION
Q: May a single person incorporate itself?
A: General Rule, No. there should be at least 5.
Q; but is there an instance where he may incorporate and become a
corporation?
A: yes. In a corporation sole.

The place where the principal office of the corporation

sole is to be established and located, which place must
be within the Philippines

Q: so that if I gather 20 people and we went to the mountains and looked for
an old tree, and there I ordered those 20 people not to cut their nails. And so
when they agreed to elect me, we organized our church and I submitted and
attached to my application for incorporation the result of the election
together with my 20 members, can I now register as a corporation sole? (We
incorporated our terms in the church and our practice every night)
So if I have no existing organization, I could no longer register as a
corporation sole?
A: the law does not require you to be a part of an existing religious
organization or sect. you could incorporate and it is very easy to incorporate
as a corporation sole.
Once you have complied with what is required such as affidavit of
incorporation sole, or organized as church, then you can now be
incorporated
It is easy because the constitution provides for your freedom of religion.
It should be made easy because what is invoked here is your freedom of
religion. Otherwise, you are no longer giving the person his freedom of
religion (violation of constitutional right)
That is why the law only requires you to file an affidavit, after which you are
already a corporation sole.
March 7, 2012

It is an instance where only one person becomes a corporation

EXISTENCE AND SUCCESSION OF A RELIGIOUS CORPORATION

Q: so what is the purpose of following the other provisions when I can

become a corporation sole?
A: for a corporation sole, it exclusively pertains to a religious organizations,
sect or institution wherein a corporation sole will incorporate himself to
administer the properties, the temporalities and the administration of the
religious organization.

Q: in a religious society, once that rabbi dies, what could happen?

A: someone can replace his place
--- it must be indicated in their articles how the successor is chosen so that
the corporation may continue.

PROCEDURE IN CORPORATION SOLE; ARTICLES OF INCORPORATION

I
T IS VERY EASY TO BE A CORPORATION SOLE. ALL YOU HAVE TO DO IS:
File before the SEC an article of incorporation which is verified
and accompanied with a certification of your appointment,
letter of election or your commission wherein you state the
following:
a.
That you are the chief, archbishop, bishop, pries,
minister, rabbi or presiding elder of his religious
denomination sec or church and that you desire to
become a corporation sole;
b.
That the rules, regulations and discipline of his
religious denomination, sect or church are not
inconsistent with his becoming a corporation sole and
do not forbid it
c.
That as such bishop, priest, etc, he is charged with the
administration of the temporalities and the
management of the affairs, estate and properties of his
religious denomination, sect or church within his
territorial jurisdiction, describing such territorial
jurisdiction;
d.
The manner in which any vacancy occurring in the
office of priest , minister, etc is required to be filled,
according to the rules, regulations or discipline of the
religious denomination, sect or church to which you
belong
20

Q: if the bishop will die, and the bishop has five children, who own the
property of the church?
A: the church
Q: The church is allowed to exist immediately even without waiting for the
approval. The effectivity of the church as a corporation starts when?
A: the moment they submit their incorporation paper
Normally, you only exist when you receive the certificate of incorporation.
Q: The mere fact of submitting will already give you the right to exercise.
Why the difference, and not wait for the approval of SEC?
A: because we have to respect the freedom of religion.
Any attempt not to allow is infringement of your freedom of religion. To
avoid any misunderstanding, SEC just have to approve.
Because if we made it dependent on the approval of SEC we might have a
problem. Especially if the head of SEC is a member of a church, there might
be manipulation, abuse, discrimination, etc.
So note: Effecitivty of your existence as a corporation starts at the moment
of filing. Not with the normal way that they can only exist upon receiving
certificate of incorporation.
Q: what are the 2 types of Religious Corporation?
1.
Corporation sole
2.
Religious society/ corporation aggregate
angels notes
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PROCEDURE IN RELIGIOUS SOCIETY; ARTICLES OF INCORPORATION

