100 questions, answers in corporation law exams
Here are more than 100 questions and answers that your professor in corporation law may ask in your final or midterm exams. NOTE: This content is under construction. PJ asks for your patience regarding misspellings and other possible errors.IMPORTANT NOTE: THIS IS A 2018 POST. PLEASE CHECK THE REVISED CORPORATION CODE.
[1] WHAT IS A CORPORATION?
A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence.
[2] WHAT ARE A CORPORATION'S ATTRIBUTES?
If referring to the attribute of a corporation based on its definition, they are the following: [a] artificial being; [b] created by operation of law; [c] having the right of succession; and [d] with express, implied and inherent powers.
If referring to the characteristics of corporations in general, they are the following:
[a] Continuity of existence;
[b] Limited investor or shareholder's liability;
[c] Separate juridical personality;
[d] Capacity to sue and be sued;
[e] Capacity to incur obligations and acquire rights;
[f] Centralized management via the governing board;
[g] Immunity from collateral attack; and
[h] others.
[3] WHAT IS THE GRANDFATHER RULE?
[3] WHAT IS THE GRANDFATHER RULE?
The Grandfather Rule is a stricter or more stringent test than the control test when it comes to determining compliance with the minimum Filipino equity requirement among corporations. The Grandfather Rule determines the actual Filipino ownership and control in a corporation by tracing both the direct and indirect shareholdings in the corporation.
In other words, if the shares of stock of the immediate investor corporation is in turn held and controlled by another corporation, then we must look into the citizenship of the individual stockholders of the latter corporation. In other words, if there are layers of intervening corporations investing in a Filipinized venture, we must delve into the citizenship of the individual stockholders of each corporation.
[4] EXPLAIN THE DOCTRINE OF PIERCING THE VEIL OF CORPORATE ENTITY?
As a rule, a corporation has a personality distinct from its stockholders, and is not affected by the personal rights, obligations and transactions of the latter. This general rule also applies between a parent company and subsidiary. However, the veil of corporate fiction may be pierced when it is used as a shield to further an end subversive of justice, or for purposes that could not have been intended by law that created it or to defeat public convenience, justify wrong, protect fraud or defend crime or to perpetuate fraud or confuse legitimate issues or to circumvent the law or perpetuate deception or as an alter ego, adjunct or business conduit for the sole benefit of the stockholders.
[5] WHAT ARE THE OBLIGATIONS OF DIRECTORS AND OFFICERS OF A CORPORATION?
In general, directors and officers are bound by the trust fund doctrine which states that the governing officers of the corporation hold in trust the funds of the corporation in trust for the benefit of the stockholders. Hence, specifically, directors and officers have the obligation to maintain loyalty, obedience and diligence to the corporation.
According to the Corporation Code, directors and trustees shall be jointly and severally liable for all damages suffered by the corporation, shareholders or third persons as a result of gross negligence or bad faith in directing the affairs of the corporation or as a result of personal or pecuniary conflict of interest with their duties as directors or trusties.
If a director, trustee or officer attempts to acquire or acquires any interest adverse to the corporation's interest, in violation of his duty or when equity disallows him to deal with himself, he shall be liable as trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation.
[7] WHAT ARE THE CIRCUMSTANCES THAT MAY BE CONSIDERED TO JUSTIFY THE APPLICATION OF THE DOCTRINE TO MAKE THE PARENT CORPORATION LIABLE FOR THE OBLIGATIONS OF ITS SUBSIDIARY?
According to Garrett vs. Southern Railway, there are 11 factors:
[a] STOCK. The parent corporation owns all or most of the capital stock of the subsidiary;
[b] DIRECTORS. The parent and subsidiary have common directors and officers;
[c] FINANCE. The parent finances the subsidiary;
[d] SUBSCRIPTION OR INCORPORATION. The parent subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation;
[e] GROSSLY INADEQUATE CAPITAL. The subsidiary has grossly inadequate capital;
[f] EXPENSES AND LOSSES. The parent pays the salaries and other expenses or losses of the subsidiary;
[g] NO OTHER BUSINESS. The subsidiary has substantially no business except with the parent corporation or no assets except those conveyed to or by the parent corporation;
[h] DEPARTMENT OR DIVISION. In the papers of the parent corporation or in the statements of its officers, the subsidiary is described as a department or division of the parent corporation or its business or financial responsibility is referred as the parent’s own;
[i] PROPERTY. The parent corporation uses the property of the subsidiary as its own;
[j] DEPENDENCE. The directors or the executives of the subsidiary do not act independently in the interest of the subsidiary but take their orders from the parent corporation in the latter’s interest; and
[k] LEGAL REQUIREMENTS. The formal legal requirements of the subsidiary are not observed.
[7] IS OWNERSHIP OF SUBSTANTIAL PORTION OF THE OUTSTANDING CAPITAL IN A CORPORATION ENOUGH JUSTIFICATION TO APPLY THE DOCTRINE?
No, ownership of substantial portion of the outstanding capital in a corporation is no enough justification to apply the doctrine of piercing of the corporate veil.
The veil of corporate fiction may be pierced when it is used as a shield to further an end subversive of justice, or for purposes that could not have been intended by law that created it or to defeat public convenience, justify wrong, protect fraud or defend crime or to perpetuate fraud or confuse legitimate issues or to circumvent the law or perpetuate deception or as an alter ego, adjunct or business conduit for the sole benefit of the stockholders. Therefore, there are limited circumstances in which said doctrine applies:
[a] Injustice;
[b] Public inconvenience;
[c] Wrong;
[d] Fraud;
[e] Crime;
[f] Confusion regarding legitimate issues; and (among others)
[g] Deception through alter ego, adjunct or business conduit.
8. WHAT ARE THE ELEMENTS THAT MUST BE PRESENT TO JUSTIFY THE PIERCING OF THE VEIL OF CORPORATE FICTION ON THE GROUND THAT THE CORPORATION IS A MERE ALTER EGO?
[9] EXPLAIN THE RIGHT OF SUCCESSION.
In corporation law, right of succession also means "continuity of existence." This means that, despite the death, incapacity, replacement or civil interdiction of the persons composing it, the corporation is not affected and its business operations continue uninterrupted as long as its juridical personality exists.
[10] DISTINGUISH THE FOLLOWING:
A. DE JURE CORPORATION VS. DE FACTO CORPORATION
A de facto corporation is a defectively organized corporation, which has all the powers and liabilities of a de jure corporation and, except as to the State, has a juridical personality distinct and separate from its shareholders, provided that the following requisites are concurrently present:
[a] That there is an apparently valid statute under which the corporation with its purposes may be formed;
[b] That there has been colorable compliance with the legal requirements in good faith; and
[c] That there has been use of corporate powers, i.e., the transaction of business in some way as if it were a corporation.
A corporation which has no defect in legal requirements is a de jure corporation.
B. STOCK CORPORATION VS. NON-STOCK
A stock corporation is one whose capital stock is divided into shares and whose articles of incorporation allows it to distribute dividends. A non-stock corporation is one which lacks either of the two requirements of a stock corporation.
C. CORPORATION VS. PARTNERSHIP
A corporation is different from a partnership in the following ways:
[a] A corporation is created by law or by operation of law while a partnership is created by mere agreement of the parties;
[b] A corporation is governed primarily by the Corporation Code while a partnership, the Civil Code;
[c] A corporation can only exercise powers which are expressly granted by law or those inherent or implied while a partnership can act freely as long as not contrary to law, morals, good customs, public order and public policy; and
[d] A corporation acts through a board while a partnership acts through any partner, except when a general partner has been appointed.
[11] A CORPORATION WAS CREATED BY A SPECIAL LAW. LATER, THE LAW CREATING IT WAS DECLARED INVALID. MAY SUCH CORPORATION CLAIM TO BE A DE FACTO CORPORATION?
No, such a corporation created by an invalid special law cannot claim to be a de facto corporation for two reasons.
First, an invalid law creates no office, confers no rights and imposes no obligation. It is not a source of anything because it is void.
Second, for there to be a de facto corporation, there must be an apparently valid statute under which the corporation with its purposes may be formed.
[12] MAMUHUNAN WAS INVITED BY HIS FRIENDS TO INVEST IN A CORP., A NEWLY ORGANIZED FIRM ENGAGED IN MONEY MARKET FINANCING OPERATION. BECAUSE OF HIS HEAVY INVESTMENTS, MAMUHUNAN BECAME THE FIRM’S PRESIDENT AND, AS SUCH, PURCHASED A BIG NUMBER OF COMPUTERS, TYPEWRITERS AND OTHER EQUIPMENT FROM TAKTAK CORP. ON INSTALLMENT BASIS. A CORP. PAID THE DOWN PAYMENT AND TAKTAK CORP. ISSUED THE CORRESPONDING RECEIPT. TO HIS CHAGRIN, MAMUHUNAN DISCOVERED THAT THE ARTICLES OF INCORPORATION HAD NOT BEEN FILED BY HIS FRIENDS ON THAT DATE SO HE HURRIEDLY ATTENDED TO THE MATTER. NO SOONER HAD THE CERTIFICATE OF INCORPORATION BEEN ISSUED BY THE SEC, A CORP. BECAME BANKRUPT AFTER THREE MONTHS. UPON BEING SUED BY TAKTAK CORP. IN HIS PERSONAL CAPACITY, MAMUHUNAN RAISED AMONG ITS DEFENSES THE DOCTRINES OF DE FACTO CORPORATIONS AND CORPORATIONS BY ESTOPPEL. CAN THE TWO DEFENSES BE VALIDLY RAISED?
As to the defense of de facto corporation, no, it cannot be validly raised because one requisite is that there must be a colorable compliance with the legal requirement. In short, there must be a certificate of registration issued by the proper government agency which, in this case, is the Securities and Exchange Commission.
If used to implead his friends, the defense of corporation by estoppel can be validly raised.
Under the Corporation Code, the doctrine of corporation by estoppel is a device to protect persons dealing with an ostensible corporation. "All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof."
