I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code) Flashcards
I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code)
A. General Principles
1. Nature and Attributes – Section 2
This section of Philippine law defines a corporation and outlines its key characteristics. Here’s a breakdown of the key points with illustrative examples:
- Artificial Being:
A corporation is not a natural person. It’s a legal entity created by the law through a process of registration.
Example: You cannot shake hands with a corporation, but it can own property and conduct business like a person. - Created by Operation of Law:
A corporation comes into existence by complying with legal requirements like registering with the Securities and Exchange Commission (SEC).
Example: Filing the Articles of Incorporation and other necessary documents officially establishes a corporation. - Right of Succession:
A corporation’s existence is independent of its members (owners).
Example: If the owner of a corporation (e.g., a sole proprietor) dies, the business might cease to operate. However, a corporation can continue to function even if its shareholders change. - Powers, Attributes, and Properties:
A corporation has specific legal capacities granted by law.
Expressly authorized powers: These are explicitly mentioned in the law or the corporation’s charter (e.g., entering contracts, owning property).
Incidental powers: These are powers necessary for the corporation to fulfill its purpose and the expressly authorized powers (e.g., opening bank accounts, hiring employees).
Example: A corporation formed to run a restaurant (expressly authorized power) can also buy equipment (incidental power) to operate the business.
Additional Explanation:
Think of a corporation as a special tool created by law.
It allows individuals (owners) to pool resources and conduct business under a separate legal entity.
The corporation itself has certain advantages like limited liability (owners’ personal assets are generally protected from business debts) and the ability to raise capital through the issuance of shares.
I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code)
A. General Principles
- Nationality of Corporations
a. Control Test - STATE THE RULES
b. Grandfather Rule - see later slides
The Control Test is the primary method used in Philippine corporate law to determine a corporation’s nationality. Here’s a breakdown with illustrative examples:
Core Principle:
A corporation is considered Filipino if at least 60% of its outstanding capital stock (voting shares) is owned and controlled by Philippine citizens.
Key Points:
Focus on Voting Rights: Not just ownership, but voting rights associated with the shares are crucial.
Direct and Indirect Ownership: Both direct ownership by Filipino citizens and indirect ownership through Filipino-controlled corporations are considered.
Examples:
Scenario 1: Filipino Majority (Complies):
A company, “Sari-Sari Store Inc.,” has a capital stock of ₱100,000 divided into 10,000 shares.
Filipino citizens directly own and control 6,500 shares (65%) with full voting rights.
Result: “Sari-Sari Store Inc.” is considered a Filipino corporation based on the Control Test.
Scenario 2: Foreign Majority (Doesn’t Comply):
A company, “Tech Startup Inc.,” has a capital stock of ₱50 million divided into 5 million shares.
Foreign investors own 3.5 million shares (70%), with full voting rights.
Result: “Tech Startup Inc.” is considered a foreign corporation due to exceeding the 40% foreign ownership limit.
Impact of Jurisprudence (Court Decisions):
- Leading cases like Narra Nickel Mining vs. Redmont Consolidated Mines Corp. (2015) emphasize that:
Indirect control matters: Even if a corporation itself has a Filipino majority, the control by a foreign-owned parent company can still disqualify it.
- The Grandfather Rule is a limited exception: This rule applies in rare situations where the Investee Corporation’s nationality is unclear, and historical Filipino ownership might be considered.
Additional Notes:
The specific percentage requirement (60% Filipino ownership) might vary depending on the industry. Certain sectors like media or public utilities might have stricter limitations on foreign ownership.
Remember:
The Control Test is the dominant method for determining corporate nationality in the Philippines.
Indirect ownership structures and the Grandfather Rule’s limited scope must be considered.
I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code)
A. General Principles
- Doctrine of Separate Juridical Personality
The Doctrine of Separate Juridical Personality is a fundamental principle in Philippine corporation law. Here’s a breakdown of its key points and illustrative examples:
Core Concept:
A corporation is recognized as a DLE DISTINCT LEGAL ENTITY separate from its owners (shareholders), directors, and officers.
Key Points:
1) Independent Existence: The corporation has its own legal life distinct from the individuals involved.
2) Own Rights and Obligations: It can:
Enter contracts.
Sue and be sued in its own name.
Own property and assets.
Incur liabilities.
3) Limited Liability: Shareholders’ personal assets are generally protected from the corporation’s debts. (Exceptions exist in specific situations like fraud or piercing the corporate veil)
Example 1: Business Transactions:
* “Sweet Treats Bakery Inc.” (the corporation) enters into a contract with a supplier to purchase ingredients.
* The bakery, not the individual owners, is legally bound by the contract.
Example 2: Legal Issues:
If “Sweet Treats Bakery Inc.” is sued for a product liability claim, the lawsuit is filed against the corporation, not the owners personally.
However, in cases of gross negligence or intentional misconduct by the owners, courts might pierce the corporate veil and hold them personally liable.
Importance and Implications:
a) This doctrine:
Encourages investment as personal assets are shielded from business risks.
Facilitates business continuity as the corporation’s existence isn’t solely dependent on the owners.
Promotes accountability of the corporation and its management for its actions.
b) Limitations:
* The limited liability shield can be pierced under certain circumstances:
Fraud or Misrepresentation: If the corporation is used to intentionally deceive creditors or the public.
Undercapitalization: If the corporation starts with insufficient capital to conduct its business legitimately.
Alter Ego: When the corporation is merely an extension of the owner’s personal affairs, and no separate business purpose exists.
Impact of Jurisprudence:
A) Courts play a crucial role in upholding the Doctrine of Separate Juridical Personality while recognizing its limitations.
B) Cases like A.M. Consunji vs. Court of Appeals (G.R. No. 114201) (1996) highlight that the court can pierce the corporate veil to prevent abuse of the legal entity and ensure fair outcomes.
Conclusion:
The Doctrine of Separate Juridical Personality is a cornerstone of Philippine corporate law, fostering a business environment that encourages investment and growth while maintaining a framework for accountability. However, it’s crucial to understand the limitations and potential exceptions to ensure responsible business conduct.
I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code)
A. General Principles
- Doctrine of Piercing the Corporate Veil
The Doctrine of Piercing the Corporate Veil is a legal principle in Philippine corporation law that disregards the separate legal personality of a corporation under specific circumstances. Here’s a breakdown:
Key Points:
A) Lifting the Limited Liability Shield: Under normal circumstances, the corporation acts as a separate entity, and shareholders’ personal assets are generally protected from the corporation’s debts.
B) Court Intervention: This doctrine empowers courts to hold shareholders personally liable for the corporation’s actions if certain conditions are met.
Conditions for Piercing the Corporate Veil:
1) Fraud or Misrepresentation: The corporation is used to intentionally deceive creditors, the public, or evade legal obligations.
2) Alter Ego: The corporation merely acts as an extension of the owner’s personal affairs, lacking a legitimate business purpose.
3) Undercapitalization: The corporation starts with insufficient capital to conduct its business legitimately, increasing the risk of harming creditors.
4) Gross Negligence or Misconduct: Management’s actions or inactions cause significant harm, and the corporation is used to shield them from accountability.
Examples of Challenging the Doctrine:
Scenario 1: Limited Liability Upheld (No Grounds for Piercing):
* “Starlight Clothing Inc.” (the corporation) has a legitimate business operation and sufficient capital.
The company experiences financial difficulties and is unable to pay all its debts.
Result: Even though the corporation cannot meet its obligations, the owners’ personal assets are likely protected due to the absence of grounds for piercing the veil.
Scenario 2: Piercing Upheld (Misconduct):
* “Fast Money Inc.” (the corporation) is solely owned and controlled by Mr. Cruz.
The company accumulates significant debt through Mr. Cruz’s reckless spending and fraudulent business practices.
Result: A court might pierce the veil, holding Mr. Cruz personally liable for the corporation’s debts due to his misuse of the legal entity.
Landmark Cases:
1) A.M. Consunji vs. Court of Appeals (G.R. No. 114201) (1996): This case established that the veil can be pierced when a corporation is used to evade a legitimate debt and functions as a mere alter ego of the owner.
2) Philippine National Bank vs. Court of Appeals (G.R. No. 132322) (1999): The court pierced the veil due to the corporation’s undercapitalization and the controlling shareholder’s diversion of corporate funds for personal gain.