Q: How is corporation done with a religious society?
A: it is done upon written consent and/or by an affirmative vote at a
meeting called for the purpose of 2/3 of its members
File to SEC articles of incorporation verified by the affidavit of the presiding
elder, secretary or clerk or other member of such religious society setting
forth:
a.
That the religious society is a religious organization of some
religious denomination, sect or church
b.
That 2/3 of its membership have given their WRITTEN consent or
have voted to incorporate at a duly convened meeting
c.
That the incorporation of the religious society is not forbidden by
competent authority or by the constitution, rules, regulation or
discipline of the religious denomination
d.
That the religious society desires to incorporate for the
administration of its affairs, properties and estate
e.
The place where the principal office of the corporation is to be
established and located, which place must be within the
Philippines
f.
The names, nationalities and residences of the trustees elected to
serve for the first year or such other period as may be prescribed
by the laws of the religious society, the board of trustees to be
not less than 5 nor more than 15
PURPOSE OF INCORPORATING AS A RELIGIOUS CORPORATION
Q: if they could already exist, why do you have to incorporate?
A: this is to acquire legal or juridical personality. As a corporation they are to
acquire assets and properties. This is to manage their assets well.

You are required to submit in SEC a modus operandi--- it will be specific on

how many members you can recruit, membership fee, how long can a
member stay --- there is a provision here on succession
It is very possible that when the bishop dies, the son will inherit to be the
leader (in some groups they believe that their leader is the son of God and
no one can lead them other than the grandsons, etc)
WHEN A CHURCH LEADER DIES, THE PROPERTY OF THE CHURCH WILL
BELONG OR REMAIN WITH THE CHURCH. EVEN IF HE IS A CORPORATION
SOLE. AND THE FILLING OF VACANCIES WILL DEPEND ON THE RULES AND
REGULATIONS OF THE CHURCH HIMSELF.
TERM AND DISSOLUTION OF RELIGIOUS CORPORATIONS
Q: how long should this type of corporation stay?
A: INDEFINITELY. The 50 years that we have learned before will not apply. It
has no term because belief has no limits.
Q: how is this dissolved?
A: file a verified declaration of dissolution to SEC containing the following:
(sec 115)
1.
The name of the corporation
2.
The reason for dissolution and winding up
3.
The authorization for the dissolution of the corporation by the
particular religious denomination, sect or church
4.
The names and addresses of the person who are to supervise the
winding up of the affairs of the corporation
The law does not even require the formalities of a by-laws.
DISSOLUTION

If you dont have juridical personalities, you cant own properties in the
name of the corporation. You can only own properties as co-owners.
Q: And therefore if some of them will die?
A: if co-owners --- the property left will go to the heirs. But if a member of a
society will die, it will still remain with the church. And that is why they have
to incorporate, so that they can own a property as a corporation and they
can sue as a corporation
Q: if they want to sue and they are not a corporation?
A: they can sue as class suit

Q: what is dissolution?
A: extinguishment of the franchise of the corporation or the termination of
its corporate existence
Q: so if all the SH will die in a plane crash?
A: it will not dissolve the corporation because the corporation has the right
of succession. The heirs will succeed on being the SH.
So that if we say dissolution, death of the SH does not necessarily result to
the resolution because this SH will definitely have heirs who will inherit their
properties because stocks are properties.

THEY CAN ADMINISTER BETTER IF THEY INCORPORATE.

This are passed on at the moment of their death.
Q: once they filed the articles, we said?
A: they immediately exercise their rights and privileges
Q: so why should you incorporate, other than sue and to own properties?
A: we said it will be more easy and more convenient. So incorporation is
more for administration and convenience and not so much of attaining
legal personality.
ACQUISITION OF PROPERTIES
Q: in a religious corporation, who owns the properties?
A: the properties are owned by the sect and in case of death it remains to
them and it does not pass on to the heirs.

Q: but when we say dissolution, is that the end of the corporation?

A: not necessarily. Because THERE ARE TWO STEPS IN DISSOLUTION
1.
The cessation of the corporation to perform its ordinary course
business or transaction
2.
Winding up. For the distribution of assets to creditors and to SH if
any are left.
When we say that it is dissolve it does not mean that there is no more
corporation. It only means that it stops functioning as a corporation
LIQUIDATION AND WINDING UP

Even if the leader dies, the religious sect or church will remain to be the
owner.

Q: it continues to exist because?

A: because they have to wind up. There are debts to be paid, there are
collectibles. There are things to be finished which have been started

Q: so who will succeed?

A: It depends on who is stated in the articles or depending on the rules of the
church. It will depend on their modus operandi.

Q: during the winding up, what do we do?

A: we liquidate the assets, then the assets are distributed to the creditors,
and if there are anything left, distribute to the SH

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angels notes
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When all of these are done and there are no more assets to speak of and no
more liabilities or obligations, then there is TERMINATION Of the corporation
itself

2.