Therefore, in the case of Mamuhunan, he can use this doctrine to bring to the suit and make liable his friends who invited him to invest and made him believe that the corporation exists.
However, if Mamuhunan intends to use this defense to defeat the valid claims of TAKTAK, it cannot be validly raised. According to the Corporation Code, when any such ostensible corporation is sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality. On who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation.
[13] EXPLAIN WHO THE FOLLOWING ARE:
A. INCORPORATORS
Incorporators are those stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof.
B. CORPORATORS
Corporators are those who compose a corporation, whether as stockholders or as members.
C. STOCKHOLDERS AND MEMBERS
Broadly, a stockholder or member is a person who has interest in a corporation by reason of his investment therein. A stockholder is an investor in a stock corporation while a member is an investor in a non-stock corporation.
D. DIRECTORS AND TRUSTEES
Directors and trustees are persons who compose the governing board of a corporation. Directors are members of the governing board of a stock corporation while trustees, non-stock corporation.
E. CORPORATE OFFICERS
Corporate officers are special agents of the corporation as provided in its by-laws. According to the Corporation Code, there shall be an election of corporate officers such as the president, who shall be a director, a treasurer who may or may not be a director, a secretary who shall be a resident and citizen of the Philippines, and such other officers as may be provided for in the by-laws.
F. PROMOTER
A promoter is a person who invites investors and subscribers before the formation and organization of a corporation. Contracts entered into by a promoter are called pre-incorporation subscriptions.
[14] CAN ALL THE STOCKHOLDERS IN A CORPORATION BE FOREIGNERS?
Yes, as long as the corporation is not engaged in a nationalized business, all its stockholders can be foreigners.
[15] WHAT ARE THE FULLY OR PARTLY NATIONALIZED CORPORATIONS?
Based on the Constitution and statutes such as the Anti-Dummy Law, the following are nationalized corporations:
[a] Banking institutions;
[b] Finance institutions;
[c] Public utilities;
[d] Those engaged in the disposition, development and utilization of natural resources;
[e] Fishing companies;
[f] Shipping companies;
[g] Construction companies;
[h] Those dealing with geothermal energy;
[i] Retail companies;
[j] Mass media;
[k] Advertising;
[l] Educational institutions;
[m] Those engaged in the rice and corn industries;
[n] Those engaged in the tax-free cottage industry; and
[o] Those dealing with atomic energy.
[16] WHAT INDUSTRIES ARE NOT ALLOWED TO HAVE FOREIGN STOCKHOLDERS?
As discussed above, under the Constitution and statutes, there are nationalized industries. Partly nationalized ones can have foreign stockholders as long as the minimum Filipino equity requirement is complied with. In case of fully nationalized industries, corporations engaged therein are not allowed to have any foreign stockholder.
Examples of fully nationalized/Filipinized industries are: [a] rural banks; [b] cooperative fish farming; [c] use of marine resources; [d] retail trade; [e] mass media; and [f] rice and cord industry.
[17] WHAT CORPORATE NAME CANNOT BE USED?
No corporate name may be allowed by the SEC if the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws. When a change in the corporate name is approved, the Commission shall issue an amended certificate of incorporation under the amended name. In short, the following are not allowed:
[a] Identical names;
[b] Deceptively similar names;
[c] Confusingly similar names;
[d] Names protected by law;
[e] Patently deceptive names;
[f] Confusing names; and
[g] Illegal names.
18. WHAT IS THE IMPORTANCE/SIGNIFICANCE OF THE PRINCIPAL PLACE OF BUSINESS STATED IN THE ARTICLES OF INCORPORATION?
The statement regarding an exact principal place of business in the AOI is important because it is this address to which all summons, papers and other legal processes can be sent.
19. WHAT IS THE MAXIMUM TERM OF A CORPORATION? CAN IT BE EXTENDED?
Under the Revised Corporation Code, the maximum term of corporate existence has been removed. The Philippines now adopts the doctrine of perpetual corporate existence.
20. DETERMINE THE FOLLOWING TERMS:
A. AUTHORIZED CAPITAL STOCK
This is the maximum capital of the corporation as reflected on its articles of incorporation as approved by the SEC.
B. SUBSCRIBED CAPITAL STOCK
This is part of the authorized capital or the whole of it over which there have been contracts of subscription. In other words, there has been a promise to pay and purchase said stocks and, as a result of such contract, a stockholder holds the stocks. According to the Corporation Code, at least 25% of the capital stock must be subscribed.
C. PAID-UP CAPITAL
This is part of the authorized capital stock or the whole of it which has not only been subscribed but also paid. According to the Corporation Code, the paid-up capital must be at least 25% of the subscribed capital.
D. OUTSTANDING CAPITAL
Outstanding capital is that part of the authorized capital which has been issued as shares to stockholders.
E. CAPITAL.
Capital is the maximum fund that the corporation intends to use in its operations. If reflected on the articles of incorporation and approved by the SEC, it is called "authorized capital stock."
[21] THE ARTICLES OF INCORPORATION TO BE REGISTERED IN THE SEC CONTAINED THE FOLLOWING PROVISIONS
A) “FIRST ARTICLE. THE NAME OF THE CORPORATION SHALL BE TOHO MARKETING COMPANY.” B) “THIRD ARTICLE. THE PRINCIPAL OFFICE OF THE CORPORATION SHALL BE LOCATED IN REGION III, IN SUCH MUNICIPALITY THEREIN AS ITS BOARD OF DIRECTORS MAY DESIGNATE.” C) “SEVENTH ARTICLE. THE CAPITAL STOCK OF THE CORPORATION IS ONE MILLION PESOS (P1,000,000.00), PHILIPPINE CURRENCY.” WHAT ARE YOUR COMMENTS AND SUGGESTED CHANGES TO THE PROPOSED ARTICLES?
First, the corporate name already exists. It should be changed.
Second, the principal place of business or principal office should be more specific. According to the implementing rules and regulations of the SEC, the principal office should be an exact address.
[22] HOW CAN THE ARTICLES OF INCORPORATION BE AMENDED?
There must be [a] a resolution by the governing board via a majority vote of its members; [b] 2/3 vote or written assent of the stockholders representing the outstanding capital stock; [c] submission to and filing with the SEC; [d] a copy of the amendments duly certified under oath by the corporate secretary and a majority of the directors or trustees stating that the vote requirements have been complied with; and [e] favorable recommendation by the appropriate supervising government agency.
[23] WHEN CAN SEC SUSPEND OR CANCEL CERTIFICATE OF REGISTRATION?
Without prejudice to other grounds provided by special laws, the license of a foreign corporation to transact business in the Philippines may be revoked or suspended by the Securities and Exchange Commission upon any of the following grounds:
[a] REPORT. Failure to file its annual report or pay any fees as required by this Code;
[b] RESIDENT AGENT. Failure to appoint and maintain a resident agent in the Philippines as required by this Title;
[c] CHANGES. Failure, after change of its resident agent or of his address, to submit to the Securities and Exchange Commission a statement of such change as required by this Title;
[d] AUTHENTICATION. Failure to submit to the Securities and Exchange Commission an authenticated copy of any amendment to its articles of incorporation or by-laws or of any articles of merger or consolidation within the time prescribed by this Title;
[e] MISREPRESENTATION. A misrepresentation of any material matter in any application, report, affidavit or other document submitted by such corporation pursuant to this Title;
[f] FAILURE TO PAY TAXES. Failure to pay any and all taxes, imposts, assessments or penalties, if any, lawfully due to the Philippine Government or any of its agencies or political subdivisions;
[g] OUTSIDE PURPOSE. Transacting business in the Philippines outside of the purpose or purposes for which such corporation is authorized under its license;
[h] UNLICENSED FOREIGN CORPORATION. Transacting business in the Philippines as agent of or acting for and in behalf of any foreign corporation or entity not duly licensed to do business in the Philippines; or
[i] OTHER GROUNDS. Any other ground as would render it unfit to transact business in the Philippines. (n)
[24] WHAT IS A BY-LAW AND IT’S VALID REQUISITES?
A by-laws is the internal rules of the corporation. It is the list of policies for the corporation's internal business. The requisites for its validity are:
[a] It must not be contrary to law, public policy or morals;
[b] It must not be inconsistent with the articles of incorporation;
[c] It must be general and uniform in its effect or applicable to all alike or those similarly situated;
[d] It must not impair the obligations of contracts or vested rights; and
[c] It must be reasonable.
[25] WHAT IS THE BINDING EFFECT OF THE PROVISIONS OF THE BY-LAWS?
By-laws become effective and binding only upon approval of the Securities and Exchange Commission (SEC). Also, all the elements for its validity must be present; otherwise, it cannot bind anyone.
It must be noted, however, that by-laws are mere internal rules and are subordinate to the articles of incorporation.
[26] WHAT ARE THE KINDS OF POWERS OF A CORPORATION?
In the broad sense, a corporation has the following powers:
[a] Those expressly granted or authorized by law and its charter or articles of incorporation;
[b] Those impliedly granted or authorized by law as are reasonable necessary to carry out its express powers; and
[c] Those incidental to its existence.
In the narrow sense, a corporation has the following express powers (those expressly granted by law):
[a] Power to extend or shorten its corporate term;
[b] Power to increase or decrease its capital stock;
[c] Power to incur, create or increase bonded indebtedness;
[d] Power to deny pre-emptive rights;
[e] Power to sell or dispose of corporate assets;
[f] Power to acquire own shares;
[g] Power to invest corporate funds in another corporation or business or for any other purpose;
[h] Power to declare dividends; and
[i] Power to enter into management contracts.
[27] WHAT IS AN ULTRA VIRES ACT?
An ultra vires act is one done by the corporation outside of its purpose. In other words, it is an act not supported by the purpose clause in the articles of corporation.
28. WHO MAY EXERCISE THE POWERS OF THE CORPORATION?
The powers of a corporation are exercised by the governing board.
In case of stock corporations, it is the board of directors. In non-stock corporations, it is the board of trustees.