Importance of Jurisprudence:
Courts play a vital role in balancing the protection offered by the Separate Juridical Personality Doctrine with the need to prevent abuse and ensure fairness in business dealings.
These landmark cases illustrate that the veil can be lifted in situations where the corporation is misused to cause harm or avoid legal responsibilities.
Conclusion:
The Doctrine of Piercing the Corporate Veil serves as a safeguard against the misuse of corporations for fraudulent or irresponsible activities. Understanding its limitations and the conditions under which it can be applied is crucial for both business owners and those who interact with corporations.
I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code)
A. General Principles
- Trust Fund Doctrine
The Trust Fund Doctrine in Philippine corporation law emphasizes the responsibility of a corporation towards its creditors. Here’s a breakdown of its key points and illustrative examples:
Core Principle:
The capital stock (including paid and unpaid subscriptions) and other corporate assets are considered a trust fund held for the benefit of creditors.
Key Points:
1) Protection for Creditors: Creditors have a right to look to these assets for the satisfaction of their claims if the corporation becomes insolvent (unable to pay its debts).
2) Priority of Payment: Creditors have priority over shareholders in claiming the corporation’s assets during liquidation.
Examples:
Scenario 1: Creditor Recovers Debt:
- “Gadget Guys Inc.” (the corporation) owes money to a supplier for unpaid deliveries.
- The company becomes insolvent and cannot meet its financial obligations.
- Result: The creditors can claim the corporation’s assets (including paid-up capital) to recover their outstanding debts.
Scenario 2: Unpaid Stock Subscriptions:
- A company issues shares, but some subscribers fail to pay the full amount.
- The corporation faces financial difficulties and needs additional funds.
- Result: The corporation can sue the subscribers to collect the unpaid amounts, which become part of the trust fund available to creditors.
Challenges to the Doctrine:
Focus on Insolvency: The Doctrine primarily applies when the corporation is unable to pay its debts.
Limited Scope: Creditors cannot directly access the corporation’s assets unless it undergoes liquidation.
Examples of Challenging the Doctrine:
Scenario 1: Solvent Corporation (Doctrine Not Applicable):
“Healthy Foods Inc.” (the corporation) is financially stable and can meet its obligations.
A creditor attempts to claim the corporation’s assets to secure future potential debts.
Result: The Doctrine wouldn’t apply here. Creditors cannot seize the assets of a solvent corporation simply due to concerns about future financial difficulties.
Scenario 2: Improper Distribution of Assets:
“Tech Solutions Inc.” (the corporation) distributes a significant portion of its profits to shareholders as dividends while knowing it has outstanding debts.
The company later becomes insolvent.
Result: Creditors might challenge such actions in court, arguing that the corporation improperly distributed assets that should have been part of the trust fund.
Landmark Cases:
1) G.R. No. 223572 (2020): This case reaffirms the applicability of the Trust Fund Doctrine not just to unpaid subscriptions but also to other corporate assets that creditors can claim during liquidation.
2) Boman Environmental Development Corporation vs. Court of Appeals (G.R. No. 77860) (1988): The court emphasized that the Doctrine prohibits corporations from distributing assets to shareholders at the expense of creditors.
Importance of Jurisprudence:
Court decisions clarify the scope and limitations of the Trust Fund Doctrine.
They ensure that corporations prioritize their obligations towards creditors and act responsibly in managing their finances.
Conclusion:
The Trust Fund Doctrine serves as a protective mechanism for creditors by guaranteeing that corporate assets are used to settle outstanding debts before distributing profits to shareholders. While the doctrine has limitations, it promotes financial accountability and encourages responsible corporate governance.
I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code)
B. Kinds of Corporation
1. Stock Corporation – Section 3
Key Differences Between Stock and Non-Stock Corporations:
1) Capital Structure:
Stock Corporation: Capital divided into shares that can be bought and sold.
Non-Stock Corporation: No shares, members contribute resources or fulfill specific requirements.
2) Ownership:
Stock Corporation: Represented by the number of shares held (shareholders).
Non-Stock Corporation: Represented by membership.
3) Profit Distribution:
Stock Corporation: Distributed as dividends based on shareholding.
Non-Stock Corporation: Profits reinvested or used for the organization’s purpose (not distributed to members).
4) Examples:
Stock Corporation: Publicly traded companies (e.g., Ayala Corporation).
Non-Stock Corporation: Non-profit organizations (e.g., Philippine Red Cross).
I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code)
B. Kinds of Corporation
- Non-Stock Corporation – Sections 86-87
Understanding Non-Stock Corporations in the Philippines (Sections 86 & 87)
Key Points:
Non-Profit Focus (Section 86):
- No Dividend Distribution: Profits cannot be distributed as dividends to members, trustees, or officers.
- Profit Reinvestment: Any income obtained is primarily used to further the corporation’s purpose.
- Example: A non-profit organization like the Philippine Red Cross uses its income to support its humanitarian activities, not to pay dividends to its members.
Applicable Provisions (Section 86):
a) General Corporation Law principles apply: Non-stock corporations are subject to the Philippine Corporation Code, with some exceptions.
b) Specific rules for non-stock corporations: This Title (Title II) outlines additional regulations specific to non-stock entities.
Permissible Purposes (Section 87):
A) Broad Range of Activities: Non-stock corporations can be formed for various purposes including:
Charitable (e.g., foundations)
Religious (e.g., churches)
Educational (e.g., schools)
Professional (e.g., bar associations)
Cultural (e.g., art organizations)
Social service (e.g., community development groups)
B) Specific Regulations: Certain purposes like trade or industry might have additional regulations beyond the general framework.
Examples:
- Non-profit Hospital: Established to provide healthcare services, any profit it generates would be used to improve facilities, acquire equipment, or offer subsidized care, not distributed to individuals.
- Environmental NGO: Formed to advocate for environmental protection. Any income would be directed towards campaigns, research, or educational initiatives related to its cause.
Simply Explained:
Non-stock corporations prioritize their mission over profit. They function for a specific social good and any income generated goes back into fulfilling that purpose, making them distinct from businesses aiming to distribute dividends to shareholders.
Additional Notes:
Non-stock corporations can receive donations and grants to support their activities.
Compensation for employees or staff is permitted, but salaries should be reasonable and not excessive.
I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code)
B. Kinds of Corporation
- Close Corporation – Section 95
Understanding Close Corporations in the Philippines (Section 95)
Key Points:
1) Limited Ownership (a): A close corporation has a maximum of 20 shareholders whose ownership is officially recorded.
2) Transfer Restrictions (b): The corporation can impose limitations on how shareholders can sell or transfer their shares.
3) No Public Offering (c): Shares are not publicly traded on stock exchanges and cannot be offered to the general public.
Examples of Restrictions:
a) Right of First Refusal: Existing shareholders get the first chance to buy shares before they are offered to others.
b) Shareholder Approval Requirement: Selling shares might require approval from a certain percentage of existing shareholders.
Who Can’t Be Close Corporations:
1) Public Interest Entities: Businesses like banks, insurance companies, and utilities due to their broader public impact.
2) Publicly Traded Companies: Companies whose shares are already available on stock exchanges.
3) Specific Industries: Excluded sectors like mining and oil due to stricter regulations.
Applicable Laws:
a) Primary Source: This Title (Title IV) outlines specific rules governing close corporations.
b) Supplementary Provisions: Other sections of the Philippine Corporation Code (Titles) apply when not explicitly contradicted by the regulations for close corporations.
Overall, Section 95 defines a close corporation as a:
1) Privately held entity with a limited number of shareholders.
2) Restricted share transferability to maintain control within a specific group.
3) Exclusion from public offerings to prevent widespread ownership.
Example:
A group of five friends establish a small tech company. They choose to incorporate as a close corporation to:
- Maintain control over the business and decision-making.
- Limit the number of shareholders involved.
- Restrict the public from easily buying shares in the company.
Key Takeaway:
Close corporations provide a legal framework for businesses seeking to operate with a smaller, controlled group of shareholders and limited public involvement.
I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code)
B. Kinds of Corporation
- Educational Corporations – Section 105
Educational Corporations in the Philippines
Key Point:
* Educational corporations in the Philippines are subject to special laws in addition to the general provisions of the Philippine Corporation Code (Section 105).