3.
SO DISSOLUTION, WINDING UP AND TERMINATION/EXTINGUISHMENT
Q: how long is winding up done?
A: supposedly its done three years
But there are cases in court now that has been existing for more than 10
years.
RECEIVER
Q: Since it is unlikely to be done in three years, what will do?
A: If Im one of the creditors, I can ask a court to appoint a receiver or a
trustee
Q: what happens when a receiver is appointed?
A: the board will no longer have the authority to meddle with the
liquidation of the corporation. But these powers are given to the receiver or
trustee. And the corporation will have to be extinguished
The receiver will now act as an administrator of whatever remaining assets
there are or whatever debts are there to be settled --- function of a receiver
Here, the corporation totally ceases to exist. But liquidation could be done by
somebody by a receiver appointed by the court
Q: what are your functions as a receiver?
A: administer all of the properties of the corporation. I will be authorized to
sue and be sued in behalf of the corporation. in short, you are the overall
in-charge of whatever there is
Of course, since this involves some degree of effort, it is a big job and this is
not a free service, you are entitled to collect a receivers fee--- the court will
determine how much is the reasonable fee depending on the complications
or the number of debts and depending also on the capacity of the
corporation especially on the assets left.

4.
5.

During the meeting, it is sufficient that there is a board resolution

voted by majority of the board and affirmed by 2/3 of the
outstanding capital stock.
A copy of the resolution authorizing the dissolution shall be
certified by a majority of the board of directors and countersigned
by the secretary of the corporation
Submit to SEC
SEC then issues the certificate of dissolution

PROCEDURE: DISSOLUTION WHEN CREDITORS ARE AFFECTED

Q: procedure if creditors are affected?
A: section 119
1.
A petition for dissolution of a corporation shall be filed with SEC
2.
The petition shall be signed by a MAJORITY of its BOD or other
officers having the management of its affairs
3.
The petition must be verified by its president or secretary or one
of its directors
4.
The petition must set forth all claims and demands against it
5.
Such petition was resolved upon by the affirmative vote of the SH
representing 2/3 of the outstanding capital stock
6.
If the petition is in form and substance, SEC will fix a date before
which objection may be filed (date must not be less than 30 days
no more than 60 days after the entry of the
order/announcement)
7.
Before the date for objections, the copy of the order setting such
date shall be published at least once a week for three consecutive
weeks in a newspaper of general circulation in the city or
municipality of the principal office of the corporation
8.
Similar copy shall be posted for three consecutive weeks in three
public places in such municipality
9.
Upon 5 days notice from the date when objections are made, SEC
shall proceed to hear the petition and try any issue made by
objections filed
Q: So there should be a hearing, what should be taken up in the hearing?
A: the SEC will weigh if the objections are substantial. SEC will determine the
propriety of the dissolution
INVOLUNTARY DISSOLUTION

Q: so how long does a receiver function?

A: as long as the liquidation is not yet finished. Until the completion of the
winding up.
Q: so how is dissolution done?
A: it may done voluntarily or involuntarily
VOLUNTARY DISSOLUTION
Q: when is voluntary dissolution done?
A: Voluntary dissolution IS FURTHER CLASSIFIED: instances when voluntary
dissolution may be allowed
1.
By vote of the Board of Directors WHEN NO CREDITORS
AFFECTED
2. By judgment of the SEC after hearing the petition WHEN
CREDITORS ARE AFFECTED
3.
By amending the articles of incorporation to SHORTEN THE TERM
4.
In the case of religious corporation, by submitting to SEC a
VERIFIED DECLARATION OF DISSOLUTION FOR APPROVAL
PROCEDURE: DISSOLUTION WHEN NO CREDITORS ARE AFFECTED
Q: what is the procedure when no creditors are affected?
A: section 118
1.
Publish the notice of the time, place and object of the meeting for
three (3) consecutive weeks in a newspaper published in the pace

Notice must be made to each SH either by registered

mail or by personal delivery at least 30 days prior to
said meeting
22

Q: what are the instances for involuntary dissolution?

A: 4 instances
1.
Failure to formally organize and commence the transaction of its
business within 2 years from date of incorporation
How do you organize?
Have a SH meeting and elect BOD, and BOD elects officers
2.
Expiration of corporate term as provided in the original articles of
incorporation unless we were able to seek an extension or
renewal of our franchise to exist
3.
By order from the SEC
4.
By Legislative enactment

Q: is involuntary dissolution allowed only if there are creditors?