[29] IAI INC. (IAI) BY A STOCK PURCHASE AGREEMENT SOLD TO AI INC (AI) FOR THE SUM OF P19.5M ALL ITS OUTSTANDING SHARES OF STOCKS IN “F” CORP. THE AGREEMENT WAS SIGNED BY LG AND JV, PRESIDENTS OF IAI AND AI RESPECTIVELY. IAI EXPRESSLY WARRANTED IN THE AGREEMENT THAT THE NETWORTH OF “F” CORP. IS P12M. IAI AGREED THAT IF THE NETWORTH IS LESS THAN P12M, IAI WILL PAY AI THE DEFICIENCY. AI PAID IAI P12M AND RETAINED THE AMOUNT OF P7.5M TO ANSWER FOR ANY DEFICIENCY IN THE NET WORTH. INSTEAD OF REFLECTING A NET WORTH, IT TURNED OUT THAT “F” HAD A DEFICIENCY OF P1.2M. HENCE, IAI IS OBLIGATED TO REIMBURSE AI THE AMOUNT OF P13.2M (P12M PLUS THE DEFICIENCY OF P1.2M). HOWEVER, CONSIDERING THAT AI RETAINED P7.5M, THE BALANCE TO BE REIMBURSED IS ONLY P5.2M. LATER, LG, THE PRESIDENT OF IAI PROPOSED IN WRITING THAT AI’S CLAIM FOR REFUND BE REDUCED TO P4.09M BUT HE PROMISED TO PAY THE COSTS OF CERTAIN SUPERSTRUCTURES IN BEHALF OF AI. AI ACCEPTED THE PROPOSAL. LATER IAI’S BOARD REFUSED TO IMPLEMENT THE ACCEPTED PROPOSAL ON THE GROUND THAT WHILE THE BOARD AUTHORIZED LG TO PURCHASE THE SHARES, IT DID NOT AUTHORIZE LG TO MAKE THE LAST PROPOSAL. IS THE POSITION OF IAI’S BOARD TENABLE?
[30] IN WHAT INSTANCES IS CONCURRENCE OF THE STOCKHOLDERS NECESSARY FOR THE EXERCISE OF THE POWERS OF THE CORPORATIONS?
[a]Section 16. Amendment of Articles of Incorporation
[b]Section 28. Removal of directors or trustees
[c]Ratification under Section 32. Dealings of directors, trustees or officers with the corporation
[d]Ratification under Section 34. Disloyalty of a director
[e]Section 37. Power to extend or shorten corporate term
[f]Sale of all or substantially all under Section 40. Sale or other disposition of assets
[g]Section 42. Power to invest corporate funds in another corporation or business or for any other purpose
[h]Merger or acquisition under Section 77. Stockholder’s or member’s approval
[i]Dissolution of the corporation under Section 118. Voluntary dissolution where no creditors are affected and Section 119. Voluntary dissolution where creditors are affected
[j]Deletion or removal of any provision in the articles or changes in the quorum or voting requirements among close corporations under Section 103. Amendment of articles of incorporation
[k] Section 43. Power to declare dividends (in case of stock dividends)
[31] WHAT ARE THE INSTANCES WHEN CORPORATION MAY ACQUIRE ITS OWN SHARES?
A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the following cases: Provided, That the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired:
[a] To eliminate fractional shares arising out of stock dividends;
[b] To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and
[c] To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of the Corporation Code.
[32] CAN THE BOARD BE COMPELLED TO DECLARE DIVIDENDS EVERY YEAR?
As a general rule, the declaration of dividends is a business judgment which is lodged in the governing board. By way of exception, the articles of incorporation may provide that such declaration is required every year.
It may also happen that the corporation's unrestricted retained earnings would exceed 100% of its paid-in capital stock every year. In such a case, each year this happens, the board may be compelled to so declared except:
[a] When justified by definite corporate expansion projects or programs approved by the board of directors; or
[b] When the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or
[c] When it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies
[33] WHAT IS THE TRUST FUND DOCTRINE?
Trust fund doctrine is a principle of judicial invention which says that corporate assets are held as a trust fund for the benefit of shareholders and creditors and that the corporate officers have a fiduciary duty to deal with them properly.
[34] WHAT CAN BE INCLUDED IN UNRESTRICTED RETAINED EARNING?
In a nutshell, unrestricted retained earnings are surplus profits which have not yet been earmarked for a project or transaction. More specifically, they are earnings which have not been allocated for any managerial, contractual or legal purpose and which are free for distribution to stockholders as dividends.
[35] WHAT ITEMS CANNOT BE USED FOR DIVIDEND DISTRIBUTION?
Broadly, the following items cannot be used for dividend distribution:
[a] Earnings allocated for managerial purposes;
[b] Earnings allocated for contractual purposes; and
[c] Earnings allocated for legal purposes.
Specifically, the dividends cannot be distributed from the corporation's capital. It should be from actual and bona fide earnings. Revaluation surplus, reduction surplus and treasury shares also cannot be used as items for dividend distribution.
In addition to this, considerations received from the issuance of no-par value shares form part of the capital and cannot be distributed as dividends.
[36] CAN GAIN FROM SALE OF REAL PROPERTY BE CONSIDERED PART OF UNRESTRICTED RETAINED EARNINGS?
Yes.
[37] CAN TREASURY SHARES BE DISTRIBUTED BY WAY OF DIVIDENDS?
Yes.
[38] WHAT ARE THE REQUISITES OF A SALE OF ALL OR SUBSTANTIALLY ALL PROPERTIES?
The following requisites of a sale of all or substantially all properties:
[a] Resolution by the majority vote of a governing board;
[b] Authorization from the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of members;
[c] Such ratification of stockholders or members must be made at a meeting duly called for that purpose;
[d] Prior written notice of the proposed action and of the time and place of meeting addressed to all stockholders of record, either by mail or personal service;
[e] The sale of assets must not be illegal such as an illegal combination or monopoly;
[f] Any dissenting stockholder shall have the option to exercise his appraisal right.
No, ownership of substantial portion of the outstanding capital in a corporation is no enough justification to apply the doctrine of piercing of the corporate veil.
The veil of corporate fiction may be pierced when it is used as a shield to further an end subversive of justice, or for purposes that could not have been intended by law that created it or to defeat public convenience, justify wrong, protect fraud or defend crime or to perpetuate fraud or confuse legitimate issues or to circumvent the law or perpetuate deception or as an alter ego, adjunct or business conduit for the sole benefit of the stockholders. Therefore, there are limited circumstances in which said doctrine applies:
[a] Injustice;
[b] Public inconvenience;
[c] Wrong;
[d] Fraud;
[e] Crime;
[f] Confusion regarding legitimate issues; and (among others)
[g] Deception through alter ego, adjunct or business conduit.
8. WHAT ARE THE ELEMENTS THAT MUST BE PRESENT TO JUSTIFY THE PIERCING OF THE VEIL OF CORPORATE FICTION ON THE GROUND THAT THE CORPORATION IS A MERE ALTER EGO?
According to Garrett vs. Southern Railway, there are 11 factors:
[a] STOCK. The parent corporation owns all or most of the capital stock of the subsidiary;
[b] DIRECTORS. The parent and subsidiary have common directors and officers;
[c] FINANCE. The parent finances the subsidiary;
[d] SUBSCRIPTION OR INCORPORATION. The parent subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation;
[e] GROSSLY INADEQUATE CAPITAL. The subsidiary has grossly inadequate capital;
[f] EXPENSES AND LOSSES. The parent pays the salaries and other expenses or losses of the subsidiary;
[g] NO OTHER BUSINESS. The subsidiary has substantially no business except with the parent corporation or no assets except those conveyed to or by the parent corporation;
[h] DEPARTMENT OR DIVISION. In the papers of the parent corporation or in the statements of its officers, the subsidiary is described as a department or division of the parent corporation or its business or financial responsibility is referred as the parent’s own;
[i] PROPERTY. The parent corporation uses the property of the subsidiary as its own;
[j] DEPENDENCE. The directors or the executives of the subsidiary do not act independently in the interest of the subsidiary but take their orders from the parent corporation in the latter’s interest; and
[k] LEGAL REQUIREMENTS. The formal legal requirements of the subsidiary are not observed.
[9] EXPLAIN THE RIGHT OF SUCCESSION.
In corporation law, right of succession also means "continuity of existence." This means that, despite the death, incapacity, replacement or civil interdiction of the persons composing it, the corporation is not affected and its business operations continue uninterrupted as long as its juridical personality exists.
[10] DISTINGUISH THE FOLLOWING:
A. DE JURE CORPORATION VS. DE FACTO CORPORATION
A de facto corporation is a defectively organized corporation, which has all the powers and liabilities of a de jure corporation and, except as to the State, has a juridical personality distinct and separate from its shareholders, provided that the following requisites are concurrently present:
[a] That there is an apparently valid statute under which the corporation with its purposes may be formed;
[b] That there has been colorable compliance with the legal requirements in good faith; and
[c] That there has been use of corporate powers, i.e., the transaction of business in some way as if it were a corporation.
A corporation which has no defect in legal requirements is a de jure corporation.
B. STOCK CORPORATION VS. NON-STOCK
A stock corporation is one whose capital stock is divided into shares and whose articles of incorporation allows it to distribute dividends. A non-stock corporation is one which lacks either of the two requirements of a stock corporation.
C. CORPORATION VS. PARTNERSHIP
A corporation is different from a partnership in the following ways:
[a] A corporation is created by law or by operation of law while a partnership is created by mere agreement of the parties;
[b] A corporation is governed primarily by the Corporation Code while a partnership, the Civil Code;
[c] A corporation can only exercise powers which are expressly granted by law or those inherent or implied while a partnership can act freely as long as not contrary to law, morals, good customs, public order and public policy; and
[d] A corporation acts through a board while a partnership acts through any partner, except when a general partner has been appointed.