Special Regulatory Framework:
* Primary Source: These corporations primarily adhere to specific laws governing educational institutions, such as:
- Republic Act No. 7732 (Higher Education Act of 1994)
- Republic Act No. 6722 (Government Assistance to Students and Schools Program)
- Department of Education (DepEd) regulations for basic education
Limited Applicability of Corporation Code:
* The general provisions of the Philippine Corporation Code (e.g., classifications like stock or non-stock) apply supplementally unless contradicted by the special laws governing educational corporations.
Example Scenario:
- Case: St. Peter’s Academy vs. Court of Appeals (G.R. No. 127953, 1998)
- Facts: St. Peter’s Academy, a stock corporation, encountered financial difficulties and sought government assistance under the Government Assistance to Students and Schools Program (RA 6722).
- Issue: Could a stock corporation qualify as an educational institution eligible for government assistance under RA 6722?
Supreme Court Ruling:
- The Court ruled that St. Peter’s Academy did not qualify for the program due to its structure as a stock corporation.
- RA 6722 primarily targets non-stock, non-profit educational institutions.
- While the general provisions of the Corporation Code might apply to St. Peter’s Academy, specific educational laws take precedence in this case.
Explanation:
This case highlights that even though educational institutions might incorporate under the general framework of the Corporation Code, their primary regulatory framework lies in special laws designed to:
- Ensure non-profit motives and prioritize educational goals.
- Regulate the establishment, operation, and funding of educational institutions.
- Promote accountability and quality standards in the education sector.
Additional Notes:
Educational institutions can be stock (with limitations) or non-stock corporations.
However, non-stock corporations are generally preferred as they better align with the non-profit nature of education.
Conclusion:
Understanding the distinction between the Corporation Code and the special regulatory framework for educational institutions is crucial.
- The general code provides a foundation, but specific educational laws govern the establishment, operation, and eligibility for government assistance in this sector.
I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code)
B. Kinds of Corporation
- Religious Corporation – Sections 107-108
Religious Corporations in the Philippines (Sections 107 & 108)
Key Points:
* Two Categories (Section 107): Religious corporations can be formed as:
a) Corporation Sole (Section 108): Established by a single head of a religious denomination (e.g., bishop, priest) to manage the church’s property and affairs.
b) Religious Societies: Established by multiple individuals belonging to a religious denomination.
General Framework (Section 107):
a) Primarily governed by the specific provisions outlined in Chapter II (Sections 107-114) of the Philippine Corporation Code.
b) Supplementary Application: General provisions for non-stock corporations apply when not explicitly contradicted by the regulations for religious corporations.
Illustrative Example (Corporation Sole):
* The Archbishop of a Catholic diocese incorporates a corporation sole to:
- Hold church property in trust for the benefit of the denomination.
- Manage financial resources for religious activities.
- Oversee the temporal affairs of the diocese.
Supreme Court Cases:
A) Iglesia ni Cristo vs. Court of Appeals (G.R. No. L-33098, 1973):
Issue: Whether the Iglesia ni Cristo (INC) qualified as a religious corporation under the Corporation Code.
Ruling: The Court recognized INC as a religious corporation based on its established doctrines, form of worship, and religious practices.
This case highlights that the Court considers the religious nature and purpose of the organization in determining its classification.
B) Heirs of Maria Luisa O. Henson vs. Court of Appeals (G.R. No. 126829, 1999):
Issue: Dispute over ownership of a property claimed by both a religious society and a private individual.
Ruling: The Court emphasized the legal distinction between a religious corporation and its members.
The property belonged to the religious corporation, not the individual members, as it was acquired for religious purposes.
Key Takeaways:
- Religious corporations operate under a specific legal framework within the Corporation Code.
- The concept of corporation sole allows a single religious leader to manage church property and affairs.
- Court cases play a crucial role in interpreting the law and clarifying the distinction between religious corporations and individual members regarding property ownership and other legal matters.
Additional Notes:
a) Religious corporations typically function as non-stock entities, focusing on fulfilling their religious mission rather than generating profits for individual members.
b) Specific regulations might exist for different religious denominations depending on their structure and practices.
Understanding these points provides a basic framework for comprehending how religious corporations operate in the Philippines and the legal principles governing their existence and activities.
I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code)
B. Kinds of Corporation
- One Person Corporation – Section 115
The statement you provided pertains to the application of Title XIII of the Revised Corporation Code, which specifically addresses One Person Corporations (OPCs). Here’s a breakdown of the key points:
- Applicability to One Person Corporations (OPCs): The provisions outlined in Title XIII of the Revised Corporation Code primarily apply to OPCs. This means that the regulations, requirements, and provisions within this Title are specifically tailored to govern the operations and structure of OPCs.
- Suppletory Application of Other Provisions: The statement also indicates that other provisions of the Revised Corporation Code apply suppletorily to OPCs. “Suppletory” means that these other provisions serve as supplementary or additional regulations that can be applied to OPCs if not covered explicitly by the provisions outlined in Title XIII.
- Exceptions: However, there may be exceptions provided within Title XIII itself where certain provisions of the Revised Corporation Code do not apply to OPCs. These exceptions would be explicitly stated within Title XIII, indicating that certain regulations or requirements within the Revised Corporation Code are not applicable to OPCs.
Regarding the key points of a One Person Corporation according to R.A. No. 11232, here are the main features:
- Single Shareholder: An OPC is a corporation with a single stockholder who can be a natural person, trust, or estate. Unlike traditional corporations that require at least five incorporators, OPCs can be formed with just one shareholder.
- Limited Liability: Similar to traditional corporations, the liability of the shareholder in an OPC is limited to the extent of their investment in the corporation. This means that the shareholder’s personal assets are generally protected from the debts and liabilities of the corporation.
- Separate Legal Entity: An OPC is considered a separate legal entity from its owner, which means it can enter into contracts, own assets, and incur liabilities in its own name. This separation of legal personality provides the shareholder with limited liability protection.
- Corporate Governance: Despite having a single shareholder, OPCs are still required to adhere to certain corporate governance requirements, such as holding annual meetings, maintaining corporate records, and complying with reporting and disclosure obligations.
- Designated Nominee: In the event of the shareholder’s death or incapacity, the OPC must designate a nominee who will take over the management and ownership of the corporation. This ensures continuity of operations and compliance with legal requirements.
Overall, the creation of OPCs provides entrepreneurs with a more flexible and streamlined option for setting up a corporate entity, especially for individuals who wish to operate and manage a business on their own.
I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code)
B. Kinds of Corporation
- Holding/Parent and Subsidiary Corporation
Holding and Subsidiary Corporations under the Revised Corporation Code (R.A. No. 11232) for Bar Exam Prep
The Revised Corporation Code (RCC) recognizes the concept of holding and subsidiary corporations, which are distinct legal entities but with ownership and control structures that create a parent-child relationship.
A) Holding Company
* A corporation that OWNS a controlling interest** (usually a majority of voting stock) in one or more other corporations (subsidiaries).
* Primary function is to control and manage its subsidiaries, often acting as a central entity for strategic planning, financing, and resource allocation.
* Holding companies themselves typically do not engage directly in commercial operations.
B) Subsidiary Corporation
* A corporation CONTROLLED BY another corporation (holding company) by virtue of ownership of a majority of its voting stock.
* Operates as a separate legal entity but its actions and decisions are often influenced by the holding company.
* Can be used for various purposes like diversification, expansion, risk management, and tax benefits.
- Key Points for Bar Exam Prep:
- Control is the defining characteristic. A holding company exerts significant influence over its subsidiaries, often through ownership of voting shares or board representation.
- Separate Legal Entity: Both holding and subsidiary corporations are separate legal entities with their own liabilities. Acts of one generally do not bind the other (except in piercing the corporate veil cases).
- Disclosure Requirements: The RCC may have specific disclosure requirements for holding companies regarding their subsidiaries, especially for financial reporting and transactions between them.
- Example:
- MegaCorp is a holding company that owns 80% of the voting stock in BakeTech, a bakery company, and 60% of the voting stock in FastFood Inc, a restaurant chain.
- MegaCorp controls the strategic direction of both BakeTech and FastFood Inc through board appointments and financial oversight.
- BakeTech and FastFood Inc operate independently but may benefit from centralized resources or purchasing power facilitated by MegaCorp.
- Understanding the legal implications of holding and subsidiary structures is crucial in various scenarios, such as:**
1) Piercing the Corporate Veil:** Courts may pierce the corporate veil and hold the holding company liable for the acts of its subsidiary if the subsidiary is a mere sham to avoid legal responsibility.