A: no sir. It may be done even if there are creditors or not
INVOLUNTARY DISSOLUTION BY LEGISLATIVE ENACTMENT
Q: When there is a legislative enactment? How could this happen?
A: this could happen as regards public utility when the common good so
requires for the dissolution.
Further, there are corporations which are created by special law, thus it can
also be dissolved by the act of congress. the corporation exist because of
the special law granted by special legislation. If congress feels that that
corporation is no longer necessary (ex. If it was formed to monitor, supervise
or regulate all karaoke houses, because these type of laws are created by
special law, they follow special regulations. But at the same time they
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discovered that LGU already have existing ordinances to regulate or monitor

these activities, congress can now make a new law dissolving that GOCC)
Another example is for a GOCC when the common good so requires it
already, then the legislative can enact
Q: but in what instance may corporation existing under the corporation code
be dissolved by the congress?
A: example: if the congress finds that the mining industry is creating bad or
hazardous effects to the residents there, in the interest of common good, it
can pass a law declaring mining corporation illegal.
Or the congress could always come out with a law that no corporation having
a capital less than 50 million should engage in banking. before they
encouraged banks to merge so that they can continue to exist.
(CAPITALIZATION REQRUIEMETN FOR BANKS)
PROCEDURE IN INVOLUNTARY DISSOLUTION
Q: how is involuntary dissolution done?
A: it depends on the ground.
In instances when the SEC will declare it as dissolved, there is a petition then
there will be a notice and hearing. Upon hearing the sides of the petition, it
will now declare the corporation dissolve

Q: once dissolve?
A: in the first stage it will merely cease to act in the ordinary course of its
business. It will continue for the winding up process.
It shall continue all its existing contracts.
It can no longer enter into new contracts.
Can appoint receiver or trustee.

So those are the effects

Q; meanwhile, within the three year period, what happens?
A:
1.
it can by itself distribute its assets or settle its own obligations.
2.
Or it may choose a trustee wherein the trustee will be incharge of
the properties of the corporation (there is transfer of property to
the trustee) and such trustee will be the one to distribute the
assets to creditors, and to those who are entitled to it (those who
have claims against the corporations or even the SHs)
3.
The court can also designate a receiver for the corporation within
such period
4.
It can enforce all the rights of the corporation such as pursue
cases
5.
It can collect assets
6.
Continue the existing contracts (complete and finish transactions)
7.
It is liable to pay its debts
8.
Settle tax dues

Almost the same with voluntary dissolution except on the grounds.

March 12, 2012

TERMINATION OF A CORPORATION; COLLECTION OF DEBTS
Q: when is a corporation considered inexistent?
A: the corporation is non existent if it has already undergone the two steps
in dissolution. Thus it should have undergone the winding up process.

Q: when the three years expires, what happens?

A: after the three year period, if there are still other claims, such can still be
collected. For example the claim was filed before the end of the three year
period, the claim still exists and it can still be paid off.
It can also pay its debts even beyond the three year period by The receiver
and trustee
RECEIVER vs. TRUSTEE

So long as the winding up still exists, it is still considered existing. However

the winding up is limited for three years
Q: so even if beyond three years, can it still exist?
A: as a rule the law says that the three years is for purposes of the winding
up. After the three year period, the corporation is deemed extinguished
(whether or not totally liquidated)
Q: those that are not collected, can you still collect it? Can you still pay your
obligations after three years?
A: for the obligations of the corporation, they can still appoint a receiver or
trustee. So that after the lapse of three years, you can still go after the
receiver or the trustee to enjoin all the properties of the corporation
A corporation is considered inexistent after the lapse of three years from the
winding up period. But it does not mean that creditors can no longer collect
because they are entitled to payment.
EFFECT OF DISSOLUTION
Q: what is the effect of dissolution?
A: the extinguishment of the franchise. You cease to transact your ordinary
course of business. Your legal personality ceases to exist as a corporate
entity.
The corporation shall cease its operation in the ordinary course of business.
It can only act in a limited scope. Its existence is only directed to the winding
up of its affairs
Q: winding up means?
A: determine all its assets and distribute
23

Q: what is the distinction between trustee and receiver?