[11] A CORPORATION WAS CREATED BY A SPECIAL LAW. LATER, THE LAW CREATING IT WAS DECLARED INVALID. MAY SUCH CORPORATION CLAIM TO BE A DE FACTO CORPORATION?
No, such a corporation created by an invalid special law cannot claim to be a de facto corporation for two reasons.
First, an invalid law creates no office, confers no rights and imposes no obligation. It is not a source of anything because it is void.
Second, for there to be a de facto corporation, there must be an apparently valid statute under which the corporation with its purposes may be formed.
[12] MAMUHUNAN WAS INVITED BY HIS FRIENDS TO INVEST IN A CORP., A NEWLY ORGANIZED FIRM ENGAGED IN MONEY MARKET FINANCING OPERATION. BECAUSE OF HIS HEAVY INVESTMENTS, MAMUHUNAN BECAME THE FIRM’S PRESIDENT AND, AS SUCH, PURCHASED A BIG NUMBER OF COMPUTERS, TYPEWRITERS AND OTHER EQUIPMENT FROM TAKTAK CORP. ON INSTALLMENT BASIS. A CORP. PAID THE DOWN PAYMENT AND TAKTAK CORP. ISSUED THE CORRESPONDING RECEIPT. TO HIS CHAGRIN, MAMUHUNAN DISCOVERED THAT THE ARTICLES OF INCORPORATION HAD NOT BEEN FILED BY HIS FRIENDS ON THAT DATE SO HE HURRIEDLY ATTENDED TO THE MATTER. NO SOONER HAD THE CERTIFICATE OF INCORPORATION BEEN ISSUED BY THE SEC, A CORP. BECAME BANKRUPT AFTER THREE MONTHS. UPON BEING SUED BY TAKTAK CORP. IN HIS PERSONAL CAPACITY, MAMUHUNAN RAISED AMONG ITS DEFENSES THE DOCTRINES OF DE FACTO CORPORATIONS AND CORPORATIONS BY ESTOPPEL. CAN THE TWO DEFENSES BE VALIDLY RAISED?
As to the defense of de facto corporation, no, it cannot be validly raised because one requisite is that there must be a colorable compliance with the legal requirement. In short, there must be a certificate of registration issued by the proper government agency which, in this case, is the Securities and Exchange Commission.
If used to implead his friends, the defense of corporation by estoppel can be validly raised.
Under the Corporation Code, the doctrine of corporation by estoppel is a device to protect persons dealing with an ostensible corporation. "All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof."
Therefore, in the case of Mamuhunan, he can use this doctrine to bring to the suit and make liable his friends who invited him to invest and made him believe that the corporation exists.
However, if Mamuhunan intends to use this defense to defeat the valid claims of TAKTAK, it cannot be validly raised. According to the Corporation Code, when any such ostensible corporation is sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality. On who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation.
[13] EXPLAIN WHO THE FOLLOWING ARE:
A. INCORPORATORS
Incorporators are those stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof.
B. CORPORATORS
Corporators are those who compose a corporation, whether as stockholders or as members.
C. STOCKHOLDERS AND MEMBERS
Broadly, a stockholder or member is a person who has interest in a corporation by reason of his investment therein. A stockholder is an investor in a stock corporation while a member is an investor in a non-stock corporation.
D. DIRECTORS AND TRUSTEES
Directors and trustees are persons who compose the governing board of a corporation. Directors are members of the governing board of a stock corporation while trustees, non-stock corporation.
E. CORPORATE OFFICERS
Corporate officers are special agents of the corporation as provided in its by-laws. According to the Corporation Code, there shall be an election of corporate officers such as the president, who shall be a director, a treasurer who may or may not be a director, a secretary who shall be a resident and citizen of the Philippines, and such other officers as may be provided for in the by-laws.
F. PROMOTER
A promoter is a person who invites investors and subscribers before the formation and organization of a corporation. Contracts entered into by a promoter are called pre-incorporation subscriptions.
[14] CAN ALL THE STOCKHOLDERS IN A CORPORATION BE FOREIGNERS?
Yes, as long as the corporation is not engaged in a nationalized business, all its stockholders can be foreigners.
[15] WHAT ARE THE FULLY OR PARTLY NATIONALIZED CORPORATIONS?
Based on the Constitution and statutes such as the Anti-Dummy Law, the following are nationalized corporations:
[a] Banking institutions;
[b] Finance institutions;
[c] Public utilities;
[d] Those engaged in the disposition, development and utilization of natural resources;
[e] Fishing companies;
[f] Shipping companies;
[g] Construction companies;
[h] Those dealing with geothermal energy;
[i] Retail companies;
[j] Mass media;
[k] Advertising;
[l] Educational institutions;
[m] Those engaged in the rice and corn industries;
[n] Those engaged in the tax-free cottage industry; and
[o] Those dealing with atomic energy.
[16] WHAT INDUSTRIES ARE NOT ALLOWED TO HAVE FOREIGN STOCKHOLDERS?
As discussed above, under the Constitution and statutes, there are nationalized industries. Partly nationalized ones can have foreign stockholders as long as the minimum Filipino equity requirement is complied with. In case of fully nationalized industries, corporations engaged therein are not allowed to have any foreign stockholder.
Examples of fully nationalized/Filipinized industries are: [a] rural banks; [b] cooperative fish farming; [c] use of marine resources; [d] retail trade; [e] mass media; and [f] rice and cord industry.
[17] WHAT CORPORATE NAME CANNOT BE USED?
No corporate name may be allowed by the SEC if the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws. When a change in the corporate name is approved, the Commission shall issue an amended certificate of incorporation under the amended name. In short, the following are not allowed:
[a] Identical names;
[b] Deceptively similar names;
[c] Confusingly similar names;
[d] Names protected by law;
[e] Patently deceptive names;
[f] Confusing names; and
[g] Illegal names.
18. WHAT IS THE IMPORTANCE/SIGNIFICANCE OF THE PRINCIPAL PLACE OF BUSINESS STATED IN THE ARTICLES OF INCORPORATION?
The statement regarding an exact principal place of business in the AOI is important because it is this address to which all summons, papers and other legal processes can be sent.
19. WHAT IS THE MAXIMUM TERM OF A CORPORATION? CAN IT BE EXTENDED?
Under the Revised Corporation Code, the maximum term of corporate existence has been removed. The Philippines now adopts the doctrine of perpetual corporate existence.
20. DETERMINE THE FOLLOWING TERMS:
A. AUTHORIZED CAPITAL STOCK
This is the maximum capital of the corporation as reflected on its articles of incorporation as approved by the SEC.
B. SUBSCRIBED CAPITAL STOCK
This is part of the authorized capital or the whole of it over which there have been contracts of subscription. In other words, there has been a promise to pay and purchase said stocks and, as a result of such contract, a stockholder holds the stocks. According to the Corporation Code, at least 25% of the capital stock must be subscribed.
C. PAID-UP CAPITAL
This is part of the authorized capital stock or the whole of it which has not only been subscribed but also paid. According to the Corporation Code, the paid-up capital must be at least 25% of the subscribed capital.
D. OUTSTANDING CAPITAL
Outstanding capital is that part of the authorized capital which has been issued as shares to stockholders.
E. CAPITAL.
Capital is the maximum fund that the corporation intends to use in its operations. If reflected on the articles of incorporation and approved by the SEC, it is called "authorized capital stock."
[21] THE ARTICLES OF INCORPORATION TO BE REGISTERED IN THE SEC CONTAINED THE FOLLOWING PROVISIONS
A) “FIRST ARTICLE. THE NAME OF THE CORPORATION SHALL BE TOHO MARKETING COMPANY.” B) “THIRD ARTICLE. THE PRINCIPAL OFFICE OF THE CORPORATION SHALL BE LOCATED IN REGION III, IN SUCH MUNICIPALITY THEREIN AS ITS BOARD OF DIRECTORS MAY DESIGNATE.” C) “SEVENTH ARTICLE. THE CAPITAL STOCK OF THE CORPORATION IS ONE MILLION PESOS (P1,000,000.00), PHILIPPINE CURRENCY.” WHAT ARE YOUR COMMENTS AND SUGGESTED CHANGES TO THE PROPOSED ARTICLES?
First, the corporate name already exists. It should be changed.
Second, the principal place of business or principal office should be more specific. According to the implementing rules and regulations of the SEC, the principal office should be an exact address.
[22] HOW CAN THE ARTICLES OF INCORPORATION BE AMENDED?
There must be [a] a resolution by the governing board via a majority vote of its members; [b] 2/3 vote or written assent of the stockholders representing the outstanding capital stock; [c] submission to and filing with the SEC; [d] a copy of the amendments duly certified under oath by the corporate secretary and a majority of the directors or trustees stating that the vote requirements have been complied with; and [e] favorable recommendation by the appropriate supervising government agency.
[23] WHEN CAN SEC SUSPEND OR CANCEL CERTIFICATE OF REGISTRATION?
Without prejudice to other grounds provided by special laws, the license of a foreign corporation to transact business in the Philippines may be revoked or suspended by the Securities and Exchange Commission upon any of the following grounds:
[a] REPORT. Failure to file its annual report or pay any fees as required by this Code;
[b] RESIDENT AGENT. Failure to appoint and maintain a resident agent in the Philippines as required by this Title;
[c] CHANGES. Failure, after change of its resident agent or of his address, to submit to the Securities and Exchange Commission a statement of such change as required by this Title;
[d] AUTHENTICATION. Failure to submit to the Securities and Exchange Commission an authenticated copy of any amendment to its articles of incorporation or by-laws or of any articles of merger or consolidation within the time prescribed by this Title;
[e] MISREPRESENTATION. A misrepresentation of any material matter in any application, report, affidavit or other document submitted by such corporation pursuant to this Title;
[f] FAILURE TO PAY TAXES. Failure to pay any and all taxes, imposts, assessments or penalties, if any, lawfully due to the Philippine Government or any of its agencies or political subdivisions;
[g] OUTSIDE PURPOSE. Transacting business in the Philippines outside of the purpose or purposes for which such corporation is authorized under its license;
[h] UNLICENSED FOREIGN CORPORATION. Transacting business in the Philippines as agent of or acting for and in behalf of any foreign corporation or entity not duly licensed to do business in the Philippines; or
[i] OTHER GROUNDS. Any other ground as would render it unfit to transact business in the Philippines. (n)
[24] WHAT IS A BY-LAW AND IT’S VALID REQUISITES?