2) Intercompany Transactions:** Transactions between holding companies and subsidiaries require careful consideration to ensure fairness and avoid manipulation for financial gain.
3) Consolidated Financial Statements:** Holding companies may be required to prepare consolidated financial statements that combine the financial results of the holding company and its subsidiaries.
I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code)
C. Incorporation and Organization
1. Number and Qualifications of Incorporators – Section 10
Unpacking the Rules on Number and Qualifications of Incorporators (Revised Corporation Code)
The Revised Corporation Code (RCC) lays out clear guidelines on who can form a corporation and how many people are involved. Here’s a breakdown of the key points:
1) Who Can Be an Incorporator?**
a) Individuals:** Anyone who is of legal age (18 years old in the Philippines) can be an incorporator.
n) Business Entities:** Partnerships, associations, and even existing corporations can also act as incorporators, either alone or jointly with others.
2) Limitations:**
* Number: There’s a maximum of 15 incorporators for a corporation.
* Professionals: Individuals licensed to practice a profession (doctors, lawyers, etc.) and partnerships/associations formed for practicing professions cannot directly incorporate a regular corporation. They would need to explore alternative structures allowed by special laws.
3) Requirements for Stock Corporations:**
* Stock Ownership: Each incorporator in a stock corporation must own or subscribe to at least one share of the capital stock. This demonstrates a personal stake in the company’s success.
4) One Person Corporation (OPC):**
* The RCC recognizes a special type of corporation - the One Person Corporation (OPC).
* An OPC can have a single stockholder who also acts as the sole director.
- Examples:
- Scenario 1: Three friends (Sarah, James, and Mark) decide to open a restaurant. They can all be incorporators of their new corporation, “Triple Flavors Inc.”
- Scenario 2: “Tech Solutions Inc.,” a software development company, wants to expand. They can partner with “ABC Consulting,” a business consulting firm, to form a new joint venture corporation. Both Tech Solutions Inc. and ABC Consulting can act as incorporators. (Assuming they stay within the 15-person limit)
- Scenario 3 (Limitation): Dr. Reyes, a licensed physician, cannot directly incorporate a medical clinic as a regular corporation. He would need to explore alternative structures allowed by laws specific to professional practice.
- Scenario 4 (Stock Ownership): Incorporating “Gadgets R Us,” a retail store selling electronics. Each incorporator, including John, the main investor, must own at least one share of the company’s stock.
- Scenario 5 (OPC): Bea, a talented baker, wants to start her own bakery. She can choose to form a One Person Corporation, allowing her to be the sole stockholder and director.
Understanding these rules ensures you can properly form a corporation following the RCC guidelines.
I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code)
C. Incorporation and Organization
- Corporate Name – Sections 14 and 17-18
Key Points on Corporate Names (Revised Corporation Code)
The Securities and Exchange Commission (SEC) plays a crucial role in regulating corporate names under the Revised Corporation Code (RCC). Here’s a breakdown of the key points for bar exam prep:
1) Distinguishability:
* The core principle is ensuring a corporate name is DISTINGUISHABLE from existing names already reserved or registered. This prevents confusion in the marketplace.
* The RCC considers names distinguishable even with minor variations like punctuation, articles, or prepositions (e.g., “StarTech” and “Star Tech”).
2) Restrictions on Corporate Names:
* The SEC cannot approve names already:
* Reserved or Registered: Claimed by another corporation.
* Protected by Law: Trademarks or other legal protections.
* Contrary to Law: Violates existing regulations or public order.
3) Process for Name Approval:
1. Name Verification:
* Proposed names are submitted to the SEC for verification of availability.
-
Articles of Incorporation and Bylaws:
- If the name is acceptable, the incorporators submit articles of incorporation and bylaws for review.
-
SEC Approval:
- The SEC issues a certificate of incorporation if all documents comply with the RCC and relevant regulations.
4) Consequences of Non-Compliance:
* The SEC can order a corporation to cease using an infringing name.
* Visible signage and marketing materials with the non-compliant name may be required for removal.
* The SEC may impose contempt charges or hold directors/officers liable.
* In extreme cases, the corporation’s registration could be revoked.
Example 1 (Approval):
* A new company wants to be named “Technovation Inc.” The SEC verifies the name isn’t already reserved or protected and isn’t confusingly similar to existing corporations. If the articles of incorporation and bylaws are compliant, the SEC would likely approve the name.
Example 2 (Denial):
* “Sunburst Bakery” wants to incorporate. However, “Sunbeam Bakery” already exists. Even with minor variations, the names might be considered too similar for approval due to a lack of distinctiveness.
I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code)
C. Incorporation and Organization
- Capitalization – Section 12
Unpacking the Rule on Minimum Capital Stock for Stock Corporations (Revised Corporation Code)
Section 12 of the Revised Corporation Code (RCC) introduces a significant shift in the requirements for stock corporations in the Philippines. Here’s a breakdown of the key points:
A) Minimum Capital Stock No Longer Mandatory:
* Traditionally, Philippine law mandated a minimum capital stock for corporations.
* The RCC removes this requirement for most stock corporations.
B) Exceptions:
* While a minimum capital stock is generally not required, there might be exceptions mandated by special laws.
* These special laws typically govern specific industries or business activities.
C) Implications:
* This change provides greater flexibility for entrepreneurs, especially those starting small businesses.
* They can incorporate without the burden of meeting a minimum capital threshold.
* However, incorporators should still consider factors like:
* Funding Needs: A corporation still needs sufficient resources to operate. Investors and creditors will likely assess the financial plan and potential capital structure.
* Credibility: While a minimum capital isn’t mandated, a higher initial capital stock can project a stronger financial image and attract investors.
Examples:
* Scenario 1 (No Minimum Capital): Three friends with tech skills decide to form a software development company. They can incorporate as a stock corporation without being bound by a minimum capital requirement. However, they’ll need to demonstrate how they plan to fund their operations (e.g., through personal investments or seeking external funding).
- Scenario 2 (Special Law Exception): A group wants to open a pawnshop, which is a business activity regulated by special laws. These laws might mandate a minimum capital stock for pawnshops to ensure they have sufficient resources to operate responsibly.
- Conclusion:
The removal of the minimum capital stock requirement simplifies the incorporation process for stock corporations. However, responsible financial planning and securing adequate funding remain crucial for a corporation’s success.
I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code)
C. Incorporation and Organization
- Corporate Term – Section 11
Unpacking the Rule on Corporate Term (Revised Corporation Code)
Section 11 of the Revised Corporation Code (RCC) deals with the duration of a corporation’s existence, also known as its corporate term. :
1) Default Corporate Term:
* A corporation generally has perpetual existence unless its articles of incorporation specify a shorter duration.
* This means the corporation can continue operating indefinitely.
2) Existing Corporations (Pre-RCC):
* Corporations established before the RCC’s effectivity and still operational retain their perpetual existence by default.
* However, they can choose to keep their specific term as outlined in their pre-existing articles of incorporation.
3) Changing the Corporate Term:
* Corporations can amend their articles of incorporation to:
a) Shorten** the corporate term (dissolve earlier than originally planned).
b) Extend** the corporate term (operate beyond the original expiry date).
4) Extension Requirements:**
* Extension cannot be done within 3 years of the original expiry date without justifiable reasons approved by the SEC.
* Any extension takes effect only after the original or subsequent expiry date.
5) Reviving an Expired Corporation:**
* A corporation whose term has expired can apply to the SEC for revival.
* Upon approval, the corporation regains its existence with all rights, privileges, and liabilities from before the expiry.
* The revived corporation generally has perpetual existence unless it specifies otherwise in the revival application.
6) Special Requirements for Financial Institutions:**
* Revival applications for specific entities like banks, insurance companies, and pawnshops require a favorable recommendation from the appropriate government agency before SEC approval.
- Examples:
- Scenario 1 (Perpetual Existence): “Tech Solutions Inc.” incorporates with no specific term mentioned in its articles of incorporation. By default, it has perpetual existence.
- Scenario 2 (Changing Term): “BakeTech Inc.” was incorporated before the RCC and has a 20-year term in its articles. They can choose to keep this term or amend their articles to extend or shorten it based on their business plans.
- Scenario 3 (Revival): “Starlight Corp.” expired due to an oversight. They can apply to the SEC for revival and resume operations after approval.
- Understanding these rules is crucial for:
- Properly drafting articles of incorporation.
- Knowing the process for modifying the corporate term.
- Navigating situations where a corporation’s term has expired.
I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code)
C. Incorporation and Organization
- Classification of Shares – Sections 6-9
Key Points on Classification of Shares (Revised Corporation Code)
The Revised Corporation Code (RCC) allows corporations to issue different classes of shares, tailoring rights and privileges for various investors. Here’s a breakdown of the key points:
A) Classification Basics (Section 6):
* A corporation’s articles of incorporation must specify the classification of shares, their rights, and any par value (amount assigned to each share).
* By default, all shares are equal, but exceptions can be created through classification.
B) Voting Rights (Section 6):
* Generally, all shares come with voting rights. Exceptions include:
* Preferred Shares: May be given priority in dividends or asset distribution during liquidation, but often lack voting rights.
* Redeemable Shares: May come with limited or no voting rights.
* However, there must always be at least one class of shares with full voting rights. * Holders of non-voting shares still get a vote on major corporate actions like mergers, dissolutions, or changes to articles of incorporation.
C) Share Types (Section 6):
* Par Value Shares: Have a face value assigned to each share (e.g., ₱10 per share).
* No-Par Value Shares: Don’t have a pre-assigned value but must be issued for at least ₱5 per share. The entire consideration received is treated as capital.
* **Restrictions:** Banks, insurance companies, and other entities requiring public trust cannot issue no-par value shares.
D) Preferred Shares (Section 6):
* Offer certain advantages like priority in dividends or asset distribution during liquidation.
* Must have a par value and can be further customized with specific terms set by the board of directors (subject to SEC approval).
E) Founders’ Shares (Section 7):
* Can be granted special rights, including exclusive voting rights for a limited period (up to 5 years) after incorporation.
* This exclusive voting right cannot violate anti-dummy or foreign investment laws.
F) Redeemable Shares (Section 8):
* The corporation can repurchase these shares from holders after a fixed period, regardless of available profits.
* Specific terms for redemption are outlined in the articles of incorporation and share certificates, subject to SEC regulations.
G) Treasury Shares (Section 9):
* Represent previously issued shares reacquired by the corporation (e.g., through purchase or donation).
* These shares can be reissued at a price determined by the board of directors.
Examples:
* Scenario 1 (Voting Rights): A startup issues two classes of shares: common stock with full voting rights for active participation and preferred stock with no voting rights but offering a guaranteed dividend.
* Scenario 2 (Share Types): A corporation issues par value shares (₱10 per share) for initial funding and later offers no-par value shares to raise additional capital (minimum ₱5 per share).
* Scenario 3 (Founders’ Shares): The founders of a tech company receive founders’ shares with exclusive voting rights for 5 years to ensure control during the crucial initial growth phase.
I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code)
C. Incorporation and Organization
- Articles of Incorporation – Sections 13-15
Key Points on Articles of Incorporation (Revised Corporation Code)
The articles of incorporation (AOI) are the foundation document of a Philippine corporation, outlining its core identity and operating framework. Here’s a breakdown of the key points for bar exam prep:
1) Mandatory Content (Section 13):**
A) Basic Information:**
* Corporation Name (Section 13(a))
* Primary and Secondary Purposes (Section 13(b)) - A corporation can have multiple purposes, but the primary purpose should be the main focus.
* Principal Office Location (Section 13(c)) - Must be within the Philippines.
* Corporate Term (Section 13(d)) - Can be perpetual or for a specific period.
B) Incorporation Details:**
* Incorporators’ Information (Section 13(e)) - Names, nationalities, and residence addresses.
* Initial Directors/Trustees (Section 13(f) & (g)) - Their names, nationalities, and addresses until the first regular election.
C) Share Capital (if Stock Corporation - Section 13(h)):**
* Authorized Capital Stock - The maximum amount of capital the corporation can raise through stock issuance.
* Number of Shares - Total number of shares authorized for issuance.
* Par Value (if applicable) - The minimum value assigned to each share.
* Original Subscribers - The initial investors who purchase shares.
* Subscription Details - Amount subscribed and paid by each subscriber.
* No-Par Value Shares (if applicable) - A statement indicating the use of no-par value shares.
D) Capital Contribution (if Non-Stock Corporation - Section 13(i)):
* Total capital amount.
* Names, nationalities, and residence addresses of contributors.
* Amount contributed by each contributor.
E) Optional Provisions (Section 13(j)):**
* The incorporators can include other lawful provisions they deem necessary.
* An arbitration agreement can be included to resolve future disputes through arbitration (Section 13(j)).
2) Amendments (Section 15):
A) Most provisions in the AOI can be amended for legitimate purposes.
B) Stock Corporations:** Require a majority vote of the board and the written consent of stockholders representing at least two-thirds of the outstanding capital stock (Section 15).
C) Non-Stock Corporations:** Require a vote or written assent of a majority of the trustees and at least two-thirds of the members (Section 15).
D) Dissenting Stockholders’ Rights:** Stockholders who disagree with amendments may exercise their appraisal rights (Section 15).
E) Filing and Approval:**
* Amended AOI with highlighted changes must be submitted to the Securities and Exchange Commission (SEC) for approval (Section 15).
* Amendments take effect upon SEC approval or, if not acted upon within six months (due to no fault of the corporation), from the filing date (Section 15).
Examples:
* Scenario 1 (Basic Information): “Technovation Inc.” incorporates with its main purpose being software development and a secondary purpose of offering IT consultancy services (as per Section 13(b)).
* Scenario 2 (Share Capital): “BakeTech Inc.” issues 10,000 shares with a par value of ₱10 each (Section 13(h)).
* Scenario 3 (Amendment): “Evergreen Enterprises Inc.” wants to change its corporate term from 20 years to perpetual existence. They need board approval, stockholder consent, and SEC approval to amend their AOI (Section 15).
Understanding these rules is crucial for properly drafting and amending a corporation’s AOI, ensuring compliance with legal requirements.
I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code)
C. Incorporation and Organization
- By-Laws – Sections 45-47
Key Points on Bylaws (Revised Corporation Code)
Bylaws are a corporation’s internal rules that supplement the articles of incorporation (AOI). Here’s a breakdown of the key points:
1) Adoption (Section 45):
- Requires a majority vote of outstanding capital stock (stock corporations) or members (non-stock corporations).
- Bylaws are signed by voting stockholders/members and kept at the principal office for inspection.
- A certified copy is filed with the SEC and attached to the original AOI.
- Pre-incorporation Option: Bylaws can be adopted and filed before incorporation, requiring approval and signatures from all incorporators.
- SEC Certification: Bylaws become effective only upon SEC certification of compliance with the RCC.
2) Special Bylaw Requirements (Section 45):
- Banks, insurance companies, and other special corporations need an additional certificate from the relevant government agency confirming their bylaws comply with specific laws.
3) Content of Bylaws (Section 46):
Private corporations can include provisions in their bylaws regarding:
- Meetings: Time, place, and manner of holding regular or special meetings for directors/trustees and stockholders/members (Sections 46(a) & (b)).
- Quorum and Voting: Required number of attendees for meetings and voting procedures (Section 46(c)).
- Attendance and Voting Methods: How stockholders/members, directors/trustees can attend meetings and cast votes (Section 46(d)).
- Proxies: Form and voting procedures for proxy votes (Section 46(e)).
- Board of Directors/Trustees: Qualifications, duties, compensation guidelines, and maximum number of other board representations for independent directors/trustees (Section 46(f)).
- Officer Elections: Timing and notification procedures for annual director/trustee elections and appointment/term of other officers (Sections 46(g) & (h)).
- Penalties: Consequences for violating the bylaws (Section 46(i)).
- Stock Certificates (Stock Corporations Only): Procedures for issuing stock certificates (Section 46(j)).
- Other Matters: Any other provisions deemed necessary for efficient corporate operations, good governance, and anti-corruption measures (Section 46(k)).
- Optional Arbitration Agreement: An arbitration agreement can be included to resolve future disputes through arbitration (Section 46(k)).
4) Amendment Process (Section 47):
* Requires a majority vote of the board and a majority of outstanding capital stock (stock corporations) or members (non-stock corporations) at a duly called meeting.
* Delegation of Amendment Power: Stockholders owning two-thirds of outstanding capital stock or two-thirds of members in a non-stock corporation can delegate the power to amend bylaws to the board. However, this delegation can be revoked by a majority vote of stockholders/members.
- Filing with SEC: Amended bylaws and, if applicable, the resolution delegating amendment power, must be filed with the SEC with a certification from the corporate secretary and a majority of the directors/trustees.
- SEC Certification: Amended bylaws are only effective upon SEC certification of compliance with the RCC and other relevant laws.
Examples:
* Scenario 1 (Meeting Procedures): “BakeTech Inc.” includes a bylaw provision specifying that quarterly board meetings will be held virtually via video conferencing (Section 46(a)).
- Scenario 2 (Stock Certificate Issuance): “Technovation Inc.” establishes a bylaw outlining the security features and issuance procedures for their stock certificates (Section 46(j)).
- Scenario 3 (Amendment): “Evergreen Enterprises Inc.” wants to amend their bylaws to change the quorum requirement for stockholder meetings. They need a majority vote of the board and a majority of outstanding stock to approve the amendment, followed by SEC certification (Section 47).
Understanding these rules is essential for ensuring a corporation’s bylaws are properly adopted, amended, and aligned with legal requirements.
I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code)
C. Incorporation and Organization
- Corporate Officers – Section 24
Key Points on Corporate Officers (Revised Corporation Code)
This section (Section 24) outlines the mandatory and optional corporate officers, along with residency and citizenship requirements.
1) Mandatory Officers:**
* President: Must be a member of the board of directors.
* Treasurer: Must be a resident of the Philippines (no citizenship requirement specified).
* Secretary: Must be a citizen and resident of the Philippines.
2) Optional Officers:**
The corporation can establish additional officer positions through their bylaws (Section 24(d)). Examples include:
* Vice President (one or more)
* Chief Financial Officer (CFO)
* Chief Operating Officer (COO)
* Public Relations Officer
3) Compliance Officer (for Public Interest Corporations):**
Corporations vested with public interest (e.g., utilities, banks) must also elect a compliance officer (Section 24).
4) Holding Multiple Positions:**
An individual can hold two or more officer positions concurrently (e.g., Secretary and CFO) except for the combination of President and Secretary or President and Treasurer (Section 24).
5) Officer Duties and Responsibilities:**
Officers manage the corporation’s day-to-day operations and fulfill duties outlined in the bylaws or board resolutions (Section 24). These duties can include:
- Overseeing specific departments (e.g., finance, marketing)
- Implementing board resolutions
- Signing contracts and other legal documents
- Maintaining corporate records
- Examples:**
- Scenario 1 (Mandatory Officers): “BakeTech Inc.” elects a board member, Maria, as President. They also elect a resident of the Philippines, Ben, as Treasurer, and a Filipino citizen and resident, Carlos, as Secretary.
- Scenario 2 (Optional Officer): “Technovation Inc.” includes a CFO position in their bylaws and appoints an individual with relevant financial expertise to fill that role.
- Scenario 3 (Compliance Officer): “Green Energy Inc.” is a public utility corporation. In addition to the mandatory officers, they elect a compliance officer to ensure adherence to relevant regulations.
I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code)
C. Incorporation and Organization
- De Facto Corporation – Section 19
Key Points on De Facto Corporations in the Philippines
This rule (Section 20 of the Revised Corporation Code) deals with the legal status of de facto corporations. Here’s a breakdown:
1) De Facto Corporation Definition:** A de facto corporation is an entity that attempts to incorporate but fails to comply with every single legal requirement. However, it has made a good faith effort to follow the incorporation process.
2) Protection from Collateral Attack:** The legal validity of a de facto corporation’s incorporation cannot be challenged in a private lawsuit between the corporation and another party (e.g., a customer, supplier, etc.). This is known as the doctrine of collateral estoppel.
3) Exception: Quo Warranto Proceeding:** The government, through the Solicitor General, can initiate a quo warranto proceeding to question the legality of a de facto corporation’s existence. This is a special legal action that challenges an entity’s right to operate under a particular franchise or privilege (e.g., corporate status).
4) Exercise of Corporate Powers:** A de facto corporation can still exercise the usual rights and powers granted to corporations, such as entering contracts, owning property, and suing or being sued.
Example 1 (Protected De Facto Corporation):
* “BakeTech Inc.” attempted to incorporate but missed filing a minor document with the SEC. They operate in good faith, holding board meetings, issuing stock, and complying with most regulations.
* A customer sues “BakeTech Inc.” for a product defect. “BakeTech Inc.” can defend itself in court without the customer being able to challenge their legal status as a corporation in this specific lawsuit.
Example 2 (Vulnerability in Quo Warranto):
* “Technovation Inc.” has been operating for years but never filed any paperwork with the SEC. They might be considered a de facto corporation due to their attempt to function as a corporation.
* The Solicitor General could initiate a quo warranto proceeding to question “Technovation Inc.’s” legitimacy as a corporation. If the court finds they failed to make a good faith effort to comply with incorporation procedures, they could be ordered to cease operations.
- In essence, the de facto corporation concept protects businesses that have attempted to incorporate in good faith but might have made minor technical errors. However, it doesn’t guarantee immunity from legal challenges by the government.**
I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code)
C. Incorporation and Organization
- Corporation by Estoppel – Section 20
Corporation by Estoppel: Key Points Explained Simply
Imagine this:
You do business with a company believing it’s a corporation, but later discover it isn’t. The Corporation by Estoppel rule protects you in such situations. Here’s a breakdown:
1) Who it applies to: People who pretend to act as a corporation knowing it’s not real (think fake incorporation documents).
2) The penalty: These individuals are personally liable for the company’s debts, just like partners in a business (general partnership).
3) Protection for those dealing with the “corporation”:
- If you transact with this fake corporation in good faith (believing it’s real), you can still sue them for breach of contract or other issues.
- They can’t defend themselves by claiming they’re not a corporation (they’re estopped, or prevented, from doing so).
4) The other side of the coin:
If you owe the fake corporation money for a legitimate transaction, you have to pay them, even though they’re not a real corporation.
Examples:
- Scenario 1 (You’re protected): You sign a contract with “Tech Solutions Inc.” for website development. Later, you discover they haven’t incorporated. Good news! You can still sue “Tech Solutions Inc.” (the individuals behind it) if they fail to deliver the website.
- Scenario 2 (They’re protected): You rent office space to “BakeTech Inc.” They haven’t incorporated, but you didn’t know. “BakeTech Inc.” runs into financial trouble and can’t pay rent. Not ideal! Despite “BakeTech Inc.” not being a real corporation, you can still hold whoever signed the lease agreement personally liable for the rent.
Remember: Corporation by Estoppel discourages fake incorporations and protects those who deal with them in good faith.
I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code)
D. Directors, Trustees, and Officers
1. Qualifications and Disqualifications – Sections 22-26
Qualifications and Disqualifications of Directors, Trustees and Officers (Philippines)
A) Directors and Trustees (Sec. 22):**
* Qualifications: Must be a stockholder (director) or member (trustee) of the corporation.
* Independent Directors: Required for corporations with public interest (e.g., banks, listed companies). They should be free from conflicts of interest and influence from management.
* Disqualifications: None mentioned in this specific section. Refer to Sec. 26 for disqualifications.
Example: Ms. Reyes, a major shareholder in “BakeTech Inc.,” is qualified to be a director. However, if “BakeTech Inc.” is a publicly listed company, the board might also need independent directors with no prior business ties to Ms. Reyes.
B) Election Process (Sec. 23):**
* Voting Rights: Stockholders/members have the right to vote for directors/trustees who meet qualifications and have no disqualifications.
* Voting Methods: Voting can be in person, by proxy, or remotely (subject to regulations).
* Election Results: Nominees with the highest number of votes win.
Example: Stockholders in “Tech Solutions Inc.” can vote for any qualified candidate as director, as long as they are not disqualified under Sec. 26. They can choose to vote in person, send a proxy to vote on their behalf, or participate electronically if allowed by the company’s bylaws.
C) Officers (Sec. 24 & 25):**
* Election: Board of directors elects officers like president, secretary, and treasurer after their own election.
* Qualifications: President must be a director. Secretary must be a citizen and resident. Treasurer must be a resident. Compliance officer required for corporations with public interest.
* Disqualifications: Same as directors/trustees (refer to Sec. 26).
Example: The board of directors of “Evergreen Enterprises” can elect Ms. Santos (director) as president, Mr. Cruz (resident) as treasurer, and Ms. Garcia (citizen and resident) as secretary. If “Evergreen Enterprises” deals with the public, they would also need to appoint a compliance officer.