A: the trustee is the one designated by the corporation while a receiver is the
one designated by the court
RECEIVER APPOINTED BY THE COURT, TRUSTEE APPOINTED BY THE
STOCKHOLDERS.
Other distinction is that Incase in trustee, there is transfer of legal interest
to the trustee but the beneficial interest remains to the SH. In receivership,
no transfer of interest happens.
Q: once all these things are over?
A: the corporation is deemed terminated.
FOREIGN CORPORATION
Q: what is a foreign corporation?
A: a foreign corporation is done, formed, organized or existing under any
laws other than those of the Philippines and whose laws allow Filipino
citizens and corporation to do business in its own country or state .
Q: so that if it was incorporated in japan but registered here, what happens?
A: the registration of a foreign corporation must be under the existing laws of
another country.
Q: if it was incorporated by Japan by Filipinos SHs, is it foreign or domestic?
All of the SHs are Filipinos and decided to incorporate in Japan.
A: even if all the incorporators are Filipinos, since it was incorporated in
Japan then it is still a foreign corporation.

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Q: what if they are all Japanese, here in the Philippines, formed a

corporation? is this a foreign coropration
A: if it is incorporated under the Philippine laws (*provided majority are
residents of the Philippines) then it is a domestic corporation

Q: why do we say to make domestic corporations on equal footing with

foreign corporation?
A: because both are subjected to the reportorial requirements of SEC
RESIDENT AGENT

Q: so what again is a foreign corporation?

A: look at section 123 (2 elements)
1.
organized in any foreign country
2.
that country extends the same privilege to Filipino citizens

Q: how are summons served to the foreign corporation?

A: you send it through its resident agent.

Q: So a foreign corporation can therefore exist here?

A: a foreign corporation may exist here if it has a license to do business here
in the Phil

A resident agent may be either an individual residing in the Philippines or a

domestic corporation lawfully transacting business in the Philippines:
Provided, That in the case of an individual, he must be of good moral
character and of sound financial standing.

ACQUISITION OF LICENSE (PREVIEW)

REQUISITES TO ACQUIRE LICESE

Q: so what is required to get that license?

A: there must be a certification that such foreign corporation exist under
the laws of the foreign country, and there should also be a proof of
reciprocity that under the laws in their own country, Filipinos are likewise
allowed to do business

Q: so that once the corporation applies for a license, what among others is
required?
A: section 125
1.
Submit to SEC copy of its Articles of Incorporation and by-laws
which must be certified in accordance with law
2.
Submit their translation to an official language of the Philippines,
if necessary
3.
Application shall be under oath and must specify the following,
UNLESS, already stated in the AOI:
a.
The date and term of incorporation
b.
The address, including the street number, fo the
principal office of the corporation in the country or
state of incorporation
c.
The name and address of its resident agent authorized
to accept summons and process in all legal
proceedings
d.
The place in the Philippines where the corporation
tends to operate
e.
The specific purpose/s of the corporation which it
intends to pursue in the transaction of its business in
the Philippines. Provided that said purpose/s are those
specifically stated in the certificate of authority issued
by the appropriate government agency
f.
The names and addresses of the present directors and
officers of the corporation
g.
A statement of its authorized capital stock
h.
A statement of its outstanding capital stock
i.
A statement of the amount actually paid in
j.
Such additional information as may be necessary
4.
Submit a certificate under oath by the authorized official of the
jurisdiction of its incorporation, attesting to the fact that the laws
of the country or state of the applicant allow Filipino citizens and
corporation to do business therein, and that the applicant is an
existing corporation in good standing (PROOF OF RECIPROCITY)
5.
Submit statement under oath of the president or any other
person authorized by the corporation showing that the applicant
is solvent and in sound financial condition, and setting forth the
assets and liabilities of the corporation as of the date not
exceeding 1 year immediately prior to the filing of the application
6.
No application for license to transact business in the Philippines
shall be accepted by Sec without previous authority from the
appropriate government agency, whenever required by law