A by-laws is the internal rules of the corporation. It is the list of policies for the corporation's internal business. The requisites for its validity are:
[a] It must not be contrary to law, public policy or morals;
[b] It must not be inconsistent with the articles of incorporation;
[c] It must be general and uniform in its effect or applicable to all alike or those similarly situated;
[d] It must not impair the obligations of contracts or vested rights; and
[c] It must be reasonable.
[25] WHAT IS THE BINDING EFFECT OF THE PROVISIONS OF THE BY-LAWS?
By-laws become effective and binding only upon approval of the Securities and Exchange Commission (SEC). Also, all the elements for its validity must be present; otherwise, it cannot bind anyone.
It must be noted, however, that by-laws are mere internal rules and are subordinate to the articles of incorporation.
[26] WHAT ARE THE KINDS OF POWERS OF A CORPORATION?
In the broad sense, a corporation has the following powers:
[a] Those expressly granted or authorized by law and its charter or articles of incorporation;
[b] Those impliedly granted or authorized by law as are reasonable necessary to carry out its express powers; and
[c] Those incidental to its existence.
In the narrow sense, a corporation has the following express powers (those expressly granted by law):
[a] Power to extend or shorten its corporate term;
[b] Power to increase or decrease its capital stock;
[c] Power to incur, create or increase bonded indebtedness;
[d] Power to deny pre-emptive rights;
[e] Power to sell or dispose of corporate assets;
[f] Power to acquire own shares;
[g] Power to invest corporate funds in another corporation or business or for any other purpose;
[h] Power to declare dividends; and
[i] Power to enter into management contracts.
[27] WHAT IS AN ULTRA VIRES ACT?
An ultra vires act is one done by the corporation outside of its purpose. In other words, it is an act not supported by the purpose clause in the articles of corporation.
28. WHO MAY EXERCISE THE POWERS OF THE CORPORATION?
The powers of a corporation are exercised by the governing board.
In case of stock corporations, it is the board of directors. In non-stock corporations, it is the board of trustees.
[29] IAI INC. (IAI) BY A STOCK PURCHASE AGREEMENT SOLD TO AI INC (AI) FOR THE SUM OF P19.5M ALL ITS OUTSTANDING SHARES OF STOCKS IN “F” CORP. THE AGREEMENT WAS SIGNED BY LG AND JV, PRESIDENTS OF IAI AND AI RESPECTIVELY. IAI EXPRESSLY WARRANTED IN THE AGREEMENT THAT THE NETWORTH OF “F” CORP. IS P12M. IAI AGREED THAT IF THE NETWORTH IS LESS THAN P12M, IAI WILL PAY AI THE DEFICIENCY. AI PAID IAI P12M AND RETAINED THE AMOUNT OF P7.5M TO ANSWER FOR ANY DEFICIENCY IN THE NET WORTH. INSTEAD OF REFLECTING A NET WORTH, IT TURNED OUT THAT “F” HAD A DEFICIENCY OF P1.2M. HENCE, IAI IS OBLIGATED TO REIMBURSE AI THE AMOUNT OF P13.2M (P12M PLUS THE DEFICIENCY OF P1.2M). HOWEVER, CONSIDERING THAT AI RETAINED P7.5M, THE BALANCE TO BE REIMBURSED IS ONLY P5.2M. LATER, LG, THE PRESIDENT OF IAI PROPOSED IN WRITING THAT AI’S CLAIM FOR REFUND BE REDUCED TO P4.09M BUT HE PROMISED TO PAY THE COSTS OF CERTAIN SUPERSTRUCTURES IN BEHALF OF AI. AI ACCEPTED THE PROPOSAL. LATER IAI’S BOARD REFUSED TO IMPLEMENT THE ACCEPTED PROPOSAL ON THE GROUND THAT WHILE THE BOARD AUTHORIZED LG TO PURCHASE THE SHARES, IT DID NOT AUTHORIZE LG TO MAKE THE LAST PROPOSAL. IS THE POSITION OF IAI’S BOARD TENABLE?
[30] IN WHAT INSTANCES IS CONCURRENCE OF THE STOCKHOLDERS NECESSARY FOR THE EXERCISE OF THE POWERS OF THE CORPORATIONS?
[a]Section 16. Amendment of Articles of Incorporation
[b]Section 28. Removal of directors or trustees
[c]Ratification under Section 32. Dealings of directors, trustees or officers with the corporation
[d]Ratification under Section 34. Disloyalty of a director
[e]Section 37. Power to extend or shorten corporate term
[f]Sale of all or substantially all under Section 40. Sale or other disposition of assets
[g]Section 42. Power to invest corporate funds in another corporation or business or for any other purpose
[h]Merger or acquisition under Section 77. Stockholder’s or member’s approval
[i]Dissolution of the corporation under Section 118. Voluntary dissolution where no creditors are affected and Section 119. Voluntary dissolution where creditors are affected
[j]Deletion or removal of any provision in the articles or changes in the quorum or voting requirements among close corporations under Section 103. Amendment of articles of incorporation
[k] Section 43. Power to declare dividends (in case of stock dividends)
[31] WHAT ARE THE INSTANCES WHEN CORPORATION MAY ACQUIRE ITS OWN SHARES?
A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the following cases: Provided, That the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired:
[a] To eliminate fractional shares arising out of stock dividends;
[b] To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and
[c] To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of the Corporation Code.
[32] CAN THE BOARD BE COMPELLED TO DECLARE DIVIDENDS EVERY YEAR?
As a general rule, the declaration of dividends is a business judgment which is lodged in the governing board. By way of exception, the articles of incorporation may provide that such declaration is required every year.
It may also happen that the corporation's unrestricted retained earnings would exceed 100% of its paid-in capital stock every year. In such a case, each year this happens, the board may be compelled to so declared except:
[a] When justified by definite corporate expansion projects or programs approved by the board of directors; or
[b] When the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or
[c] When it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies
[33] WHAT IS THE TRUST FUND DOCTRINE?
Trust fund doctrine is a principle of judicial invention which says that corporate assets are held as a trust fund for the benefit of shareholders and creditors and that the corporate officers have a fiduciary duty to deal with them properly.
[34] WHAT CAN BE INCLUDED IN UNRESTRICTED RETAINED EARNING?
In a nutshell, unrestricted retained earnings are surplus profits which have not yet been earmarked for a project or transaction. More specifically, they are earnings which have not been allocated for any managerial, contractual or legal purpose and which are free for distribution to stockholders as dividends.
[35] WHAT ITEMS CANNOT BE USED FOR DIVIDEND DISTRIBUTION?
Broadly, the following items cannot be used for dividend distribution:
[a] Earnings allocated for managerial purposes;
[b] Earnings allocated for contractual purposes; and
[c] Earnings allocated for legal purposes.
Specifically, the dividends cannot be distributed from the corporation's capital. It should be from actual and bona fide earnings. Revaluation surplus, reduction surplus and treasury shares also cannot be used as items for dividend distribution.
In addition to this, considerations received from the issuance of no-par value shares form part of the capital and cannot be distributed as dividends.
[36] CAN GAIN FROM SALE OF REAL PROPERTY BE CONSIDERED PART OF UNRESTRICTED RETAINED EARNINGS?
Yes.
[37] CAN TREASURY SHARES BE DISTRIBUTED BY WAY OF DIVIDENDS?
Yes.
[38] WHAT ARE THE REQUISITES OF A SALE OF ALL OR SUBSTANTIALLY ALL PROPERTIES?
The following requisites of a sale of all or substantially all properties:
[a] Resolution by the majority vote of a governing board;
[b] Authorization from the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of members;
[c] Such ratification of stockholders or members must be made at a meeting duly called for that purpose;
[d] Prior written notice of the proposed action and of the time and place of meeting addressed to all stockholders of record, either by mail or personal service;
[e] The sale of assets must not be illegal such as an illegal combination or monopoly;
[f] Any dissenting stockholder shall have the option to exercise his appraisal right.
[39] X CORPORATION IS ENGAGED IN SELLING PENCILS ON WHOLESALE BASIS. IT IS MERELY RENTING A BODEGA AND 90% OF ITS ASSETS CONSISTS OF ITS STOCKS OF PENCIL. “A”, A SCHOOL SUPPLY DEALER, PURCHASED ALL THE STOCKS OF X CORP. IS THE TRANSACTION A SALE OF SUBSTANTIALLY ALL OF THE ASSETS OF THE CORPORATION REQUIRING CONCURRENCE OF STOCKHOLDERS REPRESENTING 2/3 OF THE OUTSTANDING CAPITAL STOCK?
No, because this sale is in the regular course of business. Moreover, this is in line with the purpose of the corporation.
[40] AA CORPORATION IS ENGAGED IN THE BUSINESS OF PRINTING BOOKS. AROUND 70% OF ITS ASSETS CONSISTS OF CASH IN THE BANK, 25% PRINTING MACHINE AND THE REMAINING OFFICE EQUIPMENT AND SUPPLIES. AA CORPORATION PLANS TO SELL THE MACHINE. CAN IT BE CONSIDERED SALE OF SUBSTANTIALLY ALL OF THE ASSETS OF THE CORPORATION?
Yes, because the normal operations of the company would be impaired by such sale. Sale of substantially all assets of the corporation has been defined as that which will render it "incapable of continuing the business or accomplishing the purpose for which it is incorporated. The test is not quantity but quality.
[41] WHAT ARE THE WAYS OF INCREASING AND DECREASING THE CAPITAL STOCK?
The following are three ways of doing this:
[a] Increasing the par value of existing shares without increasing the number of shares;
[b] Increasing the number of existing shares without increasing the par value thereof; and
[c] Increasing the number of existing shares and, at the same time, increasing the par value thereof.