D) Disqualifications (Sec. 26):**
* General Rule: Disqualified if convicted of a serious crime, violated corporate or securities laws, or found liable for fraud within the past five years.
* Foreign Judgments: Similar disqualifications apply for convictions by foreign courts.
* Additional Rules: Regulatory agencies may impose further disqualifications.
Example: Mr. Lee cannot be a director of “BakeTech Inc.” if he was recently convicted of embezzlement. This would be a disqualifying offense under Sec. 26(a).
I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code)
D. Directors, Trustees, and Officers
- Elections – Sections 23, 25 and 91
Based on the provided sections or rules, here are the key points regarding the elections of Directors, Trustees, and Officers:
-
Who Can Nominate and Vote:
- Stockholders or members have the right to nominate any director or trustee who possesses the qualifications and none of the disqualifications set forth in the law.
- At the election, a majority of the outstanding capital stock or members entitled to vote must be present in person, by proxy, or through remote communication.
- Nonstock corporations may directly elect officers, and members may cast votes for trustees.
-
Voting Rights and Procedures:
- Stockholders in stock corporations have the right to vote the number of shares standing in their names in the stock books at the time of the election.
- Stockholders can vote their shares for as many candidates as there are directors to be elected, cumulate their votes for fewer candidates, or distribute them among multiple candidates.
- Nominees receiving the highest number of votes are declared elected.
- If requested by any voting stockholder or member, the election must be by ballot.
- Members of nonstock corporations may cast votes for trustees but not more than one vote per candidate.
-
Quorum and Adjournment:
- A quorum for the election is constituted by the presence of owners of the majority of the outstanding capital stock or members entitled to vote.
- If no election is held or if a quorum is not present, the meeting may be adjourned, and the corporation must proceed in accordance with the law.
-
Reporting Requirements:
- Within 30 days after the election, the corporation must submit to the Commission the names, nationalities, shareholdings, and residence addresses of the directors, trustees, and officers elected.
- Failure to hold elections must be reported to the Commission within 30 days, specifying a new date for the election, which must be held within 60 days.
- If the rescheduled election is not held, the Commission may order an election upon application by a concerned party.
-
Term of Office:
- Directors or trustees hold office for not more than three years until their successors are elected and qualified.
- Trustees elected to fill vacancies serve for the unexpired period of the term.
Example:
In a recent annual shareholders’ meeting of XYZ Corporation, shareholders nominated candidates for the board of directors. During the election, shareholders voted through a proxy voting system due to pandemic restrictions. After the votes were tallied, the candidates with the highest number of votes were declared elected as directors. The corporation promptly submitted the required information about the elected directors to the Securities and Exchange Commission within the stipulated timeframe.
I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code)
D. Directors, Trustees, and Officers
- Independent Directors – Section 22
Key Points on Independent Directors:
Based on the provided rules, here’s a breakdown of the concept of independent directors:
- Role and Importance:
* Independent directors are not just board members; they represent a specific role within the board structure.
* Their purpose is to provide INDEPENDENT OVERSIGHT AND OBJECTIVE DECISION MAKING for corporations with significant public interest.
* They act as a check on potential conflicts of interest and ensure fair representation of shareholder interests. - Qualifications and Selection:
* Independent directors CANNOT BE SUBSTANTIAL SHAREHOLDERS in the corporation. This prevents their personal financial stake from influencing their judgment.
* They should be FREE FROM ANY BUSINESS OR PERSONAL RELATIONSHIPTS that could compromise their independence.
* Shareholders elect them directly during the regular director election process. - Applicability:
* The requirement for independent directors applies to specific corporations with a high degree of public interest.
- Examples:- Publicly traded companies (registered with the Securities and Exchange Commission)
- Banks, insurance companies, and other financial institutions
- Companies with a large number of shareholders (200 or more holding at least 100 shares each)
- Regulatory Oversight:
* The Securities and Exchange Commission (SEC) has the authority to determine which other corporations require independent directors based on factors like:- Minority shareholder ownership: Corporations with a large dispersed ownership structure benefit from independent directors’ oversight.
- Financial products offered: Companies dealing with sensitive financial products like insurance or pre-need plans require independent directors to ensure fair practices.
- Public interest: Businesses with a significant impact on the public good, like utilities or essential services, benefit from independent directors’ objective decision-making.
- Future Regulations:
* The SEC is empowered to create specific rules and regulations regarding qualifications, term limits, and other factors related to independent directors.
* This is intended to further strengthen their independence and align with best international practices.
Example:
Imagine a large telecommunications company facing a decision to prioritize network upgrades in urban areas versus rural areas. Independent directors could ensure a balanced approach that considers both shareholder interests (potentially favoring urban areas with higher profits) and the public interest of providing essential services to underserved rural communities.
By requiring independent directors, corporations can promote transparency, accountability, and responsible decision-making, ultimately benefiting both the company and the public.
I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code)
D. Directors, Trustees, and Officers
- Term, Holdover, and Removal – Sections 22 and 27
Key Points on Term, Holdover, and Removal of Directors and Officers:
A) Term:
* Directors: Elected for a term of one (1) year unless otherwise provided in the corporation’s bylaws.
* Trustees: Elected for a term not exceeding three (3) years.
* Holdover: Directors and trustees continue to hold office until their successors are elected and qualified. This means they can serve beyond their official term if the election is delayed.
Example:
A company’s bylaws specify a two-year term for directors. Due to unforeseen circumstances, the annual meeting is postponed. The existing directors would remain in a holdover capacity until a new election is held and the new directors are qualified (e.g., complete necessary paperwork).
B) Removal:
* Shareholders/Members: Can remove directors or trustees with a two-thirds (2/3) vote, with or without cause.
* Notice: Removal requires proper notification to shareholders/members about the intention to propose such removal at a meeting.
* Special Meeting: A special meeting can be called for removal by the president, secretary upon written demand by a majority of shareholders/members, or directly by a qualified shareholder/member if the secretary fails to act.
Securities and Exchange Commission (SEC):
Can remove directors or trustees who were elected despite disqualification or whose disqualification arose later.
Example (Removal with Cause):
Imagine a publicly traded company’s CEO (also a director) faces allegations of financial misconduct. Shareholders, concerned about the impact on the company, might call for a special meeting to vote on the CEO’s removal as director.
Example (Removal by SEC):
If the SEC discovers a director has a financial stake in a competitor, violating their independence requirement, the SEC could order their removal to ensure the integrity of the board.
Holdover vs. Removal:
Holdover is a temporary status where a director/trustee continues past their term due to delayed elections. Removal is a permanent action by shareholders/members or the SEC to oust a director/trustee from their position.
Current Event Example:
In a recent case involving a large electric vehicle company, the board faced pressure from some shareholders to remove a director due to concerns about potential conflicts of interest. This situation highlights the role of shareholder voting in director removal, even if the removal is contested.
I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code)
D. Directors, Trustees, and Officers
- Compensation – Section 29
Key Points on Compensation for Directors and Trustees:
A) Presumption:
* Directors and trustees are NOT automatically entitled to compensation for their service.
B) Exceptions:
* Bylaw Provision: The corporation’s bylaws can specify compensation for directors/trustees.
* Shareholder/Member Approval: A majority of shareholders/members can vote to grant directors/trustees compensation and determine the amount at a meeting (regular or special).
C) Limits:
* Total Yearly Compensation: Cannot exceed 10% of the corporation’s net income before income tax from the preceding year. This prevents excessive compensation that could drain company resources.
D) Conflicts of Interest:
* Directors/trustees cannot participate in setting their own per diems or compensation. This avoids self-dealing and ensures fairness.
E) Transparency:
* Public interest corporations must submit an annual report to shareholders and the Securities and Exchange Commission (SEC) disclosing the total compensation for each director/trustee. This promotes transparency and accountability.
F) Commercial Concept:
These rules reflect a balance between attracting qualified individuals to serve on boards and ensuring responsible use of corporate funds. Compensation can be an incentive for directors/trustees to dedicate time and expertise to the company’s success. However, limitations prevent excessive payouts and potential conflicts of interest.
Example 1 (Bylaw Provision):
A large technology company’s bylaws specify an annual retainer fee for each director, along with additional compensation for committee work. This pre-determined structure provides directors with guaranteed compensation for their service.
Example 2 (Shareholder Approval):
A non-profit organization’s board proposes a modest per diem for attending meetings. They need approval from a majority of members at the annual meeting to implement this compensation plan.
Example 3 (Transparency):
A publicly traded company’s annual report includes a detailed breakdown of each director’s total compensation, including salary, bonuses, and stock options. This information allows shareholders to assess the board’s compensation structure.
I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code)
D. Directors, Trustees, and Officers
- Vacancy – Sections 28 and 25
Key Points on Filling Vacancies in Boards of Directors and Trustees:
A) Filling Vacancies:
* Who Fills: The process for filling vacancies depends on how the vacancy arose.
* Most Cases: A majority vote of the remaining directors/trustees (if they still form a quorum) can appoint a replacement.
* Stockholder/Member Vote: If the remaining directors/trustees don’t constitute a quorum, or in other cases (e.g., removal by shareholders/members), a vote by shareholders/members at a meeting (regular or special) is required.
B) Timing of Elections:
* Term Expiration: Elections to fill vacancies due to term expiration must be held no later than the day of expiration.
* Removal: When a vacancy arises from shareholder/member removal, the election can be held on the same day, provided the notice mentions this option.
* Other Cases: Elections for all other vacancies must be held within 45 days of the vacancy arising.
C) Term of Replacement Directors/Trustees:
* They serve only for the unexpired term of their predecessor.
D) Emergency Situations:
* If a vacancy prevents a quorum and urgent action is needed to avoid severe harm to the corporation, the remaining directors/trustees can unanimously appoint an emergency officer from among existing corporate officers.
* This emergency appointment is temporary and limited to actions addressing the immediate crisis.
* The corporation must notify the Securities and Exchange Commission (SEC) within three days of creating this emergency board.
E) Vacancies for Increased Board Size:
* Any new positions created by increasing the board size are filled by election at a shareholder/member meeting (regular or special).
F) Reporting Requirements:
* Within 30 days of elections, the corporation must report the names, nationalities, shareholdings, and residence addresses of new directors, trustees, and officers to the SEC.
* If elections are not held on the scheduled date, the corporation must report this to the SEC within 30 days. The report should specify a new election date (within 60 days of the original date).
G) Consequences of Non-Compliance:
* The SEC can investigate and order an election if there’s an unjustifiable failure to hold elections.
* The SEC can issue orders to ensure a proper election is held, including setting a date, location, and presiding officer.
Example 1 (Term Expiration):
A company’s director’s term expires on June 30th. The company must hold an election to fill this vacancy no later than June 30th.
Example 2 (Removal by Shareholders):
A company’s CEO (also a director) is removed by shareholder vote due to misconduct. The company can hold a special meeting on the same day to elect a replacement director, provided the notice mentioned this possibility.
Example 3 (Emergency Situation):
A company’s CFO (who is not a director) suddenly resigns, leaving the board without a quorum. A critical financial decision needs to be made to avoid missing a bond payment deadline. The remaining directors could unanimously appoint the company’s controller (an existing officer) as an emergency officer to handle the bond payment authorization. This temporary appointment would only address this specific urgent issue.
I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code)
D. Directors, Trustees, and Officers
- Voting Requirements
I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code)
D. Directors, Trustees, and Officers
- Duties and Liabilities
I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code)
D. Directors, Trustees, and Officers
- Doctrine of Centralized Management
The doctrine of centralized management in commercial laws and corporation law refers to the principle that grants authority and decision-making power to a centralized body or group within a corporation, typically the board of directors or trustees. This doctrine emphasizes the concentration of management authority at the top level of the corporate hierarchy, allowing for efficient and effective decision-making.
Key points regarding the doctrine of centralized management include:
- Authority and Decision-making: The board of directors or trustees, as the central governing body of the corporation, holds ultimate authority and responsibility for making key decisions on behalf of the company. This includes strategic planning, financial management, policy formulation, and oversight of corporate operations.
- Delegation of Authority: While the board of directors or trustees retains overall control, it may delegate certain powers and responsibilities to officers, committees, or management personnel within the organization. However, ultimate accountability still rests with the board.
- Legal Framework: The centralized management structure is established and regulated by commercial laws and corporation law, which outline the duties, powers, and liabilities of directors, trustees, and officers. These laws ensure transparency, accountability, and adherence to corporate governance standards.
Example:
In a publicly traded company, the board of directors exercises centralized management by setting corporate objectives, appointing executive officers, and overseeing financial performance. During the COVID-19 pandemic, many corporations faced challenges related to business continuity and crisis management. The board of directors played a critical role in formulating strategic responses, such as implementing remote work policies, adjusting supply chain strategies, and securing financing options, to navigate through the crisis and protect the interests of shareholders. Through centralized management, the board effectively coordinated efforts across various departments and stakeholders to mitigate risks and sustain business operations during uncertain times.
I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code)
D. Directors, Trustees, and Officers
- Business Judgment Rule
I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code)
D. Directors, Trustees, and Officers
- Doctrine of Apparent Authority
I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code)
D. Directors, Trustees, and Officers
- Doctrine of Ratification or Estoppel
I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code)
E. Powers of Corporations; Incidental Powers;
Ultra Vires Doctrine
(Sections 35 44)
I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code)
F. Stockholders and Members
1. Doctrine of Equality of Shares
I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code)
F. Stockholders and Members
- Participation in Management; Voting Requirements
I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code)
F. Stockholders and Members
- Proprietary Rights
a. Right to Dividends – Section 42
b. Right to Inspection – Sections 73-74
c. Pre-Emptive Right – Section 38
d. Appraisal Right – Sections 80-85
ANALYSE PROVISIONS
The right to dividends is the right of stockholders or members of a corporation TO RECEIVE a portion of the corporation’s profits that are distributed by the board of directors. It’s not guaranteed, but stockholders can expect them if the company is profitable.
The right to inspection allows stockholders or members, under certain circumstances, TO EXAMINE the corporation’s records and financial documents to ensure proper management and protect their investment. It helps ensure transparency and accountability within the corporation.
The pre-emptive right GRANTS existing stockholders or members the FIRST CHANCE to BUY additional shares or ownership interests offered by the corporation, allowing them to MAINTAIN their proportional ownership stake and potentially benefit from future growth.
The appraisal right allows dissenting stockholders TO RECEIVE a fair market value for their shares when they VOTE AGAINST certain fundamental changes to the corporation (e.g., mergers, acquisitions) and are forced to sell their shares. It protects them from being unfairly squeezed out by majority shareholders.
I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code)
F. Stockholders and Members
- Derivative Suit/Intra-Corporate Suit
Derivative Suit vs. Intra-Corporate Suit: Key Differences and Similarities
Derivative Suits and Intra-Corporate Suits are both legal actions related to corporations, but they address different situations and have distinct purposes. Here’s a breakdown of their key differences and similarities:
A) Key Differences:
-
Who Sues Whom?
- Derivative Suit: A stockholder sues on behalf of the corporation against management or third parties who have wronged the corporation.
- Intra-Corporate Suit: A corporation sues its own shareholders, directors, or officers for breaches of fiduciary duty or internal governance issues.
-
Purpose:
- Derivative Suit: To recover losses or rectify harm done to the corporation itself. The benefit ultimately flows to the corporation and all its shareholders.
- Intra-Corporate Suit: To enforce the rights and obligations within the corporate structure, protecting the corporation from internal misconduct or breaches of duty.
-
Standing:
- Derivative Suit: Requires a shareholder to have standing to sue, often by demonstrating ownership of shares at the time of the alleged wrongdoing.
- Intra-Corporate Suit: The corporation itself initiates the lawsuit through its board of directors or authorized representatives.
B) Similarities:
- Internal Disputes: Both address internal disputes within a corporation, even though the parties involved might differ.
- Protecting the Corporation: Ultimately, both aim to protect the corporation’s interests, either by recovering lost assets or ensuring proper governance.
- Legal Representation: Both types of suits typically involve complex legal issues and require representation by qualified corporate lawyers.
Examples:
* Derivative Suit Example: A shareholder sues the CEO for diverting company funds for personal use. The lawsuit seeks to recover the stolen funds for the benefit of the corporation.
* Intra-Corporate Suit Example: A corporation sues its former CFO for manipulating financial statements, causing the corporation financial losses. The lawsuit seeks to hold the CFO accountable for breaching their fiduciary duty.
I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code)
F. Stockholders and Members
- Delinquency – Sections 67-70