In other words if you organize somewhere else but that country does not
allow Filipinos to transact in their country, that can never be considered a
foreign corporation
Q: if it cannot be considered as a foreign corporation, can it register here?
A: no. because only foreign corporation are allowed to register here then if
you come from a country which do not allow Filipino to organize a
corporation there then they could never also be considered a foreign
corporation here for purposes of securing of a license
But in general, we say that a foreign corporation is any corporation that is
formed outside the Philippines and that country must be able to extend
reciprocity rights
PURPOSE OF REGISTERING
Q: so what is the purpose of registering?
A: the securing of license is needed so that the country can acquire
jurisdiction over the corporation. so that they are in equal footing with
domestic corporation. so that the state can regulate the foreign corporation.
The requirement enables our government to exercise jurisdiction over
foreign coproation doing business in the PHiippines for the regulation of
their activites in the country. By securing a license, a foreign coporation
gives assurance that it will abide by the decisions of our courts, even if
adverse to it. (page 800)
That is why we have difficulty arresting and filing a case against American
soldiers because they will argue that they are part of the American
government thus the Philippine court has no jurisdiction over them.
SO BASICALLY, REGISTRATION IS TO AVOID COMPLICATIONS IN ATTAINING
JURISDICTION. THE ULTIMATE OBJECTIVE OR REGISTRATION IS FOR
JURISDICTIONAL PURPOSES
Q: can you sue even if you dont have a license?
A: yes, under certain circumstances only
Q: once jurisdiction is acquired, what can the Philippine government do?
A: the court can now issue summons and the decisions of the court becomes
binding to the foreign corporation.
The government agency can now regulate these foreign corporations and
require submission of reports and impose sanctions to those foreign
corporations.

Q: from the requirements enumerated, in reviewing these requirements,

what does the government require the foreign corporation to establish
among others?
A: establish the corporation s existence and that it is of good standing.
That it is solvent and in sound financial condition. (to know the financial
capacity)
--- to determine whether your corporations investment guaranty
employment of some Filipinos. They are in fact required to guaranty
employment.

---our domestic corporations are therefore in equal footing with them

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THEY SHOULD SHOW THAT THEIR INVESTMENT WILL SOMEHOW BRING

MONEY TO THE FILIPINOS AND THAT THEY WILL BE ABLE TO CONTRIBUTE TO
THE ECONOMY OF THE PHILIPPINES
Q: can they bring in workers?
A: they are allowed if there are no local skills. So long as they are willing to
transfer these skills to locals. For certain period, this task must be transferred
to Filipinos
Q: So that we said that purpose of registration is to assume jurisdiction to be
able to monitor and to regulate and to do whatever the Philippines
government intends to do. Before they are given the license, they must
establish those things required of them (financial capacity, credibility of SH,
establish that they will pursue good) once al these are approved are
established, who gives them the license?
A: the SEC gives them the license
When they are given the license, all the condition under which the license is
issued are all indicated in the license and they must comply with all these
terms and conditions
Q: and because they are aware of the terms and conditions, what could
happen?
A: If they violate the terms, they may be sanctioned by SEC and they may
also be sued by persons or corporations whom they transact with.
BOND
And since there is a bond filed in acquiring the license, the bond may answer
for the violations of the terms and conditions of the license --- these are
securities for any potential liabilities which they may incur or even for those
they already incurred.
The bond is with the Securities and Exchange Commission
Q: So here the bonds may be of various forms. But it will be crazy to post a
cash bond. What they could put up are surety bonds or what?
A: they could put up bonds, evidence of indebtedness (promissory notes),
voting trust of agreements, certificate of stocks, shares of stocks or in other
words, these are stock bonds --- anything of value which must be verified or
examined by SEC
In other words the law wants to guaranty that these foreign corporation will
not just come here, get profits and then run away when they have
indebtedness. The law wants to guaranty that these foreign corporations are
here to offer or to invest --- to offer some opportunities for Filipinos.
Within sixty (60) days after the issuance of the license to transact business in
the Philippines, the license, except foreign banking or insurance corporation,
shall deposit with the Securities and Exchange Commission for the benefit of
present and future creditors of the licensee in the Philippines, securities
satisfactory to the Securities and Exchange Commission, consisting of bonds
or other evidence of indebtedness of the Government of the Philippines, its
political subdivisions and instrumentalities, or of government-owned or
controlled corporations and entities, shares of stock in "registered
enterprises" as this term is defined in Republic Act No. 5186, shares of stock
in domestic corporations registered in the stock exchange, or shares of stock
in domestic insurance companies and banks, or any combination of these
kinds of securities, with an actual market value of at least one hundred
thousand (P100,000.) pesos; Provided, however, That within six (6) months
after each fiscal year of the licensee, the Securities and Exchange Commission
shall require the licensee to deposit additional securities equivalent in actual
market value to two (2%) percent of the amount by which the licensee's gross
income for that fiscal year exceeds five million (P5,000,000.00) pesos. The
Securities and Exchange Commission shall also require deposit of additional
securities if the actual market value of the securities on deposit has decreased
by at least ten (10%) percent of their actual market value at the time they
were deposited. The Securities and Exchange Commission may at its
discretion release part of the additional securities deposited with it if the
25