42. WHAT ARE THE QUALIFICATIONS OF DIRECTORS?
[a] He must have at least one (1) share which stands in his name on the books of the corporation; and
[b] He must be a natural person.
Also:
[c] He must not have been convicted by final judgment for a crime punishable by at least 6 years of imprisonment;
[d] He must not have violated the Corporation Code within 5 years prior to the date of his election; and
[e] He must be of legal age.
43. WHAT IS THE BUSINESS JUDGEMENT RULE?
Courts will not interfere with the decisions made by the governing board as regards the internal affairs of the corporation unless such acts are so unconscionable and oppressive as to amount to a wanton destruction of the rights of the minority shareholders, let alone illegal.
44. WHAT IS THE DOCTRINE OF CORPORATE OPPORTUNITY?
Where a director, by virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation: A director shall refund to the corporation all the profits he realizes on a business opportunity which: [a] the corporation is financially able to undertake; [b] from its nature, is in line with corporation's business and is of practical advantage to it; and [ c] the corporation has an interest or a reasonable expectancy.
45. WHO IS AN INTERLOCKING DIRECTOR?
Interlocking directors are those whose interests in two (or more) companies are both (all) substantial. Substantial interest means more than 20% of the outstanding capital stock.
46. ARE CORPORATE AGENTS SUCH AS DIRECTORS, TRUSTEES OR OFFICERS OF A CORPORATION SOLIDARILY LIABLE WITH THE CORPORATION THEY REPRESENT?
Generally, corporate agents are not solidarily liable with the corporation because of the doctrine of separate corporate personality.
It is hornbook principle that personal liability of corporate directors, trustees or officers attaches only when: [a] they assent to a patently unlawful act of the corporation, or when they are guilty of bad faith or gross negligence in directing its affairs, or when there is a conflict of interest resulting in damages to the corporation, its stockholders or other persons; [b] they consent to the issuance of watered down stocks or when, having knowledge of such issuance, do not forthwith file with the corporate secretary their written objection; [c] they agree to hold themselves personally and solidarily liable with the corporation; or [d] they are made by specific provision of law personally answerable for their corporate action.
47. ANSWER THE FOLLOWING:
A. WHO ARE SELF-DEALING DIRECTORS/TRUSTEES/OFFICERS?
Self-dealing corporate agents are those [a] who have pecuniary interest in the a transaction or contract that the corporation is entering into and [b] whose affirmative vote is material to the realization or approval of such transaction, contract or project.
B. WHAT ARE THE RULES WHEN THERE IS A SELF-DEALING DIRECTOR/TRUSTEE/OFFICER IN A CORPORATION?
A contract of the corporation with one or more of its directors or trustees is VOIDABLE, at the option of such corporation.
Such contract is VALID if all of the following conditions are present:
[a] That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting;
[b] That the vote of such director or trustee was not necessary for the approval of the contract;
[c] That the contract is fair and reasonable under the circumstances; and
[d] That in case of an officer, the contract has been previously authorized by the BOD.
In the absence of the [a] and [b] above, there may be ratification by stockholders representing at least 2/3 of the outstanding capital stock or at least 2/3 of the members in a meeting called for the purpose voted to ratify the contract after full disclosure of such adverse interest in said meeting.
48. WHO ARE THE CORPORATE OFFICERS OF A CORPORATION?
They are those officers identified by the Corporation Code, by the articles of incorporation or by the by-laws of the corporation. Currently, the Revised Corporation Code provides that they are the CEO, CFO, the corporate secretary and other officers as may be provided in the by-laws.
49. IS SERVICE OF SUMMONS ON A SECRETARY OF THE PRESIDENT OF A DOMESTIC PRIVATE CORPORATION BINDING ON THE CORPORATION?
No, because the Rules of Court requires that such service shall be made exclusively to the President, the Managing Director, the Corporate Secretary, the in-house counsel, the Treasurer or the General Manager.
50. “A”, AS OWNER OF A CERTAIN NUMBER OF SHARES OF STOCK IN X CORPORATION, ENTERED INTO A VOTING TRUST AGREEMENT WITH B. ON THE BASIS OF THE VOTING TRUST AGREEMENT, B ANNOUNCED HIS DESIRE TO RUN FOR A SEAT IN THE BOARD OF DIRECTORS OF X CORPORATION. C, ANOTHER STOCKHOLDER, OBJECTED AND QUESTIONED THE ELIGIBILITY OF B TO BE A DIRECTOR OF X CORPORATION. IS C’S CONTENTION CORRECT? WHY?
A voting trust agreement results in the separation of the voting rights of a stockholder from his other rights such as the right to receive dividends and other rights to which a stockholder may be entitled until the liquidation of the corporation. It is the trustee of the shares who acquires legal title to the shares under the voting trust agreement and thus entitled to the right to vote and the right to be elected as board of directors while the trustor‐stockholder has the beneficial title which includes the right to receive dividends (Lee vs. CA 205 SCRA 752)
51. WHO CAN APPOINT AND REMOVE THE OFFICERS OF THE CORPORATION?
The stockholders have the power to remove directors of the corporation. The power to remove belongs to the stockholders exclusively. The appointment of directors/trustees is done by election also by the stockholders/members.
After the election of directors, they (the directors) must formally organize for the election of corporate officers.
52. FLAD CORPORATION WAS ORIGINALLY WITH AN AUTHORIZED CAPITAL STOCK OF P500,000.00 SHARES WITH THE MEMBERS OF THE “T” FAMILY OWNING P450,200.00 SHARES REPRESENTING THE OUTSTANDING CAPITAL. THE “T” FAMILY INVITED MEMBERS OF THE “O” FAMILY TO INVEST IN FLADC AS STOCKHOLDERS NECESSITATING AN INCREASE OF THE AUTHORIZED CAPITAL STOCK TO GIVE EACH GROUP EQUAL(50-50) SHAREHOLDINGS AS AGREED UPON IN THE PRE-SUBSCRIPTION AGREEMENT. PURSUANT TO THE SAID SUBSCRIPTION AGREEMENT, THE AUTHORIZED CAPITAL STOCK WAS THUS INCREASED FROM P500,000.00 SHARES TO P2,000,000.00 SHARES WITH A PAR VALUE OF P100.00 EACH, WITH THE “O” FAMILY SUBSCRIBING TO P1,000,000.00 SHARES AND THE “T” TO P549,800.00 MORE SHARES IN ADDITION TO THEIR P450,200.00 SHARES TO COMPLETE P1,000,000.00 SHARES. THE PRE-SUBSCRIPTION AGREEMENT LIKEWISE PROVIDES THAT THE “T” FAMILY SHALL NOMINATE THE VICE-PRESIDENT AND TREASURER AND FIVE DIRECTORS WHILE THE “O” FAMILY IS SUPPOSED TO MANAGE THE MALL OWNED BY FLADC. LATER, ALLEGING NON-COMPLIANCE WITH THE OBLIGATION UNDER THE AGREEMENT, THE MEMBERS OF THE “T” FAMILY WERE ALLEGEDLY PREVENTED FROM ACTING AS VICE-PRESIDENT AND TREASURER), THE “T” FAMILY FILED AN ACTION FOR RESCISSION OF THE PRE-SUBSCRIPTION AGREEMENT AND ASKED FOR THE LIQUIDATION OF THE ASSETS OF FLADC. WILL THE ACTION PROSPER? EXPLAIN.
No, because the agreement is contrary to the Corporation Code.
[a] Amendments increasing and decreasing the capital stock must not only be approved by the board and the stockholders, it must also be registered with and approved by the SEC;
[b] The election of corporate officers is within the power of the governing board and cannot be taken away by mere contract;
[c] The election of directors is within the power of the stockholders exclusively and cannot be taken away by mere contract; and
[d] The management of the affairs of the corporation is a business judgment which cannot be taken away from the board of directors.
53. HOW DOES ONE BECOME A SHAREHOLDER IN A CORPORATION?
He becomes one by subscription (contract of unissued shares), by purchase of shares from existing stockholders or purchase of treasury shares from the corporation.
54. WHAT IS AN UNDERWRITING AGREEMENT?
It is a contract for subscription entered into between a promoter (also known as underwriter) and a would-be stockholder.
55. WHAT IS THE DOCTRINE OF INDIVIDUALITY AND INDIVISIBILITY OF SUBSCRIPTION?
A subscription is one entire and indivisible whole contract. It cannot be divided into portions.
56. DISTINGUISH SHARE OF STOCK FROM CERTIFICATE OF STOCK.
A share of stock is an interest in the corporation while a certificate of stock is a paper which serves as prima facie proof of such interest.
A share of stock is a part of the capital stock of a corporation which may be purchased or issued. On the other hand, a certificate of stock, even if unissued, does not mean that a stockholder owns no share in the corporation.
A share of stock is a unit of investment which an investor promises to pay or pays for via a subscription contract. Whereas, a certificate of share is a mere tangible evidence of the stock itself which is an intangible property.
CLUE: Unit v. evidence; intangible v. tangible; and not fully-paid v. fully-paid.
57. WHAT IS YOUR UNDERSTANDING OF “TREASURY SHARES”? ARE SAID SHARES CONSIDERED: (A) ISSUED; (B) FULLY PAID (C) OUTSTANDING (D) ENTITLED TO DIVIDENDS? (E) MAY SUCH SHARES BE DISTRIBUTED TO THE STOCKHOLDERS BY WAY OF DIVIDENDS? IF YES, HOW WOULD YOU CLASSIFY THE DIVIDEND – CASH OR STOCK DIVIDEND?
Shares that have been earlier issued as fully corporation by purchase, donation, and redemption or through some lawful means.
They are considered previously-issued, fully-paid, not outstandign and not entitled to dividends.
They cannot be issued as dividends because they are not deemed unrestricted.
