MIDTERMS
But to aid the creditors, maybe some of the creditors will organize
NOTE: Incorporators may now be juridical persons so long as they
represent appropriate authority.
January 27, 2020
Q: Once the corporation is organized, it creates certain relations.
Relationships: whom and by whom?
A:
Q: The relationship between the corporation and the shareholders. Where
is this found?
A: Articles of Incorporation. This is even the contract or agreement between
the stockholders. Since this is an agreement, this binds the agreement
between the shareholders and the corporation.
Q: So, if the corporation’s primary purpose is to create a funeral parlor, can
the corporation create a hospital instead?
A: No. The purpose of the corporation is to create a funeral parlor.
Q: So, if you were a stockholder, the moment the corporation decides to
create a hospital, what will I do?
A: Change the agreement. Amend the Articles of Incorporation. Even if the
board of directions want to have a hospital, they can’t immediately do so if
the incorporation isn’t amended. This first has to be ratified by the
stockholders, and then there should be a change of the articles of
incorporation.
AMENDING THE ARTICLES OF INCORPORATION IS BASICALLY
AMENDING THE CONTRACT BETWEEN THE SHAREHOLDERS AND
THE CORPORATION.
Q: Another relationship?
A: The relationship among shareholders themselves. If they elect the CEO,
COO, it is provided for in their agreement.
Q: Another relationship?
A: The corporation and the state. It is a privilege granted by the State. The
corporation doesn’t enjoy right to life. While the new code allows them to
exist perpetually, this life isn’t being referred to by the constitution. The term
extended or granted by the state is subject to the condition that you will
have to comply with the reportorial requirements, behave within the
boundaries of the law. Otherwise, the state has the right to revoke or cancel
the license.
Q: In Oblicon, the principle of liberality of contracts?
A: The parties are free to contract as long as it’s not contrary to law, morals,
public policy
Q: Do corporations enjoy this principle?
A: Yes. The corporation is not only bound by the principle of liberality, but
also bound by the other laws provided in the corporation code. The
corporation’s existence should be within the boundaries of the code, and
within the boundaries of your articles of incorporation.
Q: Can the corporation engage in another business?
A: No. Although you can enter into a contract (principle of liberality), this
right is confined to the authority granted to the corporation by the state.
Q: Since there are vacant rooms in the funeral parlor, can the corporation
engage in a hotel business?
A: No. Confined by the authority granted to the corporation by the state.
Q: Separate juridical personality. What is the effect?
A: The debts of the corporation can’t be demanded by the creditors against
the stockholders.
Q: If the assets of the corporation are no longer able to satisfy the debts?
A: The corporation can’t be compelled to pursue bankruptcy proceedings.
themselves and discuss the matter with the corporation. They could agree
to pursue rehabilitation. What happens during the rehabilitation is the
gathering of all the assets of the corporation, and determining of the
liabilities. The court will then appoint a receiver (an administrator during the
rehabilitation). The receiver will determine by agreeing among the creditors
how the latter will be paid. Instead of all of the creditors going against the
assets, the receiver’s job is to settle as much as possible. Keep the
business going, appoint new or more competent managers. Since the
business will continue or proceed, income earned may now be distributed
to the creditors, but may not be in one payment. They will program the
payment so that every creditor will receive part of what is due to them in the
course of the business. In this manner, every creditor will be protected and
eventually be able to collect. Once all the creditors, are paid, and the
business continues, then the company is successfully rehabilitated.
Q: If the assets are not enough, and no rehabilitation is pursued?
A: It will be a loss to the creditors.
Q: The basic difference between the corporation and the partnership?
A:
Q: In a veil of corporate fiction, what happens?
A: The shareholders can’t be compelled to pay the debts of the corporation;
subject to certain exceptions.
Q: What happens when there is a veil of corporation fiction?
A: Veil. Shareholders and the corporation are treated as a separate and
distinct being. The law says that you do not lift this veil and determine who
are inside the vein.
Q: Unless however?
A:
1. Defraud creditors
2. Defeat public convenience
3. Justify a wrong
4. Defend a crime
Q: Corporation A. 5 stockholders. Corporation A already received a demand
letter from the lawyer of the supplier who hasn’t been paid for a while.
Corporation A is now anticipating that the creditor might proceed against
their assets. The stockholders may organize Corporation B. Exactly the
same stockholder. They made it appear that all the assets of A are sold to
B. So, all the assets of A are now in B. So, when the sheriff comes, sheriff
was shown the document that the assets are sold to corporation B.
A: Lawyers can proceed against corporation B and prove that the assets
are owned by corporation A by establishing that the stockholders of the
corporations are exactly the same. Lawyers can show that the assets of
corporation A was only transferred to B to defraud the creditors. So, this is
an instance that the corporate veil may be lifted.
Q: What did we discuss on the criminal liability of corporations?
A:

Q: What is the provision in the AMLA?
A: The AMLA defines the violation. It specifies that a juridical person can be
held liable under the violations under AMLA.
Q: The veil may be pierced in what instances?
A:
1. Defraud creditors
2. Defeat public convenience
3. Justify a wrong
4. Defend a crime
ATTY.: Artificial being, created by operation of law. Since it’s created by
operation of law, you have to comply and behave under the provisions of
law and the articles of incorporation.
Q: Right of succession?
A: If the shareholders die, the corporation would still continue.
Q: If all the stockholders will die?
A: The heirs will become the stockholders. The rights as well as the
interests of the deceased stockholders will now be transferred to the heirs
at the moment of death – succession starts at the moment of death of the
deceased person.
Q: Powers, attributes, properties. What are these? Where may these rights
be determined?
A: In the articles of incorporation, the corporation code, the by-laws.
Q: So, if you’re a transportation company. You are managing, maintaining,
operating a fleet of buses. What can you do?
A: Demand the fare. Because that’s your power. To pursue and engage the
transportation business.
Q: Do you think you can maintain a big building as your garage? You
neighbors are complaining because your business is transportation, why do
you have a building.
A: It’s allowed. It’s incidental to my business.
Q: You are operating a cement factory. It requires a big volume of power.
The existing power of VECO might not be enough, prompting you now to
maintain your own powerplant. You now have your own powerplant within
your cement factory. You have officers and employees residing within the
compound. Because you have extra power for your cement factory, you
started selling this extra power to your employees (100) inside the
compound. Maybe the price is lower, much lower than what VECO is
collecting. If you are VECO, do you have a reason to complain?
A: Yes. It’s against the cement factory’s main purpose.
Q: Decide.
ATTY.: The best approach would be to ask the employees, who they’d want
to provide their electricity for them. Most likely, they will want the company
to supply. The corporation is just extending to them these facilities to
improve their take-home. If VECO is willing to sell them at the same rate,
then the company won’t sell.
ATTY.: As long as you can justify that the act that you’re performing is
incidental to your primary purpose, then you are allowed to execute or
perform this power.
Q: After 8:30pm, the entire school will be dark. The best way to succeed in
business is to maximize the use of assets. The priests said that they will
hire dancing instructors, and offer dancing lessons to interested matrons,
and engage the services of macho dancing instructors. At least they will
earn some more for 2 hours. Can they engage in maintaining and operating
a dancing school?
A: No. Not incidental.
Old case: Mining company in the mountains. To travel from the mining site
to the city required a big sacrifice. Employees long before also have no
cellphones. The employees communicated with their families through the
mails. The mails, including the employees, were carried by the company
facilities and delivered to the city. The employees requested if their mails
can be coursed through the company parcels. The company agreed but
there had to be a little payment. The employees agreed – subsidized
mailing service. This was done. It went on for a while until the private firms
(similar to LBC) complained since the mining company is now engaged in
delivering parcels and mails. It competed against the parcel company.
SC: incidental.
But this was decided when transportation was still difficult. No text
messages, no cellphones yet.
The railroad company was buying tracts of land where they could install
their railings. Somebody complained that they can’t expropriate since the
company’s power is merely to engage in railroad. The company can’t
compel owners to sell their lands to the company, only the government can
do so.
SC: incidental to their being a railroad company.
Q: We have enumerated the requirements that we have to file with the SEC
our documents. Articles, and the bylaws. We said that the corporation is a
creation of the law, it’s only a privilege. If your papers aren’t in order, will
the SEC still issue a certificate of incorporation?
A: No. Change, make the necessary corrections.
Q: If the incorporators will not comply?
A: The SEC will have to deny the issuance of a certificate of incorporation.
Q: Since the certificate wasn’t issued, may the incorporators engage in
business?
A: They can’t engage in business as a corporation.
Q: Can they now say that they’re not engaging themselves as a corporation
but a partnership?
A: No. There was no intention to pursue a partnership relationship. Failure
to secure a certificate of incorporation doesn’t justify the pursuance of a
partnership since the intention isn’t present.
Q: Classification of corporations. Private and public. How else?
A:
Private corporations
quasi-public
GOCCS (they have their own charters – SSS, GSIS, LandBank); they have
employees, where will the employees complain? Their own body where
they can address their issues. they aren’t covered by the labor code; many
of them are covered by the civil service rules even if they are private
corporations.
publicly listed corporations (private corporations, but they are listed in the
PSE; their intention is to welcome investors who are willing to buy their
shares.)
Q: Code classifies the corporations into?
A: Stock and non-stock corporation.
Q: Why stock corporation?
A: Corporation’s capital is divided into shares of stocks solely for
determining your share in the profits. There’s no other purpose. That’s why
we also call it CORPORATIONS FOR PROFIT.
Q: As distinguished from non-stock corporations?
A: They’re not supposed to distribute profits.
Q: But do they earn profits?
A: Yes.

Coverage next meeting: Up to Section 10.

January 30, 2020 only participation in management is the election of board of directors.
Investing with people you don’t know (no personal touch, no delectus
Q: Distinguish sole proprietorship, partnership, corporation. personae).
A:
Q: Classes of corporations?
A:
1. Stock Corporation has a capital stock which is divided into
share and issue dividends based on the share.
2. Non-Stock Corporation it has capital stock but is not divided.

Q: Purpose of dividing the shares?

A: To be able to quickly determine your share in the profits – only purpose.

Q: A stock corporation is also?

A: Corporation for profit.

Q: When we say non-profit, are they supposed to earn profits?

A: Yes. However, they can’t distribute the profits among themselves. They
have to plow this back to the corporation for the benefit of the members –
improvement of facilities.

Q: Other types of corporations?

A:
Close (selected few) - close corporation is limited to select persons or
members of the family.
Open - while open corporation are open to any other person who may wish
to become a shareholder.

Q: How to close a close corporation?

Q: What happens if the sole proprietor dies, and there are 10 children?
A: All of the heirs will inherit them. Whatever estate the deceased has left,
then they will have to agree on who takes what.
*Double taxation – income derived from the corporation, and income
derived from the shareholder by the time he receives his share of the
dividend.
Corporation – limited liability
Partnership – unlimited liability (can be personally liable)
*but both are juridical persons.
Q: If both are juridical persons, why can’t the partnership claim limited
liability?
A: The veil of corporation fiction isn’t available to all juridical persons – it is
only applicable to corporations.
Basic distinction: more on the existence of the veil of corporation fiction.
A: Holders of the shares will not be allowed to sell the shares covered by
the certificate unless it is first sold to its stockholders (stated in the Articles
of Incorporation and the stock certificate itself).
Q: How do you phrase it in the certificate?
A: The holder of these shares can’t sell these shares unless there is a right
of first refusal (relative or qualified prohibition).
Q: If there is an absolute refusal to sell the shares?
A: It would be a violation of a person’s right to the property – RIGHT TO
DISPOSE.
Q: Other types of corporations?
A:

Q: Sole proprietorship v. a one-person corporation. Is there still a

distinction?
A: A one-person corporation enjoys the veil of corporation, the limited
liability. A sole proprietorship – your liability isn’t limited at all.
*One of the requirements of the OPC to exist – must declare how much
capital he intends to put so that his liability will be based on this capital. He
must prove that he has separated his capital from his other personal funds.
If he doesn’t present proof – then he is liable as a sole proprietor.

Q: What could be a reason why you would want to venture into a one-
person corporation instead of a sole proprietorship?
A: It provides stability of the business (right of succession), more capital,
regulated by the State, transferability of interest (may sell shares).
Q: What disadvantage can you think of if you engage in a one-person
corporation instead of a sole proprietorship?
A: Difficult in organizing (many paper works, many compliance
requirements), dissolution of the corporation (granted by the State).
Q: Why do you need the consent of the State if you’d want to dissolve your
one-person corporation?
A: Imbued with public interest.
Q: What would dissuade anyone from joining a corporation?
A: Double taxation. Less participation in management (indirect – the Q: What is the distinction between the corporation sole and the one-person
management of the corporation is entrusted to the Board of Directors) – corporation?

A: Corporation sole – only for religious purposes. Just tell the SEC that you
have a letter authorizing you to establish a church here – this is enough for
you to become a corporation sole.
Q: Why do you think it’s simple to establish a corporation sole?
A: Freedom of religion. Any attempt of preventing anyone from exercising
his religion, from establishing his own church, can be considered as a
violation to his freedom of religion. So, the state would just want to know
where you are located, and the funds that the church has earned.
Q: As to relationship, what are the related corporations?
A: a. Parent or holding corporation controls or owns another corporation, it
has the capacity to elect or control other corporations while
b. Subsidiary owned or controlled by another corporation or the BODs are
elected by the parent corporation.
c. Affiliate corporations are those related to a parent corporation or
subsidiary corporation.
*Holding company. Subsidiary controlled by the holding company (holding
company elects the board of directors for the subsidiary). Affiliates – sister
corporations.
*Sister companies – although performing other activities, these activities
are very much related or part of the other companies. They are part of the
supply chain perhaps. So, if you’re a corporation, and the owner creates
another corporation related to the first corporation, then it can be
considered sister companies.
*Logistics company (trucking) – haul products. The owner noted that the
products are brought to various warehouses, and these various
warehouses are owned by other people. So, the owner of the logistics
company decided to construct a warehouse. So, there is this trucking
company bringing these products to the warehouse company. He
convinces the producer, manufacturer, that he can always not assign other
people, that he can assign someone to monitor the products (just give the
list of the customers) – 3rd business – warehouse manager.
Trucking -> warehouse owner (leasing) -> warehouse manager -> sales
force (marketing arm). One manufacturing company served by only one
company performing 4 services. These various business therefore are
called sister companies – they would constistute a complete chain (related
to each other).
*Example: Aboitiz – union bank, power, real estate, and many other
activities. So, these are their subsidiaries – the more generic term would be
affiliates.
Q: Persons involved in organizing a corporation?
A:
1. Incorporators – The organizers of the corporation upon its inception.
Old law – Natural
New law – Juridical persons are allowed.
2. Corporators – Those who fund the corporation.
- These refer to stockholders, investors, incorporators
themselves.
- They are people who have interest over the corporation.
- For nonstock corporation, there are no stockholders, but these people are
considered members.
*Stock corporation – corporators
*Non-stock corporation – members
3. Board of Directors/Trustees
- This group of people manage the corporation.
4. Promoters
- They promote the corporation itself.
- They convince people to invest. They tell people that they are organizing
such corporation.
5. Underwriters
- Mostly banking companies
- Promoters have no commitment. They simply
promote.
- Underwriters have commitment. Although they collect a huge amount of
money in terms of percentage as to the investments gathered.
- Underwriters assume liability. Ex. They commit that 60% of the stocks will
be bought.
- If they cannot sell such committed shares, they guarantee that they buy
such stocks themselves.
- Do not confuse them with undertakers. These are people who take care
of you under the ground.
6. Founders
- They have an idea what the business is all about or have the vision on
what the corporation will undertake or pursue.
- Logically, they initiate the organization and eventually will be the ones who
could be the incorporators, not necessarily the only ones.
- They do not guarantee success. They only have an idea on how to make
profit.
- They are given founders’ shares.
- PRIVILEGE: FOUNDER’S SHARES.
1. Right to vote and be exclusively voted upon for the period not
exceeding 5 years.
2. The certificate of the founders’ shares defines the privilege that
holders of this share shall have the privilege to be elected into
the BODS for the next 5 years or less (from the inception of the
business), and no one will be nominated or will be able to
assume any position in the Board unless he is a holder of any
certificate given to those entitled to founders’ shares.
ROADSHOW
- In a big corporation, if you want to promote the formation of a corporation,
you may conduct a roadshow.
- You go around the country or the world and do a roadshow.
- You tell them about the corporation and the business, and convince them
to join. Usually accompanied by the underwriters who help convince.
Q: What are shares?
A: It represents the interest/investments of a stockholder.
Q: How do we classify shares?
A:
Founders’ shares
- Right to vote and be exclusively voted upon for the period not exceeding
5 years.
- The certificate of the founders’ shares defines the privilege that holders of
this share shall have the privilege to be elected into the BODS for the next
5 years, and no one will be nominated or will be able to assume any position
in the Board unless he is a holder of any certificate given to those entitled
to founders’ shares.
Preferred Shares
- Type of share where shareholders are given preference over dividends or
assets upon dissolution.
Common Shares
- Distributed prorate among common shareholders.
Voting Shares
- Provided with voting rights on any issue on the corporation.
Non-voting shares
- Not provided with voting rights subject to exceptions.
Redeemable shares
- These shares may be issued by the corporation when expressly provided
in the articles of incorporation. They are shares which may be purchased
by the corporation from the holders of such shares upon the expiration of a
fixed period, regardless of the existence of unrestricted retained earnings
in the books of the corporation, and upon such other terms and conditions
stated in the articles of incorporation and the certificate of stock
representing the shares, subject to rules and regulations issued by the
Commission. (Sec. 8, RCC)
Par-value shares
- The shares or series of shares may or may not have a par value: Provided,
That banks, trust, insurance, and preneed companies, public utilities,
building and loan associations, and other corporations authorized to obtain
or access funds from the public, whether publicly listed or not, shall not be
permitted to issue no-par value shares of stock.
- These represent the capital of the corporation.
- Minimum price that the corporation must sell to the public.
No-par value shares
- Shares of capital stock issued without par value shall be deemed fully paid
and nonassessable and the holder of such shares shall not be liable to the
corporation or to its creditors in respect thereto: Provided, That no-par value
shares must be issued for a consideration of at least Five pesos (P5.00) per
share: Provided, further, That the entire
consideration received by the corporation for its no-par value shares shall
be treated as capital and shall not be available for distribution as dividends.
Treasury shares
- Treasury shares are shares of stock which have been issued and fully
paid for, but subsequently reacquired by the issuing corporation through
purchase, redemption,
donation, or some other lawful means. Such shares may again be disposed
of for a reasonable price fixed by the Board of Directors. (Sec. 9)
Shares in Escrow
- Issued or are committed to a particular shareholder, but are deposited with
a 3rd person or a deposit account pending the fulfillment by that 3rd person
for which it was reserved of the conditions expressly provided in the
certificate of stocks.

Q: Can all corporations issue non-par value shares?

A: GR: Yes.
Exceptions: banks, trust, insurance, and preneed companies, public
utilities, building and loan associations, and other corporations authorized
to obtain or access funds from the public, whether publicly listed or not, shall
not be permitted to issue no-par value shares of stock.
*IOW those corporations that have access to public funds.
*Par value shares – value of which are stated in the articles of incorporation
– therefore it can’t be changed – can’t sell shares lower than the par value.
Q: Why can’t corporations sell shares that are lower than the par value? If
the authorized capital stock of the corporation is PHP100m, divided by
100m shares, what is the par value?
A: PHP1/share.
Q: If all of the PHP100m have been fully subscribed and paid, how much
capital would that corporation have?
A: PHP100m.
Q: And it may use that PHP100m in acquiring other assets, as long as the
corporation has declared that it has assets more than PHP100m. So that if
part of the PHP100m sold, PHP1m shares were sold at PHP0.50, how
much capital would that corporation have?
A: PHP500,000.
Q: So, our authorized capital stock was PHP100m, but actual capital that
came is was only PHP99,500,000, short of PHP500,000. What is the effect?
A: The corporation is misleading the public. It isn’t fair to the public.
Q: Can you sell shares lower than the par value?
A: You cannot because the effect would be the one stated above.

Next meeting: Up to Section 15.

February 3, 2020
Q: Par value v. non-par value?
A:
Par-value shares
- The shares or series of shares may or may not have a par value: Provided,
That banks, trust, insurance, and preneed companies, public utilities,
building and loan associations, and other corporations authorized to obtain
or access funds from the public, whether publicly listed or not, shall not be
permitted to issue no-par value shares of stock.
- These represent the capital of the corporation.
- Minimum price that the corporation must sell to the public.
No-par value shares
- Shares of capital stock issued without par value shall be deemed fully paid
and nonassessable and the holder of such shares shall not be liable to the
corporation or to its creditors in respect thereto: Provided, That no-par value
shares must be issued for a consideration of at least Five pesos (P5.00) per
share: Provided, further, That the entire
consideration received by the corporation for its no-par value shares shall
be treated as capital and shall not be available for distribution as dividends
Q: How do we arrive at the par value?
A: Dividing the authorized capital stock into the number of shares.
Q: PHP100M capital divided into 100m shares?
A: Par value is PHP1.
Q: How do we arrive at the authorized capital?
A: Multiplying par value shares by the number of shares.
Q: Other types of shares?
A:
Founders’ shares
- Right to vote and be exclusively voted upon for the period not exceeding
5 years.
- The certificate of the founders’ shares defines the privilege that holders of
this share shall have the privilege to be elected into the BODS for the next
5 years, and no one will be nominated or will be able to assume any position
in the Board unless he is a holder of any certificate given to those entitled
to founders’ shares.
Preferred Shares
- Type of share where shareholders are given preference over dividends or
assets upon dissolution.
- Preference over dividends and liquidation of assets
Common Shares
- Distributed prorate among common shareholders.
- given voting rights
- if there are any excess in dividends, it will be divided among these
common shareholders
Voting Shares
- Provided with voting rights on any issue on the corporation.
Non-voting shares
- Not provided with voting rights subject to exceptions.
Redeemable shares
- These shares may be issued by the corporation when expressly provided
in the articles of incorporation. They are shares which may be purchased
by the corporation from the holders of such shares upon the expiration of a
fixed period, regardless of the existence of unrestricted retained earnings
in the books of the corporation, and upon such other terms and conditions
stated in the articles of incorporation and the certificate of stock
representing the shares, subject to rules and regulations issued by the
Commission. (Sec. 8, RCC)
Par-value shares
- The shares or series of shares may or may not have a par value: Provided,
That banks, trust, insurance, and preneed companies, public utilities,
building and loan associations, and other corporations authorized to obtain
or access funds from the public, whether publicly listed or not, shall not be
permitted to issue no-par value shares of stock.
- These represent the capital of the corporation.
- Minimum price that the corporation must sell to the public.
No-par value shares
- Shares of capital stock issued without par value shall be deemed fully paid
and nonassessable and the holder of such shares shall not be liable to the
corporation or to its creditors in respect thereto: Provided, That no-par value
shares must be issued for a consideration of at least Five pesos (P5.00) per
share: Provided, further, That the entire consideration received by the
corporation for its no-par value shares shall be treated as capital and shall
not be available for distribution as dividends.
Treasury shares
- Treasury shares are shares of stock which have been issued and fully
paid for, but subsequently reacquired by the issuing corporation through
purchase, redemption,
donation, or some other lawful means. Such shares may again be disposed
of for a reasonable price fixed by the Board of Directors. (Sec. 9)
Shares in Escrow
- Issued or are committed to a particular shareholder, but are deposited with
a 3rd person or a deposit account pending the fulfillment by that 3rd person
for which it was reserved of the conditions expressly provided in the
certificate of stocks.
Q: Can all corporations issue non-par value shares?
A: GR: Yes.
Exceptions: banks, trust, insurance, and preneed companies, public
utilities, building and loan associations, and other corporations authorized
to obtain or access funds from the public, whether publicly listed or not, shall
not be permitted to issue no-par value shares of stock.
Q: What is watered stock about?
A: Shares purchased below the par value.
Q: Preferred participating shares?
A: Preferred shareholders already earned premium for their preferred
shares, and they still participate in the distribution of the common shares.
They take both. They take preference, and they participate.
Q: Who can issue preferred shares?
A: Every corporation can issue preferred shares.
Q: Cumulative shares?
A: If a corporation hasn’t declared dividends for one year, and the shares
are cumulative, and the second year, the corporation decided to declare
dividends. Because it’s cumulative shares, the dividends are declared
based on the previous years that the corporation didn’t declare dividends
and the current year (Y1 previous year + Y2 current year) that they decided
to declare dividends – accumulation through the years.
Q: Even if the corporation has profits, is it obliged to give dividends?
A: No.
Q: If the corporation doesn’t declare dividends for a long time, what does
the BIR assess?
A: Improperly Accumulated Earnings Tax (IAET).
VOTING SHARES v. NON-VOTING SHARES
Q: Why would a share be entitled to vote?
A: As a shareholder, I am a part owner of the corporation. But it doesn’t
mean that I could interfere. I can only exercise my ownership by voting on
certain issues. As part of my ownership, I have a right to protect my
ownership – hence, I am entitled to vote on my shares of stock.
Q: Even if I am a holder of non-voting shares, there are issues when I can
vote. What are these issues?
A:
1) Amendment of the Articles of Incorporation
2) Adoption and amendment of by-laws
3) Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporate property
- The guide is when such sale already affects the operations of the
corporation. When the corporation could no longer carry out its business,
then that will be the point when it will have to be open for voting, including
nonvoting shares.
o SC said that 80% is considered substantially all
4) Incurring bonded indebtedness
5) Increase or decrease of capital stock
6) Merger/consolidation.
Q: Why do you think you’re still entitled to vote on these issues?
A: Because the fundamental contract of these parties is the Articles of
Incorporation. In obligations and contract, we have learned that if we
change the terms and conditions of the contract, we can novate the
contract. What is necessary in novation is the consent of both parties. That’s
why if you’d want to change anything in the AOI, you need consent; all
parties must be able to participate WON they agree on the change of the
agreement.
Q: If the original purpose of the business is to operating, maintaining a
funeral parlor, can they change it to operating and maintaining a hospital?
A: No, unless consent is given. Consent must be freely given.
Q: Because you cannot be compelled to agree, what happens to your vote
refusing to the change?
A: You have APPRAISAL RIGHT.
Q: Non-par value shares?
A: They are part of capital, can’t be issued as dividends.
Q: When is the payment of the balance due?
A: No balance. Deemed fully paid. Becomes part of capital.
DISTINCTION BETWEEN PAR VALUE AND NON-PAR VALUE SHARES
Q: If the assets of the corporation have all been exhausted, and there are
still creditors, can the creditors go after the shareholders who have non-par
value shares?
A: No. Non-par value are fully paid.
Q: Par value shares?
A: Yes. They’re not telling you to be liable personally, but for the money
you’re holding owned by the corporation. This is capital of the corporation.
REDEEMABLE SHARES
Q: Why would a corporation issue a redeemable shares?
A: Purely for capital.
Q: When you issue redeemable shares, in effect, we are just asking for
people to lend money to the corporation. In effect, they are extending credit,
but not strictly lenders/creditors. The holder of a redeemable share, is he a
lender?
A: No, he is an investor.
Q: What distinction do we have between an investor and a lender?
A: An investor takes a risk.
Q: Before the redemption period, dividends declared in between. Is the
person owning redeemable shares entitled to the dividends?
A: Yes, he is an investor.
Q: When the redemption period is due?
A: He can compel the corporation to buy it back (usually at a premium).
Q: Can the corporation say, “Sorry, we have profits but we can’t buy you
back now.” Can the corporation refuse?
A: No, it’s in their agreement.
Q: Can the corporation say, “Sorry, we don’t have Retained Earnings yet.”
A: No. It’s in the agreement.
Q: What risk does the investor take?
A: Risk that he will not be paid. Only when the corporation no longer has
assets left to be paid, the redeemable shareholders can no longer be paid.
Q: Because?
A: These assets are for the creditors of the corporation.
Q: Under what doctrine?
A: Trust fund doctrine. Every fund of the corporation is held in trust by the
corporation in behalf of the corporation.
Q: Redeemable share v. creditor. Who has the preference?
A: Creditor. We don’t care WON the corporation has profits, or won the
corporation has assets or not. “PAY ME.” This is the reason.
Q: Trust fund doctrine simply states?
A: Assets of the corporation are primarily reserved for the creditors, and not
for the investors of the corporation.
Q: Redeemable shares. Would they have voting rights?
A: It depends if the redeemable shares are issued together with voting rights
or not.
Q: Once repurchased or once redeemed, what happens?
A: The redeemable shares become part of treasury shares.
TREASURY SHARES.
Q: What are they?
A: Stocks issued and were fully paid, but were reacquired by the corporation
through purchase, donation, sale, and other lawful means.
Q: What is the nature of these treasury shares?
A: They are part of capital.
Q: When we bought the shares, what did we use? Capital money or surplus
money?
A: Surplus money, part of our profits.
Q: Otherwise, if we do not have profits, we have to use capital now. Can we
use capital to reacquire?
A: No, otherwise we will be violating the trust fund doctrine.
Q: The only instance when we can’t be compelled to redeem?
A: When the corporation is insolvent. And our capital is no longer enough
to pay our obligation.
Q: When we reacquired these redeemable shares, is this part of capital?
A: Yes. When we issued this, money came in as part of capital.
Q: Being part of capital, what can we do with this?
A: We can sell it again. This is part of capital; this is part of assets.
Q: How much?
A: The board decides.
Q: Because it is now back to the treasury, can we consider them
outstanding shares?
A: No. No longer outstanding because it’s back to the corporation – it’s in
already.
Q: If they were voting shares when they were issued, now that they are
back, who may vote?
A: No one. Treasury shares have no voting rights. If the law were to give
them voting rights, since these treasury shares are owned by the
corporation, necessarily, the BOD will act on behalf of the corporation. If
they were to be given voting rights, the BOD will definitely vote for them all
the time.
Q: May these treasury shares be issued as dividends if the corporation
doesn’t sell them?
A: No. Or else it would involve double sale for the same shares.
Q: May these treasury shares be entitled for dividends?
A: No. The corporation owns the dividends. It would be absurd. Corporation
transferring money from its left to right pocket.
Q: What happens when we make the articles of incorporation, what do we
do?
A: We submit the articles of incorporation to the SEC.
Q: Corporate term?
A: GR: Perpetual.
If the new corporation was formed after February 3, 2019 – it’s perpetual.
If you’re organized before the date above, deemed perpetual. Unless they
have the intention to keep/maintain their original term.
If your term already expired, there is a chance for revival – go to the
Commission, and you will be issued a CERITIFICATE OF REVIVAL.
Q: What are the contents of the Articles of Incorporation?
A: Section 13.
Q: Authorized capital stock, subscribed capital stock, paid-up capital stock?
A:
Authorized capital stock – refers to the maximum amount of capital which
the corporation will receive when it issues all its shares.
Subscribed capital stock – refers to the committed amount of capital which
the corporation will receive from its existing subscribers.
Paid-up capital – refers to the amount of capital which the corporation
already received from its subscribers. This represents the paid portion of
the subscribed capital.
Q: If you’re a new corporation, how much should be subscribed?
A: The RCC doesn’t require a minimum subscribed capital stock.
Q: Why do you think the minimum requirement is taken away?
A: To attract the formation of more business organizations.
Q: However, the 25% subscribed is compulsory when?
A: If there’s an increase in the capital stock. 25% subscribed, and 25% paid-
up capital.
Q: What is the importance of the name of the corporation?
A: For identification.
Q: When you propose a name, what is required?
A: Such much not be misleading. SEC would require me to give 3 different
names. YOU HAVE TO RESERVE A NAME, AND HAVE IT
ELECTRONICALLY VERIFIED BEFORE FILING – the name, only
conditions are: NOT BEEN USED NOR RESERVED FOR, NOT
MISLEADING BUT MUST BE DESCRIPTIVE OF YOUR PURPOSE.
Q: If you want to carry out or organize a corporation for massage, what
could be the best name?
A: Masahe corporation.
Q: What about haplos haplos?
A: Maybe not because they might find it immoral?
ATTY.: Once you are issued a certificate of incorporation, this is called
primary franchise. The right to exist as a corporation. Now, if you’re dealing
or you’re engaged with jeepney business (you can see LTRB case no.), you
will also be given another franchise by LTFRB – secondary franchise –
intended for the carrying out the specific business. The fact that you’re given
a primary franchise isn’t a guarantee that you can immediately pursue any
business that you want especially if the business that you’re trying to pursue
would involve public interest or public utilities.

Q: Principal office? Importance?

A: For the SEC to be able to locate and identify where the corporation is.
To know where to serve summons and notices by the SEC.

Up to Section 20.
February 6, 2020 Q: If you have no share at all, can you be vice president?
A: Yes. Only the president is required to be a holder of at least one share.
Q: What are treasury shares? Q: Why not the vice president?
A: Stocks issued and were fully paid, but were reacquired by the corporation A: He only waits if the president dies.
through purchase, donation, sale, and other lawful means. Q: If the president dies?
Q: Is the corporation always free to buy back the shares of the other A: The vice president has to buy at least one stock otherwise he wouldn’t
stockholders? be entitled to become president.
A:
GR: No. Trust fund doctrine. The creditor may not be able to collect from NAME OF THE CORPORATION
the corporation if the corporation has no more funds due to the corporation Q: Name of the corporation?
always buying back the shares. A: It has to be distinguishable, not contrary to law, not one that is reserved
Exception: by law.
1. Redeemable shares – the public is already aware that these Q: If the business of the corporation was to operate, maintain, and provide
shares are sold for the purpose of attracting capital; but sooner most effective and comfortable massage in the city (principal purpose). How
or later, they will be reacquired by the corporation. would you want to call your business? IOW, the law requires that the name
2. Appraisal right has to be descriptive.
Q: Redeemable share v. Bank? A: Good hands.
A: Redeemable shares – investor; bank – lender. Q: What about haplos haplos?
Q: What is the difference? A: I think yes.
A: Q: Hapyod hapyod?
Lender – the moment the loan becomes due and demandable, A: I think yes.
he will collect; if the corporation isn’t able to pay, he will foreclose the Q: So, if one is already registered as haplos haplos corporation, and you
mortgage/collateral. come up with your hapyod hapyod corporation. Do you think SEC will allow?
Redeemable shares – if the corporation has profits, then the A: Maybe. If it confuses the public, then SEC will not allow.
corporation will be obliged to pay; if the corporation doesn’t have profits, Q: One corporation came out with EFFICIENT OIL CORPORATION. Do
then the corporation isn’t obliged to pay. When the due date for you think somebody will complain?
reacquisition has arrived, the corporation can’t deny the demand for A: Yes, efficacent oil will complain since they sound the same. Especially if
reacquisition of the shares – even if they say that they don’t have they follow the color scheme.
unrestricted retained earnings, they still can’t deny. As long as there is Atty.: Planter’s peanuts, and there’s another one that made growers. There
surplus (retained earnings) – unrestricted or not. The only time the used to be a case against growers since even the packaging looks the
redeemable shareholders can be denied payment is when the corporation same.
is insolvent. Because if the corporation will pay even if the corporation is
insolvent, the corporation would now have to take money from their capital, LIMITATIONS IN COMING OUT WITH THE NAME
which will violate the trust fund doctrine. RISK: THE CORPORATION MAY Q: What are the limitations in coming out with the name?
OR MAY NOT HAVE RETAINED EARNINGS (SURPLUS) TO PAY WHEN A:
THE TIME OF REDEMPTION OF SHARES COMES. 1. Not confusing/deceptively similar with another corporation that
is registered, or reserved by another corporation.
TREASURY SHARES 2. If it’s preserved by law.
Q: Once reacquired, what happens? 3. If it’s contrary to government rules and regulations.
A: The redeemable shares will now become treasury shares – the shares Q: United Nations Food Corporation. Do you think your corporation name
are now in the custody of the treasurer. will be approved?
Q: What happens to these shares? A: No, it falls under the second exception.
A: They become part of capital. Q: So, if you were a fan of food, what will be on your mind if you see that
Q: Are these shares still outstanding? name?
A: No. A: That the corporation is run by the United Nations. The SEC might
Q: May it still be entitled for dividends? disapprove since it is misleading - “best chefs might be here, the UN might
A: No. These shared are owned by the corporation. If the corporation hire them.”
declares dividends, it will just be paying itself. Q: If you were the SEC, what do you think is acceptable?
Q: Would these shares have the right to vote? A: International Food Corporation.
A: No. Since the board acts in behalf of the corporation, it manages the
properties of the corporation, since these shares are now properties, the ADDRESS
board will just use these properties and cast the votes pertaining to these Q: Why is the address important?
shares in their favor during an election. A: At least the SEC would know where to serve notices, summons, and
Q: May these shares be part or issued as dividends? other information.
A: Yes, they can be distributed as property dividends. Stock dividends have Q: Lora Integrated Corporation. Address: Somewhere in the interlands of
to be “fresh.” That’s why these aren’t considered stock dividends. Mindanao.
Atty.: Dividends are supposed to represent profits/income. There are 3 A: This isn’t in compliance with the requirement since it lacks specificity.
kinds of dividends: cash dividends, stock dividends, property dividends.
Q: When we distribute these treasury stock as property dividends, what PURPOSE
happens? Q: What is the importance of the purpose of the corporation?
A: Treasury stock is extra property. So instead of paying dividends in cash, A: open ended answer.
these treasury stocks are given and cash is retained. Q: So that if you perform something not within the purpose?
A: Ultra vires act – not binding upon the corporation; beyond the power of
CONTENTS OF THE ARTICLES the corporation.
Q: If you own a stock, can you be a director?
A: Yes. Q: Could you change any of the things written in the articles of
Q: Can you be a president? incorporation?
A: If voted by the board as president, yes. A: Yes.
Q: Can you be vice president? Q: How?
A: Yes. A:
 1. Proposal for amendment must be initiated by the board of
directors.
2. Proposal must be voted upon by majority of the members of
the board of directors.
3. It must then be voted upon by at least 2/3 of the
stockholders/members of the corporation.
Q: What happens to the 1/3 stockholders whose votes can’t be carried out?
A: They can exercise their right of appraisal.
Atty.: This is another instance when the corporation can buy back. However,
there must be unrestricted retained earnings. If not, the 1/3 stockholders
who want to exercise their right of appraisal can’t get anything.
Atty.: We will later on learn that in order to avoid second tax, the corporation
may not declare dividends because the moment they declare dividends, it’s
income to the stockholder (taxed), and it’s another tax on the dividends
declared by the corporation. Some corporations, instead of declaring
dividends, will no longer declare dividends. They will just tell all the
stockholders that they will just undergo training, they will all go to Europe
with their family, with per diem pocket money – they will not be taxed here
since they didn’t receive income, they were there because of an educational
tour. There’s no tax, plus the expense is deductible from the income of the
corporation.
Q: How did the BIR avoid this?
A: They have implemented the Improperly Accumulated Earnings Tax
(IAET).
Atty: Exceptions to the IAET.
1. They don’t want to be penalized with the IAET, they usually say
that they are reserving the money for an expansion plan –
restricted retained earnings (earmarked for future expansions).
2. There is a loan condition. That the corporation can’t declare
dividends unless there is consent from the bank.
AMENDMENT
Q: When does it take effect?
A: Upon approval of the Commission or within 6 months from inaction by
the Commission.
CERTIFICATE OF INCORPORATION
Q: Once we receive the certificate of incorporation, what would that mean?
A: It’s the birth of the corporation.
Q: What is the importance of having the certificate of incorporation?
A: We can now classify ourselves as de jure corporation.
Q: If we didn’t submit anything at all, and we enter into a transaction with
someone else, can we be considered a corporation?
A: No corporation at all.
Q: So that if 5 of us go to the bank, and borrow money from the bank, and
therefor the bank lent us the money that we wanted, and we didn’t pay. Can
the bank sue us as a corporation? We told that bank that we are a
corporation – Omnibus Corporation. The bank sued Omnibus Corporation
for non-payment of debt.
A: They are a corporation by estoppel.
Q: Corporation by estoppel means?
A: There is a corporation by estoppel when a group of people misrepresents
themselves to the public that they are a corporation when in fact they are
not.
Q: Are they liable for the bank loan?
A: Yes. They will be treated as general partners.
Q: What’s the point? Complying all of these that we learned, only to be
treated by the court later on as a corporation? What’s the point? Why do we
have to comply with all of these?
A: To protect third persons. Because if the law will not treat them as a
corporation, then the loan will remain unpaid. EQUITY CONSIDERATION,
unjust enrichment.
Q: Reverse situation. Somebody borrowed from them. The borrower didn’t
pay, and now these 5 persons are demanding payment. That person again
said, “I discovered, inyo kong gi ilad. Di man diay mo corporation.” Motion
to dismiss. Will the motion to dismiss be sustained?
A: No.
Q: Under the corporation by estoppel, what have we learned? Basing now
on the unjust enrichment principle?
A: Once you have enjoyed certain advantages or benefits, you cannot now
question the existence of that corporation by estoppel. The law is clear. He
who claims to be a corporation can’t deny any liability.
Q: Here is another group who have already signed and executed their
certificate of incorporation. After it was notarized, they now entered into
certain transactions. Can the corporation be considered a corporation now?
A: They never filed. There was no attempt to organize an incorporation.
There was no honest intention to organize. A de facto corporation here
doesn’t exist.
Q: However, if they filed, and because they didn’t learn Corporation Law
under Atty. Espedido, they filed something, and they didn’t even indicate
that capital of the said incorporation. Yet, for reasons we do not know,
maybe the examiners of the SEC were to busy all of the papers, and they
were able to secure a certificate of incorporation. And believing now that
they have received the juridical personality, they proceed to act as a
corporation. Is it now a corporation?
A: Yes. De facto corporation. But, if later on, the SEC gives them a notice
to rectify, and they didn’t rectify, then they will no longer be considered a de
facto corporation.
Q: What is the justification then that even if there was a defect, the law still
considers them a corporation?
A: IOW. Imagine if in every transaction, every party dealing with this
corporation would question the existence and personality of this corporation
– endless. And if they were to be very strict all the time, before you deal
with the corporation, you will always have to require all the documents if
there are any defect. Imagine if we require that in every transaction. So,
there will be multiplicity of suits. So again, because of equity, the law says
that they should be considered as a corporation. But it doesn’t mean that
they can never be questioned – THE STATE THROUGH THE OSG CAN
QUESTION.
Q: Why the state?
A: Because the state is the one that gives the privilege. It’s the state alone
who gives the privilege, then it’s the state alone can question under a quo
warranto proceeding.
Q: Once we have the certificate of incorporation, what are we supposed to
do?
A: Election of board of directors.
Q: What happens next?
A: The board of directors will convene to vote the officers.
Q: Who do we elect?
A: President, vice president, all other officers listed in the bylaws of the
corporation.
Q: However, if we do not organize?
A: Failure to organize within 5 years will revoke the corporate charter.
Q: However, failure to operate is another thing. What happens?
A: Failure to operate within 5 years, the corporation will be considered a
delinquent corporation.
Q: Delinquent. Which means?
A: You are given a chance by the SEC to comply with the requirements.
Q: Once complied?
A: You are now considered a de jure corporation.
Q: Once suspended however? Under what circumstances may a
corporation’s authority may be suspended?
A: If it is violative of the law – failure to comply with the minimum required
Filipino interest (public interest).
Next meeting: Board of Directors