gross income of the licensee has decreased, or if the actual market value of
the total securities on deposit has increased, by more than ten (10%) percent
of the actual market value of the securities at the time they were deposited.
The Securities and Exchange Commission may, from time to time, allow the
licensee to substitute other securities for those already on deposit as long as
the licensee is solvent. Such licensee shall be entitled to collect the interest or
dividends on the securities deposited. In the event the licensee ceases to do
business in the Philippines, the securities deposited as aforesaid shall be
returned, upon the licensee's application therefor and upon proof to the
satisfaction of the Securities and Exchange Commission that the licensee has
no liability to Philippine residents, including the Government of the Republic
of the Philippines.
RIGHT TO SUE AND BE SUED
Q: if a foreign corporation files a case here in the Philippines, can it do so?
A: Foreign corporations even if it has no license can a file a case in the
Philippines provided that it is trying to defend its reputation or the goodwill
of the corporation, or when the transaction is isolated.
Q: so here is a Japanese company, incorporated and operating in Japan but
offering cellphone loads. So you went to their website one time and called
them to give you a load and send it to your cell phone number. So from
Japan, there was a load. You purchased again but the Japanese company
failed to receive your remittance because you did not pay. So the Japanese
looks for a lawyer and files a case here in the Philippines to collect the load
that you have bought. Can it file a case?
A: Yes the Japanese corporation can file a case. That Japanese corporation is
not engaged in doing business here. We have the situs of the sale, and we
said that it is the place where the sale is consummated. In this case, the situs
is in Japan. There is no transaction here. That Japanese corporation has never
engaged in business here.
If a Japanese corporation sells vehicles and ten Filipinos went to Japan to buy
cars and brought the cars here in the Philippines, that Japanese corporation
is not engaged in business here. It just so happen that many our importing
cars from that corporation.
Q: so if it does not engage in business does it have to secure a license? If it
wants to collect, can it collect?
A: you dont need to have a license. It can collect debts
Q: upon on the other hand, here is a Japanese corporation who brings a car
(just one car) here and sold it jizza. But unfortunately jizza used her money
for tuition. Japanese files for collection, can the Japanese file here?
A: if the Japanese did not obtain license, that corporation cannot sue. This is
because under the law no foreign corporation transacting in the Philippines
without license shall be permitted to maintain an action.
Clar: But we note that it is only when the corporation is engaging in a
continuing transaction that it is required to obtain a license so that it may be
able to sue
Jizza: When we say doing business, its not on the quantity but on the
nature of the transaction. If the Japanese corporation is selling vehicles in
Japan and it sold a vehicle here, then by its nature, it is doing business. And
since that Japanese corporation is doing business but has no license, then
that Japanese Corporation cannot sue.
Sir: (remember that) it does not follow that if you are selling car abroad and
you sell a car here in the Philippines it is automatic that you are doing
business here. It is possible, for example, that you just want to give favor to
person and sell to him a limited edition car.
Q: how about if its an isolated transaction?
A: if its an isolated transaction, it falls under the exception to acquire a
license (meaning you dont have to acquire a license)
Q: But when jizza puts on the aircon, what came out was smoke. Etc. (Basta
the car is defective). Can Jizza sue the corporation?
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A: Yes, Jizza can sue the foreign transaction. (The law only prohibits you to
bring or maintain an action. But you can be a defendant in a case)
Ventura: when a foreign corporation transacts in the Philippines, there is an
implied admission that he is to be under the jurisdiction of the Philippines.
Q: So that the difference greatly lies where?
A: the difference lies whether or not a corporation is engaged in business or
not
Q: Because if it is engaged in business?
A: you must secure a license otherwise you cannot sue
Three rules to follow as regards Foreign Corporation:
1. If you are doing business and you have license, you can sue and
be sued
2. If you are doing business but you dont have license, you cannot
sue but you may be sued
3. If you are engaging in isolated transaction, there is no necessity
to require a license, nevertheless you can sue and be sued