58. WHAT ARE THE INSTANCES WHEN NON-VOTING SHARES MAY VOTE?
[1] Amendment of 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;
[4] Incurring, creating or increasing bonded indebtedness;
[5] Increase or decrease of capital stock;
[6] Merger or consolidation of the corporation with another corporation or other corporations;
[7 Investment of corporate funds in another corporation or business in accordance with this Code;
[8] Dissolution of the corporation.
59. WHAT ARE THE LIMITATIONS ON THE ISSUANCE OF “NO PAR VALUE” SHARES?
[1] Cannot have an issue price of less than P5.00 per share;
[2] Once issued, they shall be deemed fully paid and non-assessable and the holders of such shares shall not be liable to the corporation or to its creditors in respect thereto;
[3] Entire consideration received by the corporation shall be treated as capital and shall not be available for distribution as dividends;
[4] Articles of Incorporation must state the fact that the corporation issues no-par shares and the number of shares;
[5] Cannot be issued as preferred stocks;
[6] Cannot be issued by banks, insurance companies, trust companies, building and loan associations, and public utilities; and
[7] Issued price may be fixed in the Articles of Incorporation, or by the BOD pursuant to authority conferred upon it by the Articles of Incorporation, or, in the absence thereof, by majority vote of the outstanding shares in a meeting called for the purpose.
60. WHAT IS THE DOCTRINE OF EQUALITY OF SHARES?
Where the articles of incorporation do not provide for any distinction of the shares of stock, all shares issued by the corporation are presumed to be equal and enjoy the same rights and privileges and are also subject to the same liabilities.
61. WHAT ARE WATERED STOCKS?
A stock issued in exchange for cash, property, share, stock dividends, or services lesser than its par value.
62. WHAT IS A CERTIFICATE OF STOCK?
It is a paper representation or tangible evidence of the stock itself and of various interests therein (Tan v. SEC, G.R. No. 95696, Mar. 3, 1992)
63. WHEN CERTIFICATE OF STOCK MAY BE ISSUED?
[a] The certificate must be signed by the president or vice‐president, countersigned by the secretary or assistant secretary;
[b] The certificate must be sealed with the seal of the corporation;
[c] The certificate must be delivered;
[d] The par value as to par value shares, or full subscription as to no par value shares must be fully paid, the basis of which is the doctrine of indivisibility of subscription; and
[e] The original certificate must be surrendered where the person requesting the issuance of a certificate is a transferee from the stockholder.
Of the five above, the short answer is [d]. The subscription must be fully-paid before the issuance of a certificate of stock.
64. HOW ARE SHARES OF STOCKS TRANSFERRED?
It depends.
If certified or represent by a certificate of stock, by indorsement and recording in the books.
If uncertified or not represented by a certificate of stock, by deed of sale, assignment, transfer or conveyance and recording in the books.
65. MAY A STOCKHOLDER BRING SUIT TO COMPEL THE CORPORATE SECRETARY TO REGISTER VALID TRANSFER OF STOCKS?
Yes, it is the corporate secretary's duty and obligation to do so.
[65B] TO BE VALID AND BINDING ON THE CORPORATION AND THIRD PARTIES, IS THE ATTACHMENT OR MORTGAGE OF SHARES OF STOCK REQUIRED TO BE REGISTERED IN THE CORPORATION’S STOCK AND TRANSFER BOOKS?
No, mortgage is a voluntary dealing with shares. Involuntary dealings (which are writs or processes issued or done against shares) are required to be registered.
Involuntary dealing refers to such writ, order or process issued by a court of record affecting shares of stocks which by law should be registered to be effective, and also to such instruments which are not the willful acts of the registered owner and which may have been executed even without his knowledge or against his consent.
66. FG IS AN INCORPORATOR OF VC CORPORATION HAVING SUBSCRIBED TO AND FULLY PAID 239,500 SHARES. HOWEVER, NO CERTIFICATE OF STOCK WAS ISSUED TO FG. IN 1968, VCP AND FG SIGNED A DOCUMENT ENTITLED “UNDERTAKING AND INDORSEMENT” WHICH STATES: “UNDERTAKING: I, VCP, IS THE OWNER OF THE TOTAL SUBSCRIPTION OF FG WITH VC CORPORATION IN THE AMOUNT OF TWO HUNDRED THIRTY-NINE THOUSAND FIVE HUNDRED(P239,500.00) PESOS AND THAT FG DOES NOT HAVE ANY LIABILITY WHATSOEVER ON THE SUBSCRIPTION AGREEMENT IN FAVOUR OF VC CORPORATION. (SGD) VCP, CONFORME: (SGD) FG. INDORSEMENT: I, FG IS INDORSING THE TOTAL AMOUNT OF TWO HUNDRED THIRTY-NINE THOUSAND FIVE HUNDRED(P239,500.00) STOCKS OF VC CORPORATION TO VCP. (SGD) FG A. HOWEVER, FG REMAINS TO BE THE STOCKHOLDER IN THE BOOKS OF THE CORPORATION AND IT IS UNDISPUTED THAT VCP HAD NOT MADE A REQUEST UPON THE CORPORATE SECRETARY OF VC CORPORATION TO RECORD THE ALLEGED TRANSFER OF STOCKS. IN 1996, VCP MADE A DEMAND FOR THE ISSUANCE OF CERTIFICATES OF STOCK IN HIS NAME. THE DEMAND WAS DENIED AND VCP FILED PETITION FOR MANDAMUS FOR THE ISSUANCE OF THE CERTIFICATES.
A. WILL THE ACTION PROSPER?
No, the transfer does not bind the corporation because it was not registered in the corporate books. The corporate secretary, as far as she is concerned, has the duty to issue certificates of stock only under the name of the owner thereof as registered in the books of the corporation.
The remedy to ask for registration of his name as stockholder in the books.
B. IN THE PROBLEM ABOVE, VCP ARGUED THAT IT IS PRECISELY THE DUTY OF THE CORPORATE SECRETARY, WHEN PRESENTED WITH THE DOCUMENT OF FULLY PAID SHARES, TO EFFECT THE TRANSFER BY RECORDING THE TRANSFER IN THE STOCK AND TRANSFER BOOK AND TO ISSUE STOCK CERTIFICATES IN THE NAME OF THE TRANSFEREE. IS THE CONTENTION TENABLE?
Yes, but VCP's remedy is to compel issuance of stock certificates. His contention would be tenable if the issue is registration of transfer and refusal to so register.
Insofar as the corporate secretary is concerned, FG is the registered owner of the shares.
C. ASSUME THAT VCP CAN VALIDLY FILE THE PETITION FOR MANDAMUS. CAN SUCH PETITION BE DISMISSED ON THE GROUND OF PRESCRIPTION CONSIDERING THAT IT WAS FILED ONLY 24 YEARS AFTER THE EXECUTION OF THE UNDERTAKING AND INDORSEMENT?
The law does not prescribe a period within which the registration of the transfer of shares should be effected. Hence, the action to enforce the right does not accrue until there has been a demand and a refusal concerning the transfer.
67. WHAT ARE THE BASIC RIGHTS OF SHAREHOLDERS?
[a] To manage the corporation by vote;
[b] To enter into voting trust agreements;
[c] To receive dividends and to compel declaration;
[d] To transfer shares and to compel registration;
[e] To be issued stock certificates;
[f] To exercise pre-emptive rights;
[g] To exercise appraisal rights;
[h] To file a derivative suit;
[i] To recover shares of stock unlawfully sold for delinquency;
[j] To inspect books;
[k] To be furnished the most recent financial statements;
[l] To be issued a new certificate in case of loss or destruction;
[m] To have the corporation dissolved;
[n] To participate in the distribution of assets upon dissolution; and
[o] In case of close corporations, to petition the SEC to arbitrate in the event of deadlock.
68. WHAT ARE THE OBLIGATIONS OF A STOCKHOLDER?
[a] To pay the balance of his unpaid subscription/s;
[b] To pay interest on his unpaid subscriptions according to the by-laws or the contract;
[c] To pay creditors of the corporation with respect to his unpaid subscription based on the Trust Fund Doctrine;
[d] To pay for the water in his stocks;
[e] In case of corporation by estoppel, to be liable as a general partner; and
[f] In case of close corporations, to be personally liable for torts if he actively participates in the management of the corporation.
69. WHAT IS A DERIVATIVE ACTION AND ITS REQUISITES?
A derivative suit is a remedy under common law available to any stockholder in case where corporate directors have committed a breach of trust or fraud, negligence or ultra vires acts which have caused directly injury to the corporation and indirect injury to the stockholders AND in case the governing board is unwilling or unable to institute an action to redress the wrong.
The requisites are:
[a] The party bring the suit should be a shareholder at the time the act or transaction complained of took place;
[b] He has exhausted all intra-corporate remedies; and
[c] The cause of action actually belong to the corporation, not to the stockholder.
In addition to the above, the act complained of must not be covered by the stockholder's appraisal right.
70. WHAT IS A PRE-EMPTIVE RIGHT?
It is the preferential right of shareholders to subscribe to all issues or disposition of shares of any class in proportion to their present shareholdings. The purpose of this right is to enable the shareholder to retain his proportionate control in the corporation and to retain his equity in the surplus.
71. EXPLAIN THE APPRAISAL RIGHT AND WHERE IT MAY BE EXERCISED?
It is the right to withdraw from the corporation and demand payment of the fair value of the shares after dissenting from certain corporate acts involving fundamental changes in corporate structure. The amount paid to the stockholder is the fair value of his shares as of the day prior to the date on which the vote was taken, excluding any appreciation or depreciation in anticipation of the corporate action
The following are instances when it may be exercised:
[a] Extension or reduction or corporate term;
[b] Amendment to Articles of Incorporation which involves change in the rights of stockholders, authorize preferences superior to those stockholders, or restrict the right of any stockholder;
[c] Investment of corporate funds in another business or purpose;
[d] Sale or disposal of all or substantially all assets of the corporation; and
[e] Merger or consolidation.
72. WHAT ARE THE REMEDIES OF CORPORATIONS TO ENFORCE PAYMENT OF STOCKS?
There are three available remedies: (a) call (to action) by resolution of the governing board and sale of delinquent shares; and (b) judicial action via a collection suit.
73. WHAT DOES THE TERM UNPAID CLAIM MEAN (FOR PURPOSES OF DECLARING THE SHAREHOLDER DELINQUENT)?
The corporation may refuse to register the transfer of shares if it has an existing unpaid claim over the shares to be transferred. The “unpaid claim” refers to the unpaid subscription on the shares transferred and not to any other indebtedness that the transferor may have to the corporation.
74. WHAT IS THE PROCEDURE FOR COLLECTION AND DELINQUENCY SALE?
[a] If there is due date, no need for a call by the board. If there is none, there must be a board resolution declaring the unpaid subscription due on a specified date;
[b] Personal notice or notice by registered mail must be sent and addressed to the concerned stockholder;
[c] If he fails to pay within 30 days from call or due date, the unpaid shares shall be subjected to delinquency sale;
[d] Board resolution ordering the sale must be issued stating the amount, date, time and place of sale;
[e] The sale shall shall be made not earlier than 30 days but not later than 60 days from date of delinquency;
[f] Note of sale with a copy of the board resolution shall be send to every delinquent shareholder in person or by mail;
[g] Publication of notice of sale for 2 consecutive weeks;
[h] Sale to the bidder who offered the full amount of the balance of subscription including all costs for the smallest number of shares;
[i] Registration in the name of the winning bidder and issuance of certificate under his name;
[j] Remaining (paid) shares shall be credited to the delinquent shareholder; and
[k] If there is no bidder, the corporation may purchase and pay for the shares.
75. WHAT ARE THE EFFECTS OF STOCK DELINQUENCY?
No delinquent stock shall be voted for or be entitled to vote or to representation at any stockholder’s meeting, nor shall the holder thereof be entitled to any of the rights of a stockholder except the right to dividends in accordance with the provisions of this Code, until and unless he pays the amount due on his subscription with accrued interest, and the costs and expenses of advertisement, if any.
Any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid.
Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a stockholder.
76. WHAT BOOKS ARE REQUIRED TO BE MAINTAINED BY THE CORPORATION?
[a] Book for the minutes of shareholder and board meetings;
[b] Record of transactions;
[c] Stock and transfer book; and
[d] Other books required to be kept.
77. WHAT IS THE PROBATIVE VALUE OF THE STOCK AND TRANSFER BOOK?
The entries are considered prima facie evidence of the matters stated therein and may be subject to proof to the contrary. (G.R. No. 123553)
78. WHAT ARE THE REQUIREMENTS FOR THE EXERCISE OF THE RIGHT OF INSPECTION?
[a] It must be exercised at reasonable hours on business days;
[b] The stockholder has not improperly used any information he has secured through any previous examination; and
[c] Demand is made in good faith or for a legitimate purpose.
79. DISTINGUISH
A. MERGER FROM CONSOLIDATION
Merger happens when a corporation absorbs another. On the other hand, consolidation occurs when two or more corporations form one new corporation.
In the first, one corporation survives. In the second, all constituent corporations are dissolved.
In the first, no new corporation is created. In the second, a single, new corporation emerges.
In the first, assets and liabilities are acquired by the surviving corporation. In the second, they are transferred to the new corporation.
B. ESTOPPEL FROM SUBSEQUENT COMPLIANCE
A corporation by estoppel is a legal device to protect the corporation or third persons from deceit or fraud in dealings. Hence, despite lack of registration of the corporation, the law treats those who purport to act as a corporation liable as a corporation.
On the other hand, subsequent compliance with legal requirements for incorporation makes the corporation one de facto prior to such compliance.
80. WHAT IS THE EFFECT OF NON-USE OF CORPORATE CHARTER AND CONTINUOUS INOPERATION OF CORPORATION?
Revocation or forfeiture of the franchise or certificate of incorporation due to its misuse or non‐use pursuant to quo warranto proceedings filed by the Solicitor General.
Under the old corporation code, failure to organize and commence business within 2 years from incorporation results in its corporate powers ceasing and the corporation shall be deemed dissolve.
In the new law, the period is 5 years and the effect is "deemed revoked."
Under the old law, in case of continuous inoperation for at least 5 years, this is a ground for the suspension or revocation of corporate franchise or certificate of incorporation.
In the new law, the same period is prescribed but the effect is "declaration of delinquency status" which may be removed by compliance within 2 years.
81. IN THE ARTICLES OF INCORPORATION OF T CORPORATION, ELEVEN MEMBERS WERE NAMED TO CONSTITUTE THE BOARD OF DIRECTORS. THESE ELEVEN ELECTED FROM AMONG THEMSELVES A SECRETARY-TREASURER BUT DID NOT ELECT A PRESIDENT. THE BOARD USED TO HOLD MEETINGS TO TRANSACT BUSINESS, WHICH WAS DONE THROUGH THE SECRETARY-TREASURER. IN A PROCEEDING TO FORFEIT ITS CHARTER, THE QUESTION WAS POSED AS TO WHETHER THE CORPORATION MAY BE CONSIDERED TO HAVE FORMALLY ORGANIZED. RESOLVE THE QUESTION.
There are two views on this.
In Benguet Consolidated Mining v. Pineda, the Supreme Court held that formal organization means that the corporation has taken necessary steps to endow it with the capacity to transact legitimate business in line with its purpose. The Court said that this includes the election of officers, adoption of by-laws, subscription and payment transactions and other steps.
However, Ladia (2015) opines that it is enough that the corporation has functioned and engaged in the business for which it was formed and its charter cannot be forfeited simply because it has failed to a president or a secretary.
82. HOW MAY A CORPORATION DISSOLVE? AND WHAT ARE THE MODES OF DISSOLUTION? WHAT ARE THE EFFECTS?
It is the extinguishment of the franchise of a corporation and the termination of its corporate existence. Dissolution may be voluntary or involuntary.
If voluntary and there are no creditors affected, it is done by filing a resolution approved by the board and the stockholders with the SEC. This resolution must authorize dissolution and it must be certified and countersigned.
If voluntary and there are creditors affected, by filing a verified petition for dissolution with the SEC.
Voluntarily, there may also be a dissolution by shortening the corporate term. This is done by amendment.
Voluntarily, in the case of corporate soles, mere filing of a declaration of dissolution by the presiding elder.
Voluntarily, by merger or consolidation.
Voluntarily, by expiration of corporate term without extension. Note that, under the new law, there is no perpetual corporate existence.
Involuntarily, the following are modes of dissolution:
[a] By expiration but with failure to extend;
[b] Failure to organize and commence;
[c] Continuous inoperation and delinquency for more than 2 years;
[d] Legislative dissolution; and
[e] Dissolution by the SEC.
83. WHAT IS LIQUIDATION?
Liquidation is the process by which all the assets of the corporation are converted into liquid assets (cash) in order to facilitate the payment of obligations to creditors, and the remaining balance if any is to be distributed to the stockholders. It is a proceeding in rem.
84. WHAT CONSTITUTES “DOING BUSINESS” IN THE PHILIPPINES FOR FOREIGN CORPORATIONS?
[a] Under the Continuity Test, doing business implies a continuity of commercial dealings and arrangements, or performance of acts normally incidental to the purpose and object of the organization.
[b] Under the Substance Test, a foreign corporation is doing business in the country if it is continuing the body or substance of the enterprise of business for which it was organized.
[c] Under the contract test, a foreign corporation is doing business in the Philippines if the contracts entered into by the foreign corporation or by an agent acting under the control and direction of the foreign corporation are consummated in the Philippines.
[d] Under statutory definition, doing business means:
[i] Soliciting orders, service contracts, or opening offices;
[ii] Appointing representatives, distributors domiciled in the Philippines or who stay for a period or periods totaling 180 days or more;
[iv] Participating in the management, supervision, or control of any domestic business, firm, entity, or corporation in the Philippines; or
[v] Any act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to some extent the performance of acts or works or the exercise of some functions, normally incident to and in progressive prosecution of the purpose and object of its organization.
According to the Supreme Court, it relates to “business activities… not only casual, but so systematic and regular as to manifest continuity and permanence of activity to constitute doing business here…” To constitute doing business in the Philippines, the activity should involve profitmaking.
85. DOES AN “ISOLATED TRANSACTION” BY A FOREIGN CORPORATION QUALIFY AS “DOING BUSINESS” IN THE PHILIPPINES?
No. Foreign corporations, even unlicensed ones can sue or be sued on a transaction or series of transactions set apart from their common business in the sense that there is no intention to engage in a progressive pursuit of the purpose and object of business transaction.
86. EXPLAIN THE CONTRACT TEST OF “DOING BUSINESS” IN THE PHILIPPINES.
Under the contract test, a foreign corporation is doing business in the Philippines if the contracts entered into by the foreign corporation or by an agent acting under the control and direction of the foreign corporation are consummated in the Philippines.
87. WHAT ARE THE REQUIREMENTS FOR CLOSE CORPORATIONS?
A close corporation is onee whose articles of incorporation provide that:
[a] All issued stock, exclusive of treasury shares, shall be held by persons not exceeding 20;
[b] All issued stock shall be subject to one or more specified restrictions on transfer; and
[c] The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class.
Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least 2/3 of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation.
Any corporation may be incorporated as a close incorporation, except:
[a] Mining or oil companies;
[b] Stock exchanges;
[c] Banks;
[d] Insurance companies;
[e] Public utilities;
[f] Educational institutions; and
[g] Corporations declared to be vested with public interest.
88. CAN A NON-STOCK CORPORATION OFFSET UNUSED CONTRIBUTIONS OF MEMBERS AGAINST THE BALANCE OF RECEIVABLES FROM THE SAME MEMBERS?
The unused contributions of members cannot be offset against the balance of receivables because this would amount to distribution of the capital of the corporation. Members of a non‐stock corporation are not entitled to distribution of capital. They are only entitled to distribution of capital upon dissolution when it is provided for in the articles of incorporation or by‐laws.