FOREIGN CORP: MERGER AND CONSOLIDATION

Q: it may also enter into a merger, how?
A: it may enter into a merger in accordance with the law of the Philippines if
it merges with one or more domestic corporation in the Philippines, but
subject again to the requirement that SEC must be notified and given copies
of whatever pertinent documents such as plan of merger or articles of
merger or consolidation
Q: so that if the surviving corporation is the foreign corporation?
A: it must submit the amended articles to the SEC. the merger will still be
approved in the foreign country. They should process and approve the
merger abroad. The only requirement will be the submission of the forms to
SEC
Q: if the surviving corporation is the Philippine corporation?
A: then we apply our steps in merger and consolidation because it is now
within the jurisdiction of the SEC
WITHDRAWAL OF FOREIGN CORPORATION

Q: So here is a foreign corporation (Japanese). The business is importing new

stocks in the Philippines. He refused to secure a license. And of course
because his cars were so cheap, many transactions were made. Since he is
aware that he cannot file a case, if he doesnt get paid, he just make friends
with his buyers and just persuade them or beg that I can no longer buy food
so please pay. Until one day, he met a girl who borrowed money from him.
So he extended a loan, and the Japanese required her to sign a promissory
note payable in 30 days. After the expiration of the term, the Japanese did
not receive any payment. SO the Japanese filed a case. He has no license to
transact business, can he sue that girl for collection?
A: yes he can sue the girl for collection. This is because the loan agreement
was not in relation to the business. It is thus an isolated transaction. He can
sue even if he has no license to sell because he is suing on a different
transaction. But if you sue for unpaid cars, you cannot collect.

Q: once its fed up with the Philippines, what does it do?

A: it can leave the Philippines and withdraw its license. It will file a petition to
withdraw from SEC.

Q: so we have instances when that foreign corporation can sue. What are
these instances (GENERAL INSTANCES) THAT FOREIGN CORPORATION MAY
SUE?
A:
1.
isolated transaction, even without a license
2.
if it has a license to do business in the Philippines
3.
When there is no transaction:
a.
if it is regarding the goodwill (defending its reputation)
--- example: TOYKO-TOKYO scenario
b.
in cases of intellectual property rights
c.
when there is no transaction at all since it was
consummated abroad (ex. load bought abroad)
4.
Transacted an agreement which is not within the business of the
corporation (different transaction)

MISCELLANEOUS PROVISIONS

Q: if a park uses toyko Disney land. Can Tokyo Disney land sue?
A: it can sue even if not engaged in business because it is a violation against
its good will or reputation. It cannot be considered an isolated transaction
either because there was really no transaction made.
Q: instances when foreign corporation may be sued?
A: in all situations it can be sued.
IT CAN SUE IN FOUR INSTANCES BUT IT CAN BE SUED IN ALL INSTANCES!
FOREIGN CORP: AMENDMENT OF ARTICLES OF INCORPORATION
Q: after a foreign corporation secures a license, may it, like any domestic
corporations, amend? Where should it file its amendment of its articles?
A: it can amend its articles in its country because we have no authority to
approve the amendment. However, it must give a copy to the SEC within 60
days.
26

It must comply with the following requirements:

1.
Pay, compromise or settle all claims which have accrued in the
Philippines
2.
Pay all taxes assessments and penalties due to the Philippine
government
3.
The petition for withdrawal of license has been published once a
week for three consecutive weeks in a newspaper of general
circulation in the Philippines
After which, SEC will issue a certificate of withdrawal

Q: to recap, when we say outstanding capital stocks, what does it mean?

A: it will refer to the total shares issued by the corporation and subscribed by
the subscriber whether or not they are fully paid.
It does not need to be paid, but it does not include treasury shares.
Q: so is there a chance that treasury shares are made outstanding?
A: yes sir. A treasury shares once reissued, it again becomes an outstanding
share.
Q: so when we say, you acquire shares of stocks from a corporation, how do
we acquire it again?
A:
1.
Through a subscription contract
2.
Purchase of treasury shares from the corporation
3.
Purchase or subsequent transfers of certificates from existing SHs
or purchase it from the stock exchange market
Note that the stock exchange market may have branch offices here in the
Philippines, and you may buy shares over the counter. The Philippine Stock
exchange is covered by the SEC. Remember that it is not a government
corporation. it is a private corporation monitored, administered and
supervised by the SEC. SEC must monitor the players in the market.
Q: who are the players?
A: the corporation which are selling the stocks, the brokers, the agents,
underwriters, the issuers

---- end---angels notes